Recent Trends and Policy Issues

T-OCE/GGD-97-76: Published: Jul 16, 1997. Publicly Released: Jul 16, 1997.

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GAO discussed the large and growing role of government-sponsored enterprises (GSEs) in the nation's credit markets.

GAO noted that: (1) 95 percent of total outstanding GSE credit in 1996 was housing related, with the remaining 5 percent going for agricultural and educational purposes; (2) in recent years, housing has also been the only sector where GSE credit has been growing as a percentage of the total available credit outstanding; (3) in particular, the two largest housing GSEs, Fannie Mae and Freddie Mac, have increased their share of total residential mortgage debt from 23 percent in 1990 to over 37 percent in 1996; (4) by contrast, the share of farm credit supplied by the farm credit system, the largest agricultural GSE, actually declined between 1985 and 1995; (5) Congress passed legislation in 1996 that allowed the two education GSEs-Sallie Mae and Connie Lee- to end their government sponsorship and become fully private corporations; (6) while the legal powers, organizational structures, and operating styles of GSEs differ, they have several common characteristics; (7) each GSE was given certain explicit advantages, such as exemptions from state and local corporate income taxes, lines of credit with the Treasury Department, or exemptions from Securities and Exchange Commission registration requirements and fees, to help achieve its public purpose; (8) in GAO's recent statement on the potential impacts of Fannie Mae and Freddie Mac, GAO estimated that this funding advantage saved the two GSEs from about $2 billion to $8 billion in 1995; (9) because of their federal sponsorship, GSEs also involve significant risks and potential costs to taxpayers, including the risk that taxpayers could be potentially liable for a GSE's obligations if it were to get into financial difficulty; (10) the special nature of GSEs, and the potential taxpayers exposure to large, rapidly increasing GSE financial obligations, raises several important policy issues, including the adequacy of GSE regulation, the potential for expansion of GSE activities, and potential ways to limit GSE exposures; (11) over the past few years, GAO has performed several major evaluations of the effectiveness of the various GSE regulators; (12) based on its reviews, GAO developed the following five criteria for an effective GSE regulator: (a) objectivity and arm's length status from the GSE; (b) prominence in government; (c) consistency in regulation of similar markets; (d) separation of primary and secondary market regulation; and (e) economy and efficiency; and (13) GAO has also done work addressing ways that Congress might limit the taxpayers' potential exposure to GSE obligations.

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