Federal Housing Enterprises:

HUD's Mission Oversight Needs to Be Strengthened

GGD-98-173: Published: Jul 28, 1998. Publicly Released: Jul 28, 1998.

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Pursuant to a congressional request, GAO assessed the Department of Housing and Urban Development's (HUD) overall housing mission oversight of the two largest government-sponsored enterprises, which are the Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac), focusing on: (1) HUD's legal basis, approach, and rationale for setting the numeric housing goals at their current levels; (2) the enterprises' compliance with the goals and HUD's assessment of the goals' impacts on promoting homeownership and housing opportunities; (3) HUD's procedures and efforts to verify goal compliance data; (4) the enterprises' multifamily mortgage purchase activities under the housing goals and HUD's assessment of these activities' effects on promoting housing opportunities; and (5) HUD's implementation of its general regulatory and new mortgage program approval oversight authorities under the 1992 Federal Housing Enterprises Financial Safety and Soundness Act.

GAO noted that: (1) the 1992 Act provides the HUD Secretary with the authority to set the final housing goals, and establish six general, but potentially competing, factors to guide the Secretary's decisionmaking process; (2) the 1992 Act directed the HUD Secretary to balance: (a) the ability of the enterprises to lead the (mortgage finance) industry in financing the mortgages of targeted groups; and (b) the need to maintain the enterprises' financial soundness; (3) available evidence for HUD's final housing goal rule indicates that the HUD Secretary generally adopted a conservative approach to setting the final goals in December 1995 for the period 1996 through 1999; (4) this conservative approach placed a high priority on maintaining the enterprises' financial soundness; (5) according to annual data that Fannie Mae and Freddie Mac provided to HUD, the enterprises have increased their share of targeted mortgage purchases since 1993 and were in compliance with the final housing goals in 1996 and 1997; (6) HUD has a basic oversight responsibility to determine whether the housing goals are resulting in enhanced housing opportunities for targeted groups because this was the intent of the 1992 Act; (7) HUD has ongoing research projects to assess housing needs and households served by goal-oriented mortgage purchases, but its current research agenda does not address several highly relevant issues that are necessary to fully understand the goals' impacts; (8) HUD has implemented some limited procedures to verify the accuracy of the enterprises' reported goal compliance data; (9) for an enterprise that is not in compliance with the housing goals, HUD's final housing goal rule may provide regulatory incentives to employ risk-management strategies that help the enterprise meet or exceed the numeric goals; (10) the effects of these risk management strategies on enhancing housing opportunities for targeted groups are not clear; (11) there is also available information suggesting that the enterprises' risk-management strategies involve offsetting tradeoffs that may serve to limit lenders' incentives to originate affordable multifamily mortgages; (12) HUD has not fully implemented a procedure to assess sophisticated enterprise financial activities under its general regulatory and new mortgage program approval authorities under the 1992 Act; and (13) HUD initiated a process to assess the relationship between the enterprises' nonmortgage investments and housing mission in 1997, but this process has not been completed.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: HUD is awarding a contract to a vendor by September 30, 2000, to implement a program to assess the accuracy of housing goal compliance data.

    Recommendation: To strengthen HUD's capacity as the enterprises' housing mission regulator and enhance, to the extent consistent with financial soundness concerns, housing affordability and opportunities for targeted borrowers, the Secretary of Housing and Urban Development should develop and implement a program to assess the accuracy of housing goal compliance data. The HUD Secretary should also coordinate any such reviews with the Office of Federal Housing Enterprise Oversight.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: HUD has entered into contracts with the Urban Institute, Abt Associates, and academic economists to address these issues. Some of the studies are completed and some are ongoing. These studies include underwriting, default analyses, CRA securitization, capital flows in underserved neighborhoods, and long-term impacts of GSE funding in underserved neighborhoods. HUD has also conducted in-house research cataloging the use of credit enhancements in financing single-family and multifamily properties with comparison between GSE and non-GSE financial providers.

    Recommendation: To strengthen HUD's capacity as the enterprises' housing mission regulator and enhance, to the extent consistent with financial soundness concerns, housing affordability and opportunities for targeted borrowers, the Secretary of Housing and Urban Development should develop a better understanding of whether the housing goals are enhancing housing affordability and opportunities for targeted groups as intended by the 1992 Act by conducting research on the following issues: (1) the goals' effects on mortgage interest rates and associated loan terms for targeted groups; (2) the effects of credit enhancements on enhancing housing opportunities; and (3) the extent to which the housing goal rule may provide the enterprises with regulatory incentives to use credit enhancements.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: HUD contracted with Abt Associates to review the enterprises' nonmortgage investments and to provide expert financial market expertise. Abt has made an expert with financial market expertise available and is nearing completion on its study on nonmortgage investments.

    Recommendation: To strengthen HUD's capacity as the enterprises' housing mission regulator and enhance, to the extent consistent with financial soundness concerns, housing affordability and opportunities for targeted borrowers, the Secretary of Housing and Urban Development should continue implementing the existing process to monitor the enterprises' use of nonmortgage investments. Ensure that expertise is available to help ensure that the enterprises' financial activities are consistent with their housing mission.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: On January 6, 1999, HUD submitted a cost proposal and proposed statutory language to OMB. HUD subsequently submitted this information to the House Committee on Appropriations, Subcommittee on VA, HUD, and Independent Agencies.

    Recommendation: To strengthen HUD's capacity as the enterprises' housing mission regulator and enhance, to the extent consistent with financial soundness concerns, housing affordability and opportunities for targeted borrowers, the Secretary of Housing and Urban Development should collect information on the necessary costs for effectively overseeing the enterprises, including the necessary costs to implement the recommendations in this report, and develop a proposal for congressional consideration that would require the enterprises to reimburse HUD for these costs.

    Agency Affected: Department of Housing and Urban Development

 

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