Federal Housing Enterprises

A widespread perception exists in the financial markets that, during a financial emergency, the U.S. government would rescue the two largest federal housing enterprises--the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), which had combined financial obligations of $1.5 trillion at the end of 1996. To lower the probability of such a costly government intervention, it is important that the Office of Federal Housing Enterprise Oversight (OFHEO) ensure the safety and soundness of Fannie Mae and Freddie Mac. OFHEO's primary means for achieving its mission are establishing capital standards for Fannie Mae and Freddie Mac and conducting on-site examinations to assess their management practices and financial conditions. This report (1) identifies the reasons why OFHEO has not issued final risk-based capital standards for Fannie Mae and Freddie Mac even though there was a December 1994 deadline for doing so and (2) assesses OFHEO's implementation of its safety and soundness examination responsibilities. GAO summarized this report in testimony before Congress; see: Federal Housing Enterprises: Operations of the Office of Federal Housing Enterprise Oversight, by Thomas J. McCool, Director of Financial Institutions and Markets Issues, before the Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises, House Committee on Banking and Financial Services. GAO/T-GGD-98-25, Oct. 30, 1997.

GAO noted that: (1) to fulfill its statutory safety and soundness mission, OFHEO is to establish risk-based capital standards that are sufficient to withstand the rigors of a complex stress test and implement a comprehensive and timely examination program; (2) to date, OFHEO has not fully completed either of these tasks; (3) OFHEO has not established the risk-based capital standards because it must first develop the stress test; (4) development of a stress test has been protracted primarily due to: (a) the complexity of the development process as specified in the act; and (b) OFHEO's decision in 1994 to develop its own sophisticated stress test rather than adopting and modifying stress tests that were already under development; (5) OFHEO has already missed its December 1994 statutory deadline for completing a stress test and establishing risk-based capital standards by almost 3 years; (6) tasks remaining include making key policy decisions about the stress test and continuing to translate its components into proposed and final rules; (7) GAO believes that it is essential that OFHEO complete the tasks remaining to develop those standards as expeditiously as possible; (8) OFHEO has not fully implemented a timely and comprehensive enterprise safety and soundness examination program; (9) OFHEO established an examination plan in September 1994 that provided for a 2-year cycle for the assessment of six core risks; (10) OFHEO's current 3- to 4-year cycle for assessing the six core risks is considerably longer than the 2-year cycle established in the plan; (11) GAO's analysis found that, among other factors, limited resources allocated to the examination office were largely responsible for OFHEO's inability to comply with the 1994 plan; (12) according to OFHEO officials, the organization plans to reassess its examination strategy and make changes necessary by early 1998 to ensure that its examination staff cover all six core risk areas within a 1-year period; (13) GAO believes that, without a reassessment, and potentially a reallocation of resources, OFHEO may not be able to implement an annual examination cycle by early 1998 that fully covers all risk areas, since the organization has been unable to implement a 2-year cycle with the current assignment of staff to the examination function; and (14) OFHEO could usefully include consideration of different examination cycles and related coverage that could be accomplished with alternative resource levels.

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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