United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Capital Markets, Securities and

Government Sponsored Enterprises,

Committee on Banking and Financial

Services, House of Representatives

July 1998 FEDERAL HOUSING

ENTERPRISES

HUD’s Mission

Oversight Needs to Be

Strengthened

GAO/GGD-98-173

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-278383 

July 28, 1998

The Honorable Richard H. Baker

Chairman, Subcommittee on Capital

 Markets, Securities and

 Government Sponsored Enterprises

Committee on Banking and Financial Services

House of Representatives

Dear Mr. Chairman:

This report responds to your request that we assess the Department of

Housing and Urban Development’s (HUD) overall housing mission

oversight of the two largest government-sponsored enterprises

(enterprises), which are the Federal National Mortgage Association

(Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie

Mac). In 1992, Congress enacted the Federal Housing Enterprises

Financial Safety and Soundness Act1

 (the 1992 Act), which, among other

provisions, directed that HUD establish numeric housing goals that require

the enterprises to purchase mortgages serving targeted groups,2

 such as

low- and moderate-income borrowers3

 and those who live in central cities

and rural communities. HUD’s development, implementation, and

enforcement of the numeric housing goals have represented the primary

component of its enterprise housing mission oversight. Under the 1992

Act, HUD’s enterprise housing mission oversight also includes its general

regulatory, new mortgage program approval,4

 and fair lending

responsibilities.5

As agreed with your office, our objectives were to (1) discuss HUD’s legal

basis, approach, and rationale for setting the numeric housing goals at

their current levels; (2) report on the enterprises’ compliance with the

goals and HUD’s assessment of the goals’ impacts on promoting

1

P. L. 102-550, Title XIII, 106 Stat 3672 (1992).

2

In this report, the term “targeted” refers to (1) populations that have traditionally been underserved by

the mortgage market or (2) mortgages serving such groups that are purchased by the enterprises.

3

Households are defined as low income if their income does not exceed 80 percent of the area median

family income. Moderate income includes household borrowers with incomes that do not exceed the

area median family income.

4

The 1992 Act defines a “new mortgage program” as being significantly different from programs that

have been approved, or that represent an expansion, in terms of the dollar volume or number of

mortgages or securities involved, of programs previously approved.

5

The 1992 Act requires that HUD prohibit, by regulation, the enterprises from discriminating in any

manner in the purchase of any mortgage because of the borrowers’ race, color, religion, sex, handicap,

familial status, age, or national origin or the age or location of the property financed.

Page 1 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

homeownership and housing opportunities; (3) assess HUD’s procedures

and efforts to verify goal compliance data; (4) analyze the enterprises’

multifamily mortgage purchase activities under the housing goals and

HUD’s assessment of these activities’ effects on promoting housing

opportunities; and (5) review HUD’s implementation of its general

regulatory and new mortgage program approval oversight authorities

under the 1992 Act.

Background Congress established and chartered Fannie Mae and Freddie Mac as

government-sponsored, privately owned corporations to enhance the

availability of mortgage credit across the nation during both good and bad

economic times.6

 The enterprises are to accomplish this mission by

purchasing mortgages from lenders in the primary mortgage market (i.e.,

banks, thrifts, and mortgage bankers), which can then use the proceeds to

make additional mortgage loans to homebuyers. Purchasing mortgages

from primary mortgage market originators and others is commonly

referred to as a “secondary mortgage market” transaction. The enterprises

issue debt to finance some of the mortgage assets that they retain in their

portfolios. However, a majority of the mortgages the enterprises purchase

are pooled to create mortgage-backed securities (MBS) that may be sold to

investors. At year-end 1997, the enterprises had combined debt and net

MBS obligations outstanding of about $1.6 trillion.

The enterprises are large, sophisticated financial institutions that have

developed several mechanisms to finance residential mortgage purchases.

These mechanisms include callable bonds7

 and MBS that tailor cash flows

to different classes of investors. It is widely recognized that the

enterprises’ activities and sophisticated financial products have facilitated

the development of a liquid, secondary mortgage market, particularly for

mortgages on single-family residences.

The federal government’s creation of and continued relationship with

Fannie Mae and Freddie Mac have played an integral role in the

enterprises’ efforts to develop a secondary mortgage market. In particular,

this relationship has created the perception in the financial markets that

the government would not allow the enterprises to default on their debt

6

Congress chartered Fannie Mae in 1938 as a government-held association to buy and hold mortgages

insured by the Federal Housing Administration. In 1968, Congress reorganized Fannie Mae as a

government-sponsored, privately owned for-profit corporation. Congress chartered Freddie Mac in

1970, and it was initially a part of the Federal Home Loan Bank System. In 1989, Congress established

Freddie Mac as a government-sponsored enterprise that is owned by private investors.

7

Callable bonds give the issuer the option of repurchasing the bond before it matures.

Page 2 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

and MBS obligations, even though the government is not required to back

these obligations. As a result, the enterprises can borrow money in the

capital markets at lower interest rates than comparably creditworthy

private corporations. At least a portion of these financial benefits are

passed along to homebuyers in the form of lower mortgage interest rates.

The enterprises also enjoy other benefits resulting from their federal ties,

such as exemptions from state and local income taxes and securities

registration fees imposed by the Securities and Exchange Commission.

Congress Has Enacted a

Regulatory Framework

Directing the Enterprises

to Purchase Mortgages

Serving Targeted Groups

Among other provisions, the enterprises’ federal charters require them to

provide a secondary market for home mortgages of low- and

moderate-income borrowers as well as those who live in central cities,

rural areas, and other underserved areas. The enterprises’ charters also

provide for the possibility that extending mortgage credit to targeted

groups may involve more risks and potential losses than extending

mortgage credit to other groups. Thus, the charters state that the

enterprises’ profitability—or rate of return—on mortgage purchases

serving targeted groups must be reasonable, but the rate of return on these

purchases may also be lower than on other activities.

In 1968, Congress provided the HUD Secretary with general regulatory

authority over Fannie Mae and authorized the Secretary to require that a

reasonable portion of the enterprise’s mortgage purchases serve low- and

moderate-income families. In response to this mandate, HUD established

numeric housing goals for Fannie Mae that essentially required that at

least 30 percent of the enterprise’s purchases serve low- and

moderate-income families and at least 30 percent serve families living in

central cities. However, HUD did not (1) enforce the housing goals

consistently or (2) collect the necessary data to monitor compliance with

the goals. Before 1992, Congress had not extended the housing goals to

cover Freddie Mac.

By 1992, Congress concluded that the enterprises’ mortgage purchase

activities did not adequately serve low- and moderate-income and minority

borrowers. As a result, these potential borrowers were not sufficiently

benefiting from the enterprises’ secondary mortgage market operations,

which can serve to lower mortgage and rental costs, thereby enhancing

housing affordability. Congress also concluded that, because of the

financial benefits that Fannie Mae and Freddie Mac enjoy from their

federal charters and sponsorship, the enterprises had a public

responsibility to reach out to targeted borrowers.

Page 3 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

To address these congressional concerns, the 1992 Act established a

comprehensive framework for HUD to (1) promulgate numeric housing

goals for the enterprises and (2) obtain the necessary data from the

enterprises to monitor their compliance with the goals. The 1992 Act also

provided HUD with enforcement tools to help ensure enterprise compliance

with the goals. Specifically, the 1992 Act directed the HUD Secretary to

promulgate regulations setting annual housing goals for each enterprise

for the purchase of mortgages relating to each of the following three

categories:

• housing for low- and moderate-income families;

• housing located in central cities, rural areas, and other underserved areas;

and

• special affordable8 goals that targeted mortgage purchases serving

very-low-income9

 and low-income families living in low-income areas.

Further, the 1992 Act (1) requires the enterprises to provide HUD with

reports on their mortgage purchase activities and (2) authorizes HUD to

take enforcement actions, such as issuing cease-and-desist orders, to

ensure the enterprises’ compliance with the goals. The 1992 Act also

established calendar years 1993 and 1994 as a transition period to allow

time for HUD to collect data to implement these requirements and provided

interim annual purchase goals for each enterprise during that period.

The 1992 Act Also Defined

HUD’s General Regulatory,

New Mortgage Program

Approval, and Fair Lending

Authorities

The 1992 Act created the Office of Federal Housing Enterprise Oversight

(OFHEO) as an independent HUD office responsible for helping to ensure the

enterprises’ financial safety and soundness. The primary means by which

OFHEO is to help ensure the enterprises’ safety and soundness are that

OFHEO is to establish a stress test and risk-based capital standards10 and

conduct annual, on-site examinations. Moreover, the 1992 Act ratified and

8

In this report, the term “affordable” refers to income or location standards established in the 1992 Act

or similar statutes for very-low-, low-, or moderate-income borrowers or those who live in central

cities or rural communities.

9

Very-low-income households have incomes that do not exceed 60 percent of the area median family

income.

10Under the 1992 Act, the purpose of the stress test is to lower taxpayer risks from the enterprises’

activities by computer model simulations where the enterprises are exposed to adverse credit and

interest rate scenarios. The 1992 Act also requires that the enterprises hold sufficient risk-based capital

levels to withstand the stress test for 10 years, plus an additional 30 percent to cover management and

operations risks.

Page 4 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

clarified HUD’s general regulatory authority over the enterprises.11 Except

for the specific powers granted OFHEO, according to the 1992 Act, HUD has

“general regulatory power” over each enterprise and is charged with

making “such rules and regulations as shall be necessary and proper to

ensure” that the act’s provisions and the enterprises’ charters are

accomplished.

The 1992 Act also specified procedures that HUD must follow when

reviewing and approving new mortgage proposals by the enterprises.12 The

1992 Act directs the HUD Secretary to approve any new program that an

enterprise proposes, unless the Secretary determines that the program

(1) violates the enterprise’s charter or (2) would not be in the public

interest. The Secretary is also required to reject a new program proposal if

the Director of OFHEO determines that the proposal would risk a significant

financial deterioration of the enterprise.13 Under the 1992 Act, the

Secretary must approve or reject an enterprise’s new program proposal

within 45 days of its submission, although the Secretary can extend the

deadline for one 15-day period if the Secretary requests additional

information. New enterprise mortgage program proposals are

automatically approved under the 1992 Act if the Secretary does not

comply with these deadlines.

Finally, the 1992 Act under its fair lending provisions required that HUD, by

regulation, prohibit each enterprise from discriminating on the basis of

race and other borrower characteristics. Among HUD’s fair lending

responsibilities, it is required to periodically review and comment on the

underwriting and appraisal guidelines of each enterprise to ensure that

such guidelines are consistent with the Fair Housing Act.14

HUD’s Enterprise

Oversight Organizational

Structure and Resources

HUD’s enterprise oversight efforts are shared among four offices. These

offices are collectively responsible for developing and enforcing the

housing goal regulations and implementing HUD’s general regulatory, new

mortgage program approval, and fair lending authorities (see table 1). The

11Congress initially provided HUD with general regulatory authority over Fannie Mae in 1968 and

Freddie Mac in 1989.

12Congress initially provided HUD with the authority to review Fannie Mae’s new mortgage programs

in 1970 and Freddie Mac’s new programs in 1989.

13Under the 1992 Act, this requirement is in place until 12 months after the effective date of OFHEO’s

risk-based capital standards for the enterprises are issued in final form. OFHEO expects to issue the

final standards in 1999.

14The Fair Housing Act, among other provisions, prohibits discrimination in the extension of mortgage

loan credit.

Page 5 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Office of Government Sponsored Enterprises (GSE) Oversight coordinates

HUD’s oversight of the enterprises and conducts research on relevant

topics. The Office of Policy Development and Research (PD&R) provides

research support, both in-house and contract, for the development of the

goals and other relevant issues, while the Office of the General Counsel

provides legal support. In addition, the Office of Fair Housing and Equal

Opportunity (FHEO) is responsible for the 1992 Act’s fair lending

requirements.

According to HUD officials, 16.9 full-time equivalent (FTE) positions15 in the

four offices are devoted to enterprise oversight for fiscal year 1998 (see

table 1). Five of these positions are in the Office of GSE Oversight; as of

April 1998, one position in the office was vacant. In addition, the Acting

Director of the office was part-time while HUD conducted a search for a

new Director. Since April 1997, the Acting Director said, she has also

worked in the Federal Housing Administration’s16 (FHA) Office of the

Comptroller as the Director of the Office of Evaluation.

Table 1: HUD Offices That Are

Responsible for Enterprise Mission

Oversight and Those Offices’ FTE

Positions

HUD office Number of FTE positions

FHEO 1.4

General Counsel 2.9

GSE Oversight 5.1

PD&R 7.5

Total 16.9

Source: HUD.

In fiscal year 1998, HUD’s total enterprise oversight budget was about

$2.7 million, including about $687,000 in PD&R for research and computer

support contracts (see table 2). Unlike other federal regulators that have

housing enterprise oversight responsibilities,17 such as OFHEO, HUD’s

mission oversight expenditures are funded with taxpayer dollars from

HUD’s congressional appropriations, rather than through assessments on

15The term “full-time equivalent position” is used in the federal government to specify personnel

resources that are assigned to a particular function. The term does not necessarily constitute a single

person because, for example, two individuals working part-time could represent one FTE.

16FHA is an agency within HUD that is responsible for insuring the mortgages of low- and

moderate-income borrowers.

17OFHEO’s safety and soundness activities—about $15 million in fiscal year 1997—are financed by

assessments on Fannie Mae and Freddie Mac. Another federal housing enterprise—the Federal Home

Loan Bank System—pays similar assessments for its housing mission and safety and soundness

regulator, the Federal Housing Finance Board.

Page 6 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

the regulated entities. In previous reports,18 we have commented that

regulatory costs should be borne by the respective federal housing

enterprises to ensure effective safety and soundness and housing mission

oversight.

Table 2: HUD’s Budget for Enterprise

Oversight in Fiscal Year 1998 (Dollars in thousands)

Obligation category

GSE

Office PD&R

General

Counsel FHEO Total

Contracting $0 $687a $0 $25b $712

Overheadc 111 188 67 35 401

Personnel 412 699 248 130 1,489

Space 43 65 13 15 136

Total $566 $1,639 $ 328 $205 $2,738

aIncludes $425,000 in research contracts and $261,500 in computer support contracts.

bResearch contracts.

cPersonnel costs (including benefits) multiplied by 27 percent.

Source: HUD.

Scope and

Methodology

To meet our objectives, we reviewed HUD’s final housing goal rule and

associated research, interviewed HUD officials and representatives from

the mortgage industry and housing community groups, and reviewed

available data on the enterprises’ compliance with the goals between 1993

and 1997. We also met with officials from Fannie Mae, Freddie Mac, and

OFHEO to obtain their views on the housing goals and HUD’s enterprise

mission oversight. Appendix I provides a detailed discussion of our

objectives, scope, and methodology.

We conducted our work in Washington, D.C., between October 1997 and

May 1998 in accordance with generally accepted government auditing

standards.

Results in Brief The 1992 Act provides the HUD Secretary with the authority to set the final

housing goals, and established six general, but potentially competing,

factors to guide the Secretary’s decisionmaking process. In particular, the

1992 Act directed the HUD Secretary to balance (1) the ability of the

18Government-Sponsored Enterprises: Advantages and Disadvantages of Creating a Single Housing

GSE Regulator (GAO/GGD-97-139, July 9, 1997) and Government-Sponsored Enterprises: A Framework

for Limiting the Government’s Exposure to Risks (GAO/GGD-91-90, May 22, 1991).

Page 7 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

enterprises to “lead the [mortgage finance] industry” in financing the

mortgages of targeted groups and (2) the need to maintain the enterprises’

financial soundness. Available evidence from HUD’s final housing goal rule

indicates that the HUD Secretary generally adopted a conservative

approach to setting the final goals in December 199519 for the period 1996

through 1999. This conservative approach placed a high priority on

maintaining the enterprises’ financial soundness. For example, in 1994 and

1995, HUD and OFHEO conducted research which found that additional

mortgage purchases required under the goals were modest and would not

materially affect the enterprises’ financial condition.

According to annual data that Fannie Mae and Freddie Mac provided to

HUD, the enterprises have increased their share of targeted mortgage

purchases since 1993 and were in compliance with the final housing goals

in 1996 and 1997. For example, the percentage of Fannie Mae mortgage

purchases qualifying under HUD’s low- and moderate-income housing goal20

increased from 34 percent in 1993 to 45.5 percent in 1997. Similarly,

Freddie Mac’s reported performance under the low- and moderate-income

goal increased from 30 percent in 1993 to about 43 percent in 1997. Fannie

Mae’s performance under the housing goals has generally exceeded that of

Freddie Mac.

HUD has a basic oversight responsibility to determine whether the housing

goals are resulting in enhanced housing opportunities for targeted groups

because this was the intent of the 1992 Act. HUD has ongoing research

projects to assess housing needs and households served by goal-oriented

mortgage purchases, but its current research agenda does not address

several highly relevant issues that are necessary to fully understand the

goals’ impacts. For example, HUD has not initiated research to assess the

goals’ effects on (1) interest rates and loan terms on targeted mortgages

and (2) mortgage originators’ incentives to make targeted mortgage loans.

19HUD did not issue the final housing goal regulations, which are effective from 1996 to 1999, until

December 1, 1995. The HUD Secretary carried over the transition goal requirements for 1993 and 1994

into 1995.

20HUD’s goals are based on the number of dwelling units financed by enterprise-targeted mortgage

purchases as a percentage of the total dwelling units financed through mortgage purchases. Thus, a

single-family residential mortgage purchase that qualifies under the low- and moderate-income goal

would count as 1 dwelling unit, while a qualifying multifamily purchase containing 50 rental units

would have 50 dwelling units. Assuming an enterprise purchased mortgages containing 1 million

dwelling units in a particular year, and that 300,000 of these units qualified under the low- and

moderate-income goal, the enterprise’s goal compliance would be 30 percent (300,000/1,000,000). In

this report, we show information on the enterprises’ purchases under the goals as a percentage of their

total mortgage purchases to facilitate the presentation.

Page 8 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD has implemented some limited procedures to verify the accuracy of

the enterprises’ reported goal compliance data. However, HUD has not

implemented a program to assess the overall data collection and reporting

process. Given the decentralized nature of the housing goal data and the

potential for errors, it may not be possible for HUD at this time to

independently draw conclusions about the accuracy of the data.

For an enterprise that is not in compliance with the housing goals, HUD’s

final housing goal rule may provide regulatory incentives, especially for

multifamily housing, to employ risk-management strategies that help the

enterprise meet or exceed the numeric goals. However, the effects of these

risk management strategies on enhancing housing opportunities for

targeted groups are not clear. Under the rule, the enterprises are permitted

to count multifamily mortgage purchases toward full compliance with the

goals where the mortgage originator—such as a bank or thrift—is required

to cover most or all of the estimated future losses that may occur due to

borrower defaults. According to HUD, these risk-management strategies

encourage the enterprises to participate in the multifamily mortgage

market, promote liquidity, and are necessary to protect the enterprises’

financial soundness.

However, there is also available information suggesting that the

enterprises’ risk-management strategies involve offsetting trade-offs that

may serve to limit lenders’ incentives to originate affordable multifamily

mortgages. For example, by requiring lenders to retain most or all of the

expected credit risks, the enterprise risk management strategies could

impede the lenders’ willingness to extend mortgage credit. By contrast,

when the enterprises purchase single-family mortgages, they generally

relieve the lenders of the associated credit risks, which has encouraged

the development of a liquid, secondary market for single-family mortgages.

HUD has not conducted research to determine the effects of enterprise risk

management strategies on multifamily mortgage finance and housing

opportunities.

HUD has not fully implemented a procedure to assess sophisticated

enterprise financial activities under its general regulatory and new

mortgage program approval authorities under the 1992 Act. For example,

HUD did not begin to act on its general regulatory authority until 1997,

when congressional questions were raised about Freddie Mac’s

investments in Phillip Morris bonds and other nonmortgage investments.21

21See Government-Sponsored Enterprises: Federal Oversight Needed For Nonmortgage Investments

(GAO/GGD-98-48, Mar. 11, 1998).

Page 9 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD initiated a process to assess the relationship between the enterprises’

nonmortgage investments and housing mission in 1997, but this process

has not been completed. HUD has approved enterprise new mortgage

programs within the timeframes established by the 1992 Act. However,

HUD has not yet established a process to ensure that it has sufficient

expertise to review and monitor sophisticated financial products that may

be associated with new mortgage program proposals.

HUD’s Approach to

Setting the Final

Enterprise Housing

Goals Was

Conservative

The 1992 Act provided the HUD Secretary with the general authority to set

the levels of the final housing goals and authority to define relevant terms.

The 1992 Act also provided six general, but potentially competing, factors

that the HUD Secretary should consider. In particular, the 1992 Act directed

the HUD Secretary to balance (1) the ability of the enterprises to “lead the

(mortgage finance) industry” in financing the mortgages of targeted groups

and (2) the need to maintain the enterprises’ financial soundness. When

setting the final housing goals, the Secretary generally adopted a

conservative approach that, according to a senior HUD official, was

necessary to help maintain the enterprises’ financial soundness.

The 1992 Act Directed That

the HUD Secretary

Consider Potentially

Competing Factors When

Setting Final Housing

Goals

The 1992 Act provided six general factors22 to help guide the Secretary’s

decisionmaking process in setting the final housing goals. These factors

were (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.

Several of these factors can be considered to be in competition with one

another. In particular, the requirement that the HUD Secretary consider the

“ability of the enterprises to lead the industry” could compete with the

requirement that the Secretary also maintain the enterprises’ financial

soundness. According to the 1992 Act’s legislative history,23 it was

22The 1992 Act required the six general factors for the low- and moderate-income goal and the central

cities, rural areas, and other underserved areas goal. The 1992 Act specified only five general factors

for the special affordable goal.

23See S. Rep. No. 102-282, at 34-35 (May 15, 1992). The Senate Report addresses the provisions of the

Federal Housing Enterprises Regulatory Reform Act of 1992, S. 2733, 102nd Cong. (1992). Title XIII of

P.L. 102-550 was based on the provisions of S. 2733, which require the HUD Secretary to set specific

goals for the enterprises’ mortgage purchases to address the needs of targeted borrowers.

Page 10 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

expected that the enterprises would “lead the (mortgage finance) industry”

in making mortgage credit available to targeted borrowers, and that the

enterprises would have to “stretch” to meet the goals. However, neither

the 1992 Act nor its legislative history specifically defined the term “lead

the industry.” A potential definition of the term that HUD considered

between 1993 and 1995 was that the enterprises’ targeted mortgage

purchase requirements under the goals would exceed the primary market’s

existing originations of such mortgages. During the rulemaking process,

HUD received comments that suggested that the enterprises be required to

purchase a higher percentage of mortgages than were already originated

by the marketplace under each housing goal.

However, requiring Fannie Mae and Freddie Mac to purchase more

targeted mortgages than were already originated in the primary market

could potentially have increased the enterprises’ credit risks,24 thereby

affecting their financial soundness. The 1992 Act’s legislative history states

that increases in targeted purchases could be accomplished while

maintaining the financial safety and soundness of the enterprises.

Similarly, the 1992 Act created OFHEO as an independent regulator with

wide regulatory powers—such as the establishment of a stress test and

risk-based capital standards—to help ensure that the enterprises’

mortgage purchase activities are consistent with maintaining their

long-term safety and soundness. Thus, we conclude that the 1992 Act and

its legislative history required the HUD Secretary to carefully weigh the

trade-offs between expanding homeownership and housing opportunities

for targeted groups and maintaining the enterprises’ safety and soundness

in setting the final housing goal regulations.

HUD Generally Adopted a

Conservative Approach

When Setting the Final

Housing Goals

In setting the final regulations for 1996 through 1999, the HUD Secretary

identified national housing needs and found that the housing goal

regulations are necessary to help meet these needs. The Secretary

concluded that many Americans were unable to afford adequate housing

due to insufficient incomes, high debt levels, and rising home prices. The

Secretary also concluded that the enterprises lagged behind mortgage

originators in meeting the credit needs of targeted groups. In addition, the

Secretary found that, by establishing national housing goals, the

enterprises could play a larger role in promoting affordable housing

24Credit risk is the possibility of financial loss resulting from borrower defaults. Requiring the

enterprises to substantially increase their purchases of targeted mortgages may result in a relaxation

of the enterprises’ mortgage purchase underwriting standards. Given that targeted borrowers may

have weaker credit and employment histories than other borrowers, substantially relaxing the

enterprises underwriting standards could result in higher default rates and associated credit losses.

Page 11 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

opportunities, such as by promoting liquidity in the multifamily market.

(See app. II for a discussion of the national housing needs, the

underserved borrowers identified by HUD, and the potential influence of

HUD’s numeric goals in enhancing housing affordability for these groups.)

On the basis of our review of HUD’s final regulations and associated

research as well as our discussions with HUD officials, we determined that

the HUD Secretary generally adopted a conservative approach to setting the

final housing goals. The goals were conservative in that HUD (1) defined

“lead the industry” to mean that the enterprises should provide technical

and financial assistance to lenders to help ensure additional affordable

mortgage originations rather than adopting another definition, such as, for

example, requiring the enterprises to purchase a larger share of targeted

mortgages than is originated in the primary market; (2) conducted

research concluding that required mortgage purchases under the goals

were modest and would not materially affect the enterprises’ financial

condition; and (3) did not consider the potential financial consequences

for the enterprises of housing goals higher than those that were

established. In addition, OFHEO concluded that the housing goals were

modest and would not affect the enterprises’ financial soundness. A HUD

official said that the Department’s conservative approach to developing

the housing goal regulations was necessary to maintain the enterprises’

financial soundness and to ensure that the goals could be met in good

economic times as well as bad.

HUD Defined “Lead the

Industry” as Requiring the

Enterprises to Provide

Assistance to Mortgage

Originators

According to the final housing goal regulations, the HUD Secretary

interpreted the “lead the industry” provision of the 1992 Act to mean that

the enterprises should employ their dominant role in the secondary

mortgage market to help ensure additional affordable mortgage

originations. The Secretary concluded that the enterprises could provide

financial standards and technical assistance to mortgage originators that

would increase their willingness to extend mortgage credit to targeted

groups. By contrast, the Secretary did not define “lead the industry” to

mean that the enterprises’ purchases under all three housing goals should

exceed the estimated market shares of targeted mortgage lending already

occurring in the primary mortgage market. In fact, the Secretary set the

three final housing goals below HUD’s estimates of targeted mortgage

originations already occurring in the primary market (see table 3).

Page 12 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Table 3: Enterprise Housing Goals for

1996-1999 and HUD’s Estimates of

Primary Market Shares

Percentage goal

Goal category 1996

1997-

1999

Estimated share of

primary market

Low- and moderate-income 40% 42% 48-52%

Underserved areas 21 24 25-28

Special affordable 12 14 20-23

Source: HUD.

The HUD Secretary also decided to establish a multifamily subgoal as part

of the special affordable goal. Unlike the three housing goals, which are

based on the number of dwelling units financed by qualified mortgage

purchases, the HUD Secretary based the multifamily subgoal on the dollar

volume of qualified enterprise mortgage purchases. Specifically, the goal

was set at 0.8 percent of each enterprise’s total mortgage purchases in

1994. According to HUD, this subgoal translates into a requirement that

Fannie Mae purchase $1.29 billion in affordable multifamily mortgages

annually between 1996 and 1999, while Freddie Mac is required to

purchase $988 million in affordable multifamily mortgages annually. The

multifamily subgoal represented a significant initial commitment for

Freddie Mac because it experienced substantial multifamily losses in 1989

and 1990 and withdrew from the market completely in 1990.25 Freddie Mac

did not return to the multifamily market until 1993, and its 1994

multifamily purchases that qualified under the subgoal were only

$425 million. According to HUD’s final rule, the purpose of the subgoal was

to help ensure the development of a liquid, secondary market for

affordable multifamily properties, which may promote housing

opportunities.

Further, in setting the final underserved areas goal, the HUD Secretary

changed the definition of “central city” that had been established in the

1992 Act for the transition goals of 1993 and 1994. Under the 1992 Act, HUD

was required to base the definition of central city on criteria established

by the Office of Management and Budget (OMB) during the transition

period of 1993 and 1994, but HUD decided to use a definition that was based

on census tract data—published by the U.S. Bureau of the Census—when

setting the final goals. According to HUD, a census tract definition was

more appropriate than OMB’s central city definition because the former

25Freddie Mac reported $278 million in multifamily mortgage losses in 1989 and 1990 combined,

representing 50 percent of Freddie Mac’s losses during those years. See Federal Home Loan Mortgage

Corporation: Abuses in Multifamily Program Increase Exposure to Financial Losses (GAO/RCED-92-6,

Oct. 7, 1991).

Page 13 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

definition would focus the enterprises’ mortgage purchase efforts on

neighborhoods that have relatively high concentrations of low-income and

minority residents, areas that HUD identified as being underserved by the

mortgage market. By contrast, under OMB’s central city definition, HUD

concluded that entire cities were being treated as if they had mortgage

access problems when, in fact, residents of upper-income areas in cities

usually do not confront obstacles in obtaining mortgage credit.

HUD Determined That the Final

Goals It Established Would Not

Materially Affect Enterprise

Earnings

In 1995, HUD analyzed the goals it established and estimated that the goals

would not materially affect the enterprises’ earnings. For example, HUD

developed a simulation model,26 which basically found that the enterprises

could increase their targeted mortgage purchases to the levels established

in the 1995 rule without incurring substantial additional credit risk

because the additional purchase requirements under the established goals

were modest.

Further, HUD estimated the enterprises’ return on equity (ROE)—a common

measure of profitability—under alternative economic scenarios. These

analyses found that, despite the implementation of the housing goals,

which would require additional purchases of targeted mortgages, the

enterprises would generate ROEs generally exceeding 17 percent27 and only

fall slightly below that even if the enterprises encountered periods of

severe economic stress. For example, HUD’s analysis found that Fannie

Mae’s ROE for multifamily purchases—which are considered riskier than

single-family mortgage purchases28—would generally be above 19 percent

during a period of severe economic stress.29 Similarly, Freddie Mac’s ROE

for multifamily lending would be about 17 percent during a period of

economic stress. We note that multifamily mortgages represent only about

4 percent of Fannie Mae’s total mortgage portfolio and 1 percent of

Freddie Mac’s total portfolio. During periods of normal economic activity,

HUD estimated that both enterprises would achieve ROEs exceeding

20 percent on their single-family and multifamily mortgage purchases,

despite the implementation of the housing goals.

26A simulation model is a computer model that estimates the impact of specified economic scenarios

on a financial institution’s financial performance.

27HUD assumed that the enterprises needed to achieve ROEs of at least 17 percent to attract financial

investors.

28Multifamily loans are riskier than single-family loans because (1) multifamily loans often are not

homogenous regarding the type of collateral, interest rate, and amortization; (2) underwriting

standards often differ among multifamily loan originators; and (3) multifamily loans are relatively large

and one defaulted loan can result in significant losses.

29By contrast, the U.S. commercial banking industry’s ROE between 1993 and 1996, which was a period

of record profitably due to an improving economy and low interest rates, averaged about 14.8 percent.

Page 14 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

In conducting this research, HUD did not estimate the financial

consequences of alternative goals to those final goals that were ultimately

adopted on the enterprises’ financial soundness. For example, HUD did not

estimate whether setting the goals at higher levels would materially lower

the enterprises’ ROE under differing economic scenarios, such as those

used in estimating the effects of the final goals. Further, HUD did not

conduct research on the extent to which the enterprises’ use of

lender-provided “credit enhancements”30—which are used to minimize or

eliminate the credit risks associated with mortgage purchases—could

offset the effects of an economic downturn. We discuss the enterprises’

use of credit enhancements and their potential effects on housing

opportunities in more detail later in this report.

During the rulemaking process, HUD and OFHEO officials said that they

consulted with one another and that OFHEO reviewed drafts of the

proposed housing goal rule in 1994 and 1995. In an internal 1994

document, OFHEO concluded that HUD’s proposed housing goal rule

represented a “modest” increase in the enterprises’ then existing

commitment to targeted mortgage purchases and would not likely affect

their financial condition. In 1995, OFHEO concluded that the enterprises’

could meet the final housing goals without sacrificing their safety and

soundness.31

HUD’s Rationale for Its

Approach to Setting the Final

Housing Goals Was Generally

Grounded in Safety and

Soundness Concerns

A senior HUD official who was involved in the development of the final

housing goal rule said that maintaining the enterprises’ financial

soundness was one of several priorities HUD emphasized during the

rulemaking process. According to the HUD official, other reasons that HUD

adopted a conservative approach were to (1) ensure that the enterprises

could meet the goals in bad economic times as well as good and (2) adjust

for Freddie Mac’s initial difficulties in meeting the multifamily mortgage

purchase requirement.

30Such credit enhancements require the loan originator to accept some or all of the estimated credit

risk on a mortgage sold to an enterprise in the event of a borrower default. In its analysis, HUD

assumed that all of the losses associated with multifamily defaults would be absorbed by the

enterprises, rather than the lenders with whom the enterprises maintain credit enhancement

agreements.

31OFHEO, Annual Report to Congress 1995.

Page 15 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

The Enterprises Have

Reportedly Increased

Their Purchases of

Targeted Mortgages,

but HUD Cannot

Determine Impacts on

Housing

Opportunities

According to data Fannie Mae and Freddie Mac reported to HUD, the

enterprises have increased the shares of their overall business devoted to

targeted mortgage purchases since the transition housing goals went into

effect in 1993. The enterprises were in compliance with all three of the

final goals in 1996 and 1997, although Fannie Mae’s performance has

exceeded that of Freddie Mac. According to HUD, the enterprises’

purchases of targeted mortgages have also generally increased relative to

the originations of such mortgages in the primary market.

However, HUD has not yet determined the extent to which the

implementation of the housing goals is resulting in enhanced housing

affordability and opportunities for targeted groups, which was the intent

of the 1992 Act. As the federal regulator mandated by the 1992 Act to

establish, enforce, and adjust the housing goals as necessary, HUD has a

basic oversight responsibility to conduct research to determine the goals’

impacts on housing opportunities. Although HUD has ongoing research to

meet its oversight responsibilities, HUD’s current research agenda does not

address several important issues, such as the goals’ effects on (1) interest

rates and loan terms on targeted mortgage loans and (2) mortgage

originators’ incentives to make targeted mortgage loans.

Enterprises Increased

Purchases of Targeted

Mortgages Between 1993

and 1997

Table 4 shows that the enterprises’ reported mortgage purchases under all

three of HUD’s housing goals increased as percentages of their overall

mortgage purchases between 1993 and 1997. For example, Fannie Mae’s

purchases of mortgages under the low- and moderate-income goal

increased from 34.1 percent in 1993 to 45.5 percent in 1997. Similarly,

Freddie Mac’s purchases under the low- and moderate-income goal

increased from 30 percent in 1993 to 42.9 percent in 1997.

Table 4: Enterprise Mortgage Purchases Under the Affordable Mortgage Housing Goals, 1993-1997

Goal category Enterprise 1993 1994 1995 1996 1997

Low- and moderate- income Fannie Mae 34.1% 45.1% 42.8% 45.1% 45.5%

Freddie Mac 30.0 38.0 39.6 41.3 42.9

Underserved areas goal Fannie Mae 22.9 29.0 31.2 28.2 29.0

Freddie Mac 21.3 24.2 25.2 25.0 26.3

Special affordable Fannie Mae 10.0 16.7 15.8 17.4 19.1

Freddie Mac 7.2 11.4 13.2 14.2 15.3

Source: The 1993-95 enterprise data are reported by HUD as having been recalculated to

represent goal definitions in the 1995 final rule. According to HUD, the 1996 and 1997 figures

were reported by the enterprises in compliance with the final rule.

Page 16 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

The enterprises’ data also show that Fannie Mae and Freddie Mac

exceeded all three final housing goals in both 1996 and 1997, in some cases

by significant margins (see table 5). For example, Fannie Mae’s purchases

qualifying under the special affordable goal exceeded the goal by

45.0 percent in 1996 and 36.4 percent in 1997. Freddie Mac also exceeded

HUD’s affordable housing goals in 1996 and 1997, although not by as much

as Fannie Mae.

Table 5: HUD Housing Goals and Enterprise Compliance With the Goals in 1996 and 1997

Goal category Enterprise

1996

goal

1996

purchases

Purchases

as a

percentage

of goal

1997

goal

1997

purchases

Purchases

as a

percentage

of goal

Low- and moderate- income Fannie Mae 40.0% 45.1% 112.8% 42.0% 45.5% 108.3%

Freddie Mac 40.0 41.3 103.3 42.0 42.9 102.1

Underserved areas Fannie Mae 21.0 28.2 134.3 24.0 29.0 120.8

Freddie Mac 21.0 25.0 119.0 24.0 26.3 109.6

Special affordable Fannie Mae 12.0 17.4 145.0 14.0 19.1 136.4

Freddie Mac 12.0 14.2 118.3 14.0 15.3 109.3

Source: HUD reported the goal levels and enterprise performance levels. GAO calculated the

percentage differences.

Fannie Mae’s relatively larger volume of affordable multifamily mortgage

purchases is one reason that Fannie Mae’s performance under the goals

has exceeded that of Freddie Mac.32 For example, table 6 shows that

although both enterprises complied with the multifamily affordable

subgoal in 1996 and 1997, Fannie Mae’s multifamily purchases were

higher.33 This difference is important because, under HUD’s rules, a

mortgage purchase under one goal—such as the special affordable

multifamily subgoal34—can also count towards compliance with the other

goals for which it qualifies, such as the low- and moderate-income and

32As discussed in the previous section, Freddie Mac withdrew from the multifamily market entirely in

1990 due to large losses and did not return to the market until 1993.

33The multifamily subgoal’s income and location criteria are stricter than the low- and

moderate-income criteria. Therefore, the enterprises may purchase other affordable multifamily

mortgages that do not qualify under the special affordable subgoal but may meet the requirements of

the other goals. Thus, the enterprises’ total affordable multifamily purchases—which consist of

subgoal purchases and other goal-qualifying purchases—is larger than the special affordable subgoal

purchases alone. In 1997, Fannie Mae reported $6.9 billion in total multifamily purchases, while

Freddie Mac reported $2.7 billion.

34The special affordable subgoal is based on the dollar volume of qualified mortgage purchases.

However, the enterprises also track the dwelling units financed by these mortgage purchases to

determine the dwelling units’ compliance towards the other housing goals.

Page 17 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

special affordable goals.35 According to HUD, multifamily properties house

relatively large numbers of low- and moderate-income families and, by

definition, house many more families than a single-family property.

Consequently, Freddie Mac’s smaller presence in the multifamily market

meant that it had more to accomplish than Fannie Mae when the

enterprises became subject to the final goals.

Table 6: Enterprise Goal Levels and Loan Purchases Under the Multifamily Subgoal of the Special Affordable Goal for 1996

and 1997

(Dollars in billions)

Enterprise

1996-1997

goal

1996

purchases

Purchases as a

percentage of goal

1997

purchases

Purchases as a

percentage of goal

Fannie Mae $1.29 $2.36 182.9% $3.19 247.3%

Freddie Mac .988 1.08 109.3 1.2 121.5

Source: Qualifying mortgage purchases reported by Fannie Mae and Freddie Mac.

Enterprise Initiatives to

Enhance Housing

Opportunities for Targeted

Groups

The annual reports that the enterprises submit to HUD on their mortgage

purchases under the affordable housing goals also describe the programs

that the enterprises have in place to improve the availability of affordable

housing. For example, in its 1997 annual report, Fannie Mae attributed its

success in meeting the affordable housing goals to the partnerships it has

with state and local housing finance agencies, nonprofit agencies, and the

mortgage industry. The Fannie Mae report also describes the enterprise’s

programs in the areas of home-buyer education, the development of new

mortgage products to meet needs in the affordable housing market, and

the efforts to ensure that its underwriting guidelines broaden access to

mortgage financing for more individuals and families, including families

previously excluded from the homebuying process.

Freddie Mac’s 1997 annual report also describes its initiatives to expand

access to mortgage credit and simplify the loan origination process. For

example, the report describes initiatives to lower down-payment

requirements to expand homeownership opportunities; make loans for the

purchase and rehabilitation of homes more affordable by lowering the cost

of these mortgages; and expand financing of affordable multifamily

properties.

35For example, multifamily units represented 12 percent of the total housing units purchased by the

enterprises in 1995, but such units accounted for 22 percent of the units meeting the low-and

moderate-income goal and for 41 percent of the units meeting the special affordable goal.

Page 18 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Enterprises Also Generally

Improved Their Mortgage

Purchase Performance

Relative to the Primary

Market

As previously discussed, a potential definition of “lead the [mortgage

finance] industry” that HUD considered between 1993 and 1995 would have

required the enterprises to purchase relatively more targeted mortgages

than are originated in the primary mortgage market. Although HUD did not

adopt this potential definition, HUD research staff have collected and

analyzed data on enterprise targeted mortgage purchases compared to

primary market originations.36 The HUD analyses show that the enterprises’

targeted mortgage purchases have generally improved relative to primary

market originations. The HUD research also found that (1) Fannie Mae’s

performance compared to the primary market has improved more than

Freddie Mac’s performance has improved relative to the primary market

and (2) the enterprises still trail the primary market in most targeted

mortgage categories. We discuss these issues in more detail in appendix

III.

HUD’s Research Agenda

Does Not Address Several

Issues Relevant to

Understanding the Goals’

Effects on Promoting

Homeownership and

Housing Opportunities

HUD has initiated research to determine the extent to which the

implementation of the housing goals has resulted in enhanced housing

affordability and opportunities for targeted groups. Such research is

essential for HUD to effectively carry out its housing mission oversight role,

determine whether the intent of the 1992 Act is being met, and identify the

appropriate levels to set the goals in the future. However, HUD’s current

research agenda does not address several relevant issues necessary to

understand the housing goals’ effects.

HUD’s reported data on the enterprises’ compliance with the housing goals

are input measures that show the annual volumes of Fannie Mae’s and

Freddie Mac’s targeted loan purchases. The reported data do not provide

information on the extent to which the enterprises’ increased purchases

are resulting in the 1992 Act’s desired outcomes (i.e., increased

homeownership and housing opportunities for targeted groups). For

example, the reported data do not provide information on the extent to

which—if at all—the enterprises’ mortgage purchases are resulting in

lower mortgage interest rates or more flexible loan terms for low- and

moderate-income borrowers or those that live in underserved areas.

36Paul B. Manchester, Sue George Neal, and Harold L. Bunce, Characteristics of Mortgages Purchased

by Fannie Mae and Freddie Mac, 1993-95 (HUD, Office of Policy Development and Research, Working

Paper No. HF-003, Mar. 1998).

Page 19 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

In this regard, a Department of the Treasury study37 completed in 1996

found that the enterprises’ targeted mortgage purchases generally had

relatively high down payments. In particular, the study pointed out that in

1994 about 78 percent of Fannie Mae’s housing goal loan purchases that

meet the low- and moderate-income goal had loan-to-value (LTV) ratios38 of

less than or equal to 80 percent. Similarly in 1994, approximately

79 percent of Freddie Mac’s mortgage purchases meeting the low- and

moderate-income goal had LTV ratios of less than or equal to 80 percent.

The study concluded that many of the enterprises’ goal-oriented mortgage

purchases likely would already have been financed by the private sector,

since loans with LTVs of 80 percent or less represent relatively low credit

risks to financial institutions, such as banks and thrifts. Thus, the study

suggested that the goals have not materially affected the existing mortgage

finance market for targeted groups.

Currently, HUD has a variety of research projects—in-house, contract, and

grant—to assess a range of issues that address the impacts of the goals.

For example, HUD has awarded a contract to Abt Associates, Inc., to review

the enterprises’ underwriting and appraisal standards and practices,

specifically in reference to effects on the availability of loans on affordable

housing (see table 7 for a list of HUD contracts). In September 1997, HUD

also awarded 11 research grants totaling about $400,000 to study mortgage

purchase activities of the enterprises. According to HUD officials, one

reason HUD initiated these projects was to explore issues that may be

relevant should the Department decide to revise the housing goals after

1999.

37U.S. Department of the Treasury, Government Sponsorship of the Federal National Mortgage

Association and the Federal Home Loan Mortgage Corporation (July 11, 1996).

38In general, loans with lower LTV ratios represent smaller borrower risks to mortgage loan originators

and the enterprises than those with higher LTV ratios. The LTV ratio is determined by dividing the

balance of the mortgage loan outstanding by the estimated value of the residential property. Thus, the

LTV ratio on an outstanding mortgage balance of $60,000 on a single-family residence with an

estimated value of $100,000 would be 60 percent. The enterprises generally require mortgage insurance

or other credit enhancements on mortgage loans with LTV ratios exceeding 80 percent.

Page 20 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Table 7: HUD’s Contracts for Research Support on Housing Goals

Contractor Task description Award date End date Amount

The Urban Institute Single-family underwriting study September 30, 1997 July 31, 1998 $174,014

Affordable lending program

performance study September 30, 1997 March 30, 2000 151,446

Underserved homebuyers study February 18, 1997 June 18, 1998 24,490

Abt Associates, Inc. Multifamily underwriting study September 30, 1997 August 31, 1998 121,564

Studies on enterprises’ fair lending

practices November 3, 1997 September 30, 1998 25,000

Source: HUD.

However, HUD’s research agenda does not yet address several issues that

are relevant to understanding the effects of the goals and enterprise

activities in promoting homeownership and housing opportunities for

targeted groups. For example, we previously reported that quantification

of the enterprises’ efforts to serve targeted borrowers generally measures

resource commitments and not outcomes, such as the impacts on

mortgage interest rates and housing affordability for targeted groups.39

Therefore, we reported that understanding the impacts of goal-oriented

enterprise purchases would require a determination of how mortgage

originations by other lenders (namely, depository institutions that

undertake portfolio lending and mortgage bankers that originate federally

insured mortgages for mortgage pools guaranteed by the Government

National Mortgage Association (Ginnie Mae)) are affected and respond to

this change in funding.40 HUD has not yet initiated in-house or contracted

research to analyze the extent to which goal-oriented enterprise purchases

may affect (1) mortgage interest rates and other loan terms and

(2) mortgage lenders’ incentives to initiate affordable mortgages. However,

HUD officials said that they plan to initiate an analysis on the effects of the

housing goals on depository institutions.

39Housing Enterprises: Potential Impacts of Severing Government Sponsorship (GAO/GGD-96-120,

May 13, 1996).

40Ginnie Mae is an organization within HUD that guarantees the timely payment of principal and

interest on securities backed by mortgages insured by FHA or the Department of Veterans Affairs.

Page 21 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD Has Not Initiated

Inspections to Assess

the Accuracy of

Enterprise-Supplied

Goal Compliance Data

HUD’s verification of enterprise-supplied goal compliance data would have

important implications on the usefulness of the information because,

without verification, incorrect data could be used as the basis for policy

decisions. Also, the mortgage data that the enterprises report are very

complex and come from a large number of sources, increasing the

potential for errors. Although HUD has checked the accuracy of the

calculations that are based on the data that the enterprises provide, as of

April 1998, HUD had not initiated a program to assess the overall integrity

of the data collection and reporting process.

Housing Goal Data

Reliability Is Important

Verification of the data HUD receives from the enterprises regarding their

affordable mortgage purchases is important. The data that Fannie Mae and

Freddie Mac are required to submit tell HUD whether the enterprises are

meeting the affordable housing goals. As such, these data may be used to

make important policy decisions about how well the enterprises are using

the benefits gained from their government charters to support the nation’s

affordable housing goals. If these data are inaccurate or if officials do not

know that they can rely on them, policymakers do not have the tools they

need to make informed decisions about, for example, where affordable

housing goals should be set in the future.

A key principle in the use of data from any entity being examined by the

government is that appropriate steps should be taken to ensure the validity

of the data collected, particularly data supplied by the entity that is under

examination.41 If steps were not taken to ensure the validity of these data,

then the data may provide an unreliable basis from which to draw

conclusions.

In the final housing goal rule, HUD outlines the basis for its authority to

“ . . . independently verify the accuracy and completeness of the data, information and

reports, including conducting on-site verification, when verification is reasonably related to

determining whether the (enterprises) are complying with the law. . . . without the

authority to verify the completeness and accuracy of the data, information, or reports

submitted by each enterprise, the Secretary would be hampered in making the

determinations that are required. Such a situation could result in the Secretary erroneously

concluding that the enterprises are complying with [the 1992 Act] when they are not, or

that they are not complying with [the 1992 Act] when they are.”

41For example, see GAO’s Government Auditing Standards: 1994 Revision.

Page 22 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Housing Goal Data Is

Complex and Subject to

Errors

The data that the enterprises collect and report to HUD regarding their

mortgage purchases comes from many sources, are often complex, and

can be subject to errors. The data are supplied to the original lenders by

borrowers; the lenders, in turn, give the data to the enterprises when they

sell the loans to them. The enterprises then assemble the data and provide

them to HUD.

Officials from Fannie Mae and Freddie Mac told us how they perform a

number of checks, both on their own processing of data and on the

validity of data that they receive from lenders when they buy the mortgage

loans. Both enterprises noted that it would be impossible to independently

verify the millions of data records that the enterprises receive when they

purchase mortgages from lenders. However, the enterprise officials said

that they independently verify samples of these data to help ensure

accuracy. The enterprise officials also said that they conduct audits of

their own internal processing of loan data to ensure that the data

submitted to HUD are accurate.

Multifamily mortgages present a number of unique challenges when it

comes to accurately determining whether the mortgages meet the

affordable housing criteria. For example, some enterprise purchases of

multifamily mortgages are of pooled, seasoned mortgages, which tend to

be older. Although older, seasoned mortgages are considered safer and

more desirable on the secondary mortgage market, they also may contain

out-of-date affordability data, such as reported rent levels. Ensuring the

accuracy of rent-level data is essential for HUD’s purposes because

comparison of rent levels that are several years old with current median

income data for an area would artificially inflate the apparent affordability

of a property. According to HUD researchers,42 in 1995, Fannie Mae was

missing data items needed to determine affordability for 32 percent of its

multifamily mortgage purchase transactions.

HUD Has Not

Independently Verified the

Accuracy of

Enterprise-Supplied Data

To date, HUD has performed some limited procedures to assess the data

supplied by the enterprises. HUD officials explained how they conducted a

number of limited checks on the 1996 data the enterprises supplied in

1997. HUD has not yet implemented a program to independently verify the

reported housing goal data, but HUD officials told us that they plan to

increase their data verification activities in the future.

42See William Segal and Edward J. Szymanoski, The Multifamily Secondary Mortgage Market: The Role

of Government-Sponsored Enterprises (Working Paper No. HF-002, Mar. 1997). The views expressed in

this paper are those of the authors and do not necessarily represent HUD’s official views.

Page 23 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD’s verification of enterprise-supplied data has, to date, consisted

primarily of internal validity checks (i.e., checks on the results of

calculations that the enterprises used to determine which loan purchases

qualify under which goals). HUD performed these checks by replicating the

data tables submitted by the enterprises using the complete data sets of

enterprise-supplied data, then looking for areas where its results did not

match the enterprises’ results. HUD officials also said that they examined

the enterprise data for missing items and for noticeable “out-of-line”

values, such as properties with geographic codes placing them in states,

counties, or census tracts that do not exist. Where HUD found

discrepancies, officials said that they discussed them with the appropriate

enterprise, and the enterprise submitted revised data, where necessary.

HUD officials told us that independent verification of enterprise-supplied

data has been a goal but that the verification was superseded by other

priorities in 1997. The officials told us that HUD’s verification processes are

“evolving,” and that HUD plans to conduct more detailed data verification in

1998. HUD officials said that they may review the internal controls and

audit steps that the enterprises have in place to ensure the accuracy of the

reported goal compliance data. For example, HUD could review the

procedures that the enterprises have established to sample the data that

they receive from lenders.

HUD also did not use a relevant data integrity examination conducted by

OFHEO. Officials from OFHEO informed us that the organization conducts

on-site verification of data systems and system controls at the enterprises,

but that this activity is not regularly coordinated with HUD. For example, a

1996 OFHEO examination of financial data controls at Freddie Mac noted

that controls over Freddie Mac’s nonfinancial data were inadequate to

ensure integrity. These nonfinancial data, which include information about

the geographic location of properties and demographic information about

borrowers and tenants, are key to determining whether a particular loan

fits different purchase goals. However, OFHEO did not immediately inform

HUD of its findings, and HUD officials responsible for enterprise oversight

said that they were unaware of the examination.43

43We note that OFHEO included the information about the examination and its findings with respect to

Freddie Mac’s nonfinancial data controls in OFHEO’s 1997 Report to Congress.

Page 24 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Resource Limitations

Could Impede HUD’s

Capacity to Complete

Comprehensive Data

Integrity Reviews

We recognize that any data verification steps that HUD implements may

require an allocation of additional resources. However, HUD’s resources are

limited since the Department has initiated a major downsizing from 10,500

employees in 1997 to a projected 9,000 in 2002. Similar to the situation at

HUD as a whole, HUD’s Office of GSE Oversight lost one FTE in fiscal year

1998, leaving the office with five FTEs.44 As of April 1998, the Office of GSE

Oversight had one vacant position and the Acting Director served in a

part-time role. As discussed previously, federal oversight of housing

enterprises—except for HUD’s mission oversight of Fannie Mae and

Freddie Mac—is financed by the respective enterprises via periodic

assessments on their activities. Because HUD’s enterprise oversight

activities must compete with other priorities in HUD’s annually

appropriated budget, its capacity to implement a program to assess

housing goal data accuracy may be limited.

Housing Goal Rule

Provides Credit for

Enterprise Multifamily

Mortgage

Risk-Management

Practices Whose

Effects on Enhancing

Housing

Opportunities for

Targeted Groups Are

Unclear

For an enterprise that is not in compliance with the housing goals, HUD’s

final housing goal rule may provide regulatory incentives, especially for

multifamily housing, to employ credit enhancements, which help the

enterprise meet or exceed the numeric goals. However, the effects that

credit enhancements have on enhancing housing opportunities for

targeted groups are unclear. Under the rule, the enterprises are permitted

to count multifamily mortgage purchases toward full compliance with the

goals, even where the mortgage originator—such as a bank or thrift—is

required by credit enhancements to cover most or all estimated future

credit losses. According to HUD, credit enhancements encourage the

enterprises to participate in the multifamily mortgage market, promote

liquidity, and are necessary to protect the enterprises’ financial soundness.

However, there is also available information suggesting that the

widespread use of credit enhancements also involve offsetting trade-offs

that may serve to limit lenders’ incentives to originate affordable

multifamily mortgages. For example, by requiring lenders to retain all of

the credit risks associated with multifamily mortgage financing, credit

enhancements could impede the lenders’ willingness to extend mortgage

credit. By contrast, when Fannie Mae and Freddie Mac purchase

single-family mortgages, they generally relieve the lenders of the

associated credit risks. This has encouraged the development of a liquid,

secondary market for single-family mortgages. Moreover,

depositories—banks and thrifts—must meet federal risk-based capital

44Staff members from HUD’s Office of Policy Development and Research as well as contractor

personnel are also involved with the data verification aspects of HUD’s oversight of the enterprises.

Page 25 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

standards for mortgage loans sold to an enterprise on which the

depositories retain expected credit risks, which may further serve to limit

their incentives to originate multifamily mortgages. HUD has not conducted

research to determine the effects of enterprise risk management strategies

on multifamily mortgage finance and housing opportunities.

The Enterprises Use Credit

Enhancements to Manage

the Risks Associated With

Multifamily Mortgage

Purchases

We previously pointed out that multifamily mortgage purchases represent

greater risks of default than single-family mortgage purchases. To mitigate

the credit risks associated with multifamily loan purchases under the

goals,45 the enterprises use credit enhancements, which may require

mortgage originators to cover up to 100 percent of actual losses from

mortgage defaults over time. The credit enhancements used by the

enterprises include recourse and collateralization agreements, which may

require the mortgage loan seller—such as a bank—to take the “first loss”

on credit defaults up to a specified percentage, such as 10 percent of the

outstanding mortgage balance, or pledge collateral (e.g., in the form of

high-grade securities) before the completion of the transaction.

As previously discussed, Fannie Mae purchases a relatively larger volume

of affordable multifamily mortgages than Freddie Mac. Through the use of

recourse agreements and other credit enhancements, Fannie Mae was fully

responsible for the potential credit losses on 14 percent of the multifamily

mortgages in its mortgage portfolio and MBS in 1997. According to Fannie

Mae officials, Fannie Mae also shares credit risks with lenders in a large

number of credit-enhanced multifamily mortgage purchases. In exchange

for sharing credit risks with Fannie Mae, the lenders are permitted to use

Fannie Mae’s underwriting standards and make mortgage approval

decisions without prior approval from the enterprise,46 which increases

the lenders’ business flexibility. Fannie Mae officials added that the

enterprise’s purchases of multifamily mortgages that are subject to credit

enhancements serve to enhance the liquidity of the market. According to a

Freddie Mac official, Freddie Mac generally underwrites most of the

multifamily mortgages that it purchases and assumes all of the credit risk

on these purchases. However, Freddie Mac also has used recourse and

45The enterprises do retain exposure to losses due to fluctuations in interest rates on multifamily

mortgages retained in their portfolios. The enterprises may also absorb losses if a lender subject to a

credit enhancement fails, and the enterprise has not obtained sufficient collateral to cover such losses.

46Fannie Mae’s Delegated Underwriting and Servicing program allows lenders who share credit risk on

multifamily mortgages to make credit decisions without prior approval. Fannie Mae also purchases

multifamily mortgages where lenders use their own underwriting standards. These mortgage

purchases are subject to higher “first loss” provisions than are loans purchased under the Delegated

Underwriting and Servicing program.

Page 26 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

collateralization agreements on multifamily mortgages that it has

purchased.

Credit enhancements are routinely used by the enterprises because they

are an attractive method to manage credit risks. For example, recourse

agreements, by subjecting the mortgage originator to credit risk, motivate

the originator to follow sound underwriting practices. Such lender

motivation can be especially important to the enterprises for multifamily

mortgage purchases because default rates on such mortgages are generally

higher than for single-family mortgages. In addition, according to a Federal

Reserve study,47 the mortgage originator may have better information on

the specific risk characteristics of the financed property and its value than

does the housing enterprise purchasing the mortgage. Another reason that

the enterprises use credit enhancements for multifamily mortgage

purchases is that private mortgage insurance48 is generally not available

for such purchases as it is for single-family mortgage purchases. As a

result of these benefits, the enterprises will be more willing to purchase

multifamily mortgages at more favorable terms from lenders when the

lenders provide credit enhancements.

According to HUD officials we contacted, there are several benefits

associated with credit enhancements in the multifamily mortgage market,

including the following:

1. Credit enhancements encourage the enterprises to purchase multifamily

mortgages, thereby providing stability and liquidity to the market, which is

a requirement of their charters.

2. Credit enhancements, as previously discussed, promote sound

underwriting standards by multifamily lenders.

3. Credit enhancements help ensure the financial soundness of the

enterprises.

47Glenn Canner and Wayne Passmore, “Credit Risk and the Provision of Mortgages to Lower-Income

and Minority Homebuyers,” Federal Reserve Bulletin (Nov. 1995), pp. 989-1016.

48Private mortgage insurers are generally large corporations that insure but do not originate or

purchase conventional mortgages, which are mortgages that do not have federal mortgage insurance

or a federal guarantee. The enterprises’ charters require them to obtain private mortgage insurance or

alternative credit enhancements on mortgage purchases with LTVs exceeding 80 percent. According to

HUD, private mortgage insurance is generally not offered on multifamily mortgage purchases.

Page 27 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Credit Enhancements May

Also Limit Lenders’

Incentives to Originate

Affordable Multifamily

Mortgages

While there are potential risk-management benefits associated with credit

enhancements, there is also information showing that their widespread

use could serve to limit lenders’ incentives to originate multifamily

mortgages and promote housing opportunities. In particular, credit

enhancements (1) may require lenders to retain most expected credit

risks, (2) limit the geographic diversification of credit risk, and (3) require

depositories to continue to meet risk-based capital standards on

multifamily mortgage sales to the enterprises.

By requiring lenders to retain most of the expected credit losses

associated with multifamily mortgage purchases, credit enhancements

may serve to limit lenders’ willingness to originate such mortgages. By

contrast, it is generally acknowledged that the enterprises’ assumption of

certain credit risks on single-family mortgages has contributed to the

development of a liquid, secondary market for single-family mortgages.

The development of this secondary market has resulted in lower mortgage

interest rates for borrowers and helped ensure the nationwide availability

of mortgage credit.

The use of credit enhancements may also limit geographic diversification

of the credit risks associated with multifamily lending. When a financial

institution can diversify credit risks geographically, it can offset losses in

one region that may be experiencing an economic downturn with income

from another region that is growing. The enterprises operate on a

nationwide basis and thus have the ability to diversify the credit risks on

single-family mortgages purchased from lenders in the primary market.

However, a lending institution without the capacity to diversify credit risks

geographically, may be unable or unwilling to finance multifamily

mortgages or provide liquidity in the areas where it does business. During

an economic recession, lenders’ incentive to initiate affordable multifamily

mortgages may be particularly limited, since such projects may represent

significant credit risks.

Moreover, the HUD staff study49 we previously discussed pointed out that

regulatory risk-based capital requirements for federally insured depository

institutions, such as banks or thrifts, can serve to limit multifamily

mortgage originations. Under these requirements, a depository is generally

required to hold risk-based capital against a mortgage loan that is

subjected to a recourse agreement and sold to Fannie Mae or Freddie Mac.

Consequently, the study stated that depositories’ willingness to originate

multifamily mortgage loans may be limited by these risk-based capital

49The Multifamily Secondary Mortgage Market.

Page 28 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

requirements and questioned whether the use of recourse agreements

enhances the affordable housing market. In addition, regulatory rules

require that depositories hold cash reserves against loans subject to

recourse agreements.

In a June 1998 HUD staff study,50 HUD researchers reported that there is a

lack of liquidity for smaller multifamily properties—that is those

properties with 5 to 49 dwelling units—that tend to be affordable to

targeted groups. When HUD established the multifamily subgoal, it intended

that the enterprises’ increased presence in the multifamily mortgage

market would improve the liquidity for smaller properties, thereby

enhancing housing opportunities. The reported lack of liquidity for smaller

multifamily properties continued over the past 4 or 5 years when HUD’s

housing goals were in place and overall mortgage market liquidity was

strong.

HUD Housing Goal Rule

May Provide Regulatory

Incentives for the Use of

Credit Enhancements on

Multifamily Mortgage

Purchases

HUD’s final rule permits the enterprises to count multifamily mortgage

purchases that are subject to credit enhancements fully toward

compliance with the housing goals. For example, if an enterprise

purchased a multifamily mortgage in which the enterprise required the

seller to accept all potential losses via a recourse agreement, the

enterprise could report that purchase to HUD as complying with the

multifamily subgoal and any other goals that may similarly be covered,

such as the low- and moderate-income goal. By authorizing full credit for

multifamily mortgage purchases subject to credit enhancements, the final

rule may provide the enterprises with a regulatory incentive, in addition to

market-based incentives, to require mortgage originators to retain most or

all credit risks.

However, HUD’s final rule also requires the enterprises to accept additional

credit risks on multifamily mortgage purchases financed under FHA

“risk-sharing” demonstration programs to receive full credit toward

compliance with the housing goals. The enterprises are among the

participants in FHA’s risk-sharing programs for affordable multifamily

properties, which Congress has authorized as demonstration programs.51

50William Segal and Edward J. Szymanoski, “Fannie Mae, Freddie Mac, and the Multifamily Mortgage

Market,” Cityscape: A Journal of Policy Development and Research, HUD, Vol. 4, Number 1 (1998), pp.

59-74. This paper represents the views of the authors and does not necessarily represent HUD’s official

views.

51Congress authorized risk-sharing demonstration programs in the Housing and Community

Development Act of 1992. Congress has authorized a total of 62,000 affordable dwelling units under the

risk-sharing programs.

Page 29 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

In these demonstration programs, FHA may enter into an agreement with

an enterprise to accept half of the credit risk on multifamily mortgages

under the program, and FHA collects an insurance fee from its partner for

this guarantee. The final housing goal rule only permits enterprise

mortgage purchases under the risk-sharing programs to count toward full

compliance with the goals when the enterprise agrees to accept significant

additional credit risk, defined as 50 percent or more.52 According to the

final rule, the assumption of additional credit risk “serve(s) to increase

available housing opportunities.” In a recently issued report, we found that

FHA’s risk-sharing programs generally offer alternatives and encourage the

financing of affordable multifamily properties.53

HUD Has Not Conducted

Research to Determine the

Effects of Credit

Enhancements on

Multifamily Mortgage

Finance and Housing

Opportunities

HUD has not conducted research to determine the effects of credit

enhancements on multifamily mortgage finance and housing

opportunities. For example, HUD has not analyzed whether credit

enhancements promote liquidity by encouraging the enterprises to

participate in multifamily mortgage finance or limit liquidity due to (1) the

inability of lenders to diversify credit risks and (2) the effects of recourse

agreements and risk-based capital standards on depositories’ incentives to

sell multifamily mortgages to the enterprises. In addition, HUD has not

conducted research on the extent to which the housing goal rule may

provide the enterprises with incentives to use credit enhancements. HUD

officials told us that they do not collect data on the extent to which the

enterprises use credit enhancements on multifamily mortgage purchases

that are reported as in compliance with the housing goals.

We recognize that there are important safety and soundness issues

associated with multifamily mortgage purchases and that the enterprises

use credit enhancements to manage those risks. However, under their

charters, the enterprises also have an affirmative obligation to meet the

credit needs of targeted borrowers, which may be accomplished at a

lower, though reasonable, rate of return than other activities.

Further, it is important to note that HUD took into account the financial

soundness consequences of the special affordable multifamily subgoal by

setting it at a “reasonable” level. Specifically, Fannie Mae’s annual subgoal

52Fannie Mae—which participates extensively in FHA’s risk-sharing programs—uses credit

enhancements on multifamily mortgages that are purchased under the FHA programs. After 3 years,

Fannie Mae may relieve the lender of the credit risks associated with a mortgage purchase if the loan

is performing according to preestablished criteria, such as cash flow. Fannie Mae’s assumption of

credit risks relieves the lender of risk-based capital and cash reserve requirements.

53Housing Finance: FHA’s Risk-Sharing Programs Offer Alternatives for Financing Affordable

Multifamily Housing (GAO/RCED-98-117, Apr. 23, 1998).

Page 30 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

requirement of $1.29 billion represented about 0.7 percent of the

enterprise’s approximate total of $174 billion in mortgage purchases in

1996. Similarly, Freddie Mac’s annual multifamily subgoal purchase

requirement of $988 million represented about 0.8 percent of Freddie

Mac’s total mortgage purchases of about $125 billion in 1996.54 About

4 percent of Fannie Mae’s and 1 percent of Freddie Mac’s total mortgage

portfolios are comprised of multifamily mortgages.

Finally, we note that HUD has not conducted sufficient research to

determine the level at which the housing goals could be set in the future.

According to HUD, the possibility exists that credit enhancement use may

provide meaningful support and liquidity without subjecting the

enterprises to credit risk. In addition, the enterprises may be more willing

to purchase multifamily mortgages at more favorable terms with credit

enhancements. If so, the potential exists that the enterprises could

purchase more multifamily mortgages than are currently required without

significantly affecting the enterprises’ financial soundness. However, as

previously discussed, the possibility also exists that the housing goal rule

provides the enterprises with incentives to use credit enhancements,

which, according to the HUD staff study,55 may not meaningfully enhance

existing housing opportunities.

HUD Has Not Yet

Fully Implemented a

Process to Monitor

Enterprise Financial

Activities

In the legislative history of the 1992 Act, Congress cited our 1990 report56

that concluded that HUD lacked experience as a regulator of financial firms

and traditionally had dedicated few staff members to such functions.

Although HUD’s staff have significant expertise in housing and related

issues, we remain concerned about HUD’s capacity as a regulator of

financial institutions. On the basis of our March 1998 report,57 we conclude

that HUD has not yet fully implemented a process under its general

regulatory and new mortgage program approval authorities to ensure the

activities’ consistency with the enterprises’ housing mission. In addition,

HUD has determined that enterprise automated underwriting systems

warrant further oversight under the fair lending provisions of the 1992 Act.

54Freddie Mac did incur substantial losses on its multifamily mortgage portfolio in the late 1980s and

early 1990s, but its overall net income rose to record levels each year between 1990 and 1993, and its

ROE exceeded 20 percent.

55The Multifamily Secondary Mortgage Market.

56Government-Sponsored Enterprises: The Government’s Exposure to Risks (GAO/GGD-90-97, Aug. 15,

1990).

57GAO/GGD-98-48.

Page 31 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD Did Not Begin to

Exercise Its General

Regulatory Authority for

Enterprise Nonmortgage

Investments Until 1997

In our March 1998 report, we found that HUD had not used its general

regulatory authority provided under the 1992 Act until 1997 to ensure that

the enterprises’ nonmortgage investment practices were consistent with

their housing mission. We pointed out that such oversight by HUD is

important because the enterprises have incentives to use the funding

advantage associated with their federal sponsorship to make nonmortgage

investments that may result in arbitrage profits.58 Consistent with a

recommendation in our March 1998 report, HUD has initiated actions that,

if effectively carried out, have the potential to help ensure more effective

enterprise oversight.

Under their charters, the enterprises have broad authority to make

investment decisions. The enterprises have established investment policies

that specify permissible credit ratings, maturities, and concentration

limits, and that describe the relationship of such investments to earnings

and to achievement of the enterprises’ housing finance mission.

Nonmortgage investments constituted about 15 percent of the on-balance

sheet assets at Fannie Mae and 10 percent at Freddie Mac, as of June 30,

1997. The enterprises’ nonmortgage investments included cash and cash

equivalents, asset-backed securities, corporate debt, and state and

municipal bonds. According to enterprise officials, about 70 percent of

these nonmortgage assets had maturities under 1 year, and all were

investment grade securities. The officials said that the enterprises hold

short-term nonmortgage investments to meet liquidity needs for residential

mortgage purchases.

However, the enterprises also hold longer-term nonmortgage assets whose

relationship to their housing mission is less clear, and these assets could

be used to generate arbitrage profits. For example, in March 1997, Freddie

Mac authorized up to $10 billion over a 5-year period to be used for

long-term nonmortgage investments. By investing in long-term corporate

bonds, the enterprises may earn higher profits than on alternative

mortgage investments.59

58We defined the term “arbitrage” to mean that the enterprises use their funding advantage from

government sponsorship to raise funds for making nonmortgage investments.

59The enterprises generate income on the difference between their debt servicing costs and the income

they receive from their mortgage and nonmortgage assets. At least some of the financial benefits that

the enterprises receive from their federal charters are passed along to borrowers in the form of lower

mortgage interest rates, which reduces the enterprises’ income from mortgage investments. Because

this mechanism is not present for enterprise nonmortgage investments, certain nonmortgage

investments may be more profitable to the enterprises.

Page 32 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Although each enterprise has broad investment authority, their investment

practices are subject to regulatory oversight under the 1992 Act. OFHEO has

clear authority to regulate the enterprises’ investments in both mortgage

and nonmortgage assets to help ensure that such investments are

consistent with maintaining the enterprises’ financial safety and

soundness. To date, OFHEO has determined that the enterprises’

investments in nonmortgage assets do not constitute a significant risk to

the enterprises’ financial condition. Except for the specific powers granted

OFHEO, according to the 1992 Act, HUD has “general regulatory power” over

each enterprise and is charged with making “such rules and regulations as

shall be necessary and proper to ensure” that the enterprises’ activities,

such as their nonmortgage investments, are consistent with the charters

and the 1992 Act.

The 1992 Act does not specify any criteria, other than the charters

themselves, as the basis for HUD to monitor and evaluate the

appropriateness of the enterprises’ nonmortgage investments. HUD did not

attempt to collect information on the enterprises’ nonmortgage

investments or define the scope of its regulatory authority until 1997,

which was nearly 5 years after the passage of the 1992 Act. HUD officials

told us that they began to focus attention on the enterprises’ nonmortgage

investments in April 1997 as a result of the publicity surrounding the

disclosure that Freddie Mac had invested in long-term Phillip Morris

corporate bonds.

In 1997, HUD requested for the first time that the enterprises provide basic

information about their nonmortgage investment policies and holdings.

Moreover, in December 1997, HUD issued an Advance Notice of Proposed

Rulemaking (ANPR), which solicited public comments on how HUD should

carry out its general regulatory authorities regarding nonmortgage

investments by the housing enterprises. HUD officials said that during 1998,

they plan to begin collecting quarterly information from the enterprises on

their nonmortgage investments and discuss the issues relating to these

investments with OFHEO officials. The HUD officials said that if a decision to

develop a Notice of Proposed Rulemaking is made, they plan to draft the

notice by year-end 1998.

HUD’s decision to publish the ANPR was consistent with the

recommendation in our March 1998 report on the enterprises’

nonmortgage investments. Specifically, we recommended that the HUD

Secretary develop written criteria, through the appropriate rulemaking

Page 33 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

processes, to help ensure that the housing enterprises’ nonmortgage

investments are consistent with the purposes expressed in their charters.

HUD’s Capacity to Monitor

Sophisticated Financial

Products That May Be

Associated With New

Mortgage Proposals Is

Limited

The 1992 Act prescribed the conditions under which HUD must review and

consider the approval of enterprise new mortgage programs. Specifically,

HUD must find that a proposed new mortgage program is consistent with

the enterprises’ charters and not contrary to the public interest. Further,

the OFHEO Director must certify that the proposed program would not

jeopardize the enterprises’ financial condition. Since the passage of the

1992 Act, HUD has approved four60 new enterprise mortgage program

proposals within the 45-day deadline established by the 1992 Act (see table

8). However, our March 1998 report found that HUD lacked the financial

expertise necessary to fully evaluate Fannie Mae’s Mortgage Protection

Plan (MPP). Subsequently, HUD gave both enterprises the approval to create

Financial Asset Securitization Investment Trusts (FASIT), which are

sophisticated financial vehicles that can include nonmortgage assets. We

have no basis to question HUD’s decision to approve FASIT authority for the

enterprises. However, we note that HUD will need to develop an effective

oversight process to ensure that the enterprises use FASITs in accordance

with their housing mission.

60We counted HUD’s approvals of Fannie Mae’s and Freddie Mac’s Financial Asset Securitization

Investment Trust programs as two separate approvals in determining that HUD had approved four

programs.

Page 34 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Table 8: New Enterprise Mortgage Programs Approved by HUD

Program name Program description Submission date

Final

action date

Days in

review

Fannie Mae

Single Family Energy Loan Purchase

Program

Purchase energy loans

made to single family

homebuyers by banks,

housing finance agencies,

and utility companies. March 4, 1994 April 14, 1994 41

Mortgage Protection Plan (MPP) Obtain life, disability, and

involuntary unemployment

insurance on first-time

homebuyers. May 23, 1997 June 23, 1997 31

Financial Asset Securitization

Investment Trust (FASIT)

Issue asset-backed

securities using the FASIT

tax election. July 30, 1997 September 12, 1997 44

Freddie Mac

Financial Asset Securitization

Investment Trust (FASIT)

Issue, purchase, service,

sell, and lend on

asset-backed securities

using the FASIT tax election. October 10, 1997 November 24, 1997 45

Source: HUD

HUD officials who reviewed Fannie Mae’s MPP proposal in 1997 did not have

expertise in the intricacies of the cash-value life insurance industry. Such

expertise was important because, under the MPP, Fannie Mae proposed

that it would purchase a cash-value life insurance policy on a first-time

homebuyer after the selected borrower’s residential mortgage was

purchased by Fannie Mae. During the course of our work on the

March 1998 report, we did not see evidence that HUD provided Fannie

Mae’s MPP proposal to anyone with experience in evaluating cash-value life

insurance. A Treasury attorney with expertise in life insurance provided

basic information about life insurance products to HUD, and HUD

determined that providing information on the MPP to Treasury was not

necessary because HUD had obtained sufficient information and analysis to

complete its work. In our March 1998 report, we also noted that tax

consequences were a major factor in Fannie Mae’s MPP proposal, but that

tax consequences had not been included in HUD’s analysis.61

61Since HUD’s approval, a new tax bill was signed into law that, according to Treasury, substantially

reduced the tax benefits that were available to Fannie Mae under the MPP. Fannie Mae officials told us

that Fannie Mae has decided not to go forward with the MPP.

Page 35 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Since HUD’s approval of the MPP in June 1997, both enterprises have

received HUD approval for the creation of FASITs. FASITs are sophisticated

and new financial vehicles that are intended to provide issuers of

pass-through securities62 with greater flexibility (i.e., in relation to other

pass-through securities, such as those issued through Real Estate

Mortgage Investment Conduits (REMIC))63 in the financial assets that can be

used to support the security issue. For example, a FASIT can be partially

supported by financial instruments that help hedge cash-flow risks

associated with mortgage investments.64 FASITs can also be supported with

both mortgage and nonmortgage financial instruments, such as credit card

or automobile receivables. However, the enterprises’ proposals to HUD

contained assurances that the financial instruments used to support a FASIT

would consist primarily of cash and cash equivalents, government

securities, certain corporate debt obligations, qualifying hedging contracts,

and other assets consistent with their charters. HUD found that the creation

of FASITs by the enterprises would benefit the public interest by promoting

greater efficiency in the mortgage-related securities market and enhancing

mortgage market liquidity. As of May 1998, the enterprises had not created

any FASITs.

We have no basis to question HUD’s decision to approve the enterprises’

FASIT authority or that the enterprises will issue FASITs in accordance with

their agreements with HUD. However, we note that as the enterprises’

mission regulator, HUD has an ongoing responsibility to monitor the

enterprises’ FASIT use to ensure compliance, particularly with the

requirement that the enterprises use FASITs in accordance with their

charters. In our view, such oversight requires the ability to analyze

sophisticated financial products and a regulatory focus on the enterprises’

financial activities. In the past, HUD has not always demonstrated either the

financial expertise or regulatory focus, which was the case with

nonmortgage investments. Moreover, HUD’s current list of contractors for

enterprise oversight activities have not contracted with HUD to provide

such ongoing financial expertise and focus.

62A pass-through security passes payments from borrowers to investors as loan payments are

collected. The cash flow is from a pool or pools of underlying loans. The issuer remits, or passes

through, to the investor monthly payments of principal and interest.

63REMICs are multiclass mortgage securities that assign cash flows to different classes of investors.

For example, some classes may receive cash flows that are largely based on principal payments, while

other classes may receive cash flows that are largely based on interest payments. REMICs may be

issued by the enterprises or private companies that specialize in real estate finance.

64For example, when interest rates decline, mortgage refinancings tend to increase, which reduces

future cash flows to mortgage investors. This situation is commonly referred to as “prepayment risk.”

The enterprises purchase financial instruments, such as options on financial contracts, to help

offset—or “hedge”—prepayment risks.

Page 36 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

HUD Has Determined That

Enterprise Automated

Underwriting Systems

Warrant Further Oversight

The enterprises have developed and implemented automated underwriting

systems that have generated significant changes in the traditional

mortgage application and review process, which has relied on mortgage

originators to make credit decisions and to process the associated

paperwork. However, HUD has also considered whether the enterprises’

use of automated systems constitute new mortgage programs or raise fair

lending concerns on the basis of HUD’s authorities provided under the 1992

Act. HUD concluded in 1996 that the enterprises’ automated underwriting

systems did not represent new mortgage programs, but warranted further

oversight under the fair lending provisions of the 1992 Act.

Enterprise Automated

Underwriting Systems Can

Reduce Mortgage Transaction

Time and Costs

Requiring borrowers to meet certain underwriting standards is an

important step that lenders take to manage mortgage credit risk. Lenders

undertake the underwriting process to assess the possibility that a

prospective borrower may default on a mortgage. The assessment includes

analyzing sources of income, debt-payment-to-income ratios, credit

history, and proposed down payment on a home purchase. The enterprises

have both developed automated underwriting systems that have a number

of benefits. One of these benefits is that, by using computers, automated

systems can reduce the processing time of traditional underwriting, which

has relied on labor-intensive manual reviews of mortgage applications.

Consequently, automated underwriting systems may also reduce the costs

associated with the mortgage application and review process.

HUD Has Analyzed

Enterprise Automated

Systems Under Its New

Mortgage Program

Authority

Despite the potential benefits of the enterprises’ automated underwriting

systems, HUD has also reviewed the use of these systems as part of its

oversight responsibilities provided in the 1992 Act. In 1996, HUD conducted

an analysis of the enterprises’ automated underwriting systems and

concluded that they were not new mortgage programs under the 1992 Act.

In this analysis, HUD determined that the enterprise systems represented

alternative business processes, rather than new mortgage programs.

Therefore, HUD concluded that the enterprises did not have to submit

official new mortgage program proposals for their automated underwriting

systems.

HUD’s 1996 analysis also reviewed issues relating to enterprise charter

compliance that may be associated with automated underwriting systems.

For example, because of the speed at which automated underwriting

systems can process a mortgage application, the potential exists that the

enterprise may, at some point, bypass the mortgage originator and interact

more directly with the borrower and make credit decisions as to whether

Page 37 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

an applicant should receive a mortgage. However, the enterprises’ charters

prohibit them from originating mortgages in the primary market.

According to the 1996 analysis, HUD concluded that the systems do not

remove mortgage originators from the mortgage application and approval

process entirely. For example, HUD found that underwriters who work for

mortgage originators must still reconcile borrowers’ application

documentation to the systems’ analysis for all loans. Further, underwriters

must manually underwrite certain mortgage loan applications that are

referred to them by an automated system for further review.

There Are Fair Lending

Implications Associated With

Automated Underwriting

Systems

According to HUD’s 1996 analysis and our August 1996 report,65 automated

underwriting systems have implications for enterprise and mortgage

originator compliance with the fair lending laws under the 1992 Act. Under

the 1992 Act, HUD is required to issue regulations that prohibit each

enterprise from discriminating in any manner in the purchase of

mortgages. In addition, HUD is responsible for periodically commenting on

the enterprises’ underwriting guidelines to ensure their compliance with

the Fair Housing Act.

In our August 1996 report, we stated that the use of automated

underwriting systems could potentially result in disparate impacts on

minority borrowers. Under federal policy, a disparate impact occurs when

a seemingly neutral policy or practice is applied equally to all credit

applicants but with the result that the policy or practice has a disparate

impact on applicants from a targeted group, such as minorities. For a

prohibited disparate impact to occur, it must be the case that the policy or

practice is not justified by a business necessity. If a business necessity

does exist, the institution may still be held liable if it could have adopted a

less discriminatory policy than the one that was adopted.

The possibility exists that the use of automated underwriting

systems—which rely on uniform underwriting criteria—could result in a

disparate impact on minority borrowers. For example, the use of

automated underwriting systems could, according to a HUD official, result

in relatively low mortgage acceptance rates for minority borrowers.

According to mortgage industry representatives we contacted, originators

are concerned that they will be held accountable for potentially

discriminatory decisions that are based upon analyses provided by the

enterprises’ automated underwriting systems.

65Fair Lending: Federal Oversight and Enforcement Improved but Some Challenges Remain

(GAO/GGD-96-145, Aug. 13, 1996).

Page 38 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Enterprise officials we contacted stated that their automated underwriting

systems do not result in discrimination against minority borrowers.

Rather, the officials argued that the use of automated underwriting

systems promotes mortgage lending to minority borrowers and ensures

fair and equal treatment.

HUD Plans to Review

Enterprise Automated

Underwriting Systems

In HUD’s 1996 analysis, HUD officials stated that they planned to review the

enterprises’ automated underwriting systems under the fair lending

provisions of the 1992 Act. Since 1996, HUD has continued to provide for

the review of the enterprises’ automated underwriting systems. For

example, in 1997, HUD hired a contractor to review the potential

implications of the enterprises’ automated underwriting systems on fair

lending issues. In addition, a HUD official told us that HUD has the authority

under its enforcement authority to review the enterprises’ automated

systems if a fair lending complaint is filed.

In February 1998, FHA entered into a statement of understanding with

Freddie Mac, under which the enterprise is to provide automated

underwriting services to FHA to assist in the provision of FHA mortgage

insurance. To enable Freddie Mac to provide these services, FHA is to give

the enterprise loan data on FHA-insured mortgages. According to HUD, FHA’s

agreement with Freddie Mac has the potential to reduce the processing

time and credit losses associated with FHA-insured mortgages. According

to the Acting Director of the Office of GSE Oversight, her office was

informed but not consulted as FHA developed and implemented its

approach to evaluating and approving automated underwriting systems.

The Acting Director told us that while she participated in discussions

regarding the evaluation of the automated underwriting systems, to help

avoid a conflict with HUD’s oversight role, she was not included in FHA’s

decision to approve Freddie Mac’s system.

Conclusions HUD completed a substantial amount of in-house and contract research in

establishing the final enterprises’ housing goal rule in 1995. HUD set the

housing goals conservatively because, among other reasons, HUD had

concerns about the goals’ potential impacts on the enterprises’ financial

safety and soundness. Since 1996, the enterprises have been in compliance

with the final goals and have improved their performance in targeted

mortgage purchases when compared to the primary market, although

Fannie Mae’s performance has generally exceeded that of Freddie Mac.

Despite the enterprises’ increased purchases of targeted mortgages, there

is little information currently available on the extent to which the housing

Page 39 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

goals have resulted in increased housing affordability for targeted

borrowers.

Our review identified several weaknesses in HUD’s enterprise oversight

activities that limit its effectiveness as a housing mission regulator. The

following summarizes these weaknesses:

1. HUD has not yet verified the accuracy of the mortgage purchase data that

it receives from Fannie Mae and Freddie Mac. The recalculation steps that

HUD performed on the enterprises’ data constitute an important element of

the validation process, but recalculation alone cannot support conclusions

about the accuracy of the data upon which the original calculations were

based.

2. HUD’s research agenda does not focus on all of the key issues that are

necessary to evaluate the impacts of the enterprises’ housing goals. In

particular, HUD’s research does not currently evaluate the goals’ effects on

mortgage interest rates and other loan terms for targeted borrowers and

lenders’ incentive to originate targeted mortgages. In addition, HUD has not

conducted research to determine the effects of credit enhancements on

affordable multifamily mortgage finance and housing opportunities or

whether the housing goal rule provides the enterprises with regulatory

incentives to use credit enhancements. Consequently, HUD cannot

adequately determine the extent to which the goals promote housing

opportunities or at which levels to set the goals in the future.

3. HUD has not fully implemented a procedure to monitor sophisticated

enterprise financial activities under its general regulatory and new

mortgage program approval authorities. Consequently, HUD may not have

the ability to ensure that these financial products—such as nonmortgage

investments—are consistent with the enterprises’ housing mission.

Other federal regulators that have the responsibility for regulating housing

enterprises, such as OFHEO, are financed by the regulated entities.

However, HUD’s capability to strengthen its enterprise housing mission

oversight may be limited because resources that could be used for that

purpose must compete with other priorities for HUD’s appropriated funds.

For example, HUD’s capacity to implement a program to verify housing goal

data, which would necessarily involve a commitment of additional

resources, may be limited.

Page 40 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Moreover, HUD’s capacity to obtain the expertise to monitor the

enterprises’ financial activities may also be limited, particularly since HUD’s

traditional housing research focus may continue to command a significant

share of HUD’s available resources. In our previous reports on housing

enterprise oversight, we recommended that enterprise regulators have the

authority to assess the enterprises for the costs of federal oversight.66 This

practice would help ensure that the costs of regulation are borne by the

enterprises that benefit from ties to the government. Further, imposing

assessments helps ensure that funding for oversight is not constrained by

competing responsibilities.

Recommendations To strengthen HUD’s capacity as the enterprises’ housing mission regulator

and enhance, to the extent consistent with financial soundness concerns,

housing affordability and opportunities for targeted borrowers, we

recommend that the HUD Secretary take the following actions:

1. Develop and implement a program to assess the accuracy of housing

goal compliance data. The HUD Secretary should also coordinate any such

reviews with OFHEO.

2. Develop a better understanding of whether the housing goals are

enhancing housing affordability and opportunities for targeted groups as

intended by the 1992 Act by conducting research on the following issues:

(1) the goals’ effects on mortgage interest rates and associated loan terms

for targeted groups, (2) the effects of credit enhancements on enhancing

housing opportunities, and (3) the extent to which the housing goal rule

may provide the enterprises with regulatory incentives to use credit

enhancements.

3. Continue implementing the existing process to monitor the enterprises’

use of nonmortgage investments. Ensure that expertise is available to help

ensure that the enterprises’ financial activities are consistent with their

housing mission.

4. Collect information on the necessary costs for effectively overseeing the

enterprises, including the necessary costs to implement the

recommendations in this report, and develop a proposal for congressional

consideration that would require the enterprises to reimburse HUD for

these costs.

66GAO/GGD-97-139 and GAO/GGD-91-90.

Page 41 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Agency Comments

and Our Evaluation

We requested and received written comments on a draft of this report

from HUD and OFHEO. These written comments are provided in appendixes

IV and V. Overall, HUD was in general agreement with our report findings,

conclusions, and recommendations. OFHEO agreed with our

recommendation that the enterprises should bear the costs of HUD’s

mission oversight. We also discussed our draft report findings with Fannie

Mae and Freddie Mac officials, and provided the officials sections of the

draft report that pertained directly to the enterprises’ operations (i.e., the

sections on multifamily mortgage finance and automated underwriting). A

Fannie Mae official commented on our conclusion that imposing

assessments on the enterprises would help ensure effective oversight.

Enterprise officials also provided technical comments on our findings that

have been incorporated where appropriate.

HUD’s General Deputy Assistant Secretary for Housing generally agreed

with the draft report’s conclusions and stated that HUD planned to

implement our recommendations. He stated that HUD planned to (1) submit

a legislative proposal to Congress for the Department’s fiscal year 2000

budget that would assess the enterprises for the costs of HUD’s oversight,

(2) independently verify the housing goal compliance data and coordinate

these reviews with OFHEO, (3) consider the housing goals’ impacts on

mortgage interest rates for targeted groups, and (4) consider the

appropriate counting requirements for multifamily mortgage purchases

that are subject to credit enhancements.

HUD’s letter commenting on our draft report also contained two comments

that we believe warrant further discussion. First, the letter stated that HUD

had considered the consequences for the enterprises of alternative

housing goals. Second, the letter stated that HUD has in-house expertise

and contracting vehicles in place to assess new enterprise financial

activities.

On the basis of our review of HUD’s economic research supporting the final

rule and discussions with HUD officials, we did not see evidence that HUD

considered the financial consequences for the enterprises of alternative

goals. For example, HUD did not estimate the enterprises’ potential ROE

under differing economic scenarios for higher housing goals than those

that were established in the final rule. Regarding the second comment, we

recognize that HUD staff have significant expertise in housing and

housing-related issues. However, our review of HUD’s oversight of the

enterprises’ nonmortgage investments and HUD’s review of Fannie Mae’s

MPP new mortgage proposal suggested a lack of focus on financial

Page 42 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

activities and a lack of expertise, such as in cash-value life insurance. In

addition, HUD has not yet contracted to obtain such expertise.

OFHEO’s Acting Director agreed with our recommendation that HUD should

develop a proposal requesting that Congress consider requiring that the

enterprises bear the costs of HUD’s housing mission oversight. The Acting

Director also said that the draft report understated the extent to which

HUD and OFHEO communicated with one another in the development of the

housing goals. In addition, the Acting Director said that OFHEO did not

inform HUD of the findings of its 1996 data integrity examination at Freddie

Mac before the publication of its 1997 Report to Congress. However, the

Acting Director said that early in 1998, OFHEO agreed to a HUD request that

OFHEO provide technical assistance to HUD in ensuring the accuracy of data

submitted by the enterprises.

We have revised the report text to reflect the coordination between HUD

and OFHEO on the development of the housing goals. We also support

efforts by HUD and OFHEO to ensure, where possible, the accuracy of data

submitted by the enterprises.

A Fannie Mae official commented that it would be difficult for HUD to

separate its enterprise mission oversight responsibilities from its other

activities. The official expressed concern that HUD may use enterprise

assessments to fund other housing related research that is not directly

related to enterprise oversight.

We recognize that determining HUD’s expenditures for housing mission

oversight may pose challenges, but continue to believe that the enterprises

should bear the relevant expenditures as do other federal housing

enterprises. We believe that HUD should clearly itemize and justify its

mission oversight resource requirements to ensure accountability.

We are sending copies of this report to the majority and minority Members

of the House and Senate Banking Committees and to other interested

parties. We will also make copies available to others upon request.

Page 43 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
B-278383 

Major contributors to this report are listed in appendix VI. Please call me

or Bill Shear, Assistant Director, at (202) 512-8678 if you or your staff have

any questions.

Sincerely yours,

Thomas J. McCool

Director, Financial Institutions

 and Markets Issues

Page 44 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Page 45 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

50

Appendix II 

The Role of HUD’s

Numeric Goals in

Enhancing Housing

Affordability for

Targeted Groups

52

Appendix III 

Enterprise-Targeted

Mortgage Purchases

Compared to the

Primary Market’s

Originations of

Targeted Mortgages

56

Appendix IV 

Comments From the

Department of

Housing and Urban

Development

60

Page 46 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Contents

Appendix V 

Comments From the

Office of Federal

Housing Enterprise

Oversight

68

Appendix VI 

Major Contributors to

This Report

70

Tables Table 1: HUD Offices That Are Responsible for Enterprise

Mission Oversight and Those Offices’ FTE Positions

6

Table 2: HUD’s Budget for Enterprise Oversight in Fiscal Year

1998

7

Table 3: Enterprise Housing Goals for 1996-1999 and HUD’s

Estimates of Primary Market Shares

13

Table 4: Enterprise Mortgage Purchases Under the Affordable

Mortgage Housing Goals, 1993-1997

16

Table 5: HUD Housing Goals and Enterprise Compliance With the

Goals in 1996 and 1997

17

Table 6: Enterprise Goal Levels and Loan Purchases Under the

Multifamily Subgoal of the Special Affordable Goal for 1996 and

1997

18

Table 7: HUD’s Contracts for Research Support on Housing Goals 21

Table 8: New Enterprise Mortgage Programs Approved by HUD 35

Table III.1: Share of Conventional Conforming Mortgage Loans by

Fannie Mae, Freddie Mac, and the Primary Mortgage Market

Serving Targeted Groups

58

Page 47 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Contents

Abbreviations

ANPR Advance Notice of Proposed Rulemaking

FASIT Financial Asset Securitization Investment Trust

FHA Federal Housing Administration

FHEO Office of Fair Housing and Equal Opportunity

FTE full-time equivalent

GSE Government Sponsored Enterprise

HMDA Home Mortgage Disclosure Act of 1990

HUD Department of Housing and Urban Development

LTV loan-to-value

MBS mortgage-backed securities

MPP Mortgage Protection Plan

OFHEO Office of Federal Housing Enterprise Oversight

OMB Office of Management and Budget

PD&R Office of Policy Development and Research

REMIC Real Estate Mortgage Investment Conduit

ROE return on equity

Page 48 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Page 49 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix I 

Objectives, Scope, and Methodology

Our objectives for this report were to (1) discuss the Department of

Housing and Urban Development’s (HUD) legal basis, approach, and

rationale for setting the numeric housing goals at their current levels;

(2) report on the government-sponsored housing enterprises’ (enterprises)

compliance with these goals and HUD’s assessment of the goals’ impacts on

promoting homeownership and housing opportunities; (3) assess HUD’s

procedures and efforts to verify goal compliance data; (4) analyze the

enterprises’ multifamily mortgage purchase activities under the housing

goals and HUD’s assessment of these activities’ effects on promoting

housing opportunities; and (5) review HUD’s implementation of its general

regulatory and new mortgage program oversight authorities under the

1992 Act.

To provide HUD’s legal basis, approach, and rationale for setting the goals

at their current levels, we reviewed the 1992 Act and its legislative history,

the final housing goal rule, and supporting research and documentation. In

addition, we interviewed senior officials from HUD as well as officials from

the Federal National Mortgage Association (Fannie Mae) and the Federal

Home Loan Mortgage Corporation (Freddie Mac). We also interviewed

officials from the Office of Federal Housing Enterprise Oversight (OFHEO).

We reviewed the enterprises’ reported data to HUD to provide statistics on

the enterprises’ compliance with the housing goals between 1993 and 1997.

We also reviewed a March 1998 HUD report67 that provided information on

the enterprises’ purchases of targeted mortgage loans relative to the

primary market’s originations of such mortgage loans. To assess HUD’s

analysis of the goals’ impacts on homeownership and housing

opportunities, we reviewed our previous reports and HUD’s research on

these issues and HUD’s research contracts and grants. We also met with

representatives from the mortgage finance industry and housing

community groups.

We reviewed HUD’s efforts to verify the enterprises’ reported goal

compliance data by reviewing our standards on federal auditing

requirements68 and HUD’s final housing goal rule. We also discussed the

enterprise data collection process with HUD and enterprise officials and

reviewed relevant documents. Further, we reviewed an OFHEO examination

and its supporting workpapers regarding Freddie Mac’s data integrity

process, and we discussed this examination with OFHEO officials.

67Characteristics of Mortgages Purchased.

68Government Auditing Standards: 1994 Revision.

Page 50 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix I 

Objectives, Scope, and Methodology

We obtained information about the housing goals’ effects on the

enterprises’ multifamily mortgage financing activities and housing

opportunities by reviewing reports issued by HUD staff researchers on

these issues. We also discussed HUD’s research on these issues with senior

officials. Moreover, we compared the housing goal rule’s counting

requirements for recourse agreements and similar credit enhancements

with the rule’s treatment of risk-sharing agreements, which are

partnerships between the enterprises and the Federal Housing

Administration (FHA). We also discussed these issues with enterprise and

OFHEO officials as well as representatives from the mortgage industry.

We assessed HUD’s implementation of its general regulatory and new

mortgage program authorities by focusing on HUD’s oversight of enterprise

financial activities and these activities’ consistency with the enterprises’

housing mission. To conduct this assessment, we reviewed our August

199069 and March 199870 reports. We also reviewed HUD’s files on its

approval of the enterprises’ new mortgage program proposals to issue

Financial Asset Securitization Investment Trusts (FASIT) and discussed

FASITs with HUD and enterprise officials. Regarding HUD’s oversight of the

fair lending provisions of the 1992 Act, we reviewed internal HUD analyses

on the enterprises’ automated underwriting systems and discussed the

systems with HUD and enterprise officials.

We conducted our work in Washington, D.C., between October 1997 and

May 1998 in accordance with generally accepted government auditing

standards.

We provided copies of a draft of this report to HUD and OFHEO for review

and comment. HUD’s General Deputy Assistant Secretary for Housing and

OFHEO’s Acting Director provided written comments on the draft report’s

analysis and recommendations, which are summarized at the conclusion

of the report text and reprinted in appendixes IV and V. HUD and OFHEO

also provided technical comments, which have been incorporated where

appropriate. In addition, a Fannie Mae official provided oral comments,

and the enterprises provided technical comments on draft sections of the

report dealing with multifamily mortgage finance and automated

underwriting systems. These technical comments have been incorporated

where appropriate.

69GAO/GGD-90-97.

70GAO/GGD-98-48.

Page 51 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix II 

The Role of HUD’s Numeric Goals in

Enhancing Housing Affordability for

Targeted Groups

Congress established and chartered the enterprises as government

sponsored, privately owned corporations with public purposes to enhance

the availability of mortgage credit across the nation during both good and

bad economic times. The enterprises’ secondary market activities and

sophisticated financial products have facilitated the development of a

liquid, secondary mortgage market, particularly for single-family

residences. However, by 1992, industry participants had the perception

that the enterprises were lagging behind conventional mortgage

originators in extending mortgage credit serving low- and

moderate-income borrowers and borrowers in underserved areas.

Congress concluded that the enterprises had a responsibility to reach out

to borrowers that have traditionally been underserved by the mortgage

markets because of the financial benefits that the enterprises enjoy from

their federal charters and sponsorship. To address these congressional

concerns, the 1992 Act established a comprehensive framework for HUD to

promulgate numeric housing goals for the enterprises, obtain necessary

data from the enterprises to monitor their compliance with the goals, and

enforce enterprise compliance with the goals through the newly created

enforcement tools.

The enterprises’ charters list the following public purposes:

(1) to provide stability in the secondary market for residential mortgages;

(2) to respond appropriately to the private capital market;

(3) 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

(4) 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.

In carrying out their public purposes, the enterprises have made important

contributions to the residential mortgage market, including

(1) standardizing loan documents, underwriting standards, and estimation

Page 52 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix II 

The Role of HUD’s Numeric Goals in

Enhancing Housing Affordability for

Targeted Groups

of the value of single-family housing serving as collateral for the mortgage

loan and (2) taking on and management of credit risks. These

contributions helped establish and maintain a link between the primary

mortgage market and national financial markets, thereby increasing the

supply of residential mortgage credit. In a previous report, we indicated

that mortgage interest rates on single-family, fixed-rate, conforming

mortgages were reduced on average by 15 to 35 basis points due to the

contributions of Fannie Mae and Freddie Mac.71

Although the enterprises had generally made important contributions to

the residential mortgage market, by 1992, industry participants had the

perception that the enterprises’ distribution of conventional, conforming

loan funding serving low- and moderate-income borrowers and borrowers

in underserved areas was lagging behind the primary mortgage market’s

funding of such mortgages. In 1994, a Federal Reserve Board study72 using

1992 data collected under the Home Mortgage Disclosure Act of 1990

(HMDA)73 supported this perception. In passing the 1992 Act, Congress also

reached the finding that the enterprises “have an affirmative obligation to

facilitate the financing of affordable housing for low- and

moderate-income families in a manner consistent with their overall public

purposes, while maintaining a strong financial condition and a reasonable

economic return.”

The 1992 Act specified interim low- and moderate-income, special

affordable housing, and central city74 goals to be effective in 1993 and

1994. HUD retained low- and moderate-income and special affordable

housing goals. The 1992 Act provided HUD with discretion in defining

underserved areas in promulgating numeric goals beginning in 1995. Thus,

HUD was given the authority to help determine what geographic areas

would be targeted. Rather than relying on location in a central city, the

new underserved area goal is based on concentrations of low-income and

minority residents in the census tract. According to HUD officials, this

71GAO/GGD-96-120. A basis point is 1/100 of a percentage point.

72Glenn B. Canner and Wayne Passmore, “Residential Lending to Low-Income and Minority Families:

Evidence From the 1992 HMDA Data,” Federal Reserve Bulletin (Feb. 1994), pp. 79-108.

73HMDA data are collected by the government from residential mortgage lenders to provide the public

with information for determining whether financial institutions are serving the housing needs of their

communities and to assist regulatory agencies in identifying possible discriminatory lending patterns

and enforcing antidiscrimination statutes.

74The central city, or cities, of a Metropolitan Statistical Area receive that designation by the Office of

Management and Budget on the basis of population and employment-to-residence and

commute-to-residence ratios. Central city designation is not based on housing needs or economic

conditions in a geographic area.

Page 53 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix II 

The Role of HUD’s Numeric Goals in

Enhancing Housing Affordability for

Targeted Groups

substitution was based, in part, on research conducted at HUD. This

research relied on HMDA data on mortgage flows and U.S. Bureau of the

Census data on housing and demographic conditions across census tracts.

The results indicated that mortgage applications and originations in a

census tract, in relation to the housing stock in the census tract, tended to

be lower in census tracts that had concentrations of minority and

low-income households. HUD concluded that these results provided more

support for its underserved area definition than a definition that is based

solely on central city location.

The general purpose of the goals is to increase the total supply of

residential mortgage funds serving targeted households, which, in turn,

could lower mortgage interest rates, create more flexible underwriting

standards, and improve homeownership and housing opportunities for

low- and moderate-income households and residents of underserved areas.

Just as enterprise specialization and the taking on and management of

credit risk in the secondary market for residential mortgages has generally

helped facilitate such benefits for single-family borrowers in general, the

numeric goals can help facilitate an increase in the supply of residential

mortgage funds serving targeted households.

The impact of the numeric goals on targeted households depends on

(1) the direct impact of the goals on enterprise purchases serving targeted

households and (2) the impact of the enterprise purchases on mortgage

originations by primary mortgage market lenders. Such lenders include

depository institutions that undertake single-family portfolio lending,

multifamily lenders, and mortgage bankers who originate both

conventional and federally insured residential mortgages. As discussed in

the body of this report, multifamily mortgage purchases by the enterprises

are a fairly low proportion of their overall purchases.75 However,

multifamily purchases play a greater role in helping the enterprises meet

HUD’s numeric goals. For example, about 95 percent of the units in

multifamily properties qualify as low- and moderate-income housing.76

We also note that the impact of increased enterprise goal purchases on

mortgage originations serving targeted households by primary mortgage

market lenders is much less understood than the impacts of enterprise

activities on the overall conforming, conventional mortgage market. For

75About 4 percent of Fannie Mae’s and 1 percent of Freddie Mac’s total mortgage portfolios are

composed of multifamily mortgages.

76HUD, Economic Analysis for the Secretary of HUD’s Regulation of the Federal National Mortgage

Association and the Federal Home Loan Mortgage Corporation (Nov. 1, 1995), p. II-3.

Page 54 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix II 

The Role of HUD’s Numeric Goals in

Enhancing Housing Affordability for

Targeted Groups

example, in the overall market, the enterprises generally provide corporate

guarantees in which the credit risks associated with mortgages they

purchase are taken on and managed by the enterprise, rather than by

mortgage originators or mortgage-backed securities (MBS) investors. The

enterprises’ corporate guarantees have contributed to the link between the

overall primary mortgage market for single-family housing and national

financial markets because (1) the enterprises can diversify their credit

risks by purchasing mortgages across the nation while mortgage

originators generally cannot and (2) MBS investors do not have the data and

tools that the enterprises have to evaluate credit risks.

However, the risks associated with purchasing certain mortgages counting

toward the numeric goals and regulatory treatment of those purchases

may have created a regulatory incentive for the enterprises to enter into

agreements where mortgage originators provide credit enhancements such

as recourse arrangements, thus assuming credit risk. The impacts of such

arrangements on the supply of mortgage credit by conventional mortgage

originators serving targeted households are not understood. For example,

HUD has not analyzed whether enterprise multifamily purchases with

lender-provided credit enhancements have been made representing

mortgages (1) from across the nation rather than from limited geographic

areas, or (2) from regions of the country undergoing relative economic

declines as well as those experiencing relative prosperity, thereby

providing a cushion in declining markets.

As previously stated, the enterprises’ charters call upon them to increase

the liquidity of mortgage investments and improve the distribution of

investment capital available for residential mortgage financing serving

targeted households. We have concluded that HUD has not conducted

sufficient research to determine whether providing increased liquidity to

help serve targeted households across the nation under different economic

conditions can be achieved without the enterprises taking on greater

credit risks than they currently do on certain purchases now qualifying

toward achievement of the numeric goals.

Page 55 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix III 

Enterprise-Targeted Mortgage Purchases

Compared to the Primary Market’s

Originations of Targeted Mortgages

In March 1998, HUD published a study77 that, among other issues, compared

the enterprises’ performance in serving the mortgage credit needs to that

of the primary market in 1992 and 1996.78 According to the study, such

comparisons are important because they provide a means of evaluating the

enterprises’ efforts to serve the credit needs of targeted groups. The study

found that (1) the enterprises’ performance has generally improved

compared to the primary market’s, (2) Fannie Mae’s performance has

exceeded that of Freddie Mac, and (3) the enterprises still trail in most

affordable lending categories.

A number of factors may account for the enterprises’ generally improved

performance, such as the implementation of HUD’s goals and a generally

growing U.S. economy. There are also several factors that may explain

why the enterprises continue to trail the primary market in most

affordable lending categories. For example, the enterprises may lack

detailed knowledge about the risk characteristics of targeted borrowers in

local markets. Therefore, to manage credit risks, the enterprises may

establish stricter mortgage purchase underwriting standards than the

underwriting standards that lenders establish to originate targeted

mortgages in local markets.

The Enterprises Have

Generally Improved Their

Mortgage Purchase

Performance Relative to

the Primary Market

Table III.1 provides HMDA data on enterprise purchases of targeted

mortgages and primary market originations of such mortgages in 1992 and

1996.79 Specifically, the table shows the share of (1) each enterprise’s

purchases of conventional conforming mortgages for various targeted

borrowers as a percentage of its total mortgage purchases and

(2) mortgage originators’—that is, banks, thrifts, and mortgage

banks—originations of targeted, conforming mortgage loans as a

percentage of their total mortgage originations. In addition, the table

shows each enterprise’s share of targeted mortgage purchases as a

percentage of the primary market’s share of originations of such

mortgages. This analysis provides a comparison of the enterprises’

performance relative to the primary market over time.

77Characteristics of Mortgages Purchased.

78The HUD study focused on the enterprises’ mortgage purchase performance between 1993 and 1995.

HUD provided data to us for 1996.

79HMDA data differ from the housing goal data collected by HUD. HMDA data are based on the number

of mortgages originated and are collected from a subset of institutions that originate mortgage loans:

commercial banks, thrifts, and mortgage banks in metropolitan areas. HMDA data also report more

categories of targeted mortgage groups than do the housing goal data. The housing goal data consist of

the number of dwelling units financed by all enterprise mortgage purchases.

Page 56 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix III 

Enterprise-Targeted Mortgage Purchases

Compared to the Primary Market’s

Originations of Targeted Mortgages

Table III.1 shows that both the enterprises and originators in the primary

market generally increased their commitments to targeted mortgages

during the period, although both the primary market and Freddie Mac’s

share in high-minority census tracts declined. Overall, the enterprises’

performances generally increased compared to the primary market’s. For

example, in each of the seven categories, Fannie Mae’s performance

improved compared to the primary market’s, and Fannie Mae exceeded

the primary market in two areas (Hispanic borrowers and high-minority

tracts) by 1996. Freddie Mac’s performance improved relative to the

primary market’s in three areas, declined in three areas (underserved

areas, low-income census tract, and high-minority census tract), and

stayed the same in one area (Hispanic).

Page 57 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix III 

Enterprise-Targeted Mortgage Purchases

Compared to the Primary Market’s

Originations of Targeted Mortgages

Table III.1: Share of Conventional Conforming Mortgage Loans by Fannie Mae, Freddie Mac, and the Primary Mortgage

Market Serving Targeted Groups

Targeted borrower group

Share of Fannie

Mae mortgage

purchases

Share of Freddie

Mac mortgage

purchases

Primary market

origination share

Fannie Mae share

as a percentage

of primary market

share

Freddie Mac

share as a

percentage of

primary market

share

Very-low income

1992 5.1% 5.2% 7.6% 67% 68%

1996 8.6 8.0 10.8 80 74

African-American

1992 2.8 2.2 3.1 90 71

1996 4.4 3.6 4.7 94 77

Hispanic

1992 3.9 3.6 4.4 89 82

1996 6.6 4.7 5.7 116 82

Underserved areas

1992 18.7 18.9 21.9 85 86

1996 21.3 18.9 23.3 91 81

Low-income census tract

1992 7.0 7.3 9.2 76 79

1996 8.5 7.4 10.0 85 74

High-minority census tract

1992 12.9 12.0 13.1 98 92

1996 14.0 10.9 12.9 109 84

High AfricanAmerican census tract

1992 3.2 2.6 3.7 86 70

1996 3.6 3.0 4.1 88 73

Source: HUD.

HUD’s housing goals may have contributed to the enterprises’ performance

relative to the primary market. However, other factors may have played a

role as well. Between 1992 and 1996, the United States experienced steady

economic growth and mortgage interest rates were generally favorable.

According to the National Association of Realtors, housing was more

affordable in 1995 than in any year during the 1975 to 1992 period. With a

generally favorable economic environment and increased housing

affordability, more targeted borrowers, such as low-income households

and those living in underserved areas, may have been able to qualify for

Page 58 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix III 

Enterprise-Targeted Mortgage Purchases

Compared to the Primary Market’s

Originations of Targeted Mortgages

mortgages, and the enterprises may have found it profitable to increase

their purchases of such mortgages without prompting from HUD’s housing

goals.

The Enterprises Continue

to Trail the Primary Market

Despite their relative improvements, the enterprises continued to trail the

primary market in most categories identified in table III.1. There are

several potential reasons for these differences, including the following:

• According to a Federal Reserve study,80 mortgage originators have a better

understanding of the risks associated with lending in the areas where they

do business than the enterprises. Thus, the enterprises may establish

mortgage purchase underwriting criteria that are stricter than the

underwriting criteria of mortgage originators.

• Banks and thrifts—major originators in the primary mortgage market—are

subject to the Community Reinvestment Act, which requires them to serve

the needs, including mortgage credit needs, of targeted groups in areas

where they do business.81

• HUD set the housing goals below the estimated shares of targeted mortgage

lending in the primary market.

80Credit Risk and the Provision of Mortgages.

81See Characteristics of Mortgages Purchased.

Page 59 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

Note: GAO comments

supplementing those in

the report text appear at

the end of this appendix.

Page 60 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

Page 61 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

Page 62 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

Page 63 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

Page 64 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

See comment 1.

Page 65 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

See comment 2.

Page 66 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix IV 

Comments From the Department of Housing

and Urban Development

The following are GAO’s comments on the Department of Housing and

Urban Development’s letter dated July 14, 1998.

GAO Comments 1. In a letter to GAO, HUD provided an explanation of the differences in

counting requirements under the final rule. HUD stated that the enterprises

are required to accept additional credit risks on mortgage purchases under

the FHA risk-sharing programs because such risks are mathematically

quantifiable and agreed before the purchase of loans. By contrast, HUD said

that it is difficult to determine the risks that the enterprises incur on

multifamily mortgage purchases subject to recourse agreements that are

not made under the FHA risk-sharing programs.

As HUD agrees in its comment letter, additional research on multifamily

credit enhancements is needed. Thus, we would expect HUD to assess the

risks that the enterprises incur on multifamily mortgage purchases subject

to credit enhancements.

2. We have added language to the report consistent with the accepted

definition of a prohibited disparate impact under federal policy (see p. 38).

Page 67 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix V 

Comments From the Office of Federal

Housing Enterprise Oversight

Page 68 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix V 

Comments From the Office of Federal

Housing Enterprise Oversight

Page 69 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Appendix VI 

Major Contributors to This Report

General Government

Division

William Shear, Assistant Director

Wesley M. Phillips, Evaluator-in-Charge

Thomas H. Givens, Senior Evaluator

Phoebe Jones, Office Technician

Resources,

Community, and

Economic

Development Division

David L. Lewis, Senior Evaluator

Office of the General

Counsel

Rachel DeMarcus, Assistant General Counsel

(233541) Page 70 GAO/GGD-98-173 HUD’s Mission Oversight Needs to Be Strengthened
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100