Government-Sponsored Enterprises

Congress created government-sponsored enterprises (GSE) to help make credit available to certain sectors of the economy, such as housing and agriculture, in which the private market was perceived as not effectively meeting credit needs. GSEs receive benefits from their federal charters that help them fulfill their missions. In this report, GAO presents analysis of information on nonmortgage investment activities at three GSEs: the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Agricultural Mortgage Corporation (Farmer Mac). Specifically, GAO examines (1) the enterprises' legal authority for making nonmortgage investments and federal regulatory oversight of that activity; (2) the relationship among nonmortgage investment policies and practices and missions of the enterprises; and (3) the extent to which the enterprises have undertaken nonmortgage investments for arbitrage profits--using the funding advantage from government sponsorship to purchase nonmortgage investments that generate profits. GAO also provides information on the enterprises' compensation structures for directors and senior managers and whether these structures create incentives to make nonmortgage investments.

GAO noted that: (1) legally, the enterprises have broad investment authority; (2) to date, regulatory oversight activities for the three enterprises have focused on whether nonmortgage investments are safe and sound and not on whether the nonmortgage investment policies and practices are mission-related; (3) the Department of Housing and Urban Development (HUD) has not developed criteria to determine if nonmortgage investments are consistent with enterprise charter purposes; (4) in October 1997, the Farm Credit Administration (FCA) indicated that it did not have concerns that Farmer Mac's nonmortgage investment activity is inconsistent with its charter mission, but FCA also stated that the debt issuance strategy associated with the investments is intended to be temporary and to develop over a reasonable period of time; (5) therefore, according to FCA, its position could change if over time evidence does not show that such investments play a role in helping Farmer Mac achieve its mission; (6) enterprises have invested in nonmortgage assets to varying degrees with somewhat different rationales for how these investments further their charter purposes; (7) each enterprise has an investment policy that specifies permissible credit ratings, maturities, and concentration limits and describes the relationship of investments to earnings and to achievement of the enterprise's mission; (8) Freddie Mac officials indicated that its nonmortgage investments have been held for cash management purposes and as an investment vehicle, which could make capital available to help fund future anticipated demand for residential mortgages; (9) the relationship between longer term nonmortgage investments and the enterprises' mission goals is not always clear, because long-term nonmortgage investments may not facilitate liquidity in the residential mortgage market as well as short-term investments; (10) however, it is clear that nonmortgage investments generate arbitrage profits; (11) in its analysis, GAO found that the various nonmortgage investments fall along a continuum representing the degree to which they facilitate liquidity in the residential mortgage market and thus are more clearly related to the enterprises' missions; and (12) GAO's review of compensation practices and board member responsibilities at the enterprises suggests that individual incentives to generate corporate profits are structured in a manner that is fairly typical of major corporations and financial institutions without federal charters limiting their activities.

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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