Government Sponsored Enterprises

GAO was asked for its analysis of the advantages and disadvantages of creating a single regulator for the three housing government-sponsored enterprises (GSE): the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Federal Home Loan Bank System. These GSEs were created to help make credit available to finance home purchases. GAO believes that the housing GSE regulators would be more effective if combined and authorized to oversee both safety and soundness and mission compliance. Combining oversight into one agency would have several advantages over separate regulators: such an agency could be more independent and objective; its expertise in evaluating GSE risk management could be shared more easily; and a single regulator would be in a better position to be cognizant of specific mission requirements. The one disadvantage to creating a single regulator would be whatever short-term disruption reorganization might cause to ongoing operations of the existing regulators. An independent, stand-alone regulatory body headed by a board would best fit GAO's criteria for an effective regulatory structure for housing GSEs. GAO summarized this report in testimony before Congress; see: Housing Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE Regulator, by Jean Gleason Stromberg, 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-97-160, July 24 (13 pages).

GAO noted that: (1) GAO's ongoing work has strengthened its belief that the housing GSE regulators would be more effective if combined and authorized to oversee both safety and soundness and mission compliance; (2) nothing GAO has observed has caused it to modify GAO's criteria for an appropriate regulatory structure; (3) although there have been changes in the regulatory oversight of the housing GSEs since GAO first established these criteria, neither the Office of Federal Housing Enterprise Oversight (OFHEO), Department of Housing and Urban Development (HUD), nor the Federal Housing Finance Board (FHFB) meets all five criteria; (4) in particular, GAO notes that FHFB is not an arm's-length regulator, and it is still involved in governance of the FHLBank System; (5) in addition, regulation of Fannie Mae's and Freddie Mac's mission compliance and safety and soundness is the responsibility of HUD and OFHEO; (6) combining oversight into one agency would have several advantages; (7) such an agency could be more independent and objective than the separate regulatory bodies and could be more prominent than either one alone; (8) although the GSEs operate differently, the risks they manage and their missions are similar; (9) the regulators' expertise in evaluating GSE risk management could be shared more easily within one agency; (10) the primary disadvantage to combing oversight into one agency would be whatever short-term disruption reorganization might cause to the ongoing operations of the regulators; (11) GAO's analysis of different regulatory structures indicated that an independent, arm's-length, stand-alone regulatory body headed by a board would best fit GAO's criteria for an effective regulatory agency structure for the housing GSEs; (12) an independent regulatory body, as opposed to one within an executive branch department, should be better positioned to achieve the autonomy and prominence necessary to oversee the large and influential housing GSEs; (13) using a board to govern the independent regulatory agency would enable Congress to provide for representation that could help ensure the regulator's independence and provide appropriate balance and expertise in the regulators' deliberations of both safety and soundness and mission-related issues; (14) having an independent board would allow it to be structured to provide equal links to HUD, due to its role in housing policy, and Treasury, due to its roles in finance and financial institution oversight; and (15) however, such an arrangement would sacrifice the advantages of having the different perspectives, expertise, prestige, and stability a board could provide.