What a review of FHLB actions during the banking crisis found

The Federal Home Loan Bank System made procedural errors in its response to depository failures earlier this year, but the bigger concern is that the crisis points to risks that bear out the need for reform, according to a watchdog report issued Friday.

The report from Federal Housing Finance Agency Inspector General Brian Tomney's office  didn't make any recommendations. However, it does note that the FHFA's Division of Federal Home Loan Bank Regulation has a pledge to review related concerns.

"The collapses drew scrutiny … into the FHLBanks' member credit risk management practices and, more broadly, into the system's role in lending to troubled members," the report from Kyle Roberts, deputy inspector general for evaluations, noted.

Even before the crisis, the FHFA had identified a need for reform of the system, but its focus shifted after the bank failures. The FHLBanks advance funds that are secured with a super lien against collateral like home loans or related assets, and did so heavily during the crisis.

In terms of the system's short-term response to the bank collapses, one criticism in the inspector general's report was that, "In certain instances, examiners did not describe primary worksteps in their pre-examination analysis memoranda, as required."

However, other documentation contained some of the missing information.

In a separate report also released Friday, the inspector general office identified turnover at the government-sponsored enterprises as a risk, noting "intense competition for skill sets such as information technology, which are core to the regulated entities' mission."

As an example, the watchdog flagged the fact that "FHFA found that an attrition rate of almost 18% at one FHLBank contributed to errors in its operations."

Fannie Mae's overall attrition rate reached as high as 9% in the last two years and at one point the equivalent number for technology positions reached 12%, according to annual report data cited by FHFA-OIG. Both Fannie and Freddie have also had notable turnover in multifamily.

The report also noted that one FHLBank has experienced regional wage pressure in its area, and a pandemic-related shift to remote work boosted attrition at one of the regulated entities.

It's unclear whether the limited return to the office has reversed the latter trend to any degree, but the report did note that one enterprise, Fannie Mae, recorded a decline in turnover in 2022 following increases the previous two years.

Many of the FHFA regulated entities have dealt with executive level turnover. In the first half of 2022, 19 officers left Fannie and Freddie had a dozen vacancies, according to the inspector general's report. Fannie has succession plans for 52 senior positions. Freddie has them for 68.

Recently Freddie CEO Michael DeVito announced that he plans to retire next year. So did Teresa Bryce Bazemore, president and CEO at the Federal Home Loan Bank of San Francisco.

Overall, the enterprises said their attrition rates are in line with those of their peers in the financial services sector and the IG acknowledged that their struggles with them in part have stemmed from broader market conditions.