Federal Housing Enterprises: Operations of the Office of Federal Housing
Enterprise Oversight (Testimony, 10/30/97, GAO/T-GGD-98-25).

Pursuant to a congressional request, GAO discussed the operations of the
Office of Federal Housing Enterprise Oversight (OFHEO) and the status of
OFHEO's efforts to fulfill its mission of helping to ensure the safety
and soundness of the two largest government-sponsored enterprises,
Fannie Mae and Freddie Mac.

GAO noted that: (1) OFHEO has not fully implemented its statutory safety
and soundness responsibilities for Fannie Mae and Freddie Mac, and faces
considerable future challenges in doing so; (2) OFHEO does not expect to
complete a stress test and risk-based capital standards for Fannie Mae
and Freddie Mac until 1999, though it was to be completed by December 1,
1994; (3) OFHEO has not fully implemented a comprehensive and timely
enterprise examination program, resulting in its limited ability to
lower the long-term financial risks to taxpayers associated with the
enterprises' activities; (4) GAO has identified a number of reasons for
OFHEO's inability to comply with the statutory deadline for completing
the stress test and risk based capital standards; (5) GAO believes that
strong congressional oversight of the development process is necessary
to ensure that OFHEO completes the process as quickly as feasible; (6)
OFHEO has not been able to fully implement an enterprise examination
schedule that it established in 1994, has taken 3 to 4 years to examine
the major risks facing the enterprises, and reduced the planned coverage
of the most recently completed risk examination; (7) among other
factors, limited resources allocated to the examination office and staff
attrition contributed to OFHEO's inability to fully implement the 1994
plan; (8) OFHEO officials said that they planned to reassess the
examination cycle and implement an annual examination cycle by early
1998 to cover all enterprise risks; (9) without a reassessment of
resource requirements and potentially a reallocation of resources to the
examinations office, OFHEO may not be able to fully implement an annual
examination cycle; and (10) although Fannie Mae and Freddie Mac have
been consistently profitable in recent years, GAO believes it is
essential, given the enterprises' outstanding financial commitments of
approximately $1.5 trillion at year-end 1996, that OFHEO implement its
safety and soundness responsibilities as quickly as feasible.

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

 REPORTNUM:  T-GGD-98-25
     TITLE:  Federal Housing Enterprises: Operations of the Office of 
             Federal Housing Enterprise Oversight
      DATE:  10/30/97
   SUBJECT:  Government sponsored enterprises
             Housing programs
             Banking regulation
             Capital
             Congressional oversight
             Bank examination
             Risk management
             Mortgage loans
             Regulatory agencies

             
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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., EST
on Thursday
October 30, 1997

FEDERAL HOUSING ENTERPRISES -
OPERATIONS OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT

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

GAO/T-GGD-98-25

GAO/GGD-98-25T


(233545)


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


FEDERAL HOUSING ENTERPRISES: 
OPERATIONS OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT
====================================================== Chapter SUMMARY

In a recently issued report,\1 GAO found that the Office of Federal
Housing Enterprise Oversight (OFHEO) has not fully implemented its
statutory safety and soundness responsibilities for Fannie Mae and
Freddie Mac--the two largest housing government-sponsored
enterprises--and faces considerable future challenges in doing so. 
In particular, OFHEO does not expect to complete a stress test\2 and
risk-based capital standards for the enterprises until 1999 even
though it was to have done so by December 1, 1994, under the act. 
Further, OFHEO has not fully implemented a comprehensive and timely
enterprise examination program.  As a result, OFHEO has a limited
ability to lower the long-term financial risks to U.S.  taxpayers
associated with the enterprises' activities. 

GAO identified a number of reasons for OFHEO's inability to comply
with the statutory deadline for completing the stress test and
risk-based capital standards.  For example, the development process
specified in the act presented OFHEO with complex and time-consuming
challenges.  To meet these challenges, OFHEO, in 1994, decided to
develop its own sophisticated stress test rather than adopting
existing stress tests.  OFHEO officials said that their approach was
the most appropriate strategy, but GAO notes that the approach has
involved substantial time and resource commitments.  GAO also notes
that OFHEO faces considerable challenges in completing the stress
test by its current target of 1999, such as the need to translate its
complex components into proposed and final rules.  Given OFHEO's
history of underestimating the time necessary to complete the stress
test components, GAO believes that strong congressional oversight of
the development process is necessary to ensure that OFHEO completes
the process as quickly as feasible. 

OFHEO has not been able to fully implement an enterprise examination
schedule and plan that the organization established in 1994.  OFHEO
has taken 3 to 4 years to examine the major risks facing the
enterprises rather than 2 years as established in the plan, and it
reduced the planned coverage of the most recently completed risk
examination.  GAO's analysis found that, among other factors, limited
resources allocated to the examination office and staff attrition
contributed to OFHEO's inability to fully implement the 1994 plan. 
During GAO's audit work, OFHEO officials said that they planned to
reassess the examination program and implement an annual examination
cycle by early 1998 to cover all enterprise risks.  GAO noted that
without a reassessment of resource requirements and potentially a
reallocation of resources to the examinations office, OFHEO may not
be able to fully implement an annual examination cycle because it has
been unable to fully implement a 2-year cycle with existing
examination office resources.  Thus, GAO recommended that OFHEO
include in its reassessment an analysis of the staff resources
necessary to adequately carry out alternative examination cycles,
such as 1 or 2 years.  Through such an analysis, OFHEO could better
ensure a fuller consideration of the trade-offs associated with
examination coverage provided versus costs involved and thereby
engage in a more informed decisionmaking process. 

Although Fannie Mae and Freddie Mac have been consistently profitable
in recent years, GAO believes it is essential, given the enterprises'
outstanding financial commitments of about $1.5 trillion\3 at
year-end 1996, that OFHEO implement its safety and soundness
responsibilities as quickly as feasible so that any potential
long-term financial risks to taxpayers are lowered. 


--------------------
\1 Federal Housing Enterprises:  OFHEO Faces Challenges In
Implementing a Comprehensive Oversight Program (GAO/GGD-98-6, Oct. 
22, 1997). 

\2 The purpose of the stress test is to simulate, in a computer
model, situations where the enterprises are exposed to adverse credit
and interest rate risks and requiring them to hold sufficient capital
to withstand these risks for a period of 10 years. 

\3 The $1.5 trillion consisted of about $487 billion in combined
enterprise debt outstanding and about $1 trillion in enterprise
mortgage-backed securities that were held by investors. 


FEDERAL HOUSING ENTERPRISES: 
OPERATIONS OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Committee: 

We are pleased to be here today to discuss the operations of the
Office of Federal Housing Enterprise Oversight (OFHEO) and the status
of OFHEO's efforts to fulfill its mission of helping to ensure the
safety and soundness of the two largest housing government-sponsored
enterprises:  Fannie Mae and Freddie Mac (the enterprises). 

Congress has a long-standing concern that the safety and soundness of
the enterprises be maintained so that they can continue to fulfill
their public purposes while taxpayers are protected from unnecessary
financial risks.  Consequently, Congress passed the Federal Housing
Enterprises Financial Safety and Soundness Act of 1992\1 (the act),
which established OFHEO as an independent regulator within the
Department of Housing and Urban Development (HUD).  Under the act,
OFHEO is authorized to help ensure the enterprises' safety and
soundness by setting capital standards, conducting examinations, and
taking enforcement actions if unsafe and unsound financial or
management practices are identified. 

As mandated in the Department of Veterans Affairs/HUD Appropriations
Act of 1997,\2 we recently issued a report\3 on OFHEO's
implementation of its safety and soundness responsibilities since it
began operations in June 1993.  We concluded that OFHEO has not yet
fully implemented its statutory responsibilities and faces
considerable future challenges in doing so.  In particular, OFHEO
currently does not expect to establish final risk-based capital
standards for the enterprises until 1999, even though this process
was to have been completed under the act by December 1, 1994. 
Further, OFHEO has not fully implemented a comprehensive and timely
safety and soundness enterprise examination program.  Although Fannie
Mae and Freddie Mac have been consistently profitable in recent
years, we believe it is essential, given the enterprises' outstanding
financial commitments of about $1.5 trillion\4 at year-end 1996, that
OFHEO implement its safety and soundness responsibilities as quickly
as feasible so that any potential long-term financial risks to
taxpayers are lowered. 


--------------------
\1 Housing and Community Development Act of 1992, Pub.  L.  No. 
102-550, Title XIII, 12 U.S.C.  4501, et.  seq. 

\2 Pub.  L.  No.  104-204  430, 110 Stat.  2784, 2930 (Sept.  26,
1996). 

\3 Federal Housing Enterprises:  OFHEO Faces Challenges In
Implementing a Comprehensive Oversight Program (GAO/GGD-98-6, Oct. 
22, 1997). 

\4 The $1.5 trillion consisted of about $487 billion in combined
enterprise debt outstanding and about $1 trillion in enterprise
mortgage-backed securities that were held by investors. 


   OFHEO'S MISSION IS TO HELP
   ENSURE THE ENTERPRISES' SAFETY
   AND SOUNDNESS
-------------------------------------------------- Chapter STATEMENT:1

The federal government's creation and continued sponsorship of Fannie
Mae and Freddie Mac have created the perception in the financial
markets that the government may choose to provide financial
assistance to them in a financial emergency, even though there is no
statutory requirement to do so.  Recognizing the potential financial
risks the enterprises' activities pose to taxpayers, Congress created
OFHEO in 1992 as an independent safety and soundness regulator with
wide authority to help ensure that the enterprises' long-term
financial security is maintained. 


      ENTERPRISES' ACTIVITIES PLAY
      A VITAL ROLE IN THE U.S. 
      HOUSING FINANCE SYSTEM BUT
      ALSO INVOLVE FINANCIAL RISKS
------------------------------------------------ Chapter STATEMENT:1.1

Congress established and chartered the enterprises as
government-sponsored, privately owned and operated corporations to
enhance the availability of mortgage credit across the nation during
both good and bad economic times.  It is widely accepted that the
enterprises' activities have generated benefits to home-buyers, such
as lower mortgage interest rates.  Moreover, the enterprises have
reduced regional disparities in mortgage interest rates and spurred
the development of new technologies to facilitate the home financing
process. 

However, the potential also exists that the federal government would
choose to rescue the enterprises in a financial emergency.  OFHEO
officials have stated that, despite the enterprises' consistent
profitability in recent years, past financial performance does not
guarantee future success.  For example, during the 1990s, Fannie Mae
and Freddie Mac have rapidly increased the size of their
debt-financed mortgage asset portfolios.\5 According to OFHEO, large
holdings of debt-financed mortgage assets potentially expose Fannie
Mae and Freddie Mac to increased losses resulting from fluctuations
in interest rates.\6


--------------------
\5 Debt-financed mortgage assets generally consist of whole mortgages
and mortgage-backed securities that the enterprises have repurchased
from investors.  Between year-end 1992 and year-end 1996, the
enterprises' combined debt-financed mortgage assets more then doubled
from about $190 billion to $425 billion. 

\6 By repurchasing mortgage-backed securities, the enterprises,
rather than investors, assume the risk for losses associated with
changes in interest rates. 


      OFHEO IS STATUTORILY
      MANDATED TO DEVELOP CAPITAL
      STANDARDS AND CONDUCT SAFETY
      AND SOUNDNESS EXAMINATIONS
------------------------------------------------ Chapter STATEMENT:1.2

For fiscal year 1998, OFHEO has requested a budget of about $16
million to carry out its safety and soundness responsibilities and to
perform administrative support functions.  As of October 27, 1997,
OFHEO had a total staff of 96 individuals consisting of full-time and
temporary staff, contract employees, and detailees from bank
regulatory agencies. 


         OFHEO IS REQUIRED TO
         DEVELOP CAPITAL STANDARDS
---------------------------------------------- Chapter STATEMENT:1.2.1

As required by the act, OFHEO is to carry out its oversight function
in part by establishing minimum capital standards.  Minimum capital
is computed on the basis of capital ratios specified in the act that
are applied to certain on-balance-sheet and off-balance-sheet
obligations.  OFHEO has classified Fannie Mae and Freddie Mac as
"adequately capitalized" under the minimum standard in each quarter
beginning with the quarter that ended on June 30, 1993.\7

The act also mandated that OFHEO develop a stress test to serve as
the basis for more sophisticated risk-based capital standards.  The
purpose of a stress test is to lower taxpayer risks by simulating, in
a computer model, situations where the enterprises are exposed to
adverse credit and interest rate scenarios and requiring them to hold
sufficient capital to withstand these scenarios for a 10-year period,
plus an additional 30 percent of that amount to cover management and
operations risk.  Under the act, the stress test and risk-based
capital standards derived from the test were to have been completed
by December 1, 1994.  However, as of April 1997, OFHEO's acting
director said the organization expected to issue a proposed rule
implementing the stress test and risk-based capital standards by
September 1998, with the final rule to be issued in 1999. 


--------------------
\7 OFHEO issued the final rule implementing the minimum standard on
July 8, 1996, and the final rule was first used to classify the
enterprises as adequately capitalized in the third quarter of 1996. 
Previously, OFHEO classified the enterprises as adequately
capitalized under interim procedures. 


         OFHEO ALSO HAS THE
         AUTHORITY TO CONDUCT
         ANNUAL EXAMINATIONS
---------------------------------------------- Chapter STATEMENT:1.2.2

The act also gave OFHEO broad authority and responsibility to examine
the enterprises and requires annual on-site examinations.\8 At such
examinations, OFHEO staff with the assistance of contractors and bank
regulatory detailees are to assess the financial condition of the
enterprises and recommend improvements as necessary.  OFHEO also has
the authority to (1) take enforcement actions, such as cease and
desist orders, against the enterprises to stop unsafe practices and
(2) place an enterprise into a conservatorship when certain
circumstances exist and the enterprise is unable to meet its
financial obligations or it is critically undercapitalized. 


--------------------
\8 According to OFHEO, the annual requirement can be and has been met
without conducting annual full-scope examinations.  Full scope
examinations are generally understood to mean thorough assessments of
all the management practices and business strategies of a financial
institution that could potentially affect its safety and soundness. 
OFHEO believes it can comply with the annual examination requirement
by assessing some, but not necessarily all, enterprise risks each
year. 


   OFHEO'S DEVELOPMENT OF A STRESS
   TEST AND RISK-BASED CAPITAL
   STANDARDS HAS BEEN PROTRACTED
-------------------------------------------------- Chapter STATEMENT:2

In OFHEO's planning process and its published documents, the
organization has consistently underestimated the time necessary to
complete major components of the stress test and risk-based capital
standards.  For example, in 1995 OFHEO estimated that the final rule
would be issued in May 1997, but OFHEO now expects that the process
will not be completed until 1999.  We identified several reasons why
OFHEO did not comply with the statutory deadline and found that OFHEO
faces continuing challenges in meeting its current estimate.  Thus,
we believe that strong congressional oversight of the development
process is necessary to help ensure that OFHEO's plan to complete the
risk-based capital standards is accomplished as quickly as feasible. 


      DEVELOPMENT HAS BEEN DELAYED
      BY THE COMPLEXITY OF THE
      MANDATE AND OFHEO'S DECISION
      TO DEVELOP A COMPREHENSIVE
      STRESS TEST
------------------------------------------------ Chapter STATEMENT:2.1

Our review identified a number of reasons why OFHEO was not able to
comply with the December 1, 1994, deadline and for the continuing
delays in the development of the stress test and risk-based capital
standards.  The following reasons are among the more significant: 

  -- OFHEO's statutory mandate to develop a stress test and
     risk-based capital standards presented complex and
     time-consuming challenges to the organization.  For example,
     according to OFHEO, the final stress test should be flexible and
     capable of assessing the effects of different credit and
     interest-rate scenarios on differing components of the
     enterprises' mortgage portfolios, such as single-family and
     multifamily mortgages as well as new financial products.  By
     contrast, the risk-based capital standards developed by federal
     banking regulators categorize assets into broad categories,
     which may not account for changes in the institutions' business
     practices that could affect their risk profiles.  For example,
     banks can hold the same level of capital for loans to
     corporations with high credit ratings as to those with
     speculative credit ratings. 

  -- OFHEO decided to develop a new stress test rather than trying to
     adopt and modify existing stress tests.  During OFHEO's start-up
     phase in 1993 and 1994, there were strategies available that
     OFHEO could have pursued that might have resulted in the faster
     completion of a stress test and risk-based capital standards. 
     As the foundation of the stress test, OFHEO could have adopted
     and modified a stress test under development by HUD in 1992 or
     the financial models that the enterprises had established to
     assess the potential impacts of alternative credit and interest
     rate scenarios.  However, OFHEO officials determined that
     pursuing these strategies would have left the organization with
     an inadequate basis for assessing the risks facing the
     enterprises.  Consequently, OFHEO concluded that it could
     establish capital standards that would be more closely related
     to enterprise risks by developing its own sophisticated stress
     test and associated financial modeling capability.  We note that
     OFHEO's approach has, ultimately, involved a substantial
     development period and commitment of resources. 

  -- OFHEO encountered delays in obtaining accurate financial data
     from the enterprises.  Beginning in 1994, OFHEO officials
     requested that the enterprises provide large amounts of
     historical and current financial data so it could do the work
     necessary to develop the stress test.  According to OFHEO
     officials, the enterprises did not always provide all of the
     necessary data, or they provided data that may have been
     inaccurate.  These problems persisted into 1996 and impeded
     development of the stress test, according to OFHEO officials. 

In response, Fannie Mae officials said that OFHEO's data requests
were burdensome and would have been less extensive if OFHEO had used
a simpler approach to develop the stress test.  The Fannie Mae
officials said that a more simplified approach would have resulted in
appropriate risk-based capital standards and could have been
completed faster than OFHEO is currently taking to develop its stress
test.  Freddie Mac officials said they have tried to assist OFHEO in
developing the stress test and that inaccurate data submissions have
not been responsible for the delays. 

  -- OFHEO experienced significantly greater technical and managerial
     challenges and associated delays than initially anticipated in
     developing an integrated financial model.  This model--which is
     referred to as the Financial Simulation Model is to serve as the
     foundation of the stress test--is designed to simulate the
     behavior of the enterprises' assets, liabilities, and
     off-balance-sheet obligations under adverse credit and interest
     rate scenarios.  According to an OFHEO official, OFHEO had
     largely completed the model by April 1997, although some final
     testing and software documentation work remained. 


      OFHEO FACES CONTINUING
      CHALLENGES IN COMPLETING THE
      STRESS TEST AND RISK- BASED
      CAPITAL STANDARDS BY 1999
------------------------------------------------ Chapter STATEMENT:2.2

Our review also found that OFHEO faces several continuing challenges
in completing the stress test and risk-based capital standards
development process by 1999, as currently planned.  These challenges
include the need to (1) coordinate an interagency review process in
which OFHEO officials are to share the technical components of the
stress test with staff from the Office of Management and Budget, HUD,
and Treasury; (2) make key policy decisions about the stress test,
such as forecasts of future interest rates and the relationship
between home prices and interest rates; and (3) translate the complex
components of the stress test into proposed and final rules while
protecting proprietary enterprise data from unauthorized disclosure. 

Given OFHEO's history of consistently underestimating the time
necessary to complete the stress test and risk-based capital
standards, we believe congressional oversight appears necessary to
ensure that OFHEO completes the process as soon as possible. 
Accordingly, we recommended that OFHEO report periodically to
Congress on the organization's progress towards compliance with the
plan.  We further recommended that OFHEO inform Congress of any
problems that may arise in completing the process by 1999, as well as
corrective actions that the organization planned to address such
problems. 


   OFHEO HAS NOT FULLY IMPLEMENTED
   A COMPREHENSIVE AND TIMELY
   ENTERPRISE EXAMINATION
   OVERSIGHT PROGRAM
-------------------------------------------------- Chapter STATEMENT:3

In the absence of a stress test and risk-based capital standards,
OFHEO's primary means of helping to ensure the safety and soundness
of the enterprises is its examination program.  However, OFHEO has
not fully implemented the detailed examination schedule and plan that
it established in 1994, which limits the organization's ability to
monitor the enterprises' financial condition.  We believe that
limited resources allocated to the examination office as well as
staff attrition contributed to OFHEO's inability to fully implement
the 1994 plan.  Beginning in 1998, OFHEO plans to restructure its
examination program so that it assesses all enterprise core risks
annually. 


      OFHEO HAS NOT FULLY
      IMPLEMENTED ITS EXAMINATION
      SCHEDULE AND PLAN
------------------------------------------------ Chapter STATEMENT:3.1

OFHEO established an examination plan in September 1994 that provided
for a 2-year cycle for the assessment of six "core" risks, such as
interest rate and credit,\9 facing the enterprises.  Although OFHEO
identified six core risks, the plan stipulated that examiners were to
cover these risks in five examinations--four examinations would each
cover one core risk while another examination would cover two
risks.\10 OFHEO's examination plan was similar in substance but not
in timing to risk-focused examination plans that the Office of the
Comptroller of the Currency and the Federal Reserve System have
established to monitor the activities of large commercial banks.  As
required by law, the bank regulators are to conduct full- scope
examinations of large commercial banks annually. 

As of May 1997, OFHEO had completed or initiated examinations
covering five of the six core risks facing the enterprises.  However,
OFHEO's current 3- to 4-year cycle for assessing the six core risks
is considerably longer than the 2-year cycle established in the plan. 
In addition, OFHEO has scaled back the planned coverage of its most
recently completed core risk examination; the examination covered
only one of four business areas.\11

OFHEO's 3-to 4-year examination cycle and limited examination
coverage raise questions about the organization's ability to fully
monitor the enterprises' financial activities and risks.  In
particular, with its current examination schedule, OFHEO may not be
able to do another on-site examination of the enterprises' interest
rate risks until 1999 or 2000, even though such risks may have
increased because of increased holdings of debt-financed mortgage
assets, since the previous core risk examination that addressed
interest rate risk was completed in 1996. 


--------------------
\9 The other four core risks are corporate governance, operations,
business, and information technology. 

\10 The plan stipulated that credit and interest rate risks would be
covered in one consolidated examination. 

\11 The business core risk examination covered the planned
single-family mortgage area but did not cover three other business
areas:  multifamily mortgages, portfolio, and financial services. 


      LIMITED RESOURCES ALLOCATED
      TO THE EXAMINATION OFFICE
      AND ATTRITION CONTRIBUTED TO
      OFHEO'S INABILITY TO FULLY
      IMPLEMENT THE 1994 PLAN
------------------------------------------------ Chapter STATEMENT:3.2

In May 1995, we reported that limited staff resources had impeded
OFHEO's initial efforts to implement the 1994 plan.\12 This situation
persisted between 1995 and 1997.  As of June 1997, OFHEO's
examination office had 17 authorized positions, of which 12 were
reserved for line examiners directly responsible for conducting
examinations.\13 In its most recently completed core risk
examination, which concluded in May 1997, OFHEO assigned 9 of its 12
line examination positions to the examination for approximately 1
year to complete it.\14 Similarly, in the previous core risk
examination, which was completed in June 1996, OFHEO assigned eight
of the line examiner positions\15 to the examination for about 1
year.  In addition, during 1996 and early 1997, OFHEO experienced
significant attrition in its examination office which left five
vacant positions--a vacancy rate of 30 percent--as of March 31,
1997.\16 Both OFHEO's decision to commit virtually its entire staff
of line examiners to each core risk examination for 1 year and the
significant attrition the examination office has experienced have
contributed to OFHEO's inability to fully implement its 2-year
examination cycle. 

OFHEO officials said that another important factor that has
contributed to OFHEO's inability to fully implement the 1994
examination plan was the amount of time that OFHEO examination staff
needed to develop an understanding of the enterprises' operations and
risk management.  Prior to 1993 when OFHEO began operations, the
enterprises had not been subjected to an examination oversight
program.  OFHEO officials said that the first round of examinations
has taken longer than initially anticipated in 1994 because of the
amount of time necessary to obtain basic information about the
enterprises' operations and risk management practices. 


--------------------
\12 Government-Sponsored Enterprises:  Development of the Federal
Housing Enterprise Regulator (GAO/GGD-95-123, May 30, 1995). 

\13 Of the other five positions, one was for the director, one was
for the deputy director, one was for the executive secretary, and two
were for financial analysts who are responsible for off-site
monitoring. 

\14 The examiners assigned to each core risk examination are to
conduct that examination at both Fannie Mae and Freddie Mac. 

\15 OFHEO also assigned a financial analyst to this examination even
though this position is primarily responsible for off-site monitoring
and not examination activities. 

\16 As of August 1997, an OFHEO official said that the organization
had filled three of the five vacant positions while two others were
being advertised. 


      OFHEO PLANS TO REASSESS ITS
      EXAMINATION PROGRAM
------------------------------------------------ Chapter STATEMENT:3.3

During the course of our audit work, OFHEO officials told us that the
organization plans to reassess its examination program during 1997
and implement an annual examination cycle for all core risks by early
1998 to ensure that the enterprises' safety and soundness is
adequately monitored.  The OFHEO officials also said that the
reassessment is to include a review of examination office staff
resources to ensure that an annual examination cycle can be
implemented.  OFHEO's acting director also said that OFHEO may have
some flexibility to increase its examination staff resources by
shifting staff from its research activities as the stress test and
risk-based capital standards are completed. 

We stated in our report that, without a reassessment of and potential
reallocation of resources, OFHEO may not be able to implement an
annual examination cycle by early 1998, since it had not fully
implemented a 2-year cycle with existing examination office
resources.  In fact, as of June 1997, OFHEO had not initiated
important components of the 1994 plan, such as one of the core risk
examinations.  Thus, we recommended that OFHEO include in the
reassessment an analysis of the staff resources necessary to carry
out alternative examination schedules, such as 1 or 2 years.  Through
such an analysis, OFHEO could help ensure a fuller consideration of
the trade-offs associated with examination coverage provided versus
costs involved and thereby engage in a more informed decisionmaking
process. 

Senior OFHEO officials recently told us that they are in the process
of reviewing examination office resources, and have decided to
reallocate two positions from other offices to the examination
office.  Thus, the officials said the examinations office will have a
total of 14 line examiner positions, rather than 12, and 19 positions
overall.  In addition, the director of OFHEO's examination office
told us that OFHEO plans to make greater use of bank regulatory
detailees, than has been the case in the past, to also help ensure
the effective implementation of the annual examination cycle by early
1998.  Nevertheless, given OFHEO's past difficulties in implementing
its enterprise safety and soundness examination responsibilities, we
believe that OFHEO's future efforts, including the implementation of
its annual examination cycle, should be closely monitored. 


   CONCLUDING REMARKS
-------------------------------------------------- Chapter STATEMENT:4

I would like to conclude by reiterating that OFHEO has a crucial role
in helping to maintain the safety and soundness of Fannie Mae and
Freddie Mac and thereby ensuring that the enterprises can continue to
meet their housing mission without posing unnecessary risks to
taxpayers.  As a relatively new federal regulatory organization with
complex responsibilities, OFHEO has faced considerable challenges in
implementing its statutory safety and soundness requirements.  Among
its accomplishments, OFHEO has assembled a professional staff that
appears to have considerable expertise in housing economics, mortgage
finance, computer systems analysis, and financial institution
examinations.  Although the development process has been slow, OFHEO
has developed a working financial model that it believes will serve
as the basis of the stress test and OFHEO plans to complete the final
risk-based capital rule by 1999.  However, given the challenges that
remain in meeting this schedule, as well as OFHEO's efforts to
implement an annual examination cycle during 1998, we believe that
continued strong congressional oversight of OFHEO's progress is
essential. 


------------------------------------------------ Chapter STATEMENT:4.1

Mr.  Chairman, this concludes my statement.  My colleagues and I
would be pleased to respond to any questions that you may have. 

*** End of document. ***