The Federal National Mortgage Association in a Changing Economic Environment

RCED-85-102: Published: Apr 15, 1985. Publicly Released: Apr 15, 1985.

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Pursuant to a congressional request, GAO reported on: (1) how the secondary market for residential mortgages is changing and the Federal National Mortgage Association's (FNMA) role in that market; (2) the privileges and constraints that affect FNMA in its public-purpose role and its profitability as a shareholder-owned corporation; (3) the interest rate and credit risks that FNMA incurs; and (4) how the Departments of Housing and Urban Development (HUD) and the Treasury, as federal regulators, oversee FNMA activities.

In carrying out this review, GAO did not have legal access to all the information needed and had to rely on information that FNMA voluntarily provided. GAO found that, in 1981, two initiatives FNMA took were successful in producing earnings to partially offset the negative interest margins experienced in 1981 through 1984: (1) increasing fee income; and (2) earning money from the positive interest margin on the large volume of mortgages purchased. GAO also found that FNMA probably increased its exposure to foreclosure when it added a large volume of loans to its portfolio. FNMA developed standard mortgage instruments and practices and helped create a national market in residential loans. In performing this role, FNMA was provided with a variety of financial supports, but its business was limited to the residential secondary mortgage market exclusively. Treasury authority to purchase FNMA securities allowed FNMA to receive the highest private quality rating possible for its debt and to borrow at interest rates close to those of the Treasury. GAO found that certain benefits declined while FNMA responded to new market demands, including: (1) the primary and secondary mortgage market grew; (2) the thrift industry was deregulated; and (3) other federal credit agencies became active. Congress recognized that safeguards, in terms of HUD and Treasury oversight, were needed to ensure that FNMA would carry out its public functions and use its borrowing powers in a responsible way.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Congress took no action on this recommendation.

    Matter: To improve the regulatory, oversight, and evaluation functions relative to FNMA, Congress should establish by legislation a permanent oversight function within HUD or some other federal regulatory entity that will monitor FNMA activities, evaluate how well it performs its public policy objectives, and periodically report to Congress on these matters.

  2. Status: Closed - Implemented

    Comments: Congress took no action on this recommendation.

    Matter: To improve the regulatory, oversight, and evaluation functions relative to FNMA, Congress should clarify in legislation the regulatory role it desires, particularly as regards aspects of FNMA operations such as its portfolio operations which expose the federal government to financial risk.

  3. Status: Closed - Not Implemented

    Comments: Congress took no action on this recommendation.

    Matter: Congress should provide GAO with the authority to audit FNMA financial records and evaluate its programs with the right to access all FNMA corporate records.

 

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