Dispute Emerges Over Absence of Watchdog for Fannie, Freddie

Nov. 12, 2009 -- The government agency in charge of mortgage giants Fannie Mae and Freddie Mac is currently without a watchdog, but officials argue that the vacancy isn't an attempt to avoid oversight, but rather a legal issue that they have handled openly and transparently.

The Federal Housing Finance Agency, which has jurisdiction over Fannie Mae, Freddie Mac, and federal home loan banks, has been without an inspector general since September when the Justice Department ruled that Ed Kelley, the watchdog up until that point, did not have legal authority to serve in the position.

But since the ailing mortgage giants have received tens of billions of taxpayer dollars and currently back trillions of dollars in home mortgages, the absence of a watchdog raised the ire this week of a key lawmaker on Capitol Hill.

Rep. Darrell Issa, the ranking Republican on the House Oversight and Government Reform Committee, said Congress should consider cutting off federal funds for the agency until Kelley is allowed to operate again or a permanent replacement is put in place.

"It is absolutely unconscionable that Fannie Mae and Freddie Mac, which were at the heart of the subprime housing collapse last fall that sent our economy into a tailspin, should be without independent oversight at a time when the federal government now owns over half of all the mortgages in the United States," Issa said in a statement Wednesday.

"Until this issue is resolved, Congress should question the wisdom of continuing to provide taxpayer support to Fannie and Freddie until proper oversight is in place," he demanded.

But FHFA officials point out that the current lack of a watchdog stems from legal issues. When the agency was created by Congress in July of 2008, the law stipulated that the agency's watchdog would have to be nominated by the president and confirmed by the Senate.

Kelley, as a carryover from one of the existing agencies that was molded into FHFA, was never appointed by a president or confirmed by the Senate, so he has no legal authority to fill the position, according to the Justice Department. Upon receiving the DOJ ruling in September, the agency removed Kelley from his position as inspector general, but then appointed him to head another office so he could continue in a similar role.

"The agency sought legal certainty as to the status of Mr. Kelley from the Justice Department," FHFA acting director Ed DeMarco told ABC News Wednesday. "When we got it, we acted in appropriate fashion by making him the head of the Office of Internal Audit so that he could continue his audit activities."

The agency also contends that they have handled the process openly.

"We have made it clear to Congress about the need for an inspector general and we have been transparent in our actions," DeMarco said.

The agency has posted information about the watchdog on its Web site and testified before Congress about the need for a inspector general. On the FHFA website, the agency outlines how the legal requirements led to Kelley being assigned to a different post.

"In view of these requirements, which were clarified with the Department of Justice, FHFA's Acting Director asked Ed Kelley, the former Inspector General for the Federal Housing Finance Board, to undertake certain audit activities for FHFA, including some projects already underway by him," the website states. "This step has been taken consistent with the statutory authorities assigned the FHFA Director. In this role, Mr. Kelley's title is Associate Director for Internal Audit and he reports directly to the Office of the Director."

The agency's former head James Lockhart also testified last summer before the House Financial Services Committee on the need for a watchdog to be put in place, as well as funding for the position.

"I fully support the establishment of an OIG for the agency and encourage the administration to move forward to fill this position," Lockhart said in testimony prepared for the June 3 hearing. "I also support Congress providing the IG with the necessary resources, through the annual appropriations process, to establish an appropriately staffed, high-quality office."

According to FHFA, when Congress created the agency in 2008, lawmakers did not institute any interim or acting authority for an IG. Issa this week suggested that Congress take legislative measures to remedy the situation.

"There is no way that Congress intended for there to be no IG for the FHFA and if we need to go back and fix this legislatively – we should do so immediately," the California lawmaker said.

A fellow watchdog told ABC News Wednesday that the absence of an inspector general at FHFA constituted "a serious gap in oversight".

Neil Barofsky, the special inspector general for the $700 billion financial bailout, had been working with Kelley and looking into criminal acts connected to the administration's Making Home Affordable program.

Barofsky himself was initially subjected to a DOJ ruling earlier this year when the Treasury Department asked the Office of Legal Counsel to rule on the watchdog's independence. Treasury ultimately withdrew the request in late summer.

For now, the inspector general position will remain vacant until the White House nominates a new watchdog for the agency. The White House said they are searching for a nominee for the position, but noted that the process does take time.

"We are currently working actively to nominate an individual for the position of inspector general at FHFA as soon as possible," White House spokesperson Jen Psaki said. "The process of announcing nominees does take some time given the rigor of the process to ensure that important positions like this one are filled by the highest quality people."

Just last week, Fannie Mae requested $15 billion in federal aid after reporting a net loss of $19.8 billion in the third quarter of this year. Fannie's latest request for government money – and fourth overall – would increase total federal help from $45 billion to $60 billion as the mortgage company tries to bounce back from the housing crunch.