Housing Enterprises: Advantages and Disadvantages of Creating a Single
Housing GSE Regulator (Testimony, 07/24/97, GAO/T-GGD-97-160).

GAO discussed the advantages and disadvantages of creating a single
regulator for the housing government-sponsored enterprises (GSE)--the
Federal National Mortgage Association (Fannie Mae), the Federal Home
Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Bank
System (FHLBank System).

GAO noted that: (1) in GAO's 1991 and 1993 reports on GSE, it identified
five criteria that a GSE regulatory agency structure should meet to
facilitate effective oversight; (2) the criteria specify that a GSE
regulatory agency's structure should provide for: (a) objectivity and
independence from the GSE; (b) prominence in government; (c) economy and
efficiency; (d) consistency in regulation of similar markets; and (e)
separation of primary and secondary market regulation; (3) the housing
GSE regulators would be more effective if the regulatory function was
combined and one regulator was authorized to oversee both safety and
soundness and mission compliance; (4) GAO's analysis of different
regulatory structures indicated that an independent, arms's-length,
stand-alone regulatory body headed by a board would best fit its
criteria for an effective regulatory agency structure; (5) although
there have been changes in the structure of regulatory oversight for the
housing GSEs since GAO first established its criteria, neither the
Office of Federal Housing Enterprises Oversight (OFHEO), the Department
of Housing and Urban Development (HUD), nor the Federal Housing Finance
Board (FHFB) meets all five criteria; (6) a single housing GSE
regulatory agency could be more independent and objective than separate
regulatory bodies and could be more prominent than any one alone; (7)
although the GSEs operate differently, the risks they manage and their
missions are similar; and (8) a single regulator should be better able
to assess the competitive effect of specific mission requirements, such
as special housing goals, and new programs or initiatives on all three
housing GSEs and better ensure consistency of regulation for GSEs that
operate in similar markets.

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

 REPORTNUM:  T-GGD-97-160
     TITLE:  Housing Enterprises: Advantages and Disadvantages of 
             Creating a Single Housing GSE Regulator
      DATE:  07/24/97
   SUBJECT:  Federal agency reorganization
             Government sponsored enterprises
             Mortgage loans
             Regulatory agencies
             Interagency relations
             Lending institutions
             Risk management
             Government guaranteed loans
IDENTIFIER:  FHLB Affordable Housing Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Capital Markets, Securities and
Government-Sponsored Enterprises, Committee on Banking and Financial
Services
House of Representatives

For Release on Delivery
Expected at
10:00 a.m., EDT
on Thursday
July 24, 1997

HOUSING ENTERPRISES - ADVANTAGES
AND DISADVANTAGES OF CREATING A
SINGLE HOUSING GSE REGULATOR

Statement of Jean Gleason Stromberg
Director, Financial Institutions and Markets Issues
General Government Division

GAO/T-GGD-97-160

GAO/GGD-97-160t


233529


Abbreviations
=============================================================== ABBREV

  FCA - Farm Credit Administration
  FHFB - Federal Housing Finance Board
  GSE - government-sponsored enterprise
  HUD - Department of Housing and Urban Development
  MBS - mortgage-backed securities
  OFHEO - Office of Federal Housing Enterprise Oversight

HOUSING ENTERPRISES:  ADVANTAGES
OF CREATING A SINGLE HOUSING GSE
REGULATOR
====================================================== Chapter Summary

GAO's testimony, based on its recent report,\1 discusses the
advantages and disadvantages of creating a single regulator for the
housing government-sponsored enterprises (GSE)--the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), and the Federal Home Loan Bank System
(FHLBank System).  Currently, the Federal Housing Finance Board
(FHFB) oversees the safety and soundness and the mission compliance
of the FHLBank System.  The Office of Federal Housing Enterprise
Oversight (OFHEO), an independent office within the Department of
Housing and Urban Development (HUD), oversees the safety and
soundness of Fannie Mae and Freddie Mac.  The Secretary of HUD has
general regulatory power over Fannie Mae and Freddie Mac. 

GAO reviewed its past and ongoing work related to these GSEs and
their regulators, and solicited the views of housing, GSE, and
regulatory officials.  In GAO's 1991 and 1993 reports on GSEs, it
identified five criteria that a GSE regulatory agency structure
should meet to facilitate effective oversight.\2 The criteria specify
that a GSE regulatory agency's structure should provide for (1)
objectivity and independence from the GSE, (2) prominence in
government, (3) economy and efficiency, (4) consistency in regulation
of similar markets, and (5) separation of primary and secondary
market regulation. 

GAO determined that the housing GSE regulators would be more
effective if the regulatory function was combined and one regulator
was authorized to oversee both safety and soundness and mission
compliance.  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 its criteria for an effective
regulatory agency structure.  Although there have been changes in the
structure of regulatory oversight for the housing GSEs since GAO
first established its criteria, neither OFHEO, HUD, nor FHFB meets
all five criteria.  A single housing GSE regulatory agency could be
more independent and objective than separate regulatory bodies and
could be more prominent than any one alone.  Although the GSEs
operate differently, the risks they manage and their missions are
similar.  A single regulator should be better able to assess the
competitive effect of specific mission requirements, such as special
housing goals, and new programs or initiatives on all three housing
GSEs and better ensure consistency of regulation for GSEs that
operate in similar markets. 


--------------------
\1 Government-Sponsored Enterprises:  Advantages and Disadvantages of
Creating a Single Housing GSE Regulator (GAO/GGD-97-139, July 9,
1997). 

\2 Government-Sponsored Enterprises:  A Framework for Limiting the
Government's Exposure to Risks (GAO/GGD-91-90, May 22, 1991); and
Federal Home Loan Bank System:  Reforms Needed to Promote Its Safety,
Soundness, and Effectiveness (GAO/GGD-94-38, Dec.  8, 1993). 


HOUSING ENTERPRISES:  ADVANTAGES
OF CREATING A SINGLE HOUSING GSE
REGULATOR
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to appear here today to discuss our recently issued
report on creating a single regulator for the three housing
government-sponsored enterprises (GSE) -- the Federal National
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage
Corporation (Freddie Mac), and the Federal Home Loan Bank System
(FHLBank System).\3

First, I will discuss the advantages and disadvantages of creating a
single housing GSE regulator.  Second, I will discuss the question
whether both safety and soundness and mission oversight should be
vested in that regulator.  Third, I will discuss several possible
regulatory structures.  Finally, I will briefly mention one other
issue that is important in considering how best to regulate the
housing GSEs. 

As you know, the current regulatory arrangement for the housing GSEs
involves three regulators.  The Office of Federal Housing Enterprise
Oversight (OFHEO) regulates the safety and soundness of Fannie Mae
and Freddie Mac.  HUD regulates Fannie Mae's and Freddie Mac's
mission compliance and has general regulatory authority over matters
not made exclusive to OFHEO by statute.  The Federal Housing Finance
Board (FHFB) regulates both the safety and soundness and mission
compliance of the (FHLBank System). 

In our 1991 and 1993 reports on GSEs, we identified criteria that a
GSE regulatory agency structure should meet in our view to facilitate
effective oversight.\4 These criteria were:  (1) objectivity and
independence, (2) prominence in government, (3) ability to achieve
economy and efficiency, (4) ability to provide consistency in
regulation, and (5) ability to separate primary and secondary market
regulation.  On the basis of work we have done subsequently, we
believe those criteria remain sound.  In addition to reviewing our
past work in light of the current regulatory structure and GSE
activities, as well as ongoing work related to these GSEs and their
regulators,\5 we solicited views of housing, GSE, and regulatory
officials. 

Our ongoing work has strengthened our belief that the housing GSE
regulators would be more effective if combined and authorized to
oversee both safety and soundness and mission compliance.  Although
there have been changes in the regulatory oversight of the housing
GSEs since we first established our criteria, neither OFHEO, HUD, nor
FHFB meet all of the criteria.  In particular, we note that FHFB is
not completely an arm's-length regulator, as it is still involved in
governance of the FHLBank System.  In addition, regulation of Fannie
Mae's and Freddie Mac's mission compliance is the responsibility of
HUD, while their safety and soundness is the responsibility of OFHEO. 
Our analysis of different regulatory structures indicates that an
independent, arm's-length, stand-alone regulatory body headed by a
board would best fit our criteria for an effective regulatory agency
structure for the housing GSEs. 


--------------------
\3 Government-Sponsored Enterprises:  Advantages and Disadvantages of
Creating a Single Housing GSE Regulator (GAO/GGD-97-139, July 9,
1997). 

\4 Government-Sponsored Enterprises:  A Framework for Limiting the
Government's Exposure to Risks (GAO/GGD-91-90, May 22, 1991); and
Federal Home Loan Bank System:  Reforms Needed to Promote Its Safety,
Soundness, and Effectiveness (GAO/GGD-94-38, Dec.  8, 1993). 

\5 See Government-Sponsored Enterprises:  Development of the Federal
Housing Enterprise Financial Regulator (GAO/GGD-95-123, May 30,
1995); a study required by the Federal Housing Enterprises Financial
Safety and Soundness Act of 1992.  In addition, Section 430 of the
Department of Veterans Affairs/Department of Housing and Urban
Development Appropriations Act of 1997 required us to assess OFHEO's
operations and determine whether its resources are adequate and being
used appropriately to fulfill its critical safety and soundness
mission.  This work is ongoing. 


   WE CONTINUE TO SUPPORT A SINGLE
   HOUSING GSE REGULATOR
-------------------------------------------------- Chapter STATEMENT:1

We continue to support the creation of a single housing GSE regulator
as recommended in our 1993 report.  Although we recognize that the
housing GSEs operate and are structured differently, the risks they
manage are similar.  We believe valuable synergies could be achieved
and expertise could be shared.  Both OFHEO and FHFB evaluate how the
enterprises manage credit, interest rate, and other risks.  In
addition, OFHEO's current work in setting capital standards and
developing a stress test for its GSEs could be useful in evaluating
the risks to the FHLBank System and the adequacy of its capital. 

We also believe that a single housing GSE regulator could foster
competition among the three GSEs while providing consistent rules and
interpretations.  FHFB recently approved three FHLBank pilot programs
that involve services Fannie Mae or Freddie Mac could have or already
does provide.  OFHEO officials told us they independently assessed
the competitive impact of these programs on Fannie Mae and Freddie
Mac.  However, had a single regulator been responsible for all three
GSEs, a single assessment could have combined consideration of all
competitive effects and better ensured consistency of regulatory
oversight.  We recognize that because of possible conflicting
interests of the housing GSEs in pursuing their lines of business and
missions, such an assessment could be difficult.  However, we believe
the process could be handled more effectively and efficiently within
one regulatory body. 

The most often identified disadvantage of creating a single housing
GSE regulator is the potential disruption in operations of the
existing regulatory agencies, especially for a relatively new agency
like OFHEO.  On the other hand, these effects should be short term
and the outcome should result in more effective regulation in the
long run. 


   REGULATION OF MISSION AND
   SAFETY AND SOUNDNESS WOULD BE
   MORE EFFECTIVE IF COMBINED
-------------------------------------------------- Chapter STATEMENT:2

In our May 1991 report on GSEs, we stated that regulation of a GSE's
mission cannot be effectively separated from safety and soundness,
and we still support this position.\6 A regulator that performs both
roles must, however, be fully independent and at arm's length from
the GSEs it regulates.  We strongly believe that the independence
this would provide is imperative to ensure objectivity.  As we noted
in 1991, there is a distinction between a safety and soundness
regulator that confirms a GSE's compliance with its statutory
purposes as articulated by Congress and one that participates in the
corporate governance of a GSE. 

As you know, FHFB still participates in FHLBank System business,
which we have stated in previous work and continue to believe is
inappropriate for a regulator and presents potential for conflict.\7
For example, FHFB is required to appoint six directors to each bank's
board and, until just last month, approved applications for the
Affordable Housing Program.\8 While FHFB has delegated some duties
related to FHLBank System management to the FHLBanks, the Chairman of
FHFB told us FHFB cannot fully delegate these types of duties because
of statutory constraints. 

Some critics of combining mission and safety and soundness have
voiced concerns that doing so could create regulatory conflict for
the regulator.  It seems to us, however, that the tension caused by
having both private and public characteristics could be best
understood and accounted for by having a single regulator that has
complete knowledge of financial condition, regulates the mission
goals Congress sets, and assesses efforts to fulfill them.  The link
between mission and safety and soundness is established in the
housing GSEs' charters.  All three housing GSEs' charters acknowledge
that economic considerations of the activities undertaken cannot be
ignored, especially where special mission requirements, such as
low-income housing goals, are addressed. 

Given the current financial strength of Fannie Mae, Freddie Mac, the
FHLBank System and the overall economic environment, we determined
that, for now, there would be little tension between mission
compliance and safety and soundness concerns.  However, should
economic conditions change for the worse, more tension could be
created as the GSEs try to provide acceptable returns to their owners
while continuing to comply with their special mission requirements. 
In this situation, we believe it is important that a regulator be
responsible for both to help ensure adequate balance is maintained. 

In our report, we also point out that combining mission and safety
and soundness regulation would facilitate assessing Fannie Mae and
Freddie Mac for the cost of overseeing their compliance with housing
goals.  Currently, the cost of Fannie Mae's and Freddie Mac's mission
oversight is borne by the taxpayer as part of HUD's budget.  However,
OFHEO's and FHFB's costs are paid by their respective enterprises
through assessments.  In addition, of course, oversight by one
regulator could facilitate congressional monitoring of the housing
GSEs. 


--------------------
\6 GAO/GGD-91-90, pages 29-31.  In commenting on the 1991 report,
Fannie Mae, Freddie Mac, and FHFB all agreed with our position that
safety and soundness could not be effectively separated from
statutory activities (mission).  HUD took no position. 

\7 GAO/GGD-91-90 and GAO/GGD-94-38. 

\8 The Affordable Housing Program Regulations are set forth at 12
C.F.R.  Part 960.  The Board's approval procedures are contained in
12 C.F.R.  ï¿½ 960.5. 


   POSSIBLE STRUCTURES FOR A
   SINGLE REGULATORY AGENCY
-------------------------------------------------- Chapter STATEMENT:3

The third area of our report that I will address is the possible
structure for a single regulatory agency.  A single regulator for
housing GSEs could be a stand-alone agency or an independent office
within an executive branch agency, such as HUD or Treasury.  The
agency could be led by a board or a single director.  What is
important in our view, is to ensure that it has the independence and
prominence that would allow it to act independently of the influence
of the housing GSEs, which are large and politically influential
institutions. 

One of the primary advantages of creating a stand-alone agency,
rather than an independent agency within a department, is that it
should be better able to establish independence and be further
removed from the potential political influence of a cabinet-level
department and from the specific interests of its parent
organization.  In addition, a stand-alone agency, because it would
not be affiliated with a government department that has a particular
focus, may be in a better position to ensure that safety and
soundness and mission are equitably overseen. 

The advantages and disadvantages of having a new regulator that is
set up as an independent office within an executive branch agency
would depend on the agency.  HUD and Treasury would be the most
appropriate agencies because of their roles in housing and finance. 
Although OFHEO has functioned independently within HUD, having the
housing GSE regulator within HUD creates the potential for conflict
with HUD's role as a housing promoter.  However, HUD's expertise in
housing and the housing finance system would be an advantage. 

If the office were created within Treasury, it could benefit from
Treasury's financial and regulatory expertise and prominence.  In
addition, this affiliation would also reinforce the importance of
safety and soundness oversight as the regulator's top priority.  On
the other hand, Treasury's objectivity and arm's-length status could
be questioned because of its two specific responsibilities relating
to GSEs:  (1) power to approve the timing and terms of new GSE debt
issuances\9 and (2) ability to authorize use of conditional lines of
credit held by the GSEs.\10

Closely related to the stand-alone versus independent office
structure, we considered a board versus a single director structure
for governing a single regulatory agency.  We found that the board
structure best fits our criteria for an effective regulator for many
of the same reasons that a stand-alone agency is preferable to an
executive branch agency. 

We believe one advantage would be that a new regulator led by a board
would best be able to establish the requisite independence in
government and would also allow Congress to provide balance for the
regulator's decisionmaking body.  Both HUD and Treasury could be
represented on a board, providing a structure where any potential
conflicts could be addressed.  A disadvantage of a board structure is
that it may make determining individual accountability for actions
difficult.  This potential inefficiency could be addressed by placing
a presidentially appointed chair or chief executive officer in charge
of daily operations. 

Among the financial regulators, we could not find any examples of
stand-alone agencies that were not headed by boards or commissions or
independent offices that were not headed by single directors.  It
seems there are good reasons for these structures being linked.  That
is, although a stand-alone agency structure provides independence and
prominence in government, the board structure has the advantages of
allowing different perspectives, providing stability, and bringing
prestige to the agency, as well as allowing Congress to provide
balance for the regulator's decisionmaking body by requiring that
members have certain expertise. 

In closing, Mr.  Chairman, I want to mention one additional issue
that may need to be addressed in your deliberations. 

If a single regulator for the housing GSEs were created, you may want
to consider whether it should be included or excluded from the
appropriations process.  Most financial institution regulators,
including OFHEO and FHFB, assess the institutions they oversee for
the cost of regulation.  Thus, they are not funded from tax revenues
and typically are not subject to appropriations.  OFHEO, however, is
subject to the appropriations process and has less control than some
other regulators over its resources.  The appropriations process
could subject the agency to budgetary pressures that could conflict
with the agency's needs as a safety and soundness regulator.  On the
other hand, we recognize that the appropriations process does provide
an additional mechanism for congressional oversight. 


--------------------
\9 For years, Treasury scheduled GSE offerings to prevent timing
conflicts among the GSEs that might prove to be disruptive to the
government securities market.  On March 8, 1996, however, Treasury
eliminated its scheduling procedures for GSE securities offerings. 
GSEs have developed a voluntary, cooperative scheduling system that
eliminated the need for Treasury's queuing process.  Treasury's
statutory authority to approve the timing and terms of GSE securities
has not changed. 

\10 The FHLBank System has a $4 billion line of credit with Treasury,
while Fannie Mae and Freddie Mac each have a $2.25 billion line of
credit.  However, use of the lines of credit is subject to Treasury's
discretion. 


------------------------------------------------ Chapter STATEMENT:3.1

That concludes my prepared statement.  My colleagues and I would be
pleased to answer any questions. 


============================================================ Chapter 0


============================================================ Chapter 1


RELATED GAO PRODUCTS
============================================================ Chapter 2

Government-Sponsored Enterprises:  Advantages and Disadvantages of
Creating a Single Housing GSE Regulator, GAO/GGD-97-139, July 9,
1997. 

Housing Enterprises:  Investment, Authority, Policies, and Practices,
GAO/GGD-97-137R, June 27, 1997. 

Comments on "The Enterprise Resource Bank Act of 1996",
GAO/GGD-96-140R, June 27, 1996. 

Housing Enterprises:  Potential Impacts of Severing Government
Sponsorship, GAO/GGD-96-120, May 13, 1996. 

Letter from James L.  Bothwell, Director, Financial Institutions and
Markets Issues, GAO, to the Honorable James A.  Leach, Chairman,
Committee on Banking and Financial Services, U.S.  House of
Representatives, Re GAO views on the "Federal Home Loan Bank System
Modernization Act of 1995," B-260498, Oct.  11, 1995. 

FHLBank System:  Reforms Needed to Promote Its Safety, Soundness, and
Effectiveness, GAO/T-GGD-95-244, Sept.  27, 1995. 

Housing Finance:  Improving the Federal Home Loan Bank System's
Affordable Housing Program, GAO/RCED-95-82, June 9, 1995. 

Government-Sponsored Enterprises:  Development of the Federal Housing
Enterprise Financial Regulator, GAO/GGD-95-123, May 30, 1995. 

Farm Credit System:  Repayment of Federal Assistance and Competitive
Position, GAO/GGD-94-39, March 10, 1994. 

Farm Credit System:  Farm Credit Administration Effectively Addresses
Identified Problems, GAO/GGD-94-14, Jan.  7, 1994. 

Federal Home Loan Bank System:  Reforms Needed to Promote Its Safety,
Soundness, and Effectiveness, GAO/GGD-94-38, Dec.  8, 1993. 

Improved Regulatory Structure and Minimum Capital Standards are
Needed for Government-Sponsored Enterprises, GAO/T-GGD-91-41, June
11, 1991. 

Government-Sponsored Enterprises:  A Framework for Limiting the
Government's Exposure to Risks, GAO/GGD-91-90, May 22, 1991. 

Government-Sponsored Enterprises:  The Government's Exposure to
Risks, GAO/GGD-90-97, Aug.  15, 1990. 


*** End of document. ***