[Federal Register Volume 65, Number 210 (Monday, October 30, 2000)]
[Notices]
[Pages 64718-64720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-27812]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of Federal Housing Enterprise Oversight


Solicitation of Public Comments on Systemic Risk

AGENCY: Office of Federal Housing Enterprise Oversight, HUD.

ACTION: Solicitation of public comments.

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SUMMARY: The Office of Federal Housing Enterprise Oversight (OFHEO) is 
soliciting comments on systemic risk. To fulfill its supervisory 
responsibilities, OFHEO has initiated a comprehensive study of the 
risks the Federal National Mortgage Association (Fannie Mae) and the 
Federal Home Loan Mortgage Corporation (Freddie Mac) may pose to the 
financial system in general and to U.S. housing finance markets in 
particular. The study will examine the nature and magnitude of any 
risks posed by the Enterprises, whether and to what extent Fannie Mae 
and Freddie Mac contribute to or mitigate systemic risk, and actions 
that OFHEO and others could take to limit any systemic risk the 
Enterprises may pose. The purpose of this notice is to solicit public 
comment on specific research questions that the study may address.

DATES: Written comments regarding systemic risk due by December 29, 
2000.

ADDRESSES: Send written comments to Robert S. Seiler, Jr., Manager of 
Policy Analysis, Office of Federal Housing Enterprise Oversight, 1700 G 
Street, N.W., Fourth Floor, Washington, D.C. 20552. Written comments 
may also be sent by electronic mail to [email protected].

FOR FURTHER INFORMATION CONTACT: Robert S. Seiler, Jr., Manager of 
Policy Analysis, Office of Federal Housing Enterprise Oversight, 1700 G 
Street, N.W., Fourth Floor, Washington, D.C. 20552, telephone (202) 
414-3785 (a toll free number). The telephone number for the 
Telecommunications Device for the Deaf is: (800) 877-8339.

Background

    In 1992 the Congress created the Office of Federal Housing 
Enterprise Oversight (OFHEO) as an independent office within the 
Department of Housing and Urban Development (HUD) to ensure that the 
Federal National Mortgage Association (Fannie Mae) and the Federal Home 
Loan Mortgage Corporation (Freddie Mac) are adequately capitalized and 
operating safely. OFHEO's mission is to promote housing and a strong 
economy by ensuring the safety and soundness of the Enterprises and 
fostering the strength and vitality of the nation's housing finance 
system. In fulfilling that mission, OFHEO imposes capital requirements 
on Fannie Mae and Freddie Mac, conducts annual examinations of each 
Enterprise, and engages in a broad research program. OFHEO's research 
focuses on the markets in which Fannie Mae and Freddie Mac operate, the 
risks the Enterprises face, the economic effects of their activities, 
and any risks they may pose to other participants in mortgage and 
financial markets.
    Financial firms that have large amounts of liabilities or other 
financial obligations pose risks to other financial market 
participants. Default by a large financial firm affects their 
counterparties directly (by imposing losses on them) and may affect 
other financial firms indirectly (by leading markets to increase their 
financing costs, reduce their access to credit, or lower the market 
values of their assets). With respect to direct costs, firms with 
sufficiently large credit exposures to a large firm that fails may be 
rendered insolvent by that failure if their losses are sufficiently 
high. With respect to indirect costs, the default of a large financial 
firm may lead to temporary distortions in financial markets that may 
cause other firms to experience liquidity and even solvency problems. 
Such problems may also be caused by a loss of investor confidence, 
should investors believe that such firms have risk exposures similar to 
those that caused the large firm to default. Solvency and liquidity 
problems induced by the default of a large financial firm may also 
adversely affect the functioning of national or international systems 
for clearing and settling financial transactions, further distorting 
financial markets.
    Fannie Mae and Freddie Mac have financed over forty percent of 
conventional single-family mortgages outstanding in the U.S. and are 
among the largest financial firms in the nation. To date, OFHEO has 
consistently classified the Enterprises as adequately capitalized 
pursuant to applicable minimum capital requirements, and OFHEO's 
examinations have found the Enterprises to be financially sound and 
well managed. However, despite the current financial health of Fannie 
Mae and Freddie Mac, unexpected economic shocks, failures of Enterprise 
management or operations, or other factors could at some point cause 
either Enterprise to fail to meet OFHEO's safety and soundness 
standards. The pace at which the Enterprises are growing and their 
increasingly central role in mortgage and financial markets raise the 
issue of whether, if either Enterprise experienced severe financial 
distress or failed, the functioning of the financial system in general, 
or of U.S. housing finance markets in particular, could be disrupted to 
such an extent that the U.S. or international economies would be 
adversely affected. Financial difficulties at Fannie Mae or Freddie Mac 
could be caused by disruptions at other financial firms.
    To fulfill its supervisory responsibilities, OFHEO has initiated a 
comprehensive study of the risks Fannie Mae and Freddie Mac may pose to 
the financial system in general and to U.S. housing finance markets in 
particular. The study will examine the nature and magnitude of any 
risks posed by the Enterprises, whether and to what extent Fannie Mae 
and Freddie Mac contribute to or mitigate systemic risk, and actions 
that OFHEO and others could take to limit any systemic risk the 
Enterprises may pose. The study will help OFHEO enhance its oversight 
of Fannie Mae and Freddie Mac and improve OFHEO's ability to contribute 
to Federal regulation of financial institutions and markets more 
generally.
    By systemic risk, OFHEO means the possibility that the direct or 
indirect effects of the failure of a large financial firm would cause 
distortions or disruptions in the financial system significant enough 
to have a substantial effect on real output and employment. An event 
that caused changes in asset values--even substantial losses in 
values--would not rise to a systemic threat if it was not expected to 
induce a loss in employment or economic output.

Questions on Which OFHEO Seeks Public Comment

    OFHEO has identified a number of specific research questions that 
its study may address. The purpose of this notice is to solicit public 
comment on those questions, as well as any other topics that 
respondents believe OFHEO should examine in analyzing the risks posed 
by

[[Page 64719]]

Fannie Mae and Freddie Mac and actions that could reduce those risks. 
The questions fall into three broad areas: Whether and to what extent 
Fannie Mae and Freddie Mac pose risks to the financial system and U.S. 
housing finance markets, including systemic risk; how Federal 
sponsorship and regulation of the Enterprises affects any risks they 
pose; and the costs and benefits of possible actions to reduce those 
risks and, especially, any systemic risk Fannie Mae and Freddie Mac may 
pose. OFHEO encourages potential respondents to this notice to present 
their views, provide analysis, or suggest research methodology for some 
or all of the questions.

Whether and to What Extent Fannie Mae and Freddie Mac Pose Risks to the 
Financial System and U.S. Housing Finance Markets

    1. Do Fannie Mae and Freddie Mac pose systemic risk, as defined 
above, to the U.S. and international financial systems? If so, how? How 
does any systemic risk posed by the Enterprises compare, in magnitude 
and character, to that posed by other large financial firms such as 
large, complex banking organizations (LCBOs)?
    2. Do the activities of Fannie Mae and Freddie Mac reduce the 
systemic risk of the U.S. and international financial systems? If so, 
how?
    3. Can the risks the Enterprises pose to the financial system in 
general and U.S. housing finance markets in particular, and any 
systemic risk they may pose, be quantified meaningfully? If so, how?
    4. If Fannie Mae or Freddie Mac defaulted, how severe would losses 
on that Enterprise's obligations have to be to render other financial 
firms undercapitalized or insolvent? How many firms could experience 
such solvency problems? How does the risk of solvency problems vary for 
different types of firms, e.g., federally insured depository 
institutions, securities firms, major derivatives dealers, other 
Government-sponsored enterprises (GSEs), and pension and retirement 
funds? How does that risk vary for firms of different size? How severe 
might such solvency problems be? How might such problems affect the 
functioning of the financial system?
    5. If Fannie Mae or Freddie Mac experienced severe financial 
distress or failed, how many other financial firms could experience 
liquidity problems? How would such liquidity problems differ for 
different types of firms, e.g., federally insured depository 
institutions, securities firms, major derivatives dealers, other GSEs, 
and pension and retirement funds? How does that risk vary for firms of 
different size? How severe might such liquidity problems be? How might 
such problems affect the functioning of the financial system?
    6. If Fannie Mae or Freddie Mac failed or significantly curtailed 
its activities, how would liquidity in U.S. mortgage markets be 
affected? Would the other Enterprise or the rest of the industry be 
able to effectively fill the void? What would be the likely effects on 
the supply and price of mortgage credit? What would be the likely 
effects on economic activity in the housing sector? How might 
prospective homebuyers be affected?
    7. What is the risk that solvency or liquidity problems at 
financial firms caused by severe financial distress at or default by 
either Enterprise could be serious enough to reduce employment or 
economic output or hamper the achievement of the goals of federal 
housing policy?
    8. Fannie Mae and Freddie Mac are major participants in national 
and international systems for clearing and settling financial 
transactions. What risks do the Enterprises pose to such systems?
    9. The outstanding debt of Fannie Mae and Freddie Mac has grown at 
an annual average rate of nearly 24 percent since year-end 1992. If 
debt issued by the Enterprises continued to grow substantially faster 
than most other types of credit market instruments, how would any risks 
Fannie Mae and Freddie Mac pose to the financial system as a whole, and 
U.S. housing finance markets in particular, be affected? How would 
those risks be affected if debt issued by the Enterprises and other 
GSEs replaced Treasury securities as a benchmark in financial markets?
    10. How independent are the risks posed by Fannie Mae and Freddie 
Mac?

The Effect of Federal Sponsorship and Regulation on the Risks Posed by 
the Enterprises

    11. What are the implications for the risks Fannie Mae and Freddie 
Mac pose to the financial system in general and U.S. housing finance 
markets in particular of the fact that investors in the Enterprises' 
obligations believe the federal government would act to protect them in 
the event either Enterprise failed?
    12. Is there uncertainty about the actions the federal government 
would take in the event either Enterprise experienced severe financial 
distress? Does any such uncertainty affect the risks posed by Fannie 
Mae or Freddie Mac?
    13. How does current federal regulation of Fannie Mae and Freddie 
Mac affect any systemic risk posed by the Enterprises?

Actions to Reduce Risks Posed by Fannie Mae and Freddie Mac

    14. What steps could be taken to reduce the risk that a default by 
Fannie Mae or Freddie Mac would cause other financial firms to 
experience solvency or liquidity problems? What are the potential costs 
and benefits of those options?
    15. What steps could be taken to reduce the risk of the Enterprises 
developing liquidity problems if either of them experienced severe 
financial distress? What are the potential costs and benefits of those 
options?
    16. In addition to OFHEO's capital regulation and examinations of 
Fannie Mae and Freddie Mac, what steps can OFHEO or other appropriate 
entities take to reduce any risks the Enterprises may pose to clearing 
and settlement systems? What are the potential costs and benefits of 
those options?
    17. In what areas could increased transparency and public 
disclosure by Fannie Mae and Freddie Mac reduce the risks they pose to 
the financial system in general and U.S. housing finance markets in 
particular? What specific information would be most valuable to market 
participants?
    18. Could increased market discipline of Fannie Mae and Freddie Mac 
reduce the risks they pose to the financial system in general and U.S. 
housing finance markets in particular? If so, how? What specific 
actions could be taken to increase market discipline of the 
Enterprises? Could increased market discipline increase the risks 
Fannie Mae and Freddie Mac pose?
    19. Should OFHEO's approach to regulating the Enterprises be 
adapted to reflect the risks Fannie Mae and Freddie Mac pose to the 
financial system in general and U.S. housing finance markets in 
particular? If so, how?
    20. Should OFHEO's statutory authority be adapted to reflect the 
risk Fannie Mae and Freddie Mac pose to the financial system in general 
and U.S. housing finance markets in particular? If so, how?
    OFHEO invites respondents to provide their analyses and views of 
any other issues related to the risks posed by Fannie Mae and Freddie 
Mac that they believe OFHEO should consider.


[[Page 64720]]


    Dated: October 25, 2000.
Armando Falcon, Jr.,
Director, Office of Federal Housing Enterprise Oversight.
[FR Doc. 00-27812 Filed 10-27-00; 8:45 am]
BILLING CODE 4220-01-U