Risk Capital

1999 Report to Congress
Office Of Federal Housing Enterprise Oversight

1700 G Street NW • Washington DC 20552 • (202) 414-3800

June 15, 1999

Dear Chairmen:

I am pleased to transmit the 1999 Report to Congress of the Office of Federal Housing Enterprise Oversight (OFHEO).

This report has been prepared to meet the statutory requirements in section 1319B of the Federal Housing Enterprises

Financial Safety and Soundness Act of 1992 (Title XIII of Pub. L. No. 102-550).

The views in this report are those of the Acting Director and do not necessarily represent those of the President or the

Secretary of Housing and Urban Development.

Honorable Phil Gramm Honorable Jim Leach

Chairman Chairman

Committee on Banking, Housing, and Urban Affairs Committee on Banking and Financial Services

United States Senate House of Representatives

Washington, D.C. 20510-6075 Washington, D.C. 20515-6050
ACTING DIRECTOR’S MESSAGE

1998 was a remarkable year for OFHEO. Major steps were taken to put in place a comprehensive supervisory oversight

program to help ensure that Fannie Mae and Freddie Mac are adequately capitalized and operate in a safe and sound

manner. We completed our first comprehensive annual risk-based examinations of the Enterprises. And on the capital

regulation front, OFHEO completed its proposal for a risk-based capital standard for the Enterprises. 

The importance of OFHEO's proposed risk-based capital standard may go beyond that of regulating capital for the

Enterprises. It represents a new and innovative models-based approach for determining capital adequacy. It will help

to shed light on the many issues surrounding the use of models for determining capital requirements for banks and

thrifts. 

OFHEO's proposed risk-based capital standard utilizes a stress test that incorporates statistical models to project the

performance of all of the mortgages held or guaranteed by the Enterprises, along multiple risk dimensions, resulting

from statutorily determined credit and interest rate stresses. The stress test also takes into account how all of the

remaining assets and liabilities perform under these same stressful economic conditions. 

The stress test measures the need for capital based upon a holistic approach to measuring risk at the Enterprises. Risk

reduction activities such as issuing callable debt to protect against falling interest rates, the use of credit enhancements to protect against losses from higher risk mortgages, and the effective use of derivatives to better match the

cash flows associated with funding mortgages with Enterprise debt all serve to lower the net or “bottom line” risk

exposure. By measuring the true economic risk from an activity, OFHEO's proposed risk-based capital standard closely

matches risk and the need for capital. Chapter 1 describes this innovative capital proposal.

Just as important as a strong capital standard is a strong examination program. No amount of capital is adequate if

business operations are not conducted in a safe and sound manner. In 1998, OFHEO completed its first comprehensive

annual risk-based examination of the Enterprises based on our new examination program. Chapter 2 describes the

results and conclusions of these examinations. In keeping with OFHEO's goal for transparent oversight of the Enterprises, we recently published our Examination Handbook, which outlines in detail the comprehensive framework for

OFHEO's examination program.

The Examination Handbook and all of OFHEO's regulations, including the proposed risk-based capital standard, are

available on OFHEO's website at www.ofheo.gov. OFHEO's quarterly house price index (HPI) is also available here. The

popularity of the HPI has resulted in a distribution list of over 1500 requesters.

In connection with the government's goal of improved accountability, OFHEO voluntarily prepared financial statements for FY 1998 and subjected these statements and underlying processes to independent audit. The certified public

accounting firm of Dembo, Jones, Healy, Pennington and Ahalt audited our statements and issued an unqualified audit

opinion. Chapter 4 contains a copy of the audit opinion and the associated principal financial statements and notes.

As always, none of our accomplishments could have been achieved without the hard work of OFHEO's very talented

staff. As we move rapidly to the new millennium, OFHEO will be prepared to fulfill its responsibility of ensuring that

the Enterprises remain financially safe and sound. This will enable Fannie Mae and Freddie Mac to continue to fulfill

their important public purposes of providing a secondary mortgage market for conforming mortgages and to provide

assistance to low- and moderate-income families so that they can achieve homeownership status. 

Mark Kinsey

June 15, 1999
i

Contents

 Chapter 1 The Proposed Risk-Based Capital Standard . . . . . . . . . . . . . . . . . . . . 1

Ensuring Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Stress Test: The Best Way to Ensure the Enterprises’ Capital Adequacy . . . . . . . . . . . . . . . . . . . . 2

Stress Test: Providing Flexibility to Meet the Risk-Based Capital Requirement . . . . . . . . . . . . . . . 3

Results of the Stress Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Stress Test: Replicating the Key Drivers of Credit and Interest Rate Risk . . . . . . . . . . . . . . . . . . . 6

Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Property Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Mortgage loan performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Other Credit Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Operations, Taxes, & Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Calculation of the 

Risk-Based Capital Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Risk-Based Capital Plus Comprehensive Examinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

 Chapter 2 Risk-Based Examination Program . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

OFHEO’s Examination Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Risk Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Examination Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Program Areas for Risk-Based Examinations and Categories of Risk and Risk Management 13

Evaluation Criteria, Assessment Factors and Examination Objectives . . . . . . . . . . . . . . . . . . 14

Communicate Examination Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Effect Changes and Follow Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

1998 Examination Results and Conclusions for Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Audit Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

1998 Examination Results and Conclusions for Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ii

Contents (Continued)

Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

The Year 2000 Challenge and Examination Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

What is the Year 2000 Challenge? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Examination Assessment Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Information Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Business Process Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Internal Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

 Management Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Board Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

 Chapter 3 Mortgage Markets and the Enterprises in 1998 . . . . . . . . . . . . . . . . . 33

Housing and Primary Mortgage Market Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Record Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

FHA/VA Originations Experience Gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Subprime Market Share Decline. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Secondary Market Activities of the Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Purchases and Issuances Achieve Record Levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Financial Condition of the Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Double-Digit increases in Mortgage Investments Push Earnings Above $5 Billion . . . . . . . . . . 41

Revenues Increase Despite Lower Interest Margins and Guarantee Fees . . . . . . . . . . . . . . . . 44

Credit Losses Decline While Delinquencies Remain Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Administrative Expenses Grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Asset Growth Rate Reverses Trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Liquidations Affect Debt Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Enterprises Meet Regulatory Minimum Capital Requirements . . . . . . . . . . . . . . . . . . . . . . . . . 48

 Chapter 4 Financing OFHEO’s Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

OFHEO’s Budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Unqualified Audit Opinion of FY 1998 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Historical Data Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
iii

Contents (Continued)

List of Figures

Figure Page

1 OFHEO’s Comprehensive Risk-Based Examination Program . . . . . . . . . . . . . . . . . . . . . . . . . . 12

2 Mortgage Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

3 New and Existing Single-Family Home Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

4 Originations of Single-Family Mortgages ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

5 Refinance Share of Total Mortgage Originations vs. Commitment Rate on 30-Year FRMs . . . . 36

6 Change in House Prices, by Census Division, Fourth Quarter 1997 to Fourth Quarter 1998 . . . 36

7 Enterprise Single-Family Mortgage Purchases ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

8 Average LTV of Enterprise Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

9 Enterprise Single-Class MBS Issuance ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

10 Enterprise REMIC Issuances ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

11 Enterprises’ Primary Sources of Revenue ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

12 Enterprises’ Mortgage Investments ($ in Billions) and Net Interest Margin (%) . . . . . . . . . . . . . 44

13 Single-Family Deliquency Rates (Loans Deliquent 90 Days or More or in Foreclosure) . . . . . . . 45

14 Combined Enterprise Assets And Growth Rate ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

15 Enterprise Average Non-Mortgage Investments ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . 47

16 Effective Long-Term Debt As a Percent of Total Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

17 Enterprises’ Core Capital as a Percent of Minimum Capital Requirements . . . . . . . . . . . . . . . . 48

List of Tables

Table Page

1 Risk-Based Capital Requirements ($ in Billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

2 Rating and Size of Haircut . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

3 Examination Objectives Unique to Each Program Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4 Fannie Mae Financial Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

5 Freddie Mac Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

List of Boxes

Box Page

1 Concentration of Mortgage Originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

2 Conforming Loan Limits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

3 Benchmark and Reference Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
iv
1999 Report To Congress 1  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Chapter 1

The Proposed Risk-Based Capital Standard

The 1992 Federal Housing Enterprises Financial Safety and Soundness Act (the Act)

requires that the Office of Federal Housing Enterprise Oversight (OFHEO) establish a

risk-based capital requirement for Fannie Mae and Freddie Mac (the Enterprises). This

risk-based capital requirement sets a regulatory standard for the amount of capital that

each Enterprise must hold, commensurate with the risk it assumes. The Act dictates that

the requirement must be based on a stress test that simulates the amount of capital each

Enterprise would need in order to maintain solvency during ten years of severe economic

stress. Key conditions of the stress test’s economic scenarios are also specified in the Act.

These conditions include high levels of mortgage defaults, with associated losses, and

large sustained movements in interest rates. 

OFHEO’s test uses a computer model to simulate Enterprise cash flows associated with

mortgages and other financial assets and obligations under these severe economic conditions. The modeling of incoming and outgoing cash flows captures the risks embedded

in those financial assets and obligations and the benefits of the hedges each Enterprise

has set in place. To meet the proposed risk-based capital standard Freddie Mac and Fannie Mae must have sufficient capital to survive the losses under these conditions plus an

additional 30 percent for unspecified management and operations risks. 

The regulation itself is the blueprint needed to construct the stress test and calculate the

risk-based capital requirement for Freddie Mac and Fannie Mae. By law, the risk-based
Chapter 1 - The Proposed Risk-Based Capital Standard

2 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

capital requirement must be both transparent and replicable. The Enterprises, the mortgage industry, and the public must be able to understand how the capital requirements

for Fannie Mae and Freddie Mac are calculated. They must be able to replicate the stress

test results so that the impact on capital from changes in the Enterprises’ business and

changes in economic conditions can be understood. 

The law requires that OFHEO develop a single model that is applied equally to both

Enterprises. Although the combination of credit and interest rate risks each company

takes on differs, the risk components are the same. That is, a newly originated mortgage

loan with an 80 percent loan-to-value ratio poses the same credit risk, regardless of the

Enterprise that purchases it. Funding a 30-year mortgage with 5-year debt poses the

same interest rate risk, regardless of the Enterprise that funds it. A single stress test

applied to both Enterprises ensures that equal risks require equal capital. The Enterprises’ internal business models were developed to deal with shareholder risks, not public

risks. Use of such internal models would not ensure equal treatment, and would not

meet the requirements for regulatory fairness and complete transparency.

OFHEO issued an Advance Notice of Proposed Rulemaking in 1995 that requested comments on 65 questions related to the design of the stress test. The first and second

Notices of Proposed Rulemaking, published in 1996 and 1999, together describe the

stress test and the calculation of the risk-based capital amount. At the close of the comment period for the second Notice of Proposed Rulemaking, OFHEO will evaluate the

comments received and determine whether to proceed to final rulemaking or propose a

modified version of the regulation. A modified version would be issued as a proposed

rule if it were sufficiently different that further public comment would be necessary.

ENSURING CAPITAL ADEQUACY

The risk-based capital requirement is the final and most important piece of the capital

regulation of the Enterprises. The 1992 Act requires that the Enterprises meet two capital standards, risk-based and minimum, to be classified as adequately capitalized. The

Act authorizes mandatory and discretionary actions that must or can be taken if an

Enterprise is less than adequately capitalized. Therefore, the enforcement power to

ensure capital adequacy is tied to the risk-based capital requirement and the definition

of adequately capitalized. Furthermore, OFHEO's cease-and-desist authority varies,

depending on whether an Enterprise is adequately capitalized or not.

Beyond the legal importance of the risk-based capital requirement, there is a compelling

economic rationale. The minimum capital requirement is driven by the size of an Enterprise. An Enterprise with conservative investments and an Enterprise with riskier investments would have the same capital requirement if they were the same size. The riskbased capital requirement differentiates among the assets and accounts for both assets

and obligations to provide a substantially better measure of risk and the need for capital.

STRESS TEST: THE BEST WAY TO ENSURE THE ENTERPRISES’ CAPITAL ADEQUACY

Capital provides a buffer for a company in case of financial difficulties. It allows the company to continue to meet its obligations in the event of a decline in asset values. If capital

is inadequate, the company can fail. Generally, investors in a company's debt require

higher interest rates the weaker the company's capital adequacy, encouraging firms to

hold sufficient capital. In the case of government-sponsored enterprises, such market
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Stress Test: Providing Flexibility to Meet the Risk-Based Capital Requirement

1999 Report To Congress 3

discipline is debilitated because investors assume that the government would protect

them against loss.

The same economic conditions that would cause severe distress for the Enterprises

would also threaten homeowners. Bad economic times are those in which the Enterprises would be needed most, and for which they must be sufficiently capitalized. Regulatory capital, particularly for government-sponsored enterprises, is appropriately

designed to provide protection in circumstances more adverse than those against which

an Enterprise may choose to hold capital. Regulatory capital, therefore, is what protects

housing markets and taxpayers. 

The tool that Congress charged OFHEO to use in determining the capital adequacy of

the Enterprises is a stress test. A stress test uses predictive models of mortgage performance so that it can examine undesired, unexpected, and hopefully preventable, outcomes. It simulates economic conditions and the financial performance of the

Enterprises under what-if conditions. It is well suited to the task of determining capital

adequacy.

A stress test also works well for determining the capital adequacy of the Enterprises

because they engage in similar and narrow lines of business, guaranteeing and investing

in mortgage assets. Their businesses can be replicated in a model far more simply than

could, for example, the more diverse businesses of commercial banks. By mirroring the

performance of the Enterprises’ assets, liabilities, and off-balance-sheet obligations, the

stress test closely ties capital levels to the risks embedded in the Enterprises’ financial

positions.

A stress test, in contrast to risk measurement tools such as most value-at-risk models,

looks at outcomes over the long term. This is appropriate for companies that hold longterm mortgage assets, and explains why stress tests are used internally by the Enterprises themselves, by rating agencies, and by mortgage insurance companies.

There is a large body of data on the performance of mortgages held by the Enterprises.

OFHEO’s stress test is based on the performance of Enterprise mortgages over many

years and under diverse economic conditions. Such a database substantially improves

the reliability of a statistical model. It is far more feasible to acquire the necessary data

and understanding of the two Enterprises’ operations than it would be if there were

thousands of such companies.

STRESS TEST: PROVIDING FLEXIBILITY TO MEET THE RISK-BASED CAPITAL 

REQUIREMENT

The stress test indicates the amount of capital an Enterprise must hold given its current

risk positions. The Enterprise can hold that amount of capital or adjust its risk positions

to reduce its capital requirement. The stress test differentiates assets and liabilities along

multiple dimensions. For example, the stress test takes into account the maturities of

financial instruments, whether coupons are fixed or variable, and how principal balances

amortize. Therefore, if an Enterprise changes its mix of asset and liability maturities, or

its mix of fixed and variable coupons, it changes its risk position and, as a result, its capital requirement. This aspect of the risk-based capital requirement allows the Enterprises

to use all of the dimensions of credit risk and interest rate risk and their interactions to

adjust the amount of risk they have and, therefore, the amount of capital they need.
Chapter 1 - The Proposed Risk-Based Capital Standard

4 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

This aspect of the risk-based capital requirement also gives the Enterprises freedom to

continue innovating in product design. Because of their statutory charter restrictions,

new products are generally customized configurations of familiar features. The credit

and interest rate risks deriving from these features are generally known. For example a

new product such as a step-down mortgage, which reduces the interest rate on the mortgage that the borrower pays as the mortgage seasons over time, can easily be handled by

our proposed rule. The mortgage interest rate is a risk factor that is explicitly modeled in

our mortgage default equations. Therefore, as a mortgage’s interest rate decreases its

capital requirement will go down. New types of Enterprise debt, such as Benchmark and

Reference notes and Callable Benchmark and Reference notes, are another example. The

first two always mature on a specific date and the second two have a call option. These

payment characteristics are already used in the stress test. Furthermore, there is no prior

approval notice for new products. The proposed regulation states simply that the Enterprises will be required to provide relevant data with an explanation of new instruments

and that they will be reflected in the stress test. OFHEO will appropriately apply a capital

treatment to new products based on their characteristics and risks.

New mortgage products contribute modestly to the volume of Enterprise purchases.

Product innovation is important for many reasons, but an immediate contribution to

volume is not usually one of them. Product innovation can serve unique needs, e.g.,

needs of small numbers of borrowers. Some new products take time to catch on, and

most new products initially produce small purchase volumes. For the stress test, this

means that the impact on the capital requirement is small. The flexibility of the stress

test allows an Enterprise to meet its requirements and continue with its product innovation.

OFHEO’s risk-based capital requirement is the first regulatory capital standard that gives

credit for the economic benefit of a financial institution’s hedging activities. This is

because the capital requirement is based on the complete mix of assets and obligations,

not simply on the individual instruments. Therefore, the degree to which the Enterprises

choose to hedge their risk exposures will also have an important impact on their capital

requirements.

RESULTS OF THE STRESS TEST

The results of the stress test at any point in time will reflect an Enterprise’s mix of assets

and obligations as well as current economic conditions. The proposed rule contains the

results using Enterprise and economic data for two dates, September 30, 1996 and June

30, 1997. 

Table 1. Risk-Based Capital 

Requirements ($ in Billions)

Using data for the second quarter 1997, Fannie Mae’s proposed risk-based capital

requirement would have been $3.68 billion above its actual total capital. Freddie Mac’s

Date

Fannie Mae Freddie Mac

Actual Total 

Capital

Required 

Total Capital 

(Proposed)

Actual Total 

Capital

Required 

Total Capital

(Proposed)

9/30/96 $13.05 $16.55 $7.23 $5.66

6/30/97 $14.05 $17.73 $8.11 $6.83
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Results of the Stress Test

1999 Report To Congress 5

proposed requirement would have been $1.28 billion less than its actual total capital.

Fannie Mae would have had to reduce its risk level or raise capital. Freddie Mac would

have been required to hold capital equal to its minimum capital requirement.

The primary reason for the different results for Fannie Mae and Freddie Mac is that Freddie Mac’s asset/liability structure was more fully hedged against the large interest rate

movements of the stress test than was Fannie Mae’s. The sensitivity analysis shows that

the capital requirement can be quite sensitive to the way an Enterprise chooses to fund

its mortgage assets. OFHEO used the stress test to calculate the incremental capital

requirement associated with different aspects of an Enterprise’s business and to calculate the change in required capital that would result from changes in the credit guarantee

business or changes in the portfolio business. This analysis showed that Fannie Mae’s

overall level of risk was higher than Freddie Mac’s, that they had similar levels of risk

associated with their credit guarantee businesses, and that Fannie Mae had significantly

more risk associated with its portfolio business. The portfolio risk is predominantly

interest rate risk. 

When interest rates rise, mortgages prepay more slowly. When the debt funding these

mortgages matures, it must be replaced with new, higher rate debt. When interest rates

fall, mortgages prepay more quickly. The prepaid principal must be reinvested at lower

rates. In both scenarios, the asset/liability structure is sensitive to the risk that the profitable spread between rates on mortgages and rates on debt will disappear. The Enterprises

manage this risk, but the risk is not eliminated. And the risk management actions they

undertake have associated costs. Each Enterprise determines the risk exposure it is comfortable with taking and the cost it will pay. 

A projected capital shortfall does not mean that an Enterprise has to raise that amount

of capital. An Enterprise could meet a capital shortfall by reducing its risk with less

expensive hedging strategies. For example, Fannie Mae has estimated that it could have

met the June 1997 requirement at an annual cost of less than $70 million, with no perceptible impact on its future financial performance, using out-of-the-money interest rate

hedging tools. 

OFHEO’s analysis of the Enterprises’ mortgage portfolios provides good news for affordable housing. The primary risk associated with affordable housing loans is credit risk.

OFHEO’s analysis suggests that the credit risk profile of Enterprise loans that meet the

affordable housing goals are, on average, close to the risk profile of loans not meeting the

goals. Some affordable housing loans do have higher risk characteristics, but the higher

risk of this group of loans is muted when risk is averaged across the portfolio. Affordable

housing loans have been quite profitable for the Enterprises. Credit enhancements

required by the Enterprises on affordable loans they purchase often result in relatively

low net credit risks for the Enterprises.
Chapter 1 - The Proposed Risk-Based Capital Standard

6 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

STRESS TEST: REPLICATING THE KEY DRIVERS OF CREDIT AND INTEREST RATE RISK

The key feature of OFHEO’s proposed stress test is that it is a tool for measuring credit

and interest rate risk at the Enterprises. The Enterprises must then hold capital commensurate with their overall exposure to these risks. Therefore, a stress test approach to

determining capital adequacy requires a reasonably precise way to measure risk. OFHEO

has developed sophisticated models, tailored to the unique business of the Enterprises,

to quantify these two types of risk that are associated with guaranteeing and investing in

mortgages. 

The stress test models the performance of single-family and multifamily loans and the

cash flows of assets and liabilities. It adjusts for other credit factors such as credit

enhancements and counterparty risk. It projects income and expenses and translates

them to balance sheet positions and, in particular, monthly capital levels. The stress test

is run for an increase in interest rates, the up-rate scenario, and for a decrease in interest

rates, the down-rate scenario. Through these calculations, the stress test determines

whether capital at the start of the test is sufficient to remain positive throughout the 10-

year stress period, withstanding a substantial change in interest rates and significant

credit losses. The stress test results are used to calculate the risk-based capital requirement.

DATA The stress test uses historical and current data from the Enterprises, historical and current interest rate data, and historical and current house price, rental price, and vacancy

rate data. The historical data are used to construct models that predict loan defaults,

prepayments, and loss severity. Historical interest rate data are used to reasonably relate

other interest rates that are needed for the stress test to the 10-year constant maturity

Treasury yield which is the particular yield specified in the 1992 Act to rise or fall in the

first year of the stress period. Historical house price, rental price, and vacancy rate data

are used to update the change in property value that occurs between the time the Enterprise purchases a mortgage and the current time period for the stress test simulation.

These historical data on changes in property values are also used to project property values over the 10-year stress period.

The current data are the end-of-quarter balance sheet and off-balance-sheet positions of

the Enterprises and current market conditions that are the starting positions for each

model run of the stress test.

INTEREST RATES The 1992 Act specifies the change in the 10-year constant maturity Treasury yield and

directs that other interest rates be reasonably related. In general, rates either go up by 75

percent or down by 50 percent, with a 600 basis point cap. For the June 1997 period, this

requirement translated into a rise in rates of 490 basis points and a fall in rates of 327

basis points. In the stress test, other Treasury yields are related to the 10-year Treasury

yield by specifying yield curves. For the scenario involving a large increase in interest

rates, the proposed rule uses a flat yield curve. That is, all Treasury yields equal the 10-

year constant maturity Treasury yield during the last nine years of the stress period. For

the scenario involving a large decrease in interest rates, the proposed rule uses an

upward sloping yield curve. In that scenario Treasury yields are lower for shorter maturities and higher for longer maturities. Both of these yield curves are based on historical

relationships among Treasury yields of varying maturities. The historical data show a

pattern of relatively flat yield curves after interest rate increases and positively sloping

yield curves after interest rate decreases.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Stress Test: Replicating the Key Drivers of Credit and Interest Rate Risk

1999 Report To Congress 7

All adjustable rate mortgages and mortgage-backed securities, floating rate liabilities,

and most derivative contracts are linked to interest rate indices such as the 11th Federal

Home Loan Bank District cost of funds and LIBOR. In order to model the cash flows of

these financial instruments, the stress test incorporates projected interest rate values for

key rates. These are based on the historical relationships between non-Treasury and

Treasury yields of comparable maturities.

The cost of borrowing for the Enterprises is projected in the same manner as other nonTreasury yields are projected, except that a 50 basis points premium is added after the

first year of the stress period. This is to reflect what would likely be the market response

to the Enterprises if they were experiencing the economic conditions of the stress test.

PROPERTY VALUES Property values, in relationship to their associated loan amounts, are an important determinant of mortgage default. The higher the property value is relative to the loan amount,

the lower is the probability that the mortgage will default, and vice versa. The stress test

uses the OFHEO HPI, a repeat-sales house price index, to determine house price growth

rates on mortgaged properties purchased by the Enterprises prior to running the stress

test. By doing this, the loan-to-value (LTV) ratios of mortgages held or guaranteed by the

Enterprises are effectively marked to market.

The pattern of house price growth rates that occurred in the benchmark experience is

replicated in the stress test for single-family property values. In the up-rate scenario,

house prices decline for the first five years of the stress period and then increase, regaining the beginning house price level in the eighth year. In the down-rate scenario, house

prices likewise decline for five years, but do not regain their previous level until the tenth

year of the stress period. If the 10-year constant maturity Treasury yield increases by

more than 50 percent in the first year of the stress test, the 1992 Act requires that the

estimates of credit losses be adjusted to reflect a high rate of price inflation. This adjustment is implemented in the stress test by increasing house price growth rates beginning

in the fifth year of the stress period. The size of the adjustment is based on the amount

by which the increase in the 10-year constant maturity Treasury yield exceeds 50 percent. The adjustment is phased in during the fifth through tenth years in equal increments. This pattern reflects historical experience: generally, overall price inflation and

house price inflation are not related in the short run, but are related in the long run. The

effect of the adjustment is to increase the rate of growth for property values in the second half of the stress period.

MORTGAGE LOAN

PERFORMANCE

The Enterprises are exposed to credit risk on the loans that they hold in their retained

portfolios and the loans that collateralize their mortgage-backed securities. Within the

stress test, there are models to predict default rates, prepayment rates, and loss rates for

single-family loans and multifamily loans. The 1992 Act requires that credit losses for all

loans owned or guaranteed by an Enterprise occur at a rate that is reasonably related to

the worst regional experience, known as the benchmark loss experience.1

 The benchmark loss experience, as proposed in the first notice of proposed rulemaking, entailed a

10-year default rate of 14.9 percent, a loss severity rate of 63.3 percent, and a loss rate of

9.4 percent for 30-year fixed-rate single-family loans. The single-family loan performance

1 As identified in OFHEO's July 1995 Notice of Proposed Rulemaking, the benchmark loss experience 

occurred for mortgages originated in the States of Oklahoma, Arkansas, Louisiana, and Mississippi during 

1983 and 1984.
Chapter 1 - The Proposed Risk-Based Capital Standard

8 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

models in the stress test have been calibrated to produce the same loss rate for 30-year

fixed rate single-family loans assuming the same path of interest rates and house price

growth that occurred during the 10 years following origination of the benchmark loans.

By using these models to forecast loss rates for all single-family mortgages, subject to

current interest rates and current house prices, the projected loss rates will be reasonably

related to that of the benchmark experience. 

Loss rates during the stress period for current mortgage portfolios of the Enterprises will

be much lower than the 9.4 percent benchmark case. There are multiple reasons for this.

First, actual Enterprise mortgage portfolios are more seasoned (resulting in lower current LTVs) than was the case for benchmark loans which were all newly-originated and

tended to have high LTVs. Second, the Enterprises have significant amounts of less risky

products today, such as 15-year loans, which did not exist in the early 1980s. Finally, the

average loss rate on benchmark loans was a gross rate that did not take into account the

effect of credit enhancements. The Enterprises have, as required by law, credit enhancements on mortgages that they purchase with LTVs greater than 80 percent. Taking all of

these factors into account, the mortgage credit losses that the Enterprises experienced

during the stress test on September 1996 and June 1997 averaged less than 2 percent.

Predicting multifamily loan performance and relating it to the benchmark loss experience is accomplished in a similar way. The stress test includes loan performance models

developed specifically for multifamily loans. Multifamily rental prices and vacancy rates

from the benchmark time and place are used to reasonably relate the predicted multifamily loan performance to the benchmark. Annual rental rates are increased in the last

five years of the stress test for the up-rate scenario, consistent with the increase in property values for single-family loans.

OTHER CREDIT FACTORS Mortgage credit enhancements include mortgage insurance, recourse, and collateral.

Including them in the stress test is one way the stress test captures not only risk but also

risk management tools. 

In an adverse economic environment, the counterparties in Enterprise transactions

would also experience some level of financial stress. Counterparty risk arises in connection with some forms of credit enhancement, securities issued by others that are held as

investments, and derivative counterparties. To reflect this risk, the stress test reduces, or

haircuts, the receipts that would be expected from these counterparties. The size of the

reduction is smaller where the risk is lower, such as when there is collateral set aside to

cover payments. For most instruments and counterparties, the stress test uses ratings

from public rating agencies as an indicator of risk and ties the size of the haircut to the

rating. The size of these haircuts is based on historical default rates of corporate bonds in

each AAA through BBB rating category, and they are phased in monthly over the tenyear stress period. For example, as shown in Table 2, the haircut on a AA counterparty is

2 percent in the twelfth month, 10 percent in the sixtieth month, and 20 percent in the

final month. Much smaller haircuts apply to collateralized counterparty risks.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Stress Test: Replicating the Key Drivers of Credit and Interest Rate Risk

1999 Report To Congress 9

Table 2. Rating and Size of 

Haircut

OPERATIONS, TAXES, & 

FINANCIAL STATEMENTS

The stress test computes Federal income taxes and operating expenses as they might

reasonably occur. Operating expenses decline in proportion to declines in an Enterprise's

mortgage portfolio. After incorporating fulfillment of commitments to purchase loans

that exist at the start of the stress test period, the stress test allows for no further new

business during the stress period.

The stress test simulates new debt issues in months when there is a shortfall of cash,

and, in months when there is an excess of cash, simulates short-term investments of that

cash. In any month of the stress period in which an Enterprise’s capital exceeds the minimum capital requirement, the stress test reflects payment of dividends on preferred

stock. Common stock dividends are paid only as long as an Enterprise meets its riskbased capital requirement. For purposes of simplicity, that is assumed to be only during

the first four quarters of the stress period. 

The cash flows from the financial instruments and non-cash items flow into financial

statements for the Enterprises during the stress test period. The balance sheets show the

monthly capital amount for each Enterprise.

CALCULATION OF THE

RISK-BASED CAPITAL

REQUIREMENT

The capital balances for each month of the stress test period, in both the up-rate and the

down-rate scenarios, are discounted to its present value at the start of the stress test. The

largest negative capital balance or the smallest positive balance of capital is subtracted

from the amount of capital the Enterprise had at the start of the stress test. The difference is the amount of capital that was “used” during the stress period. This is the minimum amount of capital that the Enterprise would need to hold at the start of the stress

period in order to withstand credit and interest rate risk and maintain positive capital

throughout the stress period. Thirty percent of this amount is then added on to cover

management and operations risk, as required by statute. The 30 percent add-on is prescribed by the 1992 Act to cover all other risks associated with the conduct of an Enterprise’s business that affect its financial performance.

Month AAA AA A BBB 

or lower

12 1% 2% 4% 8%

24 2% 4% 8% 16%

36 3% 6% 12% 24%

48 4% 8% 16% 32%

60 5% 10% 20% 40%

72 6% 12% 24% 48%

84 7% 14% 28% 56%

96 8% 16% 32% 64%

108 9% 18% 36% 72%

120 10% 20% 40% 80%
Chapter 1 - The Proposed Risk-Based Capital Standard

10 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

RISK-BASED CAPITAL PLUS COMPREHENSIVE EXAMINATIONS

The proposed risk-based capital standard together with our comprehensive examination

program provides OFHEO with the necessary tools for effective regulatory oversight. The

examination program ensures the integrity of Enterprise policies and processes in all risk

management areas, and informs the qualitative evaluation presented in Chapter 2 of this

report. The risk-based capital standard, when in place, will ensure that the quantity of

risk undertaken by an Enterprise never exceeds what can be supported by its capital

base.
1999 Report To Congress 11  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Chapter 2

Risk-Based Examination Program

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 risk management, 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 1998 examinations found both Enterprises to be financially sound and wellmanaged.

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 1. 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 1, beginning with the base of the chart and
Chapter 2 - Risk-Based Examination Program

12 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

concluding at the top. Numeric references to the chart are included in the text that

describes the examination process. 

The summaries of examination results and conclusions contained in this Report vary

between Fannie Mae and Freddie Mac. These differences are to be expected given the

different approaches the Enterprises choose to conduct business, and the tailored examination strategies and work plans OFHEO developed to complete its examination program at each Enterprise. 

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

Changed frequently at each Enterprise 1

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 2

Program areas for risk-based examinations

• These remain constant

3

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

4

5 • 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

Figure 1. OFHEO’s Comprehensive RiskBased Examination Program
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO’s Examination Program

1999 Report To Congress 13

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 understanding of 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. Each strategy is

tailored to the Enterprise and is based on OFHEO’s knowledge of a variety of factors: the

Enterprise’s management, strengths, weaknesses, past performance and markets; the

Enterprise’s level of risk and risk management techniques and tools; the applicable economic conditions and their potential or actual impact on the Enterprise; OFHEO’s guidelines, standards and priorities; and statutory examination requirements. Each strategy is

designed for OFHEO to assess the continued effectiveness of the Enterprise’s risk management processes, any changes in risk appetites, enhancements management has made

and, if applicable, actions management has taken in response to previously identified

issues. Examination activities identified in the strategy correlate to the quantity of risk

and quality of risk management in the Enterprise or in a particular current or proposed

activity. In conjunction with the strategies, OFHEO creates subsidiary 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 RISKBASED EXAMINATIONS AND

CATEGORIES OF RISK AND

RISK MANAGEMENT

Once OFHEO has strategies and work plans in place, examiners implement the strategies

by 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 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 2 - Risk-Based Examination Program

14 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

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 risk 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 of Directors’ 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 AND

EXAMINATION OBJECTIVES 

OFHEO conducts examination work in each of the 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. 

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. 

4
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO’s Examination Program

1999 Report To Congress 15

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. (The assessment factors for the reported program areas are detailed at the end of this Chapter.) Sources for

the assessment factors included industry standards and benchmarks, best practices and

examiner expertise. 

For each program area there are examination objectives. These are the broad statements

of what OFHEO’s examiners will achieve through their work in each of the program

areas. In order to make a determination on an examination objective, OFHEO’s examiners are required to opine on each of the supporting 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. The examination objectives unique to each

program area are listed in Table 3.

Table 3. Examination 

Objectives Unique to Each 

Program Area

Credit Risk Program

Evaluate the risk management framework surrounding credit risk. 

Identify and evaluate any changes occurring in the level and quality of credit risk as well as the 

potential impact on the Enterprise.

Assess the overall adequacy and effectiveness of credit risk management. Determine how well 

the Enterprise manages and/or hedges credit risk.

Interest Rate Risk Program

Evaluate the risk management framework surrounding interest rate risk. 

Identify and evaluate any changes occurring in the level and quality of interest rate risk as well 

as the potential impact on the Enterprise.

Identify and evaluate the use of derivative instruments.

Assess the overall adequacy and effectiveness of interest rate risk management. Determine how 

well the Enterprise manages and/or hedges interest rate risk.

Liquidity Management Program

Evaluate the liquidity positions and the surrounding management framework.

Identify and evaluate any changes occurring in the quality of liquidity and the Enterprise’s position in the credit markets.

Information Technology Program

Evaluate the information technology infrastructure and the surrounding risk management 

framework.

Identify and evaluate changes that may influence the risks associated with information technology as well as the potential impact on the Enterprise.

Assess the overall adequacy and effectiveness of risk management and controls for information 

technology.
Chapter 2 - Risk-Based Examination Program

16 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 3. Examination 

Objectives Unique to Each 

Program Area (Continued)

Business Process Controls Program

Evaluate the framework for building the control environment surrounding revisions to the 

business proposition or new initiatives. 

Identify changes to the business proposition that may influence the quality of business process 

controls and the potential impact on the Enterprise.

Determine the adequacy and effectiveness of the due diligence process for new or revised business initiatives.

Internal Controls Program

Evaluate the framework for internal controls and the management of this framework. 

Identify and evaluate any changes that may influence the quality of internal controls and the 

potential impact on the Enterprise.

Determine the adequacy and effectiveness of the Enterprise’s system of internal controls. 

Audit Program

Assess the overall adequacy and effectiveness of both internal and external audit functions and 

the management of the audit program. 

Identify and evaluate any changes occurring in internal and external audit functions or roles, as 

well as the potential impact on the Enterprise.

Management Information Program

Evaluate the framework employed to produce reliable management information. 

Identify and evaluate any changes occurring that may substantially alter the production of 

management information.

Determine whether the Enterprise’s management information produces timely, accurate and 

meaningful information and reports that are appropriately tailored for their audiences and purpose.

Management Process Program

Evaluate the framework for key management processes influencing organizational talent and 

behavior and the management of this framework.

Identify and evaluate any changes occurring that may influence the quality of the key management processes, as well as the potential impact on the Enterprise.

Determine the adequacy and effectiveness of the key management processes influencing organizational talent and behavior on a company-wide basis.

Board Governance Program

Evaluate the framework the Board of Directors uses to govern the Enterprise.

Identify and evaluate the changes occurring in the structure and composition of the Board of 

Directors as well as the potential impact on the Enterprise.

Determine whether the Board effectively discharges its duties and responsibilities for governing 

the Enterprise.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO’s Examination Program

1999 Report To Congress 17

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. The type of communication runs the gamut from an informal discussion

with a technical expert to clarify a point, to a letter addressed to executive management

or the Board. Regardless of the format, 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. OFHEO is committed to continuous, effective communication with 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

with them as often as required by the Enterprise’s condition and the findings from examination activities. OFHEO brings to the immediate attention of the Board and executive

management 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. Technical issues and matters relating to a single line of

business or activity will generally be brought to the attention of operating managers with

the Board and executive management kept appropriately informed. 

One formal communication delivered at least annually to each Enterprise is the written

Report of Examination (ROE). The ROEs have an opening date and closing date. The

opening date is January 1 and the closing date is December 31. An ROE is delivered to

each Enterprise’s Board of Directors no later than 60 days after the closing date. The ROE

reflects the cumulative conclusions made throughout the year-long examination process

and addresses the Enterprise’s safety and soundness on an ongoing basis. The ROE

reflects the focus of the examination activities at each Enterprise. 

Another form of communicating examination results and conclusions is OFHEO’s

annual Report to Congress. In its Report to Congress, OFHEO presents results and conclusions from the annual examinations of the Enterprises by program area.

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.

5

5
Chapter 2 - Risk-Based Examination Program

18 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

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. 

1998 EXAMINATION RESULTS AND CONCLUSIONS FOR FANNIE MAE 

In accordance with OFHEO’s examination program, the results and conclusions for each

category of risk and risk management are reported in relation to safety and soundness

standards. The results of the 1998 examination show that in all categories, Fannie Mae

exceeds safety and soundness standards. These results reflect the examination work conducted from January through December 1998, 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. Management is experienced and competent, and has

developed appropriate and effective credit risk management tools to evaluate and manage the credit risk of the assets Fannie Mae purchases and securitizes. Fannie Mae has

comprehensive credit policies that effectively address all aspects of credit risk. There is a

well-conceived and thorough internal control framework that supports the credit risk

management function. Fannie Mae is adequately compensated for the credit risk it

assumes, and effectively reduces its credit risk exposure through the use of credit

enhancements. Fannie Mae effectively identifies, quantifies and monitors its credit risk

exposure. Management effectively manages its relationships with counterparties. Fannie

Mae has a sound reserve determination process. The credit risk management framework

and reporting structure provide an effective means for following up on credit-related

issues.

INTEREST RATE RISK Fannie Mae’s interest rate risk management exceeds safety and soundness standards.

There are appropriate policies and procedures governing interest rate risk management.

There is effective and appropriate separation of duties between those who analyze interest rate risk and those who execute transactions. Fannie Mae has effective tools and

models that measure interest rate risk and the company’s sensitivity to changing interest

rate environments. The processes Fannie Mae uses to monitor its interest rate profile,

and manage interest rate risk data are effective. Fannie Mae effectively uses derivatives

and its Liquid Investment Portfolio to manage its interest rate risk. 

LIQUIDITY MANAGEMENT Fannie Mae’s liquidity and the surrounding management framework exceed safety and

soundness standards. Fannie Mae has appropriate policies and procedures for managing

its liquidity position. There is a strong internal control framework surrounding liquidity

management. Fannie Mae effectively measures the adequacy of its liquidity position

through the use of proprietary models and monitoring systems. Tools that estimate how

changing interest rates will affect Fannie Mae’s liquidity position are effective. There is

strong technical support for Fannie Mae’s liquidity management function. 

INFORMATION TECHNOLOGY The information technology infrastructure and surrounding risk management framework exceed safety and soundness standards. Fannie Mae has effective operating processes that ensure secure, effective and efficient data center processing and problem

management. There are policies and processes in place to ensure that data, information

and computing resources are secure and accessed only by authorized users. Fannie Mae

has effective policies and processes in place to ensure the timely and appropriate

resumption of business in the event of a disaster. Fannie Mae has an appropriate process
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

1998 Examination Results and Conclusions for Fannie Mae

1999 Report To Congress 19

to ensure information technology plans effectively address business unit and corporate

objectives. The processes in place ensure appropriate controls are implemented and documentation for systems development and maintenance is complete. Fannie Mae has an

effective plan for identifying, renovating, testing and implementing solutions for the Year

2000 issue. Fannie Mae has appropriately coordinated Year 2000 processing capabilities

with customers, vendors and business partners. Fannie Mae has appropriately managed

the effect of Year 2000 efforts on the company’s strategic and operating plans. 

INTERNAL CONTROLS Fannie Mae’s internal control framework and the management of that framework exceed

safety and soundness standards. Fannie Mae has effective policies and procedures that

delineate internal control processes and standards for the control environment. Fannie

Mae has an accurate and reliable process for identifying risks to business processes and

implementing appropriate controls. Fannie Mae has a reliable process for ensuring

timely resolution of control-related issues. Control-related issues are appropriately communicated with management and the Board. 

AUDIT PROGRAM Fannie Mae’s audit functions exceed safety and soundness standards. Both the internal

and external audit functions are independent with appropriate access to the Board. The

internal audit staff is highly qualified, and the external auditors possess appropriate

experience and expertise. The management of internal audit and the risk assessment

process are both strong. The 1998 audit work was both appropriate and complete. Executive management’s involvement and follow-up of identified audit issues is strong, as is

the Board’s follow-up of identified audit issues. The Office of Internal Audit is appropriately involved with new products and initiatives. 

MANAGEMENT INFORMATION The framework used to produce timely, accurate and reliable reports exceeds safety and

soundness standards. The framework is based on information systems that are linked to

Fannie Mae’s overall strategy and are developed and refined pursuant to a strategic plan

for information systems. Processes and controls effectively ensure that reports used by

management for decision making are accurate. Information and reports are appropriately tailored for their audiences. Fannie Mae’s management and Board of Directors

receive meaningful and appropriately tailored reports on performance relative to established goals and objectives. Reports permit the Board and management to gauge the

quality and impact of decisions. Strategy, roles and responsibilities are effectively communicated across the company, and employees have appropriate two-way channels of

communication. 

MANAGEMENT PROCESS The key management processes that influence company-wide talent and behaviors

exceed safety and soundness standards. Fannie Mae’s management processes are

grounded on strong, comprehensive planning processes, including strategic planning.

Fannie Mae effectively uses appropriate measures that align with its strategy. 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 a talented and diverse staff. Fannie Mae’s proprietary risk management

systems and programs effectively identify and analyze risks, thereby enhancing management’s ability to control risks. Management effectively conveys an appropriate message

of integrity and ethical values. 
Chapter 2 - Risk-Based Examination Program

20 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

BOARD GOVERNANCE Fannie Mae’s Board of Directors discharges its duties and responsibilities in a manner

that exceeds safety and soundness standards. The committee structure and frequency of

Board and committee meetings are effective in ensuring the Board remains appropriately informed of Fannie Mae’s condition, operations, performance, and compliance. The

Board has sufficient, well-organized time to carry out its responsibilities. In addition, the

Board is appropriately engaged in the development of a strategic direction for Fannie

Mae. The Board’s processes for holding the executive management team accountable for

achieving defined goals and objectives is effective. The process the Board uses for hiring

and maintaining a quality executive management team is effective. 

1998 EXAMINATION RESULTS AND CONCLUSIONS FOR FREDDIE MAC

In accordance with OFHEO’s examination program, the results and conclusions for each

category of risk and risk management are reported in relation to safety and soundness

standards. The results of the 1998 examination show that in all categories, Freddie Mac

exceeds safety and soundness standards. These results reflect the examination work conducted from January through December 1998, 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. Management is experienced and competent, and has

developed an appropriate set of credit risk management tools to evaluate and manage

the credit risk of the assets Freddie Mac purchases and securitizes. Freddie Mac’s credit

risk management framework provides management with the information to understand

the performance characteristics of the risk exposures the Enterprise selects, and the

technology to assess actual performance. The expanded use of scoring and default probability technology has enhanced management’s ability to more precisely gauge performance within the retained and guaranteed portfolios. The framework effectively

positions management to identify credit mortgages that are likely to default, to attempt

foreclosure alternatives when appropriate, and to foreclose and take possession of properties expeditiously. Once Freddie Mac owns a property, the framework enables management to effectively repair, market and sell at an acceptable price. The management

committee structures, information systems, and reporting practices allow management

to effectively monitor developments in credit risk management. Management effectively

manages its relationships with the counterparties that service assets, provide mortgage

insurance and other forms of credit enhancement, and maintain and enhance credit risk

management technology. In addition, Freddie Mac’s credit risk profile exceeds safety and

soundness standards. Net recoveries (versus charge-offs), reduced credit losses and

reduced foreclosed property expenses have resulted in significant reductions in the average loss per foreclosed property. 
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

1998 Examination Results and Conclusions for Freddie Mac

1999 Report To Congress 21

INTEREST RATE RISK Freddie Mac’s interest rate risk management exceeds safety and soundness standards.

Policies and procedures appropriately describe the functions of all departments that

manage interest rate risk. Risk limits and appetites are effectively communicated in

management reports and Board materials. The interest rate risk analysis functions are

appropriately separate from the transaction functions. New products and initiatives

relating to interest rate risk are well researched prior to implementation. There are

appropriate and effective tools that evaluate the effect of changing interest rates on all

areas of the balance sheet. Actions to alter the risk/reward relationship are thoroughly

analyzed and discussed. Interest rate risk models are sound and continuously refined.

Derivatives are used in a manner consistent with risk management policies and in accordance with standards of other large financial intermediaries. Management continuously

monitors its interest rate risk profile and effectively follows up on issues related to interest rate risk.

LIQUIDITY MANAGEMENT Freddie Mac’s liquidity and surrounding management framework exceed safety and

soundness standards. There are effective and appropriate policies and procedures that

precisely detail the nature of the desired levels of liquidity and how it is managed. Risk

limits for liquidity are clearly identified and effectively communicated. Liquid investments are consistent with the strategies of the company. Tools effectively estimate how

changing interest rates affect liquidity positions. There are effective technology and controls for liquidity management. The quality of the planning process for liquidity, including tactical, strategic and contingency planning, is sound. New products, programs or

initiatives that relate to liquidity are well researched prior to implementation. Management effectively follows up on issues or initiatives that influence liquidity. 

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. Effective policies and procedures are in place to ensure 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. Adequate processes are in place to ensure appropriate controls are

implemented and documentation is complete for system development and maintenance. The plan for identifying, renovating, testing and implementing solutions for the

Year 2000 issue is effective. Processes ensure information technology plans effectively

address business unit and corporate objectives. Effective processes have been implemented for the processing of data and information to ensure accuracy and timeliness. 

INTERNAL CONTROLS The internal control framework and the management of that framework exceed safety

and soundness standards. Freddie Mac has an accurate and reliable process for identifying risks to business processes and implementing appropriate controls. There is a reliable

process for ensuring timely resolution of control-related issues. Policies and procedures

delineate internal control processes and standards for the control environment. Management effectively ensures compliance with established internal controls. 
Chapter 2 - Risk-Based Examination Program

22 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

AUDIT The audit functions exceed safety and soundness standards. The organizational structure and reporting lines effectively support and promote the independence of the audit

functions. The auditors demonstrate professional proficiency. The scope of the audit

work performed is appropriate. The audit work is complete and generates necessary and

appropriate information. The management of the Internal Audit department is strong.

The Board and executive management are appropriately involved with, and effectively

follow up on, identified audit issues. The auditors’ comprehensive risk assessment process is strong and effective. Internal audit is appropriately involved with new products

and initiatives. 

MANAGEMENT INFORMATION The framework used to produce timely, accurate and reliable reports exceeds safety and

soundness standards. Information systems are linked to support Freddie Mac’s overall

strategy, and are developed and refined pursuant to a strategic plan for information systems. Management information reports are designed to answer appropriate key questions. Freddie Mac’s strategy, roles and responsibilities are effectively communicated.

Reports for executive management and the Board provide appropriate information

about performance relative to established goals and objectives. Management reporting

provides all levels of management with necessary information to carry out their responsibilities efficiently and effectively, and to gauge the quality of decisions. The reports used

by management for decision making are accurate. 

MANAGEMENT PROCESS Key management processes that influence company-wide talent and behaviors exceed

safety and soundness standards. Freddie Mac’s planning process is comprehensive. Management has demonstrated an ability to manage and monitor change. The key performance measures are appropriate, effective and align with the company’s strategy.

Behavior management programs are designed to achieve corporate goals and objectives.

There are effective programs for career and management development and for recruiting

competent personnel. Proprietary risk management systems and programs are strong

and effective. The decision making roles and assignment of responsibilities effectively

provide for accountability and promote internal controls. 

BOARD GOVERNANCE The Board discharges its duties and responsibilities in a manner that exceeds safety and

soundness standards. The orientation and briefings provided to new Board members are

both thorough and effective. The Board’s committee structure aligns with the company’s

lines of business and governance responsibilities. Materials are provided to Board members sufficiently in advance of meetings, and the Board has sufficiently well organized

time to carry out its responsibilities. The Board is appropriately engaged in the development of a strategic direction for the company. The Board ensures that executive management appropriately defines the operating parameters and risk tolerances of the

Enterprise, and the Board’s process for hiring and maintaining a quality executive management team is effective. The Board appropriately holds the executive management

team accountable for achieving defined goals and objectives. The Board is appropriately

informed of Freddie Mac’s condition, operations, compliance and performance. 
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

The Year 2000 Challenge and Examination Activities

1999 Report To Congress 23

THE YEAR 2000 CHALLENGE AND EXAMINATION ACTIVITIES

WHAT IS THE YEAR 2000 

CHALLENGE?

The Year 2000 “challenge” arises because computer systems have typically used two digits, rather than four, to represent the year – for example, “99” represents the year 1999.

The problem with a two-digit date field is that computer systems may identify “00” as the

year 1900, rather than 2000. This error would lead to errors in performing date-sensitive

tasks, including calculations to determine payment amounts, payment dates, payoff balances, interest payments, investor payouts, and other mortgage-related payment information. Failure to address this problem also may lead to errors in annual financial

reporting to investors, shareholders, and Federal regulatory agencies; reporting related to

mortgage-backed and debt securities and derivative financial instruments; portfolio

rebalancing; mortgage commitments and purchases; and the issuance of securities.

OFHEO’s role as the Enterprises’ financial safety and soundness regulator requires it to

evaluate management’s efforts to resolve the problem as it may impact the Enterprises’

internal systems. OFHEO also is evaluating management’s efforts to safeguard against

circumstances where an Enterprise’s key business partners (such as sellers, servicers,

vendors, and service providers) have not corrected the problem in their own systems.

How OFHEO Evaluates the Enterprises’ Efforts to Achieve Year 2000 

Compliance

Year 2000 compliance efforts were an important focus of OFHEO’s examination effort

during 1998 and will remain an examination priority into the new millennium. OFHEO

follows the principles and framework laid out in the General Accounting Office’s guide

entitled Year 2000 Computing Crisis: An Assessment Guide to evaluate the Enterprises’

efforts to address the problem. Additionally, OFHEO has been participating in the Federal Financial Institutions Examination Council’s Year 2000 efforts and Working Group

on Year 2000, and The President’s Council on Year 2000 Conversion, Financial Sector

Group to ensure consistent standards and treatment with the other financial regulators.

The complexity of the effort to achieve Year 2000 compliance is not in the solution to the

actual problem, but in the size and scope of the project itself. Given that this is essentially a project management issue, OFHEO has examined, and will continue to examine,

the Enterprises’ timely and successful management of this critical project.

The Year 2000 Evaluative Framework

The framework used to achieve Year 2000 compliance follows a five-phase approach. This

five-phase approach progresses in the following sequence:

Awareness Phase. Define the Year 2000 problem, make personnel aware of the issue,

establish a Year 2000 program team, and develop an overall compliance strategy.

Assessment Phase. Assess the Year 2000 impact on the organization, identify core

business areas and processes, analyze the systems supporting the core business areas,

and prioritize conversion and/or replacement of those critical systems.

Renovation Phase. Perform the conversions, replacement, or elimination of critical

platforms, applications, databases, and utilities, and modify interfaces.

Validation Phase. Test, verify, and validate the converted or replacement platforms,

applications, databases, and utilities to ensure that they meet the organization’s needs.
Chapter 2 - Risk-Based Examination Program

24 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Implementation Phase. Implement the converted and replacement platforms, applications, databases, utilities, and interfaces while maintaining appropriate back-up.

The Enterprises’ Year 2000 Efforts Are Appropriate

In addition to examining the Enterprises’ efforts to achieve Year 2000 compliance with

their systems, OFHEO also assesses the Enterprises’ efforts to ensure that their critical

business partners achieve timely Year 2000 compliance. Because technology is a cornerstone of the Enterprises’ business, Year 2000 compliance is critical for business

continuity.

OFHEO’s Year 2000 priority with respect to the Enterprises is to safeguard the orderly

operation of the secondary mortgage market by ensuring that the Enterprises are able to

process transactions and information at the new millennium. OFHEO will continue to

treat the Year 2000 challenge as a priority during 1999 (and thereafter as appropriate) and

will monitor the Enterprises’ efforts to lead, and ultimately require, their business partners to be Year 2000 compliant.

OFHEO is able to report that each Enterprise is proceeding with an acceptable plan, and

the implementation of these plans is on schedule. Year 2000 ranks among the top priorities at each Enterprise and receives the attention of executive management and the

Board of Directors and is receiving substantial resource investments (both human and

financial). The Enterprises recognize the significance of the Year 2000 challenge, and

each organization has designated working groups to address the numerous business and

technology issues. The implementation plans for correcting the problem are comprehensive, and these plans are also being enhanced as the body of knowledge for Year 2000

issues evolves. Each Enterprise has been actively involved in comprehensive testing

(including testing with business partners and important industry-sponsored tests). Testing, including external testing, has been a priority during 1999 and is scheduled to be at a

very advanced stage at each Enterprise by the end of second quarter 1999. Also, comprehensive business continuity plans have been documented by each Enterprise and these

plans are being continuously refined and updated. 

Because OFHEO believes the Year 2000 challenge is a crucial operating issue for the

Enterprises, it believes that the Board of Directors and executive management of each

company should be actively involved. OFHEO has determined that the Boards of Directors are being appropriately and routinely briefed on the progress toward Year 2000 compliance, including the meeting of pertinent timetables. Senior executives at both

Enterprises are actively engaged and routinely receive status updates. In addition to

frequent dialogue with appropriate Enterprise representatives, OFHEO has been testing,

and will continue to test and verify, each Enterprise’s performance against its respective

plan and evaluate each Enterprise’s respective business continuity plan. In the event

there are adverse deviations from the plans or timetables, OFHEO will immediately

determine the appropriate regulatory response.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Credit Risk

1999 Report To Congress 25

Examination Assessment Factors

CREDIT RISK

1. Determine the degree and trend of diversification of credit risk. Determine whether

there are any noteworthy concentrations. For the concentrations identified, determine the nature of any identifiable trends. Determine whether the actual profile of

credit risk is in compliance with prescribed limits or guidelines. 

2. Determine the quality of policies, procedures, internal controls, and management

reporting for the credit function. Share determinations with the examination teams

responsible for internal controls, management process, management information

and board governance.

3. Determine whether the Enterprise is adequately compensated for the credit risk it

assumes. Determine whether credit models produce accurate and reliable results.

4. Determine whether management prudently manages counterparty exposure.

5. Determine the manner and extent to which new products, programs or initiatives

impact the credit risk profile.

6. Determine the adequacy of the reserve determination process.

7. Determine whether credit risk management tools are effective. Share determinations about proprietary risk management programs and systems with the examination team responsible for management processes.

8. Determine the effectiveness of credit risk sharing strategies.

9. Determine the quality of the Enterprise’s methodology for identifying and quantifying credit risk exposure. 

10. Determine the quality of the Enterprise’s tracking and analyzing of risk exposures.
Chapter 2 - Examination Assessment Factors

26 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

11. Determine the effectiveness of technology and controls supporting the credit management function. Share determinations with the examination teams responsible

for information technology and internal controls.

12. Determine whether management appropriately/effectively reconciles differences

between actual and expected credit portfolio performance.

13. Determine whether management has an effective means of following up on credit

related issues. Share determinations with the examination teams responsible for

audit, management information, management process and internal controls.

INTEREST RATE RISK

1. Determine the quality of policies, procedures, internal controls, and management

reporting relating to interest rate risk. Share determinations with the examination

teams responsible for internal controls, board governance, management process and

management information.

2. Determine whether management has established a meaningful methodology for

quantifying and monitoring the level and nature of interest rate risk and determine

whether management routinely evaluates the impact of events or alternative environments.

3. Determine management’s effectiveness in following up on issues related to interest

rate risk. Share determinations with the examination teams responsible for audit,

management information, management process and internal controls.

4. Determine the manner and extent to which new products, programs or initiatives

impact the interest rate risk profile. Share determinations with the examination

team responsible for business process controls.

5. Determine the effectiveness of technology and controls supporting the interest rate

risk management function. Share determinations with the examination teams

responsible for information technology and internal controls.

6. Evaluate the quality of the tools used to model interest rate risk and the strategies to

alter the exposures to interest rates. Share determinations about proprietary risk

management programs and systems with the examination team responsible for

management processes.

7. Determine management’s effectiveness at incorporating tactical and strategic issues

into the management of interest rate risk. Share determinations with the examination team responsible for management processes.

8. Determine whether the appropriate separation of responsibilities exists between the

strategy and analytics function and the execution function.

9. Identify the various derivative instruments being used and determine whether these

derivative instruments are used prudently.

10. Determine whether management governs the use of derivatives in accordance with

the standards used by other large financial intermediaries.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Liquidity Management

1999 Report To Congress 27

LIQUIDITY MANAGEMENT

1. Determine the quality of policies, procedures, internal controls, and management

reporting for liquidity management. Share determinations with the examination

teams responsible for internal controls board governance, management process and

management information.

2. Determine whether management has established an effective methodology for

quantifying and monitoring liquidity and determine whether management routinely

evaluates the impact of events or alternative environments and develops appropriate contingency plans. 

3. Evaluate the quality of the planning process for liquidity management including tactical, strategic, and contingency planning.

4. Determine the manner and extent to which new products, programs or initiatives

impact the liquidity management profile. Share determinations with the examination team responsible for business process controls.

5. Determine management’s effectiveness in following up on issues or initiatives that

influence liquidity.

6. Determine the effectiveness of technology and controls for the liquidity management program. Share determinations with the examination teams responsible for

information technology and internal controls.

7. Evaluate the quality of the tools used to manage and monitor liquidity, and the quality of tools used to perform scenario analyses. Share determinations about proprietary risk management programs and systems with the examination team

responsible for management processes.

8. Determine whether the appropriate separation of duties exists between the strategy

and analytics function and the execution function.

9. Determine trends and/or anomalies in funding spreads. 

10. Determine the quality of integration of liquidity management with other management and financial performance issues. 

INFORMATION TECHNOLOGY 

1. Determine whether operating processes are in place to ensure secure, effective and

efficient data center processing and problem management.

2. Determine whether there are effective policies and processes in place to ensure that

data, information and computing resources are secure and accessed only by authorized users.

3. Determine whether there are effective policies and processes in place to ensure the

timely and appropriate resumption of business in the event of a disaster.

4. Determine whether management has an adequate process to ensure information

technology plans effectively addresses business unit and corporate objectives.

5. Determine whether effective processes are in place to ensure appropriate controls

are implemented and documentation is complete for system development and

maintenance.
Chapter 2 - Examination Assessment Factors

28 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

6. Determine whether effective processes have been implemented for the processing of

data and information to ensure accuracy and timeliness. 

The following three assessment factors will be dropped from the examination program

once the Enterprises demonstrate satisfactory information and data processing after the

millennium date change. 

1. Determine whether there is an effective plan for identifying, renovating, testing and

implementing solutions for the Year 2000 issue.

2. Determine whether the Year 2000 processing capabilities are effectively coordinated

with customers, vendors and business partners.

3. Determine the effect of Year 2000 efforts on strategic and operating plans. 

BUSINESS PROCESS CONTROLS

1. Determine if there is an effective “process” or “control environment” used when considering or developing new or substantially revised business initiatives

2. Determine the appropriateness of criteria used to subject a business initiative to

review as new or substantially revised.

3. Evaluate the quality of the analysis and review conducted for new or substantially

revised business initiatives. 

4. Evaluate after consulting with the other examination teams, the quality of the communication flows associated with new or substantially revised business initiatives.

5. Evaluate the appropriateness of the balance between risk management, internal

controls and the pressure to deliver new or substantially revised business initiatives.

6. Determine the effectiveness of pilot programs used with new or substantially

revised business initiatives. 

7. Determine if corporate culture and desired employee behavior are appropriately

considered when plans for managing and marketing new or substantially revised

business initiatives are developed. 

8. Evaluate the quality of analysis conducted after new or substantially revised business initiatives are launched that determine whether the initiative is a success and/

or has aspects that warrant reconsideration or modification.

9. Evaluate after consulting with the other examination teams, the corporate environment to determine if the introduction of new ideas and intellectual capital are promoted and supported.

10. Determine after consulting with the other examination teams whether the Board

and executive management are appropriately informed about the adequacy of due

diligence for new or substantially revised business initiatives. Share determinations

with the examination teams responsible for management information and board

governance.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Internal Controls

1999 Report To Congress 29

INTERNAL CONTROLS

1. Determine after consulting with the other examination teams whether management has an accurate and reliable process for identifying risks to business processes

and implementing the appropriate controls.

2. Determine after consulting with the other examination teams whether implemented controls properly address the risks assessed by management.

3. Determine after consulting with the other examination teams whether management has a reliable process for ensuring timely resolution of control-related issues.

4. Determine after consulting with the other examination teams whether internal

audit appropriately identifies and communicates internal control deficiencies to

management and the Board of Directors. Share determinations with the examination team responsible for audit and board governance.

5. Determine after consulting with the other examination teams whether there are

established policies and procedures that delineate internal control process and standards for the control environment. 

6. Determine after consulting with the other examination teams whether management ensures compliance with established internal controls.

AUDIT

1. Determine if the Audit Functions have the appropriate independence.

2. Determine if the auditors performing the work posses the appropriate professional

proficiency.

3. Determine after consulting with the other examination teams if the scope of the

audit work performed is appropriate.

4. Determine after consulting with the other examination teams if the performance of

the audit work has been complete. 

5. Evaluate the quality of the management of the Internal Audit Department.

6. Determine after consulting with the other examination teams the appropriateness

of executive management’s involvement and follow-up of identified audit issues.

Determine the quality of the Board of Directors’ involvement and follow-up of identified audit issues.

7. Determine after consulting with the other examination teams the quality of the

auditor’s risk assessment process.

8. Determine after consulting with the other examination teams the appropriateness

of internal audit’s involvement with new products and new initiatives. Share determinations with the examination team responsible for business process controls.
Chapter 2 - Examination Assessment Factors

30 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

 MANAGEMENT INFORMATION 

1. Determine if executive management and the Board of Directors receive necessary

reports on the Enterprise’s performance relative to established goals and objectives.

2. Determine if management reporting provides the levels of management with the

necessary information to carry out their responsibilities efficiently and effectively,

and to gauge the quality of their decisions.

3. Determine if information systems are linked to the Enterprise’s overall strategy, and

if the information systems are developed and refined pursuant to a strategic plan for

information systems.

4. Evaluate after consulting with the other examination teams the accuracy of reports

used by management for decision making.

5. Determine after consulting with the other examination teams the effectiveness with

which Enterprise strategy, roles and responsibilities are communicated.

6. Evaluate the effectiveness of channels of communication available to employees to

provide feedback, report irregularities, and suggest enhancements. 

7. Determine after consulting with the other examination teams the effectiveness of

communication across the Enterprise.

MANAGEMENT PROCESS

1. Evaluate the comprehensive nature of the planning process.

2. Determine after consulting with the other examination teams the effectiveness of

business unit goals, implementing plans and programs to achieve the corporate

plans.

3. Determine after consulting with the other examination teams management’s ability

to monitor and manage change.

4. Determine after consulting with the other examination teams if key performance

measures are appropriate, effective and align with strategy.

5. Determine after consulting with the other examination teams if the behavior management programs are designed to achieve corporate goals and objectives.

6. Determine if the Enterprise has an effective program for career and management

development.

7. Determine if the Enterprise has effective programs for recruiting competent people.

8. Determine after consulting with the other examination teams the effectiveness of

proprietary risk management systems or programs.

9. Determine after consulting with the other examination teams whether management effectively conveys an appropriate message of integrity and ethical values.

10. Determine after consulting with the other examination teams the pervasive effect of

management’s philosophy and operating style on the Enterprise. 

11. Determine after consulting with the other examination teams if the decision making roles and the assignment of responsibilities provide for accountability and controls. Share determinations with the examination team responsible for internal

controls.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Board Governance

1999 Report To Congress 31

BOARD GOVERNANCE

1. Determine whether the Board has been engaged in the development of a strategic

direction for the Enterprise.

2. Determine whether the Board ensures that executive management appropriately

defines: operating parameters and risk tolerances for the Enterprise consistent with

the strategic direction, legal standards, and ethical standards.

3. Determine whether the Board has a process for hiring and maintaining a quality

executive management team.

4. Determine whether the Board holds the executive management team accountable

for achieving the defined goals and objectives.

5. Determine after consulting with the other examination teams, whether the Board

remains appropriately informed of the condition, activities and operations of the

Enterprise.

6. Determine whether the Board has sufficient well-organized time to carry out its

responsibilities.
Chapter 2 - Examination Assessment Factors

32 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
1999 Report To Congress 33  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Chapter 3

Mortgage Markets and the Enterprises in 1998

The strong U.S. economy, relatively low interest rates, and a booming housing market

boosted Fannie Mae’s and Freddie Mac’s profits to record levels in 1998. Combined net

income for the Enterprises was $5.1 billion in 1998, an increase of $660 million from 1997.

A record $1.4 trillion single-family mortgages were originated in 1998, which contributed

to record mortgage purchases for the Enterprises. Mortgage portfolio investments

increased 31 percent at Fannie Mae and 55 percent at Freddie Mac, causing net interest

income to increase for both Enterprises. Favorable housing conditions coupled with

enhancements to credit loss management continued to reduce the Enterprises’ credit

losses. Credit related losses declined by 39 percent. Fannie Mae’s and Freddie Mac’s combined capital increased approximately $5 billion in 1998 to protect against the increased

credit and interest rate risks associated with rapidly growing business volumes. Both

Enterprises met their statutory minimum capital requirements throughout the year. 

HOUSING AND PRIMARY MORTGAGE MARKET DEVELOPMENTS

RECORD ACTIVITY The housing market enjoyed a record year due to favorable economic conditions, continued low mortgage interest rates (See Figure 2) and strong consumer confidence. Job

growth was a healthy 2 percent in 1998, while unemployment remained low at 4.3 percent (the lowest rate in 28 years) and inflation remained dormant. In addition, the economy grew at a strong rate of 3.9 percent, matching the economic growth rate achieved in

1997. During 1998, the average mortgage rate was 6.9 percent, compared with 7.6 percent
Chapter 3 - Mortgage Markets and the Enterprises in 1998

34 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

in 1997. Strong consumer confidence was evident in the fact that consumer spending

increased 5 percent in 1998, the highest increase in consumer spending in more than a

decade. 

Figure 2. Mortgage Interest 

Rates

Consumers bought 888,000 new homes in 1998, up 10.6 percent from 1997 and outstripping the previous record set in 1977 by 8.4 percent (See Figure 3). Existing home sales

also achieved record levels. They soared 13.5 percent in 1998 to 4.8 million, breaking last

year’s record. Multifamily markets were strong as well. New multifamily construction

rose to $19.9 billion, the largest amount in 9 years, while vacancy rates remained stable at

just under 8 percent. 

Figure 3. New and Existing 

Single-Family Home Sales

Source: Freddie Mac Primary Mortgage Market Survey

4%

6%

8%

10%

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98

30-Year FRM Rate

1-Year ARM Rate

0

200

400

600

800

1,000

1975 1980 1985 1990 1995

0

1,000

2,000

3,000

4,000

5,000

6,000

New Home Sales

Existing Home Sales

New Home Sales

(Thousands of Units)

Existing Home Sales

(Thousands of Units)

Source: Bureau of the Census
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Housing and Primary Mortgage Market Developments

1999 Report To Congress 35

The high level of activity in home sales and low level of mortgage rates generated a huge

increase in the volume of mortgages originated. A record $1.4 trillion of mortgages were

originated in 1998, 40 percent above the previous record established in 1993 (See Figure

4). The top 25 mortgage originators accounted for over half of all originations (See Box

1). Refinancings accounted for a monthly average of 52 percent of mortgage originations

in 1998, up from 31 percent in 1997 (See Figure 5). The vast majority of borrowers refinanced their loans into long-term fixed-rate mortgages, taking advantage of the lowest

mortgage rates in three decades. The proportion of refinancings in which borrowers

withdrew cash fell only slightly last year to 51 percent. 

In contrast, during the last refinancing boom of 1992-93, borrowers chose much higher

proportions of adjustable rate and intermediate-term fixed-rate loans, and the proportion of cash-out loans was much lower (34 percent). The differences were caused by a

flatter yield curve in 1998, smaller decreases in interest rates and greater property value

appreciation. 

Figure 4. Originations of 

Single-Family Mortgages 

($ in Billions)

Source: Inside Mortgage Finance

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1986 1988 1990 1992 1994 1996 1998

FHA/VA Conventional Total
Chapter 3 - Mortgage Markets and the Enterprises in 1998

36 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Figure 5. Refinance Share of 

Total Mortgage Originations vs. 

Commitment Rate on 30-Year 

FRMs

The high level of home sales propelled a healthy increase in the value of many homes.

Single-family house prices, as measured by OFHEO’s House Price Index, increased 4.7

percent in 1998. Areas with the highest house appreciation were the Pacific (California,

Washington, Hawaii, Oregon, and Arkansas) at 7.3 percent and New England (Connecticut, Massachusetts, Maine, New Hampshire, Rhode Island, and Vermont) at 6.1 percent

(See Figure 6). Over the past 5 years, U.S. house prices increased an average 19.9 percent. 

Figure 6. Change in House 

Prices, by Census Division, 

Fourth Quarter 1997 to Fourth 

Quarter 1998

The homeownership rate also benefitted from the record housing activity. The homeownership rate increased to a record 66.3 percent in 1998, compared with the previous

record of 65.7 percent in 1997. 

Source: Freddie Mac Primary Mortgage Market Survey

6%

7%

8%

9%

10%

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98

0%

20%

40%

60%

80%

30-Year FRM Rate

Refinance Share

30-Year 

FRM Rate

Refinance 

Share

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

4.1%

3.7%

3.8%

7.3%

4.6% 4.4%

4.0%

3.8%

6.1%
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Housing and Primary Mortgage Market Developments

1999 Report To Congress 37

Box 1: Concentration of Mortgage Originations

Concentration of mortgage originations has been increasing throughout the 1990s. In 1998, the top 25 mortgage

originators accounted for an all-time high of 55 percent of single-family mortgage originations. This was the first

year in which over half of all mortgage originations were made by the very largest lenders.

Of all mortgage originations, 28 percent were originated by brokers, 30 percent came from correspondents, and 42

percent were originated through retail channels. While the proportions originated by brokers, correspondents, and

retail channels have shifted from year to year, no fundamental trend is evident. What is evident, however, is that the

top mortgage originators have developed strong wholesale, retail, and correspondent networks. The top originators

tend to be also the top wholesalers, the top in retail originations, and the top in correspondent originations. They

have developed the capability to originate loans through whichever channel is best suited to the economic environment and housing market conditions. The continued availability of large numbers of correspondent and broker

sources has been facilitated by technology, in particular, by automated underwriting systems and communication

networks.

Mortgage Originations by Source

0%

10%

20%

30%

40%

50%

1993 1994 1995 1996 1997 1998

Broker

Correspondent

Retail

Concentration of Mortgage Originations

1989-1998

$ in billions

25.6% 28.4% 26.8%

30.6%

36.8%

33.2%

39.0% 39.1%

44.3%

55.3%

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

1989

1990

1991

1992

1993

1994

1995

1996

19971998

0%

10%

20%

30%

40%

50%

60%

Originations of Top 25 Total Originations Market Share

Source: Inside Mortgage Finance

Source: Inside Mortgage Finance
Chapter 3 - Mortgage Markets and the Enterprises in 1998

38 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

FHA/VA ORIGINATIONS

EXPERIENCE GAINS

Federal Housing Administration mortgage originations rose 38.8 percent in 1998 to a

new annual record of $103.2 billion. This was $10 billion more than in the previous record

year of 1994 when FHA originations totaled $91.6 billion. Veterans Administration mortgage production rose 58.4 percent to $42.6 billion, from $26.9 billion in 1997. The record

for VA mortgage originations of $49.5 billion was set in 1994.

SUBPRIME MARKET SHARE

DECLINE

Subprime lending (excluding home-equity loans) totaled an estimated $150 billion, or

about 10 percent of all mortgage originations in 1998, compared with $135 billion, or 16

percent of originations in 1997. The loss of market share for subprime lenders was due

primarily to the effects of higher-than-expected prepayment rates and illiquid markets

associated with the global financial crisis. Low interest rates and improving borrower

credit ratings in the strong economy caused higher-than-expected prepayment speeds

on subprime securities. High prepayment speeds had a negative effect on earnings, causing some subprime lenders to exit the business. The reduction in subprime lenders contributed to reduced subprime lending. In addition, securitization became difficult for

subprime lenders in late 1998, as fixed-income investors tended to favor the higher quality Treasuries during the financial crisis. The resulting liquidity crunch forced lenders to

curtail their subprime lending activities.

SECONDARY MARKET ACTIVITIES OF THE ENTERPRISES

PURCHASES AND ISSUANCES

ACHIEVE RECORD LEVELS

The Enterprises purchased a record $621 billion in single-family mortgages in 1998, over

$89 billion more than the previous record set in 1993 (See Figure 7). Fannie Mae purchased $358 billion last year, an increase of 118 percent over 1997. Freddie Mac recorded

total purchases of $263 billion in 1998, a gain of 129 percent. The Enterprises’ share of

total mortgage originations jumped to 45 percent in 1998, from 34 percent in 1997.

Figure 7. Enterprise SingleFamily Mortgage Purchases 

($ in Billions)

The Enterprises purchased primarily fixed-rate mortgages (See Box 2), reflecting the

small supply of adjustable rate mortgages due to the attractive mortgage rates on fixedrate products. Also reflecting primary market trends, the majority of Enterprise purchases were refinance loans. A high proportion of refinance loans usually improves the

overall credit quality of Enterprise purchases because refinancing borrowers generally

have increased equity in their properties through house price appreciation and principal

Source: Freddie Mac, Fannie Mae, and Inside Mortgage Finance

$621

$279

$290

$218

$287

$532

$453

$245

$190

$0

$100

$200

$300

$400

$500

$600

$700

1990 1991 1992 1993 1994 1995 1996 1997 1998

Freddie Mac Fannie Mae Combined
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Secondary Market Activities of the Enterprises

1999 Report To Congress 39

repayments. Higher borrower equity (lower loan-to-value, or LTV ratios) makes loans

less likely to default. Last year, however, a large proportion of refinancing borrowers

increased the size of their mortgages by taking cash out, so average LTV ratios on new

purchases for both Enterprise fell only slightly to 74 percent in 1998 from 76 percent in

1997 (See Figure 8). 

Figure 8. Average LTV of 

Enterprise Purchases

Single-class mortgage-backed securities (MBS) issuance more than doubled at both

Enterprises in 1998 (See Figure 9). Fannie Mae issued $326 billion in MBS, while Freddie

Mac issued $251 billion. The increase in issuances was offset at both Enterprises by high

mortgage liquidation activity brought on by the high refinance environment in 1998. Liquidations of mortgages backing Freddie Mac’s MBS doubled in 1998 to $184 billion from

$89 billion, while comparable Fannie Mae liquidations also doubled to $201 billion from

$91 billion.

Figure 9. Enterprise SingleClass MBS Issuance 

($ in Billions)

Source: Freddie Mac and Fannie Mae

66%

68%

70%

72%

74%

76%

78%

1993 1994 1995 1996 1997 1998

Freddie Mac Fannie Mae

Source: Freddie Mac and Fannie Mae

$263

$171

$205

$373

$430

$248

$270

$196

$577

$0

$100

$200

$300

$400

$500

$600

$700

1990 1991 1992 1993 1994 1995 1996 1997 1998

Freddie Mac Fannie Mae Combined
Chapter 3 - Mortgage Markets and the Enterprises in 1998

40 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Box 2: Conforming Loan Limits

BACKGROUND

Mortgage loans purchased or guaranteed by the Enterprises must meet loan amount restrictions commonly called

conforming loan limits. Conforming loan limits were established by Congress to increase the availability of mortgage

funds for low- to moderate-income homebuyers and to reduce the Enterprises’ exposure to risk. Table 27 at the end

of this Report provides a history of the single-family conforming loan limits from 1971 to 1999. 

The Enterprises’ conforming limits were the same as the Federal Housing Administration’s (FHA) maximum insurable limits until 1980. The Housing and Community Development Act of 1980 amended the Enterprises’ charters by

establishing loan limits and the guidelines to increase the limits for conventional, single-family (one to four units)

mortgage loan amounts. The Federal Home Loan Bank Board initially provided an index, via its house price survey,

to set the single-family conforming loan limits from 1980 to 1989. Multifamily (properties of five or more units) conforming loan limits were set at 125 percent of the FHA insurance limits for multifamily housing established in the

National Housing Act of 1938. The Secondary Mortgage Market Enhancement Act of 1984 permitted multifamily

loan limits to increase in high cost areas as determined by the Department of Housing and Urban Development to

240 percent of the FHA insurable limits. 

RECENT DEVELOPMENTS

Since 1990, single-family conforming loan limits have been based on the Federal Housing Finance Board’s Monthly

Interest Rate Survey (MIRS). The MIRS monitors changes in average house prices nationwide. The methodology and

criteria for the survey remained relatively unchanged from 1990 until last year. Three changes implemented in January 1998 were designed to produce a more accurate average house price calculation. These changes were: 

➣ replacing the underlying weighting data with the Federal Reserve’s Home Mortgage Disclosure Act information,

➣ eliminating loans with terms of seven years or less, and 

➣ increasing both the loan size and house price upper limits. 

The net effect of these changes reduced the October 1998 house price calculation by $200 (to $175,200), compared

to previous survey calculations. Similar changes were applied to October 1997 survey data to create comparability

between 1998 and 1997 house price averages. 

Recent legislative changes related to loan limits were part of a 1999 VA-HUD Appropriations Bill (1999 Bill). The

1999 Bill modified the Enterprise multifamily limits as well as the FHA insurable guarantee limits. Enterprise multifamily loan limits were eliminated in the 1999 Bill. This change was an attempt to address the escalating multifamily

property valuations in large metropolitan areas (e.g. New York City). The Enterprises were unable to finance many

properties because an improved economy created project values exceeding the multifamily per unit limits. 

The 1999 Bill additionally modified the single-family FHA limits. These limits vary by county and Metropolitan Statistical Area, subject to an overall maximum. The maximum was increased to 48 percent to 87 percent of the Enterprises’ conforming loan limits. This 1999 adjustment created the largest increase ever to the FHA ceiling. The singlefamily one-unit insurable maximum limit increased by $38,438 from the 1997 level of $170,362 to the 1999 level of

$208,800.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Financial Condition of the Enterprises

1999 Report To Congress 41

Issuance of multi-class MBS, mostly Real Estate Mortgage Investment Conduit (REMIC)

securities, increased a strong 61 percent at Freddie Mac to $135 billion in 1998 (See Figure 10). However, the volume of new Fannie Mae issues declined slightly to $84 billion.

Figure 10. Enterprise REMIC 

Issuances ($ in Billions)

Both Fannie Mae and Freddie Mac continued to become increasingly important investors in their own securities. Fannie Mae’s holdings of its own MBS grew to $197 billion,

up 51 percent from 1997. Freddie Mac held $168 billion of its own securities at year-end

1998, an increase of 63 percent from 1997. Fannie Mae now holds 24 percent of its total

MBS outstanding, while Freddie Mac holds 26 percent of its total MBS outstanding.

Commercial banks were also active purchasers of agency mortgage securities in 1998.

The industry’s holdings of single-class MBS rose 14 percent to $277 billion, and its investment in multi-class MBS grew 34 percent. By contrast, total commercial bank assets

grew only 8 percent in 1998. 

FINANCIAL CONDITION OF THE ENTERPRISES

DOUBLE-DIGIT INCREASES IN

MORTGAGE INVESTMENTS

PUSH EARNINGS ABOVE $5 

BILLION

Combined earnings for the Enterprises grew to $5.1 billion in 1998, as Freddie Mac’s

income rose 22 percent and Fannie Mae’s rose 12 percent (See Tables 4 & 5). Net interest

income drove revenues for both Enterprises as combined net interest income rose to $6.3

billion in 1998, from $5.8 billion in 1997 (See Figure 11). The growth in net interest

income was largely attributable to a 31 percent rise in mortgage investments at Fannie

Mae and a 55 percent increase at Freddie Mac. Growth of mortgage asset portfolios,

lower credit losses, and higher miscellaneous fee income more than offset declining revenue yields on the Enterprises’ two principal lines of business – portfolio investments and

mortgage guarantees. Net interest margins and guarantee fee rates declined at both

Enterprises. About one-fourth of the increase in Fannie Mae’s net income came as a

result of accelerated recognition of tax credits.

Source: Freddie Mac and Fannie Mae

$169

$219

$65

$25

$146

$353

$301

$184

$108

$0

$50

$100

$150

$200

$250

$300

$350

$400

1990 1991 1992 1993 1994 1995 1996 1997 1998

Freddie Mac Fannie Mae Combined
Chapter 3 - Mortgage Markets and the Enterprises in 1998

42 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 4. Fannie Mae Financial Highlights

SELECTED FINANCIAL HIGHLIGHTS 

(Dollars in Billions)

1998 1997 1996 1995 1994

Earnings Performance:

Net Income ($) 3.42 3.06 2.72 2.14 2.13

Net Interest Income ($) 4.11 3.95 3.59 3.05 2.82

Guarantee Fees ($) 1.23 1.27 1.20 1.09 1.08

Net Interest Margin (%) 1

1 Taxable equivalent net interest income divided by average earning assets.

1.03 1.17 1.18 1.16 1.24

Average Guarantee Fee 

(basis points) 2

2 Guarantee fees divided by average MBS outstanding net of MBS held in portfolio.

20.2 22.7 22.4 22.0 22.5

Return on Common Equity (%) 25.2 24.6 24.1 20.9 24.3

Dividend Payout Ratio (%) 3

3 Common and preferred dividends divided by net income.

30.9 30.9 31.5 34.6 30.8

Balance Sheet Position:

Total Assets ($) 485.0 391.7 351.0 316.5 272.5

Outstanding Debt ($)4 

4 Includes subordinated borrowings.

460.3 369.8 331.3 299.2 257.2

Mortgages: 

Retained Mortgage Portfolio ($) 415.4 316.6 286.5 252.9 220.8

MBS ($)

(excludes MBS in Portfolio)

637.1 579.1 548.2 513.2 486.3

Retained as % of Total Mortgages in 

Portfolio and MBS

39.5 35.3 34.3 33.0 31.2

Capital: 

Equity/Assets & MBS (%) 1.38 1.42 1.42 1.32 1.26

Equity & Reserves/Assets & MBS (%) 5

5 Effective 1/1/95, reserves exclude valuation allowance related to impaired loans pursuant to SFAS 114.

1.45 1.50 1.50 1.41 1.37

Source: Fannie Mae
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Financial Condition of the Enterprises

1999 Report To Congress 43

Table 5. Freddie Mac Financial Highlights

SELECTED FINANCIAL HIGHLIGHTS 

(Dollars in Billions)

1998 1997 1996 1995 1994

Earnings Performance:

Net Income ($) 1.70 1.40 1.24 1.09 0.98

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. 

2.22 1.85 1.71 1.40 1.11

Guarantee Fees ($)1 1.02 1.08 1.08 1.09 1.11

Net Interest Margin (%) 1, 2

2 Taxable equivalent net interest income divided by average earning assets.

0.97 1.06 1.15 1.23 1.25

Average Guarantee Fee (basis points) 3

3 Guarantee fees divided by average MBS outstanding net of MBS held in portfolio.

21.4 22.9 23.4 23.8 24.4

Return on Common Equity (%) 22.6 23.1 22.6 22.1 23.3

Dividend Payout Ratio (%) 4

4 Common and preferred dividends divided by net income.

26.2 26.4 26.0 25.8 25.7

Balance Sheet Position:

Total Assets ($) 321.4 194.6 173.9 137.2 106.2

Outstanding Debt5

 ($)

5 Excludes subordinated borrowings.

287.2 172.3 156.5 119.3 92.1

Mortgages:

Retained Mortgage Portfolio ($) 255.7 164.5 137.8 107.7 73.2

MBS ($)

(excludes MBS in Portfolio)

478.4 476.0 473.1 459.0 460.7

Retained as % of Total Mortgages in 

Portfolio and MBS

34.8 25.7 22.6 19.0 13.7

Capital: 

Equity/Assets & MBS (%) 1.36 1.12 1.04 0.98 0.91

Equity + Reserves/Assets + MBS (%) 6

6 Effective 1/1/95, reserves exclude valuation allowance related to impaired loans pursuant to SFAS 114.

1.45 1.22 1.14 1.09 1.04

Source: Freddie Mac
Chapter 3 - Mortgage Markets and the Enterprises in 1998

44 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Figure 11. Enterprises’ Primary 

Sources of Revenue 

($ in Billions) 

REVENUES INCREASE

DESPITE LOWER INTEREST

MARGINS AND GUARANTEE

FEES

A $308 million increase in total revenues at Freddie Mac outpaced Fannie Mae’s $266

million increase. Net interest income accounted for most of the gains, but grew much

less rapidly than investment balances. Fannie Mae’s net interest margin declined to 1.03

percent in 1998 from 1.17 percent in 1997, while Freddie Mac’s fell to 0.97 percent from

1.06 percent (See Figure 12). The declines in margin reflect the effects of interest rate

declines on imperfectly matched investment and liability positions held in the previous

year, as well as smaller average equity-to-assets ratios. (Lower equity ratios reduce interest margins because equity creates no interest expense.)

Figure 12. Enterprises’ 

Mortgage Investments 

($ in Billions) and Net Interest 

Margin (%)

The combined guarantee fee income for the Enterprises fell 4 percent during 1998. Fannie Mae’s average guarantee fee rate fell to 20.2 basis points in 1998, compared with 22.7

basis points in 1997. Freddie Mac’s guarantee fee income also dropped in 1998, falling by

1.5 basis points to 21.4 basis points. The drop in average guarantee fee rates was caused

by more competitive pricing and an increase in credit-enhanced mortgages. 

Another factor that affected Freddie Mac’s guarantee fee income in 1998 was a transaction it undertook in May 1998. Freddie Mac entered into a reinsurance agreement (a

form of credit enhancement) under which the Enterprise transferred a portion of the

credit risk associated with $20 billion of mortgages originated in 1996 to a third-party

Source: Freddie Mac, Fannie Mae, and OFHEO

$0

$1

$2

$3

$4

$5

$6

$7

1992 1993 1994 1995 1996 1997 1998

Net Interest Inc. Guarantee Fees

Source: Freddie Mac, Fannie Mae, and OFHEO

Mortgage Investments Net Interest Margin

$100

$300

$500

$700

$900

$1,100

$1,300

$1,500

$1,700

$1,900

1992 1993 1994 1995 1996 1997 1998

0.9

1.0

1.1

1.2

1.3

1.4

Enterprise Investments

Fannie Mae's Net Interest Margin

Freddie Mac's Net Interest Margin
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Financial Condition of the Enterprises

1999 Report To Congress 45

reinsuror. The third-party reinsuror, in turn, issued a series of bonds bearing this credit

risk. Freddie Mac pays monthly insurance premiums to the reinsuror to compensate for

this risk transfer. The payments reduce Freddie Mac’s guarantee fee income, but they will

also reduce its future credit losses. 

Fannie Mae’s other fee revenues increased almost as much as its net interest income.

Other fee income includes multifamily fees, structured transaction fees, technology fees,

other miscellaneous items, and income or operating losses from certain tax advantaged

investments. All of these fee income components increased at Fannie Mae in 1998, led by

a $46.2 million increase in technology fees. Technology fees are related to fees charged for

the use of automated underwriting software such as Desktop Originator and Desktop

Underwriter. 

CREDIT LOSSES DECLINE

WHILE DELINQUENCIES

REMAIN LOW

The healthy national housing market coupled with the Enterprises’ ongoing loss mitigation programs translated into very low credit losses (charge-offs plus foreclosure

expenses) for Fannie Mae and Freddie Mac. Credit losses for Fannie Mae fell 26 percent

to $262 million, 0.027 percent of its average total mortgage portfolio. Freddie Mac’s credit

losses declined 48 percent to $268 million, 0.040 percent of its average total mortgage

portfolio. 

The single-family delinquency rate for both Enterprises fell in 1998 (See Figure 13). Fannie Mae’s single-family delinquency rate dropped to 0.58 percent in 1998, from 0.62 percent in 1997, after climbing for 4 years. Freddie Mac’s single-family delinquency rate

declined 5 basis points to 0.50 percent in 1998 from 0.55 basis points in 1997.

Figure 13. Single-Family 

Deliquency Rates (Loans 

Deliquent 90 Days or More

or in Foreclosure)

Fannie Mae’s multifamily delinquency rate fell to a very low 0.29 percent in 1998, while

Freddie Mac’s multifamily delinquency rate dropped to 0.37 percent from 0.96 percent in

1997. The improvement in Freddie Mac’s delinquency rate continues to reflect the diminishing impact of pre-1991 multifamily mortgage originations. Mortgages purchased

since the Enterprise’s full re-entry into the multifamily mortgage market in 1994 continue to outperform earlier purchases. Multifamily business at both Enterprises continued to benefit from lower vacancy rates and increasing market rents in various parts of

the country (i.e., Southwest and Northeast).

Source: Freddie Mac and Fannie Mae

0.40%

0.50%

0.60%

0.70%

0.80%

1992 1993 1994 1995 1996 1997 1998

Freddie Mac Fannie Mae
Chapter 3 - Mortgage Markets and the Enterprises in 1998

46 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

ADMINISTRATIVE EXPENSES

GROW

Administrative expenses continued to grow faster than revenues in 1998. The combined

revenue growth rate for the Enterprises was 7 percent in 1998. Administrative expenses

increased 11 percent at Fannie Mae and 17 percent at Freddie Mac. Higher administrative expenses were again impacted by costs associated with the Year 2000 date change

issue. Chapter 2 provides an assessment of the Enterprises’ readiness with respect to the

Year 2000 date change. 

ASSET GROWTH RATE

REVERSES TREND

Total assets for the Enterprises increased 37 percent to $806 billion during 1998, reversing a three-year slow down in the rate of asset growth (See Figure 14). Fannie Mae’s mortgage investments increased $99 billion or 31 percent, while Freddie Mac’s mortgage

investments rose $91 billion or 55 percent from year-end 1997. The Enterprises took

advantage of mortgage investment opportunities related to the refinance market of 1998

and widened interest rate spreads during the financial crisis. 

Figure 14. Combined 

Enterprise Assets And Growth 

Rate ($ in Billions)

Quarterly-average non-mortgage investments increased at both Enterprises during 1998

(See Figure 15). Fannie Mae’s non-mortgage investments rose by $4 billion to $75 billion,

while Freddie Mac’s non-mortgage investments increased by $23 billion to $57 billion.

The bulk of Freddie Mac’s increase in non-mortgage investments occurred during fourth

quarter 1998 following two large equity issues. Examples of non-mortgage investments

for the Enterprises include U.S. Treasury and agency securities, federal funds, repurchase

agreements, commercial paper, municipal bonds, and asset-backed securities. While

average non-mortgage investments increased at both Enterprises, the ratio of average

non-mortgage investments to average earning assets remained roughly unchanged in

1998 for the year as a whole. Fannie Mae’s ratio of annual-average non-mortgage investments to annual-average earning assets was 18 percent in 1998, while Freddie Mac’s was

17 percent. 

Source: Freddie Mac, Fannie Mae, and OFHEO

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1992 1993 1994 1995 1996 1997 1998

0%

5%

10%

15%

20%

25%

30%

35%

40%

Enterprise Assets Growth Rate
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Financial Condition of the Enterprises

1999 Report To Congress 47

Figure 15. Enterprise Average 

Non-Mortgage Investments 

($ in Billions)

LIQUIDATIONS AFFECT DEBT

ACTIVITY

The Enterprises’ abilities to manage interest rate risk was challenged in 1998, as large volumes of mortgage assets rolled off of the balance sheet. Mortgage liquidations rose due

to lower interest rates in 1998. Mortgage asset liquidations for the Enterprises amounted

to nearly $150 billion, 31 percent of their mortgage assets at the beginning of the year. 

The Enterprises exercised call options on their callable debt in 1998. Fannie Mae called

$76 billion in 1998, compared with $30 billion in 1997. Freddie Mac similarly called $49

billion in debt, compared with $16 billion in 1997. The Enterprises subsequently replaced

the called issues with cheaper debt that more closely matched the shorter expected asset

durations of the remaining mortgages.

Option embedded (mostly callable) debt continued to comprise the majority of Freddie

Mac’s long-term debt portfolio and half of Fannie Mae’s long-term debt portfolio. At

year-end 1998, 76 percent of Freddie Mac’s debt was option embedded debt, while 50 percent of Fannie Mae’s long-term debt was comprised of option embedded debt. Option

embedded debt remains attractive to the Enterprises because it reduces the risk associated with the prepayment uncertainty of their mortgage-related assets.

The total combined debt outstanding for the Enterprises reached $747 billion in 1998, an

increase of 38 percent from 1997. Roughly three-fourths of the Enterprises’ outstanding

debt is effectively long-term (See Figure 16). 

Source: Freddie Mac, Fannie Mae, and OFHEO

$20

$40

$60

$80

$100

1Q98 2Q98 3Q98 4Q98

Fannie Mae Freddie Mac
Chapter 3 - Mortgage Markets and the Enterprises in 1998

48 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Figure 16. Effective Long-Term 

Debt As a Percent of Total Debt 

The Enterprises introduced new debt programs during first quarter 1998. The new programs, Fannie Mae’s Benchmark Notes and Freddie Mac’s Reference Notes focus on the

issuance of large long-term non-callable bonds. (See Box 3). 

ENTERPRISES MEET

REGULATORY MINIMUM

CAPITAL REQUIREMENTS

The Enterprises met their regulatory minimum capital requirements1 in 1998. Fannie

Mae’s minimum capital requirement was $15.3 billion at year-end 1998. Freddie Mac’s

minimum capital requirement was $10.3 billion. The Enterprises were required to hold

$5.9 billion more in regulatory capital at year-end 1998 compared with 1997, due to

higher levels of assets. 

Figure 17. Enterprises’ Core 

Capital as a Percent of Minimum 

Capital Requirements

Surplus capital, the margin by which Enterprise core capital 2 exceeds minimum capital,

shrank at Fannie Mae (See Figure 17). Fannie Mae’s surplus capital fell to $0.1 million in

1998 from $1.1 billion in 1997. While Fannie Mae’s assets grew 24 percent in 1998, its

equity grew only 12 percent. Freddie Mac’s surplus capital was $0.4 million in 1998, compared to $0.3 million in 1997. 

Source: Freddie Mac, Fannie Mae, and OFHEO

0%

20%

40%

60%

80%

100%

120%

1992 1993 1994 1995 1996 1997 1998

Fannie Mae Freddie Mac

1 The minimum capital requirement is the sum of: 2.50 percent of on-balance sheet assets, 0.45 percent of 

outstanding MBS and 0.45 percent of other off-balance sheet obligations.

2 Core capital is the sum of: the par value of outstanding common stock, the par value of outstanding noncumulative perpetual preferred stock and paid-in capital and retained earnings. 

Source: OFHEO

0%

20%

40%

60%

80%

100%

120%

4Q90* 4Q91* 4Q92* 4Q93 4Q94 4Q95 4Q96 4Q97 4Q98

Freddie Mac Fannie Mae
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Financial Condition of the Enterprises

1999 Report To Congress 49

Box 3: Benchmark and Reference Notes

As noted in last year’s Annual Report, both Fannie Mae and Freddie Mac embarked upon programs to issue large noncallable bonds as a means of attracting new investors to their debt and lowering their funding costs. Funding costs are

minimized because these bonds, with initial issue sizes of $2-$5 billion, are more liquid than smaller issues, and thus

trade with thinner bid/ask spreads, which in turn lowers their required yields. Also, underwriting costs for these

bonds, as a percent of face value, are lower than for smaller debt issues, which further reduces funding costs.

Fannie Mae was the first with its Benchmark Notes, issuing a $4 billion 5-year note on January 15, 1998. Freddie Mac

soon responded with a $5 billion 10-year Reference Note on April 9, 1998. For the entire year, Fannie Mae issued $42.25

billion of Benchmark Notes, and Freddie Mac issued $20 billion of Reference Notes. Fannie Mae came out with eight

issues with maturities ranging from three to ten years, while Freddie Mac issued four separate notes with maturities

of three to ten years (See figure below). Fannie Mae reopened four of its issues, while Freddie Mac reopened two. 

By the end of 1998, Fannie Mae’s Benchmark Notes accounted for 12 percent of its effective long-term debt outstanding, while Freddie Mac’s Reference Notes comprised 13 percent of its effective long-term debt. (Effective long-term

debt includes short-term debt converted to long-term debt via interest rate swaps.) 

These programs took advantage of the reduction in debt issued by the U.S. Treasury, which has resulted in strong

demand for large liquid securities that can be used as hedging tools. There are active secondary markets for these

instruments, and current prices and yields are visible via services like Bloomberg and Telerate.

Both Enterprises succeeded in their efforts to attract new investors, with dealers placing many securities in Europe

and Asia, and issues were sometimes oversubscribed. Another priority for both Enterprises is to make the timing of

their bond issues predictable. Fannie Mae came to market in every month in 1998 despite markets that were sometimes turbulent. In November, Freddie Mac announced that it would issue Reference Notes on a monthly basis.

Source: Bloomberg

 1998 Benchmark and Reference Note Issues

0

2

4

6

8

10

12

14

16

18

20

20012002200320042005200620072008

Maturity

$ Billions

Benchmark Notes (Fannie)

Reference Notes (Freddie)

20012002200320042005200620072008

Maturity

$ Billions
Chapter 3 - Mortgage Markets and the Enterprises in 1998

50 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Box 3: Benchmark and Reference Notes (Continued)

Relative to U.S. Treasury securities, spreads on Benchmark and Reference Notes widened during 1998, peaking during the liquidity crunch in October. (See figure below) This spread widening occurred throughout the credit markets as investors flocked to the safety of U.S. Treasuries in the wake of the Russian ruble default, hedge fund

meltdowns, and other credit events. However, Benchmark and Reference spreads were relatively stable when compared to interest rate swaps. The widening of mortgage spreads was even more dramatic and created profitable

purchase opportunities for both Enterprises.

In April 1999, the Enterprises announced new programs to issue callable Benchmark and Reference Notes. 

Source: Bloomberg

Benchmark Note Spreads Peaked in October 1998

3.5

4

4.5

5

5.5

6

6.5

7

6-

Feb

27-

Feb

20-

Mar

10-

Apr

1-

May

22-

May

12-

Jun

3-

Jul

24-

Jul

14-

Aug

4-

Sep

25-

Sep

16-

Oct

6-

Nov

27-

Nov

18-

Dec

Yield (%)

0

10

20

30

40

50

60

70

Basis Points

Spread (Basis Points)

Fannie 5.75% Feb-2008

US Treasury 6.125% Aug-2007

Yield (%)Basis Points
1999 Report To Congress 51  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Chapter 4

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 semi-annually.

For fiscal year 1998, OFHEO’s budgetary resources totaled $16,582,000. This operating

budget supported drafting of the Notice of Proposed Rulemaking for the risk-based capital regulation for Fannie Mae and Freddie Mac, implementing comprehensive annual

risk-based examinations of Fannie Mae and Freddie Mac, and performing other safety

and soundness related regulatory activities. For fiscal year 1999, OFHEO’s budgetary

resources total $16,100,000. The fiscal year 1999 budget supports the further refinement

of the proposed risk-based capital regulation through the public comment process, continuation of comprehensive annual risk-based examinations for Fannie Mae and Freddie

Mac, and completion of the other goals and objectives identified in OFHEO’s fiscal year

1999 Performance Plan (available on OFHEO’s website at www.ofheo.gov).

As part of the President’s fiscal year 2000 budget request, OFHEO requested a budget of

$19,500,000. OFHEO’s fiscal year 2000 budget request will support the work required on
Chapter 4 - Financing OFHEO’s Operations

52 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

an ongoing basis to respond to the increased size and complexity of the Enterprises

activities and to ensure the capital adequacy and safety and soundness of the Enterprises. To accomplish these objectives, OFHEO’s fiscal year 2000 budget request

strengthens OFHEO’s regulatory infrastructure, provides the necessary depth and expertise to accomplish the Office’s regulatory mission, and supports 90 full-time permanent

positions. OFHEO’s reliance on information technology to perform its mission requires

that the Office take steps to ensure institutional capacity and stability in this critical

area. Specifically, OFHEO’s fiscal year 2000 budget will allow the Office to:

➣ increase efficiency and effectiveness of examinations and risk-based capital regulatory-related activities, through the increased automation of data management that

will take place upon the completion of OFHEO’s Data Warehouse project;

➣ enhance examination efficiency through the completion of OFHEO’s Surveillance

and Monitoring System; and

➣ enhance the management, and maximize the value, of OFHEO’s information technology investments.

These investments will allow OFHEO to continue its effective regulatory oversight of the

activities and operations of Fannie Mae and Freddie Mac.

UNQUALIFIED AUDIT OPINION OF FY 1998 FINANCIAL STATEMENTS

In conjunction with the government’s goal of improved accountability, OFHEO voluntarily prepared financial statements for fiscal year1998 and subjected these statements and

underlying processes to an 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 year1998 Financial Statements. The following document is a copy of the audit opinion and the associated principal financial statements and notes.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 53

OFHEO 1

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

(OFHEO)

FISCAL YEAR 1998

FINANCIAL STATEMENTS

MANAGEMENT’S DISCUSSION AND ANALYSIS

OFHEO MISSION STATEMENT

OFHEO effectively protects the interests of the American taxpayer and contributes to the strength

and vitality of the nation’s housing finance system through independent and fair safety and

soundness regulation of Fannie Mae and Freddie Mac.

OVERVIEW OF THE REPORTING ENTITY

OFHEO was created by the Federal Housing Enterprises Financial Safety and Soundness Act of

1992 (the Act), Title XIII of the Housing and Community Development Act of 1992. OFHEO is an

independent office in the Department of Housing and Urban Development (HUD). Its principal

responsibility is to ensure that the two largest government sponsored enterprises, Fannie Mae and

Freddie Mac, are adequately capitalized and operating safely. OFHEO is headed by a Director who

is appointed by the President for a five-year term and is responsible for the overall operation of

OFHEO. The OFHEO Director position has been vacant since early 1997 when the incumbent was

appointed as the Administrator for the Small Business Administration. Since that time, OFHEO’s

Deputy Director has served as Acting Director.

The Act requires OFHEO to develop a stress test to determine risk-based capital requirements and

to conduct other research and financial analysis necessary for effective regulatory oversight of

Fannie Mae and Freddie Mac. OFHEO is also required by statute to conduct on-site, annual

examinations at Fannie Mae and Freddie Mac to determine the condition of each Enterprise for the

purpose of ensuring their financial safety and soundness. The examinations are designed to

identify the overall risks in the business activities of the Enterprises, and to determine if those risks

are being prudently managed, controlled, and monitored. Additional special examinations may be

conducted as determined by the OFHEO Director.

OVERVIEW OF THE ENTERPRISES

It is critical that OFHEO fully develop and maintain its capacity to assess risks and market

conditions that could affect the financial safety and soundness of Fannie Mae and Freddie Mac.

The assets of the Enterprises have roughly doubled in the past four years and continue to grow

rapidly. At the end of September 1998, Fannie Mae and Freddie Mac together managed the credit

risk of $1.8 trillion in mortgages, an increase of 5% from June 30, 1998. By the end of September

1998, the Enterprises had more than $1.4 trillion in mortgage-backed securities outstanding. The

Enterprises also hold over 40% of all U.S. single family mortgages and purchased about 50% of the

single-family mortgages originated in the first three quarters of 1998. To finance their growing

portfolios, the Enterprises have expanded their global debt facilities to issue debt securities to
Chapter 4 - Financing OFHEO’s Operations

54 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 2

international investors in both dollars and foreign-denominated currencies. At the same time, the

mortgage finance markets are undergoing major changes, including increased automation and

consolidation. The Enterprises are also expanding the scope of their housing finance activities,

including entry into the alternative “A” and subprime loan markets. All of this new activity and

growth is occurring in a domestic economic environment that is coming under increasing pressure

from weaknesses in foreign economies.

FUNDING OF OFHEO OPERATIONS

OFHEO submits its annual operating budget request directly to the Office of Management and

Budget (OMB). OMB reviews the budget request as part of its government-wide review of the

President’s Budget. Once the President’s Budget is final, OFHEO may submit its annual budget

request to the Congress for review. The Act provides at section 1316 (g) (3) that OFHEO’s

Congressional Budget Justification be included with HUD’s Congressional Budget Justification.

Formulation of budget requirements is independent of HUD.

While OFHEO is subject to the appropriations process, it is not funded by taxpayer dollars. Fannie

Mae and Freddie Mac bear the full cost of OFHEO’s operations through an annual assessment

based on OFHEO’s appropriation. After the appropriation has been enacted, OFHEO receives a

General Fund Appropriation from the U.S. Treasury that is fully offset by collections from the

Enterprises. The cost to the U.S. Treasury for OFHEO’s operations is zero due to the offsetting

collections.

Each Enterprise pays a pro rata share of the annual assessment (appropriation). The pro rata shares

are determined by the combined assets and off-balance sheet obligations of each Enterprise.

OFHEO receives the annual assessment in semi-annual payments each fiscal year. These payments

are due to OFHEO October 1 and April 1 of each fiscal year.

OFHEO’s appropriation is available until expended and is classified as a no-year fund. Due to the

unique crediting provision in OFHEO’s authorizing statue, the amount of unobligated assessment

funds at year-end must be credited to the next year’s annual assessment. Consequently, the

treatment of these funds is different from a normal no-year fund. In a normal no-year fund, the

unobligated amount is automatically carried forward as budgetary resources. In OFHEO’s fund, the

unobligated amount is carried forward in OFHEO’s cash account, but it does not add to enacted

budget authority for the new budget year.

FUNDING FROM REIMBURSABLE AGREEMENT

In FY 1996 and 1997, OFHEO had a reimbursable agreement with the Agency for International

Development (AID) and OFHEO received funding from AID in both years. Through the

agreement, AID relied on OFHEO’s technical expertise to assist the Government of Mexico in

developing a secondary mortgage market. OFHEO did not receive additional funds from AID in

FY 1998. During FY 1998, OFHEO administered work already in progress but made no new

obligations pursuant to the agreement with AID.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 55

OFHEO 3

FINANCIAL MANAGEMENT AND INTERNAL CONTROLS

Federal Managers Financial Integrity Act (FMFIA). As of the end of FY 1998, OFHEO had no

material weaknesses or other reportable conditions pertaining to internal management controls.

OFHEO managers maintain effective internal controls pursuant to FMFIA and implementing

guidance from OMB. OFHEO is cognizant of its responsibility to address audit recommendations

as well as internal management control weaknesses.

OFHEO’s senior managers and supervisors evaluate internal management controls at least annually

with oversight provided by the Director of Finance and Administration. Management officials were

required to address “Year 2000” issues and control weaknesses in their annual assurance statements

to the Acting Director. OFHEO effectively evaluated “Year 2000” issues and monitored

administrative cross servicers for “Year 2000” compliance. OFHEO’s senior executives identified

some program vulnerabilities which were not material. Proper actions were taken to minimize

potential risks related to the vulnerabilities.

For FY 1998, OFHEO contracted for a review of internal controls related to its financial

management systems (OMB Circulars A-123 and A-127). This review did not identify any material

non-conformance with Section 4 of FMFIA nor did it identify any reportable weakness in

OFHEO’s financial management internal controls. The report emphasized the strength and

effectiveness of OFHEO’s financial management control structure that provides early identification

of potential problem areas to facilitate immediate problem evaluation and corrective action to

eliminate or manage risk.

General Accounting Office (GAO) Audit. In October 1997, GAO released a report of its audit at

OFHEO pursuant to Section 430 of the Department of Veterans Affairs/Department of Housing and

Urban Development Appropriations Act of 1997 (P.L. 104-204). The focus of the audit was to

review OFHEO’s progress in the development of final risk-based capital standards for the

Enterprises and to assess OFHEO’s implementation of its safety and soundness examination. GAO

recommended that OFHEO’s Acting Director:

Periodically report to Congress on OFHEO’s progress toward complying with the current

estimate of completing a stress test and risk-based capital standards by 1999,

Assess the examination staff resources necessary to adequately cover all risk areas on 1- and 2-

year examination cycles,

Identify the most appropriate examination cycle after considering the trade-offs between

examination coverage and resource requirements that would be involved, and

Develop a strategy for obtaining the necessary examination office resources, which may

involve reallocating existing resources over time.

OFHEO acted quickly to address the GAO recommendations. During FY 1998, OFHEO’s Acting

Director briefed congressional staff on thirteen occasions on the status of the risk-based capital

standard and examinations. Two of these were formal appearances on October 30, 1997 and on

July 30, 1998 before the Subcommittee on Capital Markets, Securities, and Government Sponsored

l

l

l

l
Chapter 4 - Financing OFHEO’s Operations

56 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 4

Enterprises of the House Banking and Financial Services Committee. The Acting Director spoke

about the audit findings and OFHEO’s plan to address the audit recommendations.

OFHEO significantly revised the examination program in a manner consistent with the

recommendations contained in the GAO report. OFHEO completed the initial three-year cycle of

discovery examinations of the Enterprises, which facilitated the implementation of a comprehensive

annual risk-based examination process. This comprehensive examination process includes regular

risk assessments of the core risks of the Enterprises to ensure an ongoing assessment of the safety

and soundness of the Enterprises. During the first quarter of FY 1998, OFHEO initiated the first

examination under this framework for calendar year 1998.

OFHEO has also been responsive to the staffing concerns raised in the GAO report. As of

September 1997, the Acting Director had already reallocated within OFHEO two positions to the

examination program. In FY 1998, the Acting Director secured the approval of OMB to add four

additional full-time positions to OFHEO’s staffing plan in order to bolster the number of examiners

when it became clear that other Federal financial regulators were unable to provide OFHEO

detailees, as had been previously planned. OFHEO reallocated existing resources to finance these

new positions and received no new funding for the positions. The effect of these staffing actions

was to increase the percentage of staff allocation to the examination program by 35%.

In conjunction with revising the examination program, OFHEO reorganized its examination staff.

This reorganization of staff has achieved several important objectives. First, the realignment

organizes the staff around the four major categories of risk management, allowing for a greater

concentration of skill and ongoing expertise in particular areas among the examiners to facilitate

the early identification of potential risks. Second, the reorganization facilitates direct

accountability for examination activities. Finally, OFHEO created an explicit role for surveillance

and monitoring within the examination function to target the identification of trends and/or

anomalies for immediate investigation. OFHEO has also initiated an effort to expand the capability

of the surveillance and monitoring function through increased leveraging of technology and data.

Compliance with Prompt Payment Act. The Prompt Payment Act and OMB circular A-125 focus

on improving the cash management practices of the government. OMB defines “on time as those

payments made 23 to 30 days after receipt of the invoice, earlier payments where discounts were

taken, and earlier payments made in accordance with management guidance.” During FY 1998,

OFHEO continued to demonstrate excellent compliance with the prompt payment rules and reduced

the amount of interest paid due to prompt payment rules.

While OFHEO’s prompt payment performance in FY 1997 was very good, performance during FY

1998 improved. During FY 1998, OFHEO paid only $244.95 in interest as a result of late payment

penalties for vendor invoices totaling almost $5.8 million, which are covered by OMB’s Circular

A-125. This equates to .00422% of the covered disbursements.

During FY 1998, OFHEO’s disbursements covered by prompt payment rules grew by over 16%,

from just under $5 million to $5.8 million. While the workload grew, the amount of interest paid in

FY 1998 declined by over 46.6%, $189.07 less than the $434.02 paid during FY 1997.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 57

OFHEO 5

EVOLUTION OF OFHEO’S FINANCIAL MANAGEMENT PROGRAM

From OFHEO’s inception until October 1, 1996, OFHEO relied on HUD for financial accounting

service and systems. On October 1, 1996, OFHEO converted its financial accounting activities

from HUD to a new servicing agent, the Department of Veterans Affairs (VA). OFHEO’s goals

were to improve its accountability over its financial resources as well as help HUD and OFHEO to

better leverage resources in making improvements in financial accounting in both organizations.

FY 1998 is the first year that OFHEO has prepared its own principal financial statements for

independent audit. During FY 1998, OFHEO coordinated with HUD, Office of Inspector General

(OIG), in OFHEO’s effort to contract for an independent audit of its FY 1998 Financial Statements

and internal controls systems. In the last quarter of FY 1998, OFHEO issued a task order to a

Certified Public Accounting and Consulting firm (Dembo, Jones, Healy, Pennington & Ahalt, P.C.)

through the Department of Labor (DOL) OIG contract for financial audits pursuant to the Chief

Financial Officers Act.

PERFORMANCE FOR FY 1998

OFHEO had two primary goals for FY 1998. These goals were to strengthen the examination

program and to submit for interagency review the second notice of proposed rulemaking on the

stress test for the risk-based capital standard. During FY 1998, OFHEO achieved its goal with

respect to the examination program, and sent the proposed rule for the risk-based capital standard to

OMB for interagency review in October 1998. Following is a summary of the significant

accomplishments of OFHEO during FY 1998.

Rulemaking

During FY 1998, OFHEO continued a series of informal meetings on the risk based capital stress

test with representatives from OMB, Treasury, HUD and the Office of Thrift Supervision (OTS).

These informal meetings familiarized these agencies with the Financial Simulation Model and

stress test policy issues in order to facilitate formal interagency review of OFHEO’s second notice

of proposed rulemaking for the risk-based capital standard. OFHEO also briefed Treasury and

HUD on the parameters selected and policy decisions made for the stress test that are included in

the second notice of proposed rulemaking. OFHEO drafted the second notice of proposed

rulemaking for the risk-based capital standard during FY 1998 and sent it to OMB for interagency

review on October 30, 1998.

During FY 1998, OFHEO completed the final rule to implement the Privacy Act. OFHEO also

completed a final rule to adjust civil money penalties for inflation. OFHEO issued a proposed

regulation establishing the Rules of Practice and Procedure related to the conduct of enforcement

actions. The office also sent to OMB for interagency review a final regulation on the release of

information, which implements the Freedom of Information Act.

Research and Policy Analysis

During FY 1998, OFHEO continued to classify each of the Enterprises as “adequately capitalized”

each quarter by applying regulatory minimum capital standards. OFHEO also continued to publish
Chapter 4 - Financing OFHEO’s Operations

58 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 6

each quarter its House Price Index documenting changes in home prices for the nation, each state,

and the nine Census regions.

OFHEO made policy decisions for the Financial Simulation Model, the platform for completing the

development and running of the risk-based capital stress test. OFHEO continued to make

substantial progress in readying the stress test by completing documentation of the initial version of

the Financial Simulation Model.

OFHEO continued work on the Data Warehouse, which will house the large volume of data that

OFHEO receives from the Enterprises, and enhanced the efficiency of the Financial Simulation

Model and the stress test. OFHEO developed the data transfer system and initiated data

normalization of the Enterprise data. OFHEO also completed the conceptual design of the Data

Warehouse to include capability to support OFHEO’s surveillance and monitoring system that will

provide analytical support to OFHEO’s examination staff.

OFHEO continued original research in the areas of single- and multi-family mortgage performance

to enhance OFHEO’s understanding of the risks taken by the Enterprises with these types of

activities. OFHEO also determined that a new program proposed by Freddie Mac, the Financial

Assets Securitization Investment Trust program, would not risk significant deterioration of Freddie

Mac’s financial condition and forwarded that determination to the Secretary of HUD for his

consideration in acting on the new program request.

OFHEO implemented a comprehensive framework for determining the comparability of executive

compensation and the reasonableness of termination packages at the Enterprises.

OFHEO continued to make full reports to the Congress regarding its activities. The Annual Report

to the Congress was published on June 15, 1998.

Examination and Oversight

OFHEO enhanced its examination strategy by initiating an annual continuous risk-based

examination process with regular risk assessments of the core risks of the Enterprises to ensure a

comprehensive ongoing assessment of the safety and soundness of the Enterprises. OFHEO drafted

an Examination Handbook to codify the continuous risk-based examination approach, including

supervisory philosophy, examination policies and procedures, and standards for risk management

practices and initiated the calendar year 1998 examination of the Enterprises.

During FY 1998, OFHEO completed examinations of the information systems and technology risk

of the Enterprises. The Office also completed examinations of operations risk management and

internal audit at the Enterprises. OFHEO presented examination reports and met with the Board of

Directors on each examination. OFHEO also monitored the progress of the Enterprises’ “Year

2000” compliance, including regular briefings by the Enterprises.

OFHEO conducted flood insurance compliance reviews of the Enterprises to assess the adequacy of

procedures at the Enterprises to comply with the requirements of applicable laws pertaining to

flood insurance. OFHEO reported on the adequacy of compliance in the Annual Report.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 59

OFHEO 7

OFHEO maintained and enhanced surveillance and monitoring programs to ensure that they

provide a comprehensive and timely assessment of the safety and soundness of the Enterprises.

Staff analyzed the financial condition and performance of the Enterprises and completed

evaluations of risks of the Enterprises. OFHEO also hosted a joint meeting of the examination

staffs from Federal agencies that supervise Government Sponsored Enterprises.

Infrastructure

OFHEO continued to focus on improved accountability over financial resources by issuing a task

order through the Department of Labor, Office of Inspector General, for an independent audit of

OFHEO’s FY 1998 financial statements and internal control processes. OFHEO also continued

reconciliation of financial data carried forward in FY 1997 from the HUD accounting system.

OFHEO identified surplus cash in its Treasury Fund and completed action necessary to dispose of

the cash by providing additional credit to the Enterprises against the FY 1999 annual assessment.

Through the reconciliation, OFHEO also recovered over $582,000 from prior year obligations for

use in FY 1998 enabling OFHEO to fund mission related contract services.

OFHEO revised its Performance Evaluation Management System based on feedback and

recommendations. The Office implemented a voluntary multi-source feedback (360 degree) review

program for supervisors.

OFHEO continued to maintain automation support for the Office and upgraded the operating

system for OFHEO’s Office Automation Local Area Network.

The Office began identifying potential “Year 2000” issues in April 1997. In FY 1998, OFHEO

continued to track progress to assure “Year 2000” compliance and monitored “Year 2000”

compliance of administrative cross-servicing providers. Contingency plans will be implemented in

the case of any “Year 2000” systems disruption and OFHEO will be able to continue all necessary

functions. As of the end of FY 1998, OFHEO had achieved a state of readiness regarding “Year

2000”.

OFHEO has three broad system types potentially impacted by “Year 2000” issues.

1) Mission systems under development that will be “Year 2000” compliant when put in service.

2) Administrative support systems developed and operated by OFHEO that are already “Year

2000” compliant.

3) Administrative and financial support systems owned by other federal agencies and used by

OFHEO. These support systems have either been certified as “Year 2000” compliant by the

servicing agency or corrective actions will be completed by owner agencies before OFHEO

would realize an adverse impact.

At the end of FY 1998, OFHEO had one software program used through its cross-servicing

agreement with the Department of Veterans Affairs (VA) that is not “Year 2000” compliant. The

software, a travel management program, is scheduled for replacement by VA during the second

quarter of FY 1999.
Chapter 4 - Financing OFHEO’s Operations

60 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 8

OFHEO also receives data from the Enterprises and is coordinating with both Enterprises to ensure

that OFHEO’s systems currently under development are designed in a way to ensure that Enterprise

data may be efficiently received by OFHEO.

LIMITATIONS OF THE FINANCIAL STATEMENTS

While OFHEO is not specifically covered by the requirements in the Chief Financial Officers Act,

the Office has prepared financial statements to report the financial position and results of

operations of OFHEO, pursuant to the requirements of 31 U.S.C. 3515(b). The statements have

been prepared from the books and records of OFHEO with the format prescribed by OMB. These

statements supplement the periodic financial reports used to monitor and control budgetary

resources that were prepared from the same books and records. The statements should be read with

the realization that they are for a component of the U.S. Government.

The following principal statements present the financial position of OFHEO, an independent office

within HUD, as of September 30, 1998. The statements are in conformity with the instructions

provided for federal entities by the OMB and comply with Statements of Federal Financial

Accounting Standards effective as of September 30, 1998.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 61
Chapter 4 - Financing OFHEO’s Operations

62 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 63
Chapter 4 - Financing OFHEO’s Operations

64 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 65

OFHEO 13

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

BALANCE SHEET

as of September 30, 1998

Assets

Fund Balance with Treasury – Note 2 $ 5,176,075

Accounts Receivable - Note 3 17,511

Property, Plant and Equipment – Note 4 5,425,211

Total Assets $ 10,618,797

Liabilities

Liabilities Covered by Budgetary Resources:

Intragovernmental Liabilities:

Accounts Payable $ 601

Accrued Payables 151,428

Total Intragovernmental Liabilities - Note 5 152,029

Other Liabilities

Accounts Payable 1,298,409

Other Liabilities 417,431

Total Other Liabilities - Note 5 1,715,840

Total Liabilities Covered by Budgetary Resources 1,867,869

Liabilities Not Covered by Budgetary Resources:

Intragovernmental Liabilities:

Other Intragovernmental Liabilities 406,250

Total Intragovernmental Liabilities 406,250

Other Liabilities:

Accrued Annual Leave 389,707

Total Other Liabilities 389,707

Total Liabilities Not Covered by Budgetary Resources 795,957

Total Liabilities $ 2,663,826

Net Position

Unexpended Appropriations - Note 6 $ 3,325,717

Cumulative Results of Operations 4,629,254

Total Net Position - Note 7 $ 7,954,971

Total Liabilities and Net Position $ 10,618,797

The accompanying notes are an integral part of

these Statements
Chapter 4 - Financing OFHEO’s Operations

66 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 14

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENT OF NET COST

for the Year Ended September 30, 1998

Program Costs

Intragovernmental Production

Public Production $ 11,075,929

Federal Production 2,008,838

Total Production Costs - Note 8 13,084,767

Non-production Costs

Imputed Financing Sources - PEB - Note 9 331,497

Financing Sources Yet to be Provided (A/L) - Note 10 28,407

Financing Sources Yet to be Provided (FWC) - Note 11 (18,916)

Total Non-Production Costs 340,988

Total Program Costs $ 13,425,755

Less Earned Revenues - Note 12 (36,479)

Net Program Costs $ 13,389,276

Net Cost of Operations $ 13,389,276

The accompanying notes are an integral part of

these Statements
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 67

OFHEO 15

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENT OF CHANGES IN NET POSITION

for the Year Ended September 30, 1998

Net Cost of Operations $ (13,389,276)

Financing Sources

Appropriations Used - Note 13 16,063,521

Imputed Financing Sources - PEB - Note 9 331,497

Subtotal - Financing Sources 16,395,018

Net Changes in Cumulative Results of Operations $ 3,005,742

(Decrease) in Unexpended Appropriations - Note 14 (119,346)

Changes in Net Position $ 2,886,396

Net Position - Beginning of Period - Note 15 5,068,575

Net Position - End of Period - Note 15 $ 7,954,971

The accompanying notes are an integral part of

these Statements
Chapter 4 - Financing OFHEO’s Operations

68 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 16

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENT OF BUDGETARY RESOURCES

for the Year Ended September 30, 1998

Budgetary Sources

Appropriations - Note 16 $ 16,000,000

Unobligated Balance Brought Forward October 1 55,593

Spending Authority from Offsetting Collections

Collected 68,955

Receivable from Federal Source – Note 12 (32,476)

Change in Unfilled Customer Orders Without Advance from Federal Sources -

Note 12

 (36,479)

Adjustments

Recoveries of Prior Year Obligations - Note 17 582,250

Permanently not available Pursuant to Public Law 102-550 (55,593)

Total Budgetary Resources $ 16,582,250

Status of Budgetary Resources

Obligations Incurred 16,556,930

Unobligated Balance Not Available 25,320

Total Status of Budgetary Resources $ 16,582,250

OUTLAYS

Obligations Incurred $ 16,556,930

Less: Spending Authority from Offsetting Collections/Adjustments

Collected 68,955

Receivable from Federal Sources - Note 12 (32,476)

Change in Unfilled Customer Orders Without Advance from Federal Sources -

Note 12

 (36,479)

Actual Recoveries of Prior Year Obligations - Note 17 (582,250)

Total Obligations Incurred 15,974,680

Obligated Balance, Net - Beginning of Period 4,947,080

Obligated Balance, Net - End of Period

Accounts Receivable - Note 3 17,511

Unfilled Customer Orders Federal Sources Without Advances 3,060

Undelivered Orders (3,303,456)

Accounts Payable (1,867,869)

Total Obligated Balance, Net – End of Period (5,150,754)

Outlays

Disbursements 15,827,201

Collections (68,970)

 End of Fiscal Year Adjustments - Note 19 12,775

Total Outlays $ 15,771,006

The accompanying notes are an integral part of

these Statements
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 69

OFHEO 17

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENT OF FINANCING

for the Year Ended September 30, 1998

Obligations and Nonbudgetary Resources

Obligations Incurred $ 16,556,930

Less: Spending Authority from Offsetting Collections/Adjustments

Earned Reimbursements

Collections 68,955

Receivables from Federal Sources – Note 12 (32,476)

Change in Unfilled Customer Orders – Note 12 (36,479)

Recoveries of Prior Year Obligations – Note 17 (582,250)

Other - Imputed Financing Sources –PEB – Note 9 331,497

Total Obligations as Adjusted and Nonbudgetary Resources $ 16,306,177

Resources That Do Not Fund Net Cost of Operations

Change in Goods/Services/Benefits Ordered but not Provided (Increase) 127,951

Change in Unfilled Customer Orders (Decrease) (39,109)

Costs Capitalized on the Balance Sheet (Increase)

General Property, Plant and Equipment (3,015,234)

Total Resources That Do Not Fund Net Costs of Prior Periods (2,926,392)

Financing Sources Yet to be Provided (Annual Leave) - Note 10 28,407

Financing Sources Yet to be Provided (Future Workers Compensation) - Note 11 (18,916)

Total Financing Sources Yet to be Provided 9,491

Net Cost of Operations $ 13,389,276

The accompanying notes are an integral part of

these Statements
Chapter 4 - Financing OFHEO’s Operations

70 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 18

NOTES TO FINANCIAL STATEMENTS

NOTE 1 - OFHEO ACCOUNTING PRINCIPLES AND STANDARDS

A. FY 1998 reflects a significant change in the manner in which OFHEO aggregates information

for financial reporting purposes.

Beginning with FY 1997, OFHEO assumed responsibility over the financial accounting

activities associated with its appropriation. This required the separation of accounting data

from HUD. OFHEO used FY 1997 as a transition year to convert accounting operations to a

system managed by OFHEO and to reconcile records transferred from the HUD system. FY

1998 is the first year that OFHEO has developed its own financial statements to stand on an

independent basis for reporting and audit. Consequently, for FY 1998 financial reporting,

OFHEO captured costs related to pension, post employment benefits and annual leave and is

disclosing these costs for both FY 1997 and FY 1998 in Notes associated with these liabilities.

OFHEO is reporting a portion of the actuarially determined costs for HUD for Future Workers

Compensation (FWC) pursuant to the Federal Employees Compensation Act (FECA) benefits.

Because the cost is determined by the Department of Labor (DOL) for HUD and includes

OFHEO, OFHEO prorated the cost based on a per employee basis. OFHEO has asked DOL, in

future years, to separate OFHEO from HUD on both a claim basis and actuarial liability basis.

OFHEO believes this separation will provide a more meaningful disclosure for future

liabilities.

B. The following presentation outlines the accounting principles and standards under which

OFHEO operates and under which the FY 1998 financial statements were produced.

Basis of Presentation

These principal statements were prepared to report the financial position and results of

operations of OFHEO. While OFHEO is not an entity covered by the Chief Financial Officers

(CFO) Act, the principal statements were prepared from the accounting system and records of

OFHEO in accordance with the form and content for entity financial statements specified by

the Office of Management and Budget (OMB) in OMB Bulletin 97-01 and OFHEO accounting

policies summarized in this note.

Reporting Entity/ Program Name

OFHEO was established as an independent office within HUD by the Federal Housing

Enterprises Financial Safety and Soundness Act of 1992 (title XIII of P.L. 102-550).

Budgets and Budgetary Accounting

Since 1993, Congress has enacted no-year appropriations, which are available for obligation by

OFHEO until expended. The appropriation is funded by an annual assessment of Fannie Mae

and Freddie Mac and not with taxpayer funds. Beginning with the FY 1998 appropriation,

OFHEO receives an appropriation from the U.S. Treasury General Fund each year. OFHEO

fully offsets the General Fund appropriation with collections from the annual assessment of the

Enterprises and ensures that no taxpayer funds are used for OFHEO’s operations.

l

l

l
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 71

OFHEO 19

OFHEO’s enabling statute requires that OFHEO return to the Enterprises in the form of a credit

against the next year’s annual assessment any unobligated assessment funds at the end of the

fiscal year. This effectively makes OFHEO operate like a hybrid annual appropriation with noyear authority -- OFHEO’s annual resources are available for obligation and expenditure

without regard to any fiscal year limitation. OFHEO reduces the current year’s assessment by

the amount of the unobligated balance from the previous year. Consequently, there is no carry

over of budget authority from one year to the next and cash is adjusted by the credit given to

the Enterprises each year.

Basis of Accounting

Transactions are recorded on both an accrual accounting basis and on a budgetary basis. Under

the accrual method, revenues are recognized when earned and expenses are recognized when a

liability is incurred, without regard to receipt or payment of cash. Budgetary accounting

facilitates compliance with legal requirements and controls over the use of Federal funds.

OFHEO complies with the U.S. Standard General Ledger and conforms to the hierarchy of

accounting principles for the Federal Government:

Standards approved by the Director of OMB, the Controller General, and the

Secretary of the Treasury;

Interpretations related to Standards issued by OMB in accordance with the

procedures outlined in OMB Circular A-134, Financial Accounting Principles and

Standards;

Requirements contained in OMB’s Form and Content Bulletin in effect for the

period covered by the financial statement;

Accounting principles published by other authoritative standard-setting bodies and

other authoritative sources in the absence of guidance provided above; and

Accounting principles established by HUD, VA or OFHEO that OFHEO

implements to enhance consistency or to provide guidance in the absence of

government-wide standards.

Revenues and Other Financing Sources

For reporting purposes, appropriations are recognized as revenues. At the time expenses are

accrued, revenue is adjusted as Appropriations Used.

Assessment collections based on appropriations are deposited in OFHEO’s fund account at the

U.S. Treasury (Treasury) and are used to offset the appropriation warrant from the General

Fund. Receipts which result from moneys due to OFHEO as a result of work performed for

other agencies (e.g. AID) are deposited in OFHEO’s fund and must be warranted from Treasury

before the funds are available for expenditure by OFHEO. Miscellaneous receipts collected by

OFHEO are not available to OFHEO for obligation or expenditure. These receipts must be

transferred to the Treasury when collected.

q

q

q

q

q

l

l
Chapter 4 - Financing OFHEO’s Operations

72 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 20

Funds with the Treasury and Cash

OFHEO cash receipts and disbursements are processed by Treasury. The funds with Treasury

are primarily assessment funds that are available to pay current liabilities and to finance

authorized purchase commitments. The Office does not have monetary assets held outside

OFHEO’s fund balance at Treasury. OFHEO does not have an advance from Treasury to

maintain an Imprest Fund and does not hold any marketable or non-marketable securities. The

Office does not operate a direct loan or loan guarantee program.

Accounts Receivable

OFHEO’s receivables result from the interagency agreement with AID and are related to HUD

payroll transactions processed in error by the National Finance Center against OFHEO’s

appropriation. There is no need to estimate an uncollectable account percentage at this time.

Advances

Advance payments are rarely made. Advances, when given, are normally for employee travel.

These advance payments are recorded as assets, which are reduced when reports of

expenditures are received by OFHEO or when accruals of cost estimates are made by OFHEO.

Property and Equipment

Property is capitalized and depreciated consistent with the criteria established by HUD.

OFHEO believes it is mutually beneficial to adopt the same threshold as HUD to facilitate the

preparation of consolidated financial statements that HUD would prepare under the CFO Act.

Thus, property with a cost of $100,000 or more per unit and a useful life of two years or more

will be capitalized at cost and depreciated. Other property items are expensed when purchased.

Normal repairs and maintenance are charged to expense as incurred.

At present, OFHEO has one qualifying item under the current capitalization threshold. This

asset is software under development to support the oversight of the Enterprises. The software

supports the development of risk-based capital standards and will be used to implement the

final risk-based capital standards. It also supports surveillance and monitoring of the

Enterprises. The software is being constructed “in-house”, utilizing significant contractor

support. The asset had not been placed in service as of September 30, 1998 and no

depreciation has been taken. Straight-line depreciation will be used once the software has been

placed into service. OFHEO owns no real property and has no capitalized leases.

Operating Lease

OFHEO has an operating lease with OTS at 1700 G Street, NW, Washington, D.C. The lease

covers office space and building services to include utilities, security guards, janitorial services,

mail delivery, use of the loading dock, garage parking, and building operation and maintenance.

The initial term of the lease was for five years beginning in 1993. OFHEO may renew the lease

for three 5-year options.

l

l

l

l

l
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 73

OFHEO 21

OFHEO may terminate the lease agreement in whole or in part. In the event of a termination in

OFHEO’s discretion, OFHEO is required to pay OTS two months rent. The OTS is required to

use its best effort to rent the space. OFHEO’s obligation to make payments ceases on the date

that OTS rents the space. If either OTS or OFHEO cease to exist or merge with another entity

by operation of law, either party may terminate the rental agreement. In the event of

termination under this provision, neither OTS nor OFHEO is liable for further costs, fees,

damages, or other monies due to the termination except for payments through the date of

termination.

Prepaid and Deferred Charges

Payments in advance of the receipt of goods and services are recorded as prepaid charges at the

time of prepayment and are recognized as expenditures/expenses when the related goods and

services are received. OFHEO rarely prepays for services or goods.

Liabilities

Liabilities represent the amount of moneys or other resources that are likely to be paid by

OFHEO as the result of a transaction or event that has already occurred. However, no liability

can be paid by OFHEO absent an appropriation. Liabilities for which an appropriation has not

been enacted and for which there is no certainty that an appropriation will be enacted are

classified, as Liabilities not covered by Budgetary Resources. During FY 1998, OFHEO had

five types of liabilities: (1) accounts payable, (2) accrued accounts payable, (3) payroll

accruals, (4) unencumbered cash, and (5) unfunded liabilities.

Accounts payable reflect invoices processed for payment during FY 1998 which are yet unpaid

as of the end of the fiscal year due to scheduling of payments to reflect prompt payment

guidelines. Accrued accounts payable are estimates of the value of services received during FY

1998 for which OFHEO had not been billed during the fiscal year. Payroll accruals reflect

payroll costs earned by employees during the fiscal year which are not paid until the next fiscal

year.

Unencumbered cash represents surplus cash in OFHEO’s fund documented through a

reconciliation of OFHEO’s obligations, accounts payable, and cash. In FY 1998, OFHEO

recorded a liability for “unencumbered cash”. This liability resulted from OFHEO’s

reconciliation of budgetary and proprietary accounts related to conversion from the HUD

accounting system in FY 1997. The liability will be liquidated in the first month of FY 1999

when the unencumbered cash will be credited against the FY 1999 assessment of the

Enterprises. Unfunded liabilities represent annual leave balances at the end of the fiscal year

and Future Workers Compensation (FWC) benefits under the Federal Employees

Compensation Act (FECA). OFHEO’s current year budgetary resources do not fund these

liabilities.

Annual, Sick, and Other Leave

Annual leave is accrued as it is earned and the accrual is reduced as leave is taken. Each year,

the balance in the accrued annual leave liability account is adjusted to reflect current pay rates.

For FY 1997, OFHEO identified $361,300 for annual leave balances as of the end of the fiscal

l

l

l
Chapter 4 - Financing OFHEO’s Operations

74 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 22

year; this compares to $389,707 calculated for FY 1998 leave balances. To the extent current

or prior year appropriations are not available to fund annual leave earned but not taken, funding

will be obtained from future appropriations and assessments.

Sick leave and other types of nonvested leave are expensed as taken.

Retirement Plans

OFHEO participates in the retirement plans offered by the Office of Personnel Management

(OPM) and does not maintain any private retirement plans or benefits. The majority of

OFHEO’s employees participate in either the Civil Service Retirement System (CSRS) or the

Federal Employees Retirement System (FERS). OFHEO expenses its contributions to the

retirement plans of covered employees as the expenses are incurred.

A primary feature of FERS is a savings plan whereby OFHEO automatically contributes one

percent of pay and matches any employee contribution up to an additional four- percent of pay.

Under CSRS, employees can contribute up to five percent of their pay to the savings plan, but

there is no matching contribution by OFHEO. OFHEO expenses its matching contribution on

behalf of employees as expenses are incurred.

OFHEO is reporting imputed financing with respect to retirement plans, health benefits and life

insurance pursuant to guidance received from OPM. These costs are paid by OPM and not by

OFHEO. Disclosure is intended to provide information regarding the full cost of OFHEO’s

programs.

Fiscal Year Retirement Health Life

1997 $180,635 $133,376 $797

1998 $177,014 $153,637 $846

Contingencies

OFHEO has no material pending or threatened litigation, claim or assessment outstanding or to

our knowledge any unasserted possible claim or assessment that would require disclosure in

accordance with Statement of Federal Financial Accounting Standard 5.

Certain legal matters to which OFHEO may be named a party are administered, and in some

cases, litigated by other Federal agencies. Amounts paid pursuant to a decision, settlement, or

awards pertaining thereto are generally funded through the Treasury. OFHEO is not aware of

any legal matters pending which may result in this type of settlement.

In most cases, claims (including personal injury claims) are administered and resolved by the

Department of Justice and any amounts necessary for resolution are obtained from a special

fund maintained by Treasury. Any legal actions for Workers’ Compensation claims brought by

OFHEO employees fall under FECA, which is administered by the Employment Standards

Administration of the Department of Labor. The cost of administering, litigating, and settling

these legal matters has not been delegated to individual Federal agencies.

l

l
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 75

OFHEO 23

Net Position

OFHEO’s net position is comprised of the following components:

1. Unexpended appropriations include the undelivered orders and unobligated balances of

OFHEO’s funds.

2. Invested capital represents U.S. Government resources invested in OFHEO’s property and

equipment and inventory not held for sale. Increases to invested capital are recorded when

assets are acquired with direct appropriations, and decreases are recorded as a result of the

depreciation, disposition of capital assets, or consumption of inventory.

3. Future funding requirements represent (a) accumulated annual leave earned but not taken as

of the financial statement date and (b) Future Workers Compensation. The expense for

these accruals is not funded from current appropriations, but will be funded from future

appropriations and assessments.

NOTE 2 - FUND BALANCE WITH TREASURY

Fund Balance With Treasury consists of the following as of September 30, 1998:

Obligated $4,746,098

Unobligated from FY 1998 assessment 25,321

Unencumbered prior year assessments 417,431

Collections not warranted (13,376)

HUD SF-224 reporting error 601

Total Fund Balance With Treasury $5,176,075

The unobligated FY 1998 funds will be credited to the FY 1999 annual assessment of the Enterprises.

The unencumbered balance from prior years, is the result of OFHEO’s continuing reconciliation of its

fund account during FY 1998. These funds represent a surplus of cash in the OFHEO fund, a result of

a number of factors including inadequate cash reconciliation and accounting recordation errors in prior

years. These funds will be returned to the Enterprises as credits against the FY 1999 assessment on the

Enterprises. The funds collected, but not warranted, pertain to work performed under OFHEO’s

Reimbursable Agreement with AID. Reimbursement was earned and collected during FY 1998 for FY

1997 obligations. OFHEO is required to secure a warrant from Treasury for funds collected by OFHEO

for OFHEO’s use. Treasury warranted these funds for OFHEO’s use shortly after the close of FY

1998. The HUD SF-224 reporting error was a vendor refund check that HUD received and determined

that the refund belonged to OFHEO. The refund belonged to HUD not OFHEO, and OFHEO has

coordinated with HUD to return these funds to HUD in FY 1999.

NOTE 3 - ACCOUNTS RECEIVABLE

OFHEO’s Accounts Receivable consists of receivables and reimbursements due from other Federal

agencies. The accounts receivable for FY 1998 are due from AID and HUD. OFHEO is including the

amount that should have been warranted to OFHEO by the Department of Treasury as an accounts

receivable. No account is estimated as uncollectible.

l
Chapter 4 - Financing OFHEO’s Operations

76 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 24

Accounts Receivable is composed of the following amounts as of September 30, 1998:

Intragovernmental:

Amount due from AID $ 1,649

Amount due from HUD 2,486

Collections not Warranted 13,376

Total Accounts Receivable $ 17,511

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

OFHEO is developing software for regulatory use, which meets the capitalization requirement.

Depreciation will begin when the asset is placed into service. The software supports two functions: 1)

the development and implementation of risk-based capital standards for the Enterprises and 2)

surveillance and monitoring for OFHEO’s examination program. Property, Plant and Equipment

consists of the following as of September 30, 1998:

Fixed Assets Class Book Value

Prior FY Contract Costs $1,741,303

Prior FY Staff Costs 668,674

Prior FY Total $2,409,977

FY 1998 Contract Costs $2,795,125

FY 1998 OFHEO Staff Costs 220,109

FY1998 Total $3,015,234

Total Property, Plant and Equipment $5,425,211

NOTE 5 - LIABILITIES

Liabilities Covered by Budgetary Resources:

Intragovernmental Liabilities:

1) Accounts Payable $ 601

2) Accrued Accounts Payables 151,428

Total Intragovernmental Liabilities $ 152,029

Other Liabilities:

3) Accounts Payable $ 3,529

4) Accrued Payroll and Benefits 390,139

5) Accrued Accounts Payables 904,741

6) Other Liabilities 417,431

Total Other Liabilities $1,715,840

Total Liabilities Covered by Budgetary Resources $1,867,869

Other Information:

Accounts payable represents payments in transit at the end of the fiscal year and the reflection of

the incorrect reporting of a refund check processed against OFHEO’s appropriation by HUD.

Accrued Payroll and Benefits represent wages and benefits, which have been earned but not paid as

of September 30, 1998.

l

l
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 77

OFHEO 25

Other Governmental Liabilities reflect unencumbered assessment funds for years prior to FY 1997.

As of the end of FY 1998, these prior year funds were verified as surplus and not encumbered by

valid obligations. These funds will be distributed to the Enterprises in the form of a credit against

the FY 1999 annual assessment.

Accrued Payables reflect goods and/or services provided by September 30, 1998, from outside

sources, for which OFHEO had not received a bill.

Intragovernmental Payables reflects goods and/or services received, by September 30, 1998, from

other Federal agencies.

Liabilities not Covered by Budgetary Resources:

Intragovernmental

Annual Leave $ 389,707

Future Workers Compensation 406,250

Total Intragovernmental Liabilities $ 795,957

Annual Leave represents the amount of annual leave earned by OFHEO employees but not taken as of

September 30, 1998. Future Workers Compensation represents an actuarial liability established by

DOL for HUD. OFHEO is reporting a pro rata share of HUD’s liability on a per employee basis.

NOTE 6 - UNEXPENDED APPROPRIATIONS

Unobligated Unavailable $ 25,321

Undelivered orders 3,300,396

Total $3,325,717

In accordance with law, the amount of unobligated appropriations at fiscal year end are unavailable to

OFHEO as budget authority in the next year. The value of the unobligated balance at fiscal year end is

returned to the enterprises as a credit to the following year’s annual assessment. Undelivered orders

reflect unliquidated (open) obligations as of September 30, 1998, as adjusted by end of fiscal year

estimated accounts payable for goods or services received by OFHEO but not billed.

NOTE 7 - NET POSITION

The OFHEO’s financial activities interact with and are dependent upon those of the Federal

Government as a whole. Other Federal agencies make financial decisions and report certain financial

matters on behalf of all Federal agencies. The practice of having Federal agencies record or report only

those government-wide financial matters for which they are directly responsible is consistent with

generally accepted accounting principles for Federal agencies which seek to identify financial matters

to the department or agency that has been granted budget authority and resources to manage them.

Activities which are performed or reported by other Federal agencies in which OFHEO is indirectly

involved are as follows:

Thrift Savings Plan (TSP): OFHEO makes contributions to the TSP on behalf of its employees.

OFHEO does not have control over the plan’s assets. The TSP is administered by the National

Finance Center, U.S. Department of Agriculture.

l

l

l

l
Chapter 4 - Financing OFHEO’s Operations

78 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 26

Interest: Interest on borrowings of the U.S. Treasury is not included as a cost to OFHEO’s

programs and is not included in the accompanying financial statements. OFHEO’s appropriation is

fully offset by collections from the Enterprises.

Pension and Other Post Retirement Benefits: As required by the Statement of Federal Financial

Standards Number 5, the Office of Personnel Management provides “costs factors” to each Federal

agency to compute the agencies “service cost”. This service cost represents an estimate of the

amount of funds, which, if accumulated annually and invested over the careers of covered

employees, will be enough to pay the employees future benefits. Each agency must recognize the

difference between the service cost and the regular contributions made by the agency and the

employee.

Federal Employees Compensation Act (FECA): Accrued Worker’s Compensation benefits are paid

by DOL on OFHEO’s behalf through HUD. During FY 1998, OFHEO had no claims for benefits

under FECA. OFHEO is reporting, for disclosure purposes, on a per employee, pro rata basis, a

portion of the actuarial liability calculated for HUD (an employee count was included for OFHEO

in the actuarial calculation).

The Net Position consists of the following as of September 30, 1998:

Unexpended Appropriations $ 4,381,886

Less: Accrued Payables 09/30/98 (1,056,169)

Total Unexpended Appropriation $ 3,325,717

Invested Capital $ 5,425,211

Cumulative Results of Operations (795,957)

Total Cumulative Results of Operations $ 4,629,254

Total Net Position $ 7,954,971

Invested Capital represents the net investment of the U.S. Government appropriations expended for

OFHEO’s capitalized property, plant, and equipment. Cumulative Results of Operation reflects the

amount of unfunded liabilities (Future Workers Compensation and Annual Leave) for FY 1998.

NOTE 8 - PROGRAM COSTS

OFHEO is a single program for budget purposes. OFHEO does not have heritage assets or stewardship

responsibilities for federal lands. Program Costs represent appropriated funds that have been expensed

for salaries and expenses to support OFHEO’s operations during the fiscal year ended September 30,

1998.

Operating Expenses

Public Program Costs $10,171,188

Accrued Accounts Payables Public 09/30/98 904,741

Subtotal Public Program Costs $11,075,929

Federal Program Costs 1,857,410

Accrued Accounts Payable Federal 09/30/98 151,428

Subtotal Federal Program Costs $ 2,008,838

Total Program Costs – Production $13,084,767

l

l

l
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 79

OFHEO 27

NOTE 9 - IMPUTED FINANCING - POST EMPLOYMENT BENEFITS (PEB)

Imputed Financing represents the post retirement benefits calculated pursuant to instructions from

OPM. OPM furnishes funding for these costs.

CSRS Imputed $ 161,615

CSRS Offset Imputed 15,399

Life Insurance Imputed 846

Health Insurance Imputed 153,637

Total Imputed Financing – Post Employment $ 331,497

NOTE 10 - FINANCING SOURCES YET TO BE PROVIDED (ANNUAL LEAVE)

Financing Sources Yet to be Provided consists of the net change in the amount of annual leave earned

by OFHEO employees during FY 1998.

Annual Leave FY 1998 $ 389,707

Annual Leave FY 1997 (361,300)

Net Change FY1998 $ 28,407

NOTE 11 - FINANCING SOURCES YET TO BE PROVIDED (FWC)

Financing Sources Yet to be Provided represents the actuarial liability for Future Workers

Compensation determined by DOL for HUD. OFHEO is reporting a share of HUD’s liability on a per

employee basis.

Prorated share FY 1998 $ 406,250

Prorated share FY 1997 (425,166)

Net Change for FY 1998 $ (18,916)

NOTE 12 - EARNED REVENUES

Earned revenues reflect the work performed by OFHEO under its reimbursable agreement with AID

during FY 1998. These revenues reflect the liquidation of obligations made in prior fiscal years by

OFHEO that were earned and collected from AID during FY 1998.

Earned Revenues $ 36,479

At the end of FY 1997, AID owed OFHEO $34,125 from work performed. During FY 1998, OFHEO

collected a total of $68,955 from AID and earned an additional amount of $1,649.

The net change in Receivables consists of:

FY 1998 account receivable $ 1,649

Less FY 1997 account receivable (34,125)

Net change during FY 1998 $ (32,476)
Chapter 4 - Financing OFHEO’s Operations

80 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFHEO 28

The net change in Unfilled Customer Orders consists of:

FY 1998 Unfilled Customer Orders $ 3,060

Deobligations during FY 1998 2,630

Less: FY 1997 Unfilled Customer Orders (42,169)

Net Change in Unfilled Customer Orders $ (36,479)

NOTE 13 - APPROPRIATIONS USED

Appropriations used reflect expenses funded by appropriations.

Appropriation Used $15,007,352

Accrued Payables 1,056,169

Total Appropriations Used $16,063,521

NOTE 14 - INCREASE/DECREASE IN UNEXPENDED APPROPRIATIONS

Net difference in unexpended appropriations between FY September 30, 1998 and FY

September 30, 1997:

Unexpended Appropriations – FY 1998 $ 3,325,717

Less: Unexpended Appropriations – FY 1997 3,445,063

Decrease in Unexpended Appropriations $ (119,346)

NOTE 15 - NET POSITION

Beginning Balance

Unexpended Appropriations $ 3,445,063

Cumulative Results of Operations 1,623,512

Net Position, Beginning Balance $ 5,068,575

Ending Balance

Unexpended Appropriations $ 3,325,717

Cumulative Results of Operations 4,629,254

Net Position, Ending Balance $ 7,954,971

NOTE 16 - APPROPRIATIONS

For OFHEO, appropriations reflect the FY1998 General Fund warrant from the Department of the

Treasury.

Appropriation -- FY 1998 $16,000,000

NOTE 17 - RECOVERIES OF PRIOR YEAR OBLIGATIONS

Recoveries of prior year obligations consist of the reapportionment of funds by the OMB. OFHEO

requested and received the authority to re-obligate these prior year funds in FY 1998, for valid current

year requirements.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Unqualified Audit Opinion of FY 1998 Financial Statements

1999 Report To Congress 81

OFHEO 29

NOTE 18 - OBLIGATIONS INCURRED

Obligations incurred reflect orders placed during FY1998.

NOTE 19 - ADJUSTMENTS

Collections not Warranted $ 13,376

Accounts Payable (601)

Total Adjustments $ 12,775

Collections not warranted pertain to work performed under OFHEO’s Reimbursable Agreement with

AID. Reimbursement was earned and collected during FY 1998 for FY 1997 obligations. Accounts

Payable reflect the incorrect reporting of a refund check processed against OFHEO’s appropriation by

HUD. This was a vendor refund check that HUD received and determined that the refund belonged to

OFHEO. The refund belonged to HUD not OFHEO, and OFHEO has coordinated with HUD to return

these funds to HUD in FY 1999.
Chapter 4 - Financing OFHEO’s Operations

82 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
1999 Report To Congress 83  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Historical Data Tables

Table 1. Fannie Mae Business Activities............................84

Table 2. Fannie Mae MBS Issuances.................................85

Table 3. Fannie Mae Earnings............................................86

Table 4. Fannie Mae Balance Sheet ..................................87

Table 5. Fannie Mae Financial Derivatives.........................88

Table 6. Fannie Mae Non-Mortgage Investments .............89

Table 7. Fannie Mae Asset Liability Mix.............................90

Table 8. Fannie Mae Mortgage Asset Quality....................91

Table 9. Fannie Mae Capital ..............................................92

Table 10. Freddie Mac Business Activities ..........................93

Table 11. Freddie Mac MBS Issuances ...............................94

Table 12. Freddie Mac Earnings ..........................................95

Table 13. Freddie Mac Balance Sheet.................................96

Table 14. Freddie Mac Financial Derivatives .......................97

Table 15. Freddie Mac Non-Mortgage Investments ............98

Table 16. Freddie Mac Asset Liability Mix ...........................99

Table 17. Freddie Mac Mortgage Asset Quality ................100

Table 18. Freddie Mac Capital...........................................101

Table 19. Aggregate Business Activity ..............................102

Table 20. Aggregate MBS Issuances.................................103

Table 21. Aggregate Earnings............................................104

Table 22. Aggregate Balance Sheet .................................105

Table 23. Aggregate Financial Derivatives.........................106

Table 24. Aggregate Non-Mortgage Investments..............107

Table 25. Aggregate Asset Liability Mix.............................108

Table 26. Aggregate Capital ..............................................109

Table 27. Loan Limits.........................................................110

Table 28. Mortgage Interest Rates.....................................111

Table 29. Housing Market Activity .....................................112

Table 30. Weighted Repeat Sales House Price Index .......113
Historical Data Tables

84 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 1. Fannie Mae Business Activities

Business Activity ($ Millions)

 Period 

Purchases

 Single-Family 

Purchases ($) 

 Multifamily 

Purchases ($) Total Purchases1 ($) 

1 Cash purchases plus securitizations; excludes non-Fannie Mae securities and repurchased Fannie Mae MBS.

 Mortgage Securities 

Purchases2 ($) 

2 Not included in total purchases.

4q98 107,509 3,901 111,410 55,351 

3q98 91,291 4,697 95,988 37,329 

2q98 92,935 2,021 94,956 32,931 

1q98 66,070 1,711 67,781 18,850 

Annual Data

1998 357,805 12,330 370,135 144,461 

1997 164,434 6,612 171,046 48,848 

1996 166,965 6,506 173,471 45,016 

1995 127,988 5,030 133,018 34,036 

1994 164,619 3,840 168,459 24,552 

1993 303,071 4,135 307,206 6,275 

1992 262,055 2,956 265,011 4,930 

1991 144,517 3,204 147,721 2,384 

1990 116,496 3,181 119,677 977 

1989 87,446 4,836 92,282 Not Applicable 

Before 1990 1988 73,808 4,180 77,988 

1987 82,277 1,483 83,760 

1986 89,515 1,877 91,392 

1985 43,959 1,200 45,159 

1984 29,161 1,106 30,267 

1983 30,757 140 30,897 

1982 29,077 9 29,086 

1981 6,828 2 6,830 

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
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 85

Table 2. Fannie Mae MBS Issuances

Business Activity ($ Millions)

 Period 

MBS Issuances

 Single-Family MBS 

Issued ($) 

 Multifamily MBS 

Issued ($) Total MBS Issued ($) 

Multiclass MBS 

Issued1 ($) 

1 The majority qualify as Real Estate Mortgage Investment Conduits (REMICs) and are also known as structured securitizations.

4q98 94,473 3,542 98,015 9,266 

3q98 81,618 4,376 85,994 25,443 

2q98 82,245 1,635 83,880 27,056 

1q98 56,784 1,475 58,259 22,382 

Annual Data

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 

1980 Not issued Before 1981 Not issued Before 1981

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae
Historical Data Tables

86 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 3. Fannie Mae Earnings 

Period

Earnings ($ Millions)

Net 

Interest 

Income1

($)

1 Interest income net of interest expense, nominal basis.

Guarantee 

Fee Income 

($)

Average 

Guarantee 

Fee Rate 

(basis 

points)

Admin 

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.

4q98 976 261 16.5 185 50 889 25.0 

3q98 1,067 324 21.0 179 65 857 25.2 

2q98 1,031 323 21.5 174 69 848 25.6 

1q98 1,036 321 21.9 170 77 824 25.0 

Annual Data

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 Not

Applicable 

Before 1989

507 25.2 

1987 890 263 22.1 197 376 23.5 

1986 384 175 23.8 175 105 9.5 

1985 139 112 25.6 142 (7) (0.7)

1984 (90) 78 26.2 112 (71) (7.4)

1983 (9) 54 26.3 81 49 5.1 

1982 (464) 16 27.2 60 (192) (18.9)

1981 (429) 0.3 25.0 49 (206) (17.2)

1980 21 Not

Available 

Before 1981

Not

Available 

Before 1981

44 14 0.9 

1979 322 46 162 11.3 

1978 294 39 209 16.5 

1977 251 32 165 15.3 

1976 203 30 127 13.8 

1975 174 27 115 14.1 

1974 142 23 107 14.7 

1973 180 18 126 20.3 

1972 138 13 96 18.8 

1971 49 15 61 14.4 

Source: Fannie Mae
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 87

Table 4. Fannie Mae Balance Sheet

Period

Balance Sheet ($ Millions)

Mortgage Backed 

Securities Outstanding ($ 

Millions)

Total 

Assets ($)

Retained 

Mortgage 

Portfolio ($) 1

1 Gross retained portfolio net of unamortized purchase premium, discounts and fees.

NonMortgage 

Investments 

($) 2

2 Prior to 1982 balances primarily composed of U.S. government and agency securities.

Debt 

Outstanding 

($) 3

3 Includes subordinated borrowings.

 Stockholder’s 

Equity ($)

Total MBS 

Outstanding 

($) 4

Multiclass 

MBS 

Outstanding 

($) 4

4 The majority qualify as REMICs and are also known as structured securitizations.

4q98 485,014 415,434 58,515 460,291 15,453 637,143 361,613 

3q98 455,099 376,332 68,653 430,582 14,852 625,563 383,173 

2q98 429,448 349,538 69,643 406,162 14,185 605,104 382,702 

1q98 403,993 327,171 67,209 381,093 14,071 593,303 397,116 

Annual Data

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 Issued 

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

88 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 5. Fannie Mae Financial Derivatives

Financial Derivatives1 ($ Millions)

1 Synthetically created debt instruments or interest-bearing assets used to reduce the corporation’s exposure to interest-rate and/or foreign 

currency risk; notional balances or contract amounts.

Period

 Interest 

Rate 

Swaps ($)

 Interest 

Rate Caps 

Floors 

Corridors 

($)

 Spread 

Lock 

Agreements 

($)

 Foreign 

Currency 

($)

 Futures & 

Options($) Other ($) Total ($)

4q98 142,846 14,500 100 12,995 816 16,300 187,557 

3q98 135,825 6,600 0 11,961 102 5,045 159,533 

2q98 139,073 3,600 0 11,376 670 4,025 158,744 

1q98 143,916 100 115 10,465 492 4,170 159,259 

Annual Data

1998 142,846 14,500 100 12,995 816 16,300 187,557 

1997 149,673 100 35 9,968 0 1,625 161,401 

1996 158,140 300 0 2,429 0 353 161,222 

1995 125,679 300 0 1,224 29 990 128,221 

1994 87,470 360 0 1,023 0 1,511 90,363 

1993 49,458 360 0 1,023 0 1,425 52,265 

1992 24,130 0 0 1,177 0 1,350 26,658 

1991 9,100 0 0 Not

Available 

Before 1992

50 1,050 10,200 

1990 4,800 0 0 25 1,700 6,525 

1989 Not

Available 

Before 1990 

Not

Available 

Before 1990

Not

Available 

Before 1990

Not

Available 

Before 1990

Not

Available 

Before 1990

Not

Available 

Before 1990 1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 89

Table 6. Fannie Mae Non-Mortgage Investments

 Non-Mortgage Investments ($ 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.

4q98 7,926 20,993 7,556 5,155 16,885 58,515 

3q98 14,673 20,131 4,416 9,736 19,697 68,653 

2q98 15,330 18,605 6,358 12,190 17,160 69,643 

1q98 16,939 16,832 6,503 11,888 15,045 67,207 

Annual Data

1998 7,926 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

90 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 7. Fannie Mae Asset Liability Mix

Period

Asset Liability Ratios ($ Millions)

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 Long-Term 

Debt / Total Debt2 (%)

2 Total effective long-term debt represents debt with an effective repricing date greater than one year.

4q98 85.7 12.1 42.9 76.4

3q98 82.7 15.1 43.9 76.9

2q98 81.4 16.2 46.5 78.6

1q98 81.0 16.6 46.0 79.8

Annual Data

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
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 91

Table 8. Fannie Mae Mortgage Asset Quality

Mortgage Asset Quality ($ Millions)

Period

Single-Family 

Delinquency Rate1

(%)

1 The single-family delinquency rate has been restated for periods prior to 12/31/95 to include loans three or more months delinquent, or in foreclosure.

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.

4q98 0.58 0.29 0.02 0.08 17.5

3q98 0.57 0.36 0.03 0.09 16.4

2q98 0.57 0.36 0.03 0.10 14.8

1q98 0.61 0.36 0.03 0.10 13.5

Annual Data

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 22.1

1990 0.58 1.70 0.06 0.09 26.1

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 Applicable 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

Note: Asset quality figures are not restated for the December 1987 FAS 91 change for years 1971 through 1979.
Historical Data Tables

92 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 9. Fannie Mae Capital

Capital ($ 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 

Requirement

s3 ($)

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 

Capitalization

5 ($)

5 Stock price multiplied by number of outstanding common shares.

Common 

Share 

Dividend 

Payout Rate6, 

7 (%)

6 Paid Dividends per share as a percentage of earnings per common share.

7 Dividends per common share as a percentage of (diluted) earnings per common share.

4q98 1.38 1.45 15,465 15,334 131 75,881 28.6 

3q98 1.37 1.45 14,852 14,520 332 65,831 29.6 

2q98 1.37 1.45 14,185 13,772 413 62,321 30.0 

1q98 1.41 1.49 14,071 13,079 992 65,398 30.2 

Annual Data

1998 1.38 1.45 15,465 15,334 131 75,881 29.7 

1997 1.42 1.50 13,793 12,703 1,090 59,167 29.7 

1996 1.42 1.50 12,773 11,466 1,307 39,932 30.6 

1995 1.32 1.41 10,959 10,451 508 33,812 34.9 

1994 1.26 1.37 9,541 9,415 126 19,882 30.9 

1993 1.17 1.29 8,052 7,064 988 21,387 27.0 

1992 1.12 1.25 Not

Applicable 

Before 1993

Not

Applicable 

Before 1993 

Not

Applicable 

Before 1993

20,871 23.4 

1991 1.10 1.24 18,836 20.9 

1990 0.94 1.06 8,490 16.0 

1989 0.88 1.01 8,092 13.9 

1988 0.80 0.94 3,992 11.4 

1987 0.76 0.90 2,401 7.8 

1986 0.61 0.74 3,006 8.1 

1985 0.66 0.76 19,040 30.8 

1984 0.74 0.85 1,012 N/A

1983 0.97 1.10 15,140 14.2 

1982 1.09 1.25 1,603 N/A

1981 1.73 1.90 502 N/A

1980 2.49 2.73 702 487.0 

1979 2.93 3.17 Not Available 

Before 1980

47.8 

1978 3.13 3.36 33.1 

1977 3.45 3.66 36.9 

1976 3.03 3.19 40.4 

1975 2.73 2.84 38.5

1974 2.60 2.69 35.8 

1973 2.80 2.87 22.2 

1972 2.75 2.78 18.4 

1971 2.47 2.49 19.9 

Source: Fannie Mae
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 93

Table 10. Freddie Mac Business Activities

Business Activity ($ Millions)

Mortgage Purchases

Period

 Single-Family 

Purchases ($)

 Multifamily 

Purchases ($) Total Purchases1 ($)

1 Loans purchased from Lenders; excludes non-Freddie Mac securities and repurchased Freddie Mac MBS.

 Mortgage 

Securities 

Purchases2 ($)

4q98 77,189 1,725 78,914 47,780 

3q98 68,139 1,337 69,476 29,470 

2q98 70,717 552 71,269 20,967 

1q98 47,445 296 47,741 30,229 

Annual Data

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

94 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 11. Freddie Mac MBS Issuances

Business Activity ($ Millions)

MBS Issuances

Period

 Single Family MBS Issued 

($) Multifamily MBS ($) Total MBS Issued ($) Multiclass MBS Issued1

1 The majority qualify as Real Estate Mortgage Investment Conduits (REMICs), and are also known as structured securitizations.

4q98 69,634 522 70,156 27,118 

3q98 66,775 415 67,190 37,296 

2q98 68,950 0 68,950 44,189 

1q98 44,268 0 44,268 26,559 

Annual Data

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 Not Issued Before 1988 

1986 96,798 3,400 100,198 

1985 37,584 1,245 38,829 

1984 Not Available Before 1985 Not Available Before 1985 18,684 

1983 19,691 

1982 24,169 

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
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 95

Table 12. Freddie Mac Earnings

Earnings ($ Millions)

Period

Net 

Interest 

Income 

1, 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)

 Admin 

Expenses 

($)

Creditrelated 

Expenses4

($)

4 Credit-related expenses are mortgage loan loss provision plus real estate owned expense.

 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.

4q98 621 245 20.6 169 69 468 23.4

3q98 553 255 21.1 142 79 425 24.2

2q98 534 256 21.7 135 90 414 24.4

1q98 507 263 22.4 132 104 393 24.2

Annual Data

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 Not

Applicable 

Before 1993

622 21.2

1991 683 792 23.7 287 555 23.6

1990 619 654 22.4 243 414 20.4

1989 517 572 23.4 217 437 25

1988 492 465 21.5 194 381 27.5

1987 319 472 24.2 150 301 28.2

1986 299 301 22.4 110 247 28.5

1985 312 188 22.1 81 208 30

1984 213 158 24.7 71 144 52

1983 125 132 26.2 53 86 44.5

1982 30 77 24.5 37 60 21.9

1981 34 36 19.5 30 31 13.1

1980 54 23 14.3 26 34 14.7

1979 55 18 13.2 19 36 16.2

1978 37 14 14.9 14 25 13.4

1977 31 9 18.9 12 21 12.4

1976 18 3 13.6 10 14 9.5

1975 31 3 24.8 10 16 11.6

1974 42 2 25.5 8 5 4

1973 31 2 32.4 7 12 9.9

1972 10 1 39.4 5 4 3.5

1971 10 1 Not

Available

Before 1972

Not

Available 

Before 1972

6 5.5

Source: Freddie Mac
Historical Data Tables

96 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 13. Freddie Mac Balance Sheet

Balance Sheet ($ Millions)

Mortgage-Backed Securities 

Outstanding ($ Millions)

Period

 Total Assets 

($)

Retained 

Mortgage 

Portfolio1 ($)

1 Gross retained portfolio net of unamortized purchases premiums, discounts and fees.

Non-Mortgage 

Investments2

($) 

2 Excludes mortgage-related securities held for trading purposes. 

 Debt 

Outstanding3

($)

3 Excludes subordinated borrowings

Stockholder’s 

Equity

 Total MBS 

Outstanding4

($) 

4 Total MBS outstanding net of repurchased MBS held in the retained portfolio. 

 Multiclass 

MBS 

Outstanding5

($) 

5 The majority qualify as REMICs and are also known as structured securitizations. 

4q98 321,421 255,670 42,160 287,234 10,835 478,351 260,336 

3q98 263,256 216,946 26,417 236,387 9,288 490,687 236,202 

2q98 229,991 197,126 16,523 203,494 8,413 480,687 230,373 

1q98 226,571 186,357 25,830 196,551 8,204 462,765 214,330 

Annual Data

1998 321,421 255,670 42,160 287,234 10,835 478,351 260,336 

1997 194,597 164,543 16,430 172,321 7,521 475,985 233,591 

1996 173,866 137,826 22,248 156,491 6,731 473,065 237,630 

1995 137,181 107,706 12,711 119,328 5,863 459,045 246,969 

1994 106,199 73,171 17,808 92,053 5,162 460,656 263,662 

1993 83,880 55,938 18,225 48,510 4,437 439,029 264,122 

1992 59,502 33,629 12,542 28,173 3,570 407,514 217,030 

1991 46,860 26,667 9,956 28,300 2,566 359,163 142,960 

1990 40,579 21,520 12,124 28,375 2,136 316,359 83,437 

1989 35,462 21,448 11,050 24,102 1,916 272,870 47,573 

1988 34,352 16,918 14,607 24,846 1,584 226,406 10,877 

1987 25,674 12,354 10,467 17,461 1,182 212,635 Not Issued 

Before 1988 1986 23,229 13,093 Not Available 

Before 1987

13,378 953 169,186 

1985 16,587 13,547 11,754 779 99,909 

1984 13,778 10,018 10,186 606 70,026 

1983 8,995 7,485 6,782 421 57,720 

1982 5,999 4,679 4,521 296 42,952 

1981 6,326 5,178 5,480 250 19,897 

1980 5,478 5,006 4,686 221 16,962 

1979 4,648 4,003 3,981 238 15,316 

1978 3,697 3,038 3,066 202 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
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 97

Table 14. Freddie Mac Financial Derivatives

 Financial Derivatives1 ($ Millions)

1 Synthetically created debt instruments or interest-bearing assets used to reduce the corporation’s exposure to interest-rate and/or foreign currency risk; notional 

balances or contract amounts reported. 

Interest Rate 

Swaps ($)

Interest Rate 

Caps Floors 

Corridors ($)

 Spread Lock 

Agreements 

($)

 Foreign 

Currency ($) 

 Futures & 

Options ($) Other ($) Total ($) 

4q98 42,480 21,845 26,617 1,464 220,832 0 313,238 

3q98 45,885 22,190 6,577 1,579 158,349 0 234,580 

2q98 46,620 23,246 14,363 1,153 66,200 0 151,582 

1q98 50,826 24,510 4,071 1,153 77,400 0 157,960 

Annual Data

1998 42,480 21,845 26,617 1,464 220,832 0 313,238 

1997 54,172 21,995 12,228 1,152 6,000 0 95,547 

1996 46,646 14,095 651 544 0 0 61,936 

1995 45,384 13,055 24 0 0 0 58,463 

1994 21,834 9,003 0 0 0 0 30,837 

1993 17,888 1,500 0 0 0 0 19,388 

1992 Not Available Not Available Not Available Not Available Not Available Not Available Not Available

1991 Before 1993 Before 1993 Before 1993 Before 1993 Before 1993 Before 1993 Before 1993

1990

1989

1988

1987

1986

1985

1984 

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Freddie Mac
Historical Data Tables

98 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 15. Freddie Mac Non-Mortgage Investments

Non-Mortgage Investments1 ($ 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 ($)

4q98 20,524 7,124 1,756 7,795 4,961 42,160 

3q98 6,409 5,146 3,532 6,560 4,770 26,417 

2q98 1,890 3,230 2,269 6,458 2,676 16,523 

1q98 8,239 2,425 4,997 8,925 1,244 25,830 

Annual Data

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 Not Available 

Before 1995

5,913 1,234 3,401 17,808 

1993 9,267 4,198 1,438 3,322 18,225 

1992 5,632 4,060 53 2,797 12,542 

1991 2,949 4,437 0 2,570 9,956 

1990 1,112 9,063 0 1,949 12,124 

1989 3,527 5,765 0 1,758 11,050 

1988 4,469 9,107 0 1,031 14,607 

1987 3,177 5,859 0 1,431 10,467 

1986 Not Available 

Before 1987 

Not Available 

Before 1987 

Not Available 

Before 1987 

Not Available 

Before 1987 

Not Available 

Before 1987 1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 99

Table 16. Freddie Mac Asset Liability Mix

Asset Liability Ratios ($ Millions)

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.

4q98 79.5 13.1 75.6 70.6 

3q98 82.4 10.0 86.8 65.2 

2q98 85.7 7.2 88.6 68.4 

1q98 82.3 11.4 85.7 71.3 

Annual Data

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 91.5 

1976 86.4 

1975 82.7 

1974 91.2 

1973 87.7 

1972 97.4 

1971 90.1 

Source: Freddie Mac
Historical Data Tables

100 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 17. Freddie Mac Mortgage Asset Quality

Mortgage Asset Quality ($ Million)

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 multifamily in-substance foreclosures pursuant to adoption of SFAS 114.

REO/Total MBS 

Outstanding plus 

Retained Portfolio4 

(%)

4 Real Estate Owned balances reflect end-of-period balances; beginning in 1992, data reflects adoption of SFAS 114.

Credit Losses / Total 

MBS Outstanding 

plus Retained 

Portfolio5 (%)

5 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.

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.

4q98 0.50 0.37 0.08 0.03 27.3

3q98 0.49 0.53 0.08 0.03 25.2

2q98 0.53 0.81 0.09 0.05 23.3

1q98 0.55 0.96 0.11 0.06 17.9

Annual Data

1998 0.50 0.37 0.08 0.04 27.3

1997 0.55 0.96 0.11 0.08 15.9

1996 0.58 1.96 0.13 0.10 10.0

1995 0.60 2.88 0.14 0.11 9.7

1994 0.55 3.79 0.18 0.08 7.2

1993 0.61 5.92 0.16 0.11 5.3

1992 0.64 6.81 0.12 0.09 Not Available Before 

1993 1991 0.61 5.42 0.14 0.08

1990 0.45 2.63 0.12 0.08

1989 0.38 2.53 0.09 0.08

1988 0.36 2.24 0.09 0.07

1987 0.36 1.49 0.08 0.07

1986 0.42 1.07 0.07 Not Available Before 

1987 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 

1987

0.03

1976 0.04

1975 0.03

1974 0.02

1973 Not Available Before 

1974 1972

1971

Source: Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 101

Table 18. Freddie Mac Capital

Capital ($ Millions)

Period

Stockholders' 

Equity / Total 

MBS 

Outstanding 

plus Total 

Assets (%)

Stockholders' 

Equity plus 

Reserves / 

Total MBS 

Outstanding 

plus Total 

Assets (%) 1

1 Effective 1995, reserves exclude specific allowances for impaired loans pursuant to SFAS 114. 

Core Capital 

2 ($) 

2 The sum of: (Outstanding common stock, Noncumulative preferred stock, paid-in capital and retained earnings).

Regulatory 

Minimum 

Capital 

Requirements

3 ($)

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 

Capitalization

5

5 Stock price multiplied by number of outstanding common shares.

Common 

Share 

Dividend 

Payout Rate 

6, 7 (%)

6 Paid Dividends per share as a percentage of earnings per common share.

7 Dividends per common share as a percentage of (basic) earnings per common share.

4q98 1.35 1.45 10,715 10,333 382 44,797 19.0

3q98 1.23 1.33 9,189 8,899 290 33,624 20.7

2q98 1.18 1.28 8,255 8,008 247 31,857 21.1

1q98 1.19 1.29 8,053 7,848 204 32,199 22.2

Annual Data

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 1.14 6,743 6,517 226 19,161 21.2 

1995 0.98 1.09 5,829 5,584 245 14,932 21.1 

1994 0.91 1.04 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

8,721 23.2 

1991 0.63 0.81 8,247 22.1 

1990 0.60 0.77 2,925 22.4 

1989 0.62 0.77 4,024 21.3 

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

102 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 19. Aggregate Business Activity

Business Activity ($ Millions)

Period

 Single-Family Purchases 

($) 

 Multifamily 

Purchases ($) Total Purchases($) 

Mortgage Securities 

Purchases1($) 

1 Not included in total purchases.

4q98 184,698 5,626 190,324 103,131

3q98 159,430 6,034 165,464 66,799

2q98 163,652 2,573 166,225 53,898

1q98 113,515 2,007 115,522 49,079

Annual Data

1998 621,295 16,240 637,535 272,907 

1997 279,594 8,853 288,447 84,233 

1996 289,815 8,735 298,550 81,840

1995 217,959 6,595 224,554 73,328

1994 287,182 4,687 291,869 44,369

1993 532,122 4,326 536,448 Not Applicable Before 1994

1992 453,154 2,983 456,137

1991 244,246 3,440 247,686 

1990 190,676 4,519 195,195 

1989 164,211 6,660 170,871

1988 116,692 5,371 122,063

1987 157,101 3,499 160,600

1986 189,451 5,415 194,866

1985 86,069 3,102 89,171

1984 Not Applicable Before 1985 Not Applicable Before 1985 Not Applicable Before 1985

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae and Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 103

Table 20. Aggregate MBS Issuances

Business Activity ($ Millions)

MBS Issuances

Period

Single Family MBS Issued 

($) Multifamily MBS Issued($) Total MBS Issued ($) Multiclass Issued ($)

4q98 164,107 4,064 168,171 36,384 

3q98 148,393 4,791 153,184 62,739 

2q98 151,195 1,635 152,830 71,245 

1q98 101,052 1,475 102,527 48,941 

Annual Data

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 Not Applicable 

Before 1988 1986 156,815 3,949 160,764 

1985 60,726 1,752 62,478 

1984 Not Applicable 

Before 1985

Not Applicable 

Before 1985

32,230 

1983 33,031 

1982 38,139 

1981 4,243 

1980 Not Applicable 

Before 1981 1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae and Freddie Mac
Historical Data Tables

104 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 21. Aggregate Earnings

Earnings ($ Millions)

Period Net Income ($)

Guarantee Fee 

Income ($)

Administrative 

Expenses ($)

Credit-Related 

Expenses ($) Net Income ($)

4q98 1,597 506 354 119 1,357 

3q98 1,620 579 321 144 1,282 

2q98 1,565 579 309 159 1,262 

1q98 1,543 585 302 181 1,217 

Annual Data

1998 6,325 2,248 1,286 603 5,118 

1997 5,796 2,356 1,131 904 4,451 

1996 5,297 2,282 1,000 1,017 3,968 

1995 4,443 2,173 941 876 3,235 

1994 3,935 2,191 904 803 3,115 

1993 3,385 1,994 804 829 2,659 

1992 2,753 1,770 710 Not Applicable Before 

1993

2,245 

1991 2,461 1,467 606 1,918 

1990 2,212 1,190 529 1,587 

1989 1,708 980 471 1,244 

1988 1,329 793 412 888 

1987 1,209 735 347 677 

1986 683 476 285 352 

1985 451 300 223 201 

1984 123 236 183 73 

1983 116 186 134 135 

1982 (434) 93 97 (132)

1981 (395) 36 79 (175)

1980 75 Not Applicable Before 

1981

70 48 

1979 377 65 198 

1978 331 53 234 

1977 282 44 186 

1976 221 40 141 

1975 205 37 131 

1974 184 31 112 

1973 211 25 138 

1972 148 18 100 

1971 59 Not Available Before 

1972

67 

Source: Fannie Mae and Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 105

Table 22. Aggregate Balance Sheet

Balance Sheet Outstanding ($ 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. 

4q98 806,435 671,104 100,675 747,525 26,288 1,115,494 621,949 

3q98 718,355 593,278 95,070 666,969 24,140 1,116,250 619,375 

2q98 659,439 546,664 86,166 609,656 22,598 1,085,791 613,075 

1q98 630,564 513,528 93,039 577,644 22,275 1,056,068 611,446 

Annual Data

1998 806,435 671,104 100,675 542,095 26,288 1,115,494 621,949 

1997 586,270 481,135 81,026 487,761 21,314 1,055,123 621,951 

1996 524,907 424,353 78,854 418,502 19,504 1,021,238 577,428 

1995 453,731 360,574 69,984 349,283 16,822 972,275 600,497 

1994 378,707 293,986 64,143 249,622 14,703 947,001 642,395 

1993 300,859 246,107 39,621 194,473 12,489 910,335 645,987 

1992 240,480 189,889 32,116 162,237 10,344 831,958 529,399 

1991 193,932 153,346 19,792 151,778 8,113 714,447 367,766 

1990 173,692 135,586 21,992 140,166 6,077 604,434 210,715 

1989 159,777 129,429 19,388 130,305 4,907 489,382 112,399 

1988 146,610 117,017 19,896 114,518 3,844 396,503 37,537 

1987 129,133 106,019 13,935 106,941 2,993 348,369 Not 

Applicable 

Before 1988 1986 122,850 107,216 Not 

Applicable 

 Before 1987

105,739 2,135 264,754 

1985 115,663 108,156 93,905 1,788 154,461 

1984 101,576 94,153 81,376 1,524 105,764 

1983 87,378 82,732 74,135 1,421 82,841 

1982 78,980 74,035 64,031 1,249 57,402 

1981 67,904 64,807 59,566 1,330 20,614 

1980 63,357 60,595 52,405 1,678 Not

Applicable 

Before 1981 1979 55,948 53,780 44,051 1,739 

1978 47,203 45,141 35,000 1,564 

1977 37,481 36,456 35,088 1,350 

1976 37,225 35,950 35,572 1,139 

1975 37,495 35,698 32,852 1,003 

1974 34,572 33,135 25,699 898 

1973 27,191 26,110 20,878 801 

1972 22,118 21,378 18,587 669 

1971 19,629 18,821 0 567 

Source: Fannie Mae and Freddie Mac
Historical Data Tables

106 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 23. Aggregate Financial Derivatives

Financial Derivatives1 ($ Millions)

1 Synthetically created debt instruments or interest-bearing assets used to reduce the corporation’s exposure to interest-rate and/or foreign currency risk; notional 

balances or contract amounts.

Period

Interest 

Rate 

Swaps ($)

 Interest 

Rate Caps 

Floors 

Corridors 

($)

Spread 

Lock 

Agreements 

($) Options ($) 

 Foreign 

Currency 

($) Futures ($) Other ($) Total ($) 

4q98 185,326 36,345 26,717 220,832 14,459 816 16,300 500,795 

3q98 181,710 28,790 6,577 158,349 13,540 102 5,045 394,113 

2q98 185,693 26,846 14,363 66,200 12,529 670 4,025 310,326 

1q98 194,742 24,610 4,186 77,400 11,618 492 4,170 317,219 

Annual Data 

1998 185,326 36,345 26,717 220,832 14,459 816 16,300 500,795

1997 203,845 22,095 12,263 6,000 11,120 0 1,625 256,948 

1996 204,786 14,395 651 0 2,973 0 353 223,158 

1995 171,063 13,355 24 0 1,224 29 990 186,684 

1994 109,304 9,363 0 0 1,023 0 1,511 121,200 

1993 67,346 1,860 0 0 1,023 0 1,425 71,653 

1992 Not

Available

Before 1993

Not

Available 

Before 1993

 Not

Available 

Before 1993

 Not

Available 

Before 1993

 Not

Available 

Before 1993

 Not

Available 

Before 1993

 Not

Available 

Before 1993

 Not

Available 

Before 1993 1991

1990

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae and Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 107

Table 24. Aggregate Non-Mortgage Investments

Non-Mortgage Investments ($ Millions)

Period

Federal Funds 

and Eurodollars 

($)

Asset Backed 

Securities ($)

 Repurchase 

Agreements ($) 

 Commercial 

Paper and 

Corporate Debt 

($) Other ($) Total ($)

4q98 28,452 28,117 9,312 12,950 21,846 100,675 

3q98 21,082 25,277 7,948 16,296 24,467 95,070 

2q98 17,220 21,835 8,627 18,648 19,836 86,166 

1q98 25,178 19,257 11,500 20,813 16,289 93,037 

Annual Data

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 Not Available

Before 1995

14,919 8,953 11,622 64,143 

1993 13,763 8,882 1,438 11,981 39,621 

1992 12,219 7,249 53 8,471 32,116 

1991 5,903 6,632 0 4,841 19,792 

1990 6,441 10,014 0 3,757 21,992 

1989 8,685 5,765 0 3,831 19,388 

1988 8,594 9,107 0 1,714 19,896 

1987 5,736 5,859 0 2,315 13,935 

1986 Not Applicable 

Before 1987

Not Applicable 

Before 1987

Not Applicable 

Before 1987

Not Applicable 

Before 1987

Not Applicable 

Before 1987 1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

Source: Fannie Mae and Freddie Mac
Historical Data Tables

108 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 25. Aggregate Asset Liability Mix

Aggregate Asset Liability Ratios ($ Millions)

Period

Asset Mix Liability Mix

Retained Portfolio / Total 

Assets (%)

Non-mortgage 

Investments/ Total 

Assets (%)

Callable Debt / Total Effective 

Long-Term Debt (%)

Total Effective Long-Term 

Debt / Total Debt (%)

4q98 83.2 12.5 59.1 74.1

3q98 82.6 13.2 59.5 72.8

2q98 82.9 13.1 60.8 75.2

1q98 81.4 14.8 59.2 76.9

Annual Data

1998 83.2 12.5 59.1 74.1

1997 82.1 13.8 58.2 76.7

1996 80.8 15.0 56.2 77.9

1995 79.5 15.4 55.7 72.9

1994 77.6 16.9 61.9 69.2

1993 81.8 13.2 62.7 76.9

1992 79.0 13.4 Not Applicable Before 1993 Not Applicable Before 1993

1991 79.1 10.2

1990 78.1 12.7

1989 81.0 12.1

1988 79.8 13.6

1987 82.1 10.8

1986 87.3 Not Available Before 1987

1985 93.5

1984 92.7

1983 94.7

1982 93.7

1981 95.4

1980 95.6

1979 96.1

1978 95.6

1977 97.3

1976 96.6

1975 95.2

1974 95.8

1973 96.0

1972 96.7

1971 95.9

Source: Fannie Mae and Freddie Mac
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 109

Table 26. Aggregate Capital

Capital ($ Millions)

Period

Stockholders' 

Equity /Total MBS 

Outstanding plus 

Total Assets (%)

Stockholders' 

Equity plus 

Reserves / Total 

MBS Outstanding 

plus Total Assets Core Capital

Minimum 

Regulatory Capital 

Requirements ($)

Capital Surplus 

(Deficit) ($)

4q98 1.37 1.45 26,180 25,667 513 

3q98 1.32 1.40 24,041 23,419 622 

2q98 1.29 1.38 22,440 21,779 661 

1q98 1.32 1.41 22,124 20,927 1,196 

Annual Data

1998 1.37 1.45 26,181 25,667 513 

1997 1.30 1.39 21,169 19,785 1,384 

1996 1.26 1.31 19,516 17,983 1,533 

1995 1.18 1.28 16,788 16,035 753 

1994 1.11 1.23 14,710 14,299 411 

1993 1.03 1.16 12,489 10,846 1,643 

1992 0.96 1.11 Not Applicable Before 

1993

Not Applicable Before 

1993

Not Applicable Before 

1993 1991 0.89 1.05

1990 0.78 0.93

1989 0.76 0.90

1988 0.71 0.85

1987 0.63 0.77

1986 0.55 0.69

1985 0.66 0.80

1984 0.74 0.88

1983 0.83 0.99

1982 0.92 1.10

1981 1.50 1.71

1980 2.09 2.35

1979 2.44 2.68

1978 2.64 2.87

1977 3.05 3.26

1976 2.85 3.01

1975 2.56 2.68

1974 2.54 2.63

1973 2.86 2.95

1972 2.97 2.99

1971 2.88 2.90

Source: Fannie Mae and Freddie Mac
Historical Data Tables

110 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 27. Loan Limits

Single-Family Conforming Loan Limits1 ($ 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 

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 
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 111

Table 28. 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 (%)

4Q98 6.8 5.5 7.0 6.1

3Q98 6.7 7.0 6.8 6.3

2Q98 7.1 5.7 7.2 6.4

1Q98 7.1 5.6 7.2 6.5

Annual Data

1998 6.9 5.6 7.05 6.3

1997 7.6 5.6 7.9 6.9

1996 7.8 5.7 8.0 7.0

1995 7.9 6.1 8.2 7.1

1994 8.4 5.3 8.2 6.4

1993 7.3 4.6 7.5 5.7

1992 8.4 5.6 8.5 6.6

1991 9.2 7.1 9.7 8.3

1990 10.1 8.4 10.4 9.2

1989 10.3 8.8 10.5 9.4

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 10.9

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

112 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Table 29. Housing Market Activity

Housing Starts

units in thousands

Home Sales

units in thousands

Period

Single-Family 

Housing Starts

Multifamily 

Housing Starts

Total Housing 

Starts

New SingleFamily Home 

Sale

Existing SingleFamily Homes 

Sales

4Q98* 1376 316 1692 967 4893

3Q98* 1312 320 1631 852 4777

2Q98* 1290 278 1580 901 4780

1Q98* 1295 287 1582 856 4677

Annual Data

1998 1313 302 1616 888 4785

1997 1179 296 1474 804 4215

1996 1206 271 1477 757 4087

1995 1110 244 1354 667 3802

1994 1234 224 1457 670 3946

1993 1155 133 1288 666 3802

1992 1061 139 1200 610 3520

1991 876 138 1014 509 3220

1990 932 260 1193 534 3211

1989 1059 318 1376 650 3346

1988 1140 348 1488 676 3594

1987 1212 409 1621 671 3526

1986 1263 542 1805 750 3565

1985 1166 576 1742 688 3214

1984 1206 544 1750 639 2868

1983 1181 522 1703 623 2719

1982 743 320 1062 412 1990

1981 796 288 1084 436 2419

1980 962 331 1292 545 2973

1979 1316 429 1745 709 3827

1978 1558 462 2020 817 3986

1977 1573 414 1987 819 3650

1976 1248 289 1538 646 3064

1975 956 204 1160 549 2476

1974 956 382 1338 519 2272

1973 1250 795 2045 634 2334

1972 1451 906 2357 718 2252

1971 1271 781 2052 656 2019

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
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO 1999 Report To Congress 113

Table 30. 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

1Q99 4.8% 6.7% 3.8% 3.8% 4.8% 4.7% 4.6% 3.7% 4.1% 6.5%

4Q98 5.2% 6.8% 4.5% 4.5% 4.2% 4.8% 4.9% 5.3% 4.4% 8.0%

3Q98 5.7% 7.0% 4.4% 5.3% 4.9% 5.0% 5.3% 5.7% 5.3% 8.1%

2Q98 5.8% 6.3% 4.9% 5.7% 5.2% 5.3% 5.8% 5.0% 5.7% 8.0%

1Q98 5.5% 5.7% 4.4% 5.5% 5.0% 5.1% 5.1% 5.4% 5.4% 7.3%

Annual Data

1998 5.2% 6.8% 4.5% 4.5% 4.2% 4.8% 4.9% 5.3% 4.4% 8.0%

1997 5.0% 5.1% 3.6% 5.1% 5.4% 5.1% 5.3% 4.0% 5.3% 5.9%

1996 2.7% 1.9% 0.4% 2.3% 5.2% 4.2% 4.2% 2.2% 4.6% 1.3%

1995 4.6% 4.3% 3.3% 4.5% 6.0% 5.2% 5.6% 4.2% 7.5% 3.1%

1994 1.2% -2.8% -2.8% 0.5% 5.6% 5.9% 5.1% 1.7% 9.6% -3.3%

1993 2.2% 0.5% 1.5% 2.1% 3.6% 3.9% 4.1% 4.2% 8.1% -1.7%

1992 1.9% -1.1% 1.7% 2.1% 3.9% 3.0% 3.5% 3.4% 5.4% -1.2%

1991 2.6% -2.0% 1.5% 3.2% 4.5% 3.8% 4.2% 3.8% 4.9% 1.6%

1990 0.3% -7.6% -2.4% 0.3% 3.9% 0.7% 0.7% 0.7% 1.8% 2.9%

1989 6.2% 0.8% 2.5% 5.3% 6.2% 3.3% 3.5% 2.9% 2.7% 19.4%

1988 6.3% 4.0% 6.3% 7.1% 6.6% 2.7% 3.0% -2.0% 0.5% 17.1%

1987 7.9% 13.3% 17.5% 8.0% 8.8% 4.3% 5.2% -8.0% -0.3% 10.0%

1986 10.0% 21.3% 20.2% 9.0% 8.4% 5.9% 9.1% 1.1% 4.5% 7.6%

1985 6.5% 24.6% 12.4% 6.1% 4.5% 3.2% 11.8% -2.4% 0.4% 4.6%

1984 3.8% 17.9% 12.7% 0.5% 2.5% 4.6% -3.6% -1.0% 0.9% 4.4%

1983 3.9% 15.5% 10.3% 3.6% 3.6% 3.6% 5.0% -0.1% -2.8% 1.1%

1982 2.7% 5.0% 4.2% 4.8% -3.3% -0.2% 5.1% 6.3% 6.9% 0.7%

1981 3.5% 5.1% -1.0% 3.9% 0.5% 0.0% -1.7% 11.6% 6.6% 6.5%

1980 6.3% 5.8% 8.6% 8.1% 1.3% 3.6% 3.4% 7.1% 5.7% 11.5%

1979 12.1% 12.2% 14.9% 12.4% 9.1% 8.7% 6.3% 13.0% 15.8% 16.7%

1978 13.3% 15.8% 8.1% 10.4% 14.7% 12.7% 10.3% 17.0% 16.7% 16.6%

1977 13.5% 10.0% 9.5% 9.1% 13.4% 14.4% 12.4% 11.7% 19.4% 25.5%

1976 8.4% 3.1% 7.6% 4.8% 8.3% 7.1% 4.8% 10.0% 10.6% 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 - 1998 is measured based on fourth quarter to fourth quarter 

percentage change. 
Historical Data Tables

114 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
1999 Report To Congress 115  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

Appendix
Appendix

116 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

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.
 ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

1999 Report To Congress 117

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 nearly 2 trillion at the end of 1998.

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. 

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, moderate-income and central-city homebuyers.)
Appendix

118 1999 Report To Congress  ́  ́  ́  ́  ́  ́  ́  ́  ́  ́

 ́  ́

OFHEO
1999 Report to Congress

Office of Federal Housing

Enterprise Oversight

1700 G. Street, NW

Washington, DC 20552

www.ofheo.gov

Official Business