WASHINGTON Dec 10 (Reuters) - Fannie Mae and Freddie Mac, the two mortgage firms operating under U.S. government control, need increased regulator scrutiny to ensure their senior staff pay structures are justified, a government watchdog said on Monday.
There is a "significant cost" involved in retaining 11,900 non-executive employees at Fannie Mae and Freddie Mac, the inspector general of the Federal Housing Finance Agency said in a report. The watchdog estimated that in 2011 the two companies paid about 90 executives a total of $92 million, while they paid 2,000 senior staff about $455 million.
Currently, pay levels for Fannie and Freddie's senior level employees are mainly left to the two companies to determine, while their regulator, FHFA, sets top executive officers' compensation packages in consultation with the U.S. Treasury.
"FHFA's oversight of senior professional compensation is comparatively limited," the report stated. That lack of oversight restricts FHFA's "capacity to ensure that the costs associated with senior professional compensation are warranted."
A major uproar from Republicans and Democrats over the multimillion-dollar pay packages for Fannie Mae and Freddie Mac's top executives has already prompted FHFA to take several steps to rein in compensation this past year. To further limit taxpayer liabilities, new salary benchmarks might be needed for senior staffers, the watchdog said in its report.
Fannie Mae and Freddie Mac have soaked up almost $190 billion in taxpayer aid since the government seized them in 2008 at the height of the financial crisis.
The inspector general called on the FHFA to "develop a plan to strengthen its oversight" of the costs involved in retaining senior staff through reviews or examinations. The regulator agreed with the watchdog's recommendations in the report.
Fannie Mae and Freddie Mac use market data from consulting firms as part of the process in adjusting both executive and senior staff salaries. FHFA has not tested the structures that Fannie and Freddie use to pay senior staff in order to make sure they are effective, the watchdog noted.
The report credited the FHFA for its increased control of executive compensation. FHFA implemented a revised compensation program this year that reduces the annual compensation of CEOs nearly 90 percent from about $5 million to $600,000 each.
Separately, FHFA in December 2010 imposed a pay freeze on general merit salary increases and cost of living adjustments that has been extended to cover all of 2012. Since the pay freeze has been in effect, employees do not receive more money unless they are promoted.
Uncertainty about the future of Fannie and Freddie, which many policymakers in Washington want to eventually wind down, has made it difficult to attract and retain employees with specialized skills and experience, the watchdog acknowledged.
FHFA will need to probe further whether using promotions or changing job responsibilities might offset the impact of the pay freezes on further attrition problems, the report stated.