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. The GSEs’ financial obligations were  $4.4 trillion as of September 30, 2003. The GSEs Should Lead by Example in Terms of Corporate Governance and Accountability

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. 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. 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. 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. 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. 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 should also ensure that the new GSE regulator has the  authorities necessary to carry out its critical responsibilities. FHFB serves as the safety and soundness and mission regulator  of the FHLBanks. 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. 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. The following are some examples that we have identified:    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. In summary, I believe that the  following steps can be taken to strengthen GSE governance and oversight:    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. Government-Sponsored Enterprises: Development of the Federal Housing  Enterprise Financial Regulator. Farm Credit System: Repayment of Federal Assistance and Competitive  Position.
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 responsibilities. 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.