Government-Sponsored Enterprises: Creation of a Single Housing GSE
Regulator (Testimony, 09/12/2000, GAO/T-GGD-00-200).

Pursuant to a congressional request, GAO discussed the regulation of the
housing government-sponsored enterprises (GSE).

GAO noted that: (1) GAO supports a single housing GSE regulator for
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System; (2)
selecting a stand- alone agency with a governing board would better
ensure the independence and prominence of the regulator and allow it to
act independently of the influence of the housing GSEs, which are large
and politically influential; (3) the Office of Federal Housing
Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac on
matters of safety and soundness, while the Department of Housing and
Urban Development (HUD) is the mission regulator; (4) in 1992, Congress
passed the Federal Housing Enterprises Financial Safety and Soundness
Act to minimize the risks that the enterprise pose to U.S. taxpayers
while ensuring that they meet the housing needs of all Americans; (5)
OFHEO's primary strategies to fulfilling its mission are to establish
risk-based capital standards and an examination program; (6) although
OFHEO got off to a slow start in implementing its responsibilities, the
risk-based capital standards are to be established by year-end 2000, and
the examination program is in place; (7) the act directed HUD to set
housing goals, which require the enterprises to meet specified criteria
for the purchase of mortgages serving low- and moderate-income
individuals; (8) in 1995, HUD established conservative housing goals for
the enterprises; (9) Congress recognized, in passing the Act, that the
enterprises face a natural tension between maximizing profitability for
their shareholders and fulfilling their housing mission; (10) therefore,
the act also defined HUD's general regulatory authority to ensure that
the enterprises' activities are consistent with their housing mission;
(11) GAO's review of Federal Housing Finance Board (FHFB) raised several
questions about its oversight: (a) FHFB did not ensure that its annual
examinations met its internal standards for assessing safety and
soundness; (b) off-site monitoring and supervisory enforcement program
needed improvements; and (c) its mission oversight lacked comprehensive
policies and procedures to determine whether the Federal Home Loan Banks
(FHLBanks) were supporting their public mission; (12) in addition, GAO
found that FHFB's involvement in FHLBank System corporate governance and
promoting certain programs could complicate its primary duty as a safety
and soundness regulator and raised questions about its objectivity; and
(13) since GAO's review, it has addressed some of the concerns relating
to its examination program, and in June 2000, FHFB approved a rule
governing mission activities.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-00-200
     TITLE:  Government-Sponsored Enterprises: Creation of a Single
	     Housing GSE Regulator
      DATE:  09/12/2000
   SUBJECT:  Government sponsored enterprises
	     Federal aid for housing
	     Internal controls
	     Risk management
	     Interagency relations
	     Agency missions
	     Regulatory agencies

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GAO/T-GGD-00-200

GOVERNMENTSPONSORED ENTERPRISES Creation of a Single Housing GSE Regulator

Statement of Thomas J. McCool, Director Financial Institutions and Market
Issues General Government Division

United States General Accounting Office

GAO Testimony Before Subcommittee on Capital Markets, Securities and

Government- Sponsored Enterprises, Committee on Banking and Financial
Services House of Representatives

For Release on Delivery Expected at 1: 30 p. m. EDT on Tuesday, September
12, 2000

GAO/ T- GGD- 00- 200

Statement Government- Sponsored Enterprises: Creation of a Single Housing
GSE Regulator

Page 1 GAO/ T- GGD- 00- 200

Mr. Chairman and Members of the Subcommittee: We appreciate the invitation
to participate in this roundtable discussion on regulation of the housing
government- sponsored enterprises (GSE). In your invitation, you asked us to
express our views in writing on the topics raised in H. R. 3703 and other
issues related to the housing GSEs. For this purpose, we cite here three
previous testimonies that summarize relevant work we have conducted on these
issues. Housing Enterprises: Advantages and Disadvantages of Creating a
Single Housing GSE Regulator (GAO/ T- GGD- 97- 160, July 24, 1997) discusses
the advantages and disadvantages of creating a single housing GSE regulator.
Housing Enterprises: The Roles of Fannie Mae and Freddie Mac in the U. S.
Housing Finance System (GAO/ T- GGD- 00- 182, July 25, 2000) discusses
Fannie Mae, Freddie Mac, and their regulators. Federal Housing Finance
Board: Actions Needed to Improve Regulatory Oversight (GAO/ T- GGD- 98- 185,
Sept. 24, 1998) summarizes our 1998 review of the Federal Housing Finance
Board (FHFB), the safety and soundness and mission regulator of the Federal
Home Loan Bank System (FHLBank System).

We continue to support a single housing GSE regulator for Fannie Mae,
Freddie Mac, and the FHLBank System. A single regulatory body best fits our
criteria of being (1) independent and objective, (2) prominent in
government, (3) able to achieve economy and efficiency, and (4) able to
provide consistency in regulation. Regulation of mission and safety and
soundness would be more effective if combined. One regulator could oversee
both compliance with the statutory purposes and the financial health of a
GSE, provided that the regulator does not have other responsibilities, such
as corporate governance, that could create a conflict of interest in its
oversight. We concluded that selecting a “stand- alone” agency
with a governing board would better ensure the independence and prominence
of the regulator and allow it to act independently of the influence of the
housing GSEs, which are large and politically influential. A governing board
also has the advantage of allowing different perspectives, providing
stability, and bringing prestige to the regulator.

Currently, the Office of Federal Housing Enterprise Oversight (OFHEO)
regulates Fannie Mae and Freddie Mac on matters of safety and soundness,
while the Department of Housing and Urban Development (HUD) is the mission
regulator. In 1992, Congress passed the Federal Housing Enterprises
Financial Safety and Soundness Act (act) to minimize the risks that the
enterprises pose to U. S. taxpayers while ensuring that they meet the
housing needs of all Americans. OFHEO's primary strategies to fulfilling its
mission are to establish risk- based capital

Statement Government- Sponsored Enterprises: Creation of a Single Housing
GSE Regulator

Page 2 GAO/ T- GGD- 00- 200

standards and an examination program. Although OFHEO got off to a slow start
in implementing its responsibilities, the risk- based capital standards are
to be established by year- end 2000, and the examination program is in
place.

The act directed HUD to set housing goals, which require the enterprises to
meet specified criteria for the purchase of mortgages serving low- and
moderate- income individuals. In 1995, HUD established conservative housing
goals for the enterprises. In March of this year, HUD proposed a new rule
that would require the enterprises to meet higher housing goals for the
period 2000 through 2003. Congress recognized, in passing the Act, that the
enterprises face a natural tension between maximizing profitability for
their shareholders and fulfilling their housing mission. Therefore, the act
also defined HUD's general regulatory authority to ensure that the
enterprises' activities are consistent with their housing mission. HUD
failed to promptly implement this authority, as evidenced by the fact that
HUD has not yet implemented a rule to govern the enterprises' nonmortgage
investments, such as long- term corporate bonds.

Our review of FHFB raised several questions about its oversight.
Specifically, we found (1) that FHFB did not ensure that its annual
examinations met its internal standards for assessing safety and soundness,
(2) that its off- site monitoring and supervisory enforcement program needed
improvements, and (3) that its mission oversight lacked comprehensive
policies and procedures to determine whether the FHLBanks were supporting
their public mission. In addition, we found that FHFB's involvement in
FHLBank System corporate governance and promoting certain programs could
complicate its primary duty as a safety and soundness regulator and raised
questions about its objectivity. Since our review, it has addressed some of
our concerns relating to its examination program, and in June 2000, FHFB
approved a rule governing mission activities. The Gramm- Leach- Bliley Act
of 1999 partially removed FHFB from corporate governance of the FHLBank
System.

Page 3 GAO/ T- GGD- 00- 200

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