Federal Housing Enterprises:

OFHEO Faces Challenges In Implementing a Comprehensive Oversight Program

GGD-98-6: Published: Oct 22, 1997. Publicly Released: Oct 22, 1997.

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Pursuant to a legislative requirement, GAO assessed the Office of Federal Housing Enterprise Oversight's (OFHEO) capacity to fulfill its mission of helping to ensure the safety and soundness of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), focusing on: (1) identifying the reasons why OFHEO has not issued final risk-based capital standards for the enterprises even though there was a December 1, 1994, deadline for doing so; and (2) OFHEO's implementation of its safety and soundness examination responsibilities.

GAO noted that: (1) to fulfill its statutory safety and soundness mission, OFHEO is to establish risk-based capital standards that are sufficient to withstand the rigors of a complex stress test and implement a comprehensive and timely examination program; (2) to date, OFHEO has not fully completed either of these tasks; (3) OFHEO has not established the risk-based capital standards because it must first develop the stress test; (4) development of a stress test has been protracted primarily due to: (a) the complexity of the development process as specified in the act; and (b) OFHEO's decision in 1994 to develop its own sophisticated stress test rather than adopting and modifying stress tests that were already under development; (5) OFHEO has already missed its December 1994 statutory deadline for completing a stress test and establishing risk-based capital standards by almost 3 years; (6) tasks remaining include making key policy decisions about the stress test and continuing to translate its components into proposed and final rules; (7) GAO believes that it is essential that OFHEO complete the tasks remaining to develop those standards as expeditiously as possible; (8) OFHEO has not fully implemented a timely and comprehensive enterprise safety and soundness examination program; (9) OFHEO established an examination plan in September 1994 that provided for a 2-year cycle for the assessment of six core risks; (10) 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; (11) GAO's analysis found that, among other factors, limited resources allocated to the examination office were largely responsible for OFHEO's inability to comply with the 1994 plan; (12) according to OFHEO officials, the organization plans to reassess its examination strategy and make changes necessary by early 1998 to ensure that its examination staff cover all six core risk areas within a 1-year period; (13) GAO believes that, without a reassessment, and potentially a reallocation of resources, OFHEO may not be able to implement an annual examination cycle by early 1998 that fully covers all risk areas, since the organization has been unable to implement a 2-year cycle with the current assignment of staff to the examination function; and (14) OFHEO could usefully include consideration of different examination cycles and related coverage that could be accomplished with alternative resource levels.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and OEO, should promptly develop a strategy for obtaining the necessary examination office resources, which may involve reallocating OFHEO's existing full-time and contracting positions over time.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight

  2. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and OEO, should promptly identify the most appropriate examination cycle after considering the trade-offs between examination coverage and resource requirements that would be involved.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight: Office of Examination and Oversight

  3. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and OEO, should promptly identify the most appropriate examination cycle after considering the trade-offs between examination coverage and resource requirements that would be involved.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight: Office of Examination and Oversight

  4. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and Office of Examination and Oversight (OEO), should promptly conduct an analysis to determine the examination office staff positions and financial resources that would be needed to cover all core and targeted risk areas within 1- or 2-year examination cycles.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight

  5. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and Office of Examination and Oversight (OEO), should promptly conduct an analysis to determine the examination office staff positions and financial resources that would be needed to cover all core and targeted risk areas within 1- or 2-year examination cycles.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight: Office of Examination and Oversight

  6. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Director, OFHEO, should inform Congress of any problems that may arise in completing the stress test and risk-based capital rules by 1999 and of actions that the organization plans to take to correct such problems.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight

  7. Status: Closed - Implemented

    Comments: The acting director of OFHEO has briefed the Chairman, Subcommittee on Capital Markets, Securities, and Government-Sponsored Enterprises, House Committee on Banking and Financial Services and the Chair of the Senate Committee on Banking on OFHEO's progress on multiple occasions.

    Recommendation: The Director, OFHEO, should report to Congress periodically on the organization's progress toward compliance with its current plan. The Director should include in such reports information on the status of OFHEO's progress toward important milestones, such as its: (1) projected completion of final testing on the financial model that comprises the stress test; (2) progress toward completing the interagency review process; (3) estimated completion of key policy decisions regarding the stress test by early 1998; and (4) progress in translating the components of the stress test into proposed and final rules.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight

  8. Status: Closed - Implemented

    Comments: OFHEO has implemented a plan.

    Recommendation: The Directors, OFHEO and OEO, should promptly develop a strategy for obtaining the necessary examination office resources, which may involve reallocating OFHEO's existing full-time and contracting positions over time.

    Agency Affected: Department of Housing and Urban Development: Office of Federal Housing Enterprise Oversight: Office of Examination and Oversight

 

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