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 testimony and the related report (GAO/GGD-98-6): (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 noted that: (1) OFHEO has not fully implemented its statutory safety and soundness responsibilities for Fannie Mae and Freddie Mac, and faces considerable future challenges in doing so; (2) OFHEO does not expect to complete a stress test and risk-based capital standards for Fannie Mae and Freddie Mac until 1999, though it was to be completed by December 1, 1994; (3) OFHEO has not fully implemented a comprehensive and timely enterprise examination program, resulting in its limited ability to lower the long-term financial risks to taxpayers associated with the enterprises' activities; (4) GAO has identified a number of reasons for OFHEO's inability to comply with the statutory deadline for completing the stress test and risk based capital standards; (5) GAO believes that strong congressional oversight of the development process is necessary to ensure that OFHEO completes the process as quickly as feasible; (6) OFHEO has not been able to fully implement an enterprise examination schedule that it established in 1994, has taken 3 to 4 years to examine the major risks facing the enterprises, and reduced the planned coverage of the most recently completed risk examination; (7) among other factors, limited resources allocated to the examination office and staff attrition contributed to OFHEO's inability to fully implement the 1994 plan; (8) OFHEO officials said that they planned to reassess the examination cycle and implement an annual examination cycle by early 1998 to cover all enterprise risks; (9) without a reassessment of resource requirements and potentially a reallocation of resources to the examinations office, OFHEO may not be able to fully implement an annual examination cycle; and (10) although Fannie Mae and Freddie Mac have been consistently profitable in recent years, GAO believes it is essential, given the enterprises' outstanding financial commitments of approximately $1.5 trillion at year-end 1996, that OFHEO implement its safety and soundness responsibilities as quickly as feasible.