oversight

Federal Housing Enterprises: Operations of the Office of Federal Housing Enterprise Oversight

Published by the Government Accountability Office on 1997-10-30.

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

                          United States General Accounting Office

GAO                       Testimony
                          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
                          FEDERAL HOUSING
on Thursday
October 30, 1997          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
Summary

Federal Housing Enterprises: Operations of
the Office of Federal Housing Enterprise
Oversight
               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 test2 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


               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.



               Page 1                                                                              GAO/T-GGD-98-25
Summary
Federal Housing Enterprises: Operations of
the Office of Federal Housing Enterprise
Oversight




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 trillion3 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.




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.



Page 2                                                                             GAO/T-GGD-98-25
Statement

Federal Housing Enterprises: Operations of
the Office of Federal Housing Enterprise
Oversight
               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 19921 (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 report3 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 trillion4 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.



               Page 3                                                                             GAO/T-GGD-98-25
                               Statement
                               Federal Housing Enterprises: Operations of
                               the Office of Federal Housing Enterprise
                               Oversight




                               The federal government’s creation and continued sponsorship of Fannie
OFHEO’s Mission Is to          Mae and Freddie Mac have created the perception in the financial markets
Help Ensure the                that the government may choose to provide financial assistance to them in
Enterprises’ Safety            a financial emergency, even though there is no statutory requirement to do
                               so. Recognizing the potential financial risks the enterprises’ activities pose
and Soundness                  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   Congress established and chartered the enterprises as
a Vital Role in the U.S.       government-sponsored, privately owned and operated corporations to
Housing Finance System         enhance the availability of mortgage credit across the nation during both
                               good and bad economic times. It is widely accepted that the enterprises’
but Also Involve Financial     activities have generated benefits to home-buyers, such as lower mortgage
Risks                          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


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


                               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.



                               Page 4                                                                            GAO/T-GGD-98-25
                               Statement
                               Federal Housing Enterprises: Operations of
                               the Office of Federal Housing Enterprise
                               Oversight




OFHEO Is Required to Develop   As required by the act, OFHEO is to carry out its oversight function in part
Capital Standards              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.

OFHEO Also Has the Authority   The act also gave OFHEO broad authority and responsibility to examine
to Conduct Annual              the enterprises and requires annual on-site examinations.8 At such
Examinations                   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.




                               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.
                               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.



                               Page 5                                                                            GAO/T-GGD-98-25
                                Statement
                                Federal Housing Enterprises: Operations of
                                the Office of Federal Housing Enterprise
                                Oversight




                                In OFHEO’s planning process and its published documents, the
OFHEO’s                         organization has consistently underestimated the time necessary to
Development of a                complete major components of the stress test and risk-based capital
Stress Test and                 standards. For example, in 1995 OFHEO estimated that the final rule
                                would be issued in May 1997, but OFHEO now expects that the process
Risk-Based Capital              will not be completed until 1999. We identified several reasons why
Standards Has Been              OFHEO did not comply with the statutory deadline and found that OFHEO
                                faces continuing challenges in meeting its current estimate. Thus, we
Protracted                      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            Our review identified a number of reasons why OFHEO was not able to
Delayed by the Complexity       comply with the December 1, 1994, deadline and for the continuing delays
of the Mandate and              in the development of the stress test and risk-based capital standards. The
                                following reasons are among the more significant:
OFHEO’s Decision to
Develop a Comprehensive     •   OFHEO’s statutory mandate to develop a stress test and risk-based capital
Stress Test                     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



                                Page 6                                                       GAO/T-GGD-98-25
                               Statement
                               Federal Housing Enterprises: Operations of
                               the Office of Federal Housing Enterprise
                               Oversight




                               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         Our review also found that OFHEO faces several continuing challenges in
Challenges in Completing       completing the stress test and risk-based capital standards development
the Stress Test and            process by 1999, as currently planned. These challenges include the need
                               to (1) coordinate an interagency review process in which OFHEO officials
Risk-Based Capital             are to share the technical components of the stress test with staff from the
Standards by 1999              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



                               Page 7                                                       GAO/T-GGD-98-25
                           Statement
                           Federal Housing Enterprises: Operations of
                           the Office of Federal Housing Enterprise
                           Oversight




                           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.


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


OFHEO Has Not Fully        OFHEO established an examination plan in September 1994 that provided
Implemented Its            for a 2-year cycle for the assessment of six “core” risks, such as interest
Examination Schedule and   rate and credit,9 facing the enterprises. Although OFHEO identified six
                           core risks, the plan stipulated that examiners were to cover these risks in
Plan                       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.



                           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.



                           Page 8                                                                             GAO/T-GGD-98-25
                             Statement
                             Federal Housing Enterprises: Operations of
                             the Office of Federal Housing Enterprise
                             Oversight




                             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.


Limited Resources            In May 1995, we reported that limited staff resources had impeded
Allocated to the             OFHEO’s initial efforts to implement the 1994 plan.12 This situation
Examination Office and       persisted between 1995 and 1997. As of June 1997, OFHEO’s examination
                             office had 17 authorized positions, of which 12 were reserved for line
Attrition Contributed to     examiners directly responsible for conducting examinations.13 In its most
OFHEO’s Inability to Fully   recently completed core risk examination, which concluded in May 1997,
Implement the 1994 Plan      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 positions15 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

                             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.
                             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.



                             Page 9                                                                              GAO/T-GGD-98-25
                          Statement
                          Federal Housing Enterprises: Operations of
                          the Office of Federal Housing Enterprise
                          Oversight




                          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.


OFHEO Plans to Reassess   During the course of our audit work, OFHEO officials told us that the
Its Examination Program   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.




                          Page 10                                                       GAO/T-GGD-98-25
                     Statement
                     Federal Housing Enterprises: Operations of
                     the Office of Federal Housing Enterprise
                     Oversight




                     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.


                     I would like to conclude by reiterating that OFHEO has a crucial role in
Concluding Remarks   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.


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




(233545)             Page 11                                                       GAO/T-GGD-98-25
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                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested