Housing Enterprises

The efforts of Fannie Mae and Freddie Mac have successfully lowered mortgage cost and increased home ownership in the United States. However, these two government-sponsored enterprises had combined debt and mortgage-backed securities liabilities of more than $2 trillion at the end of 1999. The enterprises' close relationship with the federal government and their federal charters provide them with advantages. First is the perception in the financial markets that the government would not allow the enterprises to fail, thus allowing them to borrow at relatively lower cost than private firms. Their charters also exempt them from paying state and local income taxes and some of the fees charged by the Securities and Exchange Commission for securities. Each enterprise has a $2.25 billion conditional line of credit with the Department of the Treasury. Federal sponsorship creates significant risks and costs because taxpayers might end up paying part of that more than $2 trillion debt. The 1992 Federal Housing Enterprises Financial Safety and Soundness Act established the Office of Federal Housing Enterprise Oversight to ensure adequate capitalization and safe operations. The act also provided the Department of Housing and Urban Development with additional regulatory authority to ensure that the enterprises fulfill their housing finance mission.

GAO noted that: (1) the enterprises are hybrid organizations that contain elements of both private- and public-sector organizations; (2) like many private companies, the enterprises issue equity and debt instruments to the investing public; (3) the enterprises have also developed compensation packages that reward top executives for increasing shareholder value; (4) an important benefit is an indirect one--the perception in the financial markets that the government would not allow the enterprises to fail, which allows them to borrow and issue mortgage-backed securities (MBS) to finance mortgage purchases at relatively lower cost than private firms; (5) federal sponsorship of the enterprises' activities as government sponsored enterprises also creates significant risks and costs; (6) the potential exists that U.S. taxpayers would end up paying for a portion of the enterprises' debt and MBS obligations, which stood at over $2 trillion at the end of 1999; (7) to help ensure that the enterprises conduct their business in a safe and sound manner and use their government-provided benefits to achieve a public purpose, in 1992 Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act; (8) the 1992 Act established the Office of Federal Housing Enterprise Oversight (OFHEO) to ensure that the enterprises are adequately capitalized and operating safely; (9) OFHEO also has the authority to establish an examination program to monitor the enterprises' management and financial condition; (10) OFHEO's examination staff has generally found that the enterprises have been operated in a safe and sound manner; (11) the Department of Housing and Urban Development (HUD) has statutory authority to ensure that the enterprises fulfill their mission of promoting housing and home ownership opportunities for all Americans; (12) HUD's proposed housing goals are set higher than the goals set for the period 1996 through 1999; (13) according to HUD, the enterprises' share of the affordable housing market remains below desired levels; (14) HUD believes that the proposed housing goals will provide strong incentives for the enterprises to more fully meet the housing needs of targeted groups; (15) HUD has the general regulatory authority to ensure that the enterprises' activities are consistent with their housing mission; and (16) however, HUD has not yet developed criteria for overseeing the enterprises' nonmortgage investments.