Q&A with Steve Linick

A one-on-one interview with the inspector general for the Federal Housing Finance Agency

Mortgage Banking
February 2012

By Robert Stowe England

Steve A. Linick has led the Office of Inspector General (OIG) in the Federal Housing Finance Agency (FHFA) since his Senate confirmation in 2010. As inspector general, he is responsible for audits, evaluations, investigations and other law-enforcement efforts to combat fraud, waste and abuse within or affecting the programs and operations of FHFA. The IG’s oversight includes FHFA’s regulation of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks.

Linick is also a member of the president’s Financial Fraud Enforcement Task Force and the Investigations Committee of the Council of the Inspectors General on Integrity and Efficiency (CIGIE). Within the committee, he serves as the vice chairman of the committee’s Suspension and Debarment Working Group. He is also a permanent member of the Council of Inspectors General on Financial Oversight.

Linick, an attorney, previously served in several leadership positions in the Department of Justice (DOJ). From 2006 to 2010, he served in dual roles as executive director of the department’s National Procurement Fraud Task Force and deputy chief of its Fraud Section, Criminal Division. As deputy chief, he managed and supervised the investigation and prosecution of white-collar criminal cases involving procurement fraud, public corruption, investment fraud, telemarketing fraud, mortgage fraud, corporate fraud and money laundering, among other cases.

Linick was the front-line official at DOJ for contract fraud cases relating to the U.S. wars and reconstruction in Iraq and Afghanistan. In October 2008, he received the Attorney General’s Award for Distinguished Service for leading DOJ’s procurement fraud initiative. Previously he was an assistant United States attorney, first in the Central District of California (1994-1999) and subsequently in the Eastern District of Virginia (1999-2006).

Linick received his bachelor’s (1985) and master’s (1990) degrees in philosophy from Georgetown University in Washington, D.C., and his juris doctorate (1990) from the Georgetown University Law Center.

Mortgage Banking recently caught up with Linick at his office in Washington to discuss his work as IG.

Q: How does your background prepare you for the job of Federal Housing Finance Agency Inspector General?

A: I spent most of my career as a federal prosecutor at the Department of Justice. I learned how to investigate, uncover and remedy fraud, waste and abuse involving businesses and government, which is what I do as an [inspector general for the FHFA].

Also, as a prosecutor, you’re taught to follow the facts wherever they lead, to be ethical, fair, objective--these are the same kind of skill sets that are necessary and critical to be an effective IG. Also, through the years I’ve investigated and prosecuted mortgage fraud cases. My background is primarily in the area of the white-collar criminal. I’ve come to learn the schemes, how they are committed and so forth. And obviously a big piece of what we do is to investigate mortgage fraud affecting Fannie and Freddie and the Federal Home Loan Banks.

Q: Who interviewed you when you applied for the job?

A: I met with a lot of individuals. It’s a lengthy process and it included members of the IG community. I interviewed with the director of the agency at the time, who was Jim Lockhart, and I spoke with individuals at the White House and members of Congress.

Q: What made you decide to take the position?

A: I spent most of career in public service. I’m a big believer in public service. I took this job with the idea that it would be a challenging and unique opportunity for me to make a difference. We’re in the midst of a housing crisis right now, obviously of historic proportions. A lot of people are suffering from the crisis and will continue to suffer, and Fannie and Freddie and the home loan banks continue to be key players in the housing market.

FHFA faces a lot of challenges under these circumstances, as well. They are not just the regulator of Fannie and Freddie but also the conservator. More than $180 billion of taxpayer funds have been used to support the enterprises. And, in addition, with so much taxpayer money involved and countless stakeholders, contractors and others involved in the housing crisis, the opportunity for bad players to engage in fraud is a huge concern.

So, to sum it up, under the circumstances, I think it’s critically important to deter and root out fraud, waste and abuse, promote transparency, efficiency and effectiveness in FHFA and in the GSEs’ [government-sponsored enterprises’] programs and operations, and I feel privileged to have the opportunity to participate in this important effort.

Q: Would you comment on the recently disclosed and what some view as excessive compensation that was approved to non-terminated, current executives at Fannie and Freddie? Do any new controls need to be put in place to prevent excessive compensation of all senior level employees?

A: So, just by way of background, we issued a report in March of 2011 that indicated that in the first two years of conservatorship--2009 and 2010--the top six executives made a total of $36 million, approximately. And obviously this is a lot of money, especially for companies that have received over $180 billion in taxpayer money. So we issued the report to make sure that those salaries were justified; and we found in our report that FHFA reviewed and approved these payments based on recommendations by Fannie and Freddie. But we also found that FHFA didn’t independently test or validate the recommendations.

So, we made a number of findings. One, FHFA should have done more to determine whether or not compensation levels were reasonable. Two, they lacked key controls to monitor executive compensation. And three, they have not been sufficiently transparent. And we made recommendations in order address these findings.

We asked FHFA to establish written procedures to evaluate the enterprises’ recommended compensation levels, to also evaluate the extent to which federal support of the enterprises may facilitate their capacity to meet performance targets and to be more transparent.

They’ve accepted our recommendations. We’re monitoring the implementation. Timing here is very important, because we are now in compensation season and the extent to which those recommendations are implemented sooner rather than later could have an impact on future compensation determinations.

Q: So it’s too early for any actual impact because they are just now implementing them?

A: Yes. We’re monitoring them. My understanding is that they are attempting to implement them in a timely fashion before final determinations are made on executive compensation. So, we’ll have to see say (Q: see???).

Q: For the quarter?

A: No. The way it works is you’ve got a base salary and then you have a performance piece of that as well. The base salary issue is real time, like a normal paycheck. But the performance piece of it is delayed, and it could take up to15 months to issue the performance piece of it. So [since November 2011], FHFA is starting to look at corporate performance goals. And throughout the year, Fannie and Freddie will be assessing whether or not they met those goals and they will be sending their self-assessments to FHFA at the end of the year. So this is a year-long or more process.

Q: What steps has the FHFA taken that may improve the GSEs’ repurchase recoveries?

A: As you know, we issued a report on the Bank of America and Freddie Mac settlement with respect to repurchase claims. And after we issued the report, FHFA suspended all settlement approvals, pending review of the loan-review process. And they are currently overseeing Freddie Mac’s efforts to take a closer look at the housing-boom loans. And we’re monitoring their activities.

In sum, it’s still a work in progress. We’ve been told that they may have something in February [2012]. We’re monitoring, and [it’s] not clear.

Q: When do those policies go into effect? How far back in time will those efforts go to recover repurchase demands? What are the oldest vintage loans on which they will make repurchase requests?

A: These questions really go to the heart of our concerns with the existing loan-review process. A loan has to be reviewed for defects in order to make a claim for repurchase. And not all loans are eligible for repurchase--only those with defects.

Freddie traditionally only reviewed loans that had gone into foreclosure within the first two years after origination in a fixed-rate environment. That was based on the theory that loans that stayed current through two years were not likely to have defects. But, as you know, during the housing boom there were new kinds of loans--the alt-A, interest-only [IO], option ARM [option adjustable-rate mortgage], which had low-interest teaser rates that did not reset for several years.

An FHFA examiner had informed the Office of Inspector General that these teaser-rate loans, in his point of view, did not enter into foreclosure while the teasers remained in effect. Rather, the default and foreclosures occurred only after the teasers expired--typically more than two years after origination. These loans were moving to foreclosure three to five years after origination. But Freddie’s existing loan-review process didn’t account for these later-defaulting housing-boom loans.

In terms of what [Freddie Mac is] looking at now, they are looking at the housing-boom loans. They’re looking at the extent to which those loans contained defects, and that’s what we’re waiting for. As a result of not having looked at those loans, at least in the first instance, there were 300,000 loans that were not reviewed for possible recovery.

Q: That’s a lot.

A: It’s a lot. They are currently examining this unreviewed population of loans.

Q: So, they’re examining the loans that weren’t reviewed in the first place.

A: That’s correct.

Q: Let’s discuss more about the foreclosure abuses. Your office [OIG] has found that if Fannie Mae had done a better job of overseeing law firms involved in foreclosures, it could have prevented a number of abuses that occurred. FHFA disagreed with that conclusion. Can you explain how Fannie Mae might have improved its operations to prevent or mitigate law firm foreclosure abuses--or was this whole approach a lost cause?

A: FHFA’s predecessor agency [the Office of Federal Housing Enterprise Oversight (OFHEO)] issued a consent order in 2006 requiring Fannie Mae to implement an operational risk program.

Q: What is operational risk?

A: Operational risk means the risk of loss to an organization from people, systems, inadequate controls and external events, which would include law firm foreclosure abuses. And implementation of a successful program would cause Fannie Mae to self-identify, report and correct operational risk.

For a five-year period, from 2006 to 2011, OFHEO and then FHFA repeatedly cited Fannie Mae for not implementing an effective operational risk program. And despite these findings, Fannie Mae has not yet implemented an effective program and FHFA has not required it to do so.

We found in a report we did on this topic that Fannie’s failure to implement an effective operational risk program may have been a missed opportunity to correct weaknesses in Fannie Mae’s oversight of servicing and foreclosure abuses, including weak oversight of its retained attorney network.

So, for example, in 2006, Fannie Mae hired a law firm to investigate foreclosure abuses. The law firm prepared a report that found that certain law firms that represented Fannie Mae in foreclosures [had] filed false documents in foreclosure proceedings in Florida.

And the report recommended that Fannie Mae stop this activity. It also observed Fannie Mae didn’t take steps to adequately oversee their attorneys. And FHFA in 2010 did a special review and also concluded that [Fannie Mae] didn’t take adequate steps, even though they were aware through this 2006 report of these foreclosure abuses.

So, we believe that strengthened law firm oversight by Fannie Mae could have detected, if not prevented, abuses like robo-signing. That’s why we recommended that FHFA require Fannie Mae to implement an effective operational risk program.

Q: In October 2011, FHFA directed Fannie and Freddie “to transition away from current foreclosure attorney network programs and move to a system where mortgage servicers select qualified law firms that meet certain minimum, uniform criteria.” Doesn’t this directive suggest that FHFA had concluded that GSE oversight of attorney networks involved in foreclosures is so flawed that they needed to ditch entirely their retained attorney networks?

A: Presumably, FHFA recognized that the retained attorney network wasn’t working in announcing its elimination. But the core message of our report on the retained attorney network--actually we did a report on default-related services--still applies. And whether default-related legal service providers are selected from a retained attorney network or another way, strong controls are critical to ensure oversight.

Our report on default-related legal services found that various indicators could have led FHFA to identify and address heightened risk posed by foreclosure abuses prior to late 2010. It also found that FHFA examination guidance for the audit period was inadequate. And we found that FHFA guidance to the GSEs was inadequate.

Specifically, there wasn’t a formal process for the enterprises to share information on bad actors. So, you’d have one enterprise firing a bad lawyer and not telling the other enterprise. And there was no guidance to the GSEs on how to handle problem servicers.

Q: And what could the guidance have done to prevent the abuses?

A: If those controls were in place, it may have prevented one enterprise from hiring lawyers who were found to be abusive to the other enterprise [that had] put those controls in place.

Our recommendation to FHFA was to make sure that there are sufficient controls at the enterprises so that they have guidance, so there’s sharing of information--almost like a watch list. [This would be like the federal system’s] program for the suspension and debarment of federal contractors. They put them on a watch list so people know if they are contractors who have defrauded or provided poor service to other government entities. We recommended something similar [to FHFA]. To the extent that the enterprises can share that information, that would be a good thing.

The other thing is that we have asked that there be more specific guidance to examiners from FHFA so that they can do more-targeted exams in this area. The more specific and the more they drill down, the better they are at making sure poor performers are rooted out.

Q: Do you think the new approach of having servicers hire attorneys for foreclosures will provide better safeguards against abuses? If so, how will it do this?

A: The core message of our report still applies. So, whether default-related legal service providers are selected from the retained attorney network or another way, strong controls are critical to ensure oversight. So, changing the selection method alone doesn’t necessarily address oversight needs. At the end of the day, the same types of problems can occur if controls are weak.

Q: Was the FHFA directive regarding attorney networks a result of any suggestions from your office following your examination of FHFA’s oversight of Fannie Mae?

A: Our recommendations in the report focused on strengthening controls, not necessarily disbanding the network. All I can tell you is that we issued our report. All of our recommendations were accepted by FHFA. And subsequent to the publication of our report, they disbanded the networks.

Q: Do you think that FHFA should make public its findings regarding its examination of Fannie Mae’s oversight of its retained attorney network?

A: As IG, I believe transparency is important for public understanding of how things work. It helps the IG do its job and it’s also critical for Congress. So, I think it would serve everybody well if the findings were made public.

Q: As FHFA goes about addressing its shortfall of examiners needed to properly execute its oversight, should its priority be beefing up the examination staff by adding more examiners? Or should it be getting more of its examiners accredited to improve the FHFA’s capabilities?

A: Figuring out how many examiners [would be] the right amount is a complex question. We’ve asked FHFA to study that issue as part of our report on this topic. At the same time, adding examination staff and getting staffers accredited are not mutually exclusive. Some options, such as getting [employees detailed from other federal agencies] or contractors, could address both problems simultaneously. And improving examination capacity goes directly to FHFA’s ability as conservator and regulator. And, based on our report, we found and recommended that it should be a priority.

Q: Is there an informal timetable for when you think that FHFA should have added more examiners to add to its current 120 examiners? Is there a numerical goal for the number of examiners who should be accredited, and if so, is there a timetable for achieving the goal?

A: Although it’s difficult to say who should and shouldn’t be accredited, I can say that in [terms of] other financial regulators, all examiners must be accredited when hired or enrolled in an accreditation program at the time of employment.

The examination program at FHFA is critical to assessing the enterprises’ credit market and operational risk management. Yet, the agency has told us that they have examination shortfalls resulting in scaled-back exams, delays and limited testing in the exam coverage. And we have actually seen key areas go unexamined as a result of these shortfalls.

So, the bottom line is that examination capacity and getting enough accredited examiners needs to be a big priority for FHFA. And we have made a number of recommendations to ensure that it is a priority, including: asking them to assess how these examination shortfalls adversely affect their examination programs; that they consider using detailees and contractors; and that they be transparent in publishing the shortfalls so Congress and the public understand what they are dealing with.

Q: The Mortgage Fraud Working Group, one of the groups under the Fraud Enforcement Task Force, was put together to combat mortgage fraud related to the financial crisis. When was it formed and what are some of its accomplishments?

A: The Mortgage Fraud Working Group is a subgroup of the Financial Fraud Enforcement Task Force, which was created in 2009. The [working group] is chaired by the fraud section of the Department of Justice, which acts as a coordinating body that explores important issues regarding mortgage fraud and, as appropriate, refers issues to the Financial Fraud Enforcement Task Force for further consideration.

The task force has a number of working groups. There’s a Corporate Fraud Working Group, a Mortgage Fraud Working Group, and there’s Procurement Fraud and Recovery Act Working Group. The larger Financial Fraud Enforcement Task Force is composed of more than 25 federal agencies, inspectors general, and their state and local partners.

The Mortgage Fraud Working Group has traveled throughout the United States and held town meetings to hear concerns from the public regarding mortgage fraud. And they have coordinated investigations and prosecutions. For example, the [working group] spearheaded something called Operation Stolen Dreams, which was the largest mortgage fraud sweep in history, which included charges, convictions and sentences for a total of more than 1,500 criminal defendants. Then, civil enforcement actions were also part of the sweep, which included about 400 civil fraud defendants and nearly $200 million in civil recoveries.

Q: That was since 2009?

A: Operation Stolen Dreams was launched on March 1, 2010, and ended on June 18, 2010. It was a multi-agency initiative.

Q: What concerns prompted your office to suggest the creation of the Federal Housing Inspectors General Task Force?

A: As you know, the current financial crisis has been driven to a large degree by the breakdown in the U.S. mortgage market. And the four agencies under the jurisdiction of the participating inspectors general for the initiative--namely FHFA, the Department of Veterans Affairs [VA], HUD [the Department of Housing and Urban Development] and U.S. Department of Agriculture--are responsible for approximately 96 percent of all mortgage-backed securities [MBS] issued. And these agencies are all concerned, to some degree, with common processes such as origination, securitization, loss mitigation and making mortgage loan guarantees.

Given the scope of the crisis and the nature of our responsibility as inspectors general and the keen congressional and public interest in fixing problems associated with housing finance, we all thought it would be critical to work together and leverage our resources. So, the creation of the initiative is really an effort to collaborate, leverage our experience and policy expertise, identify best practices, educate the public and Congress. And we recently published a compendium identifying all of each of the four agencies’ housing programs. And that’s on our website.

Q: Your semi-annual report had no commentary about the request for information issued by FHFA last August regarding the disposition of real estate-owned [REO] properties of Fannie and Freddie. Do you have any concerns about how FHFA should go about creating a process for Fannie and Freddie to sell off REO properties to investors who want to rent them out? If so, could you spell out some of those concerns?

A: Clearly, REO is a very important area. The GSEs hold almost 200,000 homes. How the REO [properties are] handled makes a difference for taxpayers, communities and neighborhoods, and ultimately will impact the housing crisis. Like so many issues in housing, things are complicated. On one hand, selling them quickly could have negative effects on home prices. On the other hand, delaying sales could add carrying costs and may [increase the] risk that prices decline further. There is also significant risk of fraud.

[G]ood internal controls and enforcement in this area [will] be necessary. And it’s good to see the FHFA and the GSEs are taking steps to address it. We’re obviously watching what they do. We’re also taking care not to get involved in management decisions or policy making, so we’re waiting until the initiative is complete.

At the end of the day, implementation is going to be key. And, in line with our findings to date, it’s important that FHFA provide careful analysis of its direction and it needs to be transparent to the markets and to communities about how it is proceeding. [Also], we have a report in progress looking at existing REO processes and procedures.

Q: Do you have any suggestions for provisions that should be put into any new GSE reform legislation to prevent some of the past problems with the GSEs?

A: Although I’m not a policy maker, my hope is that when legislation is drafted, that it takes our findings into consideration. My objective is that through our reporting, we can provide lessons learned for lawmakers. For example, we are looking at how operations of the GSEs have changed since conservatorship, how risk management is being conducted.

Based on the trends we have identified to date in the reports we have issued, it seems that FHFA needs more certainty and stability about its future and the future of the GSEs.

Q: Of course, that’s completely up in the air at this point.

A: Indeed, it is.  MB


bio: Robert Stowe England is a freelance writer based in Arlington, Virginia, and author of Black Box Casino: How Wall Street’s Risky Shadow Banking Crashed Global Finance, published by Praeger and available at Amazon.com. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Copyright © 2012 Mortgage Banking Magazine

Reprinted with Permission

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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