Government-Sponsored Enterprises:

Federal Oversight Needed for Nonmortgage Investments

GGD-98-48: Published: Mar 11, 1998. Publicly Released: Mar 25, 1998.

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Pursuant to a congressional request, GAO reviewed the nonmortgage investment activities at 3 government-sponsored enterprises (GSEs)--the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Agricultural Mortgage Corporation (Farmer Mac)--focusing on the: (1) enterprises' legal authority for making nonmortgage investments and federal regulatory oversight of that activity; (2) relationship between nonmortgage investment policies and practices and missions of the enterprises; and (3) extent to which the enterprises have undertaken nonmortgage investments for arbitrage profits--using the funding advantage from government sponsorship to purchase nonmortgage investments that generate profits.

GAO noted that: (1) legally, the enterprises have broad investment authority; (2) to date, regulatory oversight activities for the three enterprises have focused on whether nonmortgage investments are safe and sound and not on whether the nonmortgage investment policies and practices are mission-related; (3) the Department of Housing and Urban Development (HUD) has not developed criteria to determine if nonmortgage investments are consistent with enterprise charter purposes; (4) in October 1997, the Farm Credit Administration (FCA) indicated that it did not have concerns that Farmer Mac's nonmortgage investment activity is inconsistent with its charter mission, but FCA also stated that the debt issuance strategy associated with the investments is intended to be temporary and to develop over a reasonable period of time; (5) therefore, according to FCA, its position could change if over time evidence does not show that such investments play a role in helping Farmer Mac achieve its mission; (6) enterprises have invested in nonmortgage assets to varying degrees with somewhat different rationales for how these investments further their charter purposes; (7) each enterprise has an investment policy that specifies permissible credit ratings, maturities, and concentration limits and describes the relationship of investments to earnings and to achievement of the enterprise's mission; (8) Freddie Mac officials indicated that its nonmortgage investments have been held for cash management purposes and as an investment vehicle, which could make capital available to help fund future anticipated demand for residential mortgages; (9) the relationship between longer term nonmortgage investments and the enterprises' mission goals is not always clear, because long-term nonmortgage investments may not facilitate liquidity in the residential mortgage market as well as short-term investments; (10) however, it is clear that nonmortgage investments generate arbitrage profits; (11) in its analysis, GAO found that the various nonmortgage investments fall along a continuum representing the degree to which they facilitate liquidity in the residential mortgage market and thus are more clearly related to the enterprises' missions; and (12) GAO's review of compensation practices and board member responsibilities at the enterprises suggests that individual incentives to generate corporate profits are structured in a manner that is fairly typical of major corporations and financial institutions without federal charters limiting their activities.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: On March 22, 2000, the House Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises held a hearing a which HUD's proposed rulemaking activities for GSE nonmortgage investments were discussed.

    Matter: To help ensure that the enterprises' nonmortgage investments appropriately support their public missions, the appropriate congressional committees may wish to monitor HUD and FCA actions to establish criteria and procedures for carrying out their general regulatory authorities. Such oversight is important to help ensure that corporate incentives to increase shareholder value do not erode the enterprises' public mission. If adequate progress is not made in a timely way, Congress may wish to consider providing further guidance to the regulatory agencies.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: HUD never implemented criteria for nonmortgage investments. Under the Housing and Economic Recovery Act of 2008, this function was transferred from HUD to the Federal Housing Finance Agency.

    Recommendation: To provide more focused oversight of the housing enterprises' nonmortgage investments, the Secretary of Housing and Urban Development should promptly implement HUD's stated intention to develop criteria through appropriate rulemaking processes to help ensure that the housing enterprises' nonmortgage investments are consistent with the purposes expressed in their charter acts.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: FCA's December 31, 2000, semiannual report to Congress states that "The (Farmer Mac) board has adopted specific policy limitations on total debt obligations that may be outstanding at any one time and on total investments in assets other than the Farmer Mac I and II Program assets. These limitations may be changed by the (Farmer Mac) board as business conditions require." The FCA official who is in charge of Farmer Mac supervision provided guidance to Farmer Mac's board on numerous occasions, including at a presentation on August 3, 2000, focusing on the need for a sound relationship between Farmer Mac's investments and its mission. As of June 30, 2001, Farmer Mac non-mission investments had fallen to about one-third the level of its on- and off-balance sheet mission assets.

    Recommendation: The Chairman of the FCA Board should direct the Office of Secondary Market Oversight to develop the requisite criteria and report periodically, such as through its semiannual reports to the House Agriculture Committee and the Senate Agriculture Committee, on the relationship of Farmer Mac's debt issuance strategy to the achievement of Farmer Mac's mission.

    Agency Affected: Farm Credit Administration


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