Government Sponsored Enterprises

Freddie Mac's and Fannie Mae's Accounting for Costs of Foreclosed Property Gao ID: AIMD-94-75 May 27, 1994

This report provides information on the accounting changes made by two government-sponsored enterprises--the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association--in adopting the American Institute of Certified Public Accountants' Statement of Position 92-3, Accounting for Foreclosed Assets. Freddie Mac and Fannie Mae are federally chartered, privately owned, for-profit corporations created by Congress to ensure the availability of reasonably priced loans to home buyers. GAO (1) assesses whether the accounting changes made by the government-sponsored enterprises in adopting the Statement of Position 92-3 were in accordance with generally accepted accounting principles, (2) estimates the changes' effects on their respective loan loss reserves, and (3) estimates the changes' effects on compliance with minimum capital requirements set by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. GAO also considers the potential effects of accounting guidance issued by the Financial Accounting Standards Board that conflicts with the Statement of Position 92-3 relative to recognizing selling costs.

GAO found that: (1) GSE changes to foreclosed property accounting are reasonably supported by accounting guidance and in accordance with GAAP; (2) due to accounting policy changes, GSE loan loss reserves are available to cover only loan principal losses; (3) GSE chose to retain over $676 million in loan loss reserves to offset future principal losses; (4) GSE could reduce their level of loan loss reserves if they determine that their reserves exceed the amounts needed for principal losses; (5) the future effects of GSE accounting changes cannot be adequately estimated due to the considerable flexibility in GAAP; (6) the accounting changes did not affect GSE compliance with federal housing legislation minimum capital requirements; (7) GSE ability to comply with the minimum capital requirements would not increase significantly even if they decreased their current reserve levels by the maximum amount allowed; and (8) GSE accounting of loan loss reserves could become inconsistent because of conflicting new accounting guidance on the timing of recognizing selling costs on foreclosed asset financial statements.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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