Report to Congressional Committees

United States General Accounting Office

GAO

June 2002 OFHEO’S RISKBASED CAPITAL

STRESS TEST

Incorporating New

Business Is Not

Advisable

GAO-02-521
Page i GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Letter 1

Results in Brief 2

Background 3

New Business Has a Substantial Impact on the Enterprises’

Financial Health, Level of Risks, and Capital Adequacy 6

Incorporating New Business Assumptions Is Difficult and

Inherently Speculative 10

Supervisory Review Can Be Another Effective Tool for Limiting the

Potential Risks of New Business 16

Conclusions 18

Recommendation 19

Agency Comments and Our Evaluation 19

Appendix I HUD Regulates the Enterprises’ Housing Goal

Requirements 22

Appendix II The Business of the Enterprises 24

Appendix III Comments from Freddie Mac 26

Related GAO Products 27

Tables

Table 1: Enterprise Purchases of Single-Family Mortgages

Compared with Originations and the Prior Year’s Mortgage

Portfolio, 1991-2000 7

Table 2: Selected Enterprise On-Balance Sheet Holdings and

Liabilities as of December 31, 2001 24

Table 3: Total Mortgage Portfolio of the Enterprises, Year-End 2001 24

Table 4: Selected Data on Enterprise Income and Expenses for the

year ending December 31, 2001 25

Contents
Page ii GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Abbreviations

HUD Department of Housing and Urban Development

MBS mortgage-backed securities

FCA Farm Credit Administration

FHFB Federal Housing Finance Board

FHLBank Federal Home Loan Bank

GSE Government-Sponsored Enterprise

OFHEO Office of Federal Housing Enterprise Oversight

PCA Prompt Corrective Actions
Page 1 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

June 28, 2002

Congressional Committees:

This report responds to a mandate in the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992 (the act)1

 that we study

whether the Office of Federal Housing Enterprise Oversight (OFHEO)

should incorporate new business assumptions into the stress test used to

establish risk-based capital requirements. The stress test is designed to

estimate, for a 10-year period, how much capital the Federal National

Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage

Corporation (Freddie Mac) would be required to hold to withstand

potential economic shocks, such as sharp movements in interest rates or

adverse credit conditions.2

 Incorporating new business assumptions into

the stress test would mean specifying details about the types and quality of

new mortgages that would be acquired during the 10-year stress period,

the types of funding that would be used to acquire such mortgages, and

other operating and financial strategies that would be implemented by

Fannie Mae’s and Freddie Mac’s (the enterprises) managements. Under the

terms of the act, the current test assumes that the enterprises do not

contract for any new business beyond what is on the books at the time of

the test. OFHEO issued its risk-based capital rule on September 13, 2001.3

Four years after issuing its risk-based capital rule, OFHEO has the option

to incorporate new business assumptions into the test. Our mandate is to

provide, within the first year after the rule is issued, an opinion on the

advisability of including new business after the initial 4-year period.4

As agreed with your offices, our objectives were to (1) analyze the effects

that new business could have on the enterprises’ financial condition and

capital adequacy; (2) analyze the challenges of incorporating new business

assumptions into the stress test, including any potentially adverse

consequences; and (3) consider the efficacy of using supervisory review in

 1

P. L. No. 102-550, title XIII (1992). The mandate is codified at 12 U.S.C. § 4611 (a)(3)(C)

(2000).

2

The level of risk-based capital a regulated institution is required to hold is based on

potential losses the institution faces as a result of its activities.

3

12 C.F.R. part 1750 (2002).

4

The Congressional Budget is also required to submit an opinion.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

conjunction with the current stress test to address the potential risks

associated with new business.

To complete our work, we reviewed (1) the 1992 act and its legislative

history; (2) enterprise capitalization studies conducted by the Department

of Housing and Urban Development (HUD) prior to OFHEO’s

establishment; (3) OFHEO’s current risk-based capital regulation and

public comments made on previously proposed risk-based capital rules;

(4) historic financial data pertaining to the balance sheets and new

business activities of the enterprises; (5) each enterprise’s riskmanagement practices and financial models used for planning and riskmanagement purposes; and (6) related literature. We did not verify

financial data on the enterprises or provided by OFHEO, nor did we

review the mechanics of the OFHEO stress test model. We also

interviewed officials from the enterprises, HUD, OFHEO, and rating

agencies, as well as individuals engaged in developing risk-based capital

models for financial institutions. Our scope was limited to our study

mandate and its focus on new business assumptions, so we did not make

an overall evaluation of OFHEO’s current risk-based capital rule or stress

test, except as they directly applied to our study mandate.

We conducted our work in Washington, D.C., between September 2001

and April 2002, in accordance with generally accepted government

auditing standards.

New business is an important determinant of the expected future financial

condition of both Fannie Mae and Freddie Mac. Data for the enterprises

show that new business conducted over a 10-year period generally

accounts for a large share of their on- and off-balance sheet holdings of

assets and liabilities at the end of each 10-year period. Because new

business represents such a large share of enterprise holdings over time, it

would have a major impact on the enterprises’ financial condition, risks,

and capital adequacy in the face of stressful events.

However, determining the appropriate new business assumptions to

include in OFHEO’s model would be difficult and inherently speculative.

To incorporate new business assumptions, OFHEO would have to develop

plausible scenarios for how enterprise management and the market would

respond in a stressful environment. For instance, OFHEO would need to

consider management’s capacity, not only to make appropriate

adjustments in the face of uncertainty but, it would also have to make

assumptions about actions the enterprises might take to improve their

Results in Brief
Page 3 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

financial condition. Another factor to consider would be HUD’s regulatory

behavior during periods of stress, because the Secretary of HUD has

exclusive authority to promulgate and enforce numeric housing goals for

the enterprises. The fact that the enterprises do not incorporate new

business assumptions into their own long-term capital adequacy models

illustrates the difficulties involved. The enterprises generally incorporate

new business assumptions only into financial models for relatively shortterm planning (4 years or less). In addition, incorporating new business

assumptions would increase the complexity of OFHEO’s already complex

stress test, making it more difficult to understand and replicate. Because

of the importance of new business and the speculative nature of any

assumptions about enterprise behavior, the assumptions required could

dominate the capital requirement.

OFHEO has another tool it can use to limit risk taking by the enterprises.

Supervisory review, which includes examination of the enterprises’

ongoing business activities and enforcement actions, should work in

conjunction with the capital requirement to help ensure the safety and

soundness of the enterprises. OFHEO is authorized to take actions to limit

risk taking when an enterprise’s financial condition is jeopardized.

Financial regulators tend to rely on supervisory review to respond when

specific practices occur that could pose a safety and soundness concern.

This report contains a recommendation to the director of OFHEO that the

agency not incorporate new business assumptions into its stress test,

because determining the assumptions is inherently speculative and

including them would introduce more complexity to an already complex

model.

Congress established and chartered the enterprises—Fannie Mae and

Freddie Mac—as government-sponsored enterprises (GSE) that are

privately owned and operated. Their 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

bankers) that use the proceeds to make additional mortgage loans to home

buyers. The enterprises issue debt to finance some of the mortgage assets

they retain in their portfolios. Most mortgages purchased by the

enterprises are conventional mortgages, which have no federal insurance

Background
Page 4 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

or guarantees. Enterprise purchases are subject to a conforming loan limit5

that currently stands at $300,700 for a single-unit home.

The debt and mortgage assets in the enterprises’ portfolios are on-balance

sheet obligations (liabilities) and assets, respectively. A majority of the

mortgages, however, are placed in mortgage pools to support mortgagebacked securities (MBS) that may be sold to investors or repurchased by

the enterprises and held in their portfolios. MBS are conduits for

collecting principal and interest payments from mortgages in the mortgage

pools and passing payments onto MBS investors. The enterprises charge

fees for guaranteeing the timely payment of principal and interest on MBS

held by investors. MBS held by investors other than the enterprises are offbalance sheet obligations of the enterprises.

The federal government’s creation of and continued relationship with

Fannie Mae and Freddie Mac have created the perception in financial

markets that the government will not allow the enterprises to default on

their debt and MBS obligations, although no such legal requirement exists.

As a result, Fannie Mae and Freddie Mac can borrow money in the capital

markets at lower interest rates than comparably creditworthy private

corporations that do not enjoy federal sponsorship. At least a portion of

the financial benefits that accrue to the enterprises have been passed

along to homeowners in the form of lower mortgage interest rates.

During the 1980s, the government did provide limited regulatory and

financial relief to Fannie Mae when the enterprise was experiencing

significant financial difficulties; and in 1987, Congress authorized $4 billion

to bail out the Farm Credit System, another GSE. Recognizing the

potentially large costs that Fannie Mae and Freddie Mac pose to taxpayers,

Congress passed the act, which established OFHEO as an independent

regulator within HUD—tasked with ensuring the enterprises’ safety and

soundness. OFHEO’s director has broad independent authority to ensure

that OFHEO fulfills its safety and soundness mission. For example, the

director has the authority to take supervisory and enforcement actions

regarding the safety and soundness of the enterprises without the review

and approval of the Secretary of HUD.

 5

The enterprises’ charters restrict them to buying mortgages that do not exceed a set dollar

amount. This ceiling is known as the conforming loan limit.
Page 5 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

The act requires OFHEO to carry out its oversight function both by

establishing and enforcing minimum capital standards (including the riskbased capital standard) and by conducting annual on-site safety and

soundness examinations of the enterprises to assess their operations and

financial condition. The act established the broad outlines of a stress test

and mandated that OFHEO develop its stress test within those parameters

to serve as the basis for the risk-based capital standards.6

 The act requires

the stress test to simulate situations that expose the enterprises to

extremely adverse credit and interest rate scenarios over a 10-year period

and to calculate the cash flows and the amount of capital the enterprises

would need to continue to operate for the entire period. The stress test

model must include upward and downward interest rate movements of up

to 6 percentage points and assume a high level of credit risk (based on the

worst cumulative credit loss for not less than 2 consecutive years in

contiguous states encompassing at least 5 percent of the U.S. population).

As required in the act, the stress test model that the agency developed

estimates credit7

 and interest rate8 risks, among other factors, and includes

an additional 30 percent of that amount for management and operations

risk.9

 Also as required, it does not include new business assumptions. The

act set a December 1, 1994, deadline for completion of the stress test and

risk-based capital standards.

HUD is the mission regulator of the enterprises. The Secretary of HUD has

general regulatory power over the enterprises to ensure that they carry out

their mission as stated in their charters. The act requires the Secretary to

establish annual goals for purchases of mortgages on low- and moderateincome housing, special affordable housing, and housing in central cities,

rural areas, and other under-served areas. When HUD establishes housing

goals, it must look at several factors, including the need for the enterprises

to remain in sound financial condition. For more information about HUD’s

mission regulation, see appendix I.

 6

For financial purposes, capital is generally defined as the long-term funding for a firm that

cushions the firm against unexpected losses.

7

Generally, credit risk is the risk of loss that arises when borrowers fail to repay their loans,

other parties fail to meet their obligations to administer or guarantee loans, or both.

8

Generally, interest rate risk is the exposure to possible losses and changes in value arising

from changes in interest rate.

9

Generally, management and operations risk is the exposure to financial loss from

inadequate systems, management failure, faulty controls, or human error.
Page 6 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

The enterprises are in the business of buying and holding mortgages and

insuring mortgage cash flows to investors. New business accounts for a

large share of the enterprise’s on- and off-balance sheet holdings and thus

has a major impact on their activities and financial health. The financial

health of the enterprises and their ability to survive a future stressful

economic period depend on the level of risk in both their existing and new

business; the amount of capital that is available to them to absorb any

losses—their capital adequacy; and the business decisions they make

during the stressful period.

The enterprises continually acquire mortgages originated by lenders for

home purchases and for refinancing existing mortgages (see table 1). Such

mortgage acquisitions are a large share of total originations in any year

and are often large relative to mortgage holdings at the end of the prior

year. For example, the enterprises’ purchases equaled between 32 and 51

percent of total single-family originations in each year between 1991 and

2000.10 In addition, their yearly purchases between 1991 and 2000 ranged

from about 17 to 51 percent of their total mortgage portfolios in the prior

year.11

 10Due to data limitations, we compared enterprise purchases with total single-family

originations.

11An enterprise’s total mortgage portfolio includes on-balance mortgage assets plus offbalance sheet MBS held by investors. MBS issuance moves mortgage assets and associated

interest-rate risk off the enterprise’s balance sheet unless the enterprise repurchases the

securities.

New Business Has a

Substantial Impact on

the Enterprises’

Financial Health,

Level of Risks, and

Capital Adequacy

New Business Affects the

Enterprises’ Financial

Condition
Page 7 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Table 1: Enterprise Purchases of Single-Family Mortgages Compared with Originations and the Prior Year’s Mortgage

Portfolio, 1991-2000

Dollars in millions

Year

Total enterprise

purchases

Total

originations

Enterprise

purchases as a

percentage of

originations

Prior year’s

 total enterprise

mortgage portfolios

Enterprise

purchases as a

percentage of prior

year’s portfolios

1991 $233,280 $562,074 41.50 $740,020 31.52

1992 439,309 893,666 49.16 867,793 50.62

1993 518,877 1,019,861 50.88 1,021,847 50.78

1994 280,792 773,121 36.32 1,156,442 24.28

1995 215,974 639,436 33.78 1,240,987 17.40

1996 287,306 785,329 36.58 1,332,849 21.56

1997 275,081 859,100 32.02 1,445,591 19.03

1998 618,410 1,470,000 42.07 1,536,258 40.25

1999 548,748 1,275,000 43.04 1,786,598 30.71

2000 395,082 1,048,000 37.70 2,062,943 19.15

Source: OFHEO.

At the end of 2001, Fannie Mae’s total mortgage portfolio was $1.56 trillion

and Freddie Mac’s $1.14 trillion, of which $705 billion and $492 billion,

respectively, represented on-balance sheet mortgages. For more

information about the financial performance of the enterprises, see

appendix II.

The enterprises face two primary risks, which are modeled in OFHEO’s

stress test: interest rate risk and credit risk. The degree of risk depends on

the enterprises’ operating and managerial decisions as well as on future

economic factors such as interest rates, unemployment, inflation, and

economic growth. Although the enterprises can take risk-management

efforts to limit their exposure, the costs of these efforts can reduce profits.

Thus, risk management is usually associated with both a lower expected

or average profit and reduced variability in profits and losses.

Interest rate risk reflects both movements in interest rates and

management decisions about how to fund mortgage acquisitions. In

general for the enterprises, when market interest rates decline, mortgage

purchases increase as homeowners move and pay off or refinance existing

mortgages. Declining rates may also lower the enterprises’ funding costs.

In contrast, rising market interest rates create higher interest expenses for

the enterprises as debt turns over. Prolonged periods of rising interest

rates typically lead to a slowdown in prepayments and refinancing activity,

because interest rates on new mortgages are higher than those on most of

New Business Affects the

Enterprises’ Level of Risk

Effects of Interest Rate Risk
Page 8 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

the previously originated mortgages. If funding costs rise and existing onbalance sheet mortgages at old, lower interest rates remain on the books,

prolonged periods of losses and capital erosion can occur. Enterprise

management can use callable debt12 and other financial instruments or

strategies to mitigate interest rate risk and other potential losses.

However, such managerial decisions will tend to lower future expected

profits.

OFHEO’s current stress test, which assumes no new business over a 10-

year period, simulates the impact of interest rate movements and

economic conditions on the behavior of borrowers whose mortgages are

held by the enterprises and therefore affect the enterprises’ cash flows.

The model requires that the mortgage holdings wind down over the 10-

year period. The extent to which existing business winds down shows the

importance of new business, because in practice the enterprises would be

acquiring new mortgages to replace lost mortgages during the period.

In the stress test model, the remaining mortgage balance (and existing

business) depends on scheduled payments of principal, other

prepayments, and defaults. Prepayments are sensitive to interest rate

changes because lower rates accelerate prepayments and higher rates

depress them. Default losses are sensitive to economic conditions,

including loan-to-value ratios and seasoning,13 because loans with lower

loan-to-value ratios and seasoned loans are less likely to default.

OFHEO ran its model for us for a portfolio of newly originated 30-year

fixed-rate single-family mortgages14 with 95 percent loan-to-value ratios.

About 4.7 percent of a portfolio of newly originated loans would still be on

the enterprises’ books after 10 years in the declining interest rate

environment mandated by the act. In the increasing rate environment

mandated by the act, about 57.3 percent of a portfolio of newly originated

 12Callable debt refers to financial debt instruments, such as bonds, that are redeemable by

the issuer before the scheduled maturity. The issuer must pay the holders a premium price

if such a security is retired early. Bonds are usually called when interest rates fall so

significantly that the issuer can save money by floating new bonds at lower rates.

13The act defines seasoning as “the change over time in the ratio of the unpaid principal

balance of a mortgage to the value of the property by which such mortgage loan is

secured.” 12 U.S.C. § 4611 (d)(1) (2000).

14A single-family mortgage loan finances a one- to four-unit residential property;

multifamily loans finance properties with five or more housing units.
Page 9 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

loans would still be on the enterprises’ books after 10 years.15 OFHEO also

ran the model on other portfolios with different loan-to-value ratios and

degrees of seasoning, with similar results in both the declining and

increasing rate environments. As previously stated, in actual practice the

enterprises would replace many of the lost loans; and the types of

mortgages acquired and types of financial instruments actually used to

fund these new mortgages would significantly impact returns and risks.

Credit risk reflects both economic conditions and management decisions

about mortgage acquisitions. Deteriorating economic conditions can lower

home values and reduce homeowners’ incomes, therefore increasing

credit risk. Likewise, management decisions to increase loan-to-value

ratios or otherwise ease underwriting standards can raise credit risk.

The OFHEO simulations also showed how the credit stresses in the

mandated increasing and decreasing rate environments could affect creditrelated losses. The simulations showed that, for a portfolio of newly

originated single-family mortgages with a 95 percent loan-to-value ratio,

defaults would account for a decline of about 19.5 percent of the original

mortgage balances in the decreasing rate environment and a decline of

about 16.2 percent of the original mortgage balances in the increasing rate

environment.

The enterprises could limit credit risk in several ways. For example, they

could use more stringent underwriting standards, although such standards

could limit the dollar volume of mortgages they are able to purchase and

possibly affect their ability to support the residential mortgage market. For

instance, requiring homeowners to make large down payments or

purchase private mortgage insurance could make acquiring a mortgage

more difficult for potential homeowners. Second, they could more

aggressively monitor loans and work out problems with troubled loans.

Third, the enterprises could mitigate the economic costs of defaults by

raising the management guarantee fee they charge mortgage pools for

providing credit insurance and managing the pools. Ultimately, however,

management actions to limit credit risk might create expenses that would

curtail expected future profits. Actual decisions about underwriting,

mortgage monitoring, and guarantee fees would affect the returns and

risks associated with the acquisition of new mortgages by the enterprises.

 15Part of this decline in mortgage balances is the result of factors such as defaults.

Effects of Credit Risk
Page 10 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Under the risk-based capital test, capital adequacy measures the amount

of capital an enterprise needs to ensure that it can continue to operate

during a stressful period and is based on expected profits and the risks

taken to generate those profits. Generally speaking, risk and profit are

positively related. For example, an enterprise can increase its expected

profits by taking more risks, but taking greater risks can increase the

possibility that the enterprise will not survive a stressful economic period

due to losses incurred. An enterprise can increase its chances of surviving

a stressful period by increasing its capital level, but such increases raise

funding costs and reduce future expected profits. Capital adequacy also

depends on the extent and duration of the economic stress that the

enterprise might encounter. The greater the levels of stress an enterprise

must endure and the longer the exposure to stress, the less likely it is that

the enterprise will survive the stress period with a given level of capital.

Incorporating new business assumptions into long-term financial planning

models is difficult, primarily because doing so is inherently speculative.

Incorporating such assumptions would require OFHEO to develop

plausible scenarios for the future behavior of the enterprises—for

example, the types of mortgages they might acquire, their future funding

strategies, and other managerial decisions. In addition, OFHEO would

have to consider HUD’s regulatory actions and their effect on the

enterprises during the stress period. The difficulty of incorporating new

business assumptions into a stress test is reflected in the fact that the

enterprises do not include such assumptions in their own long-term capital

adequacy models. The enterprises generally use new business assumptions

only in models with relatively short time frames (up to 4 years). Finally,

OFHEO’s stress test is already highly complex. Adding new business

assumptions would increase its complexity and make the legal

requirement that it be replicable more difficult to meet.

An OFHEO stress test with new business assumptions would have to

include explicit assumptions about the enterprises’ strategic managerial

behavior in a stressful economic environment. Management’s behavior

would have to be linked to hedging, which affects interest rate risk;

underwriting, which affects credit risk; and setting guarantee fees, which

affect earnings. Specifying management’s behavior would be speculative,

unlike the modeling of borrowers’ behavior in the stress test. Borrowers’

behavior related to mortgage prepayment and default can be and is

predicted in the stress test, based on statistical techniques that are applied

to historic data. Although this prediction is subject to statistical

New Business Affects the

Enterprises’ Capital

Adequacy

Incorporating New

Business Assumptions

Is Difficult and

Inherently Speculative

OFHEO’s Assumptions

about the Behavior of

Management Would Be

Speculative
Page 11 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

measurement errors, these techniques can be used to extrapolate

borrower behavior in a stressful environment. However, because

managerial behavior is idiosyncratic, such techniques cannot be used to

extrapolate managerial behavior in a stressful environment from behavior

in more normal economic environments. For instance, overall

management strategies dealing with both interest rate and credit risks

could either exacerbate risk exposures or mitigate such risks to various

degrees. OFHEO would lack criteria, both statistical and theoretical, to

justify assumptions about these strategies. Therefore, OFHEO would have

to speculate about managerial behavior to develop new business

assumptions. In addition, because a significant proportion of the

enterprises’ mortgages either prepay or default over a 10-year period and

are replaced by new business, the assumptions about new business could

easily dominate the cash and capital flows in the stress test over the 10-

year period. These assumptions could also determine whether the

enterprises met or failed to meet the risk-based capital requirement.

In the legislative history of the act, Congress recognized that OFHEO

would have to hypothesize about any new business assumptions that

might be included in a stress test. Language in a Senate committee report

explicitly recognized that incorporating new business assumptions during

a stressful period would require speculating about enterprise behavior.

The report recognized that any assumptions addressing new business in

the stress test would also have to incorporate further assumptions about

enterprise management’s capacity to make suitable adjustments.16

The act requires the director to assume that the new business the

enterprises conduct during the stress period will be consistent with either

historic or recent experience and with the economic characteristics of the

stress period. In particular, the director must make specific assumptions

about five factors:

• the amounts and types of business,

• losses,

• pricing,

• interest rate risk, and

• reserves.

 16S. Rep. No. 102-282 at 22 (1992).
Page 12 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

These restrictions limit OFHEO’s modeling assumptions, allowing for

managerial response only after the advent of the stressful condition and

requiring that the responses be consistent with the prior behavior of the

enterprise. In other words, for purposes of the stress test OFHEO cannot

assume that management will take actions in anticipation of stressful

conditions, that management will be able to respond differently than it has

previously under similar circumstances, or that management will respond

promptly and effectively to stressful situations to maintain adequate

capital.

In addition to speculating about the behavior of the enterprises’

management, OFHEO would need to consider HUD’s regulatory response

to a stressful environment. HUD regulates the enterprises in terms of

housing goals and other charter requirements not directly concerned with

safety and soundness (see app. I for a detailed description of HUD’s

regulatory responsibilities and powers).17 However, when HUD establishes

housing goals, it must look at several factors, including the need for the

enterprises to remain in sound financial condition.

If either enterprise’s financial condition should falter, the Secretary of

HUD would likely take regulatory actions to help the enterprise rather

than allow it to withdraw entirely from the secondary mortgage market or

from segments of the market governed by HUD’s numeric goals. For

modeling purposes, OFHEO would have to consider both the regulatory

actions HUD might take to ensure that the enterprises continue to comply

with the housing goals and the effects of such actions on management’s

approach to new business and risks. HUD’s regulatory response could

have a further effect on the model by constraining the enterprises and thus

affecting managerial decisions at the enterprises.

 17The act gave the Secretary of HUD exclusive authority to promulgate numeric housing

goals for the enterprises and to monitor and enforce compliance with these goals.

OFHEO Would Need to

Consider HUD’s

Regulatory Response to

the Enterprises’ Housing

Goals
Page 13 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

The enterprises do not include new business in their long-term financial

models (Fannie Mae) or in their capital adequacy models (Freddie Mac)

because they believe that such assumptions would be speculative.18 Fannie

Mae officials told us that it would not be reasonable to make new business

assumptions beyond a window of several years, and the results of such a

modeling approach might be more reflective of the assumptions

themselves than of the actual risks faced by Fannie Mae. Freddie Mac’s

interest rate risk exposure is stated in terms of portfolio market value

sensitivity, or the estimated percentage decline in Freddie Mac’s market

value of equity that results from a change in interest rates. Freddie Mac

officials told us that another reason they do not include new business in

their risk models is that they want to focus on the risks of the current

book of business and not the profitability of new business. Although

OFHEO probably would not rely solely on the enterprises’ assumptions

about new business, in the absence of such assumptions, OFHEO would

still have to make plausible assumptions about the enterprises’ behavior.

The enterprises do include new business assumptions in the short-term

models used to manage business on a day-to-day basis and for planning.

The enterprises’ short-term planning models typically focus on business

strategies during time periods of no more than 4 years under economic

stresses that are relatively normal compared with those in OFHEO’s stress

test. Some of these models used to analyze interest rate risk include new

business assumptions.

Our review of information from regulators and three rating agencies

(Standard & Poor’s, Moody’s, and Fitch) indicates that these entities do

not use new business assumptions when evaluating the capital adequacy

of financial institutions. For example, the Federal Housing Finance Board

(FHFB) has issued risk-based capital standards for the other housing GSE,

the Federal Home Loan Bank (FHLBank) System. FHFB developed an

approach based on the existing balance sheet that estimates the market

value of the FHLBank’s portfolio at risk under financial stress scenarios

and thus does not require an assumption about new business. As another

example, depository institution regulators have established capital

requirements for credit risk that assign all existing assets and off-balance

sheet items to broad categories of relative risk; and they do not

 18Fannie Mae officials distinguish between long- and short-term models, with long-term

models covering periods of more than 4 years. Freddie Mac officials distinguish between

capital adequacy (or risk) models and models used to manage day-to-day business (and for

planning).

New Business

Assumptions Are Not

Included in Fannie Mae’s

Long-Term Financial

Modeling or Freddie Mac’s

Modeling for Capital

Adequacy

Other Entities Generally Do

Not Incorporate New Business

Assumptions When Evaluating

Long-Term Capital Adequacy
Page 14 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

incorporate new business assumptions. In addition, Standard & Poor’s,

Moody’s, and Fitch use no new business in their stress tests for rating

private mortgage insurers.19

During our review, we identified one instance in which new business

assumptions are included in a risk-based capital stress test. The Farm

Credit Administration (FCA) has established risk-based capital standards

for Farmer Mac, a relatively small GSE operating in the secondary market

for agricultural mortgages. FCA includes replacement of paid-off

agricultural mortgages in its 10-year stress test model.20

The unique nature of OFHEO’s risk-based standard, particularly the 10-

year time frame and the specificity regarding stresses, makes the OFHEO

stress test complex. Adding new business assumptions would increase this

complexity by introducing more factors that could affect the behaviors

modeled within the stress test and requiring that more behaviors be

modeled.21 Adding more complexity would further limit the ability of

analysts and others to understand and replicate the test, as the 1992 act

requires.22 For example, the test would likely require refinements to take

into account the dynamic behaviors of borrowers, investors in enterprise

debt and MBS, and the enterprises over the 10-year period. These

behaviors include shifts in borrower demand for fixed- and adjustable-rate

mortgages, investors’ willingness to take on the risk of alternative funding

sources for the enterprises, and the enterprises’ mortgage purchase and

funding strategies. According to enterprise officials, the ability of

individuals outside of OFHEO to understand and replicate the current

stress test is already strained, even without new business assumptions.

The inclusion of new business assumptions to predict the behaviors of

 19The enterprises face credit risks that are similar to those faced by private mortgage

insurance companies.

20Requirements for the test can be found at 12 C.F.R. part 650 (2002). We did not evaluate

FCA’s stress test.

21Under the act, the director of OFHEO, among other considerations, is required to ensure

that the regulations “shall contain specific requirements, definitions, methods, variables

and parameters used under the risk-based capital test and in implementing the test (such as

loan loss severity, float income, loan-to-value ratios, taxes, yield curve slopes, default

experience, and prepayment rates).” 12 U.S.C. § 4611 (e)(2) (2000).

22The act requires OFHEO’s risk-based capital regulations to be “sufficiently specific to

permit an individual other than the director to apply the test in the same manner as

(OFHEO).” 12 U.S.C. § 4611 (e)(2) (2000).

Including New Business

Assumptions Would Add

Complexity to OFHEO’s

Stress Test and Make It

Difficult to Replicate
Page 15 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

parties such as the mortgage originators, mortgage borrowers, investors,

and the enterprises would exacerbate this situation.

To incorporate new business assumptions into its stress test, OFHEO

could develop plausible scenarios for how enterprise management and the

market might respond in a stressful environment, but depending on the

assumptions, the capital requirement could be increased or decreased. The

assumptions could dominate the capital requirement. In the early 1990s,

for example, prior to the creation of OFHEO, HUD analyzed each

enterprise’s capitalization using a stress test that incorporated a

Depression scenario.23 HUD’s analyses showed that incorporating new

business resulted in higher capital requirements for the enterprises. HUD

made two major assumptions that affected the result. First, HUD assumed

that the enterprises would have difficulty determining exactly when a

downturn would begin and projecting its length and severity. This

assumption limited management’s ability to mitigate risk. Second, HUD

assumed that the enterprises would be required to provide ongoing and

meaningful support to the secondary mortgage market during a prolonged

period of severe economic conditions; and therefore, the enterprises could

not stop purchasing mortgages that might generate losses in a stressful

environment.

Other plausible scenarios could lead to assumptions showing that

incorporating new business might mitigate risk and improve capital

adequacy. According to Fannie Mae officials, for example, including new

business using the enterprises’ current underwriting standards and

guarantee fees would result in a lower capital requirement. The officials

pointed out that in a falling interest rate environment, the credit quality of

an existing mortgage portfolio would typically decline as the less risky

mortgages are refinanced and the more risky ones remain. Including new

business that encompasses the newly refinanced mortgages would lower

credit risk and thus result in a lower capital requirement. An alternative

plausible set of assumptions showing that incorporating new business

might mitigate risk and improve capital adequacy could presume that the

enterprises would change their business practices to reduce risks in a

stressful environment. For example, during a stressful period, the

 23Capitalization Study of the Federal National Mortgage Association and the Federal

Home Loan Mortgage Corporation (November 1991); 1991 Report to Congress on the

Federal Home Loan Mortgage Corporation (December 1992); 1991 Report to Congress on

the Federal National Mortgage Association (December 1992).

New Business

Assumptions Could

Dominate the Capital

Requirement Under the

Stress Test
Page 16 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

enterprises might implement stricter underwriting standards and increase

their guarantee fees in reaction to possible declines in mortgage credit

quality.

While OFHEO’s risk-based capital requirement is a key element in

ensuring the enterprises’ financial safety and soundness, other

mechanisms also exist to limit risk taking by the enterprises. The proposed

Basle Accord revisions, which address banking supervision, list the three

“mutually reinforcing pillars” that help ensure the financial safety and

soundness of banks. These pillars—risk-based capital requirements

(discussed in this report), market discipline, and supervisory review—

should also be used to address safety and soundness oversight of the

enterprises. Based on our work on bank and GSE safety and soundness

supervision and our review of the proposed Basle Accord revisions, we

have concluded that capital regulation in isolation does not provide

sufficient oversight.

Market discipline can curb risky behavior by the enterprises to the extent

that the enterprises’ customers and creditors will demand that the

enterprises stay fiscally strong in order to fulfill their obligations. Market

discipline works best when firms fully and publicly disclose their financial

conditions. Customers and creditors can then use the information to

determine further interactions with the enterprises. In October 2000, the

enterprises adopted six voluntary commitments aimed at increasing their

disclosures. The commitments included, among other things, the issuance

of subordinated debt and public disclosure of financial information.

Enterprise officials stated that these commitments would improve

transparency and market discipline because market participants could use

the added information to better assess the financial condition of the

enterprises. We acknowledge that financial disclosure as mandated by the

voluntary accord may improve transparency. However, its impact on the

enterprises and their customers or funding parties is limited if the

enterprises are perceived to have implicit government backing. That is,

other economic parties may believe that the federal government will

ensure that the enterprises continue to operate and to perform

satisfactorily on financial contracts such as loans and mortgage purchases.

For this reason, while market discipline can play a role in curbing risky

behavior by the enterprises, it also has its limitations. Supervisory review

thus takes on more importance as a means for limiting inappropriate risktaking behavior by the enterprises.

Supervisory Review

Can Be Another

Effective Tool for

Limiting the Potential

Risks of New

Business
Page 17 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

The proposed revision of the Basle Accord recognizes the supervisory

review process as one of three “pillars” that contribute to safety and

soundness in the financial system. OFHEO’s supervisory review includes

examining the operations of the enterprises and taking the supervisory

and enforcement actions necessary to ensure that the enterprises are

operating safely and soundly. In conjunction with other elements of

supervision, supervisory review can also help ensure that the enterprises

maintain sufficient capital to support the risks they undertake. Further, it

can encourage the enterprises to develop and use better risk-management

techniques to address the risks associated with both existing and new

business. Supervisory review can focus on internal approaches to capital

allocation and internal assessments that reflect management’s own

expectations about future business opportunities and risks without the

need for OFHEO to impose its own assumptions about new business.

In addition, supervisory review allows OFHEO to address the enterprises’

management structure and business approaches to ensure that riskmanagement techniques and internal controls are appropriate and are

protecting the public interest. Risk-management practices that sufficiently

limit the credit and interest rate risks associated with new business and

adequate OFHEO supervision of those practices can reduce the chances

that an enterprise will take on risky new business that could jeopardize its

capital adequacy in a stressful economic environment. For example,

adequate supervision could inhibit an enterprise’s attempt to “grow” its

way out of a problem situation in a stressful environment by means such

as lowering underwriting standards or relaxing risk-management controls

that address interest rate risk. While adequate supervision is not

guaranteed by the presence of OFHEO and its legal authorities, inclusion

of speculative new business assumptions in the stress test—based on

plausible managerial behavior—would not reduce the importance of

adequate supervision.

OFHEO has several legal authorities that help in carrying out supervisory

responsibilities relating to safety and soundness. These authorities include

informal supervisory actions; formal enforcement actions involving notice

to the affected enterprise; hearing opportunities; and, if warranted,

imposition of sanctions such as cease and desist orders or civil monetary

penalties. The Federal Deposit Insurance Corporation Improvement Act of

1991 mandates actions, known as prompt corrective actions (PCA), that

depository institution regulators must take in response to specific
Page 18 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

capitalization levels. Similarly, the 1992 act contains PCA provisions that

authorize and, depending on the level of undercapitalization, require

OFHEO to take certain actions when an enterprise is undercapitalized.24

These mandates, which specify actions to be taken at certain levels of

undercapitalization, limit the possibility that OFHEO might be lenient once

an enterprise’s capital cushion is impaired. OFHEO has issued regulations

implementing the PCA provisions and establishing prompt supervisory

responses to be taken based on specified noncapital developments.25 The

director of OFHEO has broad discretion over measures that can be taken

beyond these required actions. Such discretionary powers allow the

director of OFHEO to respond when specific enterprise practices occur

that could pose a safety and soundness concern.

Determining new business assumptions for inclusion in OFHEO’s stress

test is inherently speculative, and OFHEO would have to develop plausible

scenarios for managerial behavior to make such a determination. The

assumptions about new business could easily dominate the cash and

capital flows over the 10-year stress test period and therefore dominate

the capital requirement. Thus, these assumptions could also determine

whether the enterprises met or failed to meet the risk-based capital

requirement. Adding new business assumptions would introduce more

complexity to an already complex model and interfere with the public

policy mandate that requires the model to be understandable and

replicable. A stress test that concentrates on existing business rather than

potential new business allows all parties to observe the risks embedded in

current holdings and operations. In addition, OFHEO can use supervisory

review in conjunction with the stress test to help limit the potential risks

associated with new business.

 24See U.S. General Accounting Office, Comparison of Financial Institution Regulators’

Enforcement and Prompt Corrective Action Authorities, GAO-01-322R (Washington, D.C.:

Jan. 31, 2001). Unlike other depository institution regulators, OFHEO lacks the authority to

remove officers and directors, place an enterprise into receivership, or bring suit on the

agency’s behalf (OFHEO must rely on the Attorney General).

25On January 25, 2002, OFHEO published regulations on prompt supervisory response and

corrective action. The regulations contain the procedures under which OFHEO is to take

prompt corrective action in response to specified declines in enterprise capital levels and

contains a system of prompt supervisory responses to be taken when specified

developments internal or external to an enterprise warrant special supervisory review. 67

Fed. Reg. 3587 (Jan. 25, 2002).

Conclusions
Page 19 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

OFHEO should not incorporate new business assumptions into its riskbased capital stress test. Appropriate examination and supervisory review

by the regulator can help ensure that the enterprises maintain capital

appropriate to the financial stresses they are experiencing with regard to

new business.

We requested comments on a draft of this report from the heads, or their

designees, of Freddie Mac, Fannie Mae, and OFHEO. Freddie Mac’s

written comments, which agreed with our conclusions and

recommendation, appear in appendix III. Fannie Mae and OFHEO

provided technical comments that were incorporated where appropriate.

OFHEO officials also stated that OFHEO does not model or predict

enterprise behavior in its current stress test, but does make assumptions

to project enterprise behavior in a stylized way, consistent with the stress

conditions. For example, they cited assumptions about enterprise new

debt issues and operating expenses in the current stress test. Such

assumptions, they stated, are necessary for a capital requirement that is

appropriately sensitive to risk. The OFHEO officials stated that

incorporating new business into the stress test would entail making

assumptions that address additional complicated managerial decisions on

the full range of enterprise activities. They added that, in contrast to the

assumptions that project managerial behavior in the current stress test,

the assumptions necessary to incorporate new business have the potential

to unduly influence the capital requirement and make it less sensitive to

current risks.

We made revisions based on OFHEO’s comments distinguishing between

modeling or predicting enterprise behavior and developing reasonable

assumptions for enterprise management. We agree with OFHEO officials

that, compared to the current stress test, incorporating new business into

the stress test would require assumptions that address additional

complicated managerial decisions on the full range of enterprise activities.

Our report notes, in particular, that the assumptions required to

incorporate new business could dominate the capital requirement.

We will send copies of this report to the Director of OFHEO, the Chief

Executive Officer of Fannie Mae, and the Chief Executive Officer of

Freddie Mac. We will also make copies available to others upon request.

Recommendation

Agency Comments

and Our Evaluation
Page 20 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Please contact William Shear or me at (202) 512-8678 if you or your staff

have any questions concerning this report. Key contributors to this report

were Mitchell Rachlis, Darleen Wall, Paul Thompson, and Emily Chalmers.

Thomas J. McCool

Managing Director

Financial Markets and

 Community Investment
Page 21 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

List of Congressional Committees

The Honorable Paul S. Sarbanes

Chairman

The Honorable Phil Gramm

Ranking Minority Member

Committee on Banking, Housing,

 and Urban Affairs

United States Senate

The Honorable Michael G. Oxley

Chairman

The Honorable John J. LaFalce

Ranking Minority Member

Committee on Financial Services

House of Representatives

The Honorable Richard Baker

Chairman

The Honorable Paul Kanjorski

Ranking Minority Member

Subcommittee on Capital Markets, Insurance,

 and Government Sponsored Enterprises

Committee on Financial Services

House of Representatives
Appendix I: HUD Regulates the Enterprises’

Housing Goal Requirements

Page 22 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Except for matters under the Office of Federal Housing Enterprise

Oversight’s (OFHEO) exclusive authority, which relate primarily to

enterprise safety and soundness, the Secretary of the Department of

Housing and Urban Development (HUD) has general regulatory power

over the enterprises to ensure that they carry out the purposes of their

charters.1

 These purposes include (1) providing ongoing assistance to the

secondary market for residential mortgages allowing for mortgages on

housing for low- and moderate-income families involving lower returns

than those earned on other activities and (2) promoting access to

mortgage credit throughout the nation, including in central cities, rural

areas, and underserved areas. Moreover, the act requires the Secretary to

establish annual goals for the enterprises’ purchases of mortgages on lowand moderate-income housing; special affordable housing (housing for

low-income families in low-income areas and for very low-income

families); and housing in central cities, rural areas and other underserved

areas.2

 Based on the regulatory scheme established in the act, the

Secretary of HUD could exercise these authorities during a stressful

period in a way that might affect an enterprise’s new business. For

example, housing goals would require an enterprise to conduct new

business. Forecasting these goals and the potential for other missionrelated requirements and their impact on new business would be

speculative.

The charter for each enterprise states that the purpose of the enterprise is

• to provide stability in the secondary market for residential mortgages;

• to respond appropriately to the private capital market;

• to provide ongoing assistance to the secondary market for residential

mortgages (including activities relating to mortgages on housing for lowand moderate-income families, involving a reasonable economic return

that may be less than the return earned on other activities) by increasing

the liquidity of mortgage investments and improving the distribution of

investment capital available for residential mortgage financing; and

 1

The act directs the Secretary to exercise this authority by issuing the rules and regulations

necessary and proper to ensure that the purposes of the enterprises’ charter acts are

accomplished. 12 U.S.C. § 4541 (2000).

2

Federal Housing Enterprises Financial Safety and Soundness Act of 1992, P. L. No. 102-

550, title XIII, 106 stat. 3672, 3941. HUD currently has numeric goals in place for the years

2001 through 2003. For example, the low- and moderate-income goal is set at 50 percent of

each enterprise’s mortgage purchases, an increase from the 42-percent requirement set for

the years 1997 through 1999.

Appendix I: HUD Regulates the Enterprises’

Housing Goal Requirements
Appendix I: HUD Regulates the Enterprises’

Housing Goal Requirements

Page 23 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

• to promote access to mortgage credit throughout the nation (including

central cities, rural areas, and underserved areas) by increasing the

liquidity of mortgage investments and improving the distribution of

investment capital available for residential mortgage financing.

The numeric goals provisions of the 1992 act require the Secretary to

consider the following factors in setting final housing goals for each of the

three categories of housing: (1) national housing needs; (2) economic,

housing, and demographic conditions; (3) the performance and effort of

the enterprises in achieving the goals in previous years; (4) the size of the

conventional mortgage market serving targeted borrowers relative to the

size of the overall conventional mortgage market; (5) the ability of the

enterprises to lead the industry in making mortgage credit available to

targeted borrowers; and (6) the need to maintain the sound financial

condition of the enterprises.

Although the last factor requires consideration of an enterprise’s financial

condition, nothing in the 1992 act suggests that the Secretary should

refrain from establishing goals or taking other mission-related actions in

the event of a stressful financial condition. However, we believe that the

Secretary would not exercise mission and housing goal authorities in a

way that would continue or increase an enterprise’s financial stress,

because doing so would undermine the financial safety and soundness

requirements of the 1992 act and compromise the enterprise’s ability to

achieve its mission.3

 3

The act contains provisions authorizing, and in some circumstances requiring, OFHEO to

take supervisory and/or enforcement actions based on the degree to which an enterprise is

undercapitalized. See 12 U.S.C. §§ 4614–4636 (2000).
Appendix II: The Business of the Enterprises

Page 24 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

As table 2 shows, most of the enterprises’ on-balance sheet assets are

mortgages. The table also shows that most of the mortgage and other onbalance sheet financial activities of the enterprises are funded by debt.

Table 2: Selected Enterprise On-Balance Sheet Holdings and Liabilities as of

December 31, 2001

Dollars in millions

Item Fannie Mae Freddie Mac

Retained mortgage

portfolio, net

$705,167 $491,719

Total assets 799,791 617,340

Debt, net 763,467 561,946

Total liabilities 781,673 601,967

Stockholders equity capital 18,118 15,373

Sources: Enterprise Investor/Analyst Reports.

Each enterprise’s total mortgage portfolio (see table 3) consists of onbalance sheet mortgages and mortgage-backed securities (MBS) held by

the enterprises, and off-balance sheet MBS owned by investors who

receive their interest and principal from a pool of mortgages. At the end of

2001, Fannie Mae’s total mortgage portfolio was $1.56 trillion, and Freddie

Mac’s was $1.14 trillion. A majority of the enterprises’ holdings consisted

of off-balance sheet MBS pools. Over time, both enterprises have shifted a

greater share of their mortgage assets on book, increasing their interest

rate risk.

Table 3: Total Mortgage Portfolio of the Enterprises, Year-End 2001

Dollars in millions

Item Fannie Mae Freddie Mac

Mortgage assets, including

MBS, on the balance sheet

$705,167 $491,719

Mortgage-backed

securities held by the

public

858,867 646,448

Total mortgage portfolio 1,564,034 1,138,167

Source: Enterprise Investor/Analyst Reports.

The enterprises’ income and expenses reflect their basic operations.

Fannie Mae’s 2001 net income was $5.9 billion and Freddie Mac’s $4.1

billion, largely from net interest and fee income (see table 4). Mortgages

and MBS owned by the enterprises generated net interest income of $8.1

Appendix II: The Business of the Enterprises
Appendix II: The Business of the Enterprises

Page 25 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

billion for Fannie Mae and $5.5 billion for Freddie Mac, while investorowned MBS generated fee income that totaled about $1.6 billion for each

enterprise. Actual and estimated expenses related to credit risk were $77.7

million for Fannie Mae and $84 million for Freddie Mac, while

administrative expenses were about 17 percent of net income for both

enterprises.

Table 4: Selected Data on Enterprise Income and Expenses for the year ending

December 31, 2001

Dollars in millions

Item Fannie Mae Freddie Mac

Net income $5,894.1 $4,147

Guarantee fees and other fee

income

1,633.4 1,639

Net interest income 8,090.1 5,480

Provision for losses 115 (45)

Estimated losses due to

foreclosures

(192.7) (39)

Administrative expenses (1,017.6) (844)

Source: Enterprise Investor/Analyst Reports.
Appendix III: Comments from Freddie Mac

Page 26 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Appendix III: Comments from Freddie Mac
Related GAO Products

Page 27 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

Federal Home Loan Bank System: Establishment of a New Capital

Structure. GAO-01-873. Washington, D.C.: July 20, 2001.

Comparison of Financial Institution Regulators’ Enforcement and

Prompt Corrective Action Authorities. GAO-01-322R. Washington, D.C.:

January 31, 2001.

Capital Structure of the Federal Home Loan Bank System. GAO/GGD-99-

177R. Washington, D.C.: August 31, 1999.

Farmer Mac: Revised Charter Enhances Secondary Market Activity, but

Growth Depends on Various Factors. GAO/GGD-99-85. Washington, D.C.:

May 21, 1999.

Federal Housing Finance Board: Actions Needed to Improve Regulatory

Oversight. GAO/GGD-98-203. Washington, D.C.: September 18, 1998.

Federal Housing Enterprises: HUD’s Mission Oversight Needs to Be

Strengthened. GAO/GGD-98-173. Washington, D.C.: July 28, 1998.

Risk-Based Capital: Regulatory and Industry Approaches to Capital and

Risk. GAO/GGD-98-153. Washington, D.C.: July 20, 1998.

Government-Sponsored Enterprises: Federal Oversight Needed for

Nonmortgage Investments. GAO/GGD-98-48. Washington, D.C.: March 11,

1998.

Federal Housing Enterprises: OFHEO Faces Challenges in Implementing

a Comprehensive Oversight Program. GAO/GGD-98-6. Washington, D.C.:

October 22, 1997.

Government-Sponsored Enterprises: Advantages and Disadvantages of

Creating a Single Housing GSE Regulator. GAO/GGD-97-139.

Washington, D.C.: July 9, 1997.

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

GAO/GGD-91-137R. Washington, D.C.: June 27, 1997.

Comments on “The Enterprise Resource Bank Act of 1996.” GAO/GGD96-140R. Washington, D.C.: June 27, 1996.

Housing Enterprises: Potential Impacts of Severing Government

Sponsorship. GAO/GGD-96-120. Washington, D.C.: May 13, 1996.

Related GAO Products
Related GAO Products

Page 28 GAO-02-521 OFHEO's Risk-Based Capital Stress Test

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’s views on the “Federal Home Loan Bank

System Modernization Act of 1995.” B-260498. Washington, D.C.: October

11, 1995.

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

and Effectiveness. GAO/T-GGD-95-244. Washington, D.C.: September 27,

1995.

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

Affordable Housing Program. GAO/RCED-95-82. Washington, D.C.: June

9, 1995.

Government-Sponsored Enterprises: Development of the Federal Housing

Enterprise Financial Regulator. GAO/GGD-95-123. Washington, D.C.: May

30, 1995.

Farm Credit System: Repayment of Federal Assistance and Competitive

Position. GAO/GGD-94-39. Washington, D.C.: March 10, 1994.

Farm Credit System: Farm Credit Administration Effectively Addresses

Identified Problems. GAO/GGD-94-14. Washington, D.C.: January 7, 1994.

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

Soundness, and Effectiveness. GAO/GGD-94-38. Washington, D.C.:

December 8, 1993.

Improved Regulatory Structure and Minimum Capital Standards are

Needed for Government-Sponsored Enterprises. GAO/T-GGD-91-41.

Washington, D.C.: June 11, 1991.

Government-Sponsored Enterprises: A Framework for Limiting the

Government’s Exposure to Risks. GAO/GGD-91-90. Washington, D.C.: May

22, 1991.

Government-Sponsored Enterprises: The Government’s Exposure to

Risks. GAO/GGD-90-97. Washington, D.C.: August 15, 1990.

(250049)
The General Accounting Office, the investigative arm of Congress, exists to

support Congress in meeting its constitutional responsibilities and to help

improve the performance and accountability of the federal government for the

American people. GAO examines the use of public funds; evaluates federal

programs and policies; and provides analyses, recommendations, and other

assistance to help Congress make informed oversight, policy, and funding

decisions. GAO’s commitment to good government is reflected in its core values

of accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older

products. The Web site features a search engine to help you locate documents

using key words and phrases. You can print these documents in their entirety,

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site

daily. The list contains links to the full-text document files. To have GAO e-mail

this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily

E-mail alert for newly released products” under the GAO Reports heading.

The first copy of each printed report is free. Additional copies are $2 each. A

check or money order should be made out to the Superintendent of Documents.

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a

single address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000

TDD: (202) 512-2537

Fax: (202) 512-6061

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149

Washington, D.C. 20548

GAO’s Mission

Obtaining Copies of

GAO Reports and

Testimony

Order by Mail or Phone

To Report Fraud,

Waste, and Abuse in

Federal Programs

Public Affairs