	Federal Housing Enterprises: Operations of the Office of Federal Housing Enterprise Oversight

Mr. Chairman and Members of the Committee: We are pleased to be here today to discuss the operations of the Office of Federal Housing Enterprise Oversight (OFHEO) and the status of OFHEO’s efforts to fulfill its mission of helping to ensure the safety and soundness of the two largest housing government-sponsored enterprises: Fannie Mae and Freddie Mac (the enterprises). We concluded that OFHEO has not yet fully implemented its statutory responsibilities and faces considerable future challenges in doing so. In particular, OFHEO currently does not expect to establish final risk-based capital standards for the enterprises until 1999, even though this process was to have been completed under the act by December 1, 1994. Although Fannie Mae and Freddie Mac have been consistently profitable in recent years, we believe it is essential, given the enterprises’ outstanding financial commitments of about $1.5 trillion at year-end 1996, that OFHEO implement its safety and soundness responsibilities as quickly as feasible so that any potential long-term financial risks to taxpayers are lowered. Thus, we believe that strong congressional oversight of the development process is necessary to help ensure that OFHEO’s plan to complete the risk-based capital standards is accomplished as quickly as feasible. OFHEO Has Not Fully Implemented a Comprehensive and Timely Enterprise Examination Oversight Program

In the absence of a stress test and risk-based capital standards, OFHEO’s primary means of helping to ensure the safety and soundness of the enterprises is its examination program. OFHEO’s 3-to 4-year examination cycle and limited examination coverage raise questions about the organization’s ability to fully monitor the enterprises’ financial activities and risks. Limited Resources Allocated to the Examination Office and Attrition Contributed to OFHEO’s Inability to Fully Implement the 1994 Plan

decision to commit virtually its entire staff of line examiners to each core risk examination for 1 year and the significant attrition the examination office has experienced have contributed to OFHEO’s inability to fully implement its 2-year examination cycle. We stated in our report that, without a reassessment of and potential reallocation of resources, OFHEO may not be able to implement an annual examination cycle by early 1998, since it had not fully implemented a 2-year cycle with existing examination office resources.
Why GAO Did This Study

Pursuant to a congressional request, GAO discussed the operations of the Office of Federal Housing Enterprise Oversight (OFHEO) and the status of OFHEO's efforts to fulfill its mission of helping to ensure the safety and soundness of the two largest government-sponsored enterprises, Fannie Mae and Freddie Mac.

What GAO Found

GAO noted that: (1) OFHEO has not fully implemented its statutory safety and soundness responsibilities for Fannie Mae and Freddie Mac, and faces considerable future challenges in doing so; (2) OFHEO does not expect to complete a stress test and risk-based capital standards for Fannie Mae and Freddie Mac until 1999, though it was to be completed by December 1, 1994; (3) OFHEO has not fully implemented a comprehensive and timely enterprise examination program, resulting in its limited ability to lower the long-term financial risks to taxpayers associated with the enterprises' activities; (4) GAO has identified a number of reasons for OFHEO's inability to comply with the statutory deadline for completing the stress test and risk based capital standards; (5) GAO believes that strong congressional oversight of the development process is necessary to ensure that OFHEO completes the process as quickly as feasible; (6) OFHEO has not been able to fully implement an enterprise examination schedule that it established in 1994, has taken 3 to 4 years to examine the major risks facing the enterprises, and reduced the planned coverage of the most recently completed risk examination; (7) among other factors, limited resources allocated to the examination office and staff attrition contributed to OFHEO's inability to fully implement the 1994 plan; (8) OFHEO officials said that they planned to reassess the examination cycle and implement an annual examination cycle by early 1998 to cover all enterprise risks; (9) without a reassessment of resource requirements and potentially a reallocation of resources to the examinations office, OFHEO may not be able to fully implement an annual examination cycle; and (10) although Fannie Mae and Freddie Mac have been consistently profitable in recent years, GAO believes it is essential, given the enterprises' outstanding financial commitments of approximately $1.5 trillion at year-end 1996, that OFHEO implement its safety and soundness responsibilities as quickly as feasible.