The Housing GSEs Share Similar Missions

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), which then use the proceeds to make additional mortgages  available to home buyers. MBS issued by Fannie  Mae or Freddie Mac are either sold to investors (off-balance sheet  obligations) or held in their retained portfolios (on-balance sheet  obligations). The 12 FHLBanks that constitute the FHLBank System traditionally made  loans—also known as advances—to their members (typically banks or  thrifts) to facilitate housing finance and community and economic  development. More recently,  the FHLBanks initiated programs to purchase mortgages directly from  their members and hold them in their retained portfolios. Housing GSE Activities Involve Significant Risks

While the housing GSEs have generated public benefits, their large size  and activities pose potentially significant risks to taxpayers. The GSEs also pose potential risks to the stability of the U.S. financial  system. Housing GSE Regulatory Structure Is Divided among OFHEO, HUD, and FHFB

The current regulatory structure for the housing GSEs is divided among  OFHEO, HUD, and FHFB, as described below:    OFHEO is an independent office within HUD and is responsible for  regulating Fannie Mae and Freddie Mac’s safety and soundness. FHFB is responsible for regulating the FHLBank System’s safety and  soundness as well as its mission activities. Establishing a single  housing GSE regulator that is equipped with adequate authorities and  governed by a board would better ensure that the GSEs operate in a safe  and sound manner and fulfill their housing missions. In addition to concerns about OFHEO’s and FHFB’s authorities to fulfill  their safety and soundness responsibilities, the fragmentation of  authorities and responsibilities between OFHEO and HUD amplify our  significant concerns with HUD’s capacity as the mission regulator for  Fannie Mae and Freddie Mac. As stated in our  previous testimony, HUD officials we contacted said the department  lacked sufficient staff and resources necessary to carry out its GSE  mission oversight responsibilities. A Single Housing GSE Regulator Equipped with Sufficient Authorities and Governed by a Board or Hybrid Board Structure Is Critical

To address the deficiencies in the current GSE regulatory structure that I  have just described, 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. This single regulator should be better able to assess the  competitive effects of these activities on all three housing GSEs and better  able to ensure consistency of regulation for GSEs that operate in similar  markets. Adequate Regulatory Authorities Are Essential

It is essential that the new GSE regulator 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. Additional  studies may be needed to more precisely estimate the extent to which the  GSEs’ activities benefit home buyers. However, in our previous work, 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. Financial Regulation: Review of Selected Operations of the Federal  Housing Finance Board. Capital Structure of the Federal Home Loan Bank System. Government-Sponsored Enterprises: Development of the Federal Housing  Enterprise Financial Regulator.
Why GAO Did This Study

The housing government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System (FHLBank System), play a critical role in the nation's housing finance system. However, concerns exist that the fragmented federal oversight structure for the GSEs is not well positioned to help ensure that they operate in a safe and sound manner and fulfill their housing missions. This testimony provides information on the GSEs' missions and risks, the current regulatory structure, and proposed regulatory reforms. To prepare this testimony, GAO relied on a substantial body of previous work and updated its analysis in light of recent events.

What GAO Found

While the GSEs provide certain public benefits, they also pose potential risks. Fannie Mae and Freddie Mac's primary activity involves purchasing mortgages from lenders and issuing mortgage-backed securities that are either sold to investors or held in the GSEs' retained portfolio. The 12 FHLBanks traditionally made loans to their members and more recently instituted programs to purchase mortgages from their members and hold such mortgages in their portfolios. While not obligated to do so, the federal government could provide financial assistance to the GSEs, if one or more experienced financial difficulties, that could result in significant costs to taxpayers. Due to the GSEs' large size, the potential also exists that financial problems at one or more of the GSEs could have destabilizing effects on financial markets. The current housing GSE regulatory structure is fragmented and not well equipped to oversee their financial soundness or housing mission achievement. The Office of Federal Housing Enterprise Oversight (OFHEO) is responsible for safety and soundness oversight of Fannie Mae and Freddie Mac while the Federal Housing Finance Board (FHFB) is responsible for safety and soundness and mission oversight of the FHLBank System. Both regulators lack key statutory authorities to fulfill their safety and soundness responsibilities as compared to the authorities available to federal bank regulators. For example, OFHEO and FHFB are not authorized to limit the asset growth of housing GSEs if capital falls below predetermined levels. Moreover, the Department of Housing and Urban Development (HUD), which has housing mission oversight responsibility for Fannie Mae and Freddie Mac, faces a number of challenges in carrying out its responsibilities. In particular, HUD may not have sufficient resources and technical expertise to review sophisticated financial products and issues. Creating a single housing GSE regulator could better ensure consistency of regulation among the GSEs. With safety and soundness and mission oversight combined, a single regulator would be better positioned to consider potential trade-offs between these sometimes competing objectives. To be effective, the single regulator must have all the regulatory oversight and enforcement powers necessary to address unsafe and unsound practices, respond to financial emergencies, assess the extent to which the GSEs' activities benefit home buyers and mortgage markets, and otherwise ensure that the GSEs comply with their public missions. To ensure the independence and prominence of the regulator and allow it to act independently of the influence of the housing GSEs, this new GSE regulator should be governed by a board or hybrid board structure.