oversight

Government Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE Regulator

Published by the Government Accountability Office on 1997-07-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Subcommittee
                 on Capital Markets, Securities and
                 Government-Sponsored Enterprises,
                 Committee on Banking and Financial
                 Services, House of Representatives
July 1997
                 GOVERNMENT-
                 SPONSORED
                 ENTERPRISES
                 Advantages and
                 Disadvantages of Creating
                 a Single Housing GSE
                 Regulator




GAO/GGD-97-139
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             General Government Division

             B-277390

             July 9, 1997

             The Honorable Richard H. Baker
             Chairman, Subcommittee on Capital Markets,
               Securities and Government-Sponsored Enterprises,
             Committee on Banking and Financial Services
             House of Representatives

             Dear Mr. Chairman:

             This report responds to your request for our analysis of the advantages
             and disadvantages of creating a single regulator for the three housing
             government-sponsored enterprises (GSE). You asked that we address the
             question of whether safety and soundness and mission oversight should be
             vested in the same regulatory body. On the basis of discussions with your
             office, we also agreed to address the regulatory agency structure that
             might best provide for protecting the government’s interest by ensuring
             that the GSEs carry out their public purposes (mission) in a safe and sound
             manner. To do so, we considered whether the regulator should be an
             independent office within an agency, such as the Department of Housing
             and Urban Development (HUD) or the Department of the Treasury
             (Treasury), or a stand-alone, independent agency and whether it should be
             governed by a board or director. Finally, we briefly discuss other issues
             that are important in deciding how best to regulate the GSEs. 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 the Federal National Mortgage Association
             (Fannie Mae) and the Federal Home Loan Mortgage Corporation (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 Federal
             Home Loan Bank System (FHLBank System).


             Fannie Mae, Freddie Mac, and the FHLBank System are the GSEs Congress
Background   created to help make credit available to finance home purchases, because
             the private market was perceived as not effectively meeting credit needs.
             The GSEs’ charters largely limit activities to their public missions, and they
             receive financial benefits from the government that help them carry out
             those public missions. For example, the three GSEs are exempt from
             Securities and Exchange Commission registration requirements, and they
             have conditional lines of credit with Treasury. They receive other benefits



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directly and indirectly related to their federal charters. Most importantly,
although the government has no legal obligation to protect GSE creditors,
federal ties with the GSEs have contributed to the perception by investors
that the federal government would not allow any of the GSEs to default on
their obligations.1

The mission of both Fannie Mae and Freddie Mac is to enhance the
availability of mortgage credit by creating and maintaining a secondary
market for residential mortgages. The Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (the 1992 Act) required HUD to
establish affordable housing goals directed at Fannie Mae’s and Freddie
Mac’s efforts to finance housing for low- and moderate-income families
and housing in central cities and other underserved areas.2 Fannie Mae
and Freddie Mac borrow funds in the capital markets and use the funds to
purchase residential mortgages from lenders, such as banks and thrifts.
Fannie Mae and Freddie Mac retain some mortgages in portfolio but pool a
majority to create securities called mortgage-backed securities (MBS) that
they sell to investors in the secondary mortgage market. As of
December 31, 1996, Fannie Mae and Freddie Mac had total on balance
sheet assets of $351 billion and $174 billion, respectively, not including
MBS. Both GSEs are stockholder-owned corporations governed by boards of
directors. Each board of directors includes 13 members elected by
stockholders and 5 members appointed by the President of the United
States.

The 1992 Act established OFHEO as an independent entity within HUD to
oversee the safety and soundness of Fannie Mae and Freddie Mac. OFHEO is
led by a director who is presidentially appointed for a 5-year term and
confirmed by the Senate. Its statutory mission is to help ensure that
Fannie Mae and Freddie Mac are adequately capitalized and operate in a
safe and sound manner. OFHEO’s 1996 budget was $15 million; it had 72
full-time staff positions.



1
 The federal government intervened when the Farm Credit System faced severe financial stress in the
mid-1980s. Congress authorized up to $4 billion in federal assistance and required extensive structural
and operational reform. It also established the System’s regulator as an arm’s-length regulator and gave
it new powers. See Farm Credit Amendments Act of 1985, Pub. L. No. 99-205 (Dec. 23, 1985); Farm
Credit Act Amendments of 1986, Pub. L. No. 99-509, Title I, Subtitle D. The government provided less
direct support to Fannie Mae in 1982 in the form of changes to its income tax treatment and regulatory
forbearance of its troubled condition. See Farm Credit System: Repayment of Federal Assistance and
Competitive Position (GAO/GGD-94-39, March 10, 1994); and Government-Sponsored Enterprises: A
Framework for Limiting the Government’s Exposure to Risks (GAO/GGD-91-90, May 22, 1991).
2
  Pub. L. No. 102-550, Title XIII, codified at 12 U.S.C. §§ 4501, et seq. The provisions of the act
concerning HUD’s establishment of the housing goals are codified at 12 U.S.C.§§ 4561-4564.



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Other than safety and soundness and certain other matters that the 1992
Act specifies as exclusive to OFHEO, the 1992 Act gives general regulatory
power over Fannie Mae and Freddie Mac to the Secretary of HUD. This
includes the power to make rules and regulations necessary to ensure that
each GSE’s mission is being accomplished, including setting, monitoring,
and enforcing compliance with special housing goals.3

The FHLBank System comprises 12 district banks that extend mortgage
credit by making loans (called advances) to member institutions (thrifts,
commercial banks, and others), who in turn lend to home buyers for
mortgages. The advances are secured by home mortgage loans or other
collateral. Although the FHLBank System’s charter contains no explicit
statement of purpose, the history of the enabling legislation and
subsequent statutory language identify that purpose as supporting housing
finance. Each bank is governed by a board with at least 14 members,
including at least 6 members who are appointed by FHFB.4 The capital
stock of each bank is owned by its member institutions. As of
December 31, 1996, the FHLBank System had total assets of $292 billion,
with individual bank assets ranging from $13 to $52 billion.

FHFB was established in 1989 as the regulator of the FHLBank System and
charged with supervising System banks to ensure first, that they operate in
a safe and sound manner and also that they carry out their housing finance
mission.5 FHFB was authorized to issue consolidated obligations for the
System; it delegated this duty to the Office of Finance, which FHFB
established as a joint office of the System banks. In addition, Congress
required FHFB to establish and regulate standards for community
investment and an affordable housing program aimed at making credit
available to people of limited income and to the commercial and economic
development activities that benefit them.

A five-member Board of Directors governs FHFB, which is an independent
agency in the executive branch. Four full-time members are appointed by
the president with the advice and consent of the Senate for 7-year terms;
the president designates one of the four as Chair. The Secretary of HUD is

3
For discussion of HUD’s promulgation of regulations setting annual goals for each enterprise, see
Housing Enterprises: Potential Impacts of Severing Government Sponsorship (GAO/GGD-96-120,
May 30, 1996), pp. 80-84.
4
 FHFB can authorize a board of more than 14 members (8 elected) for districts that include 5 or more
states.
5
 Congress created FHFB as the successor to the Federal Home Loan Bank Board, with respect to the
Federal Home Loan Banks, in Title VII of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), Pub. L. 101-73 § 702, 12 U.S.C. § 1422a.



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                   the fifth member. At least one member is to be chosen from an
                   organization representing consumer or community interests in banking
                   services, credit needs, housing, or financial consumer protection. FHFB’s
                   1996 budget was $16.1 million; it had a staff of about 120.

                   In our 1991 and 1993 reports on GSEs we identified five criteria that a GSE
                   regulatory agency structure should meet to facilitate effective oversight.6
                   The criteria specify that a GSE regulatory agency’s structure should provide
                   for (1) objectivity and arm’s-length status 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. We developed these criteria on the basis of our own knowledge
                   and experience in reviewing federal financial institution regulation; our
                   review of related literature and regulatory law; the then-current
                   arrangement and operations of the GSEs; and discussions with the GSEs,
                   federal regulators, and other experts. On the basis of these criteria, we
                   stated in 1991 that regulation of a GSE’s mission-related activities cannot be
                   effectively separated from oversight of safety and soundness. In 1993,
                   again on the basis of these criteria, we recommended merging the safety
                   and soundness functions of the housing GSE regulators.


                   Our ongoing work has strengthened our belief that the housing GSE
Results in Brief   regulators would be more effective if combined and authorized to oversee
                   both safety and soundness and mission compliance. Nothing we have
                   observed has caused us to modify our criteria for an appropriate
                   regulatory structure. Although there have been changes in the regulatory
                   oversight of the housing GSEs since we first established these criteria,
                   neither OFHEO, HUD, nor FHFB meets all five criteria. In particular, we note
                   that FHFB is not an arm’s-length regulator, and it is still involved in
                   governance of the FHLBank System. In addition, regulation of Fannie
                   Mae’s and Freddie Mac’s mission compliance and safety and soundness is
                   the responsibility of HUD and OFHEO, respectively.

                   Combining oversight into one agency would have several advantages. Such
                   an agency could be more independent and objective than the separate
                   regulatory bodies and could be more prominent than either one alone.
                   Although the GSEs operate differently, the risks they manage and their
                   missions are similar. The regulators’ expertise in evaluating GSE risk
                   management could be shared more easily within one agency. In addition, a

                   6
                    GAO/GGD-91-90 and Federal Home Loan Bank System: Reforms Needed to Promote Its Safety,
                   Soundness, and Effectiveness (GAO/GGD-94-38, Dec. 8, 1993).



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              single regulator would be better positioned to be cognizant of specific
              mission requirements, such as special housing goals and new programs or
              initiatives any of the GSEs might undertake, and should be better able to
              assess their competitive effect on all three housing GSEs and better ensure
              consistency of regulation for GSEs that operate in similar markets.
              Coordination and sharing of expertise among staff responsible for safety
              and soundness and mission compliance should be facilitated by having all
              staff in one regulatory agency. The primary disadvantage to combining
              oversight into one agency would be whatever short-term disruption
              reorganization might cause to the ongoing operations of the regulators.

              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. An independent regulatory body, as opposed to one
              within an executive branch department, should be better positioned to
              achieve the autonomy and prominence necessary to oversee the large and
              influential housing GSEs. Using a board to govern the independent
              regulatory agency would enable Congress to provide for representation
              that could help ensure the regulator’s independence and provide
              appropriate balance and expertise in the regulators’ deliberations of both
              safety and soundness and mission-related issues. Having an independent
              board would allow it to be structured to provide equal links to HUD, due to
              its role in housing policy, and Treasury, due to its roles in finance and
              financial institution oversight. Having a single director, rather than a
              board, as head of the regulatory agency might provide for management
              efficiencies and clearer accountability. However, such an arrangement
              would sacrifice the advantages of having the different perspectives,
              expertise, prestige, and stability a board could provide.


              Because we had done a substantial amount of work on these GSEs in the
Scope and     past, we relied heavily upon that work. However, we reviewed our
Methodology   historical positions in light of the current regulatory structure and GSE
              activities. In addition to reviewing our past and ongoing work related to
              these GSEs and their regulators and consistent with our methodology in our
              earlier work, we solicited views of housing, GSE, and regulatory officials.
              They included officials from OFHEO, FHFB, Fannie Mae, Freddie Mac, the
              FHLBank System, HUD, and Treasury.

              We requested oral comments on a draft of this report from the Chief
              Executive Officers, or their designees, of Fannie Mae, Freddie Mac, the



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                       Council of the FHLBanks of which 9 of the 12 FHLBanks are members,
                       and the FHLBanks of New York and Chicago;7 and the heads, or their
                       designees, of OFHEO, FHFB, HUD, and Treasury. Their comments are
                       discussed at the end of this report.

                       We did our work in Washington, D.C., between May and June 1997 in
                       accordance with generally accepted government auditing standards.


                       In our 1991 report on GSEs, we recommended that Congress create a single
We Continue to         regulator for all GSEs. We determined that a single regulatory body could
Support a Single       best fit our criteria of being (1) independent and objective, (2) prominent
Housing GSE            in government, (3) able to achieve economy and efficiency, and (4) able to
                       provide consistency in regulation. We also maintained that regulation of
Regulator              primary and secondary markets could be separated within a single
                       regulator to avoid potential conflicts. In that report we discussed an
                       option that involved regulation of the GSEs according to the markets they
                       serve, such as housing. In our subsequent 1993 report on the FHLBank
                       System, we recommended that a single regulator be created for the three
                       housing GSEs that would assume the duties of OFHEO and FHFB. In that
                       report, we concluded that the new regulator would have the following
                       attributes.

                   •   The regulator would be more independent and objective than separate
                       regulatory bodies can be. Because the operations and interests of the
                       FHLBank System, Fannie Mae, and Freddie Mac do not align precisely,
                       there should be a healthy tension in the oversight of the entities that could
                       help prevent the regulator from being “captured” by the GSEs.
                   •   The regulator would be more prominent in government than either OFHEO
                       or FHFB can be individually.
                   •   The regulator would create some economies and efficiencies. Staff could
                       share expertise in such areas as examinations, credit and interest rate risk
                       monitoring, financial analysis, and economic research. Administrative
                       support functions could be combined.
                   •   The regulator would provide consistent regulation for GSEs serving the
                       same economic sector and sharing the public purpose of providing credit
                       for housing. Although the System, Fannie Mae, and Freddie Mac do not
                       directly compete in all of their activities, they are all participants in the
                       residential mortgage market. Consolidating their regulation would enable
                       a regulator to take into account the competitive effects that regulatory



                       7
                        The FHLBank of Dallas declined to comment on the draft.



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decisions made concerning Fannie Mae and Freddie Mac would have on
the FHLBank System, and vice versa.

The criterion of separating primary and secondary market regulation
would not be violated, because the new regulatory entity would not be
responsible for overseeing other regulated entities that are counterparties
(customers) of the three GSEs, such as banks and thrifts.

Since we did our work in 1991 and 1993, we have continued to monitor
and evaluate the GSEs and their regulators. We have found no evidence that
would cause us to alter our previous positions. Rather, our ongoing work
has strengthened our belief that OFHEO and FHFB would be more effective if
combined. A single, more prominent regulatory agency could help attract
and retain staff with the special mix of expertise and experience needed to
examine and monitor these sophisticated GSEs. Our 1995 report and
preliminary information from ongoing reviews of OFHEO operations show
that hiring and retaining expert staff has been an ongoing concern for
OFHEO.8 In our ongoing work, OFHEO officials told us that because there are
a limited number of individuals with the particular skills and experience
that OFHEO needs, it must compete with other financial regulators as well
as private firms for staff. Although a new regulator may have to compete
with private firms and banking regulators for staff and would be somewhat
new and unknown, the new entity should be able to provide greater
opportunities for staff growth and advancement than either OFHEO or FHFB
separately.

Several officials we spoke with believed that establishing a single
regulator for the housing GSEs to assume the responsibilities of OFHEO and
FHFB would create valuable synergies among regulatory staff. We concur
with this view. Although the GSEs operate differently, the risks they
manage are similar. OFHEO must evaluate its GSEs’ management of credit
risk associated with mortgages they purchase and management of interest
rate and other risks associated with the portfolio operations. Similarly,
FHFB must evaluate the credit risk of mortgages FHLBanks receive from
members as collateral for advances. FHFB must also oversee FHLBank
management of interest rate and other risks.



8
 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.



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In addition, OFHEO’s current work in setting capital standards and
developing a stress test for its GSEs could be useful in government
oversight of the FHLBank System. In our 1991 report, we recommended
that adequate capital standards be set for all housing GSEs based on the
risks they undertake.9 OFHEO is developing what is to be a comprehensive
financial modeling capability to determine how much capital Fannie Mae
and Freddie Mac are required to hold to withstand a variety of credit and
interest rate scenarios. The results of this work may be helpful in
evaluating the risks to the FHLBank System and the adequacy of its
capital.

Further, certain GSE programs could foster competition among the three
GSEs, and a single regulator could provide consistent rules and
interpretations more easily than three different regulators. Under the
existing regulatory structure, there would be no provision for the regulator
to consider how such programs would affect enterprises it did not
regulate. For example, in 1996 and 1997, FHFB approved three FHLBank
pilot programs that involved services Fannie Mae or Freddie Mac could
have or already did provide. One bank is to purchase senior interests in
certain whole mortgages and other related loans. The loans would be
acquired from both member and nonmember institutions and would
include loans members have made to low- and moderate-income
borrowers. Another FHLBank is to fund and hold mortgages originated by
its member institutions. FHFB found that this pilot program would provide
member institutions a way to move mortgages off their books without
having to pay fees associated with selling mortgages to Fannie Mae or
Freddie Mac or to other secondary market participants. According to
OFHEO officials, 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 ensured
regulatory consistency of oversight. Such an assessment could be difficult,
however, because of possible conflicting interests of the housing GSEs in
pursuing their lines of business and missions.

According to some officials with whom we met, the primary disadvantage
of creating a single regulator for these GSEs is the short-term disruption
that would come with any type of change. Combining staffs and creating a
single system for administrative matters, such as personnel, contracting,
and budgeting, could be time consuming and potentially disruptive at the
time. Establishing procedures for decisionmaking and working toward

9
 GAO/GGD-91-90.



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                        consistency in regulation and examination, where appropriate, would be a
                        challenge. Important work at both OFHEO and FHFB could be disrupted. For
                        example, OFHEO’s efforts to develop a stress test necessary for setting
                        capital standards for Fannie Mae and Freddie Mac could be delayed if key
                        staff left or their time was directed to other work. On the other hand, these
                        effects should be short term.


                        In our May 1991 report on GSEs, we stated that regulation of a GSE’s mission
Regulation of Mission   cannot be effectively separated from safety and soundness, and we still
and Safety and          support this position.10 A regulator that performs both roles, however,
Soundness Would Be      must be fully independent and at arm’s length from the GSEs it regulates to
                        ensure its objectivity. As we noted in 1991, there is a distinction between a
More Effective If       safety and soundness regulator that confirms a GSE’s compliance with its
Combined                statutory purposes and one that participates in the corporate governance
                        of a GSE. Currently, OFHEO does neither and FHFB does both. Our past work
                        on GSEs suggests that one regulator could oversee both compliance with
                        the statutory purposes and the financial health of a GSE, provided that the
                        regulator has no other responsibilities, such as corporate governance, that
                        could create a conflict of interest in its oversight of the GSE. Our 1991
                        report on GSEs, which discussed the thrift crisis of the late 1980s and the
                        thrift regulator at that time, showed that a regulator responsible for
                        mission-related and safety and soundness oversight should not participate
                        in the promotion or corporate governance of the entities being regulated.11

                        In the 1992 Act, Congress separated responsibility for mission regulation
                        (in HUD) from safety and soundness (in OFHEO). There was no conference
                        report explaining the rationale for the separation. Therefore, we reviewed
                        House and Senate Committee reports on their respective bills that
                        culminated in the final legislation. Although these reports differed in
                        details, they generally indicated that the regulatory structure for OFHEO
                        was designed to provide for effective supervision and oversight by a safety
                        and soundness regulator sensitive to the GSEs’ critical housing missions.12


                        10
                          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.
                        11
                          GAO/GGD-91-90.
                        12
                         See S. Rep. No. 102-282 at 12-14 (1992) (to accompany S. 2733, the “Federal Housing Enterprises
                        Regulatory Reform Act of 1992”); H.R. Rep. No. 102-206 at 51-52 (1991) (to accompany H.R. 2900, the
                        “Government-Sponsored Housing Enterprises Financial Safety and Soundness Act of 1991”). Congress
                        did not hold a formal conference to reconcile these bills. The compromise resulting in the 1992 Act
                        was added as Title XIII to the Housing and Community Development Act of 1992, Pub. L. No. 102-550,
                        103 Stat. 3672 (1992).



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                             The reports indicated that Congress gave OFHEO exclusive authority over
                             safety and soundness matters to ensure that the agency would have
                             sufficient independence to develop and maintain a primary focus on GSE
                             financial health and safety. The reports noted that GSE financial regulation
                             would thus be immune from political pressures and programs competing
                             for agency resources. On the other hand, the reports indicate that
                             Congress realized the importance of maintaining a link between OFHEO and
                             HUD to ensure that safety and soundness regulation would not undermine
                             the integrity of the GSEs’ programmatic missions. Accordingly, Congress
                             established OFHEO as an office within HUD, and HUD retained general
                             regulatory authority over the housing GSEs as well as specific authority
                             over their housing goals requirements. The existing regulatory structure is
                             one way to accomplish the objectives of maintaining a link with HUD and
                             also having a safety and soundness regulator with sufficient independence.
                             In addition, we discuss other options in the following sections.


Combining Mission and        In the past, conflicts arose when the Federal Home Loan Bank Board, the
Safety and Soundness         FHFB’s predecessor agency, functioned as the promoter and regulator for

Regulation Can Be Done       the thrift industry. Although Congress responded, in part, by enhancing the
                             independence of the System’s regulator, FHFB still participates in System
Without Creating Conflicts   business, which we have stated in previous work is inappropriate for a
of Interest                  regulator and presents potential for conflict.13 For example, FHFB is
                             required to appoint six directors to each bank’s board and approve
                             applications for the Affordable Housing Program.14

                             FHFB has delegated some duties related to System business. However, the
                             Chair of FHFB told us FHFB cannot fully delegate some of these duties,
                             because they are assigned to FHFB in statute. For example, the law
                             provides for banks to set bank directors’ compensation subject to FHFB’s
                             approval.15 Effective September 20, 1996, FHFB gave the banks authority to
                             set bank directors’ compensation but within certain reasonable limits.16
                             Some FHLBank officials told us they disagree with the FHFB


                             13
                               GAO/GGD-91-90 and GAO/GGD-94-38.
                             14
                              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. § 960.5. On June 25, 1997, FHFB delegated authority to
                             approve Affordable Housing Program applications, within stated guidelines, to the FHLBanks effective
                             January 1, 1998.
                             15
                               12 U.S.C. § 1427(i).
                             16
                              12 C.F.R. § 932.27. FHFB also has approval authority over the compensation of each bank president
                             and sets salary ranges for bank officers. See 12 C.F.R. § 932.41.



                             Page 10                                          GAO/GGD-97-139 Single Housing GSE Regulator
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implementation of the statutes on some of these issues and believe these
business matters should be fully delegated to the banks.

We found no reason to expect that combining mission and safety and
soundness regulation in one arm’s-length, independent regulator would
necessarily create conflicts. Rather, our analysis indicates that a healthy
tension should be created with the potential for balanced oversight. In
addition, oversight by one regulator could facilitate congressional
monitoring of the housing GSEs. Congress has an interest in monitoring the
benefits taxpayers derive in exchange for the benefits granted to the GSEs.17
According to some regulatory officials we spoke with, the tension caused
by having both private and public characteristics would 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 in the context of the
GSEs’ financial health. This arrangement assumes a governing structure for
the regulatory agency that includes people with expertise in safety and
soundness and mission. We discuss different governing structures in
subsequent sections of this report.

Further, the GSEs’ charters provide some safeguards to help ensure proper
balance in oversight. GSE charters acknowledge that economic
considerations of the activities undertaken cannot be ignored, especially
where special mission requirements are addressed. For example, Fannie
Mae’s and Freddie Mac’s charters specify that as part of their purpose,
they will provide “ongoing assistance to the secondary market for
residential mortgages (including activities relating to mortgages on
housing for low-and moderate-income families involving a reasonable
economic return that may be less than the return earned on other
activities)....[emphasis added]”18 Similarly, the Federal Home Loan Bank
Act (Bank Act) requires each bank to establish a program to fund
members’ community development lending and stipulates that advances
for these programs “be priced at the cost of consolidated Federal Home
Loan Bank obligations of comparable maturities, taking into account
reasonable administrative costs. [emphasis added]”19 The Bank Act is even


17
  We estimated that the value of the federal sponsorship to Fannie Mae and Freddie Mac in 1995
ranged from about $2.2 billion to $8.3 billion on a before-tax basis and from about $1.6 billion to
$5.9 billion on an after-tax basis. See GAO/GGD-96-120, p. 6. Freddie Mac officials stated that they
continue to believe, as mentioned in our 1996 report, that our estimates of the benefits associated with
government sponsorship are overstated.
18
  12 U.S.C. §§ 1451 note, 1716.
19
  12 U.S.C. § 1430(i).



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more specific in providing that bank-required participation in the
Affordable Housing Program should not contribute to financial instability.20
It specifies grounds for suspending a bank’s required contributions and
requires FHFB to notify Congress of such a suspension.21

Given the current financial strength of Fannie Mae and Freddie Mac and
the overall economic environment, we determined that there should be
little tension between mission compliance and safety and soundness
concerns. At year-end 1996, Fannie Mae and Freddie Mac reported that
they both complied with the affordable housing goals established by HUD
and had return on equity of 24.4 and 22 percent, respectively. However,
should economic conditions change for the worse, more tension could be
created between mission-related compliance and safety and soundness as
Fannie Mae and Freddie Mac try to provide acceptable returns to their
shareholders while continuing to comply with HUD’s goals. At year-end
1996, the FHLBank System reported return on equity of 8.3 percent and
accrued $120 million to help finance special housing needs for 1997 under
its Affordable Housing Program.

When mission and safety and soundness regulation are performed by
different regulators, even if activities are coordinated, there is the
potential for the GSEs to try to pit the regulators against each other,
according to some regulatory officials. In addition, possible conflicts
between rulings on safety and soundness and mission, such as whether a
GSE is financially able to meet certain special housing goals, could be
better prevented with one regulatory body as decisionmaker. It seems that
coordination between regulatory staff responsible for safety and
soundness and those responsible for setting, monitoring, and enforcing
compliance with the housing mission and special goals could be facilitated
if staff were in the same agency. Also, having only one regulator to report
to should simplify the GSEs’ reporting. Finally, having one regulator
responsible for safety and soundness and mission should preclude most
misunderstandings about, or conflicts in, regulatory rulings.

For example, any review or approval of new activities or programs would
involve only one GSE regulator. Currently, OFHEO has responsibility to
determine the effect on safety and soundness of any new program


20
  Congress required the FHLBank System to establish an Affordable Housing Program to help finance
housing for households with very low, low, and moderate incomes. Each bank is required to contribute
a set amount to the program annually. Beginning in 1995 and subsequent years, the amount is 10
percent of the preceding year’s net income, or a prorated amount so that the aggregate contribution of
the banks totals not less than $100 million. 12 U.S.C. § 1430(j)(5).
21
  12 U.S.C. § 1430(j)(6).


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introduced by Fannie Mae or Freddie Mac.22 HUD is responsible for
approving new programs concerning conventional mortgages based on
whether such programs are authorized by certain provisions of those GSEs’
respective charter acts.23 Pursuant to this responsibility, HUD and OFHEO
have recently reviewed and did not object to a Fannie Mae proposal—a
mortgage protection plan that includes an investment in cash value life
insurance.24

Other financial institution regulators oversee both mission compliance and
safety and soundness. For example, banks and thrifts have special
mission-related obligations under the Community Reinvestment Act and a
variety of consumer-oriented laws and regulations. Their respective
regulators, the Office of the Comptroller of the Currency (OCC), the
Federal Reserve System, the Federal Deposit Insurance Corporation, and
the Office of Thrift Supervision (OTS), oversee performance in both
mission and financial condition. So, too, does the Farm Credit
Administration (FCA), regulator of the Farm Credit System—the GSE that
provides credit to the agricultural sector of the economy.25 According to
some FHLBank System officials, because they believe their mission is
adequately stated in statute, Congress is the appropriate entity to directly
oversee compliance with their mission. This would not seem to us to be a
practical alternative given Congress’ many duties. In addition, Congress
has indicated a preference for entrusting similar oversight responsibilities
to other GSE and financial institution regulators.

Finally, 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. In our previous reports on GSE
oversight, we recommended that GSE regulators have authority to assess
the GSEs for the costs of federal oversight. This practice would help ensure
that the costs of regulation are borne by the GSEs that benefit from ties to
the government. Further, imposing assessments helps ensure that funding
for oversight is not constrained by competing federal responsibilities.
Currently, the cost of Fannie Mae’s and Freddie Mac’s mission oversight is

22
 Currently, OFHEO has explicit authority to determine whether a new program would risk significant
deterioration of the GSE’s financial condition. This authority expires 12 months after the effective date
of the risk-based capital test OFHEO must promulgate as required by the 1992 Act. 12 U.S.C. §
4542(b)(2).
23
  HUD’s approval authority for new programs is set forth at 12 U.S.C. § 4542.
24
  We addressed issues related to the mortgage protection plan and HUD’s and OFHEO’s
responsibilities as part of an interim letter on our review of nonmortgage investment practices at
Freddie Mac and Fannie Mae. See Housing Enterprises: Investment Authority, Policies, and Practices
(GAO/GGD-97-137R, June 27, 1997).
25
 In a study completed in 1994, we found FCA to be an effective regulator. See Farm Credit System:
Farm Credit Administration Effectively Addresses Identified Problems (GAO/GGD-94-14, Jan. 7, 1994).
Page 13                                           GAO/GGD-97-139 Single Housing GSE Regulator
                       B-277390




                       borne by the taxpayer as part of HUD’s budget. The cost of OFHEO’s
                       oversight is paid by Fannie Mae and Freddie Mac through annual
                       assessments. The FHLBank System is assessed by FHFB for both safety and
                       soundness and mission oversight.


                       A single independent regulator for housing GSEs could be a stand-alone
Advantages and         agency or an office within an executive branch agency, such as HUD or
Disadvantages of       Treasury. Existing structures for financial regulators illustrate that either
Having a Stand-Alone   arrangement is plausible;26 each has its advantages and disadvantages. One
                       of the most important considerations in establishing a single housing GSE
Independent Agency     regulator would be to ensure that it has the independence and prominence
or an Independent      that would allow it to act independently of the influence of the housing
                       GSEs, which are large and politically influential institutions. If a GSE had
Office Within an       more political clout and prominence than its regulator, it would be that
Executive Branch       much more difficult for the regulator to implement corrective action. We
Agency                 believe a stand-alone agency would best meet the criteria, which we
                       established in past GSE reports, of independence and prominence in
                       government.27

                       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. A stand-alone
                       agency should also be in a better position to avoid potential conflicts in
                       ensuring that regulation is carried out at arm’s length, because it would
                       not have a parent organization with its own particular interests. In
                       addition, a stand-alone agency may be in a better position to ensure that
                       safety and soundness and mission are more equitably overseen, because it
                       would not be affiliated with a government department that has another
                       focus, such as HUD.28

                       One disadvantage of having a stand-alone agency is that the administration
                       may not be able to exercise direct control as easily over the agency even if
                       there were a perceived need to do so in the public interest. A stand-alone
                       agency would not have a formal relationship with a potentially powerful
                       ally, such as a cabinet-level department, that could facilitate seeking

                       26
                        Most regulators of financial institutions are stand-alone agencies; however, a few are independent
                       offices within executive branch agencies.
                       27
                         GAO/GGD-91-90 and GAO/GGD-94-38.
                       28
                         Congress removed FCA from the Department of Agriculture in 1953 and established it as an
                       independent agency to insulate it from political influence. See GAO/GGD-91-90.



                       Page 14                                          GAO/GGD-97-139 Single Housing GSE Regulator
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assistance or other support. Further, a new stand-alone agency would
probably be relatively small with no track record other than that of the
predecessor agencies to rely upon and lend credibility to its actions.
Although it would be larger than FHFB and OFHEO are individually, it might
not immediately acquire the level of government prominence needed for
overseeing Fannie Mae, Freddie Mac, and the FHLBank System.
Nonetheless, a stand-alone agency structure for a combined regulator
would probably have greater prominence than either FHFB or OFHEO
individually.

The advantages and disadvantages of having a new regulator that is set up
as an independent office within an executive branch agency would vary
depending on the agency. HUD and Treasury would be the most appropriate
agencies to be considered because of their roles in housing and finance.
These roles are the basis for some advantages but also create the potential
for conflicts. HUD is the principal federal department responsible for
programs dealing with housing, community development, and fair housing
opportunities. HUD’s public policy focus on housing could serve to help
ensure that the GSEs fulfilled their mission of supporting housing. Further,
HUD has knowledge about the housing finance system that would be useful.
Although OFHEO has functioned independently within HUD, establishing a
new housing GSE regulator within HUD could create the potential for
conflict with HUD’s role as a housing promoter, unless the new regulatory
office had at least the same level of independence as OFHEO. Having an
office within HUD responsible for safety and soundness supervision may
conflict with some partnership arrangements HUD has initiated with Fannie
Mae, Freddie Mac, and other HUD-affiliated agencies, such as the Federal
Housing Administration and the Government National Mortgage
Association.29 Finally, HUD’s history of operational weaknesses and
inefficiencies could taint the reputation and hamper the effectiveness of
any office within it.30 However, we have not reviewed OFHEO’s relationship
with HUD or potential impacts this arrangement may have on OFHEO’s
operations.

29
 The Federal Housing Administration is a federally sponsored agency that insures lenders against loss
on residential mortgages.

The Government National Mortgage Association is a government-owned corporation within HUD that
establishes secondary market facilities for residential mortgages, guarantees mortgage-backed
securities composed of FHA-insured loans that are issued by private lenders, and increases the overall
supply of credit available for housing by providing a vehicle for channeling funds from the securities
market into the mortgage market.
30
 For additional information on our concerns with HUD’s management and operations and HUD’s
ongoing plans for improvement, see High-Risk Series: Department of Housing and Urban Development
(HR-97-12, Feb. 1997). On June 26, 1997, HUD announced a management reform plan—called HUD
2020—to stamp out fraud, waste, and abuse and improve performance.



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               If the office were created within Treasury, it could benefit from Treasury’s
               financial expertise and prominence. A Treasury affiliation could also
               create more opportunities for coordination with OTS and OCC, both of
               which are independent offices within Treasury. OTS and OCC examiners and
               other staff could share expertise with the GSE regulator’s staff. Currently,
               OFHEO supplements its examination staff with examiners from OCC. Finally,
               this affiliation would also reinforce the importance of safety and
               soundness oversight as the regulator’s top priority to protect the
               government from risk should any GSE fail and would ensure that the GSEs
               remain strong enough to carry out their missions.

               Having an office within Treasury also has several disadvantages. GSEs
               could be viewed as a Treasury competitor because they issue what could
               be viewed as competing debt, and Treasury could become a GSE creditor.
               Under these circumstances, its objectivity and arm’s-length status could be
               questioned. This potential conflict stems from Treasury having two
               specific responsibilities relating to GSEs. First, Treasury is authorized to
               approve or disapprove the timing and terms of new GSE debt issuances.31
               Because GSE debt is part of the U.S. agency debt market, these issuances
               could compete in some way with Treasury’s own debt securities. Second,
               Treasury is authorized to extend credit to the housing GSEs, among others.
               Specifically, 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. Use of the lines of credit is subject to Treasury’s discretion, and,
               according to Treasury officials, there are no rules or guidelines governing
               situations when such credit may be granted. An additional disadvantage of
               establishing an independent office within Treasury is that this could
               strengthen the belief among GSE investors that their obligations have an
               implicit government backing.


               We considered both a board and a single director structure for governing a
Board Versus   single regulatory agency and found that the board structure best fits our
Directorship   criteria for an effective regulator for many of the same reasons that a
               stand-alone agency is preferable to an executive branch agency. In fact,
               the stand-alone independent financial regulatory agencies—the Board of
               Governors of the Federal Reserve, Federal Deposit Insurance Corporation,
               National Credit Union Administration, Securities and Exchange

               31
                 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.



               Page 16                                         GAO/GGD-97-139 Single Housing GSE Regulator
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Commission, and Commodity Futures Trading Commission—have boards
or commissions. Among stand-alone GSE regulators, both FCA and FHFB are
led by boards. In contrast, financial regulators, such as OCC, OTS, and,
among the GSEs, OFHEO, which are executive branch agencies, are led by
individual directors. Both structures have advantages and disadvantages,
and their strengths can also be weaknesses depending on the context.

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. For example, Treasury and HUD could be
permanently represented on the board. Another advantage would be that
the Secretaries, or their designees, would provide valuable experience in
safety and soundness oversight, finance, and housing policy. They would
also provide important links to the two government departments most
affected by the GSEs’ performance while affording a structure where any
potential conflicts could be addressed. A chair could be appointed by the
president with the advice and consent of Congress. A larger board could
include a person with expertise in the low- and moderate-income housing
fields. To help provide stability and political balance, terms could exceed 4
years and be staggered.

According to some officials with whom we spoke, one disadvantage in
having a board is that it could be less efficient than a single director.
Having a board necessarily involves consultation among its members
directly or through staff. It is logical to assume that resulting inefficiencies
would increase as board size increased. Thus, a small board can be more
efficient than a large board. Unlike a directorship where there is a single
person accountable, another disadvantage of a board structure is that it
may make determining individual accountability for actions difficult.
However, part of this potential inefficiency can be overcome by placing a
presidentially appointed chair or chief executive officer in charge of daily
operations of the agency and having other members of the board serve
part time.32 Another disadvantage of a small board structure is that it may
face challenges in complying with the Government in the Sunshine Act,
which generally requires meetings held by regulatory bodies to be public.33
Because a meeting requires a quorum, the Government in the Sunshine Act


32
 Whether board members should serve in a full- or part-time capacity is debatable. Opinions varied on
whether part-time positions would attract more or less qualified candidates.
33
 See Pub. L. No. 94-409 (1976) 5 U.S.C. § 552b. The Government in the Sunshine Act requires that
every agency meeting must be open to the public unless the meeting falls within a delineated
exemption.



Page 17                                          GAO/GGD-97-139 Single Housing GSE Regulator
               B-277390




               can create a problem for three-member boards to the extent that
               discussions between two members could be subject to the Government in
               the Sunshine Act.

               Other officials we spoke with view a directorship as a higher profile
               position than board membership and thought that this would be an
               advantage and make a director-led agency more prominent and ultimately
               lead to more qualified nominees for the position. Another advantage is that
               a director-led agency would establish a clear line of accountability. One
               possible disadvantage is that if the director were viewed as weak or
               inappropriately influenced by the regulatees, there is no means to bring
               balance to the oversight. Additionally, although vacancies on a board can
               impede oversight, a single-director structure has a more serious problem
               when the position is left vacant for long periods.34

               Among the financial regulators, we could not find any examples of
               stand-alone agencies that were not headed by boards or commissions. 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.


               Creating a well-functioning regulator for housing GSEs cannot be achieved
Other Issues   by simply merging the functions of OFHEO and FHFB, because regulatory
               issues would have to be addressed. In our 1991 report on GSEs, we
               identified the following issues as important. First, as mentioned in our
               discussion, if mission and safety and soundness oversight are vested in the
               same regulatory body, the regulator should not have a role, other than
               oversight, in the governance of corporate affairs of GSEs. Second, GSEs
               should be responsible for funding all of the costs associated with their
               federal oversight. Therefore, Fannie Mae and Freddie Mac should be
               paying for their mission-related oversight through assessments.

               34
                 With respect to OFHEO, the 1992 Act provides that the Deputy Director shall serve as the acting
               Director in the event of the Director’s death, resignation, sickness, or absence until the Director’s
               return or the appointment of a successor by the president with the advice and consent of the Senate.
               12 U.S.C. § 4512(e)(2). Statutory schemes also exist for filling vacancies and absences in other offices
               led by a Director. See 12 U.S.C. § 4 (OCC) and 12 U.S.C. § 1462a(c)(3) (OTS). Under the OCC
               provision, the First Deputy Comptroller would be first among the Deputy Comptrollers to succeed or
               act in the capacity of the Comptroller. Under the OTS provision, a vacancy is to be filled by
               presidential appointment, with the advice and consent of the Senate.



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                     Third, the regulator should have all the powers and authorities granted
                     other safety and soundness regulators. Specifically, it should have the
                     authority to set rules that establish boundaries for safe GSE operations in
                     order to protect the government’s interest in achieving a GSE’s public
                     purpose. A regulator should also have the authority and responsibility to
                     monitor and examine all GSE operations and have access to all GSE books
                     and records. The purpose of this authority is to have an ongoing
                     assessment of the financial health of each GSE and to ensure that its
                     operations are advancing the purposes of its charter. The regulator needs
                     the authority to establish capital standards to provide some ensurance that
                     an adequate buffer exists to absorb unforeseen losses and keep them from
                     becoming taxpayer losses. Further, the regulator must have the authority
                     to enforce regulations and capital requirements through enforcement
                     actions. Finally, the regulator would need the authority to levy
                     assessments to cover costs of supervision.

                     An additional issue that may need to be addressed is whether a new
                     regulatory agency should be 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, compared
                     with other regulators, has less control 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, the appropriations process does provide an
                     additional mechanism for Congressional oversight.


                     On June 30 and July 1, 1997, we obtained oral comments on a draft of this
Agency Comments      report from senior officials responsible for GSE oversight at OFHEO, FHFB,
and Our Evaluation   HUD, and Treasury and from senior officials of Fannie Mae, Freddie Mac,
                     and FHLBanks. Specifically, we met with OFHEO’s Acting Director, Chief
                     Economist, and Director of Congressional Relations; FHFB’s Managing
                     Director and Director of Congressional Relations; HUD’s Director,
                     Government-Sponsored Enterprises, Associate Deputy Assistant Secretary
                     for Economic Affairs, Assistant General Council for GSEs/RESPA Division,
                     and Program Analyst; Treasury’s Acting Director for the Office of Policy,
                     Planning and Analysis and Economist from the Office of Financial
                     Institutions; Fannie Mae’s Director of Regulatory Policy; Freddie Mac’s
                     Director of Agency Relations, Director of Public Policy, Assistant General
                     Council, and Vice President of Financial Research; Senior Vice Presidents



                     Page 19                              GAO/GGD-97-139 Single Housing GSE Regulator
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from the FHLBanks of Atlanta, Boston, and San Francisco representing
the Council of FHLBanks; FHLBank of Chicago’s President and External
Affairs Representative; and FHLBank of New York’s President.

OFHEO, HUD, FHFB, Fannie Mae, and Freddie Mac officials noted that the
current oversight arrangement is working well and they saw no compelling
reasons for change. OFHEO officials noted that although in theory there is
merit in creating a single regulator for the housing GSEs and in combining
safety and soundness regulation, the current arrangement appears to be
working well. To date, they said, coordination with HUD in reviewing new
GSE programs has worked well. HUD officials also said that the relationship
with OFHEO has been working well and provides appropriate coordination
for avoiding unnecessary duplication. FHFB officials added that if changes
were to be made, they would prefer an oversight arrangement that
combined safety and soundness with mission oversight in one independent
regulatory body. We have not studied the regulatory effectiveness of FHFB,
OFHEO, or HUD, or the effectiveness of coordination between OFHEO and
HUD. Therefore, we have no position on the effectiveness of the current
regulatory oversight of the housing GSEs. However, our experience in
studying the regulation of financial institutions has shown that it is best to
make improvements in regulatory oversight before crises occur and the
government is forced to make quick and costly decisions.

FHFB, Fannie Mae, and Freddie Mac officials said they doubted that
efficiencies or cost savings could be achieved by creating a single
regulator. In addition, Fannie Mae and Freddie Mac officials said any
change would be disruptive without providing the benefits contemplated.
We do not claim that significant costs could be saved by creating a single
regulator, although some costs could be saved by combining
administrative functions. However, as we note in the report, the more
important efficiencies to be attained relate to sharing of expertise and
synergies that could be created among examinations staff and other
technical experts.

OFHEO  officials said they believe OFHEO has established a strong record as
an independent regulator. They agreed with the report’s observations on
the appropriations process and expressed some concern that a GSE could
attempt to use the appropriations process to change a regulator’s budget
or influence a regulatory decision. They noted, and we agree, that
addressing this issue would not require making an organizational change
in the housing GSE regulators.




Page 20                              GAO/GGD-97-139 Single Housing GSE Regulator
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HUD officials criticized the report for not adequately reflecting regulatory
changes made since the 1992 Act became effective or how well the current
structure is working in regard to Fannie Mae and Freddie Mac. They felt
that their efforts in establishing affordable housing goals were largely
unacknowledged in the draft. The regulatory changes made since 1992
were described in the background section of the draft. We added a
reference to some of our previous work that addressed HUD’s efforts in
establishing affordable housing goals (see pp. 2 and 3). We note that the
current report was not intended to evaluate those efforts or HUD’s
performance.

In addition, HUD officials pointed out that their expertise goes beyond
housing finance. They also questioned whether an independent regulator
would have as much stature as a cabinet-level agency. We specifically
noted that a board structure would provide the opportunity for HUD’s
expertise to be represented by including the Secretary of HUD. A board, we
noted, would also provide different perspectives, prestige, and stability for
a GSE regulator. We also pointed out that a potential disadvantage of an
independent agency was that it lacks the backing of a cabinet-level agency.

Both Fannie Mae and Freddie Mac officials emphasized that they believe
that the differences in the mission, structure, and operations of their
businesses and the FHLBank System make the application of our
principles regarding a single housing GSE regulator inappropriate. System
officials had mixed views on this issue. As we noted in our draft, although
the GSEs operate differently, there are similarities in the risks they manage
and in their missions. We believe the housing GSE regulators would be
more effective if combined and authorized to oversee both safety and
soundness and mission compliance and that such a combined regulator
could take into account differences in operations.

The Council did not have a position on creating a single housing GSE
regulator or whether safety and soundness and mission compliance
oversight should be vested in the same regulatory entity. It raised the issue
of whether there should be an oversight mechanism for the regulator. We
note that Congress performs a general oversight role and it typically has
provided us the authority to audit and review GSE regulators in its behalf.
Another vehicle for congressional oversight is inspectors general. The
Chicago and New York bank officials generally agreed with our report.




Page 21                              GAO/GGD-97-139 Single Housing GSE Regulator
B-277390




The Department of the Treasury does not have a position on whether a
single housing GSE regulator should be created, according to officials with
whom we spoke.

All officials provided some technical comments that we incorporated in
the text as appropriate.


As arranged with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 10 days after the
date of this letter. At that time, we will distribute copies of the report to
the Ranking Minority Member of your Subcommittee; the Chairman and
Ranking Minority Member of the Subcommittee on Financial Institutions
and Regulatory Relief, Senate Banking Committee; the Acting Director of
OFHEO; the Chairman of FHFB; the Secretary of the Department of Housing
and Urban Development; the Secretary of the Treasury; Fannie Mae;
Freddie Mac; the FHLBanks; and other interested parties. Copies will also
be made available to others upon request.

Major contributors to this report are listed in the appendix. If you have any
questions about the report, please call me or M. Kay Harris on
(202) 512-8678.

Sincerely yours,




Jean Gleason Stromberg
Director, Financial Institutions
  and Markets Issues




Page 22                              GAO/GGD-97-139 Single Housing GSE Regulator
Page 23   GAO/GGD-97-139 Single Housing GSE Regulator
Contents



Letter                                                                                            1


Appendix                                                                                         26

Major Contributors to
This Report
Related GAO Products                                                                             28




                        Abbreviations

                        FCA       Farm Credit Administration
                        FHFB      Federal Housing Finance Board
                        FIRREA    Financial Institutions Reform, Recovery, and Enforcement
                                       Act
                        GSE       government-sponsored enterprise
                        HUD       Department of Housing and Urban Development
                        MBS       mortgage-backed securities
                        OCC       Office of the Comptroller of the Currency
                        OFHEO     Office of Federal Housing Enterprise Oversight
                        OTS       Office of Thrift Supervision


                        Page 24                          GAO/GGD-97-139 Single Housing GSE Regulator
Page 25   GAO/GGD-97-139 Single Housing GSE Regulator
Appendix

Major Contributors to This Report


                        Thomas J. McCool, Associate Director, Financial Institutions
General Government        and Markets Issues
Division, Washington,   M. Kay Harris, Assistant Director
D.C.                    Orice M. Williams, Evaluator-in-Charge
                        Katherine D. Kitzmiller, Secretary
                        Donna M. Leiss, Communication Analyst


                        Paul G. Thompson, Senior Attorney
Office of General
Counsel, Washington,
D.C.




                        Page 26                             GAO/GGD-97-139 Single Housing GSE Regulator
Page 27   GAO/GGD-97-139 Single Housing GSE Regulator
Related GAO Products


              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-96-104R, 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).



(233521)      Page 28                             GAO/GGD-97-139 Single Housing GSE Regulator
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