OFHEO's Progress in Implementing a Comprehensive Oversight Program for Fannie Mae and Freddie Mac

Gao ID: GGD-98-182R July 29, 1998

Pursuant to a congressional request, GAO provided information on the progress of the Office of the Federal Housing Enterprise Oversight (OFHEO) in implementing the recommendations in GAO's October 1997 report on OFHEO's efforts to help ensure the financial safety and soundness of the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), focusing on: (1) OFHEO's progress in completing the risk-based capital rule by 1999; and (2) OFHEO's implementation of its financial safety and soundness examination responsibilities.

GAO noted that: (1) according to OFHEO officials, the organization has largely completed the economic and technical components of the stress test that are necessary to complete the proposed rule; (2) OFHEO has also largely completed the version of the computer-based financial simulation model that serves as the basis of the stress test; (3) the financial simulation model allows OFHEO to: (a) analyze the financial consequences for the enterprises of various interest rate and credit shock scenarios; and (b) determine the risk-based capital standards for the enterprises resulting from these analyses; (4) although some final software documentation work on the financial simulation model remains, OFHEO appears to have the major technical elements in place; (5) however, OFHEO continues to face significant challenges in ensuring that the proposed rule is completed by September 1998 and that the final rule is issued in 1999 as currently planned; (6) OFHEO lost key senior staff members due to resignations in 1998, which could delay OFHEO's development of the proposed rule; (7) a proposed plan for OFHEO to provide technical details of the stress test and financial simulation model to staff from the Office of Management and Budget (OMB), the Department of Housing and Urban Development (HUD), the Department of Treasury, and federal bank regulators during the summer of 1998 has been cancelled; (8) OFHEO officials said that this planned technical review would have facilitated the regulatory review process of the proposed rule; (9) however, OMB decided not to proceed with the meetings, which could lengthen the time OMB takes to approve the proposal; (10) given the complexity of the financial simulation model and the stress test, the process by which the public comments on the proposed rule, and OFHEO reviews, these comments could take a substantial period of time, further limiting OFHEO's ability to issue the final rule in 1999; (11) since 1997, OFHEO has made progress in implementing a revised financial safety and soundness examination program for the enterprises; (12) OFHEO has reallocated existing staff positions to the examinations office and filled existing examiner vacancies; (13) in addition, OFHEO has implemented a new examination strategy designed to annually assess the major risks facing the enterprises; and (14) according to OFHEO's examination office director, OFHEO has made significant progress during 1998 in implementing the annual plan, but some challenges remain.

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