Based on discussions with congressional staff, our major objectives were to (1) identify why OFHEO has not finalized risk-based capital standards for the enterprises even though there was a December 1, 1994, deadline for doing so and (2) assess OFHEO’s implementation of its enterprises’ safety and soundness examination responsibility. Based on discussions with congressional staff, we established the following three objectives to assess OFHEO’s overall operations and its capacity to fulfill its safety and soundness mission: (1) identify the reasons that OFHEO did not complete the stress test and risk-based capital standards by December 1, 1994, (2) assess OFHEO’s implementation of its examination responsibilities, and (3) review the status of OFHEO’s implementation of key mission support functions and determine whether OFHEO’s participation in a U.S. government initiative to assist Mexico in developing a secondary mortgage market has had a material impact on OFHEO’s ability to fulfill its mission. OFHEO’s Development of a Stress Test and Risk-Based Capital Standards Has Been Protracted

The act required OFHEO to develop a stress test and risk-based capital standards as essential components of the organization’s mission to help ensure the safety and soundness of Fannie Mae and Freddie Mac. Our review found that the delay in the ongoing development process had been caused primarily by (1) the complex challenges of developing the stress test as required by the act and (2) OFHEO officials’ decision in 1994 that the organization develop its own sophisticated stress test rather than adopting and modifying stress tests that were already under development. Given the importance of the risk-based capital standards, we believe it is essential that OFHEO complete the tasks remaining to develop those standards as expeditiously as possible. In particular, OFHEO officials must coordinate the interagency review process and make key policy decisions about the stress test. The evidence we obtained indicated that, among other factors, limited resources applied to the examination function were largely responsible for OFHEO’s inability to fully implement the 1994 examination plan. In the reassessment of its examination strategy, OFHEO could usefully include consideration of different examination cycles and related coverage that could be accomplished with alternative resource levels. Although OFHEO has completed or initiated examinations covering five of the six core risks, at its current rate it will take OFHEO 3 to 4 years to examine all six core risk areas, which is considerably longer than the 2-year cycle established in the 1994 plan. In particular, OFHEO has too few examiners and specialists to fully cover the six core risks within a 2-year period. According to OFHEO officials, the organization plans to reassess its examination strategy and to make changes as necessary to shorten the examination cycle from 3 to 4 years to 1 year. We are concerned that, without a reassessment of resources, OFHEO may not be able to implement an annual enterprise examination program that adequately covers all risk areas by early 1998. Thus far, OFHEO has not been able to implement a 2-year examination cycle that fully covers all identified risk areas with examination office resources currently assigned.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO assessed the Office of Federal Housing Enterprise Oversight's (OFHEO) capacity to fulfill its mission of helping to ensure the safety and soundness of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), focusing on: (1) identifying the reasons why OFHEO has not issued final risk-based capital standards for the enterprises even though there was a December 1, 1994, deadline for doing so; and (2) OFHEO's implementation of its safety and soundness examination responsibilities.

What GAO Found

GAO noted that: (1) to fulfill its statutory safety and soundness mission, OFHEO is to establish risk-based capital standards that are sufficient to withstand the rigors of a complex stress test and implement a comprehensive and timely examination program; (2) to date, OFHEO has not fully completed either of these tasks; (3) OFHEO has not established the risk-based capital standards because it must first develop the stress test; (4) development of a stress test has been protracted primarily due to: (a) the complexity of the development process as specified in the act; and (b) OFHEO's decision in 1994 to develop its own sophisticated stress test rather than adopting and modifying stress tests that were already under development; (5) OFHEO has already missed its December 1994 statutory deadline for completing a stress test and establishing risk-based capital standards by almost 3 years; (6) tasks remaining include making key policy decisions about the stress test and continuing to translate its components into proposed and final rules; (7) GAO believes that it is essential that OFHEO complete the tasks remaining to develop those standards as expeditiously as possible; (8) OFHEO has not fully implemented a timely and comprehensive enterprise safety and soundness examination program; (9) OFHEO established an examination plan in September 1994 that provided for a 2-year cycle for the assessment of six core risks; (10) OFHEO's current 3- to 4-year cycle for assessing the six core risks is considerably longer than the 2-year cycle established in the plan; (11) GAO's analysis found that, among other factors, limited resources allocated to the examination office were largely responsible for OFHEO's inability to comply with the 1994 plan; (12) according to OFHEO officials, the organization plans to reassess its examination strategy and make changes necessary by early 1998 to ensure that its examination staff cover all six core risk areas within a 1-year period; (13) GAO believes that, without a reassessment, and potentially a reallocation of resources, OFHEO may not be able to implement an annual examination cycle by early 1998 that fully covers all risk areas, since the organization has been unable to implement a 2-year cycle with the current assignment of staff to the examination function; and (14) OFHEO could usefully include consideration of different examination cycles and related coverage that could be accomplished with alternative resource levels.