United States General Accounting Office

GAO Testimony

Before the Subcommittee on Capital Markets, Securities

and Government-Sponsored Enterprises, Committee on

Banking and Financial Services

House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

on Thursday

July 24, 1997

HOUSING ENTERPRISES

Advantages and

Disadvantages of Creating a

Single Housing GSE

Regulator

Statement of Jean Gleason Stromberg

Director, Financial Institutions and Markets Issues

General Government Division

GAO/T-GGD-97-160

Summary 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

GAO’s testimony, based on its recent report,1 discusses the advantages and

disadvantages of creating a single regulator for the housing

government-sponsored enterprises (GSE)—the Federal National Mortgage

Association (Fannie Mae), the Federal Home Loan Mortgage Corporation

(Freddie Mac), and the Federal Home Loan Bank System (FHLBank

System). Currently, the Federal Housing Finance Board (FHFB) oversees

the safety and soundness and the mission compliance of the FHLBank

System. The Office of Federal Housing Enterprise Oversight (OFHEO), an

independent office within the Department of Housing and Urban

Development (HUD), oversees the safety and soundness of Fannie Mae and

Freddie Mac. The Secretary of HUD has general regulatory power over

Fannie Mae and Freddie Mac.

GAO reviewed its past and ongoing work related to these GSEs and their

regulators, and solicited the views of housing, GSE, and regulatory officials.

In GAO’s 1991 and 1993 reports on GSEs, it identified five criteria that a GSE

regulatory agency structure should meet to facilitate effective oversight.2

The criteria specify that a GSE regulatory agency’s structure should provide

for (1) objectivity and independence from the GSE, (2) prominence in

government, (3) economy and efficiency, (4) consistency in regulation of

similar markets, and (5) separation of primary and secondary market

regulation.

GAO determined that the housing GSE regulators would be more effective if

the regulatory function was combined and one regulator was authorized to

oversee both safety and soundness and mission compliance. GAO’s analysis

of different regulatory structures indicated that an independent,

arm’s-length, stand-alone regulatory body headed by a board would best fit

its criteria for an effective regulatory agency structure. Although there

have been changes in the structure of regulatory oversight for the housing

GSEs since GAO first established its criteria, neither OFHEO, HUD, nor FHFB

meets all five criteria. A single housing GSE regulatory agency could be

more independent and objective than separate regulatory bodies and could

be more prominent than any one alone. Although the GSEs operate

differently, the risks they manage and their missions are similar. A single

regulator should be better able to assess the competitive effect of specific

mission requirements, such as special housing goals, and new programs or

1

Government-Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE

Regulator (GAO/GGD-97-139, July 9, 1997).

2

Government-Sponsored Enterprises: A Framework for Limiting the Government’s Exposure to Risks

(GAO/GGD-91-90, May 22, 1991); and Federal Home Loan Bank System: Reforms Needed to Promote

Its Safety, Soundness, and Effectiveness (GAO/GGD-94-38, Dec. 8, 1993).

Page 1 GAO/T-GGD-97-160
Summary 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

initiatives on all three housing GSEs and better ensure consistency of

regulation for GSEs that operate in similar markets.

Page 2 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

Mr. Chairman and Members of the Subcommittee:

We are pleased to appear here today to discuss our recently issued report

on creating a single regulator for the three housing government-sponsored

enterprises (GSE) — the Federal National Mortgage Association (Fannie

Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and

the Federal Home Loan Bank System (FHLBank System).3

 First, I will

discuss the advantages and disadvantages of creating a single housing GSE

regulator. Second, I will discuss the question whether both safety and

soundness and mission oversight should be vested in that regulator. Third,

I will discuss several possible regulatory structures. Finally, I will briefly

mention one other issue that is important in considering how best to

regulate the housing GSEs.

As you know, the current regulatory arrangement for the housing GSEs

involves three regulators. The Office of Federal Housing Enterprise

Oversight (OFHEO) regulates the safety and soundness of Fannie Mae and

Freddie Mac. HUD regulates Fannie Mae’s and Freddie Mac’s mission

compliance and has general regulatory authority over matters not made

exclusive to OFHEO by statute. The Federal Housing Finance Board (FHFB)

regulates both the safety and soundness and mission compliance of the

(FHLBank System).

In our 1991 and 1993 reports on GSEs, we identified criteria that a GSE

regulatory agency structure should meet in our view to facilitate effective

oversight.4

 These criteria were: (1) objectivity and independence,

(2) prominence in government, (3) ability to achieve economy and

efficiency, (4) ability to provide consistency in regulation, and (5) ability to

separate primary and secondary market regulation. On the basis of work

we have done subsequently, we believe those criteria remain sound. In

addition to reviewing our past work in light of the current regulatory

structure and GSE activities, as well as ongoing work related to these GSEs

3

Government-Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing GSE

Regulator (GAO/GGD-97-139, July 9, 1997).

4

Government-Sponsored Enterprises: A Framework for Limiting the Government’s Exposure to Risks

(GAO/GGD-91-90, May 22, 1991); and Federal Home Loan Bank System: Reforms Needed to Promote

Its Safety, Soundness, and Effectiveness (GAO/GGD-94-38, Dec. 8, 1993).

Page 3 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

and their regulators,5 we solicited views of housing, GSE, and regulatory

officials.

Our ongoing work has strengthened our belief that the housing GSE

regulators would be more effective if combined and authorized to oversee

both safety and soundness and mission compliance. Although there have

been changes in the regulatory oversight of the housing GSEs since we first

established our criteria, neither OFHEO, HUD, nor FHFB meet all of the

criteria. In particular, we note that FHFB is not completely an arm’s-length

regulator, as it is still involved in governance of the FHLBank System. In

addition, regulation of Fannie Mae’s and Freddie Mac’s mission

compliance is the responsibility of HUD, while their safety and soundness is

the responsibility of OFHEO. Our analysis of different regulatory structures

indicates that an independent, arm’s-length, stand-alone regulatory body

headed by a board would best fit our criteria for an effective regulatory

agency structure for the housing GSEs.

We Continue to

Support a Single

Housing GSE

Regulator

We continue to support the creation of a single housing GSE regulator as

recommended in our 1993 report. Although we recognize that the housing

GSEs operate and are structured differently, the risks they manage are

similar. We believe valuable synergies could be achieved and expertise

could be shared. Both OFHEO and FHFB evaluate how the enterprises

manage credit, interest rate, and other risks. In addition, OFHEO’s current

work in setting capital standards and developing a stress test for its GSEs

could be useful in evaluating the risks to the FHLBank System and the

adequacy of its capital.

We also believe that a single housing GSE regulator could foster

competition among the three GSEs while providing consistent rules and

interpretations. FHFB recently approved three FHLBank pilot programs that

involve services Fannie Mae or Freddie Mac could have or already does

provide. OFHEO officials told us they independently assessed the

competitive impact of these programs on Fannie Mae and Freddie Mac.

However, had a single regulator been responsible for all three GSEs, a

single assessment could have combined consideration of all competitive

effects and better ensured consistency of regulatory oversight. We

recognize that because of possible conflicting interests of the housing GSEs

5

See Government-Sponsored Enterprises: Development of the Federal Housing Enterprise Financial

Regulator (GAO/GGD-95-123, May 30, 1995); a study required by the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992. In addition, Section 430 of the Department of Veterans

Affairs/Department of Housing and Urban Development Appropriations Act of 1997 required us to

assess OFHEO’s operations and determine whether its resources are adequate and being used

appropriately to fulfill its critical safety and soundness mission. This work is ongoing.

Page 4 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

in pursuing their lines of business and missions, such an assessment could

be difficult. However, we believe the process could be handled more

effectively and efficiently within one regulatory body.

The most often identified disadvantage of creating a single housing GSE

regulator is the potential disruption in operations of the existing

regulatory agencies, especially for a relatively new agency like OFHEO. On

the other hand, these effects should be short term and the outcome should

result in more effective regulation in the long run.

Regulation of Mission

and Safety and

Soundness Would Be

More Effective If

Combined

In our May 1991 report on GSEs, we stated that regulation of a GSE’s mission

cannot be effectively separated from safety and soundness, and we still

support this position.6

 A regulator that performs both roles must, however,

be fully independent and at arm’s length from the GSEs it regulates. We

strongly believe that the independence this would provide is imperative to

ensure objectivity. As we noted in 1991, there is a distinction between a

safety and soundness regulator that confirms a GSE’s compliance with its

statutory purposes as articulated by Congress and one that participates in

the corporate governance of a GSE.

As you know, FHFB still participates in FHLBank System business, which

we have stated in previous work and continue to believe is inappropriate

for a regulator and presents potential for conflict.7

 For example, FHFB is

required to appoint six directors to each bank’s board and, until just last

month, approved applications for the Affordable Housing Program.8

 While

FHFB has delegated some duties related to FHLBank System management

to the FHLBanks, the Chairman of FHFB told us FHFB cannot fully delegate

these types of duties because of statutory constraints.

Some critics of combining mission and safety and soundness have voiced

concerns that doing so could create regulatory conflict for the regulator. It

seems to us, however, that the tension caused by having both private and

public characteristics could be best understood and accounted for by

having a single regulator that has complete knowledge of financial

condition, regulates the mission goals Congress sets, and assesses efforts

6

GAO/GGD-91-90, pages 29-31. In commenting on the 1991 report, Fannie Mae, Freddie Mac, and FHFB

all agreed with our position that safety and soundness could not be effectively separated from

statutory activities (mission). HUD took no position.

7

GAO/GGD-91-90 and GAO/GGD-94-38.

8

The Affordable Housing Program Regulations are set forth at 12 C.F.R. Part 960. The Board’s approval

procedures are contained in 12 C.F.R. § 960.5.

Page 5 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

to fulfill them. The link between mission and safety and soundness is

established in the housing GSEs’ charters. All three housing GSEs’ charters

acknowledge that economic considerations of the activities undertaken

cannot be ignored, especially where special mission requirements, such as

low-income housing goals, are addressed.

Given the current financial strength of Fannie Mae, Freddie Mac, the

FHLBank System and the overall economic environment, we determined

that, for now, there would be little tension between mission compliance

and safety and soundness concerns. However, should economic

conditions change for the worse, more tension could be created as the

GSEs try to provide acceptable returns to their owners while continuing to

comply with their special mission requirements. In this situation, we

believe it is important that a regulator be responsible for both to help

ensure adequate balance is maintained.

In our report, we also point out that combining mission and safety and

soundness regulation would facilitate assessing Fannie Mae and Freddie

Mac for the cost of overseeing their compliance with housing goals.

Currently, the cost of Fannie Mae’s and Freddie Mac’s mission oversight is

borne by the taxpayer as part of HUD’s budget. However, OFHEO’s and FHFB’s

costs are paid by their respective enterprises through assessments. In

addition, of course, oversight by one regulator could facilitate

congressional monitoring of the housing GSEs.

Possible Structures

for a Single

Regulatory Agency

The third area of our report that I will address is the possible structure for

a single regulatory agency. A single regulator for housing GSEs could be a

stand-alone agency or an independent office within an executive branch

agency, such as HUD or Treasury. The agency could be led by a board or a

single director. What is important in our view, is to ensure that it has the

independence and prominence that would allow it to act independently of

the influence of the housing GSEs, which are large and politically influential

institutions.

One of the primary advantages of creating a stand-alone agency, rather

than an independent agency within a department, is that it should be

better able to establish independence and be further removed from the

potential political influence of a cabinet-level department and from the

specific interests of its parent organization. In addition, a stand-alone

agency, because it would not be affiliated with a government department

Page 6 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

that has a particular focus, may be in a better position to ensure that safety

and soundness and mission are equitably overseen.

The advantages and disadvantages of having a new regulator that is set up

as an independent office within an executive branch agency would depend

on the agency. HUD and Treasury would be the most appropriate agencies

because of their roles in housing and finance. Although OFHEO has

functioned independently within HUD, having the housing GSE regulator

within HUD creates the potential for conflict with HUD’s role as a housing

promoter. However, HUD’s expertise in housing and the housing finance

system would be an advantage.

If the office were created within Treasury, it could benefit from Treasury’s

financial and regulatory expertise and prominence. In addition, this

affiliation would also reinforce the importance of safety and soundness

oversight as the regulator’s top priority. On the other hand, Treasury’s

objectivity and arm’s-length status could be questioned because of its two

specific responsibilities relating to GSEs: (1) power to approve the timing

and terms of new GSE debt issuances9

 and (2) ability to authorize use of

conditional lines of credit held by the GSEs.10

Closely related to the stand-alone versus independent office structure, we

considered a board versus a single director structure for governing a single

regulatory agency. We found that the board structure best fits our criteria

for an effective regulator for many of the same reasons that a stand-alone

agency is preferable to an executive branch agency.

We believe one advantage would be that a new regulator led by a board

would best be able to establish the requisite independence in government

and would also allow Congress to provide balance for the regulator’s

decisionmaking body. Both HUD and Treasury could be represented on a

board, providing a structure where any potential conflicts could be

addressed. A disadvantage of a board structure is that it may make

determining individual accountability for actions difficult. This potential

9

For years, Treasury scheduled GSE offerings to prevent timing conflicts among the GSEs that might

prove to be disruptive to the government securities market. On March 8, 1996, however, Treasury

eliminated its scheduling procedures for GSE securities offerings. GSEs have developed a voluntary,

cooperative scheduling system that eliminated the need for Treasury’s queuing process. Treasury’s

statutory authority to approve the timing and terms of GSE securities has not changed.

10The FHLBank System has a $4 billion line of credit with Treasury, while Fannie Mae and Freddie Mac

each have a $2.25 billion line of credit. However, use of the lines of credit is subject to Treasury’s

discretion.

Page 7 GAO/T-GGD-97-160
Statement 

Housing Enterprises: Advantages of

Creating a Single Housing GSE Regulator

inefficiency could be addressed by placing a presidentially appointed chair

or chief executive officer in charge of daily operations.

Among the financial regulators, we could not find any examples of

stand-alone agencies that were not headed by boards or commissions or

independent offices that were not headed by single directors. It seems

there are good reasons for these structures being linked. That is, although

a stand-alone agency structure provides independence and prominence in

government, the board structure has the advantages of allowing different

perspectives, providing stability, and bringing prestige to the agency, as

well as allowing Congress to provide balance for the regulator’s

decisionmaking body by requiring that members have certain expertise.

In closing, Mr. Chairman, I want to mention one additional issue that may

need to be addressed in your deliberations.

If a single regulator for the housing GSEs were created, you may want to

consider whether it should be included or excluded from the

appropriations process. Most financial institution regulators, including

OFHEO and FHFB, assess the institutions they oversee for the cost of

regulation. Thus, they are not funded from tax revenues and typically are

not subject to appropriations. OFHEO, however, is subject to the

appropriations process and has less control than some other regulators

over its resources. The appropriations process could subject the agency to

budgetary pressures that could conflict with the agency’s needs as a safety

and soundness regulator. On the other hand, we recognize that the

appropriations process does provide an additional mechanism for

congressional oversight.

That concludes my prepared statement. My colleagues and I would be

pleased to answer any questions.

Page 8 GAO/T-GGD-97-160
Page 9 GAO/T-GGD-97-160
Page 10 GAO/T-GGD-97-160
Related GAO Products

Government-Sponsored Enterprises: Advantages and Disadvantages of

Creating a Single Housing GSE Regulator, GAO/GGD-97-139, July 9, 1997.

Housing Enterprises: Investment, Authority, Policies, and Practices,

GAO/GGD-97-137R, June 27, 1997.

Comments on “The Enterprise Resource Bank Act of 1996”, GAO/GGD-96-140R,

June 27, 1996.

Housing Enterprises: Potential Impacts of Severing Government

Sponsorship, GAO/GGD-96-120, May 13, 1996.

Letter from James L. Bothwell, Director, Financial Institutions and

Markets Issues, GAO, to the Honorable James A. Leach, Chairman,

Committee on Banking and Financial Services, U.S. House of

Representatives, Re GAO views on the “Federal Home Loan Bank System

Modernization Act of 1995,” B-260498, Oct. 11, 1995.

FHLBank System: Reforms Needed to Promote Its Safety, Soundness, and

Effectiveness, GAO/T-GGD-95-244, Sept. 27, 1995.

Housing Finance: Improving the Federal Home Loan Bank System’s

Affordable Housing Program, GAO/RCED-95-82, June 9, 1995.

Government-Sponsored Enterprises: Development of the Federal Housing

Enterprise Financial Regulator, GAO/GGD-95-123, May 30, 1995.

Farm Credit System: Repayment of Federal Assistance and Competitive

Position, GAO/GGD-94-39, March 10, 1994.

Farm Credit System: Farm Credit Administration Effectively Addresses

Identified Problems, GAO/GGD-94-14, Jan. 7, 1994.

Federal Home Loan Bank System: Reforms Needed to Promote Its Safety,

Soundness, and Effectiveness, GAO/GGD-94-38, Dec. 8, 1993.

Improved Regulatory Structure and Minimum Capital Standards are

Needed for Government-Sponsored Enterprises, GAO/T-GGD-91-41, June 11,

1991.

Government-Sponsored Enterprises: A Framework for Limiting the

Government’s Exposure to Risks, GAO/GGD-91-90, May 22, 1991.

Page 11 GAO/T-GGD-97-160
Related GAO Products

Government-Sponsored Enterprises: The Government’s Exposure to

Risks, GAO/GGD-90-97, Aug. 15, 1990.

233529 Page 12 GAO/T-GGD-97-160
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