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Report to the Congressional Committees: 

United States Government Accountability Office: 
GAO: 

November 2009: 

Financial Audit: 

Federal Housing Finance Agency's Fiscal Year 2009 Financial Statements: 

GAO-10-218: 

GAO Highlights: 

Highlights of GAO-10-218, a report to Congressional Committees. 

Why GAO Did This Study: 

The Housing and Economic Recovery Act of 2008 (HERA) created the 
Federal Housing Finance Agency (FHFA) and gave it responsibility for, 
among other things, the supervision and oversight of Fannie Mae, 
Freddie Mac, and the 12 federal home loan banks. Specifically, FHFA was 
assigned responsibility for ensuring that each of the regulated 
entities operates in a fiscally safe and sound manner, including 
maintenance of adequate capital and internal controls, and carries out 
its housing and community development finance mission. HERA also 
requires FHFA to annually prepare financial statements, and further 
requires GAO to audit these statements. 

Pursuant to HERA’s requirement, GAO audited FHFA’s fiscal year 2009 
financial statements to determine whether (1) the financial statements 
were fairly stated and (2) FHFA management maintained effective 
internal control over financial reporting. GAO also tested FHFA’s 
compliance with selected laws and regulations. 

GAO is not making any recommendations in this report. In commenting on 
a draft of this report, FHFA noted the challenges it faced in 
establishing the new agency while working to stabilize the housing 
market. It noted that it would continue to work to enhance its internal 
controls and ensure the reliability of its financial reporting, its 
operational soundness, and public confidence in its mission. 

What GAO Found: 

In GAO’s opinion, FHFA’s fiscal year 2009 financial statements are 
fairly presented in all material respects. GAO also concluded that FHFA 
had effective internal control over financial reporting as of September 
30, 2009. GAO found no reportable instances of noncompliance with the 
laws and regulations it tested. 

HERA established FHFA as an independent agency on July 30, 2008, and 
abolished, effective within 1 year of enactment, the Office of Federal 
Housing Enterprise Oversight (OFHEO) and the Federal Housing Finance 
Board (FHFB) – which, together with a mission group within the 
Department of Housing and Urban Development (HUD), had previous 
supervisory and oversight responsibilities for Fannie Mae, Freddie Mac, 
and the 12 federal home loan banks. During fiscal year 2009, OFHEO’s 
and FHFB’s personnel, property, and program activities, and certain 
employees and activities of HUD, were transferred to FHFA, and the 
assets, liabilities, and financial transactions of OFHEO and FHFB were 
consolidated into FHFA. While FHFA was in existence prior to the start 
of fiscal year 2009, this was its first full year of operations and the 
first year for which it prepared financial statements. Consequently, 
FHFA’s financial statements do not present comparative information for 
the prior year.  

In early September 2008, Fannie Mae and Freddie Mac were placed into 
conservatorship by the Director of FHFA, with the stated intent to 
stabilize these entities. The assets, liabilities, and activities of 
the two entities, Fannie Mae and Freddie Mac, are not reflected in FHFA’
s fiscal year 2009 financial statements, based on determinations by the 
Office of Management and Budget (OMB) and the Department of the 
Treasury (Treasury) that they did not meet the criteria for inclusion 
in the financial statements of the U.S. government or the Treasury 
under federal accounting concepts. Specifically, OMB and Treasury 
concluded this because the entities are not currently reflected in the 
federal government’s budget and because the conservatorship arrangement 
is considered to be temporary. FHFA management concurred with this 
conclusion. Should circumstances change, this decision would need to be 
revisited. 

Over the longer term, Congress and the executive branch face difficult 
decisions on how to restructure the entities and promote housing 
opportunities while limiting the risks to taxpayers and the financial 
markets. GAO issued a report containing a framework for evaluating 
various options available. 

GAO noted other less significant matters involving FHFA’s internal 
controls and will be reporting separately to FHFA management on these 
matters. 

View [hyperlink, http://www.gao.gov/products/GAO-10-218] or key 
components. For more information, contact Steven J. Sebastian at (202) 
512-3406 or sebastians@gao.gov. 

[End of section] 

Contents: 

Letter: 

Opinion on Financial Statements: 

Agency Comments and Our Evaluation: 

Audit Report4: 

Appendix I: Management Report on Internal Control over Financial 
Reporting: 

Appendix II: Comments from the Federal Housing Finance Agency: 

Abbreviations: 

FHFA: Federal Housing Finance Agency: 

FHFB: Federal Housing Finance Board: 

HERA: Housing and Economic Recovery Act: 

HUD: Department of Housing and Urban Development: 

OFHEO: Office of Federal Housing Enterprise Oversight: 

OMB: Office of Management and Budget: 

FMFIA: Federal Managers' Financial Integrity Act of 1982: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

The Honorable Christopher Dodd: 
Chairman: 
The Honorable Richard Shelby: 
Ranking Member: 
Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

The Honorable Barney Frank: 
Chairman: 
The Honorable Spencer Bachus: 
Ranking Member: 
Committee on Financial Services: 
House of Representatives: 

This report presents our opinion on whether the financial statements of 
the Federal Housing Finance Agency (FHFA) are presented fairly, in all 
material respects, in conformity with U.S. generally accepted 
accounting principles for the year ended September 30, 2009 - the first 
full year of FHFA's operation. These financial statements are the 
responsibility of FHFA. This report also presents (1) our opinion on 
the effectiveness of FHFA's internal control over financial reporting 
as of September 30, 2009, and (2) the results of our tests of FHFA's 
compliance with selected laws and regulations during fiscal year 2009. 

The Housing and Economic Recovery Act of 2008[Footnote 1] established 
FHFA as an independent agency empowered with supervisory and regulatory 
oversight of Fannie Mae, Freddie Mac, and the 12 Federal Home Loan 
Banks. The act requires FHFA to annually prepare and submit financial 
statements to the Director of the Office of Management and Budget, and 
requires GAO to audit the agency's financial statements and submit to 
the Congress a report on the audit and to the President and FHFA a copy 
of the report. We conducted this audit in accordance with U.S. 
generally accepted government auditing standards. The accomplishment of 
this first-ever audit of FHFA's financial statements was made possible 
by the tremendous dedication of time and effort from FHFA management 
and staff. 

FHFA faced significant challenges during fiscal year 2009 in merging 
the personnel and operations of the former Office of Federal Housing 
Enterprise Oversight and Federal Housing Finance Board into one 
regulatory entity. At the same time, FHFA was further challenged with 
carrying out its responsibilities as conservator of Fannie Mae and 
Freddie Mac to ensure these entities continued to meet their mission 
requirements of providing stability to the secondary market for 
residential mortgages and serving the needs of certain targeted groups. 
FHFA placed both entities into conservatorship in September 2008 in the 
wake of their deteriorating financial conditions with the objective of 
stabilizing them. These stabilization efforts included direct financial 
support from the U.S. Treasury to the entities of up to $200 billion 
each in exchange for Treasury's purchase of the entities' senior 
preferred stock. To date, the entities have received about $96 billion 
through such purchases. FHFA has maintained that the conservatorship 
arrangement is not intended to be permanent. Over the longer term, 
Congress and the Executive branch will face difficult decisions on how 
to restructure Fannie Mae and Freddie Mac and promote housing 
opportunities while limiting the risks to taxpayers and the stability 
of the financial markets. 

In a recent report[Footnote 2], we analyzed the record of Fannie Mae 
and Freddie Mac in meeting their housing mission objectives, their 
organizational structures, and the circumstances which led to the 
federal government's actions to intercede and stabilize them. In that 
report, we discussed the need for Congress to reevaluate the roles, 
structures, and performance of the entities, and to consider various 
options to facilitate mortgage finance while mitigating safety and 
soundness and systemic risk concerns. We also provided a framework for 
identifying the trade-offs associated with the options, and identified 
potential regulatory and oversight structures, principles, and actions 
that could help ensure their effective implementation. 

We are sending copies of this report to the Chairman of the Federal 
Housing Finance Oversight Board, the Secretary of the Treasury, the 
Secretary of Housing and Urban Development, the Chairman of the 
Securities and Exchange Commission, the Director of the Office of 
Management and Budget, and other interested parties. In addition, this 
report also is available at no charge on GAO's Web site at [hyperlink, 
http://www.gao.gov]. 

If you have any questions concerning this report, please contact me at 
(202) 512-3406 or sebastians@gao.gov. Contact points for our Offices of 
Congressional Relations and Public Affairs may be found on the last 
page of this report. 

Signed by: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

[End of section] 

United States Government Accountability Office: 
Washington, D.C. 20548: 

To the Director of the Federal Housing Finance Agency: 

In accordance with the Housing and Economic Recovery Act of 2008 
(HERA), we are responsible for conducting audits of the financial 
statements of the Federal Housing Finance Agency (FHFA). In our audit 
of FHFA's fiscal year 2009 financial statements, we found: 

* the financial statements are presented fairly, in all material 
respects, in conformity with U.S. generally accepted accounting 
principles; 

* FHFA maintained, in all material respects, effective internal control 
over financial reporting as of September 30, 2009; and: 

* no reportable noncompliance with laws and regulations we tested. 

The following sections discuss in more detail (1) these conclusions; 
(2) our conclusions on Management's Discussion and Analysis; (3) our 
audit objectives, scope, and methodology; and (4) agency comments and 
our evaluation. 

Opinion on Financial Statements: 

FHFA's financial statements, including the accompanying notes, present 
fairly, in all material respects, in conformity with U.S. generally 
accepted accounting principles, its assets, liabilities and net 
position as of September 30, 2009, and its net costs, changes in net 
position, and budgetary resources for the fiscal year then ended. 

As discussed in note 1A of the financial statements, HERA[Footnote 3] 
established FHFA on July 30, 2008, and charged it with the supervisory 
and regulatory oversight of Fannie Mae, Freddie Mac, and the 12 Federal 
Home Loan Banks. These responsibilities were previously assigned to the 
Office of Federal Housing Enterprise Oversight (OFHEO), the Federal 
Housing Finance Board (FHFB), and a mission group in the Department of 
Housing and Urban Development (HUD). HERA abolished OFHEO and FHFB 
effective no later than 1 year after enactment of the act, or by July 
30, 2009. In accordance with HERA, during fiscal year 2009, personnel, 
property, and program activities of OFHEO and FHFB, and certain HUD 
employees and activities related to regulation of Fannie Mae and 
Freddie Mac, were transferred to FHFA, with OFHEO and FHFB ceasing all 
activity in July, 2009. The assets, liabilities, and financial 
transactions of OFHEO and FHFB were consolidated into FHFA during 
fiscal year 2009. Because fiscal year 2009 was the first full year of 
FHFA's operations, this is the first year in which FHFA prepared 
financial statements. Consequently, the financial statements do not 
present comparative information for the prior year. 

As discussed in note 1A of the financial statements, FHFA's fiscal year 
2009 financial statements do not include the assets, liabilities, and 
activities associated with Fannie Mae and Freddie Mac. In early 
September 2008, less than 2 months after its establishment, the 
Director of FHFA placed Fannie Mae and Freddie Mac into conservatorship 
under the authority of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992, as amended by HERA. As announced by the 
Director, FHFA's goal in placing the two entities into conservatorship 
was to stabilize them with the objective of maintaining normal business 
operations and restoring safety and soundness. Shortly after Fannie Mae 
and Freddie Mac were placed in conservatorship, the Office of 
Management and Budget (OMB) and the Department of the Treasury 
(Treasury) determined that the finances of these entities would not be 
included in the financial statements of the federal government. In 
making this determination, OMB and Treasury reviewed the criteria 
contained in Statement of Federal Financial Accounting Concepts No. 2, 
Entity and Display. They concluded that because the entities were not 
listed in the section of the federal government's budget entitled 
"Federal Programs by Agency and Account" and because the nature of the 
conservatorships and the federal government's ownership and control of 
the entities were considered to be temporary, the entities did not meet 
the conclusive or indicative criteria in Concept Statement No. 2 for 
consolidation. Treasury recently revisited this decision with respect 
to its own financial statements and reaffirmed it and its underlying 
basis. FHFA management concurs with this conclusion. Consequently, FHFA 
did not consolidate Fannie Mae and Freddie Mac into its fiscal year 
2009 financial statements. Should circumstances change, such as the 
inclusion of Fannie Mae and Freddie Mac in the federal budget or a 
determination that the current degree of federal control and ownership 
of the entities is other than temporary, this decision would need to be 
revisited. 

Opinion on Internal Control: 

FHFA maintained, in all material respects, effective internal control 
over financial reporting as of September 30, 2009, that provided 
reasonable assurance that misstatements, losses, or noncompliance 
material in relation to the financial statements would be prevented or 
detected and corrected on a timely basis. Our opinion is based on 
criteria established under 31 U.S.C. § 3512(c), (d), commonly known as 
the Federal Managers' Financial Integrity Act of 1982 (FMFIA). 

We identified certain deficiencies in FHFA's system of internal control 
that we consider not to be material weaknesses or significant 
deficiencies.[Footnote 4] These deficiencies involve matters related to 
certain accounting and monitoring procedures, access controls, and 
information security management. We have communicated these matters to 
management and, where appropriate, will report on them separately. 

Compliance with Laws and Regulations: 

Our tests of FHFA's compliance with selected provisions of laws and 
regulations for fiscal year 2009 disclosed no instances of 
noncompliance that would be reportable under U.S. generally accepted 
government auditing standards. The objective of our audit was not to 
provide an opinion on overall compliance with laws and regulations. 
Accordingly, we do not express such an opinion. 

Consistency of Other Information: 

FHFA's Management's Discussion and Analysis contains a wide range of 
information, some of which is not directly related to the financial 
statements. We did not audit and we do not express an opinion on this 
information. However, we compared this information for consistency with 
the financial statements and discussed the methods of measurement and 
presentation with FHFA officials. On the basis of this limited work, we 
found no material inconsistencies with the financial statements or U.S. 
generally accepted accounting principles or OMB Circular No. A-136, 
Financial Reporting Requirements. 

Objectives, Scope, and Methodology: 

FHFA management is responsible for (1) preparing the financial 
statements in conformity with U.S. generally accepted accounting 
principles, (2) establishing and maintaining effective internal control 
over financial reporting and evaluating its effectiveness, and (3) 
complying with applicable laws and regulations. FHFA management 
evaluated the effectiveness of FHFA's internal control over financial 
reporting as of September 30, 2009, based on the criteria established 
under FMFIA. FHFA management's assertion is included in appendix I. 

We are responsible for planning and performing the audit to obtain 
reasonable assurance and provide our opinion about whether (1) FHFA's 
financial statements are presented fairly, in all material respects, in 
conformity with U.S. generally accepted accounting principles, and (2) 
FHFA management maintained, in all material respects, effective 
internal control over financial reporting as of September 30, 2009. We 
are also responsible for (1) testing compliance with selected 
provisions of laws and regulations that have a direct and material 
effect on the financial statements and (2) performing limited 
procedures with respect to certain other information accompanying the 
financial statements. 

In order to fulfill these responsibilities, we: 

* examined, on a test basis, evidence supporting the amounts and 
disclosures in the financial statements; 

* assessed the accounting principles used and significant estimates 
made by management; 

* evaluated the overall presentation of the financial statements; 

* obtained an understanding of the entity and its operations, including 
its internal control over financial reporting; 

* considered FHFA's process for evaluating and reporting on internal 
control over financial reporting that FHFA is required to perform by 
FMFIA; 

* assessed the risk that a material misstatement exists in the 
financial statements and the risk that a material weakness exists in 
internal control over financial reporting; 

* evaluated the design and operating effectiveness of internal control 
over financial reporting based on the assessed risk; 

* tested relevant internal control over financial reporting; 

* tested compliance with selected provisions of the following laws and 
their related regulations: 31 U.S.C. § 3902 (a), (b), (f) - Interest 
penalties under the Prompt Payment Act; 31 U.S.C. § 3904 -Limitations 
on Discount Payments Under the Prompt Payment Act; 5 U.S.C. § 5332 and 
5343, and 29 U.S.C. § 206 - Pay and Allowance System for Civilian 
Employees; Federal Employees' Retirement System Act of 1986 (FERSA), as 
amended; Social Security Act of 1935, as amended; Federal Employees 
Health Benefits Act of 1959, as amended; and Housing and Economic 
Recovery Act of 2008; and: 

* performed such other procedures as we considered necessary in the 
circumstances. 

An entity's internal control over financial reporting is a process 
effected by those charged with governance, management, and other 
personnel, the objectives of which are to provide reasonable assurance 
that (1) transactions are properly recorded, processed, and summarized 
to permit the preparation of financial statements in conformity with 
U.S. generally accepted accounting principles, and assets are 
safeguarded against loss from unauthorized acquisition, use, or 
disposition, and (2) transactions are executed in accordance with the 
laws governing the use of budget authority and other laws and 
regulations that could have a direct and material effect on the 
financial statements. 

We did not evaluate all internal controls relevant to operating 
objectives as broadly established under FMFIA, such as those controls 
relevant to preparing statistical reports and ensuring efficient 
operations. We limited our internal control testing to controls over 
financial reporting. Because of inherent limitations, internal control 
may not prevent or detect and correct misstatements due to error or 
fraud, losses, or noncompliance. We also caution that projecting any 
evaluation of effectiveness to future periods is subject to the risk 
that controls may become inadequate because of changes in conditions, 
or that the degree of compliance with the policies or procedures may 
deteriorate. 

We did not test compliance with all laws and regulations applicable to 
FHFA. We limited our tests of compliance to selected provisions of laws 
and regulations that have a direct and material effect on the financial 
statements for the fiscal year ended September 30, 2009. We caution 
that noncompliance may occur and not be detected by these tests and 
that such testing may not be sufficient for other purposes. 

We performed our audit in accordance with U.S. generally accepted 
government auditing standards. We believe our audit provides a 
reasonable basis for our opinions and other conclusions. 

Agency Comments and Our Evaluation: 

In commenting on a draft of this report, FHFA stated that it was 
pleased that the audit found that its fiscal year 2009 financial 
statements were presented fairly, that it maintained effective internal 
control over financial reporting, and that there had been no instances 
of reportable noncompliance with laws and regulations. FHFA noted the 
challenges it had faced during fiscal year 2009 in trying to stabilize 
the housing market in the midst of financial market turmoil while 
creating the new agency and establishing a new financial accounting 
system, policies, and controls, and noted that the unqualified audit 
opinion was testimony to the hard work and dedication of its management 
and staff in building a solid foundation for the agency. FHFA also 
noted that it would continue to work to enhance its internal controls 
and ensure the reliability of its financial reporting, its operational 
soundness, and public confidence in its mission. 

The complete text of FHFA's response is reprinted in appendix II. 

Signed by: 

Steven J. Sebastian: 
Director: 
Financial Management and Assurance: 

November 9, 2009: 

[End of section] 

Appendix I: Management Report on Internal Control over Financial 
Reporting: 

FHFA's Mission: 

Provide effective supervision, regulation, and housing mission 
oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks 
to promote their safety and soundness, support housing finance and 
affordable housing, and support a stable and liquid mortgage market. 

FHFA's Values: 

Accountability: 

We foster responsibility on the part of individual employees and 
divisions through defined delegations of authority. We align our 
actions and resources with our mission and respond promptly and 
proactively to emerging risks. We adhere to a predictable risk-based 
supervision program. We use agency resources and authorities 
efficiently and effectively to achieve our mission and goals. 

Responsiveness: 

We cooperate, collaborate, and communicate within the Federal Housing 
Finance Agency (FHFA) and with other government agencies, Congress, and 
the public We respond promptly to external requests and regularly 
disseminate information about the housing industry and markets. We 
promptly address and dearly communicate issues, decisions, and 
conclusions to the regulated entities. 

Independence: 

We are the independent regulator of Fannie Mae, Freddie Mac, and the 
Federal Home Loan Banks. Our evaluations of the housing-related 
regulated entities are unbiased and remain free from external 
influence. 

Integrity: 

We adhere to the highest ethical and professional standards. We treat 
the regulated entities, the public, policymakers and other stakeholders 
fairly with impartiality and respect We apply consistent treatment to 
and among the housing regulated entities and base our decisions on the 
merits of their current actions and conditions. 

Professionalism: 

We maintain a highly skilled, dedicated, and diverse workforce. We 
promote equal opportunity and advancement on the basis of merit. We 
recognize employees who demonstrate competence and effectiveness in 
their decisions and actions and whose results serve the agency's 
mission and the public interest. We judge the regulated entities 
against defined industry standards through a disciplined examination 
approach. 

Description of FHFA: 

The Housing and Economic Recovery Act of 2008 (HERA) established FHFA 
by merging the Office of Federal Housing Enterprise Oversight (OFHEO), 
the Federal Housing Finance Board (FHFB), and the Department of Housing 
and Urban Development's (HUD) mission group to oversee the financial 
safety and soundness and the housing mission of all the housing-related 
government-sponsored enterprises (GSEs), also referred to as the 
regulated entities. These include the Federal National Mortgage 
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation 
(Freddie Mac), and the Federal Home Loan Bank (FHLBank) System, 
composed of 12 FHLBanks and the Office of Finance. 

FHFA is a small government agency with a workforce that includes highly 
skilled economists, market analysts, examiners, subject matter experts, 
technology specialists, accountants, and attorneys. FHFA had a staff of 
428 employees at the end of FY 2009. In FY 2010, the agency plans to 
add 52 employees. 

FHFA's Director sets the direction for the agency to achieve its 
mission. FHFA divisions and offices have specific responsibilities and 
work together to ensure effective execution of the agency's mission. 

The Division of Federal Home Loan Bank Regulation is responsible for 
the supervision and examination of the FHLBanks and the Office of 
Finance. The division conducts annual on-site examinations, periodic 
visitations, and off-site monitoring. Other division responsibilities 
include supervisory policy and program development, regulatory analysis 
and developments, and economic research and analysis in support of 
FHLBank regulation. 

The Division of Enterprise Regulation is responsible for the 
supervision and examination of Fannie Mae and Freddie Mac (The 
Enterprises). The division conducts annual on-site examinations and off-
site monitoring. The division provides oversight and ensures 
coordination among all FHFA mission-critical supervisory functions, 
including programs for capital adequacy, compliance, examination, 
financial analysis, and quality assurance in support of the 
Enterprises. 

Figure 1: Organization Chart for FHFA: 

[Refer to PDF for image: organization chart] 

Top level: Office of the Director. 

Second level, reporting to Office of the Director: Office of Internal 
Audit. 

Third level, reporting to Office of the Director: 
Division of Enterprise Regulation; 
Division of FLHBank Regulation; 
Division of Housing Mission & Goals; 
Office of the Chief Administrative Officer; 
Office Of General Counsel; 
Office of External Relations; 
Office of Technology & Information Management. 

Fourth level, reporting to Division of Enterprise Regulation and 
Division of FLHBank Regulation: 
Office of Conservatorship Operations. 

Fourth level, reporting to Division of Housing Mission & Goals:
Office of Policy & Research Analysis; 
Office of the Chief Accountant; 
Office of Housing Mission & Goals. 

Fourth level, reporting to Office of the Chief Administrative Officer: 
Office of Budget & Financial Management; 
Office of Human Resources Management. 

[End of figure] 

The Division of Housing Mission and Goals is composed of the following 
three offices, each with responsibilities that span all of the 
regulated entities: 

The Office of Housing Mission and Goals is responsible for oversight of 
the housing mission and goals of the Enterprises and the oversight of 
the housing finance, community, and economic development mission of the 
FHLBanks. 

The Office of the Chief Accountant develops safety and soundness 
guidance and policies related to accounting, auditing, and financial 
reporting and disclosure at the regulated entities. The office monitors 
the compliance of the regulated entities with such policies and also 
promotes the application of consistent accounting policies across the 
regulated entities. 

The Office of Policy Analysis and Research conducts research and policy 
analysis to assess the short- and long-term effect of trends and issues 
in the activities of the regulated entities, housing finance, and 
financial regulation on the regulatory and supervisory functions of 
FHFA. The office also prepares data series and publications that inform 
the public about the housing finance system and changes in house prices 
and helps support development of FHFA regulatory policies. 

The Office of Conservatorship Operations assists the FHFA Director, as 
conservator, in preserving and conserving Fannie Mae's and Freddie 
Mac's assets and property. The office ensures the Enterprises 
appropriately focus on their mission, including the stability, 
liquidity, and affordability of the housing market. 

The Office of the General Counsel advises and supports the Director and 
all FHFA staff on legal matters related to functions, activities, and 
operations of FHFA and the regulated entities, specifically prproviding 
support for supervision functions, promulgation of regulations, and 
enforcement actions. 

The Office of Internal Audit reports directly to the Office of the 
Director and carries out certain audit functions for FHFA as delegated 
by the Director. Until FHFA has an Office of Inspector General, the 
Office of Internal Audit will address reports of violations of any law, 
rule or regulation; gross mismanagement gross waste of funds; abuses of 
authority; or substantial and specific dangers to public safety or 
complaints regarding the programs and operations of the agency. 

The Office of External Relations works with FHFA's external 
stakeholders to effectively communicate information about the agency, 
respond to public and congressional inquiries, and release pertinent 
information to the public. 

The Office of the Chief Administrative Officer provides operational 
support and services and business solutions to FHFA offices. The 
office's staff members work in a variety of areas, including human 
resource management, budget and financial management, performance 
management, and facilities management. 

The Office of Technology and Information Management (OTIM) is 
responsible for ensuring the integrity, confidentiality, and 
availability of FHFA's information systems and assets. The office 
maintains the information technology (IT) infrastructure, develops 
information systems, provides storage and management of the agency's 
information assets, provides support to FHFA employees on IT systems, 
manages Freedom of Information Act requests, and ensures information 
security. 

To fulfill its mission, FHFA has available a full range of oversight 
and regulatory authorities to deal with the regulated entities. These 
authorities include full scope examinations and enforcement mechanisms, 
such as cease and desist orders, civil money penalties, removal 
authority, and independent litigation authority. 

Description of Regulated Entities: 

The Enterprises: 

The primary and secondary mortgage markets work together to finance 
homeownership opportunities. The secondary market provides liquidity to 
the primary market and helps establish mortgage interest rates. 

In the primary mortgage market, financial institutions make mortgage 
loans directly to homebuyers. This process begins when the potential 
homeowner, or borrower, applies for a mortgage loan from a lender. The 
lender can be a savings bank, credit union, mortgage banking company, 
commercial bank, savings and loan, or state or local housing finance 
agency. Once the lender approves the application and the loan is 
processed, the mortgage lender provides the money to the borrower, who 
then applies the proceeds of the mortgage to the cost of the home. The 
lender in the primary market either holds the loan in its own portfolio 
or sells the loan into the secondary market. 

Congress established Fannie Mae and Freddie Mac (the Enterprises) to 
perform an important role in the nation's housing finance system: 
providing liquidity, stability, and affordability to the secondary 
mortgage market. In the secondary mortgage market, the Enterprises make 
funds readily accessible for banks, savings and loans, and mortgage 
companies that make loans in the primary mortgage market to finance 
housing. Fannie Mae and Freddie Mac are the largest buyers of mortgages 
in the secondary market. They hold the mortgages they purchase in their 
portfolios or package the loans into mortgage-backed securities (MBS). 
The Enterprises also buy other agency and private-label MBS (PLMBS) for 
their own portfolios. Lenders can use the cash raised by selling 
mortgages to the Enterprises to lend more so individuals and families 
who buy homes and investors who purchase single-family homes or 
apartment buildings and other multifamily dwellings will have a 
reliable, stable supply of mortgage money. Roughly half of the 
mortgages purchased by Fannie Mae and Freddie Mac finance dwelling 
units that are affordable to low- and moderate-income households. More 
than one-fourth are located in geographic areas designated as 
"underserved." 

Figure 2: FHFA's Oversight Role — Fannie Mae & Freddie Mac: 

[Refer to PDF for image: illustration] 

[End of figure] 

MBS are traded in the secondary mortgage market. Because Fannie Mae and 
Freddie Mac package mortgages as MBS and guarantee timely payment of 
principal and interest on the underlying mortgages, investors who might 
not otherwise invest in mortgages enter the secondary mortgage market, 
which expands the pool of funds available for housing. This process 
makes the secondary mortgage market more liquid and helps lower the 
interest rates paid by homeowners and other mortgage borrowers. 

Figure 3: FHFA's Oversight Role — FHLBanks: 

[Refer to PDF for image: illustration] 

Note: The collateral pledged may include assets other than mortgages.
Also, the collateral pledged may be loans originated well in the past. 

[End of figure] 
		
The Federal Home Loan Banks: 

The fundamental business of the FHLBanks is to provide a readily 
available, low-cost source of funds in a wide range of maturities to 
meet the liquidity demands of members. The FHLBanks are cooperatives, 
which means only members and former members own the capital stock in 
each FHLBank. Membership is limited to regulated depositories, 
insurance companies, and community development financial institutions 
engaged in residential housing finance. As a member-owned cooperative, 
each FHLBank conducts its credit and mortgage program businesses with 
its members or eligible housing associates. 

The FHLBanks make loans, called advances, to their members and eligible 
housing associates on the security of mortgages and other collateral 
pledged by the borrowing member or housing associate. This serves the 
general public by increasing the availability of credit for residential 
mortgages and community investments and by making the mortgages and 
mortgage securities owned by members more liquid. Enhancing the 
liquidity of mortgages makes members more likely to invest in mortgages 
and MBS. 

Advances are the largest category of assets of the FHLBanks. In 
addition, some FHLBanks provide members with a means of enhancing 
liquidity by purchasing or funding home mortgages through mortgage 
programs developed for their members. Under these programs, members are 
offered the opportunity to sell qualifying mortgages to, or fund them 
through, an FHLBank. Members can also borrow from an FHLBank to fund 
low-income housing, helping the members satisfy their regulatory 
requirements under the Community Reinvestment Act. Finally, some 
FHLBanks offer their members a variety of services such as 
correspondent banking, which includes security safekeeping; wire 
transfers and settlements; cash management letters of credit and 
derivative intermediation. 

The FHLBanks fund their assets and operations principally through the 
sale of debt instruments, known as consolidated obligations, to the 
public through the Office of Finance. Each FHLBank is jointly and 
severally liable with the other FHLBanks for all consolidated 
obligations issued. Consolidated obligations are not obligations of the 
United States, and the U.S. government does not guarantee them. 

Figure 4 • Federal Home Loan Bank Districts: 

[Refer to PDF for image: US map and associated data] 

Alabama, District of Columbia, Florida, Georgia, Maryland, North 
Carolina, South Carolina, Virginia. 

Boston: 
Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, 
Vermont. 

Chicago: 
Illinois, Wisconsin. 

Cincinnati: 
Kentucky, Ohio, Tennessee. 

Dallas: 
Arkansas, Louisiana, Mississippi, New Mexico, Texas. 

Des Moines: 
Iowa, Minnesota, Missouri, North Dakota, South Dakota. 

Indianapolis: 
Indiana, Michigan. 

New York: 
New Jersey, New York, Puerto Rico, Virgin Islands. 

Pittsburgh: 
Delaware, Pennsylvania, West Virginia. 

San Francisco: 
Arizona, California, Nevada. 

Seattle: 
Alaska, Guam, Hawaii, Idaho, Montana, Oregon, Utah, Washington, 
Wyoming. 

Topeka: 
Colorado, Kansas, Nebraska, Oklahoma. 

[End of figure] 

Performance Highlights: 

Establishing FHFA: 

At the beginning of FY 2009, former OFHEO and FHFB employees were 
officially transferred to FHFA, less than 90 days after enactment of 
HERA. Since then, FHFA has worked to integrate the separate 
administrative and financial systems of the two predecessor agencies. 

FHFA contracted with the Treasury Department's Bureau of the Public 
Debt. Administrative Resource Center to provide accounting services for 
the agency. The Bureau of the Public Debt is approved by the federal 
Office of Management and Budget (OMB) as a "Center of Excellence for 
Financial Management" A new accounting system, which went live on July 
1, 2009, provides the agency with a cost-effective integrated system 
for its accounting procurement, and travel activities. The project was 
completed within established timeframes and budget Combining the 
financial accounting functions of the predecessor agencies was an 
important step toward completing the transition to an operationally 
unified agency. 

The Office of Human Resource Management coordinated the programming and 
systems changes with the National Finance Center to achieve a 
transition from two separate systems into a unified payroll and 
processing system for FHFA. The integration was completed in July 2009, 
on schedule and under budget With a unified FHFA personnel and payroll 
system, the agency can move to the next phase of full employee 
integration: the migration of employees into a combined compensation 
and benefits package. 

OTIM worked to unify FHFA information technology infrastructure 
operations. The goal throughout the integration effort was to build and 
operate one IT infrastructure to support FHFA's mission effectively. 
Specifically, FHFA has: 

* Implemented an integrated e-mail messaging system;
* Consolidated software licenses and services;
* Eliminated duplication of information systems and data sources;
* Established the FHFA.gov domain and developed and deployed a new 
FHFA.gov Web site;
* Established an internal employee communication site; and
* Unified internal customer service operations. 

Charting the Future: 

Figure: Photograph: FHFA staff meet to develop the 2009 Agency 
Strategic Plan in December of 2008. 

[End of figure] 

In its first year, FHFA published its first strategic plan, first human 
capital plan, and first combined Performance and Accountability Report. 
The combined PAR presented progress and accomplishments of FHFA, FHFB, 
and OFHEO for FY 2008. 

The FHFA Strategic Plan 2009-2014, formally approved and adopted in 
July 2009, established the strategic goals and objectives of FHFA. For 
those goals to be achieved, it is imperative to restore the financial 
health of the Enterprises through the conservatorships, enhance the 
safety and soundness of the FHLBanks and the Enterprises, support 
efforts to return stability to domestic housing markets, and ensure 
that the regulated entities contribute to affordable housing and 
community and economic development. 

The strategic plan recognizes Fannie Mae's and Freddie Mac's roles in 
the Making Home Affordable (MHA) program, which seeks to stabilize 
mortgage markets by combating preventable foreclosures. The strategic 
plan also reinforces the strong supervisory framework HERA created for 
the regulation and oversight of the regulated entities, which is 
crucial in enhancing the financial safety and soundness of their 
operations and in financing and otherwise supporting affordable housing 
and community development activities. 

The FHFA 2009-2011 Strategic Human Capital Plan links human capital 
planning to FHFA's mission and strategic goals. The plan describes 
FHFA's current workforce and business challenges that will affect the 
management of human capital in the next few years. It also presents a 
program to ensure that FHFA has the staff needed to meet its 
performance goals and mission. The human capital plan is premised on 
the principle that successful human resources management is the 
foundation of the agency's ability to accomplish performance goals and 
achieve its mission. 

Conducting Examinations and Targeted Supervisory Reviews: 

The Division of FHLBank Regulation's examination process emphasizes an 
ongoing supervisory approach involving both off- and on-site 
activities. Identifying excessive risk exposure through an evaluation 
of an FHLBank's condition and practices is the primary examination 
goal. FHFA accomplishes this by conducting risk-based examinations. The 
scope, depth, and focus of the examinations are based on the results of 
previous examinations, visitations, or other analyses. During FY 2009, 
FHFA examiners conducted on-site safety and soundness examinations at 
all 12 FHLBanks and the Office of Finance. The examination process was 
enhanced in 2009 to allow an expansion of on-site activities to conduct 
more rigorous analysis in areas of perceived risk. Significant 
examination results, known as "matters requiring attention' (MRAs), are 
reviewed by a committee of senior division staff before discussion with 
the FHLBanks' Board of Directors. 

The Division of Enterprise Regulation (DER) focuses on the safety and 
soundness of Fannie Mae and Freddie Mac. To this end, FHFA conducted 
continuous supervision activities and targeted reviews of key areas 
such as financial performance, credit quality, operational risks, 
liquidity planning, interest rate risk, retained portfolios, and 
enterprise risk management. FHFA also strengthened its oversight of
MRAs through ongoing dialogue with management of the Enterprises about 
corrective actions, additional management reporting for FHFA 
executives, and establishing an Enforcement Oversight Committee. FHFA 
will continue to review and revise its formal supervisory strategy for 
the Enterprises to ensure examinations and targeted reviews reflect a 
risk-focused approach. 

Ensuring Continued Functioning of the Secondary Mortgage Market: 

Throughout FY 2009, FHFA acted as both conservator of the Enterprises 
and as the mission and safety and soundness regulator of all the 
regulated entities. In both capacities, FHFA worked to ensure the 
regulated entities continued to provide a stable and affordable source 
of liquidity for the primary mortgage market. 

The Department of Treasury's financial support for the Enterprises 
served as a foundation for those efforts. In conjunction with the 
establishment of the conservatorships in September 2008, FHFA, acting 
as conservator, entered into agreements that committed the Treasury to 
acquire senior preferred stock in each Enterprise to ensure each 
maintained positive net worth. In February, Treasury doubled the size 
of these agreements to $200 billion each. The financial support 
provided through those agreements, FHFA's suspension of all regulatory 
capital requirements following the conservatorships, and Treasury and 
the Federal Reserve's purchases of Enterprise debt and MBS enabled the 
Enterprises to carry out normal secondary mortgage market operations. 
Those operations included providing liquidity to banks, thrifts, and 
other mortgage lenders. 

Enhancing Foreclosure Prevention Efforts: 

Throughout the past year, FHFA encouraged the Enterprises to lead 
foreclosure prevention initiatives to stabilize housing and financial 
markets. FHFA worked with the Administration, the Enterprises, and 
other industry participants on a plan to address the economic crisis 
and keep people in their homes. 

FHFA worked with HOPE NOW, an alliance of mortgage market participants, 
and Treasury, the Federal Housing Administration (FHA), and the 
Enterprises to design and implement a comprehensive Streamlined 
Modification Program in November 2008. The streamlined program was 
designed to reduce preventable foreclosures by transitioning borrowers 
who were delinquent on their obligations into mortgages they could 
afford. FHFA also coordinated the actions of the Enterprises to suspend 
foreclosures of owner-occupied homes from November 26, 2008, until 
January 31, 2009, and encouraged the Enterprises to update their tenant 
eviction and foreclosure sale suspension plans. 

In early 2009, FHFA helped develop the Administration's MHA program, 
which is expected to help at-risk homeowners avoid foreclosure by 
reducing monthly mortgage payments. This program is a major step 
forward in reducing avoidable foreclosures and stabilizing the housing 
market. This program will work in tandem with an expanded and improved 
Hope for Homeowners Program. It builds on both the Federal Deposit 
Insurance Corporation's (FDIC's) modification initiative and the 
Streamlined Modification program. 

The two principal elements of the MHA program comprise an important 
step toward achieving a recovery for housing markets and the entire 
economy. 

1. Home Affordable Refinance Program (HARP). The Enterprises provide 
access to low-cost refinancing for loans they own or guarantee. This 
helps homeowners reduce their monthly payments and avoid foreclosure It 
is designed for borrowers who are current in their payments and seek to 
refinance at a lower rate or into a safer mortgage but who have 
experienced difficulties because of declining home values and limited 
availability of mortgage insurance. 

2. Home Affordable Modification Program (HAMP). This program 
establishes a national standard for loan modifications. Treasury shares 
a portion of the costs, which provides financial incentives to 
borrowers, lenders, and servicers. The Enterprises monitor servicer 
compliance with the plan's rules. The Enterprises bear the incentive 
costs of modifications for loans Fannie Mae or Freddie Mac own or 
guarantee. 

FHFA took the lead in coordinating implementation of the MHA loan 
modification process by the regulated entities, including the 
coordination of the development of the net present value (NPV) model 
used to qualify loan modification recipients. The NW model was a joint 
collaboration between the Enterprises, FHFA, FDIC, and Treasury. FHFA 
also oversaw and assisted the Enterprises in their respective roles as 
agents of the Treasury in implementing the program. 

FHFA also actively promoted transparency regarding the results of the 
Enterprises' foreclosure prevention and refinance activities. In 
November 2008, FHFA began publishing a monthly Foreclosure Prevention 
Report that provides updates on the Enterprises' loan modification and 
other foreclosure prevention activities. In August 2009, FHFA began 
publishing a monthly Refinance Report that summarizes the Enterprises 
mortgage refinance activities, including HARP refinances These reports 
together form the key elements of FHFA's monthly Federal Property 
Managers Report to Congress, which FHFA began producing in December 
2008 as required by Section 110 of the Emergency Economic Stabilization 
Act of 2008. 

Monitoring and Addressing the Challenges of PLMBS: 

As high levels of delinquencies triggered ratings downgrades of PLMBS 
and significant market illiquidity, these MBS presented significant 
financial challenges for Fannie Mae, Freddie Mac and the FHLBanks. 

Fannie Mae and Freddie Mac incurred significant accounting charges 
related to other than temporary impairment (OTTI) of residential PLMBS 
in 2008 and 2009. Through September 30, 2009, the Enterprises had taken 
a cumulative $16.1 billion of credit-related losses on roughly $160 
billion of mostly subprime, Alt-A, and option ARM (adjustable-rate 
mortgage) PLMBS. Though the overall PLMBS market has slightly improved 
because of government programs in the third quarter of 2009, prices 
remain depressed at a weighted average of roughly 60 cents on the 
dollar mark-to-market value. 

FHFA worked with the FHLBanks on the adoption of a common platform for 
accounting for PLMBS. By the end of FY2009, the common platform had 
contributed to greater standardization and coordination among the 
FHLBanks in valuing their PLMBS holdings and determining OTTI. 

Exposure to OTTI varies considerably among the FHLBanks. This has 
affected their retained earnings and accumulated other comprehensive 
income. Preliminary data indicate the FHLBanks held $51.3 billion in 
PLMBS as of September 30, 2009. These securities had a fair value of 
$46.1 billion, or 90 cents on the dollar. Because of the deterioration 
in the market, the FHLBanks took total OTTI charges in FY 2009 of $12.2 
billion. Of that amount, $2 billion was due to credit factors. A total 
of $8.4 billion was due to noncredit factors, which are recorded as 
part of their balance sheet capital accounts but do not flow through 
their income statements. 

Providing Accounting Guidance to the Regulated Entities: 

Figure: Photograph of FHFA General Counsel Alfred Pollard addresse4s 
FHFA staff at an agency-wide event. 

[End of figure] 

In light of the changing regulatory landscape, FHFA's Office of the 
Chief Accountant shared preliminary accounting examination guidance on 
a range of accounting and auditing issues with the regulated entities. 
The guidance reflected structural and regulatory differences between the
Enterprises and the FHLBanks. The new guidance, when finalized in 
October 2009, replaced previous accounting guidance applicable only to 
the Enterprises and supplemented regulations and other guidance 
applicable only to the FHLBanks. 

Several significant events had occurred since the original accounting 
guidance and FHLBank regulations were issued. The HERA legislation was 
passed, which created FHFA and made certain Securities and Exchange 
Commission (SEC) regulations applicable to the regulated entities, and 
the Enterprises were placed into conservatorship. 

The new guidance gives examiners criteria to assess risks posed by an 
entity's accounting, internal control over financial reporting, and 
audit functions. One of the primary goals of the new guidance is to 
promote consistency in implementation of generally accepted accounting
principles (GAAP) to enhance transparency. This is achieved in part by
establishing the expectation that the regulated entities maintain 
complete and current accounting policies and procedures. 

Another significant element of the new guidance articulates best 
practices around audit-related governance matters and internal 
controls. The guidance reinforces SEC, Public Company Accounting 
Oversight Board, and New York Stock Exchange requirements for audit 
committees. The updated guidance also reflects the different governance 
structures of the Enterprises as compared to the FHLBanks. For example, 
some audit committee independence requirements applicable to the 
Enterprises will not apply to the FHLBanks because of the cooperative 
ownership structure of the FHLBanks, which are subject to existing 
regulations covering the composition of their audit committees. 

Another key element of the new guidance relates to external auditor 
independence at these systemically important institutions. The guidance 
sets out regular rotation as a best practice for each regulated entity 
to promote audit independence. The guidance states that regulated 
entity audit committees should formally consider audit firm rotation 
after 10 years of audits by the same firm and every five years 
thereafter until there is a change in auditor. The new guidance also 
requires examiners to consider the tenure of audit firms in their 
assessments of auditor independence and related governance matters. 

Fulfilling Requirements Established by HERA: 

During FY 2009, FHFA began a review of existing OFHEO and FHFB 
regulations as well as regulations required to be issued under HERA. As 
a result, FHFA issued final and interim final regulations either 
required by, or in response to, HERA provisions or which adopted, with 
appropriate revisions, OFHEO or FHFB regulations. The published final 
or interim final regulations are listed in Figure 5. For those 
regulations issued as proposed or interim final regulations, FHFA 
expects to issue final regulations in FY 2010 after considering public 
comment. 

In addition to promulgating regulations, FHFA prepared and issued 
several reports required by HERA. On July 30, 2009, the agency 
published the first annual report on guarantee fees charged by the 
Enterprises for conventional single-family mortgages—loans the federal 
government does not insure or guarantee that finance properties with 
four or fewer residential units. The report, issued July 30,
2009, covered single-family fees for loans acquired by the Enterprises 
in 2007 and 2008. The sample of mortgages used to prepare that report 
represented 79 percent and 89 percent, respectively, of the unpaid 
principal balance of single-family mortgages the Enterprises acquired 
in 2007 and 2008. 

Also on July 30, 2009, FHFA published a study on securitization of home 
mortgage loans purchased, or to be purchased, by the FHLBanks from 
member financial institutions under the acquired member assets 
programs. The study focused on the: 

* Benefits and risks associated with FHLBank securitization;
* Potential effects on liquidity in the mortgage markets and broader 
credit markets;
* Abilities of FHLBanks to manage risk;
* Effects of risk management programs on existing activities of the 
FHLBanks; and; 
* Effects of risk management programs on joint and several liability of 
the FHLBanks and the cooperative structure of the FHLBank System. 

On the basis of the findings of this study and the recent calls for 
regulatory reform, FHFA did not recommend permitting the FHLBanks to 
securitize mortgages. 

Finally, on July 30, 2009, FHFA published two reports related to 
collateral securing advances at the FHLBanks. The first report, an 
annual report required by Section 1212 of HERA, analyzed collateral 
data as of December 31, 2008, by type and FHLBank district. On January 
26, 2009, FHFA published this same report for data as of December 31, 
2007. The second report, required by Section 1217 of HERA, studied the 
extent to which loans and securities used as collateral to support 
FHLBank advances were consistent with the interagency guidance issued 
by federal banking regulators on nontraditional mortgage products and 
subprime lending. The report noted that each FHLBank had adopted 
policies, procedures, and practices requiring that mortgage loans and 
securities used as collateral be consistent with interagency guidance 
as well as policies addressing antipredatory lending. 

Figure 5: Regulations Published in Response to HERA: 

Proposed: 

* Golden Parachutes and Indemnification Payments (74 FR 30975 Jun. 29, 
2009, 12 CFR Part 1231); 

* Federal Home Loan Bank Membership for Community Development Financial 
Institutions (74 FR 22848, May 15, 2009, 12 CFR Part 1263); 

* Executive Compensation (Regulated Entities) (74 FR 26989, Jun. 5, 
2009, 12 CFR Part 1230); 

* Reporting of Fraudulent Financial Instruments (74 R428636, Jun. 17, 
2009, 12 CFR Part 1233); 

* Board of Directors of FHLBank System Office of Finance (74 FR 38564, 
Aug. 4, 2009, 12 CFR Part 1273 and 12 CFR Part 1274); 

Interim: 

* Portfolio Holdings (74 FR 5609, Jan. 20, 2009, 12 CFR Part 1252); 

* Prior Approval for Enterprise Products (74 FR 31602, Jul. 2, 2009, 12 
CFR Part 1253); 

* Federal Home Loan Bank Boards of Directors: Eligibility and Elections
(73 FR 55710, Sep. 26, 2009, 12 CFR Part 1261, Subpart A); 

* Affordable Housing Program Amendments: FHLBank Mortgage Refinancing 
Authority (74 FR 38514, Aug. 4, 2009, 12 CFR part 1291). 

Final: 

* Golden Parachute Payments (74 FR 33907, Jul. 14, 2009, 12 CFR Part 
1231); 

* Capital Classifications and Prompt Corrective Action (74 FR 38508, 
Aug. 4, 2009, 12 CFR Part 1229); 

* 2009 Enterprise Transition Affordable Housing Goals (74 FR 39873, 
Aug. 10, 2009, 12 CFR Part 1282). 

Adopted with Appropriate Revisions, OFHEO or FHFB Regulations: 

* Assessments (73 FR 56712, Sep. 20, 2008, 12 CFR Part 1206); 	 

* Freedom of Information Act Implementation (74 FR 2342, Jan. 15, 2009; 
74 FR 18623, Feb. 17, 2009, 12 CFR Part 1202); 

* Flood Insurance (74 FR 7304, Feb. 17, 2009, 12 CFR 125.1); 

* Privacy Act Implementation (74 FR 33907, Jul. 14, 2009, 12 CFR Part 
1204). 

[End of figure] 

Establishing Affordable Housing Goals: 

FHFA analyzed detailed loan-level data on the 4.7 million single-family 
mortgages and 8,900 multifamily mortgages the Enterprises purchased to 
determine official goal performance for 2008. The agency also analyzed 
the feasibility of the 2008 housing goals, which were established long 
before the mortgage market collapse. FHFA determined that in light of 
market conditions, the 2008 housing goals and home purchase subgoals 
previously established in the regulation were not feasible and should 
be adjusted. 

Under HERA, the housing goals established for the Enterprises by HUD 
for 2008 carried over to 2009. In FY 2009, FHFA began evaluating these 
existing housing goals. Restrictions on the availability of private 
mortgage insurance for borrowers with lower down payments; a surge in 
refinancing, particularly by higher income borrowers, the increasingly 
important role of FHA in the mortgage marketplace; and a slowdown in 
the multifamily market, among other factors, meant fewer loans in 2009 
that qualified under housing goals. Consequently, FHFA proposed 
adjusting the overall 2009 Enterprise housing goals to lower levels. 
The final rule was published August 10, 2009. 

Developing Duty to Serve Standard for the Enterprises: 

HERA amended the Safety and Soundness Act of 1992, establishing a duty 
for the Enterprises to serve three underserved markets—manufactured 
housing, affordable housing preservation, and rural areas—to increase 
the liquidity of mortgage investments and improve the distribution of 
investment capital available for mortgage financing in those markets. 
Congress explicitly required the Enterprises to provide leadership in 
developing loan products and flexible underwriting guidelines to 
facilitate the secondary market for these underserved areas. 

FHFA published an Advance Notice of Proposed Rulemaking to begin the 
process of establishing a manner for evaluating and rating whether and 
to what extent the Enterprises have complied with their duty to serve. 
The Enterprises must provide leadership to the market in developing 
loan products and flexible underwriting guidelines to facilitate a 
secondary market for mortgages on housing for very low, low-, and 
moderate-income families with respect to the three underserved markets. 
FHFA issued the advance notice in August 2009, seeking the broadest 
possible public comment for its rulemaking. FHFA also sent 
representatives to Texas, Tennessee, and Wisconsin to learn more about 
manufactured housing needs. FHFA will report annually to Congress on 
what the Enterprises have done pursuant to their duty to serve. 

Reviewing Executive Compensation at the Regulated Entities: 

Under HERA, the FHFA Director has the power to approve, disapprove, or 
modify the executive compensation of the Enterprises and the FHLBanks. 
The FHFA Director has authority to withhold the compensation of an 
executive officer during a review for "reasonableness and 
comparability." It also grants the Director authority to prohibit or 
limit any golden parachute or indemnification payment. 

On January 29, 2009, FHFA published a Golden Parachute Payments final 
rule that sets forth factors for the FHFA Director's consideration in 
limiting golden parachute payments to entity-affiliated parties in 
connection with the Enterprises and the FHLBanks. On June 29, 2009, 
FHFA published a Golden Parachute and Indemnification Payments Proposed 
Rule. The proposal amended the Golden Parachute Payments Final Rule to 
address in more detail prohibited and permissible golden parachute 
payments. In addition, on June 5, 2009, FHFA published an Executive 
Compensation Proposed Rule. The proposed regulation sets forth 
requirements and processes with respect to compensation provided to 
executive officers by the Enterprises, the FHLBanks, and the Office of 
Finance, consistent with FHFA's safety and soundness responsibilities 
under HERA. 

Working with the U.S. Treasury, FHFA designed a forward-looking 
incentive-based retention plan for the Enterprises. The plan focuses on 
retention rather than past performance. The retention plan is designed 
to: 

* Retain key officers at a time of increased personnel demands;
* Preserve critical institutional knowledge; and; 
* Maintain optimal performance levels until capital levels are restored 
and credit losses are returned to a normal state. 

As conservator, FHFA did not allow bonuses for 2008 in light of the 
performance of the two Enterprises. 

Management Challenges: 

The Future of the Secondary Mortgage Market: 

Conservatorship is not a long-term solution to financial distress at 
the Enterprises. The Administration, Government Accountability Office 
(GAO), trade associations, academics, and others have identified a 
variety of approaches related to the future structure and functions of 
the Enterprises or their successors. The Administration has announced 
that it will propose a plan for the long-term future of the Enterprises 
in February 2010. FHFA personnel are participating in internal and 
multi-agency efforts to review and evaluate the strengths, weaknesses, 
and risks of the various options. 

FHFA's experience with, and understanding of, secondary mortgage 
markets and institutions will be valuable to Congress and the 
Administration as they consider restructuring housing finance and 
financial regulation and address the secondary mortgage market and the 
role of the Enterprises. Critical decisions have to be made about the 
future of the primary mortgage market and the FHLBanks and the 
appropriate role of the secondary mortgage market, including the roles 
of government regulation and programs, and what guiding principles will 
shape the future of the secondary mortgage market. 

Though much of the debate will focus on the Enterprises, FHFA expects 
the discussion to include the future of the FHLBanks. The FHLBanks 
played a critical role in providing financing to large and small member 
financial institutions during the second half of 2007, 2008, and the 
first part of 2009. The FHLBanks residential mortgage portfolios are 
small compared to those of the Enterprises and have suffered little in 
the way of delinquencies or credit losses. FHFA is prepared to discuss 
the role of the FHLBanks in sustaining the mortgage market. 

If Congress restructures the secondary mortgage markets or secondary 
market institutions, maintaining investor confidence and liquidity in 
existing and new mortgage products and markets and ensuring the safety 
and soundness of both old and new institutions will be the most 
significant challenges. Beyond those challenges are broader issues, 
such as retaining key employees, identifying valuable elements of the 
existing Enterprises, and determining the need for certain systems and 
processes. To prepare for future policy decisions, FHFA is closely 
monitoring markets and holding discussions with various stakeholders. 

Mortgage Delinquencies and Defaults: 

Rapidly rising levels of serious delinquencies and defaults, further 
aggravated by high levels of unemployment and severe declines in home 
prices, continue to stress the Enterprises. As of June 30, 2009, 
Enterprise serious delinquencies had increased nearly 200 percent year-
over-year to 2.89 percent for Freddie Mac and 3.94 percent for Fannie 
Mae. Real estate owned (REO) acquisitions for the first three quarters 
of FY 2009 at Fannie Mae were 57,469, an approximate 30 percent 
increase year-over-year. Freddie Mac had 35,987 REO acquisitions, 
approximately 60 percent higher than the year before. 

To mitigate the impact of continued serious delinquencies and defaults, 
the Enterprises expanded loan modification efforts and took leadership 
roles in the MHA Program. The FHLBanks that participate in mortgage 
purchase programs developed borrower assistance programs that enhance 
the foreclosure prevention efforts for mortgage loans owned by the 
FHLBanks. 

The Enterprises are recording historic levels of modifications and 
refinances. For borrowers unable to continue homeownership, the 
Enterprises offer foreclosure alternatives, including short sales, 
deeds in lieu of foreclosure, and REO rental programs. The impact of 
the HAMP and HARP elements remains uncertain as unemployment and house 
prices continue to deteriorate, interest rates rise from historic lows, 
other initiatives are set to expire, and operational difficulties in 
implementing foreclosure prevention programs arise. 

Operational Challenges Facing the Enterprises: 

FHFA placed both Enterprises into conservatorship in September 2008 
because deteriorating market conditions threatened the companies' 
ability to fulfill their mission. The Enterprises continue to be 
challenged by operational constraints both internally and by 
counterparties. To handle high numbers of loan modifications, loan 
servicers are malting significant changes in their operational systems. 
In addition, servicers are increasing personnel to meet the intensive 
labor demands needed to manage and reduce foreclosures. The Enterprises 
are working with the government and servicers to accelerate loan 
modifications and refinancing, but they also must improve systems 
within their own operations and coordinate changes with servicers. 

In 2008 Treasury established three finance facilities (GSE Credit 
Facility, MBS Purchase Program, and Senior Preferred Stock Purchase 
Agreement) to support the ongoing business operations of the 
Enterprises and meet conservatorship objectives. These facilities 
support the Enterprises capital and liquidity to provide confidence to 
investors in the Enterprises' debt and MBS. Some of these facilities 
expire at the end of this year, so the Enterprises and FHFA are working 
with Treasury to ensure investor confidence is maintained through 
appropriate government support coupled with strengthened liquidity and 
asset liability management within the Enterprises. 

Continuing Weaknesses in PLMBS Quality: 

PLMBS illiquidity and extremely poor collateral performance have 
challenged investors, including the Enterprises and the FHLBanks, in 
bonds originally rated triple-A. Credit and pricing weaknesses have 
demonstrated the need for resources to manage assets backed by riskier 
collateral and to properly account for current performance and the 
potential for future disruption to contractual cash flows. The 
regulated entities, like many other investors, have reallocated staff 
to assist with loss mitigation efforts on these bonds. 

Throughout FY 2009, and likely continuing in FY 2010, earnings have 
been affected at the Enterprises and some FHLBanks by OTTI of certain 
securities. For the Enterprises, the actual and expected PLMBS and 
guarantee fee losses resulted in Department of the Treasury purchases 
of senior preferred stock. Impairments also have prompted certain 
FHLBanks to reduce or eliminate dividends and curtail or cease the 
repurchase or redemption of FHLBank stock. 

Housing Goals for 2010: 

HERA for the first time added affordable housing and mission 
enforcement to the responsibilities of the safety and soundness 
regulator. As a result, enforcement of the affordable housing goals 
established for the Enterprises by Congress, once HUD's responsibility, 
is now up to FHFA. FHFA must ensure that the Enterprises meet their 
critical responsibility of malting it possible for low- and moderate-
income persons and underserved areas to have access to affordable 
mortgage loans while also ensuring that more prudent lending standards 
are restored. 

HERA requires, beginning in 2010, a wholesale restructuring of the 
affordable housing goals. The Enterprises will have four single-family 
goals and one multifamily special affordable goal. For single-family 
purchase money mortgages, there will be goals for households in two 
income categories: low-income (income no greater than 80 percent of 
area median income) and very low income (income no greater than 50 
percent of area median income). There will be a goal for refinanced 
mortgages for low-income families. In the multifamily area, there will 
be a separate special affordable (low-income) housing goal. FHFA must 
also finalize standards for the evaluation of the Enterprises duty to 
serve certain underserved markets. 

Beginning in 2011, HERA also requires FHFA to establish affordable 
housing goals for the FHLBanks for the first time. The affordable 
housing goals for the FHLBanks must be consistent with those for the 
Enterprises and take into consideration the unique mission and 
ownership structure of the FHLBanks. Prior to the passage of HERA, the 
FHLBanks principally supported the provision of affordable housing for 
low- and moderate-income households through their affordable housing 
programs. 

HERA established a two-year transition period and mandated that FHFA 
establish interim target affordable housing goals for the FHLBanks 
during calendar years 2009 and 2010. FHFA will soon propose interim 
target goals consistent with the low- and moderate-income housing goals 
and the underserved area housing goal applied to the Enterprises' 
mortgage purchase activities in 2009 and prior years. 

An Economic Capital Model for the Future: 

FHFA is pursuing the development of a new economic capital model to 
determine the risk-based capital requirement for the Enterprises. The 
model would address market, credit, and operational risks as before, 
but would be different from the prior OFHEO approach. In particular, it 
would incorporate substantially more stress test scenarios than the 
previous model did. It could also include a counter-cyclical adjustment 
to the credit risk component, designed to require a buildup of capital 
during an expansion or housing boom well prior to a recession or 
housing crisis when the capital would be needed to absorb losses. 

FHFA Leadership: 

Figure: Photograph of Acting Director Edward DeMarco addresses FHFA 
staff at the farewell reception for former Director James Lockhart. 

[End of figure] 

On August 31, 2009, FHFA Director James B. Lockhart III resigned, and 
FHFA's Chief Operating Officer and Senior Deputy Director for Housing 
Mission and Goals Edward DeMarco became Acting Director
of the agency. Over the past year, DeMarco played an integral role in	
setting up FHFA, so the President's appointment of DeMarco as Acting 
Director should provide a measure of stability to the agency. However,
the agency continues to face uncertainty about selection of a
presidentially appointed and Senate-confirmed Director, the future 
structure of the Enterprises, the future form of regulation for the 
Enterprises and the FHLBanks, and the role of FHFA following
decisions on the future structure of secondary mortgage markets. 

In addition, HERA calls for additional changes, including establishment 
of an Office of the Inspector General (OIG). FHFA will not have an 
inspector general, however, until one is approved by the President and 
confirmed by the Senate. Once an inspector general is appointed by the 
President and confirmed by the Senate, the agency will need to 
establish an OIG and provide appropriate staff and infrastructure to 
support it. 

FY 2009 Performance Summary: 

Strategic Planning at FHFA: 

FHFA sets long-term and annual goals and monitors progress throughout 
the year to produce results using strategic and performance planning. 
The second section of this report describes in greater detail FHFA's 
results and efforts to achieve its FY 2009 performance goals. 

FHFA's 2009 Annual Performance Plan was developed and released in 
December 2008 and consists of a combination of OFHEO and FHFB strategic 
goals and performance measures. For FY 2009, FHFA set 17 annual 
performance goals to reach its strategic goals, 5 annual performance 
goals to support its resource management strategy, and a total of 60 
performance measures. After the release of the 2009 Annual Performance 
Plan, FHFA revised its performance measures to reflect the new 
administration's policies. As a result FHFA added one measure and 
deleted five measures. This report shows the 61 measures, noting the 
five that are no longer applicable. This section describes agency 
performance based on FHFA's FY 2009 Annual Performance Plan, which 
outlined the means and strategies to achieve the annual performance 
goals and related measures for the past year. 

While FHFA analyzed the allocation of resources, the merging of two 
accounting systems prevented the agency from tracking FY 2009 
obligations by strategic goal. Beginning in FY 2010, FHFA will track 
resource allocations by strategic goals developed in FHFA's FY 2010 
strategic plan, which was published in the last quarter of FY 2009. 

FHFA's Strategic Goals: 

To achieve FHFA's mission, the agency established three strategic 
goals: 

1. Enhance supervision to ensure that Fannie Mac Freddie Mac and the 
FHLBanks operate in a safe and sound manner, are adequately 
capitalized, and comply with legal requirements. 

2. Promote homeownership and affordable housing and support an 
efficient secondary mortgage market. 

3. Through conservatorship, preserve and conserve the assets and 
property of Fannie Mae and Freddie Mac (the Enterprises) and enhance 
their ability to fulfill their mission. 

FHFA also has set a resource management strategy to manage effectively 
FHFA's human capital and resources. 

FHFA Met or Exceeded Most of Its Performance Measures: 

FHFA reported on 61 performance measures in its FY 2009 Performance 
Plan. The agency exceeded, achieved, or substantially achieved 66 
percent of the performance measures in the plan. The performance 
section outlines in detail the agency's performance goals for each 
strategic goal and FHFA's accomplishments related to each performance 
goal and its associated performance measures. Performance goals are 
counted as "achieved' when targets for all performance measures have 
been met. "Substantially achieved" indicates that at least one 
performance measure has not been achieved, although a substantial 
majority of the measures related to the performance goal were met. In 
FY 2009, FHFA achieved 63 percent, substantially achieved three 
percent, and did not achieve 26 percent of its performance measures. 
Eight percent of the performance measures were not applicable. 

FY 2009 was a year of nearly unprecedented disruption in housing and 
financial markets. In response, the agency had to allocate resources to 
the conservatorships and to housing stabilization initiatives that it 
had not envisioned when it developed the FY 2009 Performance Plan was 
developed. In cases in which FHFA did not achieve performance measures 
in FY 2009, the reasons stemmed principally from turbulent housing and 
financial market conditions and challenges encountered in integrating 
the new agency. 

FHFA identified 12 of the 61 FY 2009 performance measures as key 
performance indicators critical to its achievement of its strategic 
goals and objectives. Those key performance indicators represent each 
of the agency's three strategic goals and its resource management 
strategy and represent the highest priority measures for the agency. 
The following table summarizes FHFA's achievement of key performance 
indicators. 

Key FHFA Performance Indicators for FY2009: 

Strategic Goal: 
Strategic Goal 1: Enhance supervision to ensure that Fannie Mae and 
Freddie Mac and the Federal Home Loan Banks operate in a safe and sound 
manner, are adequately capitalized, and comply with legal requirements. 

Performance Goal: 
Performance Goal 1.1: Fannie Mae and Freddie Mac (the Enterprises) 
comply with safety and soundness standards. 

Key Performance Indicator: 
Performance Measure 1.1.1: The percentage of Enterprises with a 
composite GSE enterprise risk safety and soundness rating of "Limited 
Concerns" or better. 
Not Achieved: Both Enterprises were rated "Critical Concerns" and were 
in conservatorship.
	
Performance Measure 1.1.2: For both Enterprises, the percentage of GSE
enterprise risk categories (governance, solvency, earnings, market, 
credit, and operational risk) with a safety and soundness rating of 
limited Concerns" or better (1 or 2).
Not Achieved: Ratings for the Enterprises were "Critical Concerns" for 
earnings, credit risk, and market risk and "Significant Concerns" for 
governance and operational risk. In conservatorship, the rating for 
capital was suspended. 

Performance Goal 1: 
The FHLBanks comply with safety and soundness standards. 

Performance Measure 1.2.1: Percentage of FHLBanks with a composite 
rating of "1" or "2". 
Not Achieved: Sixty-two percent of the FHLBanks (and the Office of 
Finance) had a composite safety and soundness rating of "1" or '2" at 
the end of the fiscal year. Heightened concerns about credit risk and 
governance associated with private-label MBS holdings contributed to 
the decline in ratings. 

Performance Goal 1.4: 
The FHLBanks are adequately capitalized. 

Performance Measure 1.4.1: The FHLBanks meet FHFA's determination of 
capital adequacy. 
Substantially Achieved: FHLBanks met all capital requirements at year-
end. One FHLBank, failed private-label risk-based capital
requirement for part of the year. 

Performance Goal 1.5: 
Fannie Mae and Freddie Mac comply with applicable laws, regulations, 
directives, and agreements, including executive compensation, corporate 
responsibility, and disclosure.	 

Performance Measure 1.5.1: Any identified instances of noncompliance 
with laws and regulations are resolved to FHFA's satisfaction. 
Achieved: Enterprises resolved, or are on schedule to resolve, 
outstanding supervisory issues arising from laws, regulations, 
directives, and agreements. 

Performance Goal 1.6: 
The FHLBanks comply with applicable laws, regulations, directives, and 
agreements, including those regarding executive compensation, corporate 
responsibility, and disclosure. 

Performance Measure 1.6.3: Establish a matters requiring attention-like 
measure for tracking follow-up recommendations from annual exams. 
Achieved: An MRA tracking tool was developed in 2009 and is being used 
for FHLBank examinations that commenced in 2009. Tracking tools for 
each FHLBank were backfilled with outstanding 2008 MRAs to log and 
document remediation efforts in a consistent manner. 

Strategic Goal 2: 
Promote	homeownership and affordable housing and support an efficient 
secondary mortgage market. 

Performance Goal 2.1: 
Develop proposed and final regulations to implement statutory changes 
in Fannie Mae and Freddie Mac affordable housing goals effective 
January 1, 2010, while enforcing existing goals. 

Performance Measure 2.1.4: Enforce Fannie Mae and Freddie Mac 2009 
affordable housing goals. 
Achieved: Met monthly with each Enterprise to track progress in meeting 
housing goals. 

Performance Goal 2.2: 
The FHLBanks foster the development of affordable owner-occupied and 
rental housing for eligible very low-, low-, and moderate-income 
households. 

Performance Measure 2.2.2: The FHLBanks address principal affordable 
housing program examination findings to FHFA's satisfaction prior to 
the next examination. 
Achieved: Conducted all scheduled affordable housing program exams and 
visitations, assessed status of principal affordable housing program 
examination findings from prior exam, and obtained management
commitment to correct findings from 2009 examinations. 

Performance Goal 2.5: 
Cooperate with other federal agencies on mortgage markets and the 
nation's housing. 

Performance Measure 2.5.1: Respond to requests from other Federal 
agencies for information about housing finance markets and the 
Enterprises. 
Achieved: Thirty-day standard met on requests related to mortgage 
market conditions, debt issuance, Malting Home Affordable, and Housing 
Finance Agency assistance. 

Strategic Goal 3: 
Through conservatorship, FHFA will preserve and conserve the assets and 
property of Fannie Mae and Freddie Mac and enhance their ability to 
fulfill their mission. 

Performance Goal 3.1: 
Preserve and conserve each Enterprise's assets and property. 

Performance Measure 3.1.1: Financial condition of each enterprise 
remains liquid and they maintain positive GAAP net worth including 
Senior Preferred Stock. 
Achieved: The Treasury Preferred Stock Agreement continues to support 
the Enterprises positive net worth and sufficient capacity remains. 

Performance Goal 3.2: 
Continue to delegate appropriate authorities to each Enterprise's 
management to move forward with the business operations. 

Performance Measure 3.2.2: Establish new Boards of Directors at each 
Enterprise. 
Achieved: Both Enterprises reconstituted their Boards of Directors in 
December, 2008. 

Resource Management Strategy: 
Manage effectively FHFA's human capital and resources to support our 
mission. 

Performance Goal 4.1: 
Maintain a diverse workforce that is skilled, flexible, and performance-
oriented to fulfill the goals of the agency. 

Performance Measure 4.1.3: Percentage of vacancies filled within Office 
of Personnel Management's 45-day time-to-hire standard. 
Achieved: FHFA met the 45-day time-to-hire standard in 73 percent of 
FY2009 hires. 

[End of table] 

FY 2009 Financial Summary: 

Year of Transition: 

HERA abolished FHFB and OFHEO effective at the end of a one-year period 
beginning with the signing of the legislation, on July 30, 2008. FHFB 
and OFHEO existed until then solely for the purpose of winding up their 
affairs. From a financial standpoint, FHFA changed from three Treasury 
funds to on from two accounting systems to on and from two payroll 
systems to on effective July 2009. 

Fiscal Year 2009 Financial Results: 

HERA authorized FHFA to collect annual assessments from the regulated 
entities to pay its costs and expenses and maintain a working capital 
fund. Under HERA, annual assessments are allocated based on the cost 
and expenses of the agency's operations for supervision of the 
Enterprises and the FHLBanks. 

FHFA calculates the assessments for each Enterprise by determining a 
percentage ratio of each one's assets and off-balance-sheet obligations 
to the total of both Enterprises. FHFA calculates the assessments for 
each of the 12 FHLBanks by determining each Bank's share of minimum 
required regulatory capital as a percentage of the total minimum 
capital of all the FHLBanks. Assessments are paid semiannually on 
October 1 and April 1. 

In FY 2009, FHFA's operating budget was $120.8 million. During FY 2009, 
FHFA recovered $6 million in unspent prior year obligations and had a 
$900,000 reduction in the costs of reimbursable agreements from the 
legacy agencies. Total budget resources were $125.9 million as a result 
FHFA obligated all but $9.7 million of that amount. The $9.7 million 
unobligated amount included $3 million for the working capital fund. 

Net cost represents the gross cost incurred less any revenue earned 
from activities. For FY 2009, net cost of FHFA operations was $7.1 
million. Gross costs include expenses paid and depreciation expense for 
the year but exclude money paid for capitalized assets. Gross costs 
also include year-end accruals and unfunded expenses for retirement 
plans, health benefits, and life insurance paid by the Office of 
Personnel Management (OPM) for FHFA. Earned revenue consists of 
assessment, investment, reimbursable, and other miscellaneous revenues. 

The agencies highest cost outlay was for payroll expenses. Funded 
payroll expenses were $77.4 million for FY 2009. This included the full-
year cost of 414 full-time equivalents. During FY 2009, FHFA focused on 
hiring and retaining staff to ensure effective oversight of the 
regulated entities. 

Unqualified Audit Opinion for Fiscal Year 2009: 

For FY 2009, FHFA received an unqualified audit opinion on its 
financial statements. The auditor noted no material weaknesses in 
internal controls and cited no instances of noncompliance with laws and 
regulations. 

Internal Controls: 

Figure: Deputy Director of Enterprise Regulation Chris Dickerson meets 
with management planning staff. 

[End of figure] 

Management Assurances: 

During FY 2009, FHFA adhered to the internal control requirements of 
the Federal Managers Financial Integrity Act of 1982 (FMFIA) and the 
guidance provided by OMB Circular A-123. FHFA's Executive Committee on 
Internal Controls met quarterly to oversee internal controls and 
provide recommendations to the Director on the effectiveness of FHFA's 
internal controls. 

In 2009, the executive committee comprised the Senior Deputy 
Director/Chief Operating Officer who served as the chairman, the Chief 
Administrative Officer who served as the Vice-Chairman, the Chief 
Information Officer, the Chief Financial Officer, the Deputy Director 
for Enterprise Regulation, the Deputy Director for FHLBank Regulation, 
the Performance Improvement Officer, the General Counsel, and the
Associate Director, Office of Supervision Infrastructure. The Chairman 
and Vice-Chairman invited other FHFA executives when appropriate The 
executive committee also established senior assessment teams to review 
specific areas when needed. 

During FY 2009, pursuant to its obligations under OMB Circular A-123, 
FHFA monitored and assessed the following three areas: 

Reliability over financial reporting. 

FHFA's Office of Budget and Financial Management assessed the agency's 
financial reporting controls according to the requirements outlined in 
OMB Circular A-123, Appendix A. 

Compliance with laws and regulations. 

Assessment teams from FHFA divisions and offices identified the 
significant laws and regulations that relate to the operations for 
their respective offices. Assessment teams documented the actions that 
demonstrated compliance, and the agency's Office of General Counsel 
reviewed all submissions. 

Effectiveness and efficiency of operations. 

Assessment teams from FHFA divisions and offices reviewed controls over 
operations using the criteria outlined in the GAO Internal Control 
Management and Evaluation Tool. Division and office managers and the 
Office of Budget and Financial Management reviewed the reports of the 
assessment teams. 

The Executive Committee on Internal Controls reviewed documentation 
from all three areas. In compliance with the FMFIA requirements, the 
Director, on the basis of a recommendation from the executive 
committee, issued an unqualified opinion on internal controls over 
financial reporting as of September 30, 2009. This assurance can be 
found in the Financial Section of this report and meets the FMFIA 
reporting requirement for internal controls. 

Section 1106(g)(3) of HERA requires FHFA to implement and maintain 
financial management systems that comply substantially with federal 
financial management systems requirements, applicable federal 
accounting standards, and the United States Government Standard General 
Ledger at the transaction level. FHFA moved its accounting services to 
the Bureau of the Public Debt during its first year of operation and 
now uses that agency's financial management system (FMS) which includes 
(1) a core accounting system—Oracle Federal Financials; (2) three 
feeder systems—PRISM (procurement), GovTrip (travel), and Citidirect 
(charge card); (3) a reporting system—Discoverer; and (4) a manual 
inventory tracking system. FHFA is responsible for overseeing the 
Bureau of the Public Debt's performance of accounting services for the 
agency A financial oversight document outlines the assignment of 
activities between FHFA and the Bureau of the Public Debt. FMS includes 
manual and automatic procedures and processes from the point at which a 
transaction is initiated to issuance of financial reports. FMS meets 
the requirements of HERA Section 1106(g)(3). FHFA also uses the 
National Finance Center, a service provider within the Department of 
Agriculture, for its payroll and personnel processing. FHFA has 
streamlined accounting processes by electronically interfacing data 
from charge cards, investment activities, the GovTrip travel system, 
the PRISM procurement system, and the National Finance Center payroll 
system to FMS. 

Federal Information Security Management Act: 

Title III of the Electronic Government Act of 2002, titled the Federal 
Information Security Management Act (FISMA), requires all federal 
agencies to develop and implement an agencywide information security 
program. The program provides the framework to protect the government's 
information, operations, and assets. FHFA annually reviews the agency's 
information security program through its internal audit function and 
reports the results to OMB. The FY 2009 FISMA report is currently in 
progress. 

Significant information security program activities completed during FY 
2009 included the development and issuance of the Agency's Breach 
Notification Policy and Plan for reporting personally identifiable 
information security incidents. FHFA also published a comprehensive 
Information Technology Security Policy Handbook in FY 2009. The agency 
has begun putting procedures from the handbook in place and will 
continue this effort into FY 2010. FHFA also addressed security-related 
weaknesses for systems noted in the prior year OFHEO and FHFB FISMA 
reviews and completed a review to validate and document system 
configurations. 

FHFA maintained security certification and accreditation on 100 percent 
of all major systems in production. During the year, FHFA expanded and 
improved security awareness training, providing a required automated 
training program to all FHFA employees and contractors. FHFA also 
upgraded its Security Log Management System to monitor production 
servers and network device logs and security events. In addition, FHFA 
implemented comprehensive scanning of production systems on a monthly 
basis to identify and correct system vulnerabilities as part of a risk 
management approach to manage IT assets. 

Erroneous Payments: 

The Improper Payments Information Act of 2002 requires that agencies 
(1) review activities susceptible to significant erroneous payments (2) 
estimate the amount of annual erroneous payments (3) implement a plan 
to reduce erroneous payments and (4) report the estimated amount of 
erroneous payments and the progress to reduce them. The Act defines 
significant erroneous payments as the greater of 2.5 percent of program 
activities or $10 million. 

FHFA has implemented and maintains internal control procedures that 
ensure disbursement of federal funds for valid obligations. No 
erroneous payments were issued by FHFA in FY 2009 that met the Act's 
thresholds. 

Prompt Pay: 

The Prompt Payment Act requires federal agencies to make timely 
payments to vendors and improve the cash management practices of the 
government by encouraging the use of discounts when they are justified. 
This also means that FHFA must pay its bills within a narrow window of 
time. In FY 2009, the dollar amount subject to prompt payment was $28.3 
million. The amount of interest penalty paid in FY 2009 was $482 or 
0.0017 percent of the total dollars disbursed. 

Financial Statement Requirements: 

FHFA prepares financial statements and submits those statements for 
annual audit. FHFA has prepared principal financial statements to 
report the financial position and results of its operations, pursuant 
to the requirements of 31 U.S.C. 3515(b). FHFA prepared the statements 
from the books and records of FHFA in accordance with GAAP for federal 
entities and the formats prescribed by OMB. The statements are also 
used to monitor and control budget resources that are prepared from the 
same books and records. 

[End of section] 

Financial Statements: 

FHFA Financial Section: 

Federal Housing Finance Agency: 
Message From The Chief Financial Officer: 

I am pleased to report that the Federal Housing Finance Agency (FHFA) 
has received an unqualified "clean' audit opinion from the Government 
Accountability Office (GAO) in FHFA's first full year of operations. 
This accomplishment is particularly noteworthy in light of the 
tremendous amount of change that occurred during the year: The 
infrastructure for the new agency was developed and brought online and 
the operations of the Office of Federal Housing Enterprise Oversight 
(OFHEO) and the Federal Housing Finance Board (FHFB) were wound down. 

All of the personnel, property, and program activities of OFHEO and 
FHFB, and certain employees and activities from the Department of 
Housing and Urban Development, were transferred to FHFA during FY 2009. 
M the same time, FHFA worked on developing new accounting personnel, 
and information technology systems to operationally unify the new 
agency. One significant achievement this past year was the successful 
development and transition to a new, single, integrated accounting 
system on July 1, 2009. This transition included the decision to 
outsource the agency's accounting travel, and charge card management 
services to an Office of Management and Budget approved service 
provider. Prior to July 1, 2009, FHFA had been using the legacy 
accounting systems and processes from OFHEO and FHFB. 

Despite the operational challenges of creating a new agency, FHFA 
remained focused on maintaining a strong internal control environment 
that helped the agency receive an unqualified audit opinion on its 
initial financial statements. Senior management set the tone for the 
agency, continually reinforcing the need to maintain strong internal 
controls throughout the transition. 

During the transition year, FHFA prepared a combined Performance and 
Accountability Report for FHFA, OFHEO, and FHFB, which received the 
Certificate for Excellence in Accountability Reporting (CEAR) award for 
FY 2008 from the Association of Government Accountants. This CEAR award 
is given for achieving the highest standard of federal fiscal 
accountability reporting. 

I am very proud to work with a highly dedicated group of professionals 
whose efforts made it possible to successfully stand up the new agency 
while simultaneously maintaining effective controls over the agency's 
financial systems and processes. I am confident that FHFA will continue 
its success in the years to come. 

Sincerely, 

Signed by: 
Mark Kinsey: 
Chief Financial Officer: 
November 10, 009: 

[End of letter] 

Federal Housing Finance Agency: 
1700 G Street, N.W. 
Washington, D.C. 20552-0003: 
Telephone: (202) 414-3800: 
Facsimile: (202) 414-3823: 
[hyperlink, http://www.fhfa.gov] 

October 28, 2009: 
	
Federal Managers' Financial Integrity Act: 
Statement of Assurance: 
Fiscal Year 2009: 

The Federal Housing Finance Agency (FHFA) management is responsible for 
establishing and maintaining effective internal control and financial 
management systems that meet the objectives of the Federal Managers' 
Financial Integrity Act (FMFIA). 

FHFA conducted its assessment of the effectiveness of internal control 
over the effectiveness and efficiency of operations and compliance with 
applicable laws and regulations in accordance with OMB Circular A-123, 
Management's Responsibility for Internal Control. Based on the results 
of this evaluation, FHFA can provide reasonable assurance that its 
internal control over the effectiveness and efficiency of operations 
and compliance with applicable laws and regulations as of September 30, 
2009 was operating effectively and that no material weaknesses were 
found in the design or operation of the internal controls. 

In addition, FHFA conducted its assessment of the effectiveness of 
internal control over financial reporting, which includes safeguarding 
of assets and compliance with applicable laws and regulations, in 
accordance with the requirements of Appendix A of OMB Circular A-123. 
Based on the results of this evaluation, FHFA can provide reasonable 
assurance that its internal controls over financial reporting as of 
September 30, 2009 were operating effectively and no material 
weaknesses were found in the design or operation of the internal 
controls over financial reporting. 

In accordance with the requirements of FMFIA, FHFA's financial 
management systems are substantially in compliance with the 
requirements for federal financial management systems as presented in A-
127, Financial Management Systems as of September 30, 2009. 

Signed by: 

Edward J. DeMarco: 
Acting Director 

Date: October 25, 2009: 

[End of letter] 

Federal Housing Finance Agency: 
Balance Sheet: 
As of September 30, 2009 (in Thousands): 

Assets: 2009: 

Intragovernmental: Fund Balance With Treasury (Note 2):	$29,076; 
Intragovernmental: Investments (Note 3): $37,668; 
Intragovernmental: Accounts Receivable (Note 4): $3. 

Total Intragovemmental: $66,747. 

Accounts Receivable (Note 4): $3; 
General Property and Equipment, Net (Note 5): $3,273; 
Prepaid Expenses: $1; 

Total Assets: $70,024. 

Liabilities: 

Intragovernmental: Accounts Payable: $758; 
Intragovernmental: Payroll Taxes Payable (Note 7): $652; 
Total Intragovemmental: $1,410. 

Accounts Payable: $4,268; 

Deferred Revenue (Note 6): $35,122; 
Other (Note 7): $10,813; 
Total Liabilities: $51,613. 

Net Position: 	
Cumulative Results of Operations: $18,411. 

Total Net Position: $18,411. 

Total Liabilities and Net Position: $70,024. 

The accompanying notes are an integral part of these financial 
statements. 

[End of table] 

Federal Housing Finance Agency: 
Statement of Net Cost: 
for the Year Ended September 30, 2009 (in Thousands): 

Program Costs: (Note 10): 2009: 
	
Gross Costs: $122,816; 
Less: Earned Revenue: $115,709; 

Net Program Costs: $7,107. 

Net Cost of Operations: $7,107. 

The accompanying notes am an integral part of these financial 
statements. 

[End of table] 

Federal Housing Finance Agency: : 		
for the Year Ended September 30, 2009 (in Thousands): 

2009: 
	
Cumulative Results of Operations: Beginning Balances: $9,544. 

Budgetary Financing Sources: Appropriations Used: $12,896. 

Other Financing Sources (Non-Exchange): Imputed Financing Sources: 	
$3,078. 

Total Financing Sources: $15,974. 

Net Cost of Operations: $7,107. 

Net Change: $8,867. 

Cumulative Results of Operations: $18,411. 

Unexpended Appropriations: Beginning Balances: $12,896. 

Budgetary Financing Sources: Appropriations Used: $12,896. 

Total Budgetary Financing Sources: $12,896. 

Total Unexpended Appropriations: [Empty]. 

Net Position: $18,411. 

The accompanying notes are an integral part of these financial 
statements. 

[End of table] 

Federal Housing Finance Agency: 
Statement of Budgetary Resources: 
for the Year Ended September 30, 2009 (in Thousands): 

2009: 

Budgetary Resources: 

Unobligated Balance: Unobligated Balance Brought Forward, October 1: 
$5,132. 

Recoveries of Prior Year Unpaid Obligations: $6,002; 

Budget Authority: Appropriation - Assessments: $115,669; 

Budget Authority: Appropriation - Investment Interest: $30; 

Spending Authority From Offsetting Collections, Earned: Collected: 
$4,572; 

Spending Authority From Offsetting Collections, Earned: Change In 
Receivables From Federal Sources: ($1,459); 

Spending Authority From Offsetting Collections: Change In Unfilled 
Customer Orders: Without Advance From Federal Sources: ($4,038); 

Subtotal: $114,774. 

Total Budgetary Resources: $125,908. 

Status of Budgetary Resources: 

Obligations Incurred: Direct: $111,682; 

Obligations Incurred: Reimbursable: $4,569; 

Obligations Incurred: Subtotal: $116,251. 

Unobligated Balance: Exempt From Apportionment: $9,657. 

Total Status of Budgetary Resources: $125,908. 

Change In Obligated Balance: Obligated Balance, Net
Unpaid Obligations, Brought Forward, October 1: $29,146; 

Less: Uncollected Customer Payment From Federal Sources, Brought 
Forward, October 1: $5,500; 

Total Unpaid Obligated Balance, Net: $23,646. 

Obligations Incurred Net: $116,251; 

Less: Gross Outlays: $117,427; 

Less: Recoveries of Prior Year Unpaid Obligations, Actual: $6,002; 

Change In Uncollected Customer Payments From Federal Sources: $5,497; 

Obligated Balance, Net, End of Period: Unpaid obligations: $21,968; 

Less: Uncollected Customer Payment From Federal Sources: $3; 

Total, Unpaid Obligated Balance, Net, End of Period: $21,965. 

Net Outlays: 

Gross Outlays: $117,427; $4,572	 

Less: Offsetting Collections: $4,572; 

Less: Distributed Offsetting Receipts: $115,699; 

Net Outlays: ($2,844). 

The accompanying not are an integral part of these financial 
statements. 

[End of table] 

Federal Housing Finance Agency
Notes to the Financial Statements: 

Note 1: Summary Of Significant Accounting Policies: 

A. Reporting Entity: 

The Federal Housing Finance Agency was established on July 30, 2008, 
when the President signed into law the Housing and Economic Recovery 
Act of 2008 (HERA). FHFA is an independent agency in the Executive 
branch empowered with supervisory and regulatory oversight of the 12 
Federal Home Loan Banks, Fannie Mae, and Freddie Mac (Regulated 
Entities) FHFA is responsible for ensuring that each regulated entity 
operates in a safe and sound manner, including maintenance of adequate 
capital and internal controls, and carries out their housing and 
community development finance missions. FHFA had minimal activity 
during the agency's two months of existence in fiscal year 2008. 

HERA abolished the Federal Housing Finance Board (FHFB) and Office of 
Federal Housing Enterprise Oversight (OFHEO) effective at the end of 
the 1-year period beginning on July 30, 2008. FHFB and OFHEO existed 
until then solely for the purpose of winding up their affairs. During 
fiscal year 2009, in accordance with HERA, the transfer of personnel, 
property, and program activities of FHFB, OFHEO, and certain employees 
and activities of the Department of Housing and Urban Development 
related to the regulation of the mission of Fannie Mae and Freddie Mac 
were made to FHFA. 

Under the authority of the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992, as amended by HERA, FHFA placed Fannie Mae 
and Freddie Mac under conservatorship on September 6, 2008, to 
stabilize the two entities with the objective of maintaining normal 
business operations and restoring safety and soundness. FHFA, as 
conservator, assumed the power of stockholders, boards, and management 
FHFA delegated to Fannie Mae and Freddie Mac certain business and 
operational authority. FHFA personnel monitor the operations of the 
enterprises. 

In September 2008, after Fannie Mae and Freddie Mac were placed in 
conservatorship under the FHFA, the Office of Management and Budget 
determined that the finances of the companies would not be included in 
financial statements of the federal government For fiscal year 2008, 
the Office of Management and Budget (OMB) and the Department of the 
Treasury (Treasury) concluded that Fannie Mae and Freddie Mac did not 
meet the conclusive or indicative criteria for a federal entity 
contained in OMB Circular A-136 and Statement of Federal Financial 
Accounting Concepts No. 2, Entity and Display because they are not 
listed in the section of the federal government's budget entitled 
"Federal Programs by Agency and Account,' and because the nature of 
FHFA's conservatorships over Fannie Mae and Freddie Mac and the federal 
government's ownership and control of the entities is considered to be 
temporary. Treasury reaffirmed this position for fiscal year 2009, with 
which FHFA concurs. Consequently, the assets and liabilities of Fannie 
Mae and Freddie Mac have not been consolidated into FHFA's financial 
statements. 

Both Fannie Mae and Freddie Mac, as represented by FHFA as their 
Conservator, entered into separate agreements with Treasury known as 
the Senior Preferred Stock Purchase Agreements (Agreements) on 
September 7, 2008. These two Agreements are identical and have since 
been amended twice, on September 26, 2008 and May 6, 2009. The 
Agreements provide for each Enterprise to draw up to $200 billion from 
Treasury to ensure that they maintain a non-negative Net Worth, thereby 
avoiding a statutory requirement that an Enterprise be put in 
receivership following an extended period of negative Net Worth. Under 
the Agreements, each Enterprise submits a request for any needed draw 
amount once their financials (to be published in their 10-K or 10-Q) 
are finalized. The Enterprise also submits a statement certifying 
compliance with Agreement covenants, which include limits on portfolio 
size and indebtedness. FHFA, in its role as Conservator, reviews the 
request for a draw and certifies that the request is within the 
available amount remaining under the limit contained in the Agreement 
FHFA then sends a letter to Treasury requesting the draw amount prior 
to the end of the current quartet. FHFA as Conservator also issues an 
order to the Enterprises each quarter requiring each Enterprise to pay 
dividends to Treasury as required by the Agreements. Additionally, the 
Agreements require each Enterprise to obtain Treasury approval for the 
disposition of assets, except under certain circumstances. FHFA as 
Conservator reviews these requests. Fannie Mae and Freddie Mac draws on 
their Agreements with Treasury are summarized below (dollars in 
billions). 

Senior Preferred Draws:	September 30, 2008	
Fannie	Mae: $0.0	
Freddie Mac: $13.8 

Senior Preferred Draws:	December 31, 2008	
Fannie	Mae: $15.2	
Freddie Mac: $30.8 

Senior Preferred Draws:	March 31, 2009	
Fannie	Mae: $19.0	
Freddie Mac: $6.1 

Senior Preferred Draws:	June 30, 2009	
Fannie	Mae: $10.7	
Freddie Mac: $0.0 

Senior Preferred Draws:	Cumulative Draws	
Fannie	Mae: $44.9	
Freddie Mac: $50.7 

[End of table] 

B. Basis of Presentation: 

FHFA's principal statements were prepared from its official financial 
records and general ledger in conformity with accounting principles 
generally accepted in the United States and follow the presentation 
guidance established by the Office of Management and Budget (OMB) 
Circular A-136 "Financial Reporting Requirements," revised June 10, 
2009. The statements are a requirement of the Government Management 
Reform Act of 1994, the Accountability of Tax Dollars Act of 2002, and 
HERA. The financial statements are in addition to the financial reports 
prepared by FHFA, pursuant to OMB directives, which are used to monitor 
and control budgetary resources. As required by HERA, the financial 
statements of FHFA are audited by the U.S. Government Accountability 
Office (GAO). The financial statements and associated not for FHFA for 
fiscal year 2009 will not be comparative, as this is the agency's first 
full fiscal year of existence The balance sheet, statement of net cost, 
and statement of changes in net position are consolidated statements, 
whereas the statement of budgetary resources is a combined statement 
The statements include consolidated and combined balances for FHFA, 
FHFB, and OFHEO. Financial transactions were captured in the legacy 
FHFB and OFHEO systems until the conversion to one system was complete 
on July 1, 2009. Unless specified otherwise, all amounts are presented 
in thousands. 

C. Basis of Accounting: 

Transactions are recorded on both an accrual accounting basis, and a 
budgetary basis. Under the accrual basis of accounting revenues are 
recognized when earned, and expenses are recognized when a liability is 
incurred, without regard to receipt or payment of cash. Budgetary 
accounting facilitates compliance with legal requirements and controls 
over the use of federal funds. FHFA conforms to accounting principles 
generally accepted in the United States for Federal entities as 
prescribed by the standards set forth by the Federal Accounting 
Standards Advisory Board (FASAB). FASAB is recognized by the American 
Institute of Certified Public Accountants as the body designated to 
establish generally accepted accounting principles for Federal 
entities. Certain assets, liabilities, earned revenues, and costs have 
been classified as intragovemmental throughout the financial statements 
and notes. Intragovernmental is defined as exchange transactions made 
between two reporting entities within the Federal government. 

D. Revenues, Imputed & Other Financing Sources: 

Operating revenues of FHFA are obtained through assessments of the 
regulated entities. The agency's Director, in September 2008 approved 
the annual budget By law, FHFA is required to charge semi-annual 
assessments to the entities. Assessments collected shall not exceed the 
amount sufficient to provide for the reasonable costs associated with 
overseeing the entities, plus amounts determined by the Director to be 
necessary for maintaining a working capital fund. 

FHFA develops its annual budget using a 'bottoms up' approach. Each 
office within the agency is asked to bifurcate their budget request 
between the amount of resources needed for the regulation of Fannie Mae 
and Freddie Mac and the resources needed for the regulation of the 
twelve FHLBanks. The office requests are then aggregated (with overhead 
costs distributed proportionately) to determine the total costs 
associated with regulating Fannie Mae and Freddie Mac and the total 
costs associated with regulating the FHLBanks. These two totals, along 
with any collection for the working capital fund, equal the fiscal year 
budget for the agency. 

Fannie Mae and Freddie Mac pay a pro rata share of their portion of the 
total assessment based on the combined assets and off-balance sheet 
obligations of each enterprise Each Federal Home Loan Bank's share of 
their portion of the total assessment is based on the dollar value of 
its capital stock relative to the combined dollar value of all Federal 
Home Loan Banks' capital stock Assessment letters are sent to the 
entities 30 days prior to the assessment due dates of October 1st and 
April 1st. Assessments received prior to due dates are available for 
investment but are unavailable for obligation. These assessments are 
recorded as deferred revenue. 

Federal government entities often receive goods and services from other 
federal government entities without reimbursing the providing entity 
for all the related costs. In addition, federal government entities 
also incur costs that are paid in total or in part by other entities. 
An imputed financing source is recognized by the receiving entity for 
costs that are paid by other entities. FHFA recognized imputed costs 
and financing sources in fiscal year 2009 as prescribed by accounting 
standards. FHFA recognizes as an imputed financing source the amount of 
pension and post-retirement benefit expenses for current employees 
accrued on FHFA's behalf by the Office of Personnel Management (OPM). 

E. Use of Estimates: 

The preparation of the accompanying financial statements in accordance 
with U.S. generally accepted accounting principles requires management 
to make certain estimates and assumptions that affect the reported 
amounts of assets, liabilities, revenues, and expenses. Actual results 
could differ from those estimates. 

F. Earmarked Funds: 

FASAB's Statement of Federal Financial Accounting Standards (SFFAS) No. 
27 "Identifying and Reporting Earmarked Funds' established certain 
disclosure requirements for funds defined as "earmarked.' SFFAS No. 27 
states that "earmarked funds are financed by specifically identified 
revenues, often supplemented by other financing sources, which remain 
available over time These specifically identified revenues and other 
financing sources are required by statute to be used for designated 
activities, benefits or purposes and must be accounted for separately 
from the Government's general revenues.' The standard also presents 
three required criteria for an earmarked fund. Based on the standard's 
criteria, FHFA determined that it has no earmarked funds. 

G. Fund Balance with Treasury: 

The U.S. Treasury (Treasury) processes cash receipts and disbursements 
on FHFA's behalf. Funds held at the Treasury are available to pay 
agency liabilities and finance authorized purchase obligations. FHFA 
does not maintain cash in commercial bank accounts or foreign currency 
balances. 

During the year, increases to FHFA's Fund Balance with Treasury is 
comprised of semi-annual assessments, investment interest, collections 
on reimbursable agreements, civil penalty monies, and Freedom of 
Information Act (FOIA) request fees. FHFA is not authorized to retain 
civil penalty monies or FOIA fees, and as such, records these as 
custodial liabilities. 

The Housing and Economic Recovery Act of 2008 provides authority for 
FHFA to maintain a working capital fund. The working capital fund is 
defined in FHFA's Assessment Regulation as an account for amounts 
collected from the regulated entities to establish an operating reserve 
that is intended to provide for the payment of large or multiyear 
capital and operating expenditures, as well as unanticipated Expenses. 
The balance in the working capital fund will be evaluated annually. 

H. Investments: 

FHFA has the authority to invest in U.S. Treasury securities with 
maturities suitable to FHFA's needs. FHFA invests solely in U.S. 
Treasury securities, which are normally held to maturity and carried at 
cost Investments are adjusted for unamortized premiums or discounts. 
Premiums and discounts are amortized and interest is accrued using the 
level-yield, scientific method of effective interest amortization over 
the term of the respective issues. 

I. Accounts Receivable: 

Accounts receivable consist of amounts owed to FHFA by other federal 
agencies and the public. Amounts due from federal agencies are 
considered fully collectible and consist of interagency agreements. 
Accounts receivable from the public include reimbursements from 
employees, civil penalty assessments and FOIA request fees. An 
allowance for uncollectible accounts receivable from the public is 
established when either (1) management determines that collection is 
unlikely to occur after a review of outstanding accounts and the 
failure of all collection efforts, or (2) an account for which no 
allowance has been established is submitted to the Department of the 
Treasury for collection, which takes place when it becomes 180 days 
delinquent Historical experience has indicated that the majority of the 
receivables are collectible. 

J. Property and Equipment, Net: 

Pursuant to HERA legislation, all Property and Equipment of FHFB and 
OFHEO were transferred to FHFA at the existing net book value of those 
assets. Net book value was determined by the capitalization policies in 
effect at the legacy agencies. 

Property and Equipment is recorded at historical cost It consists of 
tangible assets and software As of May 2009, FHFA has adopted a 
property management policy. Under FHFA's property management policy, 
equipment acquisitions greater than or equal to $25 thousand are 
capitalized and depreciated using the straight-line method over the 
estimated useful life of the asset Additionally, for bulk purchases of 
similar items, which individually do not meet the test for 
capitalization, the acquisition is capitalized and depreciated if the 
depreciated basis of the bulk purchase is $250 thousand or more 
Applicable standard governmental guidelines regulate the disposal and 
convertibility of agency property and equipment The useful life 
classifications for capitalized assets are as follows: 

Description: Furniture, Fixtures, and Equipment; 
Useful Life (years): 3. 

Description: Automated Fling Storage Systems; 
Useful Life (years): 15. 

Description: Internal Use Software; 
Useful Life (years): 3. 

[End of table] 

A leasehold improvements useful life is equal to the remaining lease 
term or the estimated useful life of the improvement, whichever is 
shorter. FHFA has no real property holdings or stewardship or heritage 
assets. Other property items, normal repairs and maintenance are 
charged to expense as incurred. 

K. Advances and Prepaid Charges: 

Advance payments are generally prohibited by law. There are some 
exceptions, such as reimbursable agreements, subscriptions and payments 
to contractors and employees. Payments made in advance of the receipt 
of goods and services are recorded as advances or prepaid charges at 
the time of prepayment and recognized as expenses when the related 
goods and services are received. 

L. Liabilities: 

Liabilities represent the amount of funds that are likely to be paid by 
FHFA as a result of a transaction or event that has already occurred. 

FHFA reports its liabilities under two categories, Intragovemmental and 
With the Public Intragovemmental liabilities represent funds owed to 
another government agency. Liabilities With the Public represent funds 
owed to any entity or person that is not a Federal agency, including 
private sector firms and federal employees. Each of these categories 
may include liabilities that are covered by budgetary resources and 
liabilities not covered by budgetary resources. 

Liabilities covered by budgetary resources are liabilities funded by a 
current appropriation or other funding source. These consist of 
accounts payable and accrued payroll and benefits. Accounts payable 
represent amounts owed to another entity for goods ordered and received 
and for services rendered except for employees. Accrued payroll and 
benefits represent payroll costs earned by employees during the fiscal 
year which are not paid until the next fiscal year. 

Liabilities not covered by budgetary resources are liabilities that are 
not funded by any current appropriation or other funding source. These 
liabilities consist of accrued annual leave, deferred rent, and the 
amounts due to Treasury for collection and accounts receivable of civil 
penalties and FOIA request fees. Annual leave is earned throughout the 
fiscal year and is paid when leave is taken by the employee the accrued 
liability for annual leave represent the balance earned but not yet 
taken. The Department of labor (DOL) is the central paying agent for 
all workman compensation claims filed under the Federal Employees 
Compensation Act (FECA). Accrued FECA represents the amount FHFA is to 
reimburse DOL for claims paid to FHFA employees. No liability is 
recorded for future workman compensation as of September 30, 2009, as 
FHFA's methodology for estimating the future workman compensation as 
prescribed by DOL determined that the liability would be negligible 
Deferred rent is the difference at year-end between the sum of monthly 
cash disbursements paid to date for rent and the sum of the average 
monthly rent calculated based on the term of the lease This 
determination and recording of deferred rent is applicable only to the 
lease agreement on the property at 1750 Pennsylvania Avenue that 
commenced in 2005 (See Note 8. Leases). 

M. Employee Leave and Benefits: 

FHFA employees are entitled to accrue annual leave and sick leave at a 
rate based on years of federal service For most employees, annual leave 
may be accrued up to 240 hours each year. The FHFA executive employees 
equivalent to the Senior Executive Service (SES) employees may accrue 
annual leave consistent with the rules for SES level employees. Accrued 
annual leave is treated as an unfunded expense with an offsetting 
liability when earned. The accrued liability is reduced when the annual 
leave is taken. Any unused annual leave balance is paid to the employee 
upon leaving federal service, based on the employee's earnings per 
hour. There is no maximum limit on the amount of sick leave that may be 
accrued. Upon separation, any unused sick leave of Civil Service 
Retirement System (CSRS) plan employees is creditable as additional 
time in service for the purpose of calculating an employee's retirement 
annuity. For Federal Employees Retirement System (FERS) plan employees, 
unused sick leave is held indefinitely and may be used if rehired. 

Health Benefits and Life Insurance: FHFA, through programs established 
for all agencies by the federal government, offers its employees health 
and life insurance coverage through the Federal Employees Health 
Benefits Program and Federal Employees Group Life Insurance Program. 
The cost of each is shared by FHFA and its employees. In addition, all 
employees have 1.45% of gross earnings withheld to pay for future 
Medicare coverage. 

N. Retirement Plans: 

FHFA employees participate in the retirement plans offered by OPM, 
which consist of CSRS or FERS. The employees who participate in CSRS 
are beneficiaries of FHFA's contribution, equal to 7% of pay, 
distributed to the employee's annuity account in the Civil Service 
Retirement and Disability Fund. FERS went into effect on January 1, 
1987. FERS and Social Security automatically cover most employees hired 
after December 31, 1983. Employees hired prior to January 1, 1984 
elected to join either FERS and Social Security or remain in CSRS. FERS 
offers a Thrift Savings Plan to which FHFA automatically contributes 1% 
of pay and matches any employee contribution up to an additional 4% of 
pay. For FERS participants, FHFA also contributes the employer's 
matching share of Social Security. 

FERS employees and certain CSRS reinstatement employees are eligible to 
participate in the Social Security program after retirement In these 
instances, FHFA remits the employer's share of the required 
contribution, which is 11.2% for FERS and 7% for CSRS. 

FHFA expenses its contributions to the retirement plans of covered 
employees as the expenses are incurred. FHFA reports imputed (unfunded) 
costs with respect to retirement plans, health benefits and life 
insurance pursuant to guidance received from OPM. These costs are paid 
by OPM and not by FHFA. Disclosure is intended to provide information 
regarding the full cost of FHFA's program in conformity with generally 
accepted accounting principles. 

FHFA does not report on its financial statements information pertaining 
to the retirement plans covering its employees. Reporting amounts such 
as plan assets, accumulated plan benefits, and related unfunded 
liabilities, if any, is the responsibility of OPM as the administrator.
FHFA's 401(K) is administered by T. Rowe Price Eligible employees that 
participate may contribute up to 10% of salary on a pre-tax basis while 
FHFA will match contributions up to 3% of the employee's salary. 
Qualified employees may participate in the Federal Thrift Savings Plan 
and/or FHFA's 401(K) Savings Plan, up to the Internal Revenue Code 
limitations established for salary deferral and annual additions. 

0. Contingencies: 

Liabilities are deemed contingent when the existence or amount of the 
liability cannot be determined with certainty pending the outcome of 
future events. FHFA recognizes contingent liabilities, in the 
accompanying balance sheet and statement of net cost, when they are 
both probable and can be reasonably estimated. FHFA discloses 
contingent liabilities in the notes to the financial statements when a 
loss from the outcome of future events is more than remote but less 
than probable or when the liability is probable but cannot be 
reasonably estimated. 

Note 2: Fund Balance With Treasury: 

Fund Balance with Treasury consists of an Operating Fund and a Working 
Capital Fund. FHFA did not use the funds in the Working Capital Fund 
during fiscal year 2009. Fund Balance with Treasury (FBWT) account 
balances as of September 30, 2009 were as follows: 

2009 (In Thousands): 

Fund Balances:	 

Operating Fund: $26,076; 	
Working Capital Fund: $3,000; 
Total: $29,076. 
		
Status of Fund Balance with Treasury: 

Unobligated Balance: 

Available: $9,657; 
Unavailable — Deferred Revenue (See Note 6): $35,122; 
Total Unobligated Balance: $44,779. 

Obligated Balance Not Yet Disbursed: $21,968. 

Investments: ($37,668). 

Uncollected Customer Payment Earned: ($3). 

Total: $29,076. 

(See Note 12 Legal Arrangements Affecting Use of Unobligated Balances) 

[End of table] 

Note 3: Investments: 

Intragovernmental Securities: 
As of September 30, 2009 (In Thousands): 

Non-Marketable Market Based: 	
Cost: $37,668; 
Amortized (Premium) Discount: [Empty]; 
Interest Receivable: [Empty]; 
Investments, Net: $37,668; 
Other Adjustments: [Empty]; 
Market Value Disclosure: $37,668. 

[End of table] 

FHFA is currently investing in one-day certificates issued by the U.S. 
Treasury. There were no amortized premiums/discounts or interest 
receivable on investments as of September 30, 2009. Interest earned on 
investments was $30 thousand for fiscal year 2009. 

Note 4: Accounts Receivable: 

Accounts Receivable balances as of September 30, 2009 were as follows: 

2009 (In Thousands): 

Accounts Receivable due from the Public: $3; 
Intragovemmental Receivables: $3; 
Total Accounts Receivable: $6. 

As of September 30, 2009 there are no amounts that are deemed 
uncollectible. 

[End of table] 

Note 5: General Property And Equipment: 

Property and equipment account balances as of September 30, 2009 were 
as follows: 

Schedule of Property and Equipment as of September 30, 2009 (In 
Thousands): 
			
Description: Equipment; 
Acquisition Cost: $10,303; 
Accumulated Depreciation: $9,526; 
Book Value: $777. 

Description: Leasehold Improvements; 
Acquisition Cost: $6,881; 
Accumulated Depreciation: $6,270; 
Book Value: $611. 

Description: Capital Lease; 
Acquisition Cost: $22; 
Accumulated Depreciation: $22; 
Book Value: [Empty]. 

Description: Internal-Use Software; 
Acquisition Cost: $29,093; 
Accumulated Depreciation: $27,280; 
Book Value: $1,813. 

Description: Internal-Use Software In Development; 
Acquisition Cost: $61; 
Accumulated Depreciation: [Empty]; 
Book Value: $61. 

Description: Construction in Progress; 
Acquisition Cost: $11; 
Accumulated Depreciation: [Empty]; 
Book Value: $11. 

Description: Total; 
Acquisition Cost: $46,371; 
Accumulated Depreciation: $43,098; 
Book Value: $3,273. 

[End of table] 

Note 6: Deferred Revenue: 

Deferred revenue consists of $35.1 million classified as with the 
public for assessments received from the regulated entities prior to 
the due date of October 1st These assessments are available for 
investment but unavailable for obligation. (See Note 2 Fund Balance 
With Treasury) 

Note 7: Other Liabilities: 

The other liabilities are comprised of payroll accruals, deferred rent 
and unfunded leave. Other liabilities not covered by budgetary 
resources consist of unfunded annual leave which also includes 
compensation time and deferred rent for a total of $7.4 million. FHFA's 
other liabilities are classified as current. 

2009 (In Thousands): 

Intragovernmental: 
Payroll Taxes Payable: $652; 

Total Intragovemmental: $652. 

With the Public: 
	
Accrued Payroll: $3,417; 

Annual Leave: $7,256; 

Deferred Rent: $140; 

Total Public: $10,813. 

[End of table] 

Note 8: Leases: 

Operating Leases: 

FHFA has an occupancy lease with the Office of Thrift Supervision (OTS) 
at 1700 G Street NW, Washington, DC, that covers office space and 
building services, including utilities, security guards, janitorial 
services, mail delivery, use of the loading doily garage parking and 
building operation and maintenance The initial term of the lease was 
for five years beginning in 1993, with the option to renew for three 5-
year terms with OFHEO. This lease was transferred to FHFA with its 
creation. FHFA has exercised the third of the three option terms. 

FHFA may terminate the lease agreement with GIS in whole or in part. In 
the event of termination at FHFA's discretion, FHFA would be required 
to pay two months' rent. If either party ceases to Exist or merges with 
another entity by operation of law, either party may terminate the 
rental agreement In the event of termination under this provision, 
either party is liable for further costs, fee, damages or other monies 
due to the termination, except for payments through the date of the 
termination. Because of this termination clause, no deferred rent is 
established for this lease, nor is disclosure of minimum future lease 
payments required under Financial Accounting Standards Board Statement 
No. 13. 

1750 Pennsylvania Avenue NW and 1625 Eye Street: 

FHFA leases office space in Washington, DC at 1750 Pennsylvania 
Avenundisclosed1625 Eye Street NW. The lease terms of 1750 Pennsylvania 
Avenue NW expire on March 20, 2011. The lease terms of 1625 Eye Street 
expire on June 30, 2015. Contingency space at an undisclosed location 
is also leased, with the lease expiring on October 31, 2009. Total 
rental payments for the fiscal year ended September 30, 2009 were $4.78 
million. The minimum future payments for these leases are as follows: 

Fiscal Year: 2010; 
Amount (In Thousands): $4,467. 

Fiscal Year: 2011; 
Amount (In Thousands): $4,107. 

Fiscal Year: 2012; 
Amount (In Thousands): $3,674. 

Fiscal Year: 2013; 
Amount (In Thousands): $3,748. 

Fiscal Year: 2014; 
Amount (In Thousands): $3,823. 

Fiscal Year: Thereafter; 
Amount (In Thousands): $2,910; 

Total: 
Amount (In Thousands): $ 22,729. 

Note 9: Commitments And Contingencies: 

FHFA does not have any material commitments or contingencies that meet 
disclosure requirements as of September 30, 2009. 

Note 10: Program Costs: 

Pursuant to the Housing and Economic Recovery Act of 2008, FHFA was 
established to supervise and regulate the 14 regulated entities. The 
regulated entities include Freddie Mac, Fannie Mae and the 12 Federal 
Home Loan Banks. FHFA's Program Costs are reflected as one program as 
defined by HERA Section 1311(b)(1). Fiscal year 2009 resource 
allocation estimates and actual costs were not tracked by strategic 
goal due to the priority placed on integrating staff from three 
agencies; integrating and developing administrative and infrastructure 
and systems; and establishing a new strategic plan, goals, and 
objectives. Beginning in fiscal year 2010, FHFA will track resource 
allocations to the strategic goals developed for FHFA's new strategic 
plan, which was published in the last quarter of fiscal year 2009. 

Program costs are distributed into two categories: Intragovernmental 
and With the Public. Intragovenmental costs are a result of FHFA 
contracting with other federal agencies for goods and/or services, such 
as rent paid to OTS, payroll processing services received from the 
Department of Agriculture and imputed financing costs for post-
retirement benefits with the Office of Personnel Management With the 
Public costs include expenditures for contracts with the private sector 
for goods or services, payments for employee salaries, depreciation, 
annual leave and deferred rent expenses. Revenue is comprised of semi-
annual assessments, investment interest, and miscellaneous revenue 
Intragovernmental expenses relate to the source of goods and services 
purchased by the revenues for the year ended September 30, 2009 were:	
agency and not to the classification of related revenue The costs and 
revenues for the year ended September 30, 2009 were: 

2009 (In Thousands): 

Costs:	
	
Intragovernmental: $24,048; 
With the Public: $98,768; 
Gross Costs: $122,816. 

Less Earned Revenue: 
	
Assessment Revenue: $115,669; 
Interest Revenue: $30; 
Miscellaneous Revenue: $10; 
Total Revenue: $115,709. 

Net Program Costs: $7,107. 

[End of table] 

Note 11: Apportionment Categories Of Obligations Incurred: 

All obligations incurred are characterized as Exempt from apportionment 
(i.e not apportioned) on the Statement of Budgetary Resources. 
Obligations incurred for the year ended September 30, 2009 are: 

2009 (In Thousands): 

Direct Obligations — Exempt from Apportionment: $111,682; 
Reimbursable Obligations - Exempt from Apportionment: $4,569; 
Total Obligations — Exempt from Apportionment: $116,251. 

[End of table] 

Note 12: Legal Arrangements Affecting Use Of Unobligated Balances: 

HERA requires that any balance that remains unobligated at the end of 
the fiscal year, except for amounts assessed for contribution to FHFA's 
working capital fund, must be credited against the next year's 
assessment to the regulated entities. As of September 30, 2009, the 
unobligated balance was $44.8 million, of which $35.1 million is 
deferred revenue which is unavailable The unobligated available balance 
of $9.7 million will be credited against the regulated entities' April 
assessments. (See Note 2. Fund Balance With Treasury) 

Note 13: Budgetary Resource Comparisons To The Budget Of The United 
States Government: 

Statement of Federal Financial Accounting Standards No. 7, "Accounting 
for Revenue and Other Financing Sources and Concepts for Reconciling 
Budgetary and Financial Accounting", calls for explanations of material 
differences between amounts reported in the Statement of Budgetary 
Resources and the actual balances published in the Budget of the United 
States Government (President's Budget). However, the President's Budget 
that will include fiscal year 09 actual budgetary execution information 
has not yet been published. The President's Budget is scheduled for 
publication in February 2010 and can be found at the OMB Web site: 
[hyperlink, http://www.whitehousegov/omb[. 

With FHFA being established on July 30, 2008 and FHFB and OFHEO 
operating as separate agencies for 10 months of the fiscal year, 
separate financial statements were prepared for FHFB and OFHEO in 
fiscal year 2008. FHFA had minimal activity during fiscal year 2008 and 
therefore, did not prepare a Statement of Budgetary Resources or other 
required financial statements. As a result, the reconciliation of the 
2010 Budget of the United States Government, with the Actual column 
completed for 2008, to the Statement of Budgetary Resources for fiscal 
year 2008 has not been performed. 

Note 14: Undelivered Orders At The End Of The Period: 

Statement of Federal Financial Accounting Standards No. 7, "Accounting 
for Revenue and Other Financing Sources and Concepts for Reconciling 
Budgetary and Financial Accounting", states that the amount of 
budgetary resources obligated for undelivered orders at the end of the 
period should be disclosed. For the fiscal year ended September 30, 
2009 undelivered orders amounted to $12.87 million. 

Note 15: Custodial Revenues: 

FHFA's custodial collections primarily consist of Freedom of 
Information Act requests and civil penalties assessed. While these 
collections are considered custodial, they are neither primary to the 
mission of the agency nor material to the overall financial statements. 
FHFA also collects civil penalties assessed against the regulated 
entities. A penalty was collected in the amount of $500 thousand from a 
former executive of Fannie Mae FHFA's total custodial collections were 
$500 thousand for the year ended September 30, 2009, all of which were 
transferred to the Treasury General Fund on September 30, 2009. 

Note 16: Reconciliation Of Net Cost Of Operations To Budget: 

FHFA has reconciled its budgetary obligations and non-budgetary 
resources available to its net cost of operations. 

2009 (In Thousands): 

Resources Used to Finance Activities: 

Budgetary Resources Obligated: 

Obligations Incurred: $116,251; 

Less: Spending Authority From Offsetting Collections and Recoveries: 
$5,077; 

Obligations Net of Offsetting Collections and Recoveries: $111,174; 

Less: Offsetting Receipts: $115,699; 

Net Obligations: ($4,525). 

Other Resources: 
Imputed Financing From Costs Absorbed by Others: $3,078; 

Total Resources Used to Finance Activities: ($1,447). 

Resources Used to Finance Items Not Part of the Net Cost of Operations: 

Change in Budgetary Resources Obligated for Goods, Services and Benefits
Ordered But Not Yet Provided: ($2,524); 

Resources That Fund Expenses Recognized In Prior Periods: $46; 

Resources That Finance the Acquisition of Assets: $974; 

Total Resources Used to Finance Items Not Part of the Net Cost of 
Operations: ($1,504); 

Total Resources Used to Finance the Net Cost of Operations: $57. 

Components of Net Cost of Operations That Will Not Require or Generate 
Resources in the Current Period: 

Components Requiring or Generating Resources In Future Periods Increase 
In Annual Leave Liability: $3,349; 

Total Components of Net Cost of Operations That Will Require or 
Generate Resources In Future Periods: $3,349; 

Components Not Requiring or Generating Resources: Depreciation and 
Amortization: $3,697; 

Components Not Requiring or Generating Resources: Revaluation of Assets 
and Liabilities: $4; 

Total Components of Net Cost of Operations That Will Not Require or 
Generate Resources: $3,701; 

Total Components of Net Cost of Operations That Will Not Require or 
Generate Resources in the Current Period: $7,050. 
	
Net Cost of Operations: $7,107. 

[End of table] 

[End of section] 

Appendix I: Management’s Report on Internal Control over Financial 
Reporting: 

Federal Housing Finance Agency: 

Management's Report on Internal Control over Financial Reporting: 

The Federal Housing Finance Agency's (FHFA) internal control over 
financial reporting is a process effected by those charged with 
governance, management, and other personnel, the objectives of which 
are to provide reasonable assurance that (1) transactions are properly 
recorded, processed and summarized to permit the preparation of 
financial statements in accordance with U.S. generally accepted 
accounting principles and assets are safeguarded against loss from 
unauthorized acquisition, use, or disposition; and (2) transactions are 
executed in accordance with the laws governing the use of budget 
authority and other laws and regulations that could have a direct and 
material effect on the financial statements. 

FHFA management is responsible for establishing and maintaining 
effective internal control over financial reporting. FHFA management 
evaluated the effectiveness of the agency's internal control over 
financial reporting as of September 30, 2009, based on the criteria 
established under 31 U.S.C. sec. 3512 (c),(d) (commonly known as the 
Federal Managers' Financial Integrity Act). 

Based on that evaluation, we conclude that, as of September 30, 2009, 
FHFA's internal control over financial reporting was effective. 

Federal Housing Finance Agency: 

Signed by: 

Edward J. DeMarco: 
Acting Director: 

Signed by: 

Mark A. Kinsey: 
Chief Financial Officer: 

November 9, 2009: 

[End of section] 

Appendix II: Comments from the Federal Housing Finance Agency: 

Federal Housing Finance Agency: 

November 9, 2009: 

Mr. Steven J. Sebastian: 
Director, Financial Management and Assurance: 
Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Sebastian: 

Thank you for the opportunity to respond to the Government 
Accountability Office's (GAO) draft audit report titled, "Financial 
Audit: Federal Housing Finance Agency's Fiscal YGAO-10-218inancial 
Statements (GA0-10-218)". I would like to personally thank you and the 
GAO staff for all of your efforts in working with FHFA to meet the 
reporting deadline for our audited financial statements. 

I am pleased that the audit found that the financial statements are 
presented fairly, in all material respects, and in conformity with U.S. 
generally accepted accounting principles; that FHFA maintained, in all 
material respects, effective internal control over financial reporting; 
and that there were no instances of reportable noncompliance with laws 
and regulations tested by GAO. 

Fiscal year 2009 was a tremendously challenging year for FHFA. In 
addition to our focus on stabilizing the housing market in the midst of 
financial market turmoil, FHFA was also busy building a new agency, 
with a new financial accounting system, policies and controls. An 
unqualified audit opinion is testimony to the hard work and dedication 
of FHFA management and staff in building a solid foundation for the 
agency. 

As FHFA begins its second year of operations, we will continue to work 
to enhance our internal controls and ensure the reliability of our 
financial reporting, soundness of operations, and public confidence in 
the agency's mission. We appreciate your support of these efforts.
If you have any questions relating to our response, please contact Mark 
Kinsey, Chief Financial Officer, at (202) 414-3811. 

Sincerely, 

Signed by: 

Edward J. DeMarco: 
Acting Director: 

[End of section] 

Footnotes: 

[1] Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008). 

[2] GAO, Fannie Mae and Freddie Mac: Analysis of Options for Revising 
the Housing Enterprises' Long-term Structures, [hyperlink, 
http://www.gao.gov/products/GAO-09-782] (Washington, D.C.: Sept. 10, 
2009). 

[3] Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008). 

[4] A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented or detected and corrected on a timely 
basis. A significant deficiency is a deficiency, or combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance. A deficiency in internal control exists when the design or 
operation of a control does not allow management or employees, in the 
normal course of performing their assigned functions, to prevent, or 
detect and correct misstatements on a timely basis. 

[End of section] 

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