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Testimony: 

Before the Committee on Banking, Housing, and Urban Affairs, U.S. 
Senate: 

United States Government Accountability Office: 
GAO: 

For Release on Delivery: 
Expected at 10:00 a.m. EST: 
Thursday, March 6, 2008: 

Housing Government-Sponsored Enterprises: 

A Single Regulator Will Better Ensure Safety and Soundness and Mission 
Achievement: 

Statement of William B. Shear, Director: Financial Markets and 
Community Investment: 

GAO-08-563T: 

GAO Highlights: 

Highlights of GAO-08-563T, a testimony before the Committee on Banking, 
Housing, and Urban Affairs, U.S. Senate. 

Why GAO Did This Study: 

The housing government-sponsored enterprises (GSEs)—Fannie Mae, Freddie 
Mac, and the Federal Home Loan Bank System (FHLBank System), play a 
critical role in the nation’s housing finance system. However, concerns 
exist that the fragmented federal oversight structure for the GSEs is 
not well positioned to help ensure that they operate in a safe and 
sound manner and fulfill their housing missions. 

This testimony provides information on the GSEs’ missions and risks, 
the current regulatory structure, and proposed regulatory reforms. 

To prepare this testimony, GAO relied on a substantial body of previous 
work and updated its analysis in light of recent events. 

What GAO Found: 

While the GSEs provide certain public benefits, they also pose 
potential risks. Fannie Mae and Freddie Mac’s primary activity involves 
purchasing mortgages from lenders and issuing mortgage-backed 
securities that are either sold to investors or held in the GSEs’ 
retained portfolio. The 12 FHLBanks traditionally made loans to their 
members and more recently instituted programs to purchase mortgages 
from their members and hold such mortgages in their portfolios. While 
not obligated to do so, the federal government could provide financial 
assistance to the GSEs, if one or more experienced financial 
difficulties, that could result in significant costs to taxpayers. Due 
to the GSEs’ large size, the potential also exists that financial 
problems at one or more of the GSEs could have destabilizing effects on 
financial markets. 

The current housing GSE regulatory structure is fragmented and not well 
equipped to oversee their financial soundness or housing mission 
achievement. The Office of Federal Housing Enterprise Oversight (OFHEO) 
is responsible for safety and soundness oversight of Fannie Mae and 
Freddie Mac while the Federal Housing Finance Board (FHFB) is 
responsible for safety and soundness and mission oversight of the 
FHLBank System. Both regulators lack key statutory authorities to 
fulfill their safety and soundness responsibilities as compared to the 
authorities available to federal bank regulators. For example, OFHEO 
and FHFB are not authorized to limit the asset growth of housing GSEs 
if capital falls below predetermined levels. Moreover, the Department 
of Housing and Urban Development (HUD), which has housing mission 
oversight responsibility for Fannie Mae and Freddie Mac, faces a number 
of challenges in carrying out its responsibilities. In particular, HUD 
may not have sufficient resources and technical expertise to review 
sophisticated financial products and issues. 

Creating a single housing GSE regulator could better ensure consistency 
of regulation among the GSEs. With safety and soundness and mission 
oversight combined, a single regulator would be better positioned to 
consider potential trade-offs between these sometimes competing 
objectives. To be effective, the single regulator must have all the 
regulatory oversight and enforcement powers necessary to address unsafe 
and unsound practices, respond to financial emergencies, assess the 
extent to which the GSEs’ activities benefit home buyers and mortgage 
markets, and otherwise ensure that the GSEs comply with their public 
missions. To ensure the independence and prominence of the regulator 
and allow it to act independently of the influence of the housing GSEs, 
this new GSE regulator should be governed by a board or hybrid board 
structure. 

What GAO Recommends: 

GAO recommends that Congress establish a single regulator that is 
equipped with adequate authorities to fully oversee GSE activities and 
governed by a board or hybrid board structure. 

To view the full product, including the scope and methodology, click on 
[Hyperlink, http://www.GAO-08-563T]. For more information, contact 
William B. Shear at (202) 512-8678 or shearw@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to participate in today's hearing to 
discuss federal oversight of the housing government-sponsored 
enterprises (GSEs), namely Fannie Mae, Freddie Mac, and the Federal 
Home Loan Bank System (FHLBank System). The housing GSEs continue to 
play a critical role in the nation's housing finance system and this 
committee, with input from a number of entities, is assessing the 
contributions the GSEs may be able to make to address currently 
distressed housing market conditions. However, as you know, the housing 
GSEs, which are large and complex organizations with more than $6 
trillion in outstanding obligations, also pose potentially significant 
risks to taxpayers. When Comptroller General Walker testified before 
this committee in April 2005, he stated that the fragmented federal 
regulatory structure for the housing GSEs was not well positioned to 
help ensure that they operate in a safe and sound manner and thereby 
limit such risks.[Footnote 1] Further, he stated that the fragmented 
regulatory structure did not provide adequate assurance to Congress and 
the public that the GSEs were fulfilling their critical housing 
missions. As the Comptroller General testified, and I plan to emphasize 
today, the establishment of a single federal regulator with adequate 
authorities to oversee all housing GSE activities is critical to 
helping ensure that the housing GSEs' financial soundness is secure 
while they continue to provide opportunities to American homeowners. 

To assist the committee in its oversight of the housing GSEs and their 
regulation, my testimony today is divided into two sections. First, I 
will provide an overview of the GSEs and their missions, identify the 
risks they pose to taxpayers and the financial system, and describe the 
current regulatory structure, which is divided among the Office of 
Federal Housing Enterprise Oversight (OFHEO), the Department of Housing 
and Urban Development (HUD), and the Federal Housing Finance Board 
(FHFB). Second, I will identify deficiencies in the current regulatory 
structure and discuss how a single regulator that is endowed with 
adequate legal authorities and governed by a board or hybrid board 
structure is, in our view, the best potential means to help ensure that 
the GSEs meet their housing-related missions while doing so in a safe 
and sound manner. 

To prepare for this testimony, we relied heavily on a substantial 
amount of work that we have done on the housing GSEs and their 
regulatory oversight in the past (see Related GAO Products), and we 
also reviewed our historical positions in light of recent events. We 
conducted this work in Washington, D.C. in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

Overview of the Housing GSEs, Their Risks, and Regulatory Structure: 

I would like to begin my testimony by briefly describing the missions 
and activities of each of the GSEs, and the risks they pose to 
taxpayers. Then I will describe the current GSE regulatory structure. 

The Housing GSEs Share Similar Missions: 

Fannie Mae and Freddie Mac's mission is to enhance the availability of 
mortgage credit across the nation during both good and bad economic 
times by purchasing mortgages from lenders (banks, thrifts, and 
mortgage lenders), which then use the proceeds to make additional 
mortgages available to home buyers. Most mortgages purchased by Fannie 
Mae and Freddie Mac are conventional mortgages, which have no federal 
insurance or guarantee. The companies' mortgage purchases are subject 
to a conforming loan limit that currently stands at a maximum of 
$729,750.[Footnote 2] Although Fannie Mae and Freddie Mac hold some 
mortgages in their portfolios that they purchased, most mortgages are 
placed in mortgage pools to support mortgage-backed securities (MBS). 
MBS issued by Fannie Mae or Freddie Mac are either sold to investors 
(off-balance sheet obligations) or held in their retained portfolios 
(on-balance sheet obligations). Fannie Mae and Freddie Mac guarantee 
the timely payment of principal and interest on MBS that they issue. 

The 12 FHLBanks that constitute the FHLBank System traditionally made 
loans--also known as advances--to their members (typically banks or 
thrifts) to facilitate housing finance and community and economic 
development. FHLBank members are required to collateralize advances 
with high-quality assets such as single-family mortgages. More 
recently, the FHLBanks initiated programs to purchase mortgages 
directly from their members and hold them in their retained 
portfolios.[Footnote 3] This process is similar to Fannie Mae and 
Freddie Mac's traditional business activities, although the FHLBanks do 
not have the authority to securitize mortgages.[Footnote 4] 

The activities of the housing GSEs generally have been credited with 
enhancing the development of the U.S. housing finance market. For 
example, when Fannie Mae and the FHLBank System were created during the 
1930s, the housing finance market was fragmented and characterized by 
regional shortages of mortgage credit.[Footnote 5] It is widely 
accepted that the activities of the housing GSEs helped develop a 
unified and liquid mortgage finance market in this country. 

Housing GSE Activities Involve Significant Risks: 

While the housing GSEs have generated public benefits, their large size 
and activities pose potentially significant risks to taxpayers. As a 
result of their activities, the GSEs' outstanding debt and off-balance 
sheet financial obligations total more than $6 trillion. The GSEs face 
the risk of losses primarily from credit risk, interest rate risk, and 
operational risks.[Footnote 6] Although the federal government 
explicitly does not guarantee the obligations of GSEs, it is generally 
assumed on Wall Street that assistance would be provided in a financial 
emergency. In fact, during the 1980s, the federal government provided 
financial assistance to both Fannie Mae and the Farm Credit System 
(another GSE) when they experienced difficulties due to sharply rising 
interest rates and declining agricultural land values, respectively. 

More recently, the housing GSEs have experienced a variety of 
operational and financial challenges, some of which are described 
below: 

* Starting in 2003, first Freddie Mac and then Fannie Mae were found to 
have engaged in misapplication of relevant accounting standards and 
earnings manipulation. The GSEs also misstated their incomes by 
billions of dollars. Consequently, OFHEO required Fannie Mae and 
Freddie Mac to develop capital restoration plans and both GSEs are 
still operating under regulatory agreements, which require improvements 
in their operations. 

* According to FHFB, some FHLBanks did not embrace and implement 
corporate governance and risk management tools necessary for their 
complex and evolving operations, which resulted in operational and 
financial challenges. In 2004, FHFB entered into supervisory written 
agreements with the FHLBanks in Chicago and Seattle, which required a 
variety of operational improvements. FHFB terminated the written 
agreement with the Seattle bank in January 2007. FHFB also entered into 
a related agreement with the Chicago bank in October 2007. 

* Fannie Mae reported that rising mortgage defaults and falling home 
prices contributed to a $3.6 billion loss for the company in the last 
quarter of 2007. The GSE predicted that housing prices will continue to 
fall and that its financial performance will deteriorate further. 
Similarly, Freddie Mac reported a loss of about $2.5 billion for the 
same period, of which approximately $2.3 billion is attributed to 
losses on derivative trades. 

The GSEs also pose potential risks to the stability of the U.S. 
financial system. In particular, if Fannie Mae, Freddie Mac, or the 
FHLBank System were unable to meet their financial obligations, other 
financial market participants depending on payments from these GSEs in 
turn might become unable to meet their financial obligations. To the 
extent that this risk, called systemic risk, is associated with the 
housing GSEs, it is based primarily on the sheer size of their 
financial obligations. For example, as discussed in OFHEO's 2003 report 
on systemic risk, if either Fannie Mae or Freddie Mac were to become 
insolvent, financial institutions holding the enterprise's MBS could be 
put into a situation where they could no longer rely on those 
securities as a ready source of liquidity.[Footnote 7] Depending on the 
response of the federal government, the financial health of the banking 
segment of the financial services industry could decline rapidly, 
possibly leading to a decline in economic activity. As another example, 
derivatives counterparties holding contracts with a financially 
troubled GSE could realize large losses if the GSE were no longer able 
to meet its obligations. If such an event were to occur, widespread 
defaults could occur in derivatives markets. 

Housing GSE Regulatory Structure Is Divided among OFHEO, HUD, and FHFB: 

The current regulatory structure for the housing GSEs is divided among 
OFHEO, HUD, and FHFB, as described below: 

* OFHEO is an independent office within HUD and is responsible for 
regulating Fannie Mae and Freddie Mac's safety and soundness. OFHEO 
oversees the two GSEs through its authority to examine their 
operations, determine capital adequacy, adopt rules, and take 
enforcement actions. Although OFHEO's financial plans and forecasts are 
included in the President's budget and are subject to the 
appropriations process, the agency is not funded with tax dollars. 
Rather, Fannie Mae and Freddie Mac pay annual assessments to cover 
OFHEO's costs. 

* HUD is responsible for ensuring that Fannie Mae and Freddie Mac are 
accomplishing their housing missions. HUD is to accomplish this 
responsibility through its authority to set housing goals and review 
and approve new programs, and through its general regulatory authority. 
HUD is funded through appropriations. 

* FHFB is responsible for regulating the FHLBank System's safety and 
soundness as well as its mission activities. The agency has a five- 
member board, with the President of the United States appointing four 
members--each of whom serves a 7-year term--subject to Senate approval. 
The fifth member is the Secretary of HUD. The President also appoints 
FHFB's chair. Like OFHEO, FHFB carries out its oversight authorities 
through examinations, establishing capital standards, rule making, and 
taking enforcement actions. FHFB is funded through assessments of the 
12 Federal Home Loan Banks and is not subject to the appropriations 
process. 

Housing GSE Regulatory Reform Is Necessary to Better Ensure Safety and 
Soundness and Mission Achievement: 

We continue to believe that the current fragmented regulatory structure 
for the housing GSEs is inadequate to monitor these large and complex 
financial institutions and their mission activities. Establishing a 
single housing GSE regulator that is equipped with adequate authorities 
and governed by a board would better ensure that the GSEs operate in a 
safe and sound manner and fulfill their housing missions. 

Current GSE Regulatory Structure Is Fragmented, OFHEO Lacks Key 
Authorities, and HUD's Mission Oversight Capacity Is Questionable: 

The current fragmented structure of federal housing GSE regulation does 
not provide for a comprehensive and effective approach to safety and 
soundness regulation. Although the housing GSEs operate differently, 
they share common characteristics as large and complex financial 
institutions. For example, the GSEs rely on sophisticated strategies 
and activities, such as the use of derivatives, to manage the interest 
rate and other risks that are inherent in their operations. In recent 
years, the GSEs, as discussed earlier, have not always demonstrated the 
capacity to effectively manage the risks that they face. 

Moreover, OFHEO, and FHFB to a lesser degree, lack key authorities to 
fulfill their safety and soundness responsibilities, as described 
below: 

* Unlike bank regulators and FHFB, (1) OFHEO's authority to issue cease 
and desist orders does not specifically list an unsafe and unsound 
practice as grounds for issuance and (2) OFHEO's powers do not include 
the same direct removal and prohibition authorities applicable to 
officers and directors. 

* Bank regulators have prompt corrective action authorities that are 
arguably more robust and proactive than those of OFHEO and FHFB. These 
authorities require that bank regulators take specific supervisory 
actions when bank capital levels fall to specific levels or provide the 
regulators with the option of taking other actions when other specified 
unsafe and unsound actions occur.[Footnote 8] Although OFHEO has 
statutory authority to take certain actions when Fannie Mae or Freddie 
Mac capital falls to predetermined levels, the authorities are not as 
proactive or broad as those of the bank regulators.[Footnote 9] OFHEO 
also has established regulations requiring specified supervisory 
actions when unsafe conditions are identified that are not related to 
capital adequacy, but OFHEO's statute does not specifically mention 
these authorities. FHFB's statute does not establish a prompt 
corrective action scheme that requires specified actions when unsafe 
conditions are identified. Although FHFB officials believe they have 
all the authority necessary to carry out their safety and soundness 
responsibilities, the agency has significant discretion in resolving 
troubled FHLBanks. Consequently, there is limited assurance that FHFB 
would act decisively to correct identified problems. 

* Unlike bank regulators---which can place insolvent banks into 
receivership--and FHFB, which can take actions to liquidate an FHLBank, 
OFHEO is limited to placing Fannie Mae or Freddie Mac into a 
conservatorship.[Footnote 10] Thus, it is not clear that OFHEO has 
sufficient authority to fully resolve a situation in which Fannie Mae 
or Freddie Mac is unable to meet its financial obligations. 

In addition to concerns about OFHEO's and FHFB's authorities to fulfill 
their safety and soundness responsibilities, the fragmentation of 
authorities and responsibilities between OFHEO and HUD amplify our 
significant concerns with HUD's capacity as the mission regulator for 
Fannie Mae and Freddie Mac. The ability for a regulator to assess 
tradeoffs that may be present between mission achievement and financial 
soundness, especially in the presence of the housing market turmoil we 
are currently experiencing, is especially important. As stated in our 
previous testimony, HUD officials we contacted said the department 
lacked sufficient staff and resources necessary to carry out its GSE 
mission oversight responsibilities. According to HUD's Director of 
Government-Sponsored Enterprise Oversight, HUD currently has a total of 
about 17 full time positions that are dedicated to GSE mission 
oversight. While HUD's ability to ensure adequate resources for its GSE 
oversight responsibilities is limited, its mission oversight 
responsibilities are increasingly complex. For example, as we have 
noted in the past, it is not clear that HUD has the expertise necessary 
to review sophisticated financial products and issues, which may be 
associated with the department's program review and approval and 
general regulatory authorities.[Footnote 11] In addition, without the 
authority to impose assessments on Fannie Mae and Freddie Mac to cover 
the costs associated with their mission oversight, it would appear that 
HUD will always be challenged to fulfill its GSE mission oversight 
responsibilities. 

A Single Housing GSE Regulator Equipped with Sufficient Authorities and 
Governed by a Board or Hybrid Board Structure Is Critical: 

To address the deficiencies in the current GSE regulatory structure 
that I have just described, we have consistently supported and continue 
to believe in the need for the creation of a single regulator to 
oversee both safety and soundness and mission of the housing 
GSEs.[Footnote 12] A single regulator could be more independent, 
objective, efficient, and effective than separate regulatory bodies and 
could be more prominent than either one alone. We believe that valuable 
synergies could be achieved and expertise in evaluating GSE risk 
management could be shared more easily within one agency. In addition, 
we believe that a single regulator would be better positioned to 
oversee the GSEs' compliance with mission activities, such as special 
housing goals and any new programs or initiatives the GSEs might 
undertake. This single regulator should be better able to assess the 
competitive effects of these activities on all three housing GSEs and 
better able to ensure consistency of regulation for GSEs that operate 
in similar markets. 

Further, a single regulator would be better positioned to consider 
potential tradeoffs between mission requirements and safety and 
soundness considerations, because such a regulator would develop a 
fuller understanding of the operations of these large and complex 
financial institutions. Some critics of combining safety and soundness 
and mission have voiced concerns that doing so could create regulatory 
conflict for the regulator. However, we believe that a healthy tension 
would be created that could lead to improved oversight. The tradeoffs 
between safety and soundness and compliance with mission requirements 
could be best understood and accounted for by having a single regulator 
that has complete knowledge of the financial conditions of GSEs, 
regulates the mission goals Congress sets, and assesses efforts to 
fulfill them. 

Adequate Regulatory Authorities Are Essential: 

It is essential that the new GSE regulator have adequate powers and 
authorities to address unsafe and unsound practices, respond to 
financial emergencies, and ensure that the GSEs comply with their 
public missions. These authorities include (1) cease and desist 
authority related to unsound practices, (2) removal and prohibition 
authority related to officers and directors, (3) prompt corrective 
action authority for inadequate capital levels as well as other unsafe 
and unsound conditions, and (4) authority to resolve a critically 
undercapitalized GSE, which may include placing it into receivership. 
Additionally, the new housing GSE regulator should have the authority 
to adjust as necessary the housing enterprises' minimum and risk-based 
capital requirements to help ensure their continued safety and 
soundness. 

We also believe that the new GSE regulator should be tasked with the 
responsibility of conducting research on the extent to which the 
housing GSEs are fulfilling their housing and community development 
missions. There are already questions about the extent to which the 
housing GSEs' retained mortgage holdings benefit housing finance 
markets. Moreover, studies by federal agencies, academics, and the GSEs 
have estimated the extent to which Fannie Mae's and Freddie Mac's 
activities generate savings to home buyers and have reached differing 
conclusions. Additional studies may be needed to more precisely 
estimate the extent to which the GSEs' activities benefit home buyers. 
Further, there is limited empirical information on the extent to which 
FHLBank advances lower mortgage costs for home buyers or encourage 
lenders to expand their commitment to housing finance. Without better 
information, Congress and the public cannot judge the effectiveness of 
the GSEs in meeting their missions or whether the benefits provided by 
the GSEs' various activities are in the public interest and outweigh 
their financial and systemic risks. 

New GSE Regulator Should Have a Board or Hybrid Board/Director 
Governance Structure: 

In determining the appropriate structure for a new GSE regulator, I 
note that Congress has authorized two different structures for 
governing financial regulatory agencies: a single director and board. 
Among financial regulators, single directors head the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision and 
OFHEO, while boards or commissions run FHFB, the Securities and 
Exchange Commission, and the Board of Governors of the Federal Reserve 
System, among others. The single director model has advantages over a 
board or commission; for example, the director can make decisions 
without the potential hindrance of having to consult with or obtain the 
approval of other board members. 

However, in our previous work, we have stated that a "stand-alone" 
agency with a board of directors would better ensure the independence 
and prominence of the regulator and allow it to act independently of 
the influence of the housing GSEs, which are large and politically 
influential. A governing board may offer the advantage of allowing 
different perspectives, providing stability, and bringing prestige to 
the regulator. Moreover, including the Secretaries of Treasury and HUD 
or their designees on the board would help ensure that GSE safety and 
soundness and housing mission compliance issues are both considered. 

I would note that in other regulatory sectors---besides financial 
regulation---Congress has established alternative board structures that 
could be considered as potential models for the new GSE regulator. One 
such alternative structure would be the hybrid board/director 
governance model. Under such an approach, a Presidentially appointed 
and Senate-confirmed agency head could report to a board of directors 
consisting of secretaries from key executive branch agencies, such as 
Treasury and HUD. Having board members from the same political party 
could lessen some of the tensions and conflicts observed at boards 
purposefully structured to have a split in membership along party 
lines. However, a board composed of members from the same political 
party may not benefit from different perspectives to the same extent as 
a board with members from different political parties. Therefore, an 
advisory committee to the regulator could be formed to include 
representatives of financial markets, housing, and the general public. 
This advisory committee could be required to have some reasonable 
representation from different political parties. 

Regulatory Funding Structure: 

Finally, I would like to comment on issues surrounding the potential 
funding arrangements for a new housing GSE regulator. Exempting the new 
GSE regulator from the appropriations process would provide the agency 
with the financial independence necessary to carry out its 
responsibilities. More importantly, without the timing constraints of 
the appropriations process, the regulator could more quickly respond to 
budgetary needs created by any crisis at the GSEs. However, being 
outside the appropriations process can create tradeoffs. First, while 
the regulator will have more control over its own budget and funding 
level, it could lose the checks and balances provided by the federal 
budget and appropriations processes or the potential reliance on 
increased appropriations during revenue shortfalls. As a result, the 
regulator may need to establish a system of budgetary controls to 
ensure fiscal restraint. 

Second, removing the regulator from the appropriations process could 
diminish congressional oversight of the agency's operations. This 
tradeoff could be mitigated through increased oversight by the 
regulator's congressional authorizing committees, such as a process of 
regular congressional hearings on the new GSE regulator's operations 
and activities. 

Mr. Chairman, this completes my prepared statement. I would be happy to 
respond to any questions that you or other Members of the Committee may 
have. 

[End of section] 

GAO Contacts and Staff Acknowledgments: 

For further information regarding this testimony, please contact 
William B. Shear, Director, at (202) 512-8678 or shearw@gao.gov. 
Individuals making contributions to this testimony include Marianne E. 
Anderson, Wesley M. Phillips, and Karen C. Tremba. 

[End of section] 

Related GAO Products: 

Federal Home Loan Banks: Too Soon to Tell the Potential Impact of 
Excess Stock Rule on the Affordable Housing Program. GAO-07-878R. 
Washington, D.C.: June 22, 2007. 

Housing Government-Sponsored Enterprises: A New Oversight Structure Is 
Needed. GAO-05-576T. Washington, D.C.: April 21, 2005. 

Federal Home Loan Bank System: An Overview of Changes and Current 
Issues Affecting the System. GAO-05-489T. Washington, D.C.: April 13, 
2005. 

Government-Sponsored Enterprises: A Framework for Strengthening GSE 
Governance and Oversight. GAO-04-269T. Washington, D.C.: February 10, 
2004. 

Federal Home Loan Bank System: Key Loan Pricing Terms Can Differ 
Significantly. GAO-03-973. Washington, D.C.: September 8, 2003. 

Financial Regulation: Review of Selected Operations of the Federal 
Housing Finance Board. GAO-03-364. Washington, D.C.: February 28, 2003. 

OFHEO's Risk Based Capital Stress Test: Incorporating New Business Is 
Not Advisable. GAO-02-521. Washington, D.C.: June 28, 2002. 

Federal Home Loan Bank System: Establishment of a New Capital 
Structure. GAO-01-873. Washington, D.C.: July 20, 2001. 

Comparison of Financial Institution Regulators' Enforcement and Prompt 
Corrective Action Authorities. GAO-01-322R. Washington, D.C.: January 
31, 2001. 

Capital Structure of the Federal Home Loan Bank System. GAO/GGD-99- 
177R. Washington, D.C.: August 31, 1999. 

Federal Housing Finance Board: Actions Needed to Improve Regulatory 
Oversight. GAO/GGD-98-203. Washington, D.C.: September 18, 1998. 

Federal Housing Enterprises: HUD's Mission Oversight Needs to Be 
Strengthened. GAO/GGD-98-173. Washington, D.C.: July 28, 1998. 

Risk-Based Capital: Regulatory and Industry Approaches to Capital and 
Risk. GAO/GGD-98-153. Washington, D.C.: July 20, 1998. 

Government-Sponsored Enterprises: Federal Oversight Needed for 
Nonmortgage Investments. GAO/GGD-98-48. Washington, D.C.: March 11, 
1998. 

Federal Housing Enterprises: OFHEO Faces Challenges in Implementing a 
Comprehensive Oversight Program. GAO/GGD-98-6. Washington, D.C.: 
October 22, 1997. 

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

Housing Enterprises: Investment, Authority, Policies, and Practices. 
GAO/GGD-91-137R. Washington, D.C.: June 27, 1997. 

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

Housing Enterprises: Potential Impacts of Severing Government 
Sponsorship. GAO/GGD-96-120. Washington, D.C.: 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's views on the "Federal Home Loan Bank System 
Modernization Act of 1995." B-260498. Washington, D.C.: October 11, 
1995. 

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

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

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

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

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

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

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

[End of section] 

Footnotes: 

[1] See GAO, Housing Government-Sponsored Enterprises: A New Oversight 
Structure Is Needed, GAO-05-576T (Washington, D.C.: Apr. 21, 2005). 

[2] The Economic Stimulus Act of 2008 enacted a temporary increase in 
the conforming loan limit. For mortgages originated between July 1, 
2007, and December 31, 2008, the loan limit for an area will be the 
greater of (1) the existing limit of $417,000 or (2) 125 percent of the 
area median home price, not to exceed a ceiling of 175 percent of the 
statutory limit, or $729,750. 

[3] Mortgages purchased by the FHLBanks contain some lender-provided 
credit enhancements. 

[4] Securitization is the process of aggregating similar financial 
instruments, such as loans or mortgages, into pools and selling 
investors securities that are backed by cash flows from these pools. 

[5] Freddie Mac was established in 1970. 

[6] Credit risk is the possibility of financial loss resulting from 
default by homeowners on housing assets that have lost value; interest 
rate risk is the risk of loss due to fluctuations in interest rates; 
and operational risk includes the possibility of financial loss 
resulting from inadequate or failed internal processes, people, and 
systems or from external events. 

[7] Office of Federal Housing Enterprise Oversight, Systemic Risk: 
Fannie Mae, Freddie Mac, and the Role of OFHEO (Washington, D.C.; Feb. 
4, 2003). 

[8] Capital can be a lagging indicator of unsafe and unsound conditions 
at financial institutions. Declining asset quality is an unsafe and 
unsound condition that may be identified months or years before capital 
declines. 

[9] For example, bank regulators generally are required to take 
specified regulatory actions at earlier stages of capital depletion 
than is OFHEO. Bank regulators also are required to initiate four 
supervisory actions against an undercapitalized institution--including 
restricting asset growth--while OFHEO is mandated to take only two 
actions (not including restricting asset growth). 

[10] According to OFHEO officials, a receivership is empowered to take 
over the assets and operate an entity, assuming all of its powers and 
conducting all of its business as well as removing officers and 
directors. A receiver may place the failed institution into liquidation 
and sell its assets. While a conservator may also remove officers and 
directors of an entity, a conservator is typically appointed to 
conserve rather than dispose of assets. 

[11] See GAO, Government Sponsored Enterprises: Federal Oversight 
Needed for Nonmortgage Investments, GAO/GGD-98-48 (Washington, D.C.: 
Mar. 11, 1998). HUD's general regulatory authority can be used to limit 
or disallow activities that are determined not to support the mission 
of Fannie Mae or Freddie Mac. 

[12] See GAO, Government-Sponsored Enterprises: Advantages and 
Disadvantages of Creating a Single Housing GSE Regulator, GAO/ GGD-97-
139 (Washington, D.C.: July 9, 1997). 

[End of section] 

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