On behalf of the Office of Federal Housing Enterprise Oversight (OFHEO), I am

pleased to submit the 2000 Report to Congress. This is OFHEO’s seventh annual

report to Congress and my first as Director. I am honored to lead an agency comprised of such talented and dedicated individuals who are all committed to fulfilling a very noble mission: Safeguarding the world's best housing finance system

through the regulation and oversight of Fannie Mae and Freddie Mac (the

Enterprises).

We have taken many steps forward in the last year to further our mission. We

issued a long-awaited proposed risk-based capital rule and expect to complete a final rule by the end of

the year. We established an Office of Information Technology, led by a new Chief Information Officer, to

coordinate our heavy reliance on technology. We restructured our internal organization to clarify roles

and responsibilities and put an infrastructure in place to best fulfill our mission going forward. And we are

increasing our staff resources to add critically needed depth.

There is still much more to do. OFHEO has matured and developed to the point where it can and must

take a more comprehensive approach to fulfilling its mission. We must have a complete understanding of

not just the Enterprises, but of the entire mortgage industry and the fast-paced changes underway. Few

expect the mortgage industry to look the same in 10, five or even two years from now. OFHEO must

understand how those changes will affect the Enterprises and the rest of the mortgage industry. The fundamental changes underway in the mortgage market will affect, across the board, our oversight of the

Enterprises. Our resource allocation and skill sets must anticipate those changes and prepare accordingly,

rather than simply reacting after the fact.

To do so, I have formed a new Office of Strategic Planning and Management in OFHEO. This office will be

primarily responsible for developing and maintaining a long-term strategic plan that is consistent with

the mission of OFHEO. In addition, we will increase our research and analysis capability in order to better

understand and prepare for the changes occurring in the mortgage industry. The greater insight gained

from this work will be used to continually improve our examination and capital regulation functions.

I would like to call particular attention to Chapters 1 and 2 of this report. They serve as a discussion of the

changes underway in the mortgage industry and offer some insight into how the industry might evolve.

These chapters illustrate the need for greater understanding through research and analysis of trends in the

industry.

I look forward to another very productive year for OFHEO.

Sincerely,

Armando Falcon, Jr.

Director

D IRECTOR ’ S M ESSAGE


i

Contents

Chapter 1 Major Forces That Are Reshaping The Housing Finance System . . . . 1

Improvements In Information Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

New Technologies Have Facilitated the Growth of Mortgage Securitization. . . . . . . . . . . . . . . . 6

Scale Economies in Servicing Have Contributed to Industry Consolidation . . . . . . . . . . . . . . . . 6

The Origination Process Is Being Automated Rapidly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Originators’ Use of the Internet is Expected to Grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

New Technologies Have Transformed Risk Management and Debt Financing. . . . . . . . . . . . . . 9

Federal Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

The Enterprises Dominate the Secondary Market for Conventional Mortgages . . . . . . . . . . . . 10

Federal Regulation of the Three Housing GSEs Affects the Industry . . . . . . . . . . . . . . . . . . . . 11

Federal Policy Encourages Mortgage Lending for Affordable Housing . . . . . . . . . . . . . . . . . . . 12

Changes in Policy Also Affect the Volume of Activity of FHA, VA, and Ginnie Mae . . . . . . . . . 12

Enterprise Efforts to Improve Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Initiatives Take Advantage of New Technologies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

New Activities Affect Other Industry Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Economic and Demographic Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

A Less Robust Economy is Likely to Dampen Activity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Changes in the Age Structure of the Population May Affect the Housing Market. . . . . . . . . . . 16

Chapter 2 The Enterprises, Mortgage Markets, and The Financial System 

In The Next Decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Implications For The Primary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

A National Economic Downturn Will Test the Ability of the Enterprises to Manage Risk . . . . . 18

Changes in the Composition of Households and Borrowers May Affect Credit Performance . 19

Subprime Lending Presents Opportunities and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

New Technologies Will Lead to Changes in Industry Business Practices . . . . . . . . . . . . . . . . . 20

The Enterprises’ Provision of Origination-Related Services Raises Issues . . . . . . . . . . . . . . . . 22

Policy Changes May Affect FHA-Insured and VA-Guaranteed Originations . . . . . . . . . . . . . . . 23

Implications For The Secondary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Investment in New Technologies Creates Opportunities and Presents Risks . . . . . . . . . . . . . . 23

The Potential Benefits of Enterprise Efforts to Expand Market Share Are Uncertain . . . . . . . . 24

Degree of Competition in the Secondary Market Has Been Questioned. . . . . . . . . . . . . . . . . . 25

Changes in Federal Policy May Affect the Secondary Market. . . . . . . . . . . . . . . . . . . . . . . . . . 26

The Enterprises’ Ability to Sustain Double-Digit Earnings Growth Is Uncertain . . . . . . . . . . . . 27

Implications For Securities Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Economic Effects of Retained Mortgage Portfolios Are Unclear . . . . . . . . . . . . . . . . . . . . . . . . 28

Increased Use of Credit Enhancements and Derivatives Poses Risks . . . . . . . . . . . . . . . . . . . 29

Implications For The Financial System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Growth of Enterprise Debt Raises Concerns About Systemic Risk. . . . . . . . . . . . . . . . . . . . . . 30

Potential Benchmark Role of Enterprise Debt Raises Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ii

Contents (Continued)

Implications for Federal Regulation of Mortgage Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Greater Transparency of Enterprise Risk Could Enhance Market Discipline. . . . . . . . . . . . . . . 33

More Comprehensive Federal Research About Mortgage Markets May be Appropriate . . . . . 34

Chapter 3 Mortgage Markets and The Enterprises In 1999 . . . . . . . . . . . . . . . . . 35

Housing and Primary Mortgage Market Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Strong Economy Sustains High Levels Of Activity, Healthy Home Price Appreciation . . . . . . . 36

Rising Rates Alter the Composition of Conventional, Single-Family Originations . . . . . . . . . . . 40

Consolidation Among Lenders Continues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Secondary Market Activities of the Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Single-Family Purchases Decline But Remain at High Levels . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Newly Acquired Single-Family Loans Pose Slightly Greater Credit Risk . . . . . . . . . . . . . . . . . . 45

Enterprises Expand Presence in the Subprime Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Enterprises Continue to Manage Single-Family Credit Risk Actively. . . . . . . . . . . . . . . . . . . . . 46

Multifamily Purchases Rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Volumes of MBS and REMIC Issuances Decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Financial Condition of The Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Growth in Mortgage Investments Pushes Combined Earnings Over $6 Billion. . . . . . . . . . . . . 49

Revenues Continue to Rise Despite Fall in Interest Margins and Guarantee Fees . . . . . . . . . . 52

Credit Losses and Delinquencies Continue to Decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Administrative Expenses Grow Less Rapidly Than Mortgages Financed . . . . . . . . . . . . . . . . . 54

Assets Grow Rapidly, But More Slowly Than in 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Composition of Debt Changes as Interest Rates Rise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Enterprises Continue to Meet Regulatory Minimum Capital Requirements. . . . . . . . . . . . . . . . 59

Chapter 4 Risk-Based Examination Program and Regulatory Activity . . . . . . . 61

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

OFHEO’s Examination Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Risk Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Examination Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

1999 Examination Results and Conclusions for Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Audit Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

1999 Examination Results and Conclusions for Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
iii

Contents (Continued)

Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Audit Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Regulatory Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Rulemaking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Executive Compensation Authority and Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Flood Insurance Compliance Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Chapter 5 Financing OFHEO’s Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

OFHEO’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Unqualified Audit Opinion of FY 1999 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Chapter 6 Historical Data Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 . . . . . . . . . . . . . . . . 134

(Title 13 of Public Law 102-550). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Office Of Federal Housing Enterprise Oversight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135

List of Figures

Figure Page

1 Mortgage Interest Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

2 New Home Sales and Existing Home Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

3 One-Year Change in House Prices by Census Division, Fourth Quarter 1998 to 

Fourth Quarter 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4 Originations of Single-Family Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

5 Interest on 30-Year Fixed-Rate Mortgages Rate Versus Refinance Share . . . . . . . . . . . . . . . . . 40

6 Loan-to-Value (LTV) Ratios of Conventional Single Family Mortgages and Percentage 

of Originations with LTV Ratios >90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

7 Percentage of Conventional Single-Family Loans with Adjustable Rates Versus 

Commitment Rates on 30-Year Fixed-Rate Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

8 Concentration of Mortgage Originations Among the Top 25 Originators . . . . . . . . . . . . . . . . . . 43

9 Enterprise Single-Family Mortgage Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

10 Enterprises’ Single-Family Purchases by Loan-to-Value (LTV) Ratio . . . . . . . . . . . . . . . . . . . . . 45

11 Percent of Mortgages Evaluated by Enterprise Automated Underwriting Systems 

Prior to Purchase—Based on Recently Originated Mortgages Not Included in Structured 

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

12 Enterprise Multifamily Mortgage Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
iv

Contents (Continued)

13 Enterprise Single-Class MBS Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

14 Enterprise REMIC Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

15 Enterprise Primary Sources of Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

16 Enterprise Mortgage Investments and Net Interest Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

17 Single-Family Delinquency Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

18 Combined Enterprise Assets and Growth Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

19 Enterprise Average Non-Mortgage Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

20 Callable Debt as Percentage of Total Effective Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . 58

21 Effective Long-Term Debt as a Percentage of Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

22 Core Capital as a Percentage of Minimum Capital Requirement . . . . . . . . . . . . . . . . . . . . . . . . 60

23 OFHEO’s Comprehensive Risk-Based Examination Program . . . . . . . . . . . . . . . . . . . . . . . . . . 62

24 Examination Communications Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

List of Tables

Table Page

1 Fannie Mae Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

2 Freddie Mac Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

List of Boxes

Box Page

1 Components of Single-Family Mortgage Lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2 Methods of Originating Single-Family Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3 The Subprime Market in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

4 The Enterprises’ Purchases of Mortgage Securities in 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Figure Page
OFHEO 2000 Report To Congress 1

1

Major Forces That Are

Reshaping The Housing

Finance System

Fannie Mae and Freddie Mac are integral components of the U.S. housing

finance system. They are the largest investors in conventional mortgages—those

that do not carry government insurance or guarantees. At the end of 1999, the

Enterprises owned or had securitized 47 percent of outstanding conventional

single-family loans. Fannie Mae and Freddie Mac set standards for originating

and servicing the loans they purchase. Their credit policies influence the business practices and financial performance not only of originators and servicers

but also of mortgage insurers, other providers of credit enhancements, credit

bureaus, appraisal firms, and other companies that provide services to lenders. In

turn, those firms affect the credit quality of the mortgages the Enterprises buy

and the profitability of their mortgage guarantee business. Fannie Mae and Freddie Mac also affect indirectly the volume of activity of two Federal agencies that

support mortgage lending—the Federal Housing Administration (FHA) and the

Government National Mortgage Association (Ginnie Mae)—and the Federal
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

2 OFHEO 2000 Report To Congress

Home Loan Bank System, the third government-sponsored enterprise (GSE) that

supports housing finance. The Enterprises combined are the largest portfolio

investors in mortgage securities, the largest private issuers of debt securities, and

are among the largest end users of derivatives. The funding and hedging activities of Fannie Mae and Freddie Mac are large enough to influence the activities of

other large debt issuers and users of derivatives.

To regulate Fannie Mae and Freddie Mac effectively, the Office of Federal Housing Enterprise Oversight (OFHEO) must have a comprehensive and thorough

understanding of the U.S. housing finance system and the roles the Enterprises

play in the markets in which they participate. OFHEO must understand the

major trends in housing finance and financial markets and the fundamental

forces shaping those trends, in order to grasp the opportunities, challenges, and

risks facing the Enterprises, anticipate future developments, and identify public

policy issues. OFHEO must pay close attention not only to likely developments

but to less likely ones that could cause significant problems for the functioning

of mortgage markets in general and for the safety and soundness of Fannie Mae

and Freddie Mac in particular.

OFHEO’s understanding of housing finance markets and the financial system is

the foundation of the Office’s regulatory activities. That understanding informs

all of OFHEO’s decisions about its risk-based capital regulation and comprehensive examination program, which are two of the principal tools used to regulate

Fannie Mae and Freddie Mac. OFHEO’s expertise regarding housing finance

markets also shapes its views about other Federal policies that may affect the

safety and soundness of the Enterprises and the efficiency and stability of mortgage markets. To maintain a thorough knowledge of the housing finance system,

OFHEO must conduct a broad program of economic and policy research. 

OFHEO’s regulation of Fannie Mae and Freddie Mac must adapt continually to

the evolution of housing finance markets and the activities and risks of the

Enterprises. Once the proposed risk-based capital regulation is final, OFHEO will

have the opportunity to consider fully the operation of the regulation. As the

Enterprises change their activities—as they introduce new loan products and

use new hedging techniques, for example—OFHEO will assess how well its riskbased capital stress test measures the risk of each Enterprise. OFHEO would

base any changes in the test on its understanding of developments in housing

finance and the activities of Fannie Mae and Freddie Mac. Similarly, OFHEO’s

understanding of housing finance markets and the activities of the Enterprises is

critical to its decisions about where to deploy examination resources and about

the policies, procedures, and controls Fannie Mae and Freddie Mac should use to

manage their businesses effectively. As markets and the activities of the Enterprises change, OFHEO must assess how its examination program should evolve

in order to ensure the safety and soundness of Fannie Mae and Freddie Mac.
Improvements In Information Technologies

OFHEO 2000 Report To Congress 3

This chapter surveys the fundamental forces that transformed housing finance

markets in the 1990s and are likely to continue to reshape those markets in the

next decade. Chapter Two analyzes the implications those forces may have in the

next decade for primary and secondary mortgage markets, the participation of

Fannie Mae and Freddie Mac in securities markets and the global financial system, and Federal regulation of mortgage markets and the Enterprises.

IMPROVEMENTS IN INFORMATION TECHNOLOGIES 

In the last two decades improvements in computer and telecommunications

technologies have reduced the money and time spent in carrying out financial

transactions and have made it easier to obtain and analyze information about

market participants and financial instruments.1

 Lower transaction costs and

greater transparency have transformed financial markets in many ways. Debt

markets have become larger, with an increasing share of debt instruments

becoming actively traded. Securitization, which transforms illiquid whole loans

into liquid securities, has spurred the growth of debt markets. Derivatives markets have expanded, allowing firms to trade market risks more efficiently. Electronic payments technologies have grown rapidly, increasing the speed and

efficiency of payments. Economies of scale in financial services have increased,

spurring rapid consolidation during the 1990s, particularly in commercial banking because of the loosening of restrictions on geographic and product markets.

Scoring—the process of using statistical techniques to evaluate the credit risk of

specific borrowers or loans—long used to evaluate auto, credit card, and installment loans, has also become widely used to underwrite residential mortgages

and small business loans. This has reduced the fixed costs associated with

screening applicants for such loans and increased competition among lenders.

With the emergence of the World Wide Web as a powerful communications

medium, a growing share of the customers of securities firms, banks, insurance

companies, and other providers of financial services are accessing information

and executing transactions online.

Improvements in technology have profoundly altered the housing finance system.2

 All of the components of the single-family mortgage lending process—

origination, funding, assumption of credit risk, and servicing—have become

cheaper and easier to perform (Box 1 summarizes those components). Lower

costs and faster execution have led to significant changes in the structure of

mortgage markets and in the business practices of firms throughout the housing

finance system.

1 For a discussion of the effects of changes in technology on financial markets, see Frederick S. 

Mishkin and Philip E. Strahan, “What Will Technology Do to Financial Structure?” in BrookingsWharton Papers on Financial Services 1999 (Washington, DC: The Brookings Institution, 1999), pp. 

249-277.

2 The remainder of this section draws upon Michael LaCour-Little, “The Evolving Role of Technology 

in Mortgage Finance,” (paper presented at the Mid-Year Meeting of the American Real Estate and 

Urban Economics Association, Washington, DC, May 30-31, 2000).
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

4 OFHEO 2000 Report To Congress

Box 1: Components of Single-Family Mortgage Lending

Single-family mortgage lending has four components: loan origination or production, funding,

assumption of credit risk, and servicing or loan administration. A financial institution may perform

some or all of these functions for a particular loan.

Loan origination or production is the actual making of mortgage loans. It includes marketing to

prospective borrowers, processing applications (ordering credit reports, appraisals or other property

valuations, and title reports; and verifying borrower income, employment, and assets), underwriting

applications, arranging for approved loans to be closed, and disbursing funds to borrowers. (Box 2 discusses the different methods used to originate single-family mortgage loans).

Funding is the provision, either temporarily or permanently, of the funds to finance mortgage loans. A

depository institution that buys mortgage loans (or obtains mortgage-backed securities in exchange

for whole loans) funds them on a long-term basis through checking and savings accounts, certificates

of deposit, other depository products, and other borrowings. Mortgage banks, which are not deposittaking institutions, finance closed mortgage loans temporarily, usually with a warehouse line of credit

from a commercial bank. (To mortgage bankers, warehousing is the provision of temporary funding for

loans.) Mortgage banks then sell the loans in the secondary market. Purchasers in the secondary market include investors who finance their purchases by issuing debt, or intermediaries between lenders

and investors, often called conduits, that pool loans and sell them in the form of mortgage-backed

securities. Fannie Mae and Freddie Mac function as both investors and conduits.

Assumption of credit risk is the act of bearing the risk that loans will default. Different types of

financial institutions assume the credit risk of conventional single-family mortgages. Private mortgage

insurers assume a portion of the risk of loans that they insure, typically those with loan-to-value (LTV)

ratios greater than 80 percent, and may bear additional risk by providing supplemental coverage of

pools of loans. Depository institutions bear some of the credit risk of conventional mortgages that they

hold if the loans carry private mortgage insurance, and all of the risk if the loans are uninsured. Fannie

Mae and Freddie Mac bear the credit risk associated with the uninsured portions of conventional

mortgages that they hold in their investment portfolios or that serve as collateral for mortgage-backed

securities they have guaranteed.

Servicing or loan administration is the management of the mortgage payment process for investors who are the ultimate holders of mortgage notes. Servicers collect monthly payments from borrowers, transfer principal and interest payments to investors, manage escrow accounts, and handle

delinquencies and foreclosures.
Improvements In Information Technologies

OFHEO 2000 Report To Congress 5

Box 2: Methods of Originating Single-Family Mortgages

There are two methods of originating single-family mortgage loans — retail lending and wholesale

lending. In retail lending, a mortgage lender performs all of the tasks involved in originating loans

(refer to Box 1 on the previous page). Retail lenders may operate as portfolio lenders—lending institutions that hold mortgages as investments—or as mortgage banks. Retail lending may involve applicants visiting branch offices or contacting lenders by phone or over the Internet.

In wholesale lending, two or more firms are involved in the origination process. Mortgage brokers are

originators who introduce prospective borrowers to lenders who operate as wholesalers. Brokers generally perform most of the application processing. Wholesalers complete any remaining processing,

underwrite the applications, and generally provide funds that brokers need to close approved loans.

Wholesalers may operate as portfolio lenders or mortgage banks. As compensation for their services,

brokers receive the origination fees paid by borrowers and may earn additional fees from wholesalers.

As with retail lenders, applicants may contact brokers in person, by phone, or by visiting a web site.

Web-based mortgage consolidators such as E-loan and Lending Tree, which allow borrowers to compare loans available from and submit applications to multiple wholesalers, are online mortgage

brokers. 

A wholesaler may also purchase a closed loan from a correspondent lender after the latter has completed the loan origination process. A correspondent is usually a smaller lender, often a community

bank or thrift, that has the funds and capacity to close loans in its own name, but cannot or does not

want to service all of the loans it makes. Correspondents typically cannot manage as economically as

wholesalers the interest rate risk posed by warehousing loans and selling them in the secondary market. Correspondents may commission mortgage brokers to perform some loan processing tasks. By

dealing with a number of wholesalers, mortgage brokers and correspondents can assure themselves of

a complete line of loan products and competitive prices at all times.
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

6 OFHEO 2000 Report To Congress

NEW TECHNOLOGIES HAVE

FACILITATED THE GROWTH

OF MORTGAGE

SECURITIZATION

Improvements in information technologies first affected housing finance markets by making securitization the preferred method of funding mortgages. The

growth of securitization was stimulated in the 1970s by the advent of computers

and cheap data transmission. Rapid increases in computer processor speeds

facilitated the development of multi-class mortgage securities and more active

markets for mortgage securities in the 1980s and 1990s. The growth of securitization greatly increased the liquidity of most single-family and multifamily

mortgages and made it easier for single-family lenders to split, or “unbundle”, the

components of the lending process. As a result, single-family lenders operate

largely as mortgage banks, which means that they specialize in the origination

and servicing components of the lending process. Today almost all large mortgage lenders are affiliates of depository institutions.

SCALE ECONOMIES IN

SERVICING HAVE

CONTRIBUTED TO

INDUSTRY CONSOLIDATION

Improvements in technology have allowed large lenders to achieve economies of

scale in the servicing component of the lending process. Four different innovations—personal computers (PCs), local area networks (LANs) linking PCs, automated voice response technologies, and the Internet—have each reduced the

costs of responding to consumer inquiries. Document imaging has allowed large

servicers to retain much less paper for each individual loan and to access records

quickly and cheaply. The achievement of economies of scale in servicing has been

the primary force driving rapid consolidation among the largest mortgage lenders. According to Inside Mortgage Finance, between 1989 and 1999 the share of

single-family loans serviced by the 25 largest servicers more than tripled to 56

percent. The market share of the 25 largest originators grew less rapidly, but still

more than doubled to 57 percent.

THE ORIGINATION

PROCESS IS BEING

AUTOMATED RAPIDLY

In the origination component of mortgage lending, automation has allowed single-family lenders to transmit information quickly and cheaply, allocate staff

flexibly, and transform fixed costs into variable costs. One important effect of

automation is that refinancing single-family mortgages is cheaper and less timeconsuming, which has made borrowers more likely to refinance when mortgage

rates decline and to shop among originators for the best rates and terms. Electronic commerce—the process of evaluating, negotiating, executing, and managing business transactions electronically—has been another source of savings in

origination costs. The largest lenders have used Electronic Data Interchange

(EDI) to exchange information and execute transactions with mortgage insurers,

credit bureaus, and other business partners since the 1970s. Other firms in the

industry began using EDI in the mid-1990s.

Fannie Mae and Freddie Mac accelerated the industry’s automation of the origination process and use of e-commerce by introducing their own proprietary

automated underwriting systems (AUS) and electronic mortgage information

networks in 1995. The industry has rapidly adopted automated underwriting

and, in the process, made the use of scoring widespread in the origination
Improvements In Information Technologies

OFHEO 2000 Report To Congress 7

process.3 According to MORTECH 99, a leading survey of the use of technology

in mortgage banking, over three-quarters of lenders had implemented AUS in

1999, up from one-quarter in 1996. The Enterprises’ systems are the industry’s

overwhelming favorites: over 60 percent of lenders had implemented either Freddie Mac’s Loan Prospector or Fannie Mae’s Desktop Underwriter. By contrast, no

other AUS had been implemented by more than six percent of lenders. However,

the largest lenders tend to use systems they have developed themselves. Large

lenders often want the flexibility to tailor a system’s use of scoring and underwriting rules to suit their particular risk preferences and the requirements of a

variety of investors. Nearly 90 percent of lenders are expected to have implemented automated underwriting by the end of this year. The widespread adoption of automated underwriting, and especially its availability at the point of sale,

has given borrowers much better access to useful information about their credit

profiles and eligibility for different types of loans.

In 1999, one-half of newly originated single-family mortgages sold to Freddie

Mac (excluding those included in structured transactions) and 39 percent of

such loans sold to Fannie Mae were evaluated by the respective Enterprise’s AUS

prior to origination. Lenders may access either Enterprise’s system through its

proprietary information network. Mortgage brokers may gain access to each system through the wholesale lenders with which they do business. (Box 2 on page 5

summarizes the differences between wholesale and retail single-family lending).

To develop alternative channels for delivering mortgages, Fannie Mae and Freddie Mac are giving lenders and affiliated brokers access to their AUS and electronic mortgage information networks through the Internet. Thus, borrowers

may access each Enterprise’s AUS online by signing onto a lender’s web site or by

selecting a lender on the site of an online mortgage broker.

ORIGINATORS’ USE OF THE

INTERNET IS EXPECTED TO

GROW

The World Wide Web gives mortgage lenders the opportunity to reduce their

costs of doing business with both consumers and their business partners. Originators increasingly use the Internet to conduct business-to-business transactions with service providers. According to MORTECH 99, over 57 percent of

originators obtained services such as appraisals and mortgage insurance commitments online in 1999. Online business-to-business e-commerce by servicers

is at an earlier stage of development.

Lenders see the Internet as a potentially very significant channel for originating

single-family loans, and many firms have begun to use web sites to enable prospective applicants to complete some of the origination process. About 21

3 For an earlier discussion by OFHEO of automated underwriting, see OFHEO, 1995 Annual Report 

to Congress, Chapter I, “Current Issues,” pp. 1-7. For a recent discussion, see John W. Straka, “A 

Shift in the Mortgage Landscape: The 1990s Move to Automated Credit Evaluations,” (paper 

presented at the Mid-Year Meeting of the American Real Estate and Urban Economics Association, 

Washington, DC, May 30-31, 2000).
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

8 OFHEO 2000 Report To Congress

percent of lenders had their own sites in 1996, but the figure has been 47 percent

since 1997, according to MORTECH 99. Some recent surveys suggest that

between one-half and three-quarters of prospective applicants now use the

Internet to help find a mortgage.4

 If technical and legal issues are resolved, Internet lending has the potential to eliminate as much as two-thirds of the closing

costs single-family borrowers pay, which today equal about 3 percent of the

amount of a typical home-purchase loan.5

The proportion of single-family mortgages originated online is very low at

present. Wall Street analysts estimate that originations in which the borrower

completed much of the transaction via the Internet accounted for less than one

percent of total lending of the industry in 1999.6

 According to MORTECH 99, the

Internet accounted for 3.3 percent of single-family originations by lenders who

had web sites in 1999, up from 1.5 percent in 1998. Moreover, few sites let applicants complete the entire origination process online. Over 90 percent of the lenders used their sites to disseminate information to borrowers, over 50 percent

used them to prequalify borrowers, and over one-quarter enabled applicants to

lock in their mortgage rates, but less than 8 percent used their sites to close

loans. MORTECH 99 indicates that most lenders are not investing heavily in the

Internet delivery channel and are motivated primarily by a desire to hedge

against online competition from firms that are investing heavily. Nonetheless,

consumer use of the Internet both to submit applications for single-family mortgages and complete the origination process may grow rapidly in the next decade,

despite the slow start.7

4 Kenneth A. Posner and Michael D. Courtain, The Internet Mortgage Report II: Focus on Fulfillment 

(New York: Morgan Stanley Dean Witter, February 10, 2000), p. 4.

5 David P. Danforth, “Online Mortgage Business Puts Consumers in the Drivers Seat,” Secondary 

Mortgage Markets, vol. 16, no. 1 (April 1999), pp. 2-8.

6 See Michael S. Hodes, Gregory W. Hall, and Lawrence N. Rosenberg, Home Run: Taking a Closer 

Look at Internet Mortgage Finance (New York: Goldman Sachs, November 15, 1999), p. 12; and 

Kenneth A. Posner and Michael D. Courtain, The Internet Mortgage Report II: Focus on Fulfillment, 

p. 4.

7 Michael S. Hodes, Gregory W. Hall, and Lawrence N. Rosenberg, Home Run: Taking a Closer Look 

at Internet Mortgage Finance, p. 10; and Kenneth A. Posner and Michael D. Courtain, The Internet 

Mortgage Report II: Focus on Fulfillment, p. 4.
Federal Policies

OFHEO 2000 Report To Congress 9

NEW TECHNOLOGIES HAVE

TRANSFORMED RISK

MANAGEMENT AND DEBT

FINANCING

New technologies have also revolutionized the measurement, pricing, and allocation of risks throughout the mortgage lending process, and have facilitated the

development of new financial instruments. Ever faster computer processing has

steadily reduced the costs of hedging interest rate risk and of valuing whole

loans, mortgage securities, and the rights to service pools of loans, thereby spurring more active trading of those assets. Scoring has led to greater quantification

in underwriting of single-family loans, more competitive markets for mortgage

credit risk, and more active management of delinquent loans.8

 Fannie Mae and

Freddie Mac and other industry participants have benefited from new forms of

credit enhancement, including pool insurance, spread accounts, and reinsurance

agreements. The Enterprises are now among the largest issuers of callable debt

and end-users of derivatives such as interest-rate swaps, which have allowed

them to lower their funding costs and manage interest rate risk more efficiently.

All those changes permit the risks associated with investing in single- and multifamily mortgages to be transferred to other firms and investors that are willing to

bear them most cheaply, thereby reducing costs.

FEDERAL POLICIES

The Federal government has promoted homeownership for over fifty years by

intervening in financial markets to allocate credit to housing and hold mortgage

rates below their free-market level. In the last two decades, there have been

major changes in the institutions and the means of conveying subsidies that the

government uses to achieve those objectives. The dominant institutions are now

Fannie Mae and Freddie Mac, which in the mid-1980s took the place of thrifts as

the most important sources of funds for so-called conforming loans—conventional single-family mortgages with balances that make them eligible for purchase by the Enterprises.9

 Before that time the government subsidized mortgage

borrowers primarily through deposit insurance and tax subsidies for thrift institutions; now it provides subsidies primarily by sponsoring the Enterprises and

bearing the risk of loss if they fail.10

8 For an earlier OFHEO discussion of scoring, see OFHEO, 1996 Annual Report to Congress, 

Chapter II, “Use of Scoring in Mortgage Lending,” pp. 21-29. For a recent discussion, see Straka, 

“A Shift in the Mortgage Landscape: The 1990s Move to Automated Credit Evaluations.”

9 Fannie Mae and Freddie Mac are restricted to financing single-family mortgages that have balances 

less than certain prescribed levels, which are adjusted annually based on changes in U.S. housing 

prices. In 2000 this so-called conforming limit is $252,700. This report uses the term “conforming 

mortgage” to refer to any single-family loan with a balance less than the limit. The Departments of 

Veterans Affairs and Housing and Urban Development (HUD) and Independent Agencies 

Appropriation Act for FY 1999 repealed the limit on the size of multifamily mortgages eligible to be 

financed by the Enterprises.

10 For an analysis of the process by which Fannie Mae and Freddie Mac became the most important 

sources of funds for single-family mortgages, see Patric H. Hendershott, “The Market for Home 

Mortgage Credit: Recent Changes and Future Prospects,” in R. Alton Gilbert (Ed.), The Changing 

Market in Financial Services (Boston: Kluwer Academic Publishers, 1992), pp. 99-123. For an 

analysis of how the housing finance system has changed in recent years and its current structure, 

see John C. Weicker, “The New Structure of the Housing Finance System,” Review (Federal 

Reserve Bank of St. Louis, July/August 1994), vol. 76, pp. 47-65.
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

10 OFHEO 2000 Report To Congress

The dominant position of Fannie Mae and Freddie Mac in the secondary market

for conventional mortgages is a major influence on the evolution of the housing

finance system. Capital and program regulation of the Enterprises and the Federal Home Loan Banks also affect mortgage markets. Federal initiatives that

encourage the industry to provide more credit for affordable housing and

changes that affect the demand for FHA mortgage insurance, guarantees of

mortgages by the Department of Veterans Affairs (VA), and securitization by

Ginnie Mae are additional influences.

THE ENTERPRISES

DOMINATE THE

SECONDARY MARKET FOR

CONVENTIONAL

MORTGAGES

Since the mid-1980s, Fannie Mae and Freddie Mac have dominated the secondary market for conforming fixed-rate mortgages (FRMs), which comprise about

60 to 70 percent of the annual dollar volume of conventional single-family originations. In 1998 and 1999, for example, the Enterprises purchased $1.1 trillion in

fixed-rate loans, which amounted to over two-thirds of the volume of conforming FRMs originated in those two years. Fannie Mae and Freddie Mac are also

major investors in adjustable-rate mortgages (ARMs) and multifamily loans. The

Enterprises have broad discretion to determine the volume of mortgages and

mortgage securities they purchase.

The dominant position of Fannie Mae and Freddie Mac in the secondary market

for conforming mortgages stems largely from their special relationship to the

Federal government, which has contributed to a perception among investors

that the government will take any action necessary to prevent either Enterprise

from defaulting on its obligations. Government sponsorship and the perception

of Federal backing greatly increase the liquidity of debt issued by the Enterprises,

lead investors to treat their guaranteed MBS like agency debt, permit them to

operate with more leverage than non-Enterprise mortgage investors, and make

them attractive derivative counterparties. Those advantages allow Fannie Mae

and Freddie Mac to raise funds in the Federal agency debt market at interest

rates below those paid by private firms with the highest credit ratings.

Capital regulation of Fannie Mae and Freddie Mac and depository institutions

also contributes to the dominant position of the Enterprises. Banking regulation

allows banks and thrifts to hold less capital against the mortgage securities and

debt of Fannie Mae and Freddie Mac than against whole mortgages or mortgage

securities issued by others. The Federal Housing Enterprises Financial Safety and

Soundness Act of 1992 (the 1992 Act), which established OFHEO, strengthened

the Enterprises’ position in the secondary mortgage market by requiring OFHEO

to impose leverage ratios on them that are lower than those imposed on depositories and by prescribing specific risk-based capital requirements for Fannie Mae

and Freddie Mac.
Federal Policies

OFHEO 2000 Report To Congress 11

An important consequence of the dominance of Fannie Mae and Freddie Mac in

the market for conforming FRMs has been a reduction in interest rates on those

loans. Research has found that the yields on fixed-rate loans with balances below

the conforming limit are consistently lower than those on jumbo FRMs—fixedrate loans with balances above the limit. The differential appears to have averaged about 45 basis points between 1987 and 1991 and about 25 basis points

from 1991 through early 1999. That research is often interpreted as indicating

that purchases of conforming FRMs by the Enterprises have reduced the yields

on such loans by the full amount of the differential.11

Fannie Mae and Freddie Mac are important influences on the volume of business

done by the private mortgage insurance industry. Because of statutory requirements, nearly all of the single-family mortgages purchased by each Enterprise

that have loan-to-value (LTV) ratios greater than 80 percent are covered by primary mortgage insurance. In addition to the volume of high-LTV loans purchased by the Enterprises, the depth of coverage they require affects the volumes

of new insurance written by the industry and of primary mortgage insurance in

force. In recent years Fannie Mae and Freddie Mac have purchased pools of

mortgages covered by pool insurance, an additional layer of coverage that obligates the mortgage insurer to cover a portion of any losses beyond those covered

by primary insurance. Such coverage has also affected the level of exposure and

the revenues of the industry.

FEDERAL REGULATION OF

THE THREE HOUSING GSES

AFFECTS THE INDUSTRY

Federal capital regulation of Fannie Mae, Freddie Mac, and the Federal Home

Loan Banks affects each GSE’s volume of business, financing strategies, and risk.

The 1992 Act directed OFHEO to establish minimum and risk-based capital

requirements for Fannie Mae and Freddie Mac. The risk-based capital regulation

proposed by OFHEO in June 1999, when final, will determine how much capital

the Enterprises must maintain against the risks they take. In addition, the Federal Home Loan Bank System Modernization Act of 1999 changes the capital

structure of the Federal Home Loan Banks and requires the Federal Housing

Finance Board (FHFB), which is responsible for regulating the Banks, to impose

new risk-based capital requirements on them. Because mortgage and financial

markets are efficient, risks flow to the institutions that can bear them most

cheaply. 

11 See Robert F. Cotterman and James E. Pearce, “The Effects of the Federal National Mortgage 

Association and the Federal Home Loan Mortgage Corporation on Conventional Fixed-Rate 

Mortgage Yields,” in U.S. Department of Housing and Urban Development, Studies on Privatizing 

Fannie Mae and Freddie Mac (Washington, DC, Office of Policy Development and Research, May 

1996), pp. 97-168; and Robert S. Seiler, Jr., “Estimating the Value and Allocation of Federal 

Subsidies to Fannie Mae and Freddie Mac,” (paper presented at an American Enterprise Institute 

conference on “Fannie Mae and Freddie Mac: Public Purposes and Private Interests, Washington, 

DC, March 1999).
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

12 OFHEO 2000 Report To Congress

Federal regulation of the programs of the three housing GSEs also affects housing finance markets. The 1992 Act directed the Secretary of Housing and Urban

Development (HUD) to establish numeric goals related to purchases by the

Enterprises of mortgages that finance affordable housing. The revised affordable

housing goals regulation proposed by the HUD Secretary in March 2000, when

final, will affect the types of mortgages the Enterprises purchase. The FHFB has

approved a number of new programs under which individual Federal Home Loan

Banks may acquire mortgages, bear the interest rate risk associated with financing the loans, and share the credit risk with member institutions. The programs

give member institutions an alternative to selling conforming FRMs to Fannie

Mae and Freddie Mac and to placing FHA-insured loans in pools backing MBS

guaranteed by Ginnie Mae.

FEDERAL POLICY

ENCOURAGES MORTGAGE

LENDING FOR AFFORDABLE

HOUSING

In the 1990s, the government encouraged originators to engage in greater lending to low-income and minority families and other populations that typically

have been underserved by the housing finance system. The Federal bank regulators promoted that objective by issuing a revised regulation to implement the

Community Reinvestment Act (CRA) in 1995. The objective was also furthered

by the activities and new programs that Fannie Mae and Freddie Mac initiated to

comply with the affordable housing goals imposed by the initial regulation that

the HUD Secretary issued in 1995 to implement the 1992 Act. The revised regulation recently proposed by the Secretary, when final, may also influence the level

of affordable mortgage lending.

CHANGES IN POLICY ALSO

AFFECT THE VOLUME OF

ACTIVITY OF FHA, VA, AND

GINNIE MAE

Through FHA mortgage insurance and VA guarantees, the government bears the

credit risk of many single- and multifamily mortgages. Mortgage securities guaranteed by Ginnie Mae provide a low-cost means of financing FHA-insured and

VA-guaranteed loans. Changes in Federal policy affect the use of FHA insurance,

VA guarantees, and Ginnie Mae financing. For example, in 1998 the Congress

raised the ceiling on single-family mortgages eligible for insurance by FHA. Since

lenders earn higher servicing fees on FHA-insured mortgages than they do on

conventional loans, the higher ceiling has tended to boost the volume of loans

financed with FHA insurance.
Enterprise Efforts to Improve Financial Performance

OFHEO 2000 Report To Congress 13

ENTERPRISE EFFORTS TO IMPROVE FINANCIAL PERFORMANCE

Fannie Mae and Freddie Mac have increased earnings per share (EPS) at doubledigit rates since 1991, and each Enterprise has made a public commitment to

stockholders to sustain that rate of growth in the future. In the early 1990s, the

rates of growth of the mortgage market as a whole and mortgage debt financed

by the Enterprises slowed, limiting their capacity to increase earnings by

expanding the volume of mortgage debt securitized. In response, Fannie Mae

and Freddie Mac have engaged in a range of new activities designed to expand

their market share, improve their financial performance, and sustain doubledigit earnings growth. 

INITIATIVES TAKE

ADVANTAGE OF NEW

TECHNOLOGIES

The new initiatives of Fannie Mae and Freddie Mac, which may be grouped into

four broad categories, take advantage of improvements in technology to maximize the value of each Enterprise’s charter. The Enterprises will continue to rely

on improvements in technology to increase earnings and improve financial performance in the next decade.

Retained Portfolio Growth

Fannie Mae and Freddie Mac have increased their earnings at double-digit rates,

despite less rapid growth in the mortgage market as a whole, primarily by

expanding their retained mortgage portfolios, whose returns exceed those

earned by securitizing loans. The Enterprises expand their portfolios primarily

by buying large amounts of their own mortgage-backed securities (MBSs) and

Real Estate Mortgage Investment Conduit (REMIC) securities. (Box 3 on page 39

discusses the Enterprises’ purchases of mortgage securities in 1999). This activity takes advantage of the growth of the market for the Enterprises’ callable debt

and their preferred position as counterparties in derivatives transactions.

Improvements in technology made possible the growth of derivatives markets

and the development of a large, liquid market for Enterprise callable debt.

New Products and Entry into Subprime Lending

In an effort to increase the volume of mortgages they purchase, Fannie Mae and

Freddie Mac have expanded the range of loans they buy. Both Enterprises have

introduced new products such as low-downpayment and reverse mortgages.

Fannie Mae and Freddie Mac have also purchased loans that they previously

deemed to pose an unacceptable level of credit risk, including some subprime

mortgages. Freddie Mac also issues multi-class mortgage securities supported

by pools of subprime mortgages. Those activities take advantage of improvements in the measurement and management of mortgage credit risk made possible by automated underwriting and scoring technology. 
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

14 OFHEO 2000 Report To Congress

Services to Lenders

In an effort to increase the volume of mortgages sold to them and their revenues,

Fannie Mae and Freddie Mac have provided new services to lenders. Each Enterprise leases its AUS and other online services to lenders. Lenders that use the

Enterprises’ AUS and proprietary networks have access to credit reports, property valuations, title insurance, and other origination-related services. Each

Enterprise earns money by selling foreclosed properties owned by lenders as well

as foreclosed properties that it owns. Freddie Mac has taken a financial interest

in HomeAdvisor Technologies, Inc. (HTI), a joint venture with Microsoft and,

initially, four of the largest lenders in the industry. According to the partners in

that venture, HTI will provide an integrated, web-based origination platform

that consumers, real estate brokers, and mortgage lenders and brokers can use

to access a broad array of origination services. Those activities take advantage of

automated underwriting technology and the ability of the Enterprises to deploy

their AUS at the point of sale and use electronic links to exchange information

and execute transactions with lenders and other firms.

Efforts to Reduce Funding Costs

Fannie Mae and Freddie Mac have taken steps to lower the yields on their debt

securities. In 1998 the Enterprises introduced benchmark debt issuance programs (called “Benchmark” securities by Fannie Mae and “Reference” securities

by Freddie Mac) that provide for the regular issuance of securities in large volumes and in a range of maturities.12 Each Enterprise’s benchmark securities are

designed to appeal to investors who might otherwise buy U.S. Treasury securities

and are promoted as substitutes for Treasuries in investors’ portfolios. The

Enterprises have also issued debt denominated in foreign currencies, endeavored

to expand foreign ownership of their debt and MBS, and used swaps and other

new hedging tools to create synthetic securities that are attractive to investors

with specific preferences. Those initiatives take advantage of improvements in

information technology that have lowered the costs of informing investors about

the Enterprises and the credit quality and liquidity of their securities, and the

costs of measuring and managing interest rate risk.

NEW ACTIVITIES AFFECT

OTHER INDUSTRY

PARTICIPANTS

The initiatives that Fannie Mae and Freddie Mac have undertaken to improve

their financial performance and maintain earnings growth affect the relative

market shares of the Enterprises and other firms in specific markets of the mortgage industry. For example, Fannie Mae and Freddie Mac have become the dominant purchasers of mortgage securities backed by newly originated loans. The

reduction in the supply of such securities available for purchase by other inves12 The Federal Home Loan Banks and the Farm Credit Banks have introduced benchmark debt 

issuance programs similar to those of Fannie Mae and Freddie Mac. The Federal Home Loan 

Banks introduced their “Tap Issue” program in July 1999 and the Farm Credit Banks introduced 

their “Designated Bonds” program in March 1999. 
Economic and Demographic Trends

OFHEO 2000 Report To Congress 15

tors has led fewer firms to be active in that market. By initiating programs to purchase new types of mortgages, the Enterprises have encouraged more lenders to

originate such loans, which has tended to increase competition in the primary

market and may have lowered the interest rates paid by borrowers. By giving

lenders who use their AUS the option of obtaining electronic property valuations

or streamlined property appraisals, Fannie Mae and Freddie Mac may reduce the

demand for traditional appraisals and alter appraisal industry practices.

ECONOMIC AND DEMOGRAPHIC TRENDS

Movements in interest rates, the stage of the business cycle, and demographic

trends influence the levels of activity in housing markets and in the primary and

secondary mortgage markets. In recent years solid economic growth, relatively

low mortgage interest rates, the booming stock market, and strong growth in the

number of households have produced record levels of housing market activity

and mortgage originations and boosted the homeownership rate. (Chapter 3 discusses conditions in housing and mortgage market in 1999 in more detail.) At

the same time, the vulnerability of some households to an economic downturn

has increased. The median amount of debt owed by households has increased

strongly since 1989, and some indicators of debt burden, such as the median

ratio of debt payments to income among debtors, have also increased substantially.13 Economic and demographic trends will continue to influence housing

and mortgage market activity in the next decade.

A LESS ROBUST ECONOMY

IS LIKELY TO DAMPEN

ACTIVITY

The economy, the stock market, and housing market activity are expected generally to be less robust in the next few years than they were in the late 1990s. Since

May 1999, the Federal Reserve has raised its Federal funds rate target by 1.5 percentage points, in an effort to dampen inflationary pressures. The Federal

Reserve is widely expected to increase that target further over the rest of the year

unless economic activity slows. Higher interest rates are expected to slow the

growth of the economy and to dampen housing starts, home sales, and mortgage

originations in 2000 and 2001. It is almost certain that there will be an economic

downturn in the next decade, and any downturn might be severe. Also, home

prices might rise substantially before a recession begins, at which point a downturn might produce a sharp deflation in housing markets. If the economy falls

into recession, housing and mortgage market activity will decline further.

13 Arthur B. Kennickell, Martha Starr-McCluer, and Brian J. Surette, “Recent Changes in U.S. Family 

Finances: Results from the 1998 Survey of Consumer Finances,” Federal Reserve Bulletin 

(Washington, DC: January 2000), pp. 1-29.
Chapter 1 - Major Forces That Are Reshaping The Housing Finance System

16 OFHEO 2000 Report To Congress

CHANGES IN THE AGE

STRUCTURE OF THE

POPULATION MAY AFFECT

THE HOUSING MARKET

The Joint Center for Housing Studies of Harvard University expects the number

of households to increase by an average of 1.1-1.2 million annually in the next

decade.14 Immigration is expected to contribute about one-quarter of that

growth. Two-thirds of the increase is expected to come from the movement of

the population into age groups whose members are frequently heads of households. The entry into the housing market of the children of the baby boom generation born since 1977, the so-called “echo-boomers,” will increase the number of

young households.

At the same time, the parents of the baby boomers are now reaching their 70s

and 80s. As those older individuals age, a substantial proportion will depart their

homes for smaller or more appropriate units, or move in with others. The new,

presumably younger owners of those units are likely to invest in substantial modifications or upgrades to their properties, which may boost the volume of housing activity.

14 Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing 1999 

(Cambridge, MA, June 1999), pp. 9-14.
OFHEO 2000 Report To Congress 17

2

The Enterprises, Mortgage

Markets, and The Financial

System In The Next Decade

The fundamental forces that transformed the U.S. housing finance system in the

1990s will continue to reshape the industry in the next decade. There are likely to

be far-reaching changes for borrowers, lenders, Fannie Mae and Freddie Mac,

and other firms in the industry. This chapter reviews some of the potential implications for primary and secondary mortgage markets, securities markets, the

financial system, and Federal regulation of the Enterprises. An important objective of OFHEO’s comprehensive research program is to identify the potential

risks and benefits of the various paths the industry may take and of possible

changes in Federal policy. The chapter provides several examples of topics for

economic and policy research.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

18 OFHEO 2000 Report To Congress

IMPLICATIONS FOR THE PRIMARY MARKET

The primary mortgage market will face important challenges and is likely to

change significantly in the next decade. A national economic downturn would

test the ability of Fannie Mae and Freddie Mac to manage their exposure to

credit risk and interest rate risk. Changes in the composition of households may

affect mortgage performance. The Enterprises and traditional prime lenders will

have to manage the unique risks associated with subprime lending. Automated

underwriting, scoring, and the Internet will undoubtedly affect the industry, but

there is uncertainty about how the new technologies may be used and how business practices may evolve in specific markets. Fannie Mae and Freddie Mac may

continue to expand the services they provide to mortgage lenders. 

A NATIONAL ECONOMIC

DOWNTURN WILL TEST THE

ABILITY OF THE

ENTERPRISES TO MANAGE

RISK

Fannie Mae and Freddie Mac have made significant changes in their underwriting guidelines and credit risk management practices since the last national

recession ended in the spring of 1991. Those changes include the introduction of

new loss mitigation techniques, the use of scoring and AUS, and the use of new

types of credit enhancement. Several of the changes have contributed, along with

robust housing markets, to the decline in credit losses, measured as a percentage

of average mortgage loans financed, achieved by the Enterprises in recent years.

Fannie Mae and Freddie Mac have also introduced a number of new products,

including low-downpayment mortgages, since the last national downturn.

The next national downturn will be the first major test of the changes in credit

risk management and new loan products introduced by Fannie Mae and Freddie

Mac in the 1990s. A recession could be accompanied by higher interest rates,

stagnant household incomes, rising consumer debt burdens, higher unemployment, and a stagnant or declining stock market. Such conditions could reduce

the demand for housing, dampen or reverse home price appreciation, and

increase delinquency and foreclosure rates and mortgage credit losses. Each

Enterprise’s credit losses might increase by more than expected, reveal weaknesses in the Enterprises’ underwriting, and lead to changes in their use of scoring and their AUS. On the other hand, the new loan programs and risk

management practices may perform well and allow the Enterprises to keep their

credit losses from increasing as much as they would have under similar conditions in the past.

A recession accompanied by higher interest rates would test the ability of Fannie

Mae and Freddie Mac to manage the interest rate risk associated with their large

retained mortgage portfolios. The Enterprises rely heavily on derivatives to manage that risk. A downturn could affect the performance of their derivatives counterparties and the price and availability of new derivatives in ways that could

alter significantly the returns on their portfolios. In addition, as interest rates

rose, the risk-based capital regulation proposed by OFHEO would increase each

Enterprise’s risk-based capital requirement. 
Implications For The Primary Market

OFHEO 2000 Report To Congress 19

CHANGES IN THE

COMPOSITION OF

HOUSEHOLDS AND

BORROWERS MAY AFFECT

CREDIT PERFORMANCE

The composition of households and homebuyers are projected to change in the

next decade. The changing age structure of the population is expected to

increase the proportion of households headed by young adults and retirees. The

proportion of first-time homebuyers who are immigrants is projected to increase

along with the immigrant share of the population. The share of first-time homebuyers who have made little previous use of consumer credit may also increase as

the industry continues to engage in outreach efforts.

Changes in the composition of households and homebuyers may affect the performance of single- and multifamily mortgages. For example, younger households generally have less equity in their homes, which suggests that an increase

in their share of the purchase market might raise single-family default rates. On

the other hand, if their incomes grow at a healthy pace, their debt burdens may

decline fairly quickly. Retirees are often on fixed incomes and may have difficulty

making mortgage payments if unexpected expenses arise. At the same time,

many retirees may supplement fixed incomes by using reverse mortgages or

home equity loans to tap the wealth in their homes. Retirees on fixed incomes

may be less likely to make modifications or upgrades in their properties, which

might limit their resale values. However, home price appreciation in recent years

may have boosted home values enough to offset the potential effect on default

and loss severity rates of lower investment.

SUBPRIME LENDING

PRESENTS OPPORTUNITIES

AND CHALLENGES

Subprime lending3⁄4the provision of credit to mortgage borrowers who have past

credit problems of varying severity3⁄4expanded dramatically in the second half of

the 1990s as lenders sought to increase their origination volumes and to profit

from the higher margins offered by subprime loans. In 1999, traditional prime

lenders and diversified finance companies greatly increased their share of

subprime originations, and Fannie Mae and Freddie Mac increased their purchases of subprime loans. (Box 3 on page 39 reviews the subprime market in

1999.) These developments suggest that the markets for prime and subprime

mortgages are likely to become more integrated in the next decade, with many

originators offering loans to nearly all applicants. Lack of extensive and reliable

historical data on the performance of subprime mortgages has made developing

accurate scoring models more difficult than for prime loans. Nonetheless, several

firms in the industry have developed AUS for evaluating applications for

subprime loans. 
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

20 OFHEO 2000 Report To Congress

In addition to offering lenders and the Enterprises the prospect of greater volumes and higher margins, subprime mortgages pose significantly greater credit

risk than prime loans. Subprime mortgages are riskier, despite the fact that borrowers have significant equity in their homes, because borrowers also generally

have higher debt burdens and other financial difficulties. According to Mortgage

Information Corp. (MIC), in September 1999 subprime mortgages were nearly

nine times more likely to be seriously delinquent or in foreclosure than prime

mortgages.1

 A 1997 study using MIC data found that the historical average

foreclosure rate of subprime loans made to refinance existing mortgages was

nearly eight times that of prime loans.2

 The same data indicate that subprime

mortgages given a credit rating of C are seriously delinquent or default twice as

frequently as subprime loans on average. Because there is a lack of historical data

on the performance of subprime mortgages, those statistics may understate the

additional credit risk posed by such loans.

To earn attractive returns from investing in subprime mortgages, Fannie Mae

and Freddie Mac and traditional prime lenders must understand and manage

the unique risks posed by such lending. Important tasks include developing and

maintaining accurate scoring models for subprime mortgages, deciding which

grades of subprime loans to purchase, identifying best practices in originating

and servicing such loans, monitoring the performance of originators and servicers, and using credit enhancements to limit risk exposure. Failure to manage the

risks associated with subprime mortgages may lead to significantly larger credit

losses than on prime loans. As the safety and soundness regulator of Fannie Mae

and Freddie Mac, OFHEO is and will remain well informed about all aspects of

risk management of subprime loans as it evolves.

NEW TECHNOLOGIES WILL

LEAD TO CHANGES IN

INDUSTRY BUSINESS

PRACTICES

Improvements in technology will continue to reshape single-family mortgage

lending over the next decade. Differences in the preferences and interests of consumers, lenders, and secondary market investors will affect how the industry

uses new technologies and how business practices evolve in specific markets. In

addition, public policy issues may affect the implementation of risk-based pricing and the speed at which mortgage originations move to the Internet.

1 Mortgage Information Corporation, Market Pulse (September 1999). In compiling statistics on the 

delinquency rates of prime and subprime mortgages, MIC accepts each lender’s classification of 

the loans it originated. Subprime loans include mortgages that lenders classified as A-, B, C, and D 

loans. 

2 John C. Weicher, The Home Equity Lending Industry: Refinancing Mortgages for Borrowers with 

Impaired Credit (Indianapolis, IN: Hudson Institute, 1997), pp. 80-82.
Implications For The Primary Market

OFHEO 2000 Report To Congress 21

Scoring and automated underwriting, for example, have the potential to allow

the industry to vary significantly the prices charged for bearing the credit risk of

single-family mortgages.3

 Such pricing would tend to reduce cross-subsidies

among borrowers who pose different degrees of risk. Fannie Mae and Freddie

Mac and lenders are using AUS to determine the minimum downpayments

required of borrowers based on their credit scores. Subprime borrowers already

pay different interest rates on the basis of their credit histories, and prices for

prime loans differ for different types of loans and on the basis of some loan characteristics such as LTV ratio.

In the primary mortgage market, consumer preferences, the needs of lenders,

and fair lending concerns may affect how risk-based pricing is implemented. If

many households benefit from setting rates and points on the basis of specific

borrower characteristics that affect credit risk, consumers may generally accept

risk-based pricing. At the same time, sophisticated lenders may vary their prices

for some loans less on the basis of credit risk and more on the basis of prepayment risk and the potential to cross-sell other financial services to borrowers,

since those factors may have a greater effect on profitability. Implementation of

“total-value” risk-based pricing might quicken the pace of consolidation among

originators. The pace at which lenders implement risk-based pricing may also be

affected by the potential for such pricing to have a disparate impact on applicants who are members of protected groups. It will be important for the Federal

government to understand how risk-based pricing may affect the access to credit

by different classes of borrowers.

Online mortgage lending has the potential to reduce the importance of production channels that rely on applicants interacting with lender staff at local branch

offices. The rate of consumer migration to online mortgage origination is difficult to project, however. Wall Street analysts’ estimates of the proportion of originations taking place purely online by 2005 range from 3 to 15 percent.4

 One

source of uncertainty is that many regulations that apply to mortgage originations do not fit well with the speed of the Internet.5

 Another is that taking out a

mortgage is an infrequent transaction, which makes many consumers both more

tolerant of inefficiency and more attracted to trusted, often local, institutions. A

third is that some firms that provide services used in the origination process—

title record companies, for example—are not yet capable of providing

3 The following paragraphs draw upon Richard Beidl and Craig Focardi, “The Coming of Risk-Based 

Pricing,” Mortgage Banking (May 2000), pp. 46-53.

4 Michael S. Hodes, Gregory W. Hall, and Lawrence N. Rosenberg, Home Run: Taking a Closer Look 

at Internet Mortgage Finance (New York: Goldman Sachs Investment Research, November 15, 

1999), p. 10; and Kenneth A. Posner and Michael D. Courtain, The Internet Mortgage Report II: 

Focus on Fulfillment (New York: Morgan Stanley Dean Witter, February 10, 2000), p. 4.

5 Craig C. Thomas, “Policy Thicket Complicates Efforts to Take Lending Online,” Secondary 

Mortgage Markets, vol. 16, no. 1 (April 1999), pp. 9-15. 
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

22 OFHEO 2000 Report To Congress

information electronically. Ultimately, online mortgage lending may not prove

profitable for many lenders. The volume of loans that a lender originates online

will determine whether the Internet is more or less profitable than other channels of production used by the lender.

THE ENTERPRISES’ 

PROVISION OF

ORIGINATION-RELATED

SERVICES RAISES ISSUES

As the industry has implemented the AUS of Fannie Mae and Freddie Mac, the

relationships between the Enterprises and many lenders that sell single-family

mortgages to them have changed. Lenders still originate all loans, but many

small and medium-sized lenders are leasing technology from Fannie Mae and

Freddie Mac that performs many aspects of the origination process that they

themselves previously performed, including underwriting applications and

obtaining credit scores, property valuations, and title insurance from third

parties. The Enterprises offer lenders the ability to sell loans at the time they are

closed, thereby eliminating the need for lenders to manage the interest rate risk

associated with funding loans before selling them. Fannie Mae and Freddie Mac

may soon be able to verify the incomes and employment status of applicants.

At some point many small and medium-sized lenders may decide to function

essentially as mortgage brokers, limiting their operations to sourcing loans, processing applications and submitting them to Fannie Mae and Freddie Mac for

underwriting, and processing and closing approved loans. Such changes might

affect the profitability and financial health of some lenders, which might in turn

pose risk for the Enterprises. Some industry participants have raised the issue of

the appropriateness of GSEs providing technology that performs many of the

functions previously performed by primary market lenders. Those changes may

benefit borrowers by heightening competition among originators, lowering origination costs, and speeding up the origination process.

Further, if Fannie Mae and Freddie Mac became the dominant sources of origination-related services to lenders that originate conforming loans, the Enterprises

might have market power in their dealings with third-party providers of those

services. Fannie Mae and Freddie Mac might be able to hold down the prices they

paid for credit reports, property appraisals, title insurance, and other services,

while not passing those savings through to lenders, thereby increasing their profits.6

 Of course, Fannie Mae and Freddie Mac would have an incentive to protect

the integrity of underwriting decisions by ensuring that credit reports and property valuations were accurate and that providers of those services were financially viable. An important task of safety and soundness regulation is to monitor

the quality of the data used in the Enterprises’ AUS and the effect of the actions

of Fannie Mae and Freddie Mac on the financial health of mortgage lenders and

service providers.

6 For a discussion of the risks posed when Fannie Mae and Freddie Mac enter new markets, see 

Robert S. Seiler, Jr., “Fannie Mae and Freddie Mac as Investor-Owned Public Utilities,” Journal of 

Public Budgeting, Accounting & Financial Management (Spring 1999), vol. 11, no. 1, pp. 129-131.
Implications For The Secondary Market

OFHEO 2000 Report To Congress 23

POLICY CHANGES MAY

AFFECT FHA-INSURED AND

VA-GUARANTEED

ORIGINATIONS

Changes in Federal policy may alter the proportion of single-family originations

insured by the Federal Housing Administration (FHA) and guaranteed by the

Department of Veterans Affairs (VA) in the next decade. The increase in the ceiling on single-family mortgages eligible for insurance by FHA made in 1998 may

boost the volume of loans financed with FHA insurance. The Federal Home Loan

Banks are acquiring FHA-insured loans, which may put downward pressure on

their yields and make them more attractive to borrowers. At the same time, the

relative liquidity and market value of mortgage securities guaranteed by the Government National Mortgage Association (Ginnie Mae) and those issued and

guaranteed Fannie Mae and Freddie Mac fluctuates, which at times may tend to

raise the yields on FHA-insured and VA-guaranteed loans and boost the market

share of conventional loans. Uncertainty about the magnitudes of those potential influences make it difficult to predict what their net effect may be on the

share of single-family mortgages insured by FHA and guaranteed by VA.

IMPLICATIONS FOR THE SECONDARY MARKET

Fannie Mae and Freddie Mac are likely to continue to dominate the secondary

market for conforming mortgages in the next decade. Along with large lenders,

the Enterprises will make significant investments in technology. It is uncertain

which investments are most likely to pay off, however, because it is not clear that

online originations will become routine or how e-commerce may affect the

industry. As Fannie Mae and Freddie Mac offer new loan products or expand

into new markets, the benefits they provide to borrowers will be influenced by

existing market conditions and how vigorously they compete with each other.

Changes in Federal policy may affect the volumes of activity of the Enterprises,

the Federal Home Loan Banks, and Ginnie Mae. There is some risk that margin

pressure and limitations on their ability to grow may prevent Fannie Mae and

Freddie Mac from growing earnings as quickly as they would like, but the magnitude of that risk is unclear.

INVESTMENT IN NEW

TECHNOLOGIES CREATES

OPPORTUNITIES AND

PRESENTS RISKS

The structure of the mortgage industry undoubtedly will be affected by

increased business-to-business e-commerce and online loan originations. How

the new uses of technology may affect the market shares and profitability of different players in the industry, including Fannie Mae and Freddie Mac, is uncertain, however. Ultimately, consumers will determine which applications will

succeed.

Lenders are attempting to use their own Web sites or on-line mortgage brokers

to attract prospective borrowers. Each approach can be used to communicate

with borrowers directly, or to allow mortgage brokers or real estate professionals

to help borrowers review loan terms and submit applications. Fannie Mae and

Freddie Mac are using their proprietary networks and Web sites to give lenders

access to their AUS and related services. Through HomeAdvisor Technologies,
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

24 OFHEO 2000 Report To Congress

Inc. (HTI), a joint venture between Freddie Mac, Microsoft, and four of the largest lenders, mortgage lenders and brokers and real estate brokers will have access

to the Enterprise’s AUS.

At this early stage in the development of online lending, it is unclear whether any

particular approach will prove to be significantly more efficient or attractive to

borrowers than the others. To diversify their risk exposure, Fannie Mae and Freddie Mac and lenders are investing in as many potentially fruitful approaches as

possible. Inevitably, some of those investments will not prove successful,

although some may pay off handsomely.

Fannie Mae and Freddie Mac may use automated underwriting and scoring to

move toward introducing much greater variation in their prices based on their

estimation of risk. The Enterprises are likely to do so because they have the data

and quantitative tools to quantify credit risk more precisely. In addition, failure

to do so would expose each Enterprise to adverse selection if the other Enterprise and lenders moved more quickly to implement risk-based pricing. Adverse

selection on a large scale would tend to reduce significantly an Enterprise’s profitability and financial health and create a significant safety and soundness issue.

More refined risk-based pricing would pose several risks for Fannie Mae and

Freddie Mac. Implementing new business systems always poses operational

risks. In addition, automated underwriting and scoring have not been tested in a

severe, nationwide economic downturn. Risk-based pricing would also heighten

competition for high-quality loans, both between Fannie Mae and Freddie Mac

and between each Enterprise and large lenders, which could lead to lower

margins.

THE POTENTIAL BENEFITS

OF ENTERPRISE EFFORTS

TO EXPAND MARKET

SHARE ARE UNCERTAIN

When Fannie Mae and Freddie Mac purchase a new type of loan or enter an

existing loan market, borrowers may benefit by being able to obtain credit more

cheaply than it is available elsewhere. Previous research has found that the differential between the yields on conforming FRMs and the yields on jumbo fixedrate loans has averaged about one-quarter of one percentage point in recent

years. It would be premature, however, to infer from this finding that the Enterprises would be likely to reduce the interest rates on other types of mortgages by

that amount, for two reasons.
Implications For The Secondary Market

OFHEO 2000 Report To Congress 25

First, it is not clear that previous econometric studies have properly estimated

the relationship between loan size and risk. Future research may conclude that

some of the differential between the yields on jumbo and conforming FRMs is

due to differences in default and prepayment risk between loans in the two size

categories, rather than the activities of Fannie Mae and Freddie Mac.7

Second, the secondary market for subprime mortgages purchased by Fannie Mae

and Freddie Mac may differ substantially from the market for conforming FRMs.

On one hand, the market may be relatively inefficient, with a lack of standardization and liquidity and a wide variation in prices that is not justified by differences

in risk. In that event, entry into the market by the Enterprises might lower interest rates by more than has occurred in the market for conforming FRMs. On the

other hand, the market may already be fairly efficient, in which case Fannie Mae

and Freddie Mac might use their competitive advantage to crowd out other

investors without affecting the rates paid by borrowers very much. The markets

for other types of single-family mortgages that the Enterprises may start to purchase in the future may also differ from the market for conforming FRMs.

DEGREE OF COMPETITION

IN THE SECONDARY

MARKET HAS BEEN

QUESTIONED

The benefits that Fannie Mae and Freddie Mac provide to mortgage borrowers

also depend on how diligently they compete with each other. Previous research

has concluded that the Enterprises do not vigorously compete in the secondary

market for conforming FRMs, a finding that Fannie Mae and Freddie Mac dispute.8

 There is some recent anecdotal evidence that can be cited in support of

increased competition: each Enterprise has slashed the fees it charges lenders to

use its AUS and other technology services, Fannie Mae and Freddie Mac competed to enter into special business arrangements with large lenders in 1999, and

each Enterprise’s average guarantee fee has fallen in recent years. Increased use

of credit enhancements may explain much of the decline in guarantee fees,

however.

7 For discussions of the issue of the effect of loan size on mortgage rates, see General Accounting 

Office, Housing Enterprises: Potential Impacts of Severing Government Sponsorship (Washington, 

DC: July 1996), pp. 58-62; and Robert S. Seiler, Jr., “Estimating the Value and Allocation of Federal 

Subsidies to Fannie Mae and Freddie Mac,” (paper presented at an American Enterprise Institute 

conference on “Fannie Mae and Freddie Mac: Public Purposes and Private Interests, Washington, 

DC, March 1999).

8 See John L. Goodman and S. Wayne Passmore, Market Power and the Pricing of Mortgage 

Securitization, (Washington, DC: Finance and Economics Discussion Series, Division of Research 

and Statistics, Federal Reserve Board, March 1992); Benjamin Hermalin and Dwight Jaffee, 

“Privatization of Fannie Mae and Freddie Mac: Implications for Mortgage Industry Structure,” in 

Department of Housing and Urban Development, Studies on Privatizing Fannie Mae and Freddie 

Mac, (Washington, DC, Office of Policy Development and Research, May 1996), pp. 225-302; 

Fannie Mae, “Fannie Mae Review of the Hermalin-Jaffee Paper,” in Department of Housing and 

Urban Development, Studies on Privatizing Fannie Mae and Freddie Mac, pp. 314-332; and Robert 

S. Seiler, Jr., “Estimating the Value and Allocation of Federal Subsidies to Fannie Mae and Freddie 

Mac”.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

26 OFHEO 2000 Report To Congress

Further research by OFHEO could shed light on the extent to which Fannie Mae

and Freddie Mac compete to securitize conforming FRMs and buy mortgage

securities. The degree of competition between the Enterprises is one of the determinants of how much of the federal subsidy they receive is transferred to borrowers through lower mortgage rates. 

CHANGES IN FEDERAL

POLICY MAY AFFECT THE

SECONDARY MARKET

Current Federal policy and possible changes may affect the competitive positions and volumes of activity of the three housing GSEs and Ginnie Mae in the

next few years. Potential sources of change include the new mortgage purchase

programs of the Federal Home Loan Banks, OFHEO’s proposed risk-based capital

requirements for Fannie Mae and Freddie Mac, new risk-based capital requirements for the Banks required by the Federal Home Loan Bank System Modernization Act of 1999, and a proposal to allow Ginnie Mae to invest in mortgage

securities it has guaranteed.

Fannie Mae and Freddie Mac compete directly with the Federal Home Loan

Banks in two ways. First, the Banks compete with each Enterprise in the market

for mortgage securities issued by the Enterprise. Second, the mortgage purchase

programs initiated by the Banks in recent years give member institutions an

alternative to selling conforming FRMs to Fannie Mae and Freddie Mac. As of

year-end 1999, the Banks had acquired $2 billion in mortgages under those programs, and lenders had committed to provide an additional $6.6 billion in loans.

There is uncertainty about the ability of the Banks to acquire a large volume of

mortgages under the programs, in part because it is not clear that the bank regulators will continue to grant favorable capital treatment to the portion of the

credit risk of the loans that member institutions retain. Further, large lenders

have demonstrated a preference for selling conforming fixed-rate loans to the

Enterprises. Nonetheless, the Chairman of the Federal Housing Finance Board,

the regulator of the System, has recently speculated that the Banks could acquire

$100 billion of mortgages by the beginning of 2003.9

New Federal risk-based capital requirements for the three housing GSEs will take

effect in the next few years. Because OFHEO and the FHFB have not finalized

their proposed risk-based capital regulations, it is not clear how the requirements may affect the competitive position of Fannie Mae and Freddie Mac relative to the Banks.

Ginnie Mae has recently proposed that it be authorized to acquire and maintain

a portfolio of mortgage securities it has guaranteed. By reducing the supply of

Ginnie Mae securities available to other investors, large-scale purchases by the

government might increase yields on the securities and make securitization

9 Mark Fogarty, “MPF May Zoom to $100 Billion,” National Mortgage News (May 22, 2000), pp. 1, 

22.
Implications For The Secondary Market

OFHEO 2000 Report To Congress 27

through Ginnie Mae a more attractive alternative than selling FHA-insured

mortgages to the three housing GSEs. The proposal faces budgetary and policy

hurdles, however, and it not clear how large a portfolio would have to be for Federal purchases to have the desired effect on the liquidity and pricing of Ginnie

Mae securities.

THE ENTERPRISES’ ABILITY

TO SUSTAIN DOUBLE-DIGIT

EARNINGS GROWTH IS

UNCERTAIN

Fannie Mae and Freddie Mac each have strong incentives to maximize the market value of its stock. The Enterprises have increased their earnings per share

(EPS) at double-digit rates in recent years by increasing their retained mortgage

portfolios, expanding the range of loans they buy, offering new services to lenders, and lowering their debt costs. Each Enterprise has committed to sustain that

rate of earnings growth in the future. Although Fannie Mae and Freddie Mac

may be able to do so, a number of factors may limit their success.

❏ There are limits to the ability of Fannie Mae and Freddie Mac to increase

earnings by expanding their retained mortgage portfolios. In recent years

each Enterprise’s net interest margin has declined, as at times its purchases of

its own mortgage securities have exceeded the supply of newly issued securities backed by recently originated loans. Increased hedging of interest rate

risk has also compressed margins on the portfolios. To sustain earnings

growth, the Enterprises have been buying non-Enterprise mortgage securities, but there are limits to that market, too. At some point the volume of outstanding conforming mortgage debt will constrain the size of the retained

portfolios.

❏ By introducing new products and buying subprime mortgages, the Enterprises may be able to expand the volume of mortgages they purchase and

increase their margins. New types of lending may pose unusual risks and may

not be as profitable as expected, however.

❏ The Enterprises used their benchmark debt issuance programs to hold down

their borrowing costs in 1998 and 1999. Recent uncertainty about the extent

of the Federal government’s support for their obligations have raised their

funding costs, however, and it is not clear that spreads between the yields on

their debt and the yields on Treasury securities will return to previous levels.

❏ A national recession would undoubtedly increase the credit losses incurred

by Fannie Mae and Freddie Mac. The increase in credit losses might be

significant.

It is important that OFHEO analyze how these factors might affect the ability of

Fannie Mae and Freddie Mac to meet their earnings targets. Future earnings are

critically important for each Enterprise to pass OFHEO’s risk-based capital stress

test and meet the Office’s risk-based capital requirement.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

28 OFHEO 2000 Report To Congress

IMPLICATIONS FOR SECURITIES MARKETS

Fannie Mae and Freddie Mac will almost certainly remain the largest investors in

their own mortgage securities in the next decade. Their purchase volumes are

large enough to affect the yields of those assets and close substitutes. Whether

their purchases affect yields on conforming FRMs in the primary market is

unclear, however. Research on that topic would help clarify the overall benefits

and costs of the growth of the Enterprises’ retained mortgage portfolios. Fannie

Mae and Freddie Mac are also increasing their presence in securities markets

through their expanded use of derivatives.

ECONOMIC EFFECTS OF

RETAINED MORTGAGE

PORTFOLIOS ARE UNCLEAR

As the retained mortgage portfolios of Fannie Mae and Freddie Mac grow, the

interest rate risk each Enterprise must manage also increases, as does its potential exposure to losses from a failure in the systems and procedures it uses to

manage that risk. Safety and soundness regulation can limit those increases in

risk. To assess the overall merits of the growth of the portfolios, it is necessary to

balance the additional risks against the contribution the portfolios make to

Enterprise earnings and any benefits they provide to mortgage markets, in particular the market for conforming FRMs. In recent years Fannie Mae and Freddie

Mac have grown their portfolios almost exclusively by buying their own mortgage securities. Thus, to assess the benefits of their portfolios, it would be useful

to conduct empirical research on the effects that the Enterprises’ purchases of

those securities may have on the yields on conforming FRMs.

Fannie Mae and Freddie Mac finance their purchases of mortgage securities by

issuing debt. Economic theory suggests that, the more integrated the markets for

the Enterprises’ debt and mortgage securities are, the more likely that, under

normal economic conditions, simultaneous purchases of mortgage securities

and issuance of debt by Fannie Mae and Freddie Mac will not change the market

yields of either type of obligation or those of loans being originated in the primary market. In the short run, a reduction in the supply of mortgage securities

will lower yields on those assets, while an increase in the supply of Enterprise

debt will increase the yields on those obligations. Those effects may be only temporary, since investors will likely rebalance their portfolios until yields once again

reflect the relative risk of the two types of assets. Temporary fluctuations in secondary market yields may not affect yields in the primary market. On the other

hand, if the markets for Enterprise debt and mortgage securities are not well

integrated, so that the two types of obligations are not close substitutes, the

transactions could affect their relative yields over long periods. The magnitude of

any changes in yields might or might not be large.

Econometric research can test which of these two conflicting hypotheses are

best supported by the evidence. It may be that under most circumstances the

Enterprises’ purchases of mortgage securities have no effect on primary market
Implications For The Financial System

OFHEO 2000 Report To Congress 29

yields, but that in crisis conditions they have a significant effect. Such research

should take into account purchases by the Federal Home Loan Banks as well as

Fannie Mae and Freddie Mac.

INCREASED USE OF CREDIT

ENHANCEMENTS AND

DERIVATIVES POSES RISKS

Fannie Mae and Freddie Mac have dramatically increased their use of credit

enhancements and derivatives in the last decade. Each Enterprise has allowed

lenders to reduce the credit risk on mortgages they sell to the Enterprise by supplementing primary mortgage insurance with supplementary insurance at the

pool level. Both Enterprises have made widespread use of interest rate and currency swaps. Those risk management techniques do not eliminate an Enterprise’s exposure to credit or interest rate risk but transform it into counterparty

default risk. As a result, the focus of risk management must include the financial

strength of counterparties and the adequacy of the collateral they post. As Fannie Mae and Freddie Mac continue to grow in the next decade, their exposure to

counterparty risk will increase.

As the safety and soundness regulator of Fannie Mae and Freddie Mac, OFHEO

must continue to assess thoroughly the counterparty risk exposure of each

Enterprise and the adequacy of its management of that risk. The increased use of

pool insurance in recent years underscores the need for the Enterprises to have

strong eligibility requirements for mortgage insurers and procedures for monitoring the financial strength and management of those firms. Because large

banks are major swap counterparties for Fannie Mae and Freddie Mac, OFHEO

also monitors how rapid consolidation in the banking industry is affecting concentration in their counterparty exposure and each Enterprise’s policies and procedures for limiting that exposure.

IMPLICATIONS FOR THE FINANCIAL SYSTEM

To fund their rapidly growing retained mortgage portfolios, Fannie Mae and

Freddie Mac have sharply increased their outstanding debt. The Enterprises’

combined debt outstanding rose from about $195 billion at year-end 1992 to

about $908 billion at year-end 1999, an average growth rate of nearly 25 percent a

year. The pace at which their debt is growing and their increasingly central role

in financial markets have raised concerns about the potential systemic risk that

Fannie Mae and Freddie Mac pose to the financial system. In addition, if current

Federal budgetary policies are unchanged, Treasury debt held by the public will

fall dramatically in the next decade. As a result, debt issued by the Enterprises,

perhaps with debt issued by the other GSEs and other issuers in the Federal

agency debt market, could replace Treasury securities as a benchmark in financial markets.10 If debt issued by Fannie Mae and Freddie Mac became an important benchmark, the Enterprises’ issuance practices would assume increased

importance, and OFHEO would increase its oversight and regulation.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

30 OFHEO 2000 Report To Congress

GROWTH OF ENTERPRISE

DEBT RAISES CONCERNS

ABOUT SYSTEMIC RISK

Systemic risks are those that have the potential to cause a systemic crisis in the

financial system—a disturbance that severely impairs the workings of the system

and, at the extreme, causes a complete breakdown in it. There are three reasons

why Fannie Mae and Freddie Mac may pose systemic risk. First, investors in the

debt and mortgage securities of each Enterprise are exposed to risk of loss if the

Enterprise got into financial difficulties, its securities became illiquid, or it

defaulted on its obligations. Second, the debt and mortgage securities of Fannie

Mae and Freddie Mac are widely held by investors across the globe, including

commercial banks, pension and retirement funds, and other private investors in

the U.S. and abroad; state and local governments in the U.S.; and foreign central

banks. A disruption in the flow of payments to this broad range of investors

could potentially cause difficulties for non-mortgage-related institutions and

markets. Third, many investors hold Enterprise debt and mortgage securities in

amounts that are large relative to their capital. If either Fannie Mae or Freddie

Mac ever defaulted on their obligations and many investors that held their debt

and mortgage securities booked significant losses and became undercapitalized,

disruptions in the flow of credit, payments, or the pricing of financial of financial

assets in some markets could result.

The Federal government currently limits the level of systemic risk Fannie Mae

and Freddie Mac may pose to the financial system in several ways. OFHEO’s proposed risk-based capital regulation, when final, will limit the potential for systemic risk by helping to ensure that the Enterprises hold adequate capital

against the risks they take. OFHEO’s comprehensive examination program also

limits the risk of Enterprise default by assuring that each Enterprise operates in a

financially safe and sound manner. The provisions of the 1992 Act that require an

undercapitalized Enterprise to submit and implement a recapitalization plan are

also a source of protection. In addition, the ability of Fannie Mae and Freddie

Mac to retain some of their Federal subsidies makes their charters quite valuable,

which gives each Enterprise an incentive to limit its risk.

Concerns about the systemic risk that Fannie Mae and Freddie Mac may pose

are likely to increase if the Enterprises’ outstanding debt continues to grow rapidly. Therefore, the benefits and costs of proposals intended to limit the potential

systemic risk posed by Fannie Mae and Freddie Mac deserve careful analysis.

Proposals advanced recently include repealing the exemption of Enterprise debt

from the limit on an individual bank’s credit exposure to any one entity, granting

OFHEO the authority to place a severely undercapitalized Enterprise in receivership, and taking steps to increase the degree of market discipline of Fannie Mae

and Freddie Mac by requiring enhanced Federal disclosure of their risk. The last

option is discussed in more detail below.

10 The Federal agency debt market includes debt issued by the five GSEs and Federal agencies such 

as the Postal Service, the Tennessee Valley Authority, and the Export-Import Bank. In dollar volume, 

GSE debt makes up nearly all Federal agency debt, with Fannie Mae, Freddie Mac, and the Federal 

Home Loan Banks being by far the largest issuers.
Implications For The Financial System

OFHEO 2000 Report To Congress 31

POTENTIAL BENCHMARK

ROLE OF ENTERPRISE DEBT

RAISES ISSUES

The dramatic growth in the outstanding debt of Fannie Mae and Freddie Mac

has coincided with a significant improvement in the Federal government’s fiscal

situation. In fiscal years 1998 and 1999, the government recorded its first consecutive budget surpluses since 1956-57. If current budgetary policies remain

unchanged, the government will continue to record surpluses well into the new

century. The President’s Budget for Fiscal Year 2001 projects that Treasury debt

held by the public will fall to $2.4 billion by the end of fiscal year 2005. If outstanding debt of Fannie Mae and Freddie Mac continues to grow at 25 percent a

year and Treasury debt held by the public declines as projected, the Enterprises’

debt will surpass publicly held Treasury debt during that fiscal year.

The projected growth of debt issued by Fannie Mae and Freddie Mac suggests

that OFHEO may want to take steps to assure investors that there will always be

adequate transparency in the pricing and distribution of the Enterprises’ obligations. If investors accepted Enterprise debt as a benchmark, the process by which

the securities were issued would become more important, and the market as a

whole might require more thorough Federal oversight. 

According to a recent study by staff of the Federal Reserve Bank of New York,

several attributes of U.S. Treasury securities make them a benchmark for other

financial markets.11 Treasury securities are considered to be free of default risk.

As a result, investors and analysts use the yields on Treasury securities as riskfree interest rates to forecast future economic events and analyze securities in

other markets. The Treasury market is also large and liquid, with active repurchase agreement (repo) and futures market. Those features make Treasuries a

popular benchmark for pricing other fixed-income securities and for hedging

positions taken in other markets. If future Federal budget surpluses materialize

and Treasury debt held by the public declines as projected, the market for Treasuries will become much smaller, less liquid, and less efficient. A less liquid and

efficient market would be a less useful benchmark of risk-free interest rates and

for pricing and hedging positions in other markets.

The study found that Federal agency debt securities have some attributes that

make them attractive as a benchmark, and some that make them unattractive.

On the plus side, the performance of agency securities is highly correlated with

that of other fixed-income securities. The agency debt market is reasonably liquid, agencies trade in an active overnight repo market, and agencies have been

relatively unaffected by issue-specific differences in liquidity. The benchmark

debt issuance programs initiated by the four GSEs in 1998 and 1999 are likely to

improve activity in the repo market. On the minus side, the presence of credit

11 The following two paragraphs draw upon Michael J. Fleming, “The Benchmark U.S. Treasury 

Market: Recent Performance and Possible Alternatives,” Economic Policy Review (New York: 

Federal Reserve Bank of New York, April 2000), pp. 129-145.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

32 OFHEO 2000 Report To Congress

risk means that there is an idiosyncratic risk component in agency securities

that could become significant in the future. In addition, the agency market is not

as liquid as the Treasury market, the repo market is less active, and there is a

much smaller agency futures market.

The possibility of investors accepting the debt of Fannie Mae and Freddie Mac as

a benchmark raises the issue of how financial markets might be affected. On one

hand, if Enterprise debt outstanding continued to increase rapidly, the liquidity

of the securities might increase significantly and the repo market might become

more active. Moreover, if the Federal Reserve relied heavily on Enterprise debt

securities to conduct open market operations, investors’ perception that the government stands behind those obligations might be strengthened, perhaps significantly. Less uncertainty about the government’s intentions might in turn make

the debt more accepted as a benchmark for risk-free interest rates, which might

lead to a larger universe of investors buying the selling the securities, which

would increase their liquidity. Fannie Mae and Freddie Mac might also be able to

take further steps to enhance market acceptance of their obligations. Under this

scenario, outstanding Enterprise debt might crowd out Treasury debt, leading

investors to require perceptibly higher yields on the latter and resulting in higher

debt service costs for the Federal government.

On the other hand, if outstanding debt of Fannie Mae and Freddie Mac continued to grow rapidly, the market might become increasingly concerned about the

absence of an explicit Federal guarantee and the systemic risk posed by the fact

that Enterprise obligations comprised a large share of the portfolios of many

investors. At some point, investors might require increasingly greater yields in

order to absorb increased quantities of Enterprise debt, especially if the obligations were perceived to pose significant credit risk. In the absence of an explicit

Federal commitment to back Enterprise debt, major market participants such as

foreign central banks might limit their holdings. Concerns about credit quality

might tend to reduce liquidity and the growth of the repo market, hamper acceptance of the debt of Fannie Mae and Freddie Mac as a benchmark for risk-free

rates, and ultimately limit the growth of the Enterprises’ retained mortgage

portfolios.

IMPLICATIONS FOR FEDERAL REGULATION OF MORTGAGE MARKETS

Federal regulation must adapt to the rapid evolution of mortgage markets and

the activities of Fannie Mae and Freddie Mac. The growing concentration of risk

at the Enterprises and the potential systemic risk they pose to the financial system suggest that it would be useful to increase disclosure about their risks. Such

disclosure would increase transparency and might enhance market discipline of

their risk-taking and activities. It may also be appropriate for Federal regulators

to pool their resources in order to conduct more comprehensive research about

mortgage markets. Such research would provide policymakers and the public

with new information about the U.S. housing finance system.
Implications for Federal Regulation of Mortgage Markets

OFHEO 2000 Report To Congress 33

GREATER TRANSPARENCY

OF ENTERPRISE RISK

COULD ENHANCE MARKET

DISCIPLINE

Market discipline of Fannie Mae and Freddie Mac is a potentially important

complement to safety and soundness regulation of the Enterprises. If creditors

have accurate and timely information on the financial risks of Fannie Mae and

Freddie Mac and believe that they are exposed to material risk of loss if the

Enterprises get into financial trouble, they will take steps to ensure that the

Enterprises strike an appropriate balance between risk and return. By enhancing

market discipline, greater transparency has the potential to limit the systemic

risk that Fannie Mae and Freddie Mac may pose to the financial system. 

Investors’ perception of the risk posed by the obligations of Fannie Mae and

Freddie Mac is also influenced significantly by government sponsorship of the

Enterprises. Credit rating agencies routinely give the debt and mortgage securities of Fannie Mae and Freddie Mac the highest investment-grade rating because

of their unique relationship to the government. Thus, the Enterprises’ status as

GSEs may limit the degree to which increased disclosure could enhance market

discipline of their activities by creditors. 

Under current law, Fannie Mae and Freddie Mac are exempt from the registration requirements of the Securities Act of 1933. The 1933 act requires all nonexempt corporations issuing stock or debt securities with maturities of more

than nine months to register such offerings with the Securities and Exchange

Commission (SEC), disclose uniform financial and operational information

about the securities, and pay registration fees. Fannie Mae and Freddie Mac voluntarily disclose much of the information that the SEC requires. Most of the

securities issued by the Enterprises’ competitors to finance loans comparable to

those financed by the Enterprises must be registered with the SEC. Although

securities issued by banks and thrifts are exempt from the registration requirements of the 1933 act, bank and thrift holding company securities are not. More

importantly, all MBS and asset-backed securities (ABS) issued by non-GSEs

must be registered. 

The best practices of financial institutions regarding disclosure of information

about risk go beyond the SEC’s requirements and are rapidly evolving as technology improves risk measures and management techniques. The Federal bank regulators recognize that transparency promotes market discipline and

complements safety and soundness regulation and are developing proposals to

require large banks to disclose additional, more precise information about their

risks in a timely manner. The Basel Committee on Banking Supervision has recommended standards for public disclosure of trading and derivatives activities

for banks. The credit rating agencies and other private market participants have

also made proposals.
Chapter 2 - The Enterprises, Mortgage Markets, and The Financial System In The Next Decade

34 OFHEO 2000 Report To Congress

In light of the potentially important role of market discipline in promoting the

safety and soundness of Fannie Mae and Freddie Mac, OFHEO will develop

requirements for expanded disclosure of information about their financial risks.

For example, it is common for private financial institutions to assess their exposure to interest rate risk by using simulation analysis to test how their market

value would be affected by a variety of large, short-term changes in interest rates.

Conducting such simulations and disclosing the results on a regular basis would

give investors additional information about the Enterprises’ interest rate risk

exposure that is not conveyed by the results of OFHEO’s risk-based capital stress

test. Another approach would be to require each Enterprise, at a minimum, to

adhere to the best disclosure practices that the Federal bank regulators require of

the largest U.S. banks and bank holding companies.

MORE COMPREHENSIVE

FEDERAL RESEARCH

ABOUT MORTGAGE

MARKETS MAY BE

APPROPRIATE

Federal policy has caused the single-family market to be demarcated into a number of segments. There is an FHA submarket, defined by the ceiling on the maximum principal balances of mortgages that FHA may insure. There is a

conforming, conventional submarket, defined by the limit on the balances of

loans that are eligible for purchase by Fannie Mae and Freddie Mac. Above the

conforming limit is the “jumbo” submarket of the conventional market, which is

served by depository institutions. And the conventional market has historically

divided into two submarkets: one for mortgages that meet the Enterprises’

underwriting standards (so-called prime or A loans) and mortgages that do not

meet those standards (so-called subprime loans). The segmentation between

those markets is not absolute, but it has focused Federal agencies on collecting

and analyzing data on different submarkets rather than on the market as a

whole.

The pace of change in mortgage markets and the growth of competition for borrowers who were served by FHA and subprime lenders in the past suggest that it

may be appropriate for OFHEO and other Federal regulators to use data on different markets to conduct comprehensive research on the market as a whole.

Such research could provide policymakers and the public with new and potentially quite useful insights about U.S. mortgage markets. For example, it would be

possible to use data on sales or refinancings of single-family homes whose mortgages were insured by FHA to expand OFHEO’s house price index (HPI). Another

possibility would be to use data on the terms and performance of mortgages

insured by FHA, purchased by the Enterprises, and financed in the jumbo and

subprime markets, to do comparative research on trends in single-family mortgage markets.
OFHEO 2000 Report To Congress 35

3

Mortgage Markets and The

Enterprises In 1999

The U.S. economy and housing markets enjoyed another very strong year in 1999

despite higher interest rates. Mortgage rates averaged 7.4 percent for the year, up

from an average of 6.9 percent in 1998. Rising rates reduced the number of homeowners who refinanced, but record levels of new construction and existing home

sales spurred mortgage originations. Overall, originations reached an estimated

$1.3 trillion in 1999, just under the record $1.4 trillion in 1998.

The high volume of mortgage originations in 1999 facilitated the continued

rapid increase in the retained mortgage portfolios of Fannie Mae and Freddie

Mac. Each Enterprise expanded its mortgage assets by 26 percent. This rapid

portfolio growth was the primary reason for another year of record profits at

both Enterprises. Combined net income for Fannie Mae and Freddie Mac was

$6.1 billion, an increase of $1 billion from 1998. Also contributing to higher profits was a further decline in each Enterprise’s credit losses, due to favorable housing market conditions and increased recoveries. The combined core capital of

Fannie Mae and Freddie Mac increased $4.4 billion, in line with their rapidly

growing business volumes. Both Enterprises met their statutory minimum capital requirements throughout the year.
Chapter 3 - Mortgage Markets and The Enterprises In 1999

36 OFHEO 2000 Report To Congress

HOUSING AND PRIMARY MORTGAGE MARKET DEVELOPMENTS 

STRONG ECONOMY

SUSTAINS HIGH LEVELS OF

ACTIVITY, HEALTHY HOME

PRICE APPRECIATION

The housing market benefitted greatly in 1999 from the economy’s overall

strength. For the fourth consecutive year, the economy expanded by more than 4

percent, well above the average growth rate since 1973 of 3 percent. The booming

stock market continued to improve household balance sheets, and the average

unemployment rate fell to a 30-year low of 4.2 percent.

Consumer price inflation accelerated to 2.7 percent during the year from 1.6 percent in 1998. Concerns about further acceleration led the Federal Reserve to raise

its federal funds rate target by three-fourths of a percentage point in the second

half of 1999. Freddie Mac’s Primary Mortgage Market Survey (PMMS) indicates

that mortgage lenders’ commitment rates on 30-year fixed-rate mortgages

(FRMs) rose throughout 1999, following yields on longer-term Treasury securities (see Figure 1). In December 1999, the average FRM commitment rate was

close to 8 percent, nearly 1.2 percentage points higher than in December 1998.

For the year, FRM commitment rates averaged 7.4 percent, half of a percentage

point higher than their 1998 average of 6.9 percent. Commitment rates on 30-

year adjustable-rate mortgages (ARMs) also rose in 1999, albeit less sharply,

reflecting a slight steepening of the yield curve.

Figure 1. Mortgage Interest 

Rates

Source: Freddie Mac Primary 

Mortgage Market Survey

The strong economy pushed housing market activity to record levels in 1999,

despite the increase in interest rates. Single-family housing starts and home

sales set new records. Starts rose 5 percent from 1998, while combined new and

existing home sales increased 4 percent (see Figure 2). The homeownership rate

benefited from the healthy housing market in 1999. The rate increased to a

record 66.8 percent in 1999, up slightly from the previous record of 66.3 percent

4%

6%

8%

10%

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00

30-Year FRM Rate

1-Year ARM Rate
Housing and Primary Mortgage Market Developments

OFHEO 2000 Report To Congress 37

in 1998. Multifamily markets were quite healthy as well. Although multifamily

starts declined slightly, new construction increased to $21.6 billion, the highest

level in a decade. Vacancy rates rose slightly to just over 8 percent. 

Figure 2. New Home Sales and 

Existing Home Sales

Sources: U.S. Bureau of the Census 

and National Association of Realtors

Increased housing demand produced a more rapid rise in home values in 1999

than in the previous year. Single-family house prices, as measured by OFHEO’s

House Price Index, increased 6.4 percent, compared with 5.4 percent in 1998.

New England and the West North Central Census division were the regions with

the highest house price appreciation (see Figure 3). The lowest rate of house

price appreciation occurred in the East South Central division. Prices in all divisions rose at a pace well above the general inflation rate. Over the past 5 years,

U.S. house prices have increased an average 26.1 percent, compared with just 8.5

percent during the previous 5 years.

Figure 3. One-Year Change in 

House Prices by Census 

Division, Fourth Quarter 1998 to 

Fourth Quarter 1999

0

200

400

600

800

1,000

1975 1979 1983 1987 1991 1995 1999

0

1,000

2,000

3,000

4,000

5,000

6,000

New Home Sales

Existing Home Sales

New Home Sales Existing Home 

Sales

(in thousands of units, annual rates) 

CA

WA

NV

OR

ID

AZ

UT CO

NM

AR

TN

NJ

 CT

DE

RI

DC

 

HI TX 

LA 

ND

SD 

NE 

KS

OK 

 MO 

IA 

 MN 

 WI 

IN 

 PA 

 NY 

 ME 

IL

MS

AK

MT VT

 NH

WY 

AL

 MD

East

South

Central

Pacific

New England

East MA

North

Central

West North

Central

Mountain

West South Central

MS

TN

KY

PA

ME

OH

IL IN

WI MI

NY

PA

South Atlantic

 FL

GA

SC

NC

VA

WV

NY

CA

Middle Atlantic

8.9%

6.9%

5.7%

6.0%

5.7% 4.5%

5.7%

5.8%

9.7%
Chapter 3 - Mortgage Markets and The Enterprises In 1999

38 OFHEO 2000 Report To Congress

Originations of single-family mortgages reached $1.3 trillion in 1999 (see

Figure 4). That volume was the second highest total ever, down 10 percent from

the preceding year’s record. Quarterly originations declined steadily during the

year, as the rising-rate environment decreased borrower incentives to refinance

existing mortgages. Originations of conventional mortgages declined more than

total originations, as home loans insured by the Federal Housing Administration

and guaranteed by the Veterans Administration increased to record levels. FHA

originations rose 19 percent in 1999, while VA production increased 16 percent.

The share of mortgages with FHA or VA financing rose to 13 percent, the highest

since 1994. Net new insurance of conventional loans written by private mortgage

insurers increased slightly to nearly $189 billion. Originations of subprime mortgages rose 7 percent to $160 billion, 12.2 percent of the conventional market (see

Box 3).

Figure 4. Originations of 

Single-Family Mortgages

Sources: Department of Housing 

and Urban Development and Inside 

Mortgage Finance $1,310

$1,450

$859 $785

$639

$769

$1,020

$894

$562

$458 $453 $446

$499 $507

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

FHA/VA Conventional Total

$ in Billions
Housing and Primary Mortgage Market Developments

OFHEO 2000 Report To Congress 39

Box 3: The Subprime Market in 1999

Subprime mortgage lending involves the provision of credit to borrowers who have past credit problems

of varying severity. Originations of subprime mortgages (including first and second mortgages and

home-equity lines of credit) totaled an estimated $160 billion in 1999, up 7 percent from $150 billion in

1998. With the decline in total conventional originations in 1999, the subprime share of the conventional market rose, climbing to 12.2 percent from 10.3 percent in 1998.

The entry into the subprime market of many traditional prime lenders and diversified financial services

companies made possible the increased volume of subprime originations in 1999. The global financial

crisis of late 1998 led many monoline finance companies, which had dominated the industry, to shut

their doors, sharply curtail their lending, or put themselves up for sale. Low interest rates and improving

borrower credit ratings led to higher-than-expected prepayments that depressed earnings and put

many firms out of business. Investors’ preference for Treasury securities during the financial crisis also

made securitization of subprime mortgages much more difficult. Traditional prime lenders responded

to those developments by entering the subprime market, often by buying monoline lenders, in search of

larger volumes and the higher margins on subprime loans. 

Subprime mortgages intended for sale into the secondary market receive a rating of A-, B, C, or D. Lenders and other firms in the industry often define those ratings differently. Inside B&C Lending classifies

subprime loans solely on the basis of the borrower’s credit history as measured by the credit scores that

the three national credit bureaus calculate using models developed by Fair, Isaac and Company (FICO).

Mortgages with a FICO score from 580 to 619 are rated A- loans, loans with a score of 560 to 579 are

rated B loans, those with a score of 540 to 559 as C loans, and those with a score below 540 as D loans.

That ranking system indicates that

mortgage lenders provided credit primarily to lower-risk subprime borrowers in 1999. Based on a survey of

subprime originators, Inside B&C

Lending estimates that seventy-three

percent of subprime loans originated

last year went to borrowers with Acredit. Thirteen percent, nine percent,

and 5 percent were the shares for borrowers with B, C, and D credit, respectively. As a result of the prevalence of

mainstream lenders, the industry is

likely to continue to focus on lowerrisk borrowers in the future, as it has

in the past.

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

1994 1995 1996 1997 1998 1999

Subprime 

Originations

($ in Billions)

0%

2%

4%

6%

8%

10%

12%

14%

16%

Subprime Share 

(%)

Subprime Mortgage Originations

Subprime Share of Conventional Originations

Source: Inside B&C Lending

Subprime Originations and Subprime Share

of Conventional Originators
Chapter 3 - Mortgage Markets and The Enterprises In 1999

40 OFHEO 2000 Report To Congress

RISING RATES ALTER THE

COMPOSITION OF

CONVENTIONAL, SINGLEFAMILY ORIGINATIONS

Higher mortgage rates altered the characteristics of conventional, single-family

mortgages originated in 1999. According to the PMMS, the average monthly

share of mortgages made to refinance existing loans was 32 percent, down from

52 percent in 1998 (see Figure 5). During 1999, the refinance share fell from 50

percent in the first quarter to 22 percent in the third and fourth quarters. With

rising rates, fewer homebuyers refinanced their homes to reduce their payments,

and more who did so took out equity by increasing the size of their loan. For the

year, 59 percent of refinancing homeowners took out a new mortgage at least 5

percent greater than the original loan, up from 48 percent in 1998. Healthy property value appreciation facilitated the trend. As in the previous year, the vast

majority of refinancing borrowers chose long-term fixed-rate loans.

Figure 5. Interest on 30-Year 

Fixed-Rate Mortgages Rate 

Versus Refinance Share

Source: Freddie Mac Primary 

Mortgage Market Survey

The Federal Housing Finance Board’s Mortgage Interest Rate Survey (MIRS),

which tracks the terms of single-family, conventional, purchase-money originations, provides additional information on the characteristics of newly originated

mortgages. The survey also permits comparison of the characteristics of purchase-money loans with balances small enough to make them eligible for purchase by Fannie Mae and Freddie Mac (conforming mortgages) and with

balances too large to make them eligible for purchase by the Enterprises (jumbo

loans). According to MIRS, the conforming share of total purchase-money originations, based on the number of loans, held steady at 91 percent in 1999,

whereas the conforming share based on the total dollar volume of loans fell

slightly from 79 percent in 1998 to 78 percent in 1999. The conforming share of

the dollar volume fell because the size of the average conforming loan increased

6%

7%

8%

9%

10%

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99

0%

20%

40%

60%

80%

30-Year FRM Rate

Refinance Share

30-Year 

FRM 

Refinance 

Share
Housing and Primary Mortgage Market Developments

OFHEO 2000 Report To Congress 41

less than the size of the average jumbo loan. The average conforming mortgage

increased 5.4 percent to $118,500 in 1999, whereas the average jumbo loan

increased 10.6 percent to $343,600. The conforming limit in 1999 for mortgages

that financed single-family properties was $240,000, a 5.7 percent increase from

1998’s limit.

According to MIRS, the average loan-to-value (LTV) ratio of single-family, conventional, purchase-money mortgages and the proportion of such loans with

high LTV ratios both fell slightly compared to 1998 (see Figure 6). A lower LTV

ratio (higher borrower equity in the property) indicates that a mortgage is less

likely to default, everything else being equal. Conforming and jumbo loans each

had average LTV ratios of about 78 percent, and there was little difference in the

average LTV ratios of FRMs and ARMs in each category. Conforming mortgages

were much more likely to have high LTV ratios than jumbo loans, as in the past.

Twenty-six percent of conforming FRMs had LTV ratios over 90 percent last

year, compared to 7 percent of jumbo FRMs. The percentages for conforming

and jumbo ARMs were 16 percent and 7 percent, respectively. The average LTV

ratio of all purchase-money mortgages has not declined much from its peak in

1997 and remains much higher than in the early 1990s. The high-LTV proportion

of such loans has fallen somewhat from its peak in 1995, but also remains quite

high in comparison early in the decade. These trends reflect both households’

desire for lower down payments on purchase-money loans and the increased

availability of such loans.

Figure 6. Loan-to-Value (LTV) 

Ratios of Conventional Single 

Family Mortgages and 

Percentage of Originations with 

LTV Ratios >90

Source: Federal Housing Finance 

Board’s Mortgage Interest Rate 

Survey

70%

75%

80%

85%

90%

Jan90Jul90Jan91Jul91Jan92Jul92Jan93Jul93Jan94Jul94Jan95Jul95Jan96Jul96Jan97Jul97Jan98Jul98Jan99Jul99

0%

10%

20%

30%

40%

Average LTV Share >90% LTV
Chapter 3 - Mortgage Markets and The Enterprises In 1999

42 OFHEO 2000 Report To Congress

Rising mortgage rates also led more borrowers to choose ARMs over fixed-rate

loans in 1999. The ARM share of conventional single-family originations, after

reaching a low in the fourth quarter of 1998, had climbed a year later to its highest level since the third quarter of 1996 (see Figure 7). According to MIRS, the

ARM share of the market on a quarterly average basis rose from 12 percent in

1998 to nearly 22 percent in 1999. The decline in FRMs was much more pronounced in the jumbo market. The fixed-rate share of jumbo loans, based on the

number of mortgages, fell from 60 percent in 1998 to 41 percent in 1999. The

fixed-rate share of conforming mortgages fell from 90 percent to 83 percent.

Many depository institutions prefer to retain adjustable-rate loans in their portfolios rather than sell them to the secondary market, because they can earn

attractive spreads with acceptable levels of interest rate risk by financing ARMs

with short-term liabilities. Adjustable-rate loans are more likely to default than

FRMs, everything else being equal, largely because ARM borrowers are exposed

to the risk that rising interest rates will increase their monthly payments.

Figure 7. Percentage of 

Conventional Single-Family 

Loans with Adjustable Rates 

Versus Commitment Rates on 

30-Year Fixed-Rate Mortgages

Source: Freddie Mac Primary 

Mortgage Market Survey

6

8

10

12

92Q1 92Q4 93Q3 94Q2 95Q1 95Q4 96Q3 97Q2 98Q1 98Q4 99Q3

FRM 

Commitment 

Rate (percent)

0

10

20

30

40

50

60

ARM Share 

(percent)

FRM Commitment Rate ARM Share
Housing and Primary Mortgage Market Developments

OFHEO 2000 Report To Congress 43

CONSOLIDATION AMONG

LENDERS CONTINUES

The proportion of single-family mortgages originated by the largest lenders continued to increase in 1999, consistent with the consolidation trend in the financial services industry. The top 25 originators accounted for 57 percent of all

single-family originations in 1999, up from 55 percent in 1998 and more than

double their market share in the early 1990s (see Figure 8). Lenders continued to

rely on multiple channels of production to originate loans. Of all single-family

mortgages originated in 1999, 26 percent were acquired from brokers, 36 percent

came from correspondent lenders, and 39 percent were originated through retail

channels.

Figure 8. Concentration of 

Mortgage Originations Among 

the Top 25 Originators

Source: Inside Mortgage Finance

57%

55%

26%

28%

27%

31%

37%

33%

39%

40%

45%

$0

$150

$300

$450

$600

$750

$900

$1,050

$1,200

$1,350

$1,500

$1,650

1989 1991 1993 1995 1997 1999

Year

Originations

 $ in Billions

0%

10%

20%

30%

40%

50%

60%

Market Share

Originations of Top 25 Total Originations Market Share
Chapter 3 - Mortgage Markets and The Enterprises In 1999

44 OFHEO 2000 Report To Congress

SECONDARY MARKET ACTIVITIES OF THE ENTERPRISES

SINGLE-FAMILY

PURCHASES DECLINE BUT

REMAIN AT HIGH LEVELS

Purchases by Fannie Mae and Freddie Mac of single-family mortgages (defined

to include cash purchases from lenders and swaps of whole loans for mortgagebacked securities, or MBS) declined in 1999, as a lower volume of originations

and a higher ARM share of the primary market limited opportunities to buy new

loans (see Figure 9). Each Enterprise’s purchases were at the second-highest level

ever, however. Fannie Mae purchased $316 billion in single-family loans last year,

a reduction of 11 percent from 1998. Freddie Mac bought $233 billion, a decline

of 12 percent. Each Enterprise’s quarterly purchases fell steadily during the year,

reflecting the decline in originations. The Enterprises’ share of total single-family

originations declined slightly to 42 percent for the year.

Figure 9. Enterprise SingleFamily Mortgage Purchases

Sources: Fannie Mae and 

Freddie Mac

Each Enterprise entered into special business arrangements with a number of

mortgage lenders in 1999. Those arrangements typically involve a commitment

by the lender to sell a high proportion of its conforming mortgage originations

to the respective Enterprise. Such arrangements expose an Enterprise to the risk

that it will lose significant purchase volume that it may be unable to replace if,

when the agreements end, one or more lenders significantly reduces the volume

of mortgages it sells to the Enterprise. The arrangements had little effect on the

Enterprises’ respective shares of their combined single-family purchases in 1999,

however. Fannie Mae’s share climbed very slightly to 57.6 percent from 57.4 percent in 1998, whereas Freddie Mac’s fell from 42.6 percent to 42.4 percent.

$618

$549

$275 $287

$216

$281

$519

$440

$233

$185

$0

$100

$200

$300

$400

$500

$600

$700

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Freddie Mac Fannie Mae Combined

$ in Billions
Secondary Market Activities of the Enterprises

OFHEO 2000 Report To Congress 45

NEWLY ACQUIRED SINGLEFAMILY LOANS POSE

SLIGHTLY GREATER CREDIT

RISK

Trends in the primary market in 1999 altered the characteristics of single-family

originations in ways that tended to increase slightly the credit risk posed by the

mortgages purchased by each Enterprise. There were several related

developments:

❏ The refinance share of single-family mortgages purchased by the Enterprises

declined. Of the loans purchased by each Enterprise, about one-half were refinance loans, down from about two-thirds the previous year. A higher portion

of refinancing borrowers withdrew equity.

❏ The average LTV ratio of single-family mortgages purchased by each Enterprise increased slightly (see Figure 10). That change reflects the decline in the

refinance share of Enterprise purchases. Mortgages with high LTV ratios also

made up a larger share of each Enterprise’s single-family purchases.

Figure 10. Enterprises’ SingleFamily Purchases by Loan-toValue (LTV) Ratio

Sources: Fannie Mae and 

Freddie Mac

❏ Adjustable-rate loans comprised a slightly higher share of each Enterprise’s

single-family purchases, consistent with the larger proportion of conforming

originations with adjustable rates. The ARM share of Fannie Mae’s purchases

rose from 4 percent to 5 percent, whereas the ARM share of Freddie Mac’s

purchases increased from 3 percent to 6 percent.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1993 1994 1995 1996 1997 1998 1999

Year

Share LTV> 

90% (bars)

66%

68%

70%

72%

74%

76%

78%

Average LTV 

(lines)

Fannie Mae LTV > 90% Freddie Mac LTV >90%

Fannie Mae Average LTV Freddie Mac Average LTV 
Chapter 3 - Mortgage Markets and The Enterprises In 1999

46 OFHEO 2000 Report To Congress

ENTERPRISES EXPAND

PRESENCE IN THE

SUBPRIME MARKET

After investing in the senior tranches of subprime securitizations during the

illiquid market conditions of late 1998, Fannie Mae and Freddie Mac became

major participants in the secondary market for subprime mortgages in 1999.

Freddie Mac issued $5.3 billion in multi-class mortgage securities supported by

pools of subprime loans, up from $1.4 billion in 1998. Each Enterprise initiated a

program to purchase individual A- mortgages approved by its automated underwriting system (AUS), charging a somewhat higher price to cover the additional

credit risk. Freddie Mac charges a delivery fee on A- loans that lenders may

recoup by charging the borrower a higher rate. Fannie Mae introduced a product

under which the interest rate on an A- loan is initially higher but is reduced if the

borrower makes 24 consecutive months of payments on time.

ENTERPRISES CONTINUE

TO MANAGE SINGLEFAMILY CREDIT RISK

ACTIVELY

Increasingly, the Enterprises are assessing the credit risk of the single-family

mortgages they purchase through the use of automated underwriting. The proportion of new single-family loans purchased by Fannie Mae and Freddie Mac

that was evaluated by the respective Enterprise’s automated underwriting system (AUS) prior to purchase increased in 1999 (see Figure 11). Each system combines LTV ratios, credit scores, and other loan and borrower characteristics to

classify loans in terms of their relative risk of default. Fifty percent of the loans

sold to Freddie Mac were evaluated using that Enterprise’s system, Loan Prospector, in 1999, more than double the level of two years before. Lenders used Fannie Mae’s system, Desktop Underwriter, to evaluate 39 percent of new mortgages

sold to that Enterprise, an increase of more than 400 percent since 1997.

Figure 11. Percent of 

Mortgages Evaluated by 

Enterprise Automated 

Underwriting Systems Prior to 

Purchase—Based on Recently 

Originated Mortgages Not 

Included in Structured 

Transactions

Sources: Fannie Mae and 

Freddie Mac

0%

10%

20%

30%

40%

50%

60%

1997 1998 1999

Year

Percent

Freddie Mac Fannie Mae
Secondary Market Activities of the Enterprises

OFHEO 2000 Report To Congress 47

The Enterprises also reduce their exposure to mortgage credit risk by obtaining

credit enhancements on higher-risk single-family loans. Credit enhancements

include primary mortgage insurance on loans with original LTV ratios greater

than 80 percent, and agreements in which lenders or other third parties pledge

collateral or agree to accept losses on loans that default. In addition, a portion of

the mortgages purchased by each Enterprise are insured by FHA or guaranteed

by VA. In 1999, the share of single-family mortgages purchased by the Enterprises where lenders or other third parties bear primary risk of default declined.

The proportion of single-family MBS issued by Fannie Mae where lenders bear

primary risk on the collateral declined from 28 percent to 25 percent. Single-family loans on which lenders or other third-parties bear primary default risk

declined from 40 percent of Freddie Mac’s purchases in 1998 to 35 percent in

1999. However, each Enterprise bore primary default risk on a smaller proportion

of the single-family mortgages it acquired in 1999 than on old loans that were

repaid or written off during the year. As a result, the share of Fannie Mae’s total

mortgage portfolio where lenders or other third parties bear primary risk

increased from 18 percent at year-end 1998 to 21 percent at year-end 1999. Similarly, the share of Freddie Mac’s total portfolio where lenders or other third parties bear primary risk increased from 27 percent to 30 percent.

MULTIFAMILY PURCHASES

RISE

Total Enterprise purchases of multifamily mortgages (defined to include cash

purchases and securitizations) rose in 1999 (see Figure 12). The increase was due

to a large jump in Freddie Mac’s activity, which offset a decline in Fannie Mae’s.

Freddie Mac’s multifamily purchases increased from $3.9 billion in 1998 to $7.2

billion last year, an increase of 84 percent. Fannie Mae’s fell from $11.4 billion to

$10.0 billion. Each Enterprise’s purchases of multifamily loans was lower in the

second half of the year.

Figure 12. Enterprise 

Multifamily Mortgage Purchases

Sources: Fannie Mae and 

Freddie Mac

$17.2

$15.3

$8.7 $8.8

$6.5

$4.7 $4.3 $4.5 $3.4 $3.0

$0

$5

$10

$15

$20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Freddie Mac Fannie Mae Combined

$ in Billions
Chapter 3 - Mortgage Markets and The Enterprises In 1999

48 OFHEO 2000 Report To Congress

VOLUMES OF MBS AND

REMIC ISSUANCES

DECLINE

The Enterprises’ securitizations of mortgages in 1999 mirrored trends in the primary market. Issuance of single-class MBS declined at both Enterprises as purchase volumes fell (see Figure 13). Fannie Mae’s issuances totaled $292 billion, a

decrease of 8 percent. Freddie Mac issued $231 billion in 1999, a decline of 7 percent. Each Enterprise’s issuances fell in each quarter of the year, consistent with

the steady downward trend in loan originations. The decrease in issuances was

more than offset at both Enterprises by a decrease in mortgage liquidations

brought on by the lower volume of refinance loans in 1999. As they have in recent

years, the Enterprises each repurchased large volumes of their MBS issues.

Despite that, outstanding MBS held by other investors increased 7 percent for

Fannie Mae and 12 percent for Freddie Mac.

Figure 13. Enterprise SingleClass MBS Issuances

Sources: Fannie Mae and 

Freddie Mac

Issuance of multi-class mortgage securities, mostly Real Estate Mortgage Investment Conduit (REMIC) offerings, also fell at both Enterprises in 1999 (see

Figure 14). Freddie Mac’s new issue volume fell $15 billion to $120 billion, while

Fannie Mae issues declined $29 billion to $55 billion in 1999. Freddie Mac’s outstanding issues rose 21 percent, while Fannie Mae’s declined by 14 percent.

$168 $204

$372 $429

$245

$192

$263 $257

$565

$523

$0

$100

$200

$300

$400

$500

$600

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Freddie Mac Fannie Mae Combined

$ in Billions
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 49

Figure 14. Enterprise REMIC 

Issuances

Sources: Fannie Mae and 

Freddie Mac

FINANCIAL CONDITION OF THE ENTERPRISES

GROWTH IN MORTGAGE

INVESTMENTS PUSHES

COMBINED EARNINGS

OVER $6 BILLION

Fannie Mae and Freddie Mac each recorded another year of record profits in

1999, with a combined net income of $6.1 billion. Freddie Mac’s net income rose

31 percent, its biggest increase in 8 years, whereas Fannie Mae’s rose a more typical 14 percent (see Tables 1 and 2). Net interest income accounted for most of

the increase in revenues for both Enterprises, as combined net interest income

rose to $7.8 billion, up from $6.3 billion in 1998 (see Figure 15). The Enterprises’

profits increased despite a further decline in the revenue yields on their two

principal lines of business3⁄4portfolio investments and mortgage guarantees.

Growth in mortgage investments and a decline in credit losses, as well as growth

in other income at Freddie Mac, more than offset the effect of lower net interest

margins and guarantee fee rates.

$25

$175

$220

$170

$65

$146

$354

$301

$185

$109

$0.0

$40.0

$80.0

$120.0

$160.0

$200.0

$240.0

$280.0

$320.0

$360.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Freddie Mac Fannie Mae Combined

$ in Billions
Chapter 3 - Mortgage Markets and The Enterprises In 1999

50 OFHEO 2000 Report To Congress

Table 1. Fannie Mae Financial Highlights

SELECTED FINANCIAL HIGHLIGHTS

(Dollars in Billions)

1999 1998 1997 1996 1995

EARNINGS PERFORMANCE:

Net Income ($) 3.91 3.42 3.06 2.73 2.14 

Net Interest Income ($) 4.89 4.11 3.95 3.59 3.05 

Guarantee Fees ($) 1.28 1.23 1.27 1.20 1.09 

Net Interest Margin (%)1 

1. Taxable equivalent net interest income divided by average earning assets.

1.01 1.03 1.17 1.18 1.16

Average Guarantee Fee (basis points)2

2. Guarantee fees divided by average MBS outstanding net of MBS held in portfolio.

19.3 20.2 22.7 22.4 22.0

Return on Common Equity (%) 25.2 25.2 24.6 24.1 20.9

Dividend Payout Ratio (%)3

3. Paid common dividends as a percentage of earnings available to common stockholders.

28.8 29.5 29.4 30.4 34.6

BALANCE SHEET POSITION:

Total Assets ($) 575.2 485.0 391.7 351.0 316.6

Outstanding Debt ($) 547.6 460.3 369.8 331.3 299.2

Mortgages:

Retained Mortgage Portfolio ($) 522.8 415.4 316.6 286.5 252.9

MBS ($) (excludes MBS in Portfolio) 679.2 637.1 579.1 548.2 513.2

Retained as % of Total Mortgages in Portfolio 

and MBS

43.0 39.5 35.3 34.3 33.0

Capital:

Equity/Assets & MBS (%) 1.41 1.38 1.42 1.42 1.32

Equity + Reserves /Assets +MBS (%)4

4. Effective 1/1/95, reserves exclude valuation allowance related to impaired loans pursuant to SFAS 114.

1.47 1.45 1.50 1.50 1.41

Source: Fannie Mae
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 51

Table 2. Freddie Mac Financial Highlights

SELECTED FINANCIAL HIGHLIGHTS

(Dollars in Billions)

1999 1998 1997 1996 1995

EARNINGS PERFORMANCE:

Net Income ($) 2.22 1.70 1.40 1.24 1.09

Net Interest Income ($)1

1. Effective 1/1/96, Freddie Mac reports guarantee fees on retained Freddie Mac Participation Certificates or “MBS” as guarantee fee 

income. Previously these fees were included in net interest income. However, for comparability with Fannie Mae, guarantee fee 

income on retained MBS for subsequent periods has been estimated and included in net interest income rather than fee income.

2.93 2.22 1.85 1.71 1.40

Guarantee Fees ($)1 1.02 1.02 1.08 1.09 1.09

Net Interest Margin (%)1,2

2. Taxable equivalent net interest income divided by average earning assets.

0.88 0.93 1.01 1.10 1.18

Average Guarantee Fee (basis points)3

3. Guarantee fees divided by average MBS outstanding net of MBS held in portfolio.

19.8 21.4 22.9 23.4 23.8

Return on Common Equity (%) 25.5 22.6 23.1 22.6 22.1

Dividend Payout Ratio (%)4

4. Paid common dividends as a percentage of earnings available to common stockholders.

20.1 20.7 21.1 21.3 21.1

BALANCE SHEET POSITION:

Total Assets ($) 386.7 321.4 194.6 173.9 137.2

Outstanding Debt ($) 360.7 287.4 172.8 156.9 120.0

Mortgages:

Retained Mortgage Portfolio ($) 322.9 255.7 164.5 137.8 107.7

MBS ($) (excludes MBS in Portfolio) 537.9 478.4 476.0 473.1 459.0

Retained as % of Total Mortgages in 

Portfolio and MBS

37.5 34.8 25.7 22.6 19.0

Capital:

Equity/Assets & MBS (%) 1.25 1.35 1.12 1.04 0.98

Equity & Reserves/Assets & MBS (%)5

5. Effective 1/1/95, reserves exclude valuation allowance related to impaired loans pursuant to SFAS 114.

1.33 1.45 1.22 1.14 1.09

Source: Freddie Mac
Chapter 3 - Mortgage Markets and The Enterprises In 1999

52 OFHEO 2000 Report To Congress

Figure 15. Enterprise Primary 

Sources of Revenue

Sources: Fannie Mae and Freddie 

Mac

While growth of the Enterprises’ mortgage investments was still very rapid, it

was lower than in 1998, as rising interest rates and a decline in the refinance

market reduced the supply of newly originated mortgages and newly issued

mortgage securities. Fannie Mae’s mortgage investments grew 26 percent in

1999, compared with 31 percent in 1998. Freddie Mac’s mortgage investments

also increased 26 percent in 1999, compared with 55 percent in 1998.

REVENUES CONTINUE TO

RISE DESPITE FALL IN

INTEREST MARGINS AND

GUARANTEE FEES

Total revenues rose $753 million at Fannie Mae and $718 million at Freddie Mac

in 1999. Net interest income drove the increase in total revenues for both Enterprises, as growth in mortgage investments offset the effect of lower net interest

margins. Fannie Mae’s net interest margin (tax equivalent basis) declined two

basis points to 1.01 percent in 1999. Freddie Mac’s margin (defined to include

guarantee fees on MBS in the retained portfolio) fell 5 basis points to 0.88 percent (see Figure 16). Fannie Mae’s net interest margin fell largely because a large

volume of mortgages with relatively high yields refinanced in the first half of the

year and because the Enterprise reduced its equity-to-assets ratio, raising its

interest expense. Freddie Mac’s net interest margin declined for the same reasons and because the Enterprise raised the proportion of its portfolio funded

with higher-cost, longer-term debt and increased its portfolio of option-based

derivatives.

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1992 1993 1994 1995 1996 1997 1998 1999

Net Interest Inc. Guarantee Fees

$ in Billions
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 53

Figure 16. Enterprise Mortgage 

Investments and Net Interest 

Margin

Sources: Fannie Mae, Freddie Mac, 

and OFHEO

The combined guarantee fee income for the Enterprises rose 2 percent during

1999. Fannie Mae’s average guarantee fee rate fell to 19.3 basis points in 1999,

compared with 20.2 basis points in 1998. Freddie Mac’s average guarantee fee

rate also dropped in 1999, falling by 1.6 basis points to 19.8 basis points. The drop

in average guarantee fee rates was due to the replacement of liquidated mortgages with newly originated loans that have lower fees. Lower average guarantee

fees on newly financed mortgages reflects more competitive pricing, greater use

of credit enhancements on MBS that reduce guarantee fees, and changes in the

mix of loan products purchased.

CREDIT LOSSES AND

DELINQUENCIES CONTINUE

TO DECLINE

Strong housing markets and increased recoveries from credit enhancements

enabled the Enterprises to reduce their credit losses (charge-offs plus foreclosure

expenses) for the third consecutive year in 1999. Credit losses for Fannie Mae fell

53 percent to $124 million, 0.011 percent of its average total mortgage portfolio.

Freddie Mac’s credit losses declined 42 percent to $155 million, 0.019 percent of

its average total mortgage portfolio. Fannie Mae’s lower loss rate reflects differences in accounting practices. Improving economic conditions nationwide

reduced the number of foreclosed properties acquired by each Enterprise. In

addition, strong home price appreciation and increased recoveries reduced

losses on foreclosed properties.

Delinquency rates on the Enterprises’ single-family mortgages (based on the

number of loans on which an Enterprise bears the primary risk of loss that are

delinquent 90 days or more or in foreclosure) also declined in 1999 (see

$100

$300

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

$1,900

1992 1993 1994 1995 1996 1997 1998 1999

0.8

0.9

1

1.1

1.2

1.3

1.4

Net Interest 

Margin (%)

Enterprise Investments

Fannie Mae's Net Interest Margin

Freddie Mac's Net Interest Margin

$ in Billions
Chapter 3 - Mortgage Markets and The Enterprises In 1999

54 OFHEO 2000 Report To Congress

Figure 17). The increased proportion of recently originated loans in the Enterprises’ retained and securitized mortgage portfolios and even more healthy economic conditions in 1999 accounted for that trend. The proportion of delinquent

single-family loans at Fannie Mae declined for the second year in a row, falling

from 0.58 percent at year-end 1998 to 0.48 percent at the end of 1999. Freddie

Mac’s single-family delinquency rate declined for the fourth year in a row, dropping from 0.50 percent at the end of 1998 to 0.39 percent at year-end 1998.

Figure 17. Single-Family 

Delinquency Rates

Sources: Fannie Mae and 

Freddie Mac

The delinquency rates on the Enterprises’ multifamily mortgages (based on

loans for which an Enterprise has primary or shared risk that are delinquent 60

days or more) also declined to very low levels in 1999. Fannie Mae’s multifamily

delinquency rate fell to 0.12 percent, down from 0.29 percent in 1998 and less

than one-third of the level in 1997. Freddie Mac’s multifamily delinquency rate

dropped to 0.14 percent, down from 0.37 percent in 1998 and 0.96 percent in

1997. Multifamily delinquencies at both Enterprises benefited from solid economic conditions, including rising rents in many markets.

ADMINISTRATIVE EXPENSES

GROW LESS RAPIDLY THAN

MORTGAGES FINANCED

Each Enterprise’s administrative expenses increased in 1999. Fannie Mae’s

administrative costs rose from $0.7 billion to $0.8 billion, whereas Freddie Mac’s

increased from $0.6 billion to $0.7 billion. The ratio of administrative costs to

total revenues remained stable at Fannie Mae and declined at Freddie Mac, however. Each Enterprise’s administrative expenses also grew less rapidly than its

assets and net MBS outstanding. Administrative expenses are expected to grow

more slowly than revenues in 2000 with the elimination of expenses associated

with the Year 2000 date change.

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1992 1993 1994 1995 1996 1997 1998 1999

Freddie Mac Fannie Mae
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 55

ASSETS GROW RAPIDLY, 

BUT MORE SLOWLY THAN

IN 1998

Total assets for the Enterprises increased 19 percent to $962 billion during 1999,

compared with 38 percent in 1998 (see Figure 18). While still rapid, asset growth

slowed because the volume of single-family originations tapered off in 1999,

reducing the volume of newly originated loans and newly issued mortgage securities available for purchase. Fannie Mae’s retained mortgage portfolio rose $109

billion, a growth rate of 26 percent, compared with a 31 percent jump in 1998.

Freddie Mac’s mortgage assets rose $67 billion, also an increase of 26 percent,

down from 55 percent growth in 1998. Purchases of mortgage securities

accounted for all of the growth in each Enterprise’s mortgage investments.

Acquisitions of non-Enterprise securities accounted for two-fifths of Freddie

Mac’s purchases of mortgage securities and over one-quarter of Fannie Mae’s

(see Box 4).

Figure 18. Combined 

Enterprise Assets and Growth 

Rate

Sources: Fannie Mae, Freddie Mac, 

and OFHEO

Quarterly average non-mortgage investments declined at both Enterprises in

1999, although by very different magnitudes (see Figure 19). Fannie Mae’s quarterly average non-mortgage investments fell by over $30 billion, dropping from

$75 billion in the fourth quarter of 1998 to $45 billion in the fourth quarter of

1999, a decline of 40 percent. Freddie Mac’s quarterly average non-mortgage

investments decreased slightly, falling from just over $57 billion in the fourth

quarter of 1998 to just under $57 billion a year later. Fannie Mae’s ratio of annualaverage non-mortgage investments to annual-average earning assets was 10 percent in 1999, down from 18 percent in 1998. Freddie Mac’s ratio of annual-average non-mortgage investments to annual-average earning assets was unchanged

at 17 percent. Examples of non-mortgage investments for the Enterprises

include U.S. Treasury and agency securities, federal funds, reverse repurchase

agreements, commercial paper, municipal bonds, corporate debt, and assetbacked securities.

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1991 1992 1993 1994 1995 1996 1997 1998 1999

$ in Billions

0%

5%

10%

15%

20%

25%

30%

35%

40%

Enterprise Assets

Growth Rate
Chapter 3 - Mortgage Markets and The Enterprises In 1999

56 OFHEO 2000 Report To Congress

Box 4: The Enterprises’ Purchases of Mortgage Securities in 1999

Since 1994, Fannie Mae and Freddie Mac have increased their on-balance-sheet assets primarily by buying mortgage-backed securities (MBS) and Real Estate Mortgage Investment Conduit (REMIC) securities. When either Enterprise purchases mortgage securities that it has previously issued and guaranteed,

the net effect is to add on-balance-sheet assets and subtract off-balance-sheet contingent liabilities, for

no net effect on the Enterprise’s overall credit risk exposure. Buying mortgage securities allows the

Enterprises to increase their assets in periods when volumes of newly originated loans available for purchase are insufficient to meet their asset-growth targets.

In 1999, Fannie Mae purchased $166 billion of mortgage securities, up from $144 billion in 1998. Freddie

Mac bought $102 billion of mortgage securities, down from $128 billion. The Enterprises’ large purchase

volumes reflected the high level of mortgages securitized in the first half of the year and attractive MBSto-debt spreads. At year-end, Fannie Mae’s holdings of mortgage securities comprised 72 percent of the

Enterprise’s mortgage assets, up from 49 percent at the end of 1997. Whole loans in Fannie Mae’s

retained portfolio declined for the fifth straight year, as the Enterprise’s holdings of mortgage securities

increased more than its mortgage assets. Freddie Mac’s mortgage securities holdings comprised 83 percent of its retained portfolio, up from 70 percent at year-end 1997. Whole loans held by Freddie Mac

declined for the first time.

Fannie Mae and Freddie Mac are increasingly buying mortgage securities guaranteed by the Government National Mortgage Association (Ginnie Mae) and other government agencies or issued by private

firms. Ginnie Mae and other agency securities generally pose little or no credit risk. Private-label securities pose both mortgage and institutional credit risk, which the Enterprises limit by requiring senior/

subordinated structures and bond insurance and by monitoring the creditworthiness of bond insurers.

Fannie Mae purchased $41 billion of non-Enterprise mortgage securities last year, up slightly from $40

billion in 1998 and more than quadruple the 1997 level of $10 billion. Freddie Mac bought nearly $33 billion of such securities, up from just under $21 billion in 1998 and $4 billion in 1997. Non-Enterprise

mortgage securities accounted for 18 percent of each Enterprise’s mortgage assets at year-end, up from 8

percent at the end of 1997.

The increase in Fannie Mae’s non-Enterprise mortgage securities in 1999 accounted for 29 percent of the

growth of its retained portfolio, down from 36 percent in 1998. The rise in Freddie Mac’s holdings of such

securities represented 40 percent of the growth of its mortgage assets, more than double the 19 percent

proportion in 1998. Freddie Mac’s holdings included nearly $20 billion in securities guaranteed by Ginnie

Mae or other agencies, nearly $14 billion in securities backed by home equity loans, and nearly $8 billion

in securities backed by commercial mortgages.
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 57

Figure 19. Enterprise Average 

Non-Mortgage Investments

Sources: Fannie Mae and 

Freddie Mac

COMPOSITION OF DEBT

CHANGES AS INTEREST

RATES RISE

Rising interest rates in 1999 slowed the pace at which the Enterprises exercised

call options to retire debt securities before their stated maturities. As rates rose,

opportunities diminished to replace callable debt with cheaper new issues. Fannie Mae called $34 billion in 1999, down from $61 billion in 1998, and Freddie

Mac called $22 billion, compared to $49 billion in 1998. Roughly three-quarters

of each Enterprise’s 1999 calls occurred during the first half of the year.

Option-embedded debt remained attractive to Fannie Mae and Freddie Mac in

1999, however. The Enterprises issue such debt to reduce their exposure to losses

from falling interest rates. When rates fall, mortgage investments roll off the balance sheet and are replaced by newly purchased assets that have lower yields.

The Enterprises can offset a large portion of their losses by retiring callable debt

and issuing new, lower-cost debt (or by exercising other options that effectively

reduce the rates on outstanding debt), thereby matching the decline in their

interest income with a reduction in interest expense. Consistent with this strategy, the majority of effective long-term debt issued by the Enterprises in 1999

had call options or downward rate-adjustment features, as has been the case in

recent years. Option-embedded (mostly callable) debt comprised two-thirds of

Freddie Mac’s effective long-term debt at the end of the year, down from threequarters at year-end 1998, and remained at about 43 percent of Fannie Mae’s

effective long-term debt (see Figure 20).

$20

$40

$60

$80

$100

1Q98 2Q98 3Q98 4Q98 1Q99 2Q99 3Q99 4Q99

Fannie Mae Freddie Mac

$ in Billions
Chapter 3 - Mortgage Markets and The Enterprises In 1999

58 OFHEO 2000 Report To Congress

Figure 20. Callable Debt as 

Percentage of Total Effective 

Long-Term Debt

Sources: Fannie Mae and 

Freddie Mac

Both Enterprises increased the proportion of their debt that is effectively longterm in 1999 (see Figure 21). (Such debt includes both notes with long-term

maturities and short-term debt that has been made effectively long-term

through the acquisition of derivatives.) At the end of the year, 87 percent of Fannie Mae’s debt was effectively long-term, up from 76 percent at year-end 1998.

The proportion of Freddie Mac’s debt that is effectively long-term rose from 71

percent to 92 percent. When interest rates are rising, the average expected maturity of the Enterprises’ mortgage assets increases. Fannie Mae and Freddie Mac

respond by increasing the proportion of their debt that is effectively long-term in

order to lengthen their debt’s average maturity. 

The total combined outstanding debt of Fannie Mae and Freddie Mac reached

$908 billion at the end of 1999, an increase of 38 percent from year-end 1998. In

an effort to attract new investors to their debt and minimize their funding costs,

each Enterprise expanded its program to issue new debt according to preannounced schedules, with more standardized features. These programs mimic

some techniques used by the Treasury Department in issuing debt and are

designed to increase the predictability and liquidity of debt offerings. Fannie

Mae issued $114 billion of such “Benchmark” securities with maturities ranging

from 3 months to 30 years in 1999, compared with $42 billion with maturities

ranging from 3 years to 10 years in 1998. The volume of “Reference” securities

issued by Freddie Mac rose to $56 billion from $20 billion in 1998.

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999

Fannie Mae Freddie Mac
Financial Condition of The Enterprises

OFHEO 2000 Report To Congress 59

Figure 21. Effective Long-Term 

Debt as a Percentage of Total 

Debt

Sources: Fannie Mae and 

Freddie Mac

ENTERPRISES CONTINUE

TO MEET REGULATORY

MINIMUM CAPITAL

REQUIREMENTS

OFHEO determined that the Enterprises continued to meet their regulatory

minimum capital requirements in 1999.1

 Fannie Mae’s minimum capital requirement was $17.8 billion, and Freddie Mac’s was $12.3 billion, at year-end 1999. The

Enterprises were required to hold $4.4 billion more in core capital at year-end

1999 compared with 1998, primarily due to higher levels of assets. Core capital is

the sum of the par value of outstanding common stock, the par value of outstanding noncumulative preferred stock, and paid-in capital and retained earnings. Core capital excludes net unrealized gains or losses, net of taxes, on certain

investments reported at fair value, which are included in stockholders’ equity.

Given the Enterprises’ hedging practices for interest rate risk, such unrealized

gains or losses generally are offset by comparable changes in the value of outstanding debt. Excluding the gains or losses from core capital is required by statute and more accurately assesses an Enterprise’s capacity to absorb potential

future losses.

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999

Fannie Mae Freddie Mac

1 The minimum capital requirement is the sum of 2.5 percent of on-balance-sheet assets, 0.45 

percent of outstanding MBS and 0.45 percent of other off-balance-sheet obligations. 
Chapter 3 - Mortgage Markets and The Enterprises In 1999

60 OFHEO 2000 Report To Congress

Surplus capital, the margin by which Enterprise core capital exceeds minimum

capital, remained small at both Enterprises in 1999, particularly Fannie Mae (see

Figure 22). Fannie Mae’s surplus capital dropped to $106 million at the end of the

year from $131 million a year earlier. Freddie Mac’s surplus capital rose from $382

million in 1998 to $405 million in 1999. Freddie Mac’s surplus rose despite its

recording net unrealized losses of nearly $1.3 billion on available-for-sale securities, which reduced stockholders’ equity but not core capital. As a percentage of

required minimum capital, Fannie Mae’s surplus fell from 0.9 percent to 0.6 percent. Freddie Mac’s surplus capital fell from 3.7 percent to 3.3 percent.

Figure 22. Core Capital as a 

Percentage of Minimum Capital 

Requirement

Source: OFHEO

0%

20%

40%

60%

80%

100%

120%

4Q90* 4Q92* 4Q94 4Q96 4Q98 2Q99 4Q99

Freddie Mac Fannie Mae

* Estimated
OFHEO 2000 Report To Congress 61

4

Risk-Based Examination

Program and Regulatory

Activity

INTRODUCTION

OFHEO’s annual risk-based examination program is an integral part of a system

designed to ensure the ongoing safety and soundness of Fannie Mae and Freddie

Mac. The examination program assesses the appropriateness and effectiveness

of the Enterprises’ policies and processes for selecting and managing risks, and

assesses the companies’ financial performance. Using a risk-based approach

allows OFHEO to recognize the unique operations of each Enterprise while

applying uniform safety and soundness standards throughout the year. This

aspect of the examination program’s design ensures that OFHEO is responsive to

changes at the Enterprises while not imposing unnecessary burdens. The analysis and testing conducted during the examinations add further depth and perspective to OFHEO’s oversight of Fannie Mae and Freddie Mac. The examination

program, together with OFHEO’s capital adequacy framework, informs the

Director’s judgment about the appropriateness of the balance of risk and capital

at each Enterprise.

The 1999 Annual Risk-based Examinations found both Enterprises to be financially sound and well managed.
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

62 OFHEO 2000 Report To Congress

The process OFHEO employed in its comprehensive annual risk based examinations to reach these conclusions is briefly described below, and depicted on the

chart set forth in Figure 23. This information is provided to give context for the

summary of the examination results and conclusions for each Enterprise. The

description of the examination process corresponds to the chart in Figure 23,

beginning with the base of the chart and concluding at the top. Numeric references to the chart are included in the text that describes the examination

process. 

Figure 23. OFHEO’s Comprehensive Risk-Based Examination Program

Fannie Mae Risk Profile Freddie Mac Risk Profile

• Balance Sheet and OBS

• Strategy

• Business Initiatives

• Management of Risks

• Balance Sheet and OBS

• Strategy

• Business Initiatives

• Management of Risks

Constant changes at each Enterprise

OFHEO’s risk profile for each Enterprise

- Updated quarterly

Examination Strategies

• Strategy Tailored for Fannie Mae

• Strategy Tailored for Freddie Mac

Annual risk-based examination plan

- Reviewed and updated quarterly

Program areas for risk-based examinations

- These Remain Constant

Credit Market Operations Corporate

Governance Categories of risk and risk management

- These Remain Constant

Evaluation Criteria

Assessment Factors

Examination Objectives

Communicate

Examination Findings;

Effect Changes and

Follow up

Basis for evaluating the quantitative

- These Remain Constant

- Continuous communication and follow-up

Credit Risk

Interest Rate Risk

Liquidity Risk

Information Technology

Business Process Controls

Internal Controls

Board Governance

Management Processes

Audits

Management Information

and qualitative features of risk and

risk management

1

2

3

4

5
OFHEO’s Examination Program

OFHEO 2000 Report To Congress 63

OFHEO’S EXAMINATION PROGRAM

RISK PROFILES Through a wealth of resources (including OFHEO knowledge, external sources

and proprietary Enterprise information and data), the examination process

begins by assessing the quantity of risk and quality of risk management at each

Enterprise. OFHEO reviews each Enterprise’s risk profile at least quarterly, and

revises its views if, for example, the Enterprise has planned or undertaken substantive new business initiatives, or if the Enterprise has substantially changed

its level of risk or the manner in which it manages risks. 

EXAMINATION STRATEGIES Based upon OFHEO’s unique position to understand the Enterprises’ risk profiles, in the next step of the examination process OFHEO develops detailed

examination strategies to provide effective, efficient oversight of each Enterprise.

The annual written examination strategies are dynamic and represent a blueprint of the examination work to be conducted in the coming year. The examination strategies are reviewed and updated quarterly based on Enterprise, industry

and economic developments. In conjunction with the strategies, OFHEO creates

work plans that describe how the strategies will be achieved. The work plans outline the scope, timing, and resources needed to meet the objectives and examination activities set forth in the strategies. 

Program Areas for Risk-Based Examinations and Categories of Risk 

and Risk Management 

Once OFHEO has strategies and work plans in place, examiners implement the

strategies by performing testing and completing exam work in each of the program areas for risk-based examinations. These are the program areas that capture the areas of risk and risk management being assessed at the Enterprises,

with each program area focusing on specific sources of risk or risk management

practices and tools. Later in this Chapter, OFHEO presents overall results and

conclusions by program area for both Fannie Mae and Freddie Mac.

In order to enhance examinations and maximize expertise, OFHEO has grouped

the program areas into four categories of risk and risk management, and aligned

its examiner force expertise into five teams that correspond to the categories of

risk and risk management, and provide analytical expertise and financial

monitoring.

The ten program areas, grouped by category, are:

Credit

Credit Risk Program. The risk that borrowers and counterparties will fail to

meet their contractual or other obligations to the Enterprise

1

2

3
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

64 OFHEO 2000 Report To Congress

Market

Interest Rate Risk Program. The risk from movements in interest rates, including changes in: the level of interest rates; the shape of the yield curve; the level of

volatility; and the relationships or spreads among various yield curves or indices.

Liquidity Management Program. The exposure that could arise from the Enterprise’s inability to efficiently meet its obligations as they come due and to transact the next incremental dollar of business cost effectively.

Operations

Information Technology Program. The infrastructure, or the general controls,

needed to safeguard data, protect computer application programs, prevent system software from unauthorized access, and ensure continued computer operations in case of unexpected interruptions.

Business Process Controls Program. Assesses the process employed to ensure

business initiatives and endeavors are considered and evaluated within a complete business context with particular attention directed to risk assessment and

risk management framework.

Internal Controls Program. The plan of organization, methods and procedures

adopted by management to ensure that: goals and objectives are met; resource

use is consistent with laws, regulations and policies; resources are safeguarded

against waste, loss and misuse; and reliable data are obtained, maintained and

fairly disclosed in reports.

Corporate Governance

Audit Program. The risk that the Board or management’s reliance on internal or

external audits is misplaced.

Management Information Program. The risk that management will make decisions based on ineffective, inaccurate or incomplete information or reports.

Management Processes Program. The processes used to drive behaviors to

support the Enterprise’s defined corporate goals, standards and risk tolerances.

Board Governance Program. The manner in which the Board discharges its

duties and responsibilities.

Evaluation Criteria, Assessment Factors & Examination Objectives

OFHEO conducts examination work in each of the ten program areas by using

evaluation criteria, assessment factors and examination objectives. The examination objectives are broad in scope, the assessment factors are more narrowly

focused and the evaluative criteria are narrower still. 

4
OFHEO’s Examination Program

OFHEO 2000 Report To Congress 65

The approximately 700 evaluation criteria in the examination program detail

both qualitative and quantitative items that examiners consider when making

decisions about the assessment factors. The evaluation criteria are designed to

assist the examiners and to ensure that the examination work is consistent at

both Enterprises by creating transparency and understanding of the framework

within which examiners make judgments. 

Examiners use the information and data from the evaluation criteria to form

their expert opinions about the almost 100 assessment factors which in turn link

directly to one or more of the examination objectives for each of the program

areas. Sources for the assessment factors included industry standards and

benchmarks, best practices and examiner expertise. 

For each program area there are four or five examination objectives. These are

the broad statements of what OFHEO’s examiners will achieve through their

work in each of the ten program areas. In order to make a determination on an

examination objective, OFHEO’s examiners are required to support and opine on

each of the underlying assessment factors. By using the evaluation criteria to

reach judgments about the approximately 100 assessment factors, OFHEO

achieves its examination objectives, and reaches the examination results and

conclusions that are reported in this chapter. 

Communicate Examination Findings

Throughout the course of conducting examinations, OFHEO communicates

with Enterprise personnel not only to gather information, but also to share findings and discuss observations. OFHEO is committed to continuous, effective

communication with the Enterprises. OFHEO has the same goal for all communications; that the free flow of information furthers the objective of ensuring the

safe and sound operations of the Enterprises. Communications are tailored to

the individual structure and dynamics of the Enterprise, and the timing of the

communication depends on the situation being addressed. OFHEO keeps executive management and the Board appropriately informed and communicates

directly with them as often as required by the Enterprise’s condition and the

findings from examination activities. OFHEO brings those issues that introduce

an exposure to the stable operation of the Enterprise, otherwise fall under the

normal duties and responsibilities of the Board, or warrant the Board’s attention

to the immediate attention of the Board and executive management. Technical

issues and matters relating to a single line of business or activity are generally

brought to the attention of operating managers with the Board and executive

management kept appropriately informed.

5
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

66 OFHEO 2000 Report To Congress

Throughout the 1999 annual examination cycle, OFHEO’s examiners had ongoing dialogues with the operating management at both Enterprises about the

operations and processes covered by each of the ten examination program areas.

In these discussions, the examiners shared their views about discrete opportunities the companies had to strengthen their operations and processes, including

initiatives that if implemented, would enhance existing tools and processes and

minimize the resulting exposure to financial risk. The goal of ensuring that the

Enterprises’ operations meet or exceed financial safety and soundness standards

at any given point in time is supported by this iterative process and netted

results that found both companies to be well-managed and financially sound. 

The different communication vehicles OFHEO uses in its examination program

are highlighted on the facing page.

Effect Changes and Follow Up

A primary goal of the examination process is to influence positive changes at the

Enterprises to enhance their financial safety and soundness. The intensity of the

influence exerted by OFHEO relates directly to the risk presented by an issue. If,

for example, in the course of an examination OFHEO identifies a significant

issue in risk management systems or an undesirable risk level, OFHEO will

require management to develop and execute a corrective action plan, and will

ensure that the Board holds management accountable for executing the action

plan. OFHEO will review the action plan to ensure that it identifies the steps or

methods required to cure the root causes of significant deficiencies, and to

determine whether the plan is likely to resolve the significant issues within an

appropriate time frame. As part of follow up, OFHEO will verify that the action

plan has been executed and evaluate its success. 

OFHEO will consider the responsiveness of the Enterprise in recognizing the

issue and formulating an effective solution when determining if OFHEO needs to

take incremental action. If an Enterprise is unresponsive or unable to effect the

resolution of meaningful issues, OFHEO will take more formal steps to ensure

deficiencies are corrected.

While “effect changes and follow up” is at the top of the chart for the comprehensive annual risk-based examination process, in practice, the final step starts the

examination cycle anew. 

5
OFHEO’s Examination Program

OFHEO 2000 Report To Congress 67

Figure 24. Examination Communications Vehicles

OFHEO’s communications about examination activities are ongoing throughout

the year. As portrayed above, the communications have a common thread of the

Assessment Factors, and grow directly from strategies and workplans which

direct the examination field work. As examiners complete field work, they share

observations with Enterprise management, including the discrete opportunities

the Enterprise has to enhance its tool and processes, through worksheets. The

worksheets incorporate and document Enterprise’s feedback on the examiner’s

observations. The worksheets also identify follow up or additional examination

work which is reflected in revised strategies and workplans. At least once a year,

OFHEO prepares summary memoranda on each Assessment Factor. These

memoranda document that OFHEO has completed a full scope examination.

The Report of Examination (ROE) informs the Enterprise’s Board of Directors

about the results and conclusions from OFHEO’s risk-based examination activities, and documents OFHEO’s expectations about the level of direct involvement

by the Board of Directors in the Enterprise’s affairs. The ROE is also an official

mechanism for the examination group to document for OFHEO’s Director its

1

2

3

4

5

6

Assessment

Factors

Examination Strategies and Workplans

Exam Field Work

Worksheets

Conclusion

Memos

Report of

Examination

PUBLIC

Communication of Examination

Results and Conclusion

NON-PUBLIC

Communication of Examination

Findings, Analysis, and Input

Annual

Report to

Congress

6. Public document that includes the 

results and conclusion by program 

area of the annual risk-based 

examination.

5. Proprietary report prepared at 

least annually for, and shared with, 

the Board of Directors. Informs 

Board about results and conclusions of examination activities.

4. Proprietary OFHEO documents 

produced at least annually. The 

memos contain a comprehensive 

summary for each assessment 

factor.

3. Confidential summary of facts, 

opinions and examiner judgments. 

Relates discrete exam work to 

defined program areas and identifies assessment factors relevant to 

field work conducted

2. Confidential review of GSE intellectual capital, information, and 

documents. Includes transaction 

and process testing, evaluation of 

tools, systems, records and 

personnel.

1. Confidential documents tailored to 

business proposition and risk profile of the GSE. Covers all assessment factors. Shared with GSE to 

make examination work 

transparent.

Full Scope Exam = Opine on All Assessment Factors at Least Annually
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

68 OFHEO 2000 Report To Congress

cumulative conclusions of the Enterprise’s financial safety and soundness, quality of operations and controls, quality of risks, and quality of risk management

and risk selection. As required by law, OFHEO’s Director reports to Congress

annually on the financial safety and soundness of each Enterprise, including the

results and conclusions of the annual examinations.

1999 EXAMINATION RESULTS AND CONCLUSIONS FOR FANNIE MAE 

In accordance with OFHEO’s examination program, the results and conclusions

for each program area are reported in relation to safety and soundness standards

—whether they meet, exceed, or fail to meet safety and soundness standards.

Throughout the annual examination cycle, OFHEO’s examiners had ongoing dialogues with Fannie Mae’s operating management about the company’s operations and processes in all the program areas. In these discussions, the examiners

shared their views about discrete opportunities the company had to strengthen

its operations and processes, including initiatives that if implemented, would

enhance existing tools and processes and minimize the resulting exposure to

financial risk. The goal of ensuring that Fannie Mae’s operations meet or exceed

financial safety and soundness standards at any given point in time is supported

by this iterative process and netted favorable results. At year-end 1999, Fannie

Mae exceeded safety and soundness standards in all examination program areas.

These results reflect the examination work conducted from January through

December 1999, and do not necessarily reflect the current condition or operations of the Enterprise.

CREDIT RISK Fannie Mae’s credit risk management and credit risk management framework

exceed safety and soundness standards. The portfolio is diversified and the profile of credit risk is in compliance with the internally prescribed limits that are

deemed prudent. Policies, procedures, internal controls and management reporting for the credit function are effective. Fannie Mae is adequately compensated

for the credit risk it assumes. Management prudently manages counterparty

exposure. New products and initiatives are appropriately researched prior to

implementation. The process for determining the reserve for losses, credit risk

sharing strategies, and the credit risk management tools management uses are

effective. Fannie Mae effectively identifies, quantifies and tracks its credit risk

exposures. Management has an effective means for following up on credit related

issues. The technology and controls supporting the credit risk management

function are effective. Management effectively reconciles differences between

actual and expected credit portfolio performance.

INTEREST RATE RISK Fannie Mae’s interest rate risk management exceeds safety and soundness standards. The policies, procedures, internal controls and management reporting

relating to interest rate risk are effective. Management has a meaningful methodology for quantifying and monitoring the level and nature of interest rate risk.
1999 Examination Results and Conclusions for Fannie Mae

OFHEO 2000 Report To Congress 69

Fannie Mae’s management effectively follows up on issues related to interest rate

risk. Fannie Mae appropriately researches and controls the extent to which new

products and initiatives may impact the interest rate risk profile. The technology

and controls supporting the interest rate risk management function are effective. The tools used to model interest rate risk, and the strategies to alter the

exposures to interest rates are effective. Management effectively incorporates

tactical and strategic issues into the management of interest rate risk. The

responsibilities for strategy and analytics functions are appropriately separated

from those for the execution functions. Derivative instruments are used prudently and in accordance with the standards used by other large financial intermediaries. 

LIQUIDITY MANAGEMENT Fannie Mae’s liquidity management exceeds safety and soundness standards.

The policies, procedures, internal controls and management reporting relating to

liquidity management are effective. Management has an effective methodology

for quantifying and monitoring liquidity, and management appropriately evaluates the impact of events and alternative environments when developing contingency plans. The planning process for liquidity management is effective. Fannie

Mae appropriately considers the impact new products and initiatives may have

on liquidity. Management effectively follows up on issues and initiatives that

influence liquidity. Technology and controls for liquidity management are effective. The quality of tools Fannie Mae uses to manage and monitor liquidity, and

the quality of tools used to perform scenario analyses are effective. An appropriate separation of duties exists between the strategy and analytics functions and

the execution function. Liquidity management is appropriately integrated with

other management and with financial performance issues.

INFORMATION

TECHNOLOGY

The information technology infrastructure and surrounding risk management

framework exceed safety and soundness standards. Operating processes are in

place to ensure secure, effective and efficient data center processing and problem

management. There are effective policies and processes in place to ensure that

data, information and computing resources are secure and accessed only by

authorized users. There are effective policies and processes in place to ensure the

timely and appropriate resumption of business in the event of a disaster. Management has an adequate process to ensure information technology plans effectively address business unit and corporate objectives. Effective processes are in

place to ensure appropriate controls are implemented. Documentation for system development and maintenance is complete. Fannie Mae has implemented

effective processes to ensure data and information are processed accurately and

in a timely manner. Fannie Mae’s plan for identifying, renovating, testing and

implementing solutions for Year 2000 issues was effective. Fannie Mae effectively

coordinated its Year 2000 processing capabilities with customers, vendors and

business partners. 
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

70 OFHEO 2000 Report To Congress

INTERNAL CONTROLS Fannie Mae’s internal control framework and the management of that framework exceed safety and soundness standards. Management has an accurate and

reliable process for identifying risks to business processes and implementing

appropriate controls. Implemented controls properly address risks assessed by

management. Management has a reliable process for ensuring the timely resolution of control related issues. Internal Audit appropriately identifies and communicates control deficiencies to management and the Board of Directors. There

are established policies and procedures that delineate internal control process

and standards for the control environment. Management effectively ensures

compliance with established internal controls.

AUDIT CONTROLS The audit functions exceed safety and soundness standards. The Internal and

External Audit functions have the appropriate independence. Auditors performing the work possess appropriate professional proficiency. The scope of audit

work performed is appropriate, and the audit work is complete. The management of the Internal Audit department is effective. Executive management and

the Board of Directors are appropriately involved with and follow up on identified audit issues. The auditor’s risk assessment process is effective. Internal Audit

is appropriately involved in new products and new initiatives. 

BOARD GOVERNANCE The Board discharges its duties and responsibilities in a manner that exceeds

safety and soundness standards. The Board is appropriately engaged in the

development of a strategic direction for the company, and ensures that management appropriately defines the operating parameters and risk tolerances of the

Enterprise in a manner consistent with the strategic direction; legal standards;

and ethical standards. The Board has an effective process for hiring and maintaining a quality executive management team, and holds the executive management team accountable for achieving the defined goals and objectives. The Board

is appropriately informed of the condition, activities and operations of the Enterprise, and has sufficient, well-organized time to carry out its responsibilities.

MANAGEMENT

INFORMATION

The framework used to produce timely, accurate and reliable reports exceeds

safety and soundness standards. Management and the Board of Directors receive

necessary reports on Fannie Mae’s performance relative to established goals and

objectives. Management reporting provides the levels of management with the

necessary information to carry out their responsibilities efficiently and effectively. Management reporting permits management to gauge the quality of their

decisions. Information systems are linked to Fannie Mae’s overall strategy, and

are developed and refined pursuant to a strategic plan. The reports management

uses for decision making are reliable. Enterprise strategy, roles and responsibility

are effectively communicated. Employees have effective channels of communication to provide feedback, report suspected improprieties and suggest enhancements. Communications across the company are effective.
1999 Examination Results and Conclusions for Freddie Mac

OFHEO 2000 Report To Congress 71

MANAGEMENT PROCESS Key management processes that influence company-wide talent and behaviors

exceed safety and soundness standards. The strategic planning process is comprehensive. Business unit goals, implementation plans and programs designed to

achieve the corporate plan are effective. Management is able to monitor and

manage change. Key performance measures are appropriate, effective and align

with strategy. The behavior management programs are effectively designed to

achieve corporate goals and objectives. Fannie Mae has effective programs for

career and management development, and for recruiting competent people. Fannie Mae’s proprietary risk management programs and systems are effective.

Management effectively conveys an appropriate message of integrity and values.

Management’s philosophy and operating style have a pervasive effect on the

company. The organizational structure and the assignment of responsibility provide for accountability and controls. 

1999 EXAMINATION RESULTS AND CONCLUSIONS FOR FREDDIE MAC

In accordance with OFHEO’s examination program, the results and conclusions

for each program area are reported in relation to safety and soundness standards

—whether they meet, exceed, or fail to meet safety and soundness standards.

Throughout the annual examination cycle, OFHEO’s examiners had ongoing dialogues with Freddie Mac’s operating management about the company’s operations and processes in all the program areas. In these discussions, the examiners

shared their views about discrete opportunities the company had to strengthen

its operations and processes, including initiatives that if implemented, would

enhance existing tools and processes and minimize the resulting exposure to

financial risk. The goal of ensuring that Freddie Mac’s operations meet or exceed

financial safety and soundness standards at any given point in time is supported

by this iterative process and netted favorable results. At year-end 1999, Freddie

Mac exceeded safety and soundness standards in all examination program areas.

These results reflect the examination work conducted from January through

December 1999, and do not necessarily reflect the current condition or operations of the Enterprise.

CREDIT RISK Freddie Mac’s credit risk management and credit risk management framework

exceed safety and soundness standards. The portfolio is diversified and the profile of credit risk is in compliance with the internally prescribed limits that are

deemed prudent. Policies, procedures, internal controls and management reporting for the credit function are effective. Freddie Mac is adequately compensated

for the credit risk it assumes. Management prudently manages counterparty

exposure. New products and initiatives are appropriately researched prior to

implementation. The process for determining the reserve for credit losses, credit

risk sharing strategies, and the credit risk management tools management uses

are effective. Freddie Mac effectively identifies, quantifies and tracks its credit

risk exposures. Management has an effective means for following up on credit
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

72 OFHEO 2000 Report To Congress

related issues. The technology and controls supporting the credit risk management function are effective. Management effectively reconciles differences

between actual and expected credit portfolio performance.

INTEREST RATE RISK Freddie Mac’s interest rate risk management exceeds safety and soundness standards. The policies, procedures, internal controls and management reporting

relating to interest rate risk are effective. Management has a meaningful methodology for quantifying and monitoring the level and nature of interest rate risk.

Freddie Mac’s management effectively follows up on issues related to interest

rate risk. Freddie Mac appropriately researches and controls the extent to which

new products and initiatives may impact the interest rate risk profile. The technology and controls supporting the interest rate risk management function are

effective. The tools used to model interest rate risk, and the strategies to alter the

exposures to interest rates are effective. Management effectively incorporates

tactical and strategic issues into the management of interest rate risk. The

responsibilities for strategy and analytics functions are appropriately separated

from those for the execution functions. Derivative instruments are used prudently and in accordance with the standards used by other large financial intermediaries. 

LIQUIDITY MANAGEMENT Freddie Mac’s liquidity management framework exceeds safety and soundness

standards. The policies, procedures, internal controls and management reporting relating to liquidity management are effective. Management has an effective

methodology for quantifying and monitoring liquidity, and management appropriately evaluates the impact of events and alternative environments when

developing contingency plans. The planning process for liquidity management is

effective. Freddie Mac appropriately considers the impact new products and initiatives may have on liquidity. Management effectively follows up on issues and

initiatives that influence liquidity. Technology and controls for liquidity management are effective. The quality of tools Freddie Mac uses to manage and monitor

liquidity, and the quality of tools used to perform scenario analyses are effective.

An appropriate separation of duties exists between the strategy and analytics

functions and the execution function. Liquidity management is appropriately

integrated with other management and with financial performance issues.

INFORMATION

TECHNOLOGY

The information technology infrastructure and surrounding risk management

framework exceed safety and soundness standards. Operating processes are in

place to ensure secure, effective and efficient data center processing and problem

management. There are effective policies and processes in place to ensure that

data, information and computing resources are secure and accessed only by

authorized users. There are effective policies and processes in place to ensure the

timely and appropriate resumption of business in the event of a disaster. Management has an adequate process to ensure information technology plans effectively address business unit and corporate objectives. Effective processes are in
1999 Examination Results and Conclusions for Freddie Mac

OFHEO 2000 Report To Congress 73

place to ensure appropriate controls are implemented. Documentation for system development and maintenance is complete. Freddie Mac has implemented

effective processes to ensure data and information are processed accurately and

in a timely manner. Freddie Mac’s plan for identifying, renovating, testing and

implementing solutions for Year 2000 issues was effective. Freddie Mac effectively coordinated its Year 2000 processing capabilities with customers, vendors

and business partners. 

INTERNAL CONTROLS The internal control framework and the management of that framework exceed

safety and soundness standards. Management has an accurate and reliable process for identifying risks to business processes and implementing appropriate

controls. Implemented controls properly address risks assessed by management.

Management has a reliable process for ensuring the timely resolution of control

related issues. Internal Audit appropriately identifies and communicates control

deficiencies to management and the Board of Directors. There are established

policies and procedures that delineate internal control process and standards for

the control environment. Management effectively ensures compliance with

established internal controls.

AUDIT CONTROLS The audit functions exceed safety and soundness standards. The Internal and

External Audit functions have the appropriate independence. Auditors performing the work possess appropriate professional proficiency. The scope of audit

work performed is appropriate, and the audit work is complete. The management of the Internal Audit department is effective. Executive management and

the Board of Directors are appropriately involved with and follow up on identified audit issues. The auditor’s risk assessment process is effective. Internal Audit

is appropriately involved in new products and new initiatives. 

BOARD GOVERNANCE The Board discharges its duties and responsibilities in a manner that exceeds

safety and soundness standards. The Board is appropriately engaged in the

development of a strategic direction for the company. The Board ensures that

management appropriately defines the operating parameters and risk tolerances

of the Enterprise in a manner consistent with the strategic direction; legal standards; and ethical standards. The Board has an effective process for hiring and

maintaining a quality executive management team, and holds the executive

management team accountable for achieving the defined goals and objectives.

The Board is appropriately informed of the condition, activities and operations

of the Enterprise, and has sufficient, well-organized time to carry out its responsibilities.

MANAGEMENT

INFORMATION

The framework used to produce timely, accurate and reliable reports exceeds

safety and soundness standards. Management and the Board of Directors receive

necessary reports on Freddie Mac’s performance relative to established goals and

objectives. Management reporting provides the levels of management with the
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

74 OFHEO 2000 Report To Congress

necessary information to carry out their responsibilities efficiently and effectively. Management reporting permits management to gauge the quality of their

decisions. Information systems are linked to Freddie Mac’s overall strategy, and

are developed and refined pursuant to a strategic plan. The reports management

uses for decision making are reliable. Enterprise strategy, roles and responsibility

are effectively communicated. Employees have effective channels of communication to provide feedback, report suspected improprieties and suggest enhancements. Communications across the company are effective.

MANAGEMENT PROCESS Key management processes that influence company-wide talent and behaviors

exceed safety and soundness standards. The strategic planning process is appropriately comprehensive. Business unit goals, implementation plans and programs designed to achieve the corporate plan are effective. Management is able

to monitor and manage change. Key performance measures are appropriate,

effective and align with strategy. The behavior management programs are effectively designed to achieve corporate goals and objectives. Freddie Mac has effective programs for career and management development, and for recruiting

competent people. Freddie Mac’s proprietary risk management programs and

systems are effective. Management effectively conveys an appropriate message

of integrity and values. Management’s philosophy and operating style have a pervasive effect on the company. The organizational structure and the assignment

of responsibility provide for accountability and controls. 
Regulatory Activity

OFHEO 2000 Report To Congress 75

REGULATORY ACTIVITY

RULEMAKING On April 13, 1999, OFHEO published the second notice of proposed rulemaking

for the risk-based capital standard. During the public comment period, which

was extended until March 10, 2000, OFHEO assisted interested parties by

responding to technical questions about the proposed standard. The agency also

distributed supplementary technical information about the proposal throughout

the comment period. 

OFHEO issued two other final rules during FY 1999. One rule sets forth procedures for use by OFHEO in collecting debts owed to the Federal government,

including procedures for collection of debts through salary offset, administrative

offset, and tax refund offset. The second rule implements the Freedom of Information Act (FOIA) by setting forth the basic policies of OFHEO regarding information it maintains and procedures for obtaining access to such information.

The second rule also establishes a schedule of fees that will be charged for the

processing of document requests under FOIA and sets forth procedures with

respect to legal proceedings.

EXECUTIVE COMPENSATION

AUTHORITY AND ACTIVITIES

OFHEO’s enabling statute and the Enterprises’ Charter Acts give the Director of

OFHEO oversight responsibility in the area of executive compensation. OFHEO’s

statute requires the Director to prohibit the Enterprises from providing excessive

compensation to any executive officer. Specifically, the statute provides that

compensation must be reasonable and comparable with compensation paid by

other similar businesses to executives having similar duties and responsibilities.

“Similar businesses” include publicly held financial institutions or major financial services companies.

Additionally, the Enterprises’ Charter Acts require the Enterprises to obtain the

prior approval of OFHEO’s Director before entering into or changing termination

agreements with their executive officers. The Charter Acts provide that the

Director of OFHEO may not approve any such agreement unless the Director

determines that the benefits provided under the agreements are comparable to

benefits provided under such agreements for officers of other public and private

entities involved in financial services and housing interests who have comparable duties and responsibilities.

During 1999, OFHEO approved four termination agreements submitted by the

Enterprises. 
Chapter 4 - Risk-Based Examination Program and Regulatory Activity

76 OFHEO 2000 Report To Congress

FLOOD INSURANCE

COMPLIANCE ACTIVITIES

Background

Federal legislation requires the Enterprises to implement procedures designed to

ensure that adequate flood insurance is placed over the term of loans that the

Enterprises purchased after September 28, 1995, and that are secured by properties located in certain designated flood hazard areas. OFHEO is responsible for

assessing whether the Enterprises have adopted, and are adhering to, such procedures and is also responsible for including that assessment in our annual

reports to Congress for 1996, 1998 and 2000. 

In its 1996 Annual Report, OFHEO reported that in 1995 Freddie Mac had established adequate flood insurance policies and procedures and was complying with

them. OFHEO further reported that Freddie Mac had established appropriate

internal controls to provide reasonable assurance of compliance with applicable

flood insurance requirements and had adopted quality control procedures that

would allow the Enterprise to verify sufficient flood insurance coverage on applicable loans.

OFHEO’s 1996 Annual Report also reported that Fannie Mae had established an

appropriate flood insurance compliance framework and adequate procedures to

ensure the Enterprise’s compliance with the applicable flood insurance requirements. OFHEO further reported that the Enterprise was developing internal

controls to ensure adequate flood insurance is in place on applicable loans, and

that OFHEO would monitor the Enterprise’s implementation of the compliance

program.

In its 1998 Annual Report, OFHEO reported that in 1997 it had again reviewed

the flood insurance procedures and controls at each Enterprise. The reviews

included on-site evaluations of applicable procedures and meetings with responsible management. The reviews also included the evaluation of each Enterprise’s

efforts to test and validate the internal controls established to ensure compliance with applicable statutory requirements. OFHEO reported its conclusion

that both Enterprises had implemented, and was adhering to, adequate flood

insurance procedures.

Results of Flood Insurance Review

In 1999, OFHEO once again reviewed the flood insurance procedures and controls at both Fannie Mae and Freddie Mac. The reviews were similar in nature

and scope to the reviews conducted in 1997. The reviews included on-site evaluations of procedures, assessments of responsible management, and evaluations

of internal controls. Based on the reviews, OFHEO concluded that each Enterprise has implemented, and is adhering to, adequate flood insurance procedures. 
OFHEO 2000 Report To Congress 77

5

Financing OFHEO’s Operations

OFHEO’S BUDGET

OFHEO’s operations are not financed by taxpayer funds. OFHEO’s annual operating budget is, however, subject to the Federal appropriations process and is

based on the amount appropriated by Congress and signed into law by the President. The amounts provided for by the appropriations process are collected from

Fannie Mae and Freddie Mac in the form of an annual assessment paid semiannually.

OFHEO has asked the Administration and Congress to review the law that

requires OFHEO to be subject to the appropriations process. OFHEO believes

that the lengthy appropriations process may not allow the flexibility necessary to

address evolving, dynamic issues before those issues impact the financial safety

and soundness of the Enterprises or funding for the housing market. OFHEO is

requesting that it be removed from the appropriations process, and is seeking the

authority to operate like most other financial regulators, such as the Office of the

Comptroller of the Currency and the Office of Thrift Supervision. OFHEO’s operations would remain subject to the oversight of Congress, but its budget would

be free from the appropriations process.

For fiscal year 1999, OFHEO’s budgetary resources totaled $16,287,000. Budgetary resources represent $16 million appropriated to OFHEO for fiscal 1999 plus a
Chapter 5 - Financing OFHEO’s Operations

78 OFHEO 2000 Report To Congress

recovery of prior year funds of $287,000. The amount appropriated by Congress

was less than OFHEO’s request of $16,551,000. The fiscal year 1999 operating

budget supported drafting of the notice of proposed rulemaking for the riskbased capital regulation for Fannie Mae and Freddie Mac, conducting comprehensive annual risk-based examinations of Fannie Mae and Freddie Mac, reviewing capital for each Enterprise quarterly and classifying the Enterprises as

adequately capitalized, and performing other safety and soundness related regulatory activities. 

For fiscal year 2000, OFHEO received an appropriation of $19,493,000. The fiscal

year 2000 budget will support the analysis of public comments on the proposed

risk-based capital regulation, continuation of comprehensive annual risk-based

examinations and quarterly classification of capital for Fannie Mae and Freddie

Mac, and completion of the other goals and objectives identified in OFHEO’s fiscal year 2000 Performance Plan (available on OFHEO’s website at

www.ofheo.gov).

For fiscal year 2001, OFHEO requested a budget of $26,770,000. The increase in

requested resources will bolster OFHEO’s regulatory infrastructure, strengthen

OFHEO’s capability to perform qualitative and quantitative assessments of risk,

and respond to the rapid growth and increasing complexity of the Enterprises’

operations. To accomplish these objectives, OFHEO’s fiscal year 2001 budget provides the necessary depth and expertise to accomplish the Office’s regulatory

mission by supporting 124 full-time equivalent work years. OFHEO’s fiscal year

2001 budget will allow the Office to:

❏ Enhance the examination and oversight function;

❏ Strengthen economic, finance, policy analysis and systems development

capacity;

❏ Ensure that there is no over-reliance on any single risk measure or quantitative tool by the Enterprises;

❏ Enhance the management, and maximize the value, of OFHEO’s information

technology investments; and

❏ Modernize financial and administrative support systems.

UNQUALIFIED AUDIT OPINION OF FY 1999 FINANCIAL STATEMENTS

In conjunction with the government’s goal of improved accountability, OFHEO

voluntarily prepared financial statements for fiscal year 1999 and subjected

these statements and underlying processes to independent audit. The certified

public accounting firm of Dembo, Jones, Healy, Pennington and Ahalt audited

the statements. The firm issued an unqualified audit opinion on OFHEO’s fiscal

year 1999 Financial Statements. Following is a copy of the audit opinion and the

associated principal financial statements and notes.
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 79
Chapter 5 - Financing OFHEO’s Operations

80 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 81
Chapter 5 - Financing OFHEO’s Operations

82 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 83
Chapter 5 - Financing OFHEO’s Operations

84 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 85
Chapter 5 - Financing OFHEO’s Operations

86 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 87
Chapter 5 - Financing OFHEO’s Operations

88 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 89
Chapter 5 - Financing OFHEO’s Operations

90 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 91
Chapter 5 - Financing OFHEO’s Operations

92 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 93
Chapter 5 - Financing OFHEO’s Operations

94 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 95
Chapter 5 - Financing OFHEO’s Operations

96 OFHEO 2000 Report To Congress
Unqualified Audit Opinion of FY 1999 Financial Statements

OFHEO 2000 Report To Congress 97
Chapter 5 - Financing OFHEO’s Operations

98 OFHEO 2000 Report To Congress
OFHEO 2000 Report To Congress 99

Historical Data Tables

Table 1. Fannie Mae Mortgage Purchases. . . . . . . . . . . . . . . . . 100

Table 2. Fannie Mae MBS Issuances . . . . . . . . . . . . . . . . . . . . . 101

Table 3. Fannie Mae Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Table 4. Fannie Mae Balance Sheet . . . . . . . . . . . . . . . . . . . . . . 103

Table 5. Fannie Mae Retained Mortgage Portfolio . . . . . . . . . . . 104

Table 6. Fannie Mae Financial Derivatives . . . . . . . . . . . . . . . . . 105

Table 7. Fannie Mae Non-Mortgage Investments . . . . . . . . . . . 106

Table 8. Fannie Mae Asset - Liability Mix. . . . . . . . . . . . . . . . . . 107

Table 9. Fannie Mae Mortgage Asset Quality. . . . . . . . . . . . . . . 108

Table 10. Fannie Mae Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109

Table 11. Freddie Mac Mortgage Purchases . . . . . . . . . . . . . . . . 110

Table 12. Freddie Mac MBS Issuances . . . . . . . . . . . . . . . . . . . . 111

Table 13. Freddie Mac Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 112

Table 14. Freddie Mac Balance Sheet . . . . . . . . . . . . . . . . . . . . . 113

Table 15. Freddie Mac Retained Mortgage Portfolio . . . . . . . . . . 114

Table 16. Freddie Mac Financial Derivatives . . . . . . . . . . . . . . . . 115

Table 17. Freddie Mac Non-Mortgage Investments. . . . . . . . . . . 116

Table 18. Freddie Mac Asset-Liability Mix . . . . . . . . . . . . . . . . . . 117

Table 19. Freddie Mac Mortgage Asset Quality . . . . . . . . . . . . . . 118

Table 20. Freddie Mac Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Table 21. Aggregate Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . 120

Table 22. Aggregate MBS Issuances . . . . . . . . . . . . . . . . . . . . . . 121

Table 23. Aggregate Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 122

Table 24. Aggregate Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 123

Table 25. Aggregate Retained Mortgage Portfolio . . . . . . . . . . . . 124

Table 26. Aggregate Financial Derivatives . . . . . . . . . . . . . . . . . . 125

Table 27. Aggregate Non-Mortgage Investments . . . . . . . . . . . . 126

Table 28. Aggregate Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127

Table 29. Loan Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Table 30. Mortgage Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . 129

Table 31. Housing Market Activity . . . . . . . . . . . . . . . . . . . . . . . . 130

Table 32. Weighted Repeat Sales House Price Index . . . . . . . . . 131
Historical Data Tables

100 OFHEO 2000 Report To Congress

Table 1. Fannie Mae Mortgage Purchases

Business Activity ($ in Millions)

 Period 

 Purchases 

 Single-Family

($) 

 Multifamily 

($) 

 Total 1

($) 

1 Cash purchases from lenders plus lender-originated securitizations; excludes non-Fannie Mae securities and repurchased Fannie Mae MBS.

 Mortgage Securities2

($) 

2 Not included in total purchases.

4q99 52,105 1,903 54,008 31,706

3q99 68,632 2,479 71,111 44,188

2q99 82,789 2,769 85,558 47,963

1q99 112,610 2,861 115,471 42,574

Annual Data

1999 316,136 10,012 326,148 166,431

1998 354,920 11,428 366,348 144,461 

1997 159,921 6,534 166,455 48,848 

1996 164,456 6,451 170,907 45,016 

1995 126,003 4,966 130,969 34,036 

1994 158,229 3,939 162,068 24,552 

1993 289,826 4,135 293,961 6,275 

1992 248,210 2,852 251,062 4,930 

1991 133,551 3,204 136,755 2,384 

1990 111,007 3,180 114,187 977 

1989 80,510 4,325 84,835 Not 

Applicable 

Before 1990 1988 64,613 4,170 68,783 

1987 73,942 1,733 75,675

1986 77,223 1,877 79,100 

1985 42,543 1,200 43,743 

1984 27,713 1,106 28,819 

1983 26,339 140 26,479

1982 25,929 10 25,939

1981 6,827 2 6,829 

1980 8,074 27 8,101 

1979 10,798 9 10,807 

1978 12,302 3 12,305 

1977 4,650 134 4,784 

1976 3,337 295 3,632 

1975 3,646 674 4,320 

1974 4,746 2,273 7,019 

1973 4,170 2,082 6,252 

1972 2,596 1,268 3,864 

1971 2,742 1,298 4,040 

Source: Fannie Mae
Historical Data Tables

OFHEO 2000 Report To Congress 101

Table 2. Fannie Mae MBS Issuances

Business Activity ($ in Millions)

 Period 

MBS Issuances

 Single-Family MBS

($) 

 Multifamily MBS

($)

 Total MBS

($) 

Multiclass MBS1

($)

1 The majority qualify as Real Estate Mortgage Investment Conduits (REMICs) and are also known as structured securitizations.

4q99 48,395 1,517 49,912 7,797

3q99 63,851 1,922 65,773 12,588

2q99 76,194 2,359 78,553 18,652

1q99 103,752 2,699 106,451 16,123

Annual Data

1999 292,192 8,497 300,689 55,160

1998 315,120 11,028 326,148 84,147 

1997 143,615 5,814 149,429 85,415 

1996 144,201 5,668 149,869 30,780 

1995 106,269 4,187 110,456 9,681 

1994 128,385 2,237 130,622 73,365 

1993 220,485 959 221,444 210,630 

1992 193,187 850 194,037 170,205 

1991 111,488 1,415 112,903 112,808 

1990 96,006 689 96,695 68,291 

1989 66,489 3,275 69,764 41,715 

1988 51,120 3,758 54,878 17,005 

1987 62,067 1,162 63,229 9,917 

1986 60,017 549 60,566 2,400 

1985 23,142 507 23,649 Not Issued 

Before 1986 1984 13,087 459 13,546 

1983 13,214 126 13,340 

1982 13,970 Not Issued 

Before 1983

13,970 

1981 717 717 

Not Issued 

Before 1981

Not Issued 

Before 1981

Source: Fannie Mae
Historical Data Tables

102 OFHEO 2000 Report To Congress

Table 3. Fannie Mae Earnings 

Earnings ($ in Millions)

Period

Net 

Interest 

Income1

($)

1 Interest income net of interest expense, nominal basis.

Guarantee 

Fee Income 

($)

Average 

Guarantee 

Fee Rate 

(basis points)

Administrative 

Expenses 

($) 

Creditrelated 

Expenses2

 ($)

2 Credit-related expenses are mortgage loan loss provision plus real estate owned expense.

Net 

Income 

($) 

Return on 

Common 

Equity3

(%)

3 Average common equity used to calculate return.

4q99 1,306 325 19.3 206 19 1,038 25.5

3q99 1,241 320 19.2 203 21 991 25.2

2q99 1,188 320 19.4 199 40 958 24.9

1q99 1,159 317 19.4 192 47 925 24.8

Annual Data

1999 4,894 1,282 19.3 800 127 3,912 25.2

1998 4,110 1,229 20.2 708 261 3,418 25.2 

1997 3,949 1,274 22.7 636 375 3,056 24.6 

1996 3,592 1,196 22.4 560 409 2,725 24.1 

1995 3,047 1,086 22.0 546 335 2,144 20.9 

1994 2,823 1,083 22.5 525 378 2,132 24.3 

1993 2,533 961 21.3 443 305 1,873 25.3 

1992 2,058 834 21.2 381 320 1,623 26.5 

1991 1,778 675 21.0 319 370 1,363 27.7 

1990 1,593 536 21.1 286 310 1,173 33.7 

1989 1,191 408 21.3 254 310 807 31.1 

1988 837 328 21.6 218 365 507 25.2 

1987 890 263 22.1 197 360 376 23.5 

1986 384 175 23.8 175 306 105 9.5 

1985 139 112 25.6 142 206 (7) (0.7)

1984 (90) 78 26.2 112 86 (71) (7.4)

1983 (9) 54 26.3 81 48 49 5.1 

1982 (464) 16 27.2 60 36 (192) (18.9)

1981 (429) 0.3 25.0 49 (28) (206) (17.2)

1980 21 Not

Applicable 

Before 1981

Not

Applicable 

Before 1981

44 19 14 0.9 

1979 322 46 35 162 11.3 

1978 294 39 36 209 16.5 

1977 251 32 28 165 15.3 

1976 203 30 25 127 13.8 

1975 174 27 16 115 14.1 

1974 142 23 17 107 14.7 

1973 180 18 12 126 20.3 

1972 138 13 5 96 18.8 

1971 49 15 4 61 14.4 

Source: Fannie Mae
Historical Data Tables

OFHEO 2000 Report To Congress 103

Table 4. Fannie Mae Balance Sheet

Balance Sheet ($ in Millions)

Mortgage Backed Securities 

Outstanding 

($ in Millions)

Period

Total 

Assets

 ($)

Retained 

Mortgage 

Portfolio 

($) 1

1 Gross retained portfolio net of unamortized purchase premium, discounts and deferred price adjustments.

NonMortgage 

Investments2

 ($) 

2 Prior to 1982 balances primarily composed of U.S. government and agency securities.

Debt 

Outstanding 

($) 

 Stockholder’s 

Equity 

($)

Total MBS 

Outstanding3

($)

3 Total MBS outstanding net of MBS in portfolio.

Multiclass 

MBS 

Outstanding4

($)

4 The majority qualify as REMICs and are also known as structured securitizations. 

4q99 575,167 522,977 39,751 547,619 17,629 679,169 335,514

3q99 551,532 504,497 36,407 524,879 17,055 670,157 338,626

2q99 526,263 473,652 42,304 499,897 16,581 661,619 342,572

1q99 501,058 440,924 49,916 475,418 16,134 660,102 346,461

Annual Data

1999 575,167 522,977 39,751 547,619 17,629 679,169 335,514

1998 485,014 415,434 58,515 460,291 15,453 637,143 361,613 

1997 391,673 316,592 64,596 369,774 13,793 579,138 388,360 

1996 351,041 286,527 56,606 331,270 12,773 548,173 339,798 

1995 316,550 252,868 57,273 299,174 10,959 513,230 353,528 

1994 272,508 220,815 46,335 257,230 9,541 486,345 378,733 

1993 216,979 190,169 21,396 201,112 8,052 471,306 381,865 

1992 180,978 156,260 19,574 166,300 6,774 424,444 312,369 

1991 147,072 126,679 9,836 133,937 5,547 355,284 224,806 

1990 133,113 114,066 9,868 123,403 3,941 288,075 127,278 

1989 124,315 107,981 8,338 116,064 2,991 216,512 64,826 

1988 112,258 100,099 5,289 105,459 2,260 170,097 26,660 

1987 103,459 93,665 3,468 97,057 1,811 135,734 11,359 

1986 99,621 94,123 1,775 93,563 1,182 95,568 Not 

Available Before 

1987 1985 99,076 94,609 1,466 93,985 1,009 54,552 

1984 87,798 84,135 1,840 83,719 918 35,738 

1983 78,383 75,247 1,689 74,594 1,000 25,121 

1982 72,981 69,356 2,430 69,614 953 14,450 

1981 61,578 59,629 1,047 58,551 1,080 717 

1980 57,879 55,589 1,556 54,880 1,457 Not Issued 

Before 1981 1979 51,300 49,777 843 48,424 1,501 

1978 43,506 42,103 834 40,985 1,362 

1977 33,980 33,252 318 31,890 1,173 

1976 32,393 31,775 245 30,565 983 

1975 31,596 30,820 239 29,963 861 

1974 29,671 28,666 466 28,168 772 

1973 24,318 23,589 227 23,003 680 

1972 20,346 19,652 268 19,239 559 

1971 18,591 17,886 349 17,672 460 

Source: Fannie Mae
Historical Data Tables

104 OFHEO 2000 Report To Congress

Table 5. Fannie Mae Retained Mortgage Portfolio Detail

($ in Millions)

Period

Whole Loans

($)

Fannie Mae Securities

($) 

Other Mortgage-Related 

Securities

($)

Total Retained Mortgage 

Portfolio

($)

4q99 149,105 281,714 93,122 523,941

3q99 150,984 268,327 85,627 504,938

2q99 152,897 249,816 70,602 473,315

1q99 154,973 221,713 63,453 440,139

Annual Data

1999 149,105 281,714 93,122 523,941

1998 155,779 197,375 61,361 414,515

1997 160,102 130,444 26,132 316,678

1996 167,891 102,607 16,554 287,052

1995 171,481 69,729 12,301 253,511

1994 173,909 43,998 7,150 225,057

1993 163,149 24,219 3,493 190,861

1992 134,597 20,535 2,987 158,119

1991 109,251 16,700 3,032 128,983

1990 101,797 11,758 3,073 116,628

1989 95,729 11,720 3,272 110,721

1988 92,220 8,153 2,640 103,013

1987 89,618 4,226 2,902 96,746

1986 94,167 1,606 2,060 97,833

1985 97,421 435 793 98,649

1984 87,205 477 427 88,109

1983 77,983 273 78,256

1982 71,777 37 71,814

1981 61,411 1 61,412

1980 57,326 1 57,327

1979 51,096 1 51,097

1978 43,315 43,315

1977 34,377 34,377

1976 32,937 32,937

1975 31,916 31,916

1974 29,708 29,708

1973 24,459 24,459

1972 20,326 20,326

1971 18,515 18,515

Source: Fannie Mae
Historical Data Tables

OFHEO 2000 Report To Congress 105

Table 6. Fannie Mae Financial Derivatives

Financial Derivatives ($ in Millions)

Period

 Interest Rate 

Swaps

($)

 Interest Rate 

Caps Floors 

Corridors

($)

 Foreign 

Currency

($)

Futures & 

Options and 

Forward Rate 

Agreements

($)

Short Sales and 

Other 

($)

 Total 

($)

4q99 192,032 28,950 11,507 41,081 1,400 274,970

3q99 176,493 26,000 12,255 19,712 500 234,981

2q99 149,888 25,750 12,914 18,915 3,885 211,351

1q99 147,425 25,000 12,997 18,875 3,565 207,863

Annual Data

1999 192,032 28,950 11,507 41,081 1,400 274,970

1998 142,846 14,500 12,995 13,481 3,735 187,557 

1997 149,673 100 9,968 0 1,660 161,401 

1996 158,140 300 2,429 0 350 161,219 

1995 125,679 300 1,224 29 975 128,207 

1994 87,470 360 1,023 0 1,465 90,317 

1993 49,458 360 1,023 0 1,425 52,265 

1992 24,130 0 1,177 0 1,350 26,658 

1991 9,100 0 Not

Available Before 

1992

50 1,050 10,200 

1990 4,800 0 25 1,700 6,525 

Source: Fannie Mae
Historical Data Tables

106 OFHEO 2000 Report To Congress

Table 7. Fannie Mae Non-Mortgage Investments

 Non-Mortgage Investments ($ in Millions)

Period

 Federal Funds 

and Eurodollars 

($)

 Asset Backed 

Securities 

($)

 Repurchase 

Agreements 

($) 

Commercial 

Paper and 

Corporate Debt 

($)

 Other 

($)

 Total1

($)

1 Prior to 1982, the majority of non-mortgage investments were comprised of U.S. government securities and agency securities.

4q99 4,837 19,207 2,574 1,723 11,410 39,751

3q99 1,112 18,911 2,299 895 13,190 36,407

2q99 3,683 18,912 3,306 1,910 14,493 42,304

1q99 6,750 19,930 4,653 2,943 15,640 49,916

Annual Data

1999 4,837 19,207 2,574 1,723 11,410 39,751

1998 7,928 20,993 7,556 5,155 16,885 58,515 

1997 19,212 16,639 6,715 11,745 10,285 64,596 

1996 21,734 14,635 4,667 6,191 9,379 56,606 

1995 19,775 9,905 10,175 8,629 8,789 57,273 

1994 17,593 3,796 9,006 7,719 8,221 46,335 

1993 4,496 3,557 4,684 0 8,659 21,396 

1992 6,587 4,124 3,189 0 5,674 19,574 

1991 2,954 2,416 2,195 0 2,271 9,836 

1990 5,329 1,780 951 0 1,808 9,868 

1989 5,158 1,107 0 0 2,073 8,338 

1988 4,125 481 0 0 683 5,289 

1987 2,559 25 0 0 884 3,468 

1986 1,530 0 0 0 245 1,775 

1985 1,391 0 0 0 75 1,466 

1984 1,575 0 0 0 265 1,840 

1983 1,462 0 0 0 227 1,689 

1982 1,799 0 0 0 631 2,430 

1981 Not 

Available 

 Before 1982 

 Not 

Available 

 Before 1982 

 Not 

Available 

 Before 1982 

 Not 

Available 

 Before 1982 

 Not 

Available 

 Before 1982 

1,047 

1980 1,556 

1979 843 

1978 834 

1977 318 

1976 245 

1975 239 

1974 466 

1973 227 

1972 268 

1971 349 

Source: Fannie Mae
Historical Data Tables

OFHEO 2000 Report To Congress 107

Table 8. Fannie Mae Asset - Liability Mix

Asset - Liability Ratios 

Asset Mix Liability Mix

Period

Retained Portfolio / 

Total Assets 

(%)

Non-mortgage 

Investments/ Total Assets 

(%)

Callable Debt / Total 

Effective Long-Term 

Debt1

(%)

1 Callable debt includes derivative financial instruments that provide interest-rate protection similar to callable debt.

Total Effective Long-Term 

Debt / Total Debt2

 (%)

2 Total effective long-term debt represents debt with an effective repricing date greater than one year.

4q99 90.9 6.9 43.4 87.1

3q99 91.5 6.6 44.4 86.0

2q99 90.0 8.0 46.3 84.9

1q99 88.0 10.0 46.1 82.3

Annual Data

1999 90.9 6.9 43.4 87.1

1998 85.7 12.1 42.9 76.4

1997 80.8 16.5 46.4 79.4

1996 81.6 16.1 47.5 80.5

1995 79.9 18.1 48.0 73.9

1994 81.0 17.0 54.6 72.6

1993 87.6 9.9 58.1 80.0

1992 86.3 10.8 48.8 77.9

1991 86.1 6.7 36.0 85.5

1990 85.7 7.4 21.9 82.6

1989 86.9 6.9 10.1 80.1

1988 89.2 4.7 3.6 78.7

1987 90.5 3.4 Not 

Available 

Before 1988

 Not 

Available 

Before 1988 1986 94.5 1.8

1985 95.5 1.5

1984 95.8 2.1

1983 96.0 2.2

1982 95.0 3.3

1981 96.8 1.7

1980 96.0 2.7

1979 97.0 1.6

1978 96.8 1.9

1977 97.9 0.9

1976 98.1 0.8

1975 97.5 0.8

1974 96.6 1.6

1973 97.0 1.0

1972 96.6 1.3

1971 96.2 1.8

Source: Fannie Mae
Historical Data Tables

108 OFHEO 2000 Report To Congress

Table 9. Fannie Mae Mortgage Asset Quality

Mortgage Asset Quality 

Period

Single-Family 

Delinquency 

Rate1

(%)

1 Includes conventional loans for which Fannie Mae has primary risk of loss that are 90 or more days delinquent or are in the process of foreclosure. 

Data prior to 1992 includes loans in relief or bankruptcy, even if they are less than 90 days delinquent.

Multifamily 

Delinquency 

Rate2

(%)

2 Includes loans that are two or more months delinquent based on the dollar amount of such loans in the portfolio and underlying MBS.

Credit Losses /

Total MBS 

Outstanding plus 

Retained Portfolio3

(%)

3 Credit losses are charge-offs plus real estate owned expense; average balances used to calculate ratios subsequent to 1994; quarterly data are 

annualized.

REO /Total MBS 

Outstanding plus 

Retained Portfolio4

(%)

4 Real Estate Owned balances reflect end-of-period amounts. Beginning with 1995, data reflect adoption of SFAS 114.

Credit-Enhanced 

Outstanding /Total 

MBS Outstanding 

plus Retained 

Portfolio5

(%)

5 The proportion of the retained portfolio that has additional recourse from a third party to accept some or all of the expected losses on defaulted 

mortgages.

4q99 0.48 0.12 0.01 0.06 20.9

3q99 0.49 0.12 0.01 0.07 20.4

2q99 0.49 0.19 0.01 0.07 19.5

1q99 0.55 0.21 0.02 0.08 18.4

Annual Data

1999 0.48 0.12 0.01 0.06 20.9

1998 0.58 0.29 0.03 0.08 17.5

1997 0.62 0.37 0.04 0.10 12.8

1996 0.58 0.68 0.05 0.11 10.5

1995 0.56 0.81 0.05 0.08 10.6

1994 0.47 1.21 0.06 0.10 10.2

1993 0.48 2.34 0.04 0.10 10.6

1992 0.53 2.65 0.04 0.09 15.6

1991 0.64 3.62 0.04 0.07 22.0

1990 0.58 1.70 0.06 0.09 25.9

1989 0.69 3.20 0.07 0.14 Not 

Available

 Before 1990 1988 0.88 6.60 0.11 0.15 

1987 1.12 Not Available

 Before 1988

0.11 0.18 

1986 1.38 0.12 0.22 

1985 1.48 0.13 0.32 

1984 1.65 0.09 0.33 

1983 1.49 0.05 0.35 

1982 1.41 0.01 0.20 

1981 0.96 0.01 0.13 

1980 0.90 0.01 0.09 

1979 0.56 0.02 0.11 

1978 0.55 0.02 0.18 

1977 0.46 0.02 0.26 

1976 1.58 0.03 0.27 

1975 0.56 0.03 0.51 

1974 0.51 0.02 0.52 

1973 Not 

Available 

Before 1974

0.00 0.61 

1972 0.02 0.98 

1971 0.01 0.59 

Source: Fannie Mae
Historical Data Tables

OFHEO 2000 Report To Congress 109

Table 10. Fannie Mae Capital

Capital ($ in Millions)

Period

Stockholders’ 

Equity /Total 

MBS 

Outstanding 

plus Total 

Assets 

(%)

Stockholders’ 

Equity plus 

Reserves /

Total MBS 

Outstanding 

plus Total 

Assets1

(%)

1 Effective 1995, reserves exclude specific allowances for impaired loans pursuant to SFAS 114.

Core 

Capital2

($)

2 The sum of: (Outstanding Common Stock, Noncumulative preferred stock, paid-in capital and retained earnings).

Minimum 

Regulatory 

Capital 

Requirements3

($)

3 Minimum capital requirement in accordance with the Federal Housing Enterprise Financial Safety and Soundness Act of 1992.

Regulatory 

Capital 

Surplus 

(Deficit)4

($)

4 The difference between Core Capital and Minimum Regulatory Capital Requirement.

Market 

Capitalization5

($)

5 Stock price multiplied by number of outstanding common shares.

Common 

Share 

Dividend 

Payout 

Rate6

(%)

6 Common dividends paid as a percentage of net income available to common shareholders.

4q99 1.41 1.47 17,876 17,770 106 63,651 27.0 

3q99 1.40 1.46 17,222 17,100 122 63,982 28.5 

2q99 1.40 1.46 16,690 16,465 225 69,825 29.5 

1q99 1.39 1.46 16,153 15,837 316 71,109 30.6 

Annual Data

1999 1.41 1.47 17,876 17,770 106 63,651 28.8

1998 1.38 1.45 15,465 15,334 131 75,881 29.5

1997 1.42 1.50 13,793 12,703 1,090 59,167 29.4 

1996 1.42 1.50 12,773 11,466 1,307 39,932 30.4 

1995 1.32 1.41 10,959 10,451 508 33,812 34.6 

1994 1.26 1.37 9,541 9,415 126 19,882 30.8 

1993 1.17 1.29 8,052 7,064 988 21,387 26.8

1992 1.12 1.25 Not

Applicable 

Before 1993

Not

Applicable 

Before 1993 

Not

Applicable 

Before 1993

20,874 23.2

1991 1.10 1.24 18,836 21.3

1990 0.94 1.06 8,490 14.7 

1989 0.88 1.01 8,092 12.8 

1988 0.80 0.94 3,992 11.2 

1987 0.76 0.90 2,401 11.7 

1986 0.61 0.74 3,006 8.0

1985 0.66 0.76 1,904 30.1

1984 0.74 0.85 1,012 N/A

1983 0.97 1.10 1,514 13.9

1982 1.09 1.25 1,603 N/A

1981 1.73 1.90 502 N/A

1980 2.49 2.73 702 464.2

1979 2.93 3.17 Not 

Available Before 

1980

45.7 

1978 3.13 3.36 30.3

1977 3.45 3.66 31.8 

1976 3.03 3.19 33.6

1975 2.73 2.84 31.8

1974 2.60 2.69 29.6 

1973 2.80 2.87 18.1

1972 2.75 2.78 15.2

1971 2.47 2.49 18.7 

Source: Fannie Mae
Historical Data Tables

110 OFHEO 2000 Report To Congress

Table 11. Freddie Mac Mortgage Purchases

Business Activity ($ Millions)

Purchases

Period

 Single-Family

($)

 Multifamily

($)

Total 1

($)

1 Loans purchased from Lenders; excludes non-Freddie Mac securities and repurchased Freddie Mac MBS.

 Mortgage Securities2

($)

2 Not included in total purchases.

4q99 32,341 2,186 34,527 12,963

3q99 50,000 1,514 51,514 23,261

2q99 68,848 2,078 70,926 31,359

1q99 81,423 1,403 82,826 34,315

Annual Data

1999 232,612 7,181 239,793 101,898

1998 263,490 3,910 267,400 128,446 

1997 115,160 2,241 117,401 35,385 

1996 122,850 2,229 125,079 36,824 

1995 89,971 1,565 91,536 39,292 

1994 122,563 847 123,410 19,817 

1993 229,051 191 229,242 Not 

Available 

Before 1994 1992 191,099 27 191,126 

1991 99,729 236 99,965 

1990 74,180 1,338 75,518 

1989 76,765 1,824 78,589 

1988 42,884 1,191 44,075 

1987 74,824 2,016 76,840 

1986 99,936 3,538 103,474 

1985 42,110 1,902 44,012 

1984 Not 

Available 

Before 1985

Not 

Available 

Before 1985

21,885 

1983 22,952 

1982 23,671 

1981 3,744 

1980 3,690 

1979 5,716 

1978 6,524 

1977 4,124 

1976 1,129 

1975 1,716 

1974 2,185 

1973 1,334 

1972 1,265 

1971 778 

Source: Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 111

Table 12. Freddie Mac MBS Issuances

Business Activity ($ in Millions)

MBS Issuances

Period

 Single Family MBS

($)

 Multifamily MBS

($)

Total MBS

($)

 Multiclass MBS1

($)

1 The majority qualify as Real Estate Mortgage Investment Conduits (REMICs), and are also known as structured securitizations. 

In years 1983 - 1986, data consists of collateralized mortgage obligations (CMOs) and mortgage cash flow obligations (MCFs). 

4q99 31,129 1,260 32,389 15,748

3q99 48,115 341 48,456 18,635

2q99 67,350 435 67,785 28,617

1q99 84,392 9 84,401 56,565

Annual Data

1999 230,986 2,045 233,031 119,565

1998 249,627 937 250,564 135,162 

1997 113,758 500 114,258 84,366 

1996 118,932 770 119,702 34,145 

1995 85,522 355 85,877 15,372 

1994 116,901 209 117,110 73,131 

1993 208,724 0 208,724 143,336 

1992 179,202 5 179,207 131,284 

1991 92,479 0 92,479 72,032 

1990 71,998 1,817 73,815 40,479 

1989 72,931 587 73,518 39,754 

1988 39,490 287 39,777 12,985 

1987 72,866 2,152 75,018 0

1986 96,798 3,400 100,198 2,233

1985 37,583 1,245 38,828 2,625

1984 Not 

Available 

Before 1985

Not 

Available 

Before 1985

18,684 1,805

1983 19,691 1,685

1982 24,169 Not Issued 

Before 1983 1981 3,526 

1980 2,526 

1979 4,546 

1978 6,412 

1977 4,657 

1976 1,360 

1975 950 

1974 46 

1973 323 

1972 494 

1971 65 

Source: Freddie Mac
Historical Data Tables

112 OFHEO 2000 Report To Congress

Table 13. Freddie Mac Earnings

Earnings ($ in Millions)

Period

Net 

Interest 

Income1, 2, 3

($)

1 Interest income net of interest expense, nominal basis. 

2 Effective 1/1/96, Freddie Mac reports guarantee fees on retained MBS as guarantee fee income. However, in these data, fees on retained MBS have 

been estimated and reclassified as interest income for comparability with Fannie Mae.

3 In 1993, Freddie Mac adopted a change in reporting of uncollectable interest on single-family mortgages. Pre-1993 amounts do not reflect this 

change.

 Guarantee 

Fee 

Income 2, 3

($)

Average 

Guarantee 

Fee3, 4 

(basis 

points)

 Administrative 

Expenses ($)

Creditrelated 

Expenses4

($)

4 Credit-related expenses are mortgage loan loss provision plus real estate owned expense. From 1988 to 1990, data include real estate owned 

disposition loss provisions instead of expense, and before 1988, only mortgage loan loss provision.

 Net 

Income 

($)

Return on 

Common 

Equity5

(%)

5 Average common equity used to calculate return for annual data. Quarterly data are based on averages of quarter-end equity.

4q99 767 259 19.5 167 40 594 26.7

3q99 710 256 19.6 164 36 564 26.0

2q99 734 255 19.9 161 33 552 25.6

1q99 715 249 20.3 163 50 513 23.5

Annual Data

1999 2,926 1,019 19.8 655 159 2,223 25.5

1998 2,215 1,019 21.4 578 342 1,700 22.6

1997 1,847 1,082 22.9 495 529 1,395 23.1

1996 1,705 1,086 23.4 440 608 1,243 22.6

1995 1,396 1,087 23.8 395 541 1,091 22.1

1994 1,112 1,108 24.4 379 425 983 23.3

1993 772 1,009 23.8 361 524 786 22.3

1992 695 936 24.7 329 457 622 21.2

1991 683 792 23.7 287 419 555 23.6

1990 619 654 22.4 243 474 414 20.4

1989 517 572 23.4 217 278 437 25.0

1988 492 465 21.5 194 219 381 27.5

1987 319 472 24.2 150 175 301 28.2

1986 299 301 22.4 110 120 247 28.5

1985 312 188 22.1 81 79 208 30.0

1984 213 158 24.7 71 54 144 52.0

1983 125 132 26.2 53 46 86 44.5

1982 30 77 24.5 37 26 60 21.9

1981 34 36 19.5 30 16 31 13.1

1980 54 23 14.3 26 23 34 14.7

1979 55 18 13.2 19 20 36 16.2

1978 37 14 14.9 14 13 25 13.4

1977 31 9 18.9 12 8 21 12.4

1976 18 3 13.6 10 (1) 14 9.5

1975 31 3 24.8 10 11 16 11.6

1974 42 2 25.5 8 33 5 4

1973 31 2 32.4 7 15 12 9.9

1972 10 1 39.4 5 4 4 3.5

1971 10 1 Not Available 

Before 1972

Not Available 

Before 1972

Not Available 

Before 1972

6 5.5

Source: Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 113

Table 14. Freddie Mac Balance Sheet

Balance Sheet ($ in Millions)

Mortgage-Backed Securities 

Outstanding ($ in Millions)

Period

 Total Assets 

($)

Retained 

Mortgage 

Portfolio1

($)

1 Gross retained portfolio net of unamortized purchases premiums, discounts, and deferred fees.

Non-Mortgage 

Investments2

($) 

2 Excludes mortgage-related securities held for trading purposes. 

 Debt 

Outstandings

 ($)

Stockholder’s 

Equity

($)

 Total MBS 

Outstanding3

($) 

3 Total MBS outstanding net of repurchased MBS held in the retained portfolio. 

 Multiclass 

MBS 

Outstanding4

($) 

4 The majority qualify as REMICs and are also known as structured securitizations. In years 1983 - 1999, data also includes original issue CMOs and 

MCFs, and structured securitizations and PCs with mandatory purchase obligations. 

4q99 386,684 322,914 34,152 360,711 11,525 537,883 316,168

3q99 364,885 315,911 22,344 341,146 11,140 529,213 313,504

2q99 341,540 299,236 19,749 314,412 10,555 515,607 302,639

1q99 327,766 277,995 23,976 299,196 10,886 499,756 286,954

Annual Data

1999 386,684 322,914 34,152 360,711 11,525 537,883 316,168

1998 321,421 255,670 42,160 287,396 10,835 478,351 260,504 

1997 194,597 164,543 16,430 172,842 7,521 475,985 233,591 

1996 173,866 137,826 22,248 156,981 6,731 473,065 237,939 

1995 137,181 107,706 12,711 119,961 5,863 459,045 246,366

1994 106,199 73,171 17,808 93,279 5,162 460,656 264,152 

1993 83,880 55,938 18,225 49,993 4,437 439,029 265,178 

1992 59,502 33,629 12,542 29,631 3,570 407,514 218,747 

1991 46,860 26,667 9,956 30,262 2,566 359,163 146,978 

1990 40,579 21,520 12,124 30,941 2,136 316,359 88,124 

1989 35,462 21,448 11,050 26,147 1,916 272,870 52,865 

1988 34,352 16,918 14,607 26,882 1,584 226,406 15,621

1987 25,674 12,354 10,467 19,547 1,182 212,635 3,652

1986 23,229 13,093 Not Available 

Before 1987

15,375 953 169,186 5,333

1985 16,587 13,547 12,747 779 99,909 5,047

1984 13,778 10,018 10,999 606 70,026 3,214

1983 8,995 7,485 7,273 421 57,720 1,669

1982 5,999 4,679 4,991 296 42,952 Not Issued 

Before 1983 1981 6,326 5,178 5,680 250 19,897 

1980 5,478 5,006 4,886 221 16,962 

1979 4,648 4,003 4,131 238 15,316 

1978 3,697 3,038 3,216 202 12,017 

1977 3,501 3,204 3,110 177 6,765 

1976 4,832 4,175 4,523 156 2,765 

1975 5,899 4,878 5,609 142 1,643 

1974 4,901 4,469 4,684 126 780 

1973 2,873 2,521 2,696 121 791 

1972 1,772 1,726 1,639 110 444 

1971 1,038 935 915 107 64 

Source: Freddie Mac
Historical Data Tables

114 OFHEO 2000 Report To Congress

Table 15. Freddie Mac Retained Mortgage Portfolio Detail

 ($ in Millions)

Period

Whole Loans1

($)

1 Includes purchase and sale premiums, discounts, and deferred fees and unrealized gain or loss on available-for-sale securities.

Fannie Mae Securities

($)

Other Mortgage-Related 

Securities

($)

Total Retained 

Mortgage Portfolio2

($)

2 Gross retained portfolio net of amortized purchases, premiums, discounts and deferred fees. 

4q99 55,147 211,198 56,569 322,914

3q99 54,586 209,368 51,957 315,911

2q99 53,321 202,478 43,437 299,236

1q99 53,619 187,423 36,953 277,995

Annual Data

1999 55,147 211,198 56,569 322,914

1998 57,745 168,108 29,817 255,670

1997 48,576 103,400 12,567 164,543

1996 46,575 81,195 10,056 137,826

1995 44,035 56,006 7,665 107,706

1994 Not 

Separately Available 

Before 1995

30,670 Not 

Available Before 

1995

73,171

1993 15,877 55,938

1992 6,394 33,629

1991 Not 

Available Before 1992

26,667

1990 21,520

1989 21,448

1988 16,918

1987 12,354

1986 13,093

1985 13,547

1984 10,018

1983 7,485

1982 4,679

1981 5,178

1980 5,006

1979 4,003

1978 3,038

1977 3,204

1976 4,175

1975 4,878

1974 4,469

1973 2,521

1972 1,726

1971 935

Source: Freddie Mac.
Historical Data Tables

OFHEO 2000 Report To Congress 115

Table 16. Freddie Mac Financial Derivatives

 Financial Derivatives ($ in Millions)

Period

Interest Rate 

Swaps1

($)

1 In 1999, reclassifications were made between certain financial derivatives contracts and 1998 amounts have been restated to reflect these 

reclassifications. 

Interest Rate 

Caps Floors 

Corridors

($)

Treasury-Based 

Contracts1,2

($)

2 Excludes exchange-traded derivative financial instruments, such as U.S. Treasury-based futures contracts.

 Foreign 

Currency

($) 

 Futures & 

Options and 

Forward Rate 

Agreements

($) 

Total

($) 

4q99 126,580 19,936 8,894 1,097 267,737 424,244

3q99 107,575 20,449 14,331 1,413 221,348 365,116

2q99 77,625 21,334 17,409 1,592 247,520 365,480

1q99 61,771 20,274 14,829 1,415 176,722 275,011

Annual Data

1999 126,580 19,936 8,894 1,097 267,737 424,244

1998 57,555 21,845 11,542 1,464 220,832 313,238 

1997 54,172 21,995 12,228 1,152 6,000 95,547 

1996 46,646 14,095 651 544 0 61,936 

1995 45,384 13,055 24 0 0 58,463 

1994 21,834 9,003 0 0 0 30,837 

1993 17,888 1,500 0 0 0 19,388 

Source: Freddie Mac
Historical Data Tables

116 OFHEO 2000 Report To Congress

Table 17. Freddie Mac Non-Mortgage Investments

Non-Mortgage Investments1 ($ in Millions)

1 Excludes mortgage-related securities held for trading purposes.

Period

 Federal Funds 

and Eurodollars 

($)

 Asset Backed 

Securities 

($)

 Repurchase 

Agreements 

($) 

Commercial 

Paper and 

Corporate Debt 

($) 

 Other1

($)

 Total 

($)

4q99 10,545 10,305 4,961 3,916 4,425 34,152

3q99 1,944 9,234 3,068 4,783 3,315 22,344

2q99 875 8,925 2,143 4,275 3,531 19,749

1q99 2,024 9,371 2,191 7,571 2,819 23,976

Annual Data

1999 10,545 10,305 4,961 3,916 4,425 34,152

1998 20,524 7,124 1,756 7,795 4,961 42,160 

1997 2,750 2,200 6,982 3,203 1,295 16,430 

1996 9,968 2,086 6,440 1,058 2,696 22,248 

1995 110 499 9,217 1,201 1,684 12,711 

1994 7,260 0 5,913 1,234 3,401 17,808 

1993 9,267 0 4,198 1,438 3,322 18,225 

1992 5,632 0 4,060 53 2,797 12,542 

1991 2,949 0 4,437 0 2,570 9,956 

1990 1,112 0 9,063 0 1,949 12,124 

1989 3,527 0 5,765 0 1,758 11,050 

1988 4,469 0 9,107 0 1,031 14,607 

1987 3,177 0 5,859 0 1,431 10,467 

Source: Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 117

Table 18. Freddie Mac Asset-Liability Mix

Asset-Liability Ratios 

Period

Asset Mix Liability Mix

 Retained Portfolio / 

Total Assets 

(%)

 Non-mortgage 

Investments/ Total 

Assets 

(%)

Callable Debt / Total 

Effective Long-Term 

Debt1

(%)

1 Callable debt includes derivative financial instruments that provide interest-rate protection similar to callable debt.

 Total Effective LongTerm Debt / Total Debt2

(%)

2 Total effective long-term debt represents debt with an effective repricing date greater than one year.

4q99 83.5 8.8 67.2 92.0

3q99 86.3 6.1 67.3 93.0

2q99 87.3 5.8 69.7 96.7

1q99 84.8 7.3 71.4 83.4

Annual Data

1999 83.5 8.8 67.2 92.0

1998 79.5 13.1 75.6 70.6 

1997 84.6 8.4 83.9 70.8 

1996 79.3 12.8 73.8 72.4 

1995 78.5 9.3 72.5 70.2 

1994 68.9 16.8 81.0 59.8 

1993 66.7 21.7 86.1 63.9 

1992 56.5 21.1 Not 

Available 

Before 1993

Not 

Available 

Before 1993 1991 56.9 21.2 

1990 53.0 29.9 

1989 60.5 31.2 

1988 49.2 42.5 

1987 48.1 40.8 

1986 56.4 Not 

Available 

Before 1987 1985 81.7 

1984 72.7 

1983 83.2 

1982 78.0 

1981 81.9 

1980 91.4 

1979 86.1 

1978 82.2 

1977 91.4 

1976 86.1

1975 82.2

1974 91.5 

1973 87.7 

1972 97.4 

1971 90.1 

Source: Freddie Mac
Historical Data Tables

118 OFHEO 2000 Report To Congress

Table 19. Freddie Mac Mortgage Asset Quality

Mortgage Asset Quality 

Period

Single-Family 

Delinquency Rate1

(%)

1 1994 - 1998 data include only loans for which Freddie Mac has assumed primary default risk (“at-risk”); includes foreclosures and in process. Pre-1994 

calculations include both at-risk and non-at-risk loans.

Multifamily 

Delinquency Rate2,3

(%)

2 1982 - 1987 data based on the number of loans delinquent 60 days or more; calculations subsequent to 1987 based on unpaid principal balance of 

loans 60 days or more. 

3 Pre-1991 amounts do not reflect change in reporting of multi-family in-substance foreclosures pursuant to adoption of SFAS 114.

Credit Losses / Total 

MBS Outstanding 

plus Retained 

Portfolio4

(%)

4 Credit losses are defined as charge-offs plus real estate owned expense, average balances used to calculate ratios subsequent to 1994; quarterly data 

are annualized.

REO/Total MBS 

Outstanding plus 

Retained Portfolio5 

(%)

5 Real Estate Owned balances reflect end-of-period balances; beginning in 1992, data reflects adoption of SFAS 114.

Credit-Enhanced / 

Total MBS 

Outstanding plus 

Retained Portfolio6

(%) 

6 Includes loans for which the lender or third-party has agreed to retain primary default risk. Also includes securities guaranteed by agencies such as 

GNMA, as well as asset-backed securities and commercial mortgage-backed securities.

4q99 0.39 0.14 0.02 0.05 29.9

3q99 0.40 0.17 0.02 0.06 29.6

2q99 0.41 0.16 0.02 0.06 29.3

1q99 0.46 0.29 0.03 0.07 28.3

Annual Data

1999 0.39 0.14 0.02 0.05 29.9

1998 0.50 0.37 0.04 0.08 27.3

1997 0.55 0.96 0.08 0.11 15.9

1996 0.58 1.96 0.10 0.13 10.0

1995 0.60 2.88 0.11 0.14 9.7

1994 0.55 3.79 0.08 0.18 7.2

1993 0.61 5.92 0.11 0.16 5.3

1992 0.64 6.81 0.09 0.12 Not 

Available 

Before 1993 1991 0.61 5.42 0.08 0.14

1990 0.45 2.63 0.08 0.12

1989 0.38 2.53 0.08 0.09

1988 0.36 2.24 0.07 0.09

1987 0.36 1.49 0.07 0.08

1986 0.42 1.07 Not 

Available 

Before 1987

0.07

1985 0.42 0.63 0.10

1984 0.46 0.42 0.15

1983 0.47 0.58 0.15

1982 0.54 1.04 0.12

1981 0.61 Not 

Available 

Before 1982

0.07

1980 0.44 0.04

1979 0.31 0.02

1978 0.21 0.02

1977 Not 

Available 

Before 1978

0.03

1976 0.04

1975 0.03

1974 0.02

Source: Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 119

Table 20. Freddie Mac Capital

Capital ($ in Millions)

Period

Stockholders' 

Equity / Total 

MBS 

Outstanding 

plus Total 

Assets 

(%)

Stockholders' 

Equity plus 

Reserves / 

Total MBS 

Outstanding 

plus Total 

Assets1

(%) 

1 Effective 1995, reserves exclude specific allowances for impaired loans pursuant to SFAS 114. 

Core 

Capital2

($) 

2 The sum of: (Outstanding common stock, Noncumulative preferred stock, paid-in capital and retained earnings).

Regulatory 

Minimum 

Capital 

Requirements3

($)

3 Minimum capital requirement in accordance with the Federal Housing Enterprise Financial Safety and Soundness Act of 1992.

Regulatory 

Capital 

Surplus 

(Deficit)4

($) 

4 The difference between Core Capital and Minimum Regulatory Capital Requirement.

 Market 

Capitalization5

($)

5 Stock price multiplied by number of outstanding common shares.

Common 

Share 

Dividend 

Payout Rate6

(%)

6 Paid common dividends as a percentage of earnings available to common shareholders.

4q99 1.25 1.33 12,692 12,287 405 32,713 19.0

3q99 1.25 1.33 12,048 11,659 389 36,226 19.8

2q99 1.23 1.32 11,358 11,061 297 40,367 20.2

1q99 1.32 1.41 10,940 10,595 345 39,866 21.8

Annual Data

1999 1.25 1.33 12,692 12,287 405 32,713 20.1

1998 1.35 1.45 10,715 10,333 382 44,797 20.7 

1997 1.12 1.22 7,376 7,082 294 28,461 21.1 

1996 1.04 1.04 6,743 6,517 226 19,161 21.3 

1995 0.98 1.09 5,829 5,584 245 14,932 21.1 

1994 0.91 1.14 5,169 4,884 285 9,132 20.5 

1993 0.85 0.99 4,437 3,782 655 9,005 21.6 

1992 0.76 0.93 Not 

Applicable 

Before 1993

Not 

Applicable Before 

1993

Not 

Applicable 

Before 1993

8,721 23.1 

1991 0.63 0.81 8,247 21.6 

1990 0.60 0.77 2,925 23.2

1989 0.62 0.77 4,024 24.3 

1988 0.61 0.76 Not 

Applicable Before 

1989

Not 

Applicable 

Before 1989 1987 0.50 0.64

1986 0.50 0.64

1985 0.67 0.85

1984 0.73 0.93

1983 0.63 0.83

1982 0.60 0.82

1981 0.95 1.25

1980 0.98 1.27

1979 1.19 1.44

1978 1.29 1.50

1977 1.72 1.93

1976 2.05 2.22

1975 1.88 2.03

1974 2.22 2.34

1973 3.30 3.47

1972 4.95 4.96

1971 9.71 9.80

Source: Freddie Mac
Historical Data Tables

120 OFHEO 2000 Report To Congress

Table 21. Aggregate Purchases

Business Activity ($ in Millions)

Period

Purchases

 Single-Family

($) 

 Multifamily

($) 

Total

($) 

Mortgage Securities1

($) 

1 Not included in total purchases.

4q99 84,446 3,306 88,535 44,669

3q99 118,632 4,557 122,625 67,449

2q99 151,637 4,283 156,484 79,322

1q99 194,033 5,047 198,297 76,889

Annual Data

1999 548,748 17,193 565,941 268,329

1998 618,410 15,338 633,748 272,907 

1997 275,081 8,775 283,856 84,233 

1996 287,306 8,680 295,986 81,840

1995 215,974 6,531 222,505 73,328

1994 280,792 4,786 285,478 44,369

1993 518,877 4,326 523,203 Not 

Available 

Before 1994 1992 439,309 2,879 442,188

1991 233,280 3,440 236,720

1990 185,187 4,518 189,705 

1989 157,275 6,149 163,424

1988 107,497 5,361 112,858

1987 148,766 3,749 152,515

1986 177,159 5,415 182,574

1985 84,653 3,102 87,755

1984 Not 

Available 

Before 1985

Not 

Available 

Before 1985

50,704

1983 49,431

1982 49,610

1981 10,573

1980 11,791

1979 16,523

1978 18,829

1977 8,908

1976 4,761

1975 6,036

1974 9,204

1973 7,586

1972 5,129

1971 4,818

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 121

Table 22. Aggregate MBS Issuances

Business Activity ($ in Millions)

Period

MBS Issuances

Single Family MBS

($)

Multifamily MBS

($)

Total MBS

($)

Multiclass MBS

($)

4q99 79,524 2,777 82,301 23,545

3q99 111,966 2,263 114,229 31,223

2q99 143,544 2,794 146,338 47,269

1q99 188,144 2,708 190,852 72,688

Annual Data

1999 523,178 10,542 533,720 174,725

1998 564,747 11,965 576,712 219,309 

1997 257,373 6,314 263,687 169,781 

1996 263,133 6,438 269,571 64,925 

1995 191,791 4,542 196,333 25,053 

1994 245,286 2,446 247,732 146,496 

1993 429,209 959 430,168 353,966 

1992 372,389 855 373,244 301,489 

1991 203,967 1,415 205,382 184,840 

1990 168,004 2,506 170,510 108,770 

1989 139,420 3,862 143,282 81,469 

1988 90,610 4,045 94,655 29,990 

1987 134,933 3,314 138,247 9,917

1986 156,815 3,949 160,764 4,633

1985 60,725 1,752 62,477 2,625

1984 Not 

Available

Before 1985

Not 

Available 

Before 1985

32,230 1,805

1983 33,031 1,685

1982 38,139 Not 

Issued 

Before 1983 1981 4,243 

1980 2,526

1979 4,546

1978 6,412

1977 4,657

1976 1,360

1975 950

1974 46

1973 323

1972 494

1971 65

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

122 OFHEO 2000 Report To Congress

Table 23. Aggregate Earnings

Earnings ($ in Millions)

Period

Net Income

($)

Net Interest

Income

($)

Guarantee Fee 

Income

($)

Administrative 

Expenses

($)

Credit-Related 

Expenses

($)

4q99 1,632 2,073 584 373 59

3q99 1,555 1,951 576 367 57

2q99 1,510 1,922 575 360 73

1q99 1,438 1,874 566 355 97

Annual Data

1999 6,135 7,820 2,301 1,455 286

1998 5,118 6,325 2,248 1,286 603 

1997 4,451 5,796 2,356 1,131 904 

1996 3,968 5,297 2,282 1,000 1,017 

1995 3,235 4,443 2,173 941 876 

1994 3,115 3,935 2,191 904 803 

1993 2,659 3,305 1,970 804 829 

1992 2,245 2,753 1,770 710 777

1991 1,918 2,461 1,467 606 789

1990 1,587 2,212 1,190 529 784

1989 1,244 1,708 980 471 588

1988 888 1,329 793 412 584

1987 677 1,209 735 347 535

1986 352 683 476 285 426

1985 201 451 300 223 285

1984 73 123 236 183 140

1983 135 116 186 134 94

1982 (132) (434) 93 97 62

1981 (175) (395) 36 79 (12)

1980 48 75 23 70 42

1979 198 377 18 65 55

1978 234 331 14 53 49

1977 186 282 9 44 36

1976 141 221 3 40 24

1975 131 205 3 37 27

1974 112 184 2 31 50

1973 138 211 2 25 27

1972 100 148 1 18 9

1971 67 59 1 Not Available 

Before 1972

Not Available 

Before 1972

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 123

Table 24. Aggregate Balance Sheet

Balance Sheet Outstanding ($ in Millions)

Period

Total 

Assets 

($)

Retained 

Mortgage 

Portfolio 1

($)

1 Total MBS Outstanding net of MBS in (retained) portfolio.

NonMortgage 

Investments2 

($)

 Debt 

Outstanding 

($) 

Stockholders' 

Equity 

($)

 Total MBS 

Outstanding 

($)

Multiclass 

MBS 

Outstanding2

($)

2 The majority qualify as REMICS and may also be known as structured securitizations.

4q99 961,851 845,891 73,903 908,330 29,154 1,217,052 651,682

3q99 916,417 820,408 58,751 866,025 28,195 1,199,370 652,130

2q99 867,803 772,888 62,053 814,309 27,136 1,177,226 645,211

1q99 828,824 718,919 73,892 774,614 27,020 1,159,858 633,415

Annual Data

1999 961,851 845,891 73,903 908,330 29,154 1,217,052 651,682

1998 806,435 671,104 100,675 747,687 26,288 1,115,494 622,117 

1997 586,270 481,135 81,026 542,616 21,314 1,055,123 621,951 

1996 524,907 424,353 78,854 488,251 19,504 1,021,238 577,737 

1995 453,731 360,574 69,984 419,135 16,822 972,275 599,894

1994 378,707 293,986 64,143 350,509 14,703 947,001 642,885 

1993 300,859 246,107 39,621 251,105 12,489 910,335 647,043 

1992 240,480 189,889 32,116 195,931 10,344 831,958 531,116 

1991 193,932 153,346 19,792 164,199 8,113 714,447 371,784 

1990 173,692 135,586 21,992 154,344 6,077 604,434 215,402 

1989 159,777 129,429 19,388 142,211 4,907 489,382 120,691 

1988 146,610 117,017 19,896 132,341 3,844 396,503 42,281

1987 129,133 106,019 13,935 116,604 2,993 348,369 15,011

1986 122,850 107,216 Not 

Applicable 

 Before 1987

108,938 2,135 264,754 Not 

Available

 Before 1987 1985 115,663 108,156 106,732 1,788 154,461 

1984 101,576 94,153 94,718 1,524 105,764 

1983 87,378 82,732 81,867 1,421 82,841 

1982 78,980 74,035 74,605 1,249 57,402 

1981 67,904 64,807 64,231 1,330 20,614 

1980 63,357 60,595 59,766 1,678 16,962

1979 55,948 53,780 52,555 1,739 15,316

1978 47,203 45,141 44,201 1,564 12,017

1977 37,481 36,456 35,000 1,350 6,765

1976 37,225 35,950 35,088 1,139 2,765

1975 37,495 35,698 35,572 1,003 1,643

1974 34,572 33,135 32,852 898 780

1973 27,191 26,110 25,699 801 791

1972 22,118 21,378 20,878 669 444

1971 19,629 18,821 18,587 567 64

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

124 OFHEO 2000 Report To Congress

Table 25. Aggregate Retained Mortgage Portfolio Detail

 ($ in Millions)

Period

 Aggregate Whole 

Loans

($)

 Aggregate

 Own-Enterprise

Securities

($) 

 

Aggregate

Other 

Mortgage-Related 

Securities

($)

Aggregate

Total Retained 

Mortgage

Portfolio

($)

4q99 204,252 492,912 149,691 846,855

3q99 205,570 477,695 137,584 820,849

2q99 206,218 452,294 114,039 772,551

1q99 208,592 409,136 100,406 718,134

Annual Data

1999 204,252 492,912 149,691 846,855

1998 213,524 365,483 91,178 670,185

1997 208,678 233,844 38,699 481,221

1996 214,466 183,802 26,610 424,878

1995 215,516 125,735 19,966 361,217

1994 Not 

Available Before 

1995

74,668 Not 

Available 

Before 

1995

298,228

1993 40,096 246,799

1992 26,929 191,748

1991 Not 

Available 

Before 

1992

155,650

1990 138,148

1989 132,169

1988 119,931

1987 109,100

1986 110,926

1985 112,196

1984 98,127

1983 85,741

1982 76,493

1981 66,590

1980 62,333

1979 55,100

1978 46,353

1977 37,581

1976 37,112

1975 36,794

1974 34,177

1973 26,980

1972 22,052

1971 19,450

Sources: Fannie Mae and Freddie Mac. 
Historical Data Tables

OFHEO 2000 Report To Congress 125

Table 26. Aggregate Financial Derivatives

Financial Derivatives ($ in Millions)

Period

Interest Rate 

Swaps

($)

 Interest Rate 

Caps Floors 

Corridors

($)

 Foreign 

Currency

($)

Futures & 

Options and 

Forward Rate 

Agreements

($)

Other

($)

 Total

($) 

4q99 318,612 48,886 12,604 308,818 10,294 699,214

3q99 284,068 46,449 13,668 241,060 14,851 600,097

2q99 227,513 47,084 14,506 266,435 21,294 576,831

1q99 209,196 45,274 14,412 195,597 18,394 482,874

Annual Data 

1999 318,612 48,886 12,604 308,818 10,294 699,214

1998 200,401 36,345 14,459 234,313 15,277 500,795

1997 203,845 22,095 11,120 6,000 13,888 256,948 

1996 204,786 14,395 2,973 0 1,001 223,155 

1995 171,063 13,355 1,224 29 999 186,670

1994 109,304 9,363 1,023 0 1,465 121,154 

1993 67,346 1,860 1,023 0 1,425 71,653 

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

126 OFHEO 2000 Report To Congress

Table 27. Aggregate Non-Mortgage Investments

Non-Mortgage Investments ($ in Millions)

Period

Federal Funds 

and Eurodollars 

($)

Asset Backed 

Securities 

($)

 Repurchase 

Agreements 

($) 

 Commercial 

Paper and 

Corporate Debt 

($)

Other 

($)

Total 

($)

4q99 15,382 29,512 7,535 5,639 15,835 73,903

3q99 3,056 28,145 5,367 5,678 16,505 58,751

2q99 4,558 27,837 5,449 6,185 18,024 62,053

1q99 8,774 29,301 6,844 10,514 18,459 73,892

Annual Data

1999 15,382 29,512 7,535 5,639 15,835 73,903

1998 28,452 28,117 9,312 12,950 21,846 100,675 

1997 21,962 18,839 13,697 14,948 11,580 81,026 

1996 31,702 16,721 11,107 7,249 12,075 78,854 

1995 19,885 10,404 19,392 9,830 10,473 69,984 

1994 24,853 3,796 14,919 8,953 11,622 64,143 

1993 13,763 3,557 8,882 1,438 11,981 39,621 

1992 12,219 4,124 7,249 53 8,471 32,116 

1991 5,903 2,416 6,632 0 4,841 19,792 

1990 6,441 1,780 10,014 0 3,757 21,992 

1989 8,685 1,107 5,765 0 3,831 19,388 

1988 8,594 481 9,107 0 1,714 19,896 

1987 5,736 25 5,859 0 2,315 13,935 

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

OFHEO 2000 Report To Congress 127

Table 28. Aggregate Capital

Capital ($ in Millions)

Period

Core Capital

($)

Minimum Regulatory 

Capital Requirements

($)

Capital Surplus (Deficit)

($)

Market Capitalization

($)

4q99 30,568 30,057 511 96,364

3q99 29,270 28,759 511 100,208

2q99 28,048 27,526 522 110,192

1q99 27,093 26,432 661 110,975

Annual Data

1999 30,568 30,057 511 96,364

1998 26,180 25,667 513 120,678

1997 21,169 19,785 1,384 87,628

1996 19,516 17,983 1,533 59,093

1995 16,788 16,035 753 48,744

1994 14,710 14,299 411 29,014

1993 12,489 10,846 1,643 30,392

1992 Not 

Applicable 

Before 1993

Not 

Applicable 

Before 1993

Not 

Applicable 

 Before 1993

29,595

1991 27,083

1990 11,415

1989 12,116

1988 3,992

1987 2,401

1986 3,006

1985 1,904

1984 1,012

1983 1,514

1982 1,603

1981 502

1980 702

Sources: Fannie Mae and Freddie Mac
Historical Data Tables

128 OFHEO 2000 Report To Congress

Table 29. Loan Limits

Single-Family Conforming Loan Limits1 ($ in Millions)

1 Conforming Loan Limits are 50% higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

Year 1-unit 2-units 3-units 4-units

1970 - 1976 33,000 Not Available Not Available Not Available 

1977 - 1978 60,000 Not Available Not Available Not Available

1979 67,500 Not Available Not Available Not Available

1980 93,750 120,000 145,000 180,000 

1981 98,500 126,000 152,000 189,000 

1982 107,000 136,800 165,100 205,300 

1983 108,300 138,500 167,200 207,900 

1984 114,000 145,800 176,100 218,900 

1985 115,300 147,500 178,200 221,500 

1986 133,250 170,450 205,950 256,000 

1987 153,100 195,850 236,650 294,150 

1988 168,700 215,800 260,800 324,150 

1989 187,600 239,950 290,000 360,450 

1990 187,450 239,750 289,750 360,150 

1991 191,250 244,650 295,650 367,500 

1992 202,300 258,800 312,800 388,800 

1993 203,150 259,850 314,100 390,400 

1994 203,150 259,850 314,100 390,400 

1995 203,150 259,850 314,100 390,400 

1996 207,000 264,750 320,050 397,800 

1997 214,600 274,550 331,850 412,450 

1998 227,150 290,650 351,300 436,000 

1999 240,000 307,100 371,200 461,350 

2000 252,700 323,400 390,900 485,800 

Sources: Department of Housing and Urban Development (HUD), Federal Housing Finance Board, Freddie Mac

FHA Single-Family Insurable Limits

1-Unit 2-units 3-units 4-units

Low Cost High Cost Low Cost High Cost Low Cost High Cost Low Cost High Cost

Year Area Max Area Max Area Max Area Max Area Max Area Max Area Max Area Max

1997 81,546 170,362 104,310 205,875 126,103 248,888 156,731 309,338 

1998 109,032 197,621 139,512 252,866 168,624 305,631 209,568 379,842 

1999 115,200 208,800 147,408 267,177 178,176 322,944 221,448 401,375 

2000 121,296 219,849 155,232 281,358 187,632 340,083 233,184 422,646
Historical Data Tables

OFHEO 2000 Report To Congress 129

Table 30. Mortgage Interest Rates

Period

Average Commitment Rates on Loans Effective Rates on Closed Loans

Conventional Conventional

30-Year Fixed Rate

(%)

One-Year ARMs

(%)

Fixed-Rate

(%)

Adjustable Rate

(%)

4q99 7.8 6.4 8.0 6.6

3q99 7.8 6.1 7.7 6.7

2q99 7.2 5.7 7.3 6.3

1q99 6.9 5.7 7.0 6.3

Annual Data

1999 7.4 6.0 7.5 6.5

1998 6.9 5.6 7.2 6.5

1997 7.6 5.6 7.9 7.0

1996 7.8 5.7 8.0 7.2

1995 7.9 6.1 8.2 7.4

1994 8.4 5.3 8.1 6.6

1993 7.3 4.6 7.5 5.9

1992 8.4 5.6 8.5 6.9

1991 9.2 7.1 9.7 8.4

1990 10.1 8.4 10.4 9.2

1989 10.3 8.8 10.5 9.3

1988 10.3 7.9 10.4 8.5

1987 10.2 7.8 9.9 8.5

1986 10.2 8.4 10.5 9.4

1985 12.4 10.0 12.4 10.8

1984 13.9 11.5 13.2 12.1

1983 13.2 Not Available

Before 1984

13.0 12.3

1982 16.1 15.2 15.4

1981 16.6 Not Available

Before 1982

Not Available

Before 1982 1980 13.8

1979 11.2

1978 9.6

1977 8.8

1976 8.9

1975 9.0

1974 9.2

1973 8.0

1972 7.4

1971 Not Available

Before 1971

Average Commitment Rate Source: Freddie Mac

Effective Rates Source: Federal Housing Finance Board
Historical Data Tables

130 OFHEO 2000 Report To Congress

Table 31. Housing Market Activity

Period

Housing Starts

units in thousands

Home Sales

units in thousands

Single-Family 

Housing Starts

Multifamily 

Housing Starts

Total Housing 

Starts

New SingleFamily Home 

Sales

Existing SingleFamily Homes 

Sales

4q99 1,403 286 1,689 866 5,057

3q99 1,344 319 1,663 899 5,253

2q99 1,324 267 1,591 925 5,418

1q99 1,420 340 1,760 897 5,187

Annual Data

1999 1,367 300 1,667 907 5,197

1998 1,314 303 1,617 886 4,970

1997 1,179 296 1,474 804 4,382

1996 1,206 271 1,477 757 4,196

1995 1,110 244 1,354 667 3,888

1994 1,233 224 1,457 670 3,916

1993 1,155 133 1,288 666 3,786

1992 1,061 139 1,200 610 3,479

1991 876 138 1,014 509 3,186

1990 932 260 1,193 534 3,219

1989 1,059 318 1,376 650 3,325

1988 1,140 348 1,488 676 3,513

1987 1,212 409 1,621 671 3,436

1986 1,263 542 1,805 750 3,474

1985 1,166 576 1,742 688 3,134

1984 1,206 544 1,750 639 2,829

1983 1,181 522 1,703 623 2,697

1982 743 320 1,062 412 1,991

1981 796 288 1,084 436 2,419

1980 962 331 1,292 545 2,973

1979 1,316 429 1,745 709 3,827

1978 1,558 462 2,020 817 3,986

1977 1,573 414 1,987 819 3,650

1976 1,248 289 1,538 646 3,064

1975 956 204 1,160 549 2,476

1974 956 382 1,338 519 2,272

1973 1,250 795 2,045 634 2,334

1972 1,451 906 2,357 718 2,252

1971 1,271 781 2,052 656 2,019

Components may not add to totals due to rounding. *Adjusted Annual Rates. 

Housing Starts Source and New Single-Family Home Sales Source: Bureau of the Census. 

Existing Single-Family Home Sales Source: National Association of Realtors
Historical Data Tables

OFHEO 2000 Report To Congress 131

Table 32. Weighted Repeat Sales House Price Index 

Weighted Repeat Sales House Price Index (Annual Data)1

%

Change USA

New

England

MidAtlanticSouth

Atlantic

East

North

Central

West

North

Central

East

South

Central

West

South

Central Mountain Pacific

1Q00 6.5% 10.2% 6.5% 5.7% 6.3% 7.8% 3.9% 5.3% 5.9% 7.1%

4Q99 6.7% 10.2% 6.5% 5.7% 7.1% 8.9% 4.7% 5.8% 5.8% 6.5%

3Q99 6.2% 9.5% 6.2% 5.3% 6.3% 8.2% 4.5% 5.7% 5.3% 5.8%

2Q99 5.8% 8.5% 4.9% 5.0% 5.6% 7.0% 4.5% 5.4% 5.3% 6.7%

1Q99 5.2% 7.4% 4.1% 4.3% 5.2% 5.3% 4.8% 4.3% 4.6% 6.9%

Annual Data

1999 6.7% 10.2% 6.5% 5.7% 7.1% 8.9% 4.7% 5.8% 5.8% 6.5%

1998 5.4% 7.0% 4.7% 4.8% 4.4% 4.9% 5.1% 5.5% 4.6% 8.0%

1997 4.8% 4.9% 3.4% 4.7% 5.3% 5.0% 5.1% 3.9% 5.1% 5.5%

1996 2.7% 1.9% 0.4% 2.3% 5.1% 4.1% 4.0% 2.2% 4.5% 1.1%

1995 4.5% 4.1% 3.2% 4.4% 5.9% 5.2% 5.6% 4.0% 7.4% 2.9%

1994 1.2% -2.7% -2.8% 0.5% 5.4% 5.8% 5.1% 1.8% 9.5% -3.2%

1993 2.1% 0.5% 1.5% 2.0% 3.6% 3.9% 4.1% 4.1% 8.0% -1.8%

1992 1.9% -1.0% 1.7% 2.2% 3.9% 3.1% 3.4% 3.5% 5.4% -1.2%

1991 2.6% -2.0% 1.6% 3.1% 4.5% 3.8% 4.1% 3.7% 4.8% 1.5%

1990 0.3% -7.6% -2.5% 0.4% 3.8% 0.6% 0.7% 0.6% 1.8% 2.8%

1989 6.1% 0.9% 2.5% 5.1% 6.2% 3.3% 3.4% 2.9% 2.8% 19.3%

1988 6.3% 3.9% 6.3% 7.1% 6.7% 2.7% 3.0% -2.1% 0.4% 17.2%

1987 8.0% 13.5% 17.6% 8.0% 8.8% 4.4% 5.2% -7.7% 0.0% 10.1%

1986 10.0% 21.2% 20.3% 9.0% 8.4% 5.9% 9.1% 1.2% 4.5% 7.7%

1985 6.8% 24.6% 12.3% 7.4% 4.5% 3.5% 12.1% -2.2% 0.7% 4.7%

1984 3.6% 17.8% 12.8% -0.3% 2.4% 4.3% -4.4% -1.3% 0.5% 4.8%

1983 4.3% 15.9% 10.3% 4.2% 3.8% 4.3% 5.8% 0.8% -2.6% 1.1%

1982 2.6% 5.0% 4.4% 4.4% -3.4% -0.2% 5.3% 5.8% 6.8% 1.1%

1981 3.4% 5.8% -1.0% 4.0% 0.5% 0.0% -3.1% 11.7% 6.3% 5.8%

1980 6.4% 5.2% 9.0% 8.5% 1.2% 2.7% 4.9% 6.9% 6.2% 11.5%

1979 11.8% 11.6% 14.5% 11.8% 9.0% 9.7% 5.8% 12.5% 15.6% 16.3%

1978 13.1% 16.4% 6.6% 10.4% 14.6% 11.9% 10.6% 17.5% 16.8% 16.6%

1977 13.5% 10.7% 11.3% 8.2% 13.1% 14.5% 12.7% 11.6% 18.8% 25.6%

1976 8.0% 1.8% 7.2% 5.9% 9.3% 7.6% 3.1% 10.4% 11.2% 20.3%

Regional Divisions: 

New England: CT, MA, ME, NH, RI, VT

Mid-Atlantic: NJ, NY, PA

South Atlantic: DC, DE, FL, GA, MD, NC, SC, VA, WV

East North Central: IL, IN, MI, OH, WI, ND, SD, NE

East South Central: AL, KY, MS, TN

West South Central: AR, LA, OK, TX

Mountain: AZ, CO, ID, MT, NM, NV, UT, WY

Pacific: AK, CA, HI, OR, WA

1 All data is measured based on percentage change over the previous four quarters. Data from 1976 - 1999 is measured based on fourth quarter to fourth 

quarter percentage change. 
Historical Data Tables

132 OFHEO 2000 Report To Congress
OFHEO 2000 Report To Congress 133

Appendix
Appendix

134 OFHEO 2000 Report To Congress

FEDERAL HOUSING ENTERPRISES FINANCIAL SAFETY AND SOUNDNESS ACT OF 1992

(TITLE 13 OF PUBLIC LAW

102-550)

Section 1313. DUTY AND AUTHORITY OF DIRECTOR.

(a) DUTY.- The duty of the Director shall be to ensure that the enterprises are adequately

capitalized and operating safely, in accordance with this title.

(b) AUTHORITY EXCLUSIVE OF SECRETARY.- The Director is authorized, without the

review or approval of the Secretary, to make such determinations, take such actions, and perform

such functions as the Director determines necessary regarding -

(1) the issuance of regulations to carry out this part, subtitle B, and subtitle C

(including the establishment of capital standards pursuant to subtitle B);

(2) examinations of the enterprises under section 1317;

(3) determining the capital levels of the enterprises and classification of the enterprises within capital classifications established under subtitle B;

(4) decisions to appoint conservators for the enterprises;

(5) administrative and enforcement actions under subtitle B, actions taken under

subtitle C with respect to enforcement of subtitle B, and other matters relating to safety

and soundness;

(6) approval of payments of capital distributions by the enterprises under section

303(c)(2) of the Federal National Mortgage Association Charter Act and section 303(b)(2)

of the Federal Home Loan Mortgage Corporation Act;

(7) requiring the enterprises to submit reports under section 1314 of this title, section 309(k) of the Federal National Mortgage Association Charter Act, and section 307(c) of

the Federal Home Loan Mortgage Corporation Act;

(8) prohibiting the payment of excessive compensation by the enterprises to any

executive officer of the enterprises under section 1318;

(9) the management of the Office, including the establishment and implementation

of annual budgets, the hiring of, and compensation levels for, personnel of the Office, and

annual assessments for the costs of the Office;

(10) conducting research and financial analysis;

(11) the submission of reports required by the Director under this title.

(c) AUTHORITY SUBJECT TO APPROVAL OF SECRETARY.- Any determinations, actions,

and functions of the Director not referred to in subsection (b) shall be subject to the review and

approval of the Secretary.

(d) DELEGATION OF AUTHORITY.- The Director may delegate to officers and employees

of the Office any of the functions, powers, and duties of the Director, as the Director considers

appropriate.

(e) INDEPENDENCE IN PROVIDING INFORMATION TO CONGRESS.- The Director shall

not be required to obtain the prior approval, comment, or review of any officer or agency of the

United States before submitting to the Congress, or any committee or subcommittee thereof, any

reports, recommendations, testimony, or comments if such submissions include a statement indicating that the views expressed therein are those of the Director and do not necessarily represent

the views of the Secretary or the President.
Office Of Federal Housing Enterprise Oversight

OFHEO 2000 Report To Congress 135

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

The Office of Federal Housing Enterprise Oversight (OFHEO) was established as

an independent entity within the Department of Housing and Urban Development by the Federal Housing Enterprises Financial Safety and Soundness Act of

1992 (Title XIII of P.L. 102-550). The Office is headed by a Director appointed by

the President for a five-year term. 

OFHEO’s primary mission is ensuring the capital adequacy and financial safety

and soundness of two government-sponsored enterprises (GSEs) — the Federal

National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

Fannie Mae and Freddie Mac are the nation’s largest housing finance institutions. They buy mortgages from commercial banks, thrift institutions, mortgage

banks, and other primary lenders, and either hold these mortgages in their own

portfolios or package them into mortgage-backed securities for resale to investors. These secondary mortgage market operations play a major role in creating a

ready supply of mortgage funds for American homebuyers. Combined assets and

off-balance sheet obligations of Fannie Mae and Freddie Mac were more than

$2 trillion at the end of 1999.

Fannie Mae and Freddie Mac are Congressionally-chartered, publicly-owned corporations whose shares are listed on the New York Stock Exchange. Under terms

of their GSE charters, they are exempt from state and local taxation and from

registration requirements of the Securities and Exchange Commission. Each

firm has a back-up credit line with the U.S. Treasury.

OFHEO’s oversight responsibility includes:

❏ Conducting broad-based examinations of Fannie Mae and Freddie Mac;

❏ Developing risk-based capital standards using a “stress test” that simulates

stressful interest rate and credit risk scenarios;

❏ Making quarterly findings of capital adequacy based on minimum capital

standards until a risk-based standard is completed; 

❏ Prohibiting excessive executive compensation;

❏ Issuing regulations concerning capital and enforcement standards; and

❏ Taking necessary enforcement actions.

OFHEO is funded through assessments of Fannie Mae and Freddie Mac.

OFHEO’s operations represent no direct cost to the taxpayer. 
Appendix

136 OFHEO 2000 Report To Congress

In its safety and soundness mission, OFHEO has regulatory authority similar to

such other federal financial regulators as the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve System.

(The legislation that established OFHEO also requires Fannie Mae and Freddie

Mac to meet certain affordable housing goals set annually by the Secretary of

Housing and Urban Development. These goals specify the share of mortgages that

the two GSEs are required to purchase annually from low-income, moderateincome and central-city homebuyers.)