Housing Enterprises

Pursuant to a congressional request, GAO reviewed the non-mortgage investment practices of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), focusing on the enterprises': (1) legal authority for making non-mortgage investments and oversight of that authority by the enterprises' regulators; (2) non-mortgage investment policies and practices; and (3) use of non-mortgage investments for arbitrage purposes.

GAO noted that: (1) information provided by the enterprises and their regulators, and GAO's review of the enterprises' charters, indicate that the enterprises have broad investment authority; (2) the Department of Housing and Urban Development (HUD) and the Office of Federal Housing Enterprise Oversight (OFHEO) have regulatory and enforcement authorities that could be used to limit the enterprises non-mortgage investments, at least in certain circumstances, but the extent of such authorities is not clearly stated in statute; (3) HUD has general regulatory authority over each enterprise and is charged with making such rules and regulations as shall be necessary and proper to ensure that the purposes of the respective charter acts are accomplished; (4) with respect to limitations on enterprise investment activities, HUD officials said that they are considering a range of possible standards that could be appropriate and within the scope of HUD's statutory authority; (5) OFHEO has exclusive authority, without review or approval of HUD, over matters of enterprise safety and soundness and certain other matters; (6) OFHEO thus could limit an enterprise's non-mortgage investments if the investments were not conducted in a safe and sound manner; (7) with respect to the enterprises' non-mortgage investment policies and practices, OFHEO has concluded that these investments have not constituted a safety and soundness concern; (8) the enterprises each have investment policies that specify permissible credit ratings, maturities, and concentration limits, and describe the relationship of investments to earnings and to achievement of the enterprise's housing finance mission; (9) non-mortgage investments constituted about 15 percent of on-balance sheet assets at Fannie Mae and 9 percent at Freddie Mac as of December 31, 1996; (10) according to enterprise officials, most holdings had maturities under 2 years, and all were investment grade securities; (11) enterprise officials indicated that non-mortgage investments are held for two principal reasons: (a) cash management purposes; and (b) as an investment vehicle to employ capital for future demand to fund residential mortgages; (12) to date, GAO has not examined in detail non-mortgage investments nor the debt issuance to fund such investments at either enterprise; and (13) thus, based on the work GAO has done to date, the degree to which enterprise non-mortgage investments represent arbitrage with enhanced earnings as the primary result, or merely another tool to accomplish the enterprises' special purposes, is not clear.