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

United States General Accounting Office:


For Release on Delivery Expected at 10:00 a.m. EST:

Tuesday, February 10, 2004:

Government-Sponsored Enterprises:

A Framework for Strengthening GSE Governance and Oversight:

Statement of David M. Walker Comptroller General of the United States:


GAO Highlights:

Highlights of GAO-04-269T, a testimony before the Committee on 
Banking, Housing, and Urban Affairs, U.S. Senate 

Why GAO Did This Study:

Congress established government sponsored enterprises (GSE)—such as 
Fannie Mae, Freddie Mac, the FHLBank System, and the Farm Credit 
System—to facilitate the development of mortgage and agricultural 
lending in the United States. Although the federal government does not 
explicitly guarantee the GSEs’ approximately $4.4 trillion in 
financial obligations, the potential exists that the government would 
provide financial assistance in an emergency as it has done in the 
past. Recent financial reporting problems at Freddie Mac have raised 
concerns about the quality of the GSEs’ corporate governance and 
regulatory oversight. 

To assist Congress in reviewing the adequacy of GSE oversight, this 
testimony provides information on GSE corporate governance, regulatory 
oversight, and mission compliance measures.

What GAO Found:

GSEs should lead by example in connection with governance, 
accountability, integrity, and public trust issues. GSEs should strive 
to achieve model corporate governance structure, provide reasonable 
transparency of financial and performance activities, and adopt 
compensation arrangements that focus on both long-term and short-term 
results. However, GSE corporate governance has not always reflected 
best practices. For example, currently, the Chief Executive Officers 
(CEO) of Freddie Mac and Fannie Mae also serve as the chairmen of 
their respective GSE boards, which is not consistent with model 
governance standards that call for officers to work for an independent 
board. GAO notes that as part of its regulatory agreement, Freddie Mac 
has agreed to separate the position of CEO and the position of 
chairman within a reasonable period of time. However, Fannie Mae has 
yet to take this step. With respect to compensation arrangements, 
Freddie Mac’s focus on short-term financial results as performance 
targets appears to have contributed to the GSE’s recent financial 
reporting problems. 

GSE regulators must be capable, credible, strong, and independent. 
However, the regulatory structure for the housing GSEs—Fannie Mae, 
Freddie Mac, and the FHLBank System—is fragmented with safety and 
soundness and mission oversight responsibilities divided among three 
regulators. A single housing GSE regulator offers many advantages over 
this fragmented structure including prominence in government, the 
sharing of technical expertise, and the ability to assess trade-offs 
between safety and soundness considerations and certain mission 
compliance activities, such as affordable housing initiatives. 
Although there are advantages of a single director model for the new 
housing GSE regulator, GAO believes on balance that a board or a 
hybrid board and director might make the most sense to oversee the 
GSEs’ safety and soundness and mission oversight. To be effective, the 
single GSE regulator must also have all the regulatory oversight and 
enforcement powers necessary to carry out its critical 

Because of a lack of clear measures, it is difficult for Congress, 
accountability organizations, and the public to determine whether the 
benefits provided by the GSEs’ activities are in the public interest 
and outweigh their financial risks. Available evidence and data 
indicate that the housing GSEs have made, in some cases, progress in 
benefiting homebuyers. For example, it is generally agreed that Fannie 
Mae and Freddie Mac’s activities have lowered mortgage interest rates, 
although there is debate over the degree of these benefits. However, 
it is not clear that the housing GSEs’ large holdings of mortgage-
backed securities benefit borrowers. There is also limited information 
as to the extent to which the FHLBank System’s more than $500 billion 
in outstanding loans to financial institutions have facilitated 
mortgage lending. 

What GAO Recommends:

GAO recommends several steps that GSEs, regulators, and Congress can 
take to strengthen GSE oversight. These steps include strengthening 
GSE corporate governance, creating a single housing GSE regulator, and 
establishing standards to measure GSE mission compliance.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Thomas J. McCool at 
(202) 512-8678 or

[End of section]

Mr. Chairman, Mr. Ranking Member, and Members of the Committee:

I appreciate the opportunity to participate in today's hearing to 
discuss oversight of the government-sponsored enterprises (GSE), namely 
Fannie Mae, Freddie Mac, the Federal Home Loan Banks (FHLBanks), the 
Farm Credit System (FCS), and the Federal Agricultural Mortgage 
Corporation (Farmer Mac). I note that the GSEs had combined 
obligations, including mortgage-backed securities (MBS) and other debt 
obligations, of $4.4 trillion as of September 30, 2003, and, as I will 
explain in detail later, the potential exists that the federal 
government may choose to provide financial assistance to the GSEs in an 
emergency. Accounting and financial reporting problems related to 
earnings disclosed by Freddie Mac last year have raised several 
concerns about the company's management and board of directors as well 
as the effectiveness of regulatory oversight that is designed to 
protect taxpayers from the risks associated with the GSEs. Recently 
reported investment losses at the FHLBanks have also served to raise 
public concerns regarding the well-being of GSEs. These events prompted 
Congress to consider the need for meaningful reforms to help strengthen 
the oversight of GSEs. In my view, our past experience in the savings 
and loan industry, the recent accountability breakdowns in the private 
sector, and the importance of gaining public trust for regulatory 
agencies that oversee our financial institutions and our capital 
markets is directly relevant to the ongoing debate on appropriate 
regulatory oversight of GSEs.

It is clear that many parties have different views on what needs to be 
fixed and how to do it. My comments today are intended to frame GSE 
oversight issues broadly and provide our views on some of the questions 
and options that must be addressed to better oversee the GSEs going 
forward. Although my comments will largely focus on the housing GSEs--
Fannie Mae, Freddie Mac, and the FHLBank System---given the themes of 
our discussion today, I will also use examples from the other GSEs to 
illustrate my points. We look forward to working with Congress to 
provide assistance in defining these issues, exploring various options, 
and identifying their implications in order to address any weaknesses 
that could serve to threaten confidence in our financial markets and 
that inhibit improvements in the current regulatory structure.

My testimony today is divided into two sections. In the first part, I 
will provide an overview of the GSEs and their missions, discuss the 
risks they pose to taxpayers and financial markets, and then I will lay 
out principles to help ensure effective governance and oversight of the 
GSEs. Second, I will provide our views regarding the extent to which 
GSE governance and oversight structures are consistent with these 
important principles.

In summary, to ensure that the GSEs operate in a safe and sound manner, 
it is essential that effective governance, reasonable transparency, and 
effective oversight systems are established and maintained. In 
particular, the GSEs should lead by example in the area of corporate 
governance; GSE regulators must be strong, independent, and have 
necessary expertise; and GSE mission definitions and benefit measures 
need to be established. However, our work found that GSE corporate 
governance does not always reflect best practices; for example, Fannie 
Mae's Chief Executive Officer (CEO) serves as chairman and its Chief 
Operating Officer (COO) and Chief Financial Officer (CFO) both serve as 
vice chairmen of the board, which is not consistent with model 
governance theory that calls for an independent board and chair. I note 
that Freddie Mac's CEO is also the chairman of that company's board but 
Freddie Mac has agreed to split these functions in the future. 
Furthermore, the regulatory structure for the housing GSEs is 
fragmented and serious questions exist as to the capacity of GSE 
regulators to fulfill their responsibilities. In each of these areas, I 
will summarize steps that Congress, GSEs, and regulators can take to 
improve GSE governance and oversight. In particular, I believe that 
Congress should establish a single housing GSE regulator that would be 
governed by a board or a hybrid board and director and provided with 
the authorities necessary to carry out its mission.

To prepare for this testimony, we relied heavily on a substantial 
amount of work that we had done on GSEs and their regulatory oversight 
in the past, but we also reviewed our historical positions in light of 
the current regulatory structure and GSE activities. The attachment 
lists reports representing this body of work. In addition to reviewing 
our past work, we solicited views of officials from the Office of 
Federal Housing Enterprises Oversight (OFHEO), the Department of 
Housing and Urban Development (HUD), and the Federal Housing Finance 
Board (FHFB). We also reviewed financial data on the GSEs, best 
practices standards for corporate governance, and regulatory reports on 
such issues as the GSEs' effects on financial market stability. We 
conducted our work in Washington, D.C., between November 2003 and 
January 2004 in accordance with generally accepted government auditing 

Overview of GSEs, Their Risks, and Principles for Effective Governance 
and Oversight:

I would like to begin by summarizing the roles and responsibilities of 
the GSEs, describing their potential risks to taxpayers and the 
financial markets, and offering certain principles on governance and 
oversight to help ensure that the GSEs' activities are safe, sound, and 
consistent with their public missions.

What are the GSEs and How Do They Carry Out Their Missions?

Over the past century, Congress established GSEs to address concerns 
that private financial institutions were not adequately meeting the 
credit needs of homebuyers and agricultural interests (see table 1). 
The GSEs are government-sponsored, privately owned and operated 
corporations whose public missions are to enhance the availability of 
mortgage and agricultural credit across the United States. It is also 
generally understood that the housing GSEs' public missions include the 
obligation to meet the needs of targeted groups of borrowers.[Footnote 
1] The GSEs generally carry out their missions by (1) borrowing funds 
in the capital markets and purchasing assets from financial 
institutions or making loans to the institutions or (2) securitizing 
assets and providing a credit guarantee to security holders. These 
activities may provide mortgage or real estate credit to homebuyers, 
businesses, or farmers at rates or conditions more favorable than those 
that would be available in the absence of these GSEs. It is important 
to note that the GSEs' debt and security offerings are not explicitly 
guaranteed or insured by the U.S. government.

Table 1: Overview Information on the GSEs as of September 30, 2003:

Dollars in billions: 

Fannie Mae (1938); 
Financial obligations: $2,187[A]; 
Structure: For profit publicly traded; 
Regulator: OFHEO - safety & soundness; 
HUD - mission.

Freddie Mac (1970); 
Financial obligations: $1,388[A]; 
Structure: For profit publicly traded; 
Regulator: OFHEO - safety & soundness; 
HUD - mission.

FHLBank System (1932); 
Financial obligations: $716.9[B]; 
Structure: 12 District Banks; 
Member-owned cooperatives; 
Regulator: FHFB.

FCS (1916); 
Financial obligations: $97.1[C]; 
Structure: 5 banks and 99 Associations; 
Member-owned cooperatives; 
Regulator: Farm Credit Administration.

Farmer Mac (1987); 
Financial obligations: $7.2[D]; 
Structure: For profit publicly traded; 
Regulator: Farm Credit Administration - Office of Secondary Market 

Sources: OFHEO, FHLBank System Office of Finance, Federal Farm Credit 
Banks Funding Corporation, and Farm Credit Administration (FCA).

[A] Includes short-and long-term debt and MBS held by investors. 
Freddie Mac data are as of December 31, 2002, and are subject to change 
as Freddie Mac is currently restating its 2002, 2001, and possibly 2000 
financial statements.

[B] FHLBank System consolidated obligations.

[C] Total liabilities, including securities, bonds, and other 

[D] On-balance sheet liabilities and off-balance sheet liabilities, 
including agricultural mortgage-backed securities (AMBS) held by 

[End of table]

Let me now briefly discuss the missions and activities of each of the 

* 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) that use the proceeds to make additional mortgages 
available to homebuyers. 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 $333,700 for a single-
family home in most states. Although Fannie Mae and Freddie Mac hold 
some mortgages in their portfolios that they purchased, most mortgages 
are placed in mortgage pools to support MBS. Fannie Mae and Freddie Mac 
issued MBS 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 interest and 
principal on MBS that they issue.

* The 12 FHLBanks traditionally made loans--also known as advances--to 
their members (typically banks or thrifts) to facilitate housing 
finance and community 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. This process is similar to Fannie Mae and 
Freddie Mac's traditional business activities, although the FHLBanks do 
not currently have the authority to securitize mortgages.

* FCS, of which Farmer Mac is an independent institution, is a 
nationwide network of borrower-owned financial institutions and 
specialized service organizations. FCS consists of six Farm Credit 
Banks and one Agricultural Credit Bank, which provide funding and 
affiliated services to locally owned Farm Credit associations and 
numerous cooperatives nationwide. Among other activities, FCS provides 
credit and related services to farmers, ranchers, producers, and rural 

* Farmer Mac's mission is to provide for a secondary marketing 
arrangement for agricultural real estate and rural housing loans 
subject to its underwriting standards. Farmer Mac purchases mortgages 
directly from lenders for cash and purchases bonds from agricultural 
lenders. Farmer Mac securitizes mortgages and issues AMBS and, like 
Fannie Mae and Freddie Mac, guarantees the timely payment of interest 
and principal on these securities. Farmer Mac holds most of the AMBS 
that it issues in its retained portfolio.

What are the Risks of the GSEs?

As a result of their activities, the GSEs' outstanding debt and off-
balance sheet financial obligations are large. The GSEs' financial 
obligations were $4.4 trillion as of September 30, 2003. By comparison, 
the U.S. Treasury had $6.8 trillion in total obligations for the same 
date. The GSEs face the risk of losses primarily from credit risk, 
interest rate risk, and operational risks.[Footnote 2] Although the 
federal government explicitly does not guarantee the obligations of the 
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 
FCS when they experienced difficulties due to sharply rising interest 
rates and declining agricultural land values, respectively. The 
potential exists that Congress and the Executive Branch would determine 
that such assistance was again necessary in the event that one or more 
of the GSEs experienced severe financial difficulties. Because the 
markets perceive that there is an implied federal guarantee on the 
GSEs' obligations, the GSEs are able to borrow at interest rates below 
that of private corporations, which--as I discussed earlier--allows 
them to extend credit to financial institutions at favorable rates.

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, 
may in turn become unable to meet their financial obligations. This 
risk, called systemic risk, is often associated with the housing GSEs 
because of 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 3] 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 a hypothetical event were to occur, widespread 
defaults could occur in derivatives markets.

How Can GSE Risks Be Mitigated?

To prevent the need for the federal government ever to have to provide 
financial support to a GSE and to minimize the risks of financial 
instability, it is critical to ensure that proper corporate governance, 
reasonable transparency, and effective oversight systems are in place. 
There are several lines of defense to ensure that GSEs' activities are 
conducted in a safe and sound manner including management, boards of 
directors, auditors, and regulators. As we have seen in recent private 
sector instances such as Enron and Worldcom, these critical lines of 
defense can and do fail. Consequently, the private sector, Congress, 
and regulators have initiated actions--such as the passage and 
implementation of the Sarbanes-Oxley Act--to ensure that the risk of 
such failures of governance and oversight are minimized. In my view, it 
is all the more important that strong safeguards are established for 
the GSEs because such institutions are not subject to the same degree 
of market discipline as other privately run businesses. As a result of 
the perception of an implied guarantee of GSE obligations, customers 
and creditors may be less willing to monitor the companies' risk-
taking, which could encourage managers to take on excessive risks.

I would now like to offer, on the basis of both my own experience and 
past GAO work, several specific and pragmatic principles to ensure 
effective GSE governance and oversight:

The GSEs Should Lead by Example in Terms of Corporate Governance and 

Not only should GSEs be sensitive to good governance but it is all the 
more important they lead by example in connection with accountability, 
integrity, and public trust. In particular, GSEs should strive to have 
a truly independent board, compensation arrangements consistent with 
their public mission and private shareholder obligations, and 
appropriate transparency of their financial activities. Under model 
governance theory, the board of directors works in the best interest of 
the shareholders and the CEO works for the board. Board members should 
be independent and be able to provide strategic advice to management in 
order to help maximize shareholder value. The board should also help 
manage risk to shareholders and have a clear responsibility to hold 
management accountable for results both currently and over time. I note 
that in the context of the GSEs, boards could also have a 
responsibility to ensure that the GSEs' activities fulfill their public 
missions. In some cases, there can be a tension between maximizing 
shareholder value and fulfilling public missions. GSE boards and 
executives must have the requisite commitment and talent to respond to 
this challenge.

To adhere to model governance theory, it is also important for the 
board to ensure that overall executive compensation is aligned with 
achievements related to the company's long-term strategic objectives 
and less on short-term accomplishments such as quarterly or annual 
earnings. Further, it is not just the total amount of compensation but 
the form and structure of executive compensation arrangements that is 
important as well. Finally, transparency through timely and reliable 
financial and performance information and reasonable disclosures is 
necessary to enable capital markets and investors to understand related 
values and risks associated with the GSEs. Market discipline works best 
when firms fully and publicly disclose their financial obligations and 

The GSEs Require a Strong, Independent, and Capable Regulatory System:

A regulatory system of GSE oversight must have the necessary strength, 
independence, and capability to protect against the significant risks 
and potential costs to taxpayers posed by the GSEs. 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, which, as I will describe later, are 
currently divided among OFHEO, HUD, and FHFB.[Footnote 4] A single 
regulator could be more independent and objective than separate 
regulatory bodies and could be more prominent than either one alone. 
Although the housing GSEs operate differently, the risks they manage 
and their missions are similar. 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 any of the GSEs might undertake. This 
single regulator should be better able to assess these activities' 
competitive effects 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 trade-offs 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 trade-offs 
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 GSEs' financial condition, regulates 
the mission goals Congress sets, and assesses efforts to fulfill them.

To be effective, the single regulator must have all the powers, 
authorities, and technical expertise necessary to oversee the GSEs' 
operations and compliance with their missions.

Measures Must Be Established to Help Ensure That the GSEs' Benefits 
Outweigh the Financial Risks That Their Activities Pose to Taxpayers:

Without clearly defined measures of the GSEs' benefits, it is not 
possible for Congress, accountability organizations, and the public to 
determine whether the federal government should be subject to the 
financial risks associated with the GSEs' activities. I acknowledge 
that developing such measures may prove challenging for several 
reasons. First, isolating the GSEs' effects on mortgage and 
agricultural credit markets is a complex and technical undertaking. 
Second, the GSEs' financial activities have evolved over the years and 
become increasingly sophisticated, which further complicates any 
analysis of the GSEs' benefits and costs. Third, in some cases, there 
is a lack of measurable mission-related criteria that would allow for a 
meaningful assessment of the GSEs' mission achievement or whether the 
GSEs' activities are consistent with their charters. Nevertheless, past 
actions by Congress and regulators demonstrate that developing such 
quantifiable measures is possible. For example, in 1992, Congress 
required HUD to set numeric housing goals for Fannie Mae and Freddie 
Mac to help ensure that their mortgage purchases served the needs of 
low-income households as well as other targeted groups.

The GSEs' Corporate Governance, Regulatory Oversight, and Mission 
Compliance Reporting Can Be Strengthened:

Now that I have laid out the risks associated with the GSEs and 
principles for effective governance and oversight, I would like to turn 
my attention to how the current system compares with those principles. 
While there is some positive information to report about the GSEs, 
there are also weaknesses in the areas of corporate governance, 
regulatory oversight, and mission compliance reporting. In each of 
these areas, there are steps we believe Congress, the regulators, or 
GSEs can take to address weaknesses in GSE governance and oversight 
that we have identified.

GSE Corporate Governance Practices Can Be Improved:

The GSEs' corporate governance practices are not fully consistent with 
the principles that I previously mentioned. The first principle I 
discussed is independence of the board and the role of the board of 
directors. There are instances where the GSEs can further their efforts 
in ensuring board independence. To illustrate:

* Like CEOs at many other publicly traded companies, the CEO of Fannie 
Mae and the CEO of Freddie Mac currently serve as chairman of their 
respective boards of directors. In addition, Fannie Mae's COO and CFO 
both serve as vice chairmen of the board. All too frequently, such 
individuals will have significant influence over who is asked to join 
the board and who is asked to leave it. OFHEO, in its special 
examination of Freddie Mac (OFHEO report), recommended that Freddie Mac 
should separate the functions of the CEO and the board chairman to 
improve the effectiveness of the board of directors and Freddie Mac has 
agreed to do so.[Footnote 5] I also note that OFHEO recently submitted 
proposed corporate governance reforms to the Office of Management and 
Budget that would require the GSEs to separate the CEO and chair 
positions; and:

* A recent FHFB study on board governance of the FHLBanks found that 
the selection process for board and committee chairpersons and 
assignment of committee memberships at some FHLBanks lacked 
transparency or inclusiveness.[Footnote 6] The study concluded that 
committee selection processes relying on only one person or the 
recommendations of senior management may diminish the independence of 
directors. FHFB recommended the FHLBanks strengthen their boards of 
directors by using a transparent and inclusive selection process.

In practice, GSE boards may face difficulties in complying with modern 
governance standards because of statutory and regulatory requirements 
regarding the structure, selection, and composition of such boards. For 

* Fannie Mae and Freddie Mac's boards include five seats that are 
appointed annually by the President, serve one-year terms, and 
represent various interests including the real estate industry, the 
mortgage lending industry, and consumer interests.[Footnote 7] Treasury 
has proposed eliminating the presidentially appointed directors at 
Fannie Mae and Freddie Mac because the perceived roles of these 
directors contradict best practices of corporate governance.[Footnote 
8] OFHEO agrees with Treasury's position because it has found that the 
appointed members do not play meaningful roles on the GSEs' boards. 
While there may be reasons to eliminate these positions, should 
Congress decide to retain them, it should consider (1) lengthening the 
terms of the appointed directors so that they have sufficient time to 
understand the GSEs' complex activities, (2) establishing criteria to 
ensure that qualified individuals serve on the boards who have 
expertise in financial activities and understand the GSEs' mission 
responsibilities, and (3) establishing fiduciary responsibilities to 
serve the special public purpose of the GSE.

* I would also like to point out that FHFB appoints at least 6 
directors, known as public interest directors, to serve on the board of 
the FHLBanks, whose boards each consist of at least 14 members. We 
believe that a selection process that uses a regulator to select the 
directors of the regulated entities could jeopardize the independence 
of those directors as well as FHFB.

* As another example, our recent study of Farmer Mac provides an 
illustration of how congressionally established board structure can 
complicate a GSE's compliance with board independence requirements. We 
noted that the statutory structure of the Farmer Mac board requires a 
majority of the directors to come from institutions that utilize Farmer 
Mac's services.[Footnote 9] This raises questions as to the 
independence of that board.

In the area of compensation, there are indications that the structure 
of executive compensation arrangements and the process of determining 
compensation levels at the GSEs are not in line with best practices for 
corporate governance. As examples,

* According to the OFHEO report, approximately 54 percent of the total 
cash compensation (salaries, bonuses, and other compensation) paid by 
Freddie Mac to executive officers for performance in 2001 was based on 
corporate performance for that year. The study found that the 
compensation of senior executives, in particular, the size of the bonus 
pool, was tied, in part, to meeting or exceeding annual specified 
earnings per share targets. OFHEO concluded that the importance of 
achieving such targets contributed, in part, to the improper accounting 
and management practices of the GSE. As such, OFHEO recommended that 
Freddie Mac should develop financial incentives for executives and 
employees based on long-term goals.

* Our study at Farmer Mac also identified an aggressive stock option 
vesting plan whereby stock options for employees and directors were 
fully vested within 2 years. By comparison, companies have average 
vesting periods of 4 to 5 years. Farmer Mac has since changed its 
vesting program to be more aligned with those of other companies.

Finally, in my view, adequate transparency is important because the 
housing GSEs engage in complex transactions, such as securitizations, 
guarantees, and hedging of risk which introduce many financial 
reporting complexities. With the exception of Farmer Mac, GSEs are 
exempt from the securities laws, and are not required to file 
disclosure documents with the Securities Exchange Commission (SEC) with 
respect to their securities issuances. Nevertheless, in October 2000, 
Fannie Mae and Freddie Mac adopted six voluntary commitments aimed at 
increasing their financial disclosures. More recently, Fannie Mae has 
registered its stock with SEC on a voluntary basis and Freddie Mac has 
stated its intention to do the same. Although financial disclosure may 
improve transparency, its impact on the GSEs and their customers or 
funding parties may be limited if the GSEs are perceived to have 
implicit government backing. For this reason, while market discipline 
can play a role in curbing risky behavior by GSEs, it also has its 
limitations. Effective oversight thus takes on more importance as a 
means for limiting inappropriate risk-taking behavior by the GSEs. Now 
let me move on to the last line of defense, that is, oversight by 

Housing GSE Regulatory Structure Does Not Ensure Effective Oversight:

Unfortunately, the current housing GSE regulatory structure is 
fragmented, which limits the federal government's ability to oversee 
the GSE's activities. Congress now has the opportunity to rationalize 
the current GSE regulatory structure through the creation of a single 
regulator that would oversee the housing GSEs' safety and soundness and 
mission activities. Congress should also ensure that the new GSE 
regulator has the authorities necessary to carry out its critical 

GSE Regulatory Structure Can Be Consolidated:

Although the housing GSEs share similar risks and missions, there are 
three regulators overseeing either their safety and soundness, their 
missions, or both. Currently, OFHEO regulates Fannie Mae and Freddie 
Mac on matters of safety and soundness, while HUD is the mission 
regulator. FHFB serves as the safety and soundness and mission 
regulator of the FHLBanks. Available evidence raises questions about 
the capacity of the current regulatory structure to effectively monitor 
the GSEs' safety and soundness and mission compliance. To illustrate:

* OFHEO did not identify the substantial financial accounting problems 
at Freddie Mac at an early stage. In fact, OFHEO's 2001 and 2002 
examinations of Freddie Mac gave high marks to the GSE in such relevant 
areas as corporate governance and internal controls, despite the 
widespread deficiencies later identified in these areas. OFHEO's 
current director has stated that the agency plans to strengthen its 
examination program, create an office of the chief accountant, and 
elevate the important area of corporate accounting into its oversight 

* As of July 2002, FHFB employed just 10 examiners to review the 
increased risks and complexity of the 12 FHLBanks and the agency's 
reviews of key activities--such as internal controls--were 
limited.[Footnote 10] Although FHFB has initiated a program to triple 
the number of examiners to 30 by the end of FY 2004 and has revised its 
examination program, it is too soon to judge the effectiveness of 
FHFB's initiatives.[Footnote 11] For example, as FHFB continues the 
process of developing a sufficient and capable force of examiners, it 
must cope with the fact that several FHLBanks reported losses or weak 
financial results in late FY 2003 and some FHLBanks continue to expand 
their mortgage purchase programs.

* HUD officials we contacted said that the department lacks sufficient 
staff and resources necessary to carry out its GSE mission oversight 
responsibilities. HUD officials said that although the GSEs' assets 
have increased nearly six-fold since 1992, HUD's staffing has declined 
by 4,200 positions and GSE oversight--which now consists of about 13 
full-time positions--must compete with other department priorities for 
the limited resources available. The President's 2005 budget includes a 
proposal that would allow HUD to assess Fannie Mae and Freddie Mac for 
the cost of its mission oversight.[Footnote 12] I also note that HUD 
(1) has not proposed a rule to ensure that the GSEs' nonmortgage 
investments (such as long-term corporate debt) are consistent with 
their housing mission as the department committed to do in response to 
a 1998 GAO report and (2) it is not clear that HUD has the expertise 
necessary to review sophisticated financial products and issues, which 
are associated with nonmortgage investments and new program 
applications.[Footnote 13]

As I stated previously, a single GSE regulator offers many advantages 
over the fragmented structure that exists today including prominence in 
government, the sharing of technical expertise, and the ability to 
assess trade-offs between safety and soundness considerations and 
certain mission compliance activities.

In determining the appropriate structure for a new GSE regulator, we 
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 (OCC), the Office of Thrift Supervision 
(OTS) and OFHEO while boards or commissions run FHFB, SEC, 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.

In our previous work, however, 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, if the board included the secretaries of 
Treasury and HUD or their designees, the potential exists that safety 
and soundness and housing mission compliance concerns would both be 
represented. We are mindful, though, based on recently completed work, 
of some of the disadvantages of a stand-alone agency with a board of 
directors that is divided along party lines.[Footnote 14] Tensions and 
conflicts between board members potentially diminish some of these 

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 to have a presidentially appointed 
and Senate confirmed director, and a board of directors comprised of 
the secretaries from relevant executive branch agencies, such as 
Treasury and HUD. Board members being 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. A board comprised of members all from the same political party 
may, though, 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 also be required to have some reasonable 
representation from different political parties.

I would now like to comment on issues surrounding the potential funding 
arrangements for a new housing GSE regulator. Similar to FHFB, OCC, and 
OTS, OFHEO funds its operations through assessments on its regulated 
entities, Fannie Mae and Freddie Mac. However, unlike these agencies 
that are exempt from the appropriations process, OFHEO can only collect 
the assessments when approved by an appropriations bill and at a level 
set by its appropriators. While testifying on GSE regulatory reform, 
the director of OFHEO noted that the appropriations process has placed 
severe constraint on OFHEO's operations and has hindered its ability to 
hire additional resources it needs to strengthen its 
oversight.[Footnote 15]

Exempting the new GSE regulator from the appropriations process would 
provide the agency 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 trade-offs. First, while 
the regulator will have more control over its own budget and funding 
level, it will 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 would 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 trade-off 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.

Congress Should Ensure That the New Housing GSE Regulator Has Adequate 
Enforcement Authorities:

The new GSE regulator must 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. In our 
previous work, we have stated that each GSE housing regulator 
administers its own statutory scheme and these schemes contain various 
types of powers and authorities, which although similar, are not 
identical.[Footnote 16] Further, the GSE housing regulators' powers and 
authorities differ from that of banking regulators in key areas. The 
following describes some of these differences, which Congress may wish 
to consider in determining the appropriate authorities for a new GSE 
housing regulator:

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

* Bank regulators have prompt corrective 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 17] 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 18] OFHEO 
has also established regulations requiring specified supervisory 
actions when unsafe developments are identified that do not include 
capital, but OFHEO's statute does not specifically mention these 
actions. FHFB's statute does not establish prompt corrective action 
scheme, but FHFB officials believe they have all the authority 
necessary to carry out their safety and soundness responsibilities; 

* 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 19] I note that should Congress decide to 
grant the new GSE regulator receivership authority, it should task the 
regulator to develop rules and procedures that would reduce the adverse 
impacts that a GSE liquidation could have on housing finance and the 
stability of financial markets.

In summary, I believe Congress can review the regulatory authorities at 
OFHEO, FHFB, and bank regulators and, where appropriate, ensure that 
the new regulator has sufficient authorities to carry out its critical 

Measures Have Not Been Established to Determine Whether the GSEs' 
Benefits Outweigh Their Risks:

In important cases, it is clear that the GSEs have fulfilled the public 
missions for which they were initially created. Since the establishment 
of Fannie Mae and the FHLBank System in the 1930s, for example, the 
nation's mortgage finance market has progressed from a regionally based 
system characterized by periodic credit shortages to a nationwide and 
liquid system. Furthermore, it is generally agreed that Fannie Mae and 
Freddie Mac's mortgage purchase activities have lowered the interest 
rates on qualifying mortgages below what they otherwise would be. In a 
1996 report, we estimated that Fannie Mae and Freddie Mac's activities 
lowered the rate on qualifying mortgages by about 15 to 35 basis points 
or a monthly savings of between $10 and $25 on a typical mortgage of 
$100,000.[Footnote 20] Subsequently, federal agencies and researchers, 
academics, and the GSEs have initiated studies that have estimated the 
extent of the benefits provided by the GSEs' activities and the 
recipients of such benefits (i.e., homebuyers vs. investors and 
management), which have reached differing conclusions. Additional 
studies may be needed to more precisely estimate the extent to which 
the GSEs' activities benefit homebuyers.

In other areas, however, there is substantially greater uncertainty 
regarding the benefits of the GSEs' activities and more research is 
needed to clarify these issues. Although the GSEs have expanded rapidly 
and become more complex in recent years, for example, it is not always 
clear how the GSEs' growth and complexity have enhanced their public 
missions. For instance, at year-end 2002, Fannie Mae and Freddie Mac 
held a combined $1.4 trillion of mortgage assets in their retained 
portfolios, including MBS, while the FHLBanks hold about a combined 
$100 billion of MBS. Although holding mortgage assets in their 
portfolios may enhance the profitability of the GSEs, it also exposes 
them to interest rate risk, which requires the use of sophisticated 
financial strategies--such as the use of hedging which includes the use 
of derivatives--to manage effectively. In addition, derivatives may 
also be used by financial institutions to take positions on interest 
rate movements, which can enhance their profitability but which is also 
inherently risky. Over the years, questions have been raised as to 
whether the GSEs' portfolio investments in MBS generate benefits to 

Additionally, the lines that initially existed between Fannie Mae and 
Freddie Mac on the one hand and the FHLBank System on the other have 
blurred. In addition to making advances to their members, for example, 
FHLBanks have now purchased about $108 billion in mortgages directly 
from their members, which is essentially Fannie Mae and Freddie Mac's 
traditional business. Although the FHLBanks' mortgage purchases may 
enhance competition in the market for secondary mortgage purchases, 
they can just as easily raise questions as to whether there is a need 
for an additional GSE performing essentially the same mission and 
incurring similar risks.

In some cases, the absence of specific criteria and guidance 
complicates efforts to assess the benefits of the GSEs' activities. Our 
recent work concluded that Farmer Mac's statute contains broad mission 
purpose statements and lacks specific or measurable criteria that would 
help determine whether the GSE is meeting its policy goals. Farmer 
Mac's nonmission-related assets--such as long-term corporate bonds--
declined from 66 percent of assets in 1997 to 37 percent in 2002. 
However, the composition and criteria for nonmission investments could 
potentially lead to investments that are excessive in relation to 
Farmer Mac's financial operating needs or otherwise would be 
inappropriate to the statutory purpose of Farmer Mac. We suggested that 
Congress should consider establishing clearer mission goals for Farmer 
Mac with respect to the agricultural and real estate market to allow a 
determination as to whether Farmer Mac had achieved its public policy 

Finally, I would also like to point out that there are other 
limitations in the evidence and research on the benefits provided by 
the GSEs' activities. The following are some examples that we have 

* There is limited information as to the extent to which the FHLBank 
System's more than $500 billion in outstanding advances, as of mid-year 
2003, have facilitated mortgage availability. Although anecdotal 
information is available on the benefits of FHLBank advances, studies 
using quantitative analysis to assess the impacts of FHLBank advances 
on housing and community development have not been produced.

* There is limited information available on the extent to which Fannie 
Mae and Freddie Mac's investments in nonmortgage assets--such as long-
term corporate bonds--serve their public missions. As I described 
earlier, HUD has not acted on its general regulatory authority to 
review the appropriateness of the GSEs' nonmortgage investments as it 
committed to do in response to a 1998 GAO report. Given that HUD has 
not acted in this area for the past 6 years, we again recommend that 
Congress legislate nonmortgage investment criteria for HUD or any new 
GSE regulator that may be established through legislation.

* There is virtually no information available as to whether Farmer 
Mac's activities have benefited agricultural real estate markets. For 
example, the depth and liquidity of the demand for AMBS in the current 
market is unknown.

Without quantifiable measures and reliable data, 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 
risks. To improve the quality of information about the GSEs' 
activities, I believe that the GSEs, the new housing GSE regulator, and 
FCA--the regulator of Farmer Mac and FCS--should research the areas 
that we have identified as well as others and periodically report their 
findings to the public.

Mr. Chairman, this concludes my statement. In summary, I believe that 
the following steps can be taken to strengthen GSE governance and 

* Fannie Mae and Freddie Mac should ensure that their executives report 
to independent boards; FHLBank directors should be chosen through 
transparent and inclusive processes; and GSE compensation packages 
should include short and long-term performance measures;

* Congress should create a single housing GSE regulator that is 
governed by a board or a hybrid board and director and has adequate 
authorities to fulfill its safety and soundness and mission compliance 
oversight responsibilities; and:

* Congress should provide clearer direction to the GSEs in fulfilling 
their missions--such as in the case of the GSEs' nonmortgage 
investments--and the GSEs, the new GSE regulator, and FCA should 
research certain aspects of the GSEs' financial activities and 
periodically report to the public as to how these activities are 
consistent with mission requirements.

I would now be happy to respond to any questions that you or other 
members of the Committee may have.

Staff Contacts and Acknowledgements:

For further information regarding this testimony, please contact Thomas 
J. McCool at (202) 512-8678 or William B. Shear at (202) 512-4325. 
Individuals making contributions to this testimony include Diane 
Brooks, M'Baye Diagne, Rachel DeMarcus, Andrew Pauline, Wesley M. 
Phillips, Mitchell Rachlis, and Karen Tremba.

[End of section]

GAO Government-Sponsored Enterprise Related Reports:

Farmer Mac: Some Progress Made, but Greater Attention to Risk 
Management, Mission, and Corporate Governance Is Needed. GAO-04-116. 
Washington, D.C.: October 16, 2003:

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.

Farm Credit Administration: Oversight of Special Mission to Serve, 
Young, Beginning, and Small Farmers Needs to Be Improved. GAO-02-304. 
Washington, D.C.: March 8, 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.

Farmer Mac: Revised Charter Enhances Secondary Market Activity, but 
Growth Depends on Various Factors. GAO/GGD-99-85. Washington, D.C.: May 
21, 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, 

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, 

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, 

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

Farm Credit System: Repayment of Federal Assistance and Competitive 
Position. GAO/GGD-94-39. Washington, D.C.: March 10, 1994.

Farm Credit System: Farm Credit Administration Effectively Addresses 
Identified Problems. GAO/GGD-94-14. Washington, D.C.: January 7, 1994.

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.


[1] Through legislation, Congress has required the housing GSEs to 
serve the credit needs of targeted borrowers, such as low-income, 
urban, and rural homeowners. For example, Fannie Mae and Freddie Mac 
are required to meet housing goals established by HUD for the purchase 
of mortgages serving targeted groups. The FHLBanks are also required to 
provide grants or below market price advances for mortgages serving 
targeted groups through the Affordable Housing Program.

[2] 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. 

[3] Office of Federal Housing Enterprises Oversight. Systemic Risk: 
Fannie Mae, Freddie Mac, and the Role of OFHEO. Washington, D.C: 
February 4, 2003. 

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

[5] Office of Federal Housing Enterprises Oversight. Report of the 
Special Examination of Freddie Mac. December 2003.

[6] Federal Housing Finance Board. Report of the Horizontal Review of 
Board Governance of the Federal Home Loan Banks. June 2003.

[7] As specified in their charters, Fannie Mae and Freddie Mac each 
have 18-member boards of directors. The President appoints 5 of the 
directors at each company, while shareholders elect the other 13. Board 
members are elected or appointed to 1-year terms.

[8] Testimony of Secretary John W. Snow Before the U.S. Senate 
Committee on Banking, Housing and Urban Affairs. Washington, D.C.: 
October 16, 2003. He stated that "…The Administration is committed to 
make sure that corporate governance … remain strong and effective. That 
requires that there be great clarity that the people running large 
companies are there to serve the interests of the shareholders and that 
their incentives and loyalties be clearly aligned in this way."

[9] U.S. General Accounting Office, Farmer Mac: Some Progress Made, but 
Greater Attention to Risk Management, Mission, and Corporate Governance 
Is Needed. GAO-04-116 (Washington, D.C.: Oct 16, 2003).

[10] The FHLBanks direct mortgage purchase programs expose the banks to 
interest rate risk and increasingly sophisticated strategies--such as 
the use of derivatives and hedging techniques--are necessary to manage 
these risks. 

[11] By late 2003, FHFB had a staff of 22 examination professionals, 
according to FHFB officials.

[12] HUD's GSE mission oversight expenses are funded through the 
appropriations process.

[13] U.S. General Accounting Office, Government Sponsored Enterprises: 
Federal Oversight Needed for Nonmortgage Investments, GAO/GGD-98-48 
(Washington, D.C.: March 11, 1998).

[14] See U.S. General Accounting Office, Financial Regulation: Review 
of Selected Operations of the Federal Housing Finance Board, GAO-03-364 
(Washington, D.C.: Feb. 28, 2003).

[15] Statement of the Honorable Armando Falcon, Jr., Director of OFHEO 
before the House Financial Services Subcommittee on Capital Markets, 
Insurance and Government Sponsored Enterprises Hearing on The Office of 
Federal Housing Enterprise Oversight's December Report of the Special 
Examination of Freddie Mac. Washington, D.C.: January 21, 2004.

[16] See U.S. General Accounting Office, Comparison of Financial 
Institution Regulators' Enforcement and Prompt Corrective Action 
Authorities, GAO-01-322R (Washington, D.C.: Jan. 31, 2001).

[17] 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.

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

[19] 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.

[20] U.S. General Accounting Office, Housing Enterprises: Potential 
Impacts of Severing Government Sponsorship, GAO/GGD-96-120 
(Washington, D.C.: May 13, 1996).