Housing Enterprises: Assessment of OFHEO's Interest Rate Analysis

GAO discussed the Office of Federal Housing Enterprise Oversight's (OFHEO) analysis of the potential effects of a large and rapid interest rate increase on the financial conditions of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). GAO noted that: (1) OFHEO analyzed its own financial projection model as well as those used by Fannie Mae and Freddie Mac; (2) the financial models assumed severe financial conditions, including a sustained interest rate increase, high credit losses, enterprise debt cost increases, and guarantee fee increases, over a 10-year stress period; (3) the three financial models differed in both the assumptions and the relationships embodied in the models, and time constraints limited OFHEO analysis of the models and their projections; and (4) although Fannie Mae and Freddie Mac officials believed that the OFHEO assumptions were not reasonable, GAO believes that the assumptions, while not necessarily likely or probable, were reasonable for evaluating the potential effects of severe financial conditions.