Scope and Methodology

We reviewed the enterprises’ charters and relevant statutes to examine the enterprises’ legal authority for making nonmortgage investments and regulatory oversight of that activity. We reviewed literature on the role of the housing enterprises in the residential mortgage market to examine the extent to which the enterprises have undertaken nonmortgage investments for arbitrage profits. The Enterprises’ Nonmortgage Investments Have Not Created a Safety and Soundness Concern

OFHEO has concluded that each housing enterprise’s nonmortgage investment policies and practices have not constituted a safety and soundness concern. FCA has general regulatory authority that would allow oversight of Farmer Mac’s investment activities. HUD’s plan is to monitor investment trends so that it can determine if the investments are consistent with the enterprises’ missions and purposes as defined in their charters. In October 1997, FCA indicated that, for now, it did not have concerns that Farmer Mac’s nonmortgage investment activity is inconsistent with its charter mission. However, 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. 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. All three enterprises have committees that set policy and make recommendations concerning compensation. Long-Term, Fixed-Rate Nonmortgage Investments by the Housing Enterprises Generate Arbitrage Profits, and Their Relationship to Mission Is Less Clear

Freddie Mac officials indicated that nonmortgage investments are an integral tool for carrying out its housing finance mission and are held for three principal reasons: (1) cash management purposes; (2) as an investment vehicle that could make capital available (i.e., to employ capital) to help fund future anticipated demand to fund residential mortgages; and (3) as an investment vehicle to employ capital for future unexpected demand to fund residential mortgages. This activity is consistent with how Fannie Mae employs its short-term nonmortgage investments. Nonetheless, some arbitrage profits are generated from these investments. The enterprises have investment policies that specify permissible credit ratings, maturities, and concentration limits and describe the relationship of investments to earnings and to achievement of mission. The various nonmortgage investments appear to fall along a continuum representing the degree to which they relate to the housing enterprises’ missions. Such an approach was used in a study commissioned by the Department of Housing and Urban Development to evaluate the implications of severing government sponsorship of the housing enterprises on the enterprises’ debt costs. 3. Freddie Mac’s nonmortgage investments, in contrast, directly serve our statutory purposes of providing liquidity and stability to the mortgage market.” Here, we again note that the relationship between the various nonmortgage investments and mission achievement is less clear for the longer term than the shorter term nonmortgage investments. 4. GAO Comments

1. As a result, they are less useful in facilitating liquidity in the agricultural mortgage market than short-term investments. 2. 3. 5.
Why GAO Did This Study

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.

What GAO Found

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.