FHFA Budget Cut Would End Most Mortgage-Fraud Investigations

The Federal Housing Finance Agency in Washington, D.C. FHFA has reduced its inspector general’s fiscal 2027 budget to $20 million, which the watchdog says will require cutting 70 to 80 percent of its staff. (Photo by Ajay Suresh)

On September 29, the Federal Housing Finance Agency’s inspector general published three audits.

One found that FHFA’s security controls weren’t effective at protecting its network and systems against internal threats. Another found that the agency’s oversight of Fannie Mae and Freddie Mac’s multifamily credit-risk transfer programs was effective. The third found that FHFA’s Office of General Counsel was providing sufficient oversight of its suspended-counterparty program, although some controls weren’t documented in its operating procedures. A fourth audit published the previous day found that security controls for one of FHFA’s cloud systems weren’t fully effective.

On September 30, FHFA announced that it was reducing the Office of Inspector General’s fiscal 2027 budget to $20 million.

FHFA says the inspector general has become unusually large compared with other federal watchdogs. According to the agency, OIG requested funding equal to 16 percent of FHFA’s operating budget, while inspector general offices average about 2 percent of their agencies’ budgets across the federal government. OIG employees account for about 18 percent of FHFA’s workforce, compared with an average of about 4 percent at other agencies. FHFA adopted zero-based budgeting and says it couldn’t justify maintaining that difference.

The inspector general’s office says the $20 million allocation will require it to cut approximately 70 to 80 percent of its staff. Acting Principal Deputy Inspector General James Hodge told Congress that the Office of Investigations would discontinue essentially all of its criminal investigations, stop supporting ongoing investigations as soon as feasible and reduce its investigative staff to the minimum necessary to handle FHFA employee matters and operate its legally required hotline.

FHFA regulates Fannie Mae, Freddie Mac and the 11 Federal Home Loan Banks, which together provide more than $8.7 trillion in funding to U.S. mortgage markets and financial institutions. FHFA also remains the conservator of Fannie Mae and Freddie Mac. Its inspector general investigates mortgage, bank and other fraud involving the entities the agency regulates.

The office has maintained roughly 40 special agents in recent years, along with three Special Assistant U.S. Attorneys who prosecute mortgage fraud and related crimes. Hodge told Congress that its criminal enforcement work has produced more than 1,270 convictions and nearly $75 billion in monetary results since 2011.

During the six months ending March 31, 2026, OIG investigations produced 32 indictments or charges, 23 convictions or pleas, 25 sentencings and 54 suspended-counterparty referrals to FHFA. Court-ordered restitution, fines, forfeitures and other investigative results totaled about $87.7 million.

The office was still announcing criminal cases immediately before the budget cut. On September 29, it reported the extradition of a dual U.S.-Peruvian national accused in a $40 million bank-fraud and money-laundering scheme. Earlier that month, it announced a guilty plea in a real-estate fraud case and the sentencing of a defendant in a mortgage-fraud case.

At the same time, its auditors were continuing to find problems inside FHFA itself, including cybersecurity weaknesses that had remained unresolved from earlier reviews. Other audits found that FHFA was doing what it was supposed to be doing. The office losing most of its staff is doing both kinds of work now.

FHFA Says the Inspector General Costs Too Much

FHFA’s case for the reduction rests largely on comparisons with other federal inspector general offices. Its September 30 announcement points to both spending and headcount, comparing the OIG’s 16 percent share of the agency budget and 18 percent share of the workforce with federal averages of about 2 and 4 percent respectively.

OIG’s original fiscal 2027 request was $57.6 million. The administration’s budget request sent to Congress included $55 million. The $20 million allocation represents a reduction of more than 60 percent from both the inspector general’s request and its fiscal 2026 operating level.

FHFA is a relatively small federal agency, but the inspector general’s investigators don’t limit their work to misconduct by FHFA employees. Their jurisdiction follows FHFA into the housing-finance system it regulates. Fannie Mae, Freddie Mac and the Federal Home Loan Banks sit throughout that system, while FHFA’s conservatorship gives the agency additional authority over Fannie and Freddie.

That helps explain why comparing OIG staffing only with FHFA staffing produces such a large number. It doesn’t establish that the OIG needs its existing budget or that all of its current positions should be preserved. FHFA may be able to reduce spending without losing work that another office could perform.

We won’t have to infer whether the $20 million budget crosses that line. Hodge has already told Congress what his office expects to stop doing. Investigators would concentrate on FHFA personnel matters and the hotline, while essentially all external criminal investigations would end. Support for the Justice Department’s National Fraud Enforcement Division would also stop.

The budget dispute therefore reaches beyond how much an inspector general should cost. FHFA has decided that $20 million is enough to perform the office’s statutory mission. The inspector general says that at that level, most of the people who currently investigate fraud involving the housing-finance system won’t be there.

FHFA Still Has Cybersecurity Problems to Fix

The September 29 cybersecurity audit followed several years of findings about FHFA’s information systems.

In fiscal 2023, auditors found that 1,716 of 2,820 identified vulnerabilities hadn’t been fixed within the 14 days required by federal and agency policy. By fiscal 2025, FHFA was tracking overdue vulnerabilities quarterly but still didn’t have estimated completion dates for them.

Penetration testing showed what some of those weaknesses could allow. Auditors gained access to a privileged user account, elevated a standard account to domain administrator and took full control of FHFA’s network. The OIG reported 3,318 potentially exploitable vulnerabilities across agency servers, workstations and other devices, 64 percent of which it classified as critical. Another audit found problems with disaster-recovery planning, including backup data at an alternate site that wasn’t encrypted at rest and had no documented controls compensating for that weakness.

The findings published at the end of September continued that work. The September 28 audit found that selected security controls for FHFA’s eGRC cloud system weren’t fully effective. The following day, the OIG again found that FHFA’s controls weren’t effective at protecting its network and systems against internal threats.

Other programs held up better under the same kind of review. FHFA’s Division of Enterprise Regulation had designed and implemented effective oversight of Fannie Mae and Freddie Mac’s multifamily credit-risk transfer programs. The Office of General Counsel was providing sufficient oversight of the suspended-counterparty program, although auditors recommended documenting some controls that were missing from its operating procedures. Earlier this year, the OIG found that FHFA was effectively overseeing Fannie Mae’s multifamily lenders and loan-monitoring activities, with a narrower problem involving documentation of its sampling approach.

The office doesn’t stop working on a problem when an audit is published. Recommendations remain open until corrective action is completed, and the OIG publishes monthly lists of recommendations that haven’t been resolved. Its cybersecurity work has returned to weaknesses found in earlier years because some of them were still there.

FHFA remains responsible for fixing every one of those problems after the budget cut. Its technology staff can patch vulnerabilities, change procedures and strengthen controls without the inspector general doing it for them. What the OIG has been providing is an independent check on whether those repairs were completed and whether the controls worked afterward.

The fiscal 2027 budget doesn’t eliminate the inspector general, and the public information available so far doesn’t tell us exactly how many auditors will remain after the reduction in force. Hodge’s warning is much more specific about criminal investigations. A 70-to-80-percent staff reduction would reach far beyond the investigators, though, and the office’s publication record will make the effect on audits visible fairly quickly. FHFA-OIG has published nine audits or evaluations so far in 2026, including four between September 17 and September 29.

Other Agencies May Take Some of the Fraud Cases

FHFA-OIG’s criminal cases already involve other federal law-enforcement agencies. Its semiannual reports describe joint investigations, and prosecutions are handled through U.S. Attorneys’ Offices and other parts of the Justice Department. The FBI and other federal investigators will continue to have authority over financial crimes that fall within their jurisdictions.

What we don’t know yet is how many of FHFA-OIG’s cases they’ll take.

That should become measurable because Hodge said support for existing criminal investigations will end as soon as feasible. OIG leadership has told employees that staffing reductions will occur over the coming months and has begun preparing a reduction in force.

If another agency takes an open investigation and continues it, much of that work survives even though FHFA-OIG no longer performs it. If cases are closed, delayed or narrowed because no one else has the staff or specialization to take them, they don’t.

The same question applies before a case becomes a prosecution. During the six months ending in March, OIG investigators sent 54 suspended-counterparty referrals to FHFA. The suspended-counterparty program allows FHFA to restrict individuals or institutions from doing business with its regulated entities, and the inspector general’s September audit found that FHFA’s Office of General Counsel was providing sufficient oversight of the program.

FHFA can continue suspending counterparties after the investigative staff is cut. The investigators are one of the places the information comes from.

That distinction is likely to become more important than the raw number of prosecutions. The Justice Department can prosecute a fraud case that reaches it. FHFA can act on misconduct identified through supervision, regulated entities or law enforcement. The harder number to reconstruct later is how many cases never developed because the investigators who would have found or pursued them were gone.

There’s already an example of why that can be difficult to measure in FHFA’s multifamily mortgage market.

Fannie Mae identified multifamily mortgage fraud as an emerging risk after referrals increased substantially beginning in 2023. An OIG evaluation published in January found that Fannie had expanded its fraud controls and that FHFA continued monitoring the issue. Most of the referrals reviewed from the earlier period were ultimately closed with no fraud found, and Fannie reported no actual multifamily mortgage-fraud losses during the period examined.

Those closed referrals weren’t wasted information. They helped establish how much of the apparent problem was actually fraud and gave Fannie and FHFA evidence they could use to adjust their response. A decline in referrals after investigators disappear won’t tell us by itself whether misconduct declined or whether fewer possible cases were being found.

The Budget Cut Will Be Easier to Measure Than Its Consequences

The staff reduction should leave several records behind.

We’ll know approximately how many employees remain. We can count criminal investigations, indictments, convictions and suspended-counterparty referrals. We can see how many audits and evaluations the office publishes and whether it continues returning to unresolved recommendations. Congress can ask where existing cases went.

FHFA’s supervision will continue. Fannie Mae and Freddie Mac have their own fraud controls. Other federal investigators can take cases, and prosecutors can receive referrals from other sources. If those institutions take over most of the investigations FHFA-OIG can no longer handle, fewer cases will actually be lost. If they don’t, a decline in investigations or referrals won’t necessarily mean there’s less fraud. It may mean fewer people are looking for it.

There could be fewer referrals because regulated institutions improved their controls, or because one of the offices generating referrals has stopped looking for most external cases. Fewer unresolved audit recommendations could mean FHFA fixed its problems, but it could also reflect fewer audits producing recommendations in the first place.

That’s why the September audits are a useful baseline. Immediately before the budget reduction, the office was finding some FHFA programs effective, finding weaknesses in others, following older cybersecurity problems that hadn’t been fixed and producing criminal cases outside the agency.

The question over the next year is which of those activities continue somewhere else, which remain inside a much smaller OIG and which stop.

What I’m watching now

The first thing I’m watching is the reduction in force itself. The $20 million allocation has been announced, but the projected 70-to-80-percent staffing loss hasn’t happened yet. Congress could still change the funding available to the office, and OIG leadership has been seeking a legislative response.

The existing criminal caseload should give us the clearest early measure of what other agencies can absorb. I want to know how many open investigations are transferred to the FBI, Justice Department or another agency, how many joint investigations continue after FHFA-OIG withdraws and how many are closed. The number of new mortgage- and bank-fraud investigations opened after the staffing reduction will matter too.

Suspended-counterparty referrals provide another measure. OIG sent 54 to FHFA during the six months ending March 31. If that number falls sharply after the investigators are cut, the change will need to be read alongside fraud reports and enforcement activity elsewhere before it can tell us whether the underlying problem improved.

I’m also watching the audit calendar. FHFA-OIG published four audits between September 17 and September 29 and nine audits or evaluations during 2026 through the end of September. Its 2027 output will show how much of that work survives.

The unresolved cybersecurity findings give us something specific to follow. If FHFA completes the overdue remediation and later independent testing verifies that the controls work, the underlying problem has improved. If the recommendations remain open while independent testing becomes less frequent, we’ll have less information about whether the weaknesses were fixed.

Finally, I’m watching whether the reduction remains specific to FHFA-OIG. Right now, the evidence supports a major loss of investigative capacity at this office. Similar reductions across other federal watchdogs would be a different and broader development.

Current Risk Assessment · October 6, 2026

Current assessment: FHFA has reduced its inspector general’s fiscal 2027 budget to $20 million, and the official responsible for implementing that budget says it will require cutting 70 to 80 percent of the office’s staff and ending essentially all external criminal investigations. Those investigators currently work mortgage, bank and other fraud cases involving a housing-finance system in which FHFA’s regulated entities provide more than $8.7 trillion in funding. The office is also still auditing FHFA, including cybersecurity problems that have remained unresolved across multiple years. Other federal agencies can take some criminal cases, and FHFA retains its own supervisory and enforcement powers. We don’t yet know how much of the work will move elsewhere.

Expected if this assessment holds: FHFA-OIG will transfer or discontinue much of its existing criminal caseload, open substantially fewer external fraud investigations and send fewer investigative referrals to FHFA. Audit and evaluation work is also likely to decline if the projected staff reduction occurs, although we don’t yet know how large that decline will be. The effect should become visible through case transfers, new investigations, suspended-counterparty referrals, audit output and follow-up on unresolved recommendations.

Would weaken the assessment: Congress or FHFA restores enough funding to prevent most of the projected staff reduction; other agencies take over the existing criminal cases without a substantial loss of investigative work; FHFA-OIG continues publishing a significant number of audits and evaluations after the cuts; and outstanding cybersecurity problems are fixed and independently verified.

Status: Elevated — FHFA’s budget decision is expected to remove most of the investigators dedicated to fraud involving the housing-finance system while the office is still producing criminal cases, regulatory referrals and audits identifying unresolved problems inside FHFA.

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Sources

Federal Housing Finance Agency, “To Be Good Financial Stewards, FHFA Inspector General’s Budget Will Match the Budgets of Peer Agencies,” September 30, 2026.

Federal Housing Finance Agency Office of Inspector General, “Audits and Evaluations,” accessed October 6, 2026.

Federal Housing Finance Agency Office of Inspector General, “Semiannual Report to the Congress — October 1, 2025 Through March 31, 2026,” 2026.

Federal Housing Finance Agency Office of Inspector General, “Fiscal Year 2026 Management and Performance Challenges,” 2025.

Reuters, “US housing agency internal watchdog warns budget cut will stymie its work,” October 1, 2026.

Federal News Network, “Pulte’s FHFA slashes mortgage fraud watchdog’s budget,” October 1, 2026.