OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 

NEWS RELEASE 

FOR IMMEDIATE RELEASE Contact: Stefanie Mullin 

Friday, June 14, 2002 202.414.6921 

www.ofheo.gov 

OFHEO SUBMITS ITS 

ANNUAL REPORT TO CONGRESS 

WASHINGTON, D.C. — Armando Falcon, Jr., Director of the Office of Federal Housing Enterprise 

Oversight (OFHEO), safety and soundness regulator for Fannie Mae and Freddie Mac (the Enterprises), 

today released OFHEO’s Annual Report to Congress. 

“I am pleased to report that OFHEO has found both Fannie Mae and Freddie Mac to be well-capitalized 

and operating in a safe and sound manner,” said Falcon. 

HIGHLIGHTS OF THE REPORT INCLUDE: 

1) Results and conclusions of OFHEO’s annual examinations of Fannie Mae (p. 22) and 

Freddie Mac for 2001(p. 43). 

2) An overview of the stress test and capital classifications of the Enterprises. 

3) Detailed, new information on OFHEO’s examination program including information on the 

Enterprises’ derivatives use, corporate governance and audit practices. 

4) An independent, unqualified audit opinion of OFHEO for the third consecutive year. 

5) Detailed charts on the Enterprises’ portfolios. 

### 

1700 G STREET, NW WASHINGTON, DC (202)414-6922 FAX (202)414-3823 

-1-

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 

1700 G STREET NW WASHINGTON DC 20552 (202) 414-3800 

June 14, 2002 

The Honorable Paul S. Sarbanes The Honorable Michael G. Oxley 

Chairman Chairman 

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

United States Senate United States House of Representatives 

Washington, D.C. 20510 Washington, D.C. 20515 

Dear Chairmen: 

I am pleased to transmit the 2002 Report to Congress from 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 P.L. 102-

550). 

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

or the Secretary of Housing and Urban Development. 

Sincerely, 

CC: The Honorable Phil Gramm, Ranking Member, Senate Committee on Banking, Housing & Urban Affairs 

The Honorable John J. LaFalce, Ranking Member, House Committee on Financial Services 
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 

1700 G STREET NW WASHINGTON DC 20552 (202) 414-3800 

June 14, 2002 

The Honorable Paul S. Sarbanes The Honorable Michael G. Oxley

Chairman Chairman 

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

United States Senate United States House of Representatives 

Washington, DC 20510 Washington, DC 20515 

Dear Chairmen: 

According to Section 1319B(a)(3) of the Federal Housing Enterprises Financial Safety and 

Soundness Act of 1992, the Director of the Office of Federal Housing Enterprise Oversight (OFHEO) 

shall include any legislative recommendations to enhance the financial safety and soundness of Fannie 

Mae and Freddie Mac (the Enterprises) in this annual report to Congress. Pursuant to that requirement, 

I am forwarding the following recommendation which was submitted to the Congress earlier this year 

through the Administration’s Fiscal Year (FY) 2003 budget request. 

As noted in the FY 2003 budget, the Enterprises continue to grow in both size and scope. As the 

safety and soundness regulator of the Enterprises, OFHEO must be adequately positioned to address this 

growth and any unforeseen contingencies. I concur with the Administration’s position that OFHEO 

should be permanently funded to ensure adequate resources and flexibility, on par with all other financial 

safety and soundness regulators. Such funding would not come from taxpayer dollars, but rather 

through direct assessment on the Enterprises. Congressional oversight of OFHEO would continue as it 

currently does with the other financial regulators. 

The legislative recommendation which is identical to that recommended by the Administration 

follows: 

Section 1316(a) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 

U.S.C. 4516) is amended in the first sentence by striking “, to the extent provided in appropriations 

Acts.” 

Sincerely, 

CC: The Honorable Phil Gramm, Ranking Member, Senate Committee on Banking, Housing & Urban Affairs 

The Honorable John J. LaFalce, Ranking Member, House Committee on Financial Services 
DIRECTOR’S MESSAGE 

I am pleased to report that 2001 was a very busy 

and productive year at the Office of Federal 

Housing Enterprise Oversight. I am proud of the 

role that OFHEO plays in ensuring the safety and 

soundness of two of the vital governmentsponsored enterprises charged with providing 

liquidity to the primary mortgage market. I am also 

pleased to report that OFHEO has found both 

Fannie Mae and Freddie Mac to be well-capitalized 

and operating in a safe and sound manner. 

We have included in this report details on 

OFHEO’s work during 2001: A year in review 

summation; the results and conclusions of our 

examinations of the Enterprises; information on the 

completion of our risk-based capital rule; the 

development of rules and policy guidances for our 

Regulatory Infrastructure Project; the results of our 

quarterly house price index; the report of our independent audit; and numerous 

informational charts and tables to assist in understanding the Enterprises’ business. As it 

has in past years, OFHEO received an unqualified, clean audit. 

With the completion of our risk-based capital rule, OFHEO now has all the key elements 

of a strong, thorough oversight program in place: Examinations, Capital standards and 

Research. We continue to build upon that program to enhance our oversight. We will 

soon be expanding OFHEO’s Examination staff, we will utilize the risk-based capital 

stress test as an analytical tool, we have research underway to increase our 

understanding of Enterprise risks and we have established working groups on 

derivatives and disclosure. 

This year is already shaping up to be a very active year as well. We look forward to 

another successful year for OFHEO and the housing market.

Sincerely, 
TABLE OF CONTENTS 

CHAPTER ONE – YEAR IN REVIEW.................................................................................................. 1

HOUSING MARKET FLOURISHES AMID A FALTERING ECONOMY ............................1 

House Price Appreciation....................................................................................................................2 

The Enterprises’ Financial Performance.......................................................................................... 3

Examination Activities......................................................................................................................... 3 

CAPITAL REQUIREMENTS.............................................................................................................5 

OFHEO RULEMAKING.....................................................................................................................6 

OFHEO POLICY GUIDANCES ........................................................................................................ 7

OFHEO ACTIONS ON EXECUTIVE COMPENSATION........................................................ 7 

OFHEO RESEARCH............................................................................................................................8 

CHAPTER TWO – CAPITAL REGULATION ...................................................................................9 

Capital Classification Process............................................................................................................9 

Implementation Period ........................................................................................................................9 

Risk-Based Capital Standard............................................................................................................ 10 

Box 2.1. OFHEO's Stress Test.......................................................................................................... 12 

Enterprise Data .....................................................................................................................................13 

Economic Conditions ..........................................................................................................................13 

Mortgage Performance.......................................................................................................................14 

Other Credit Factors .......................................................................................................................... 14 

Cash Flows............................................................................................................................................14 

Operating and Accounting Rules .................................................................................................... 15 

CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS ................... 16

Table 3.1 OFHEO's Comprehensive Risk-Based Examination Program .............................. 16 

INTRODUCTION................................................................................................................................17 

OFHEO’s Examination Program ......................................................................................................17 

Risk Profiles ...........................................................................................................................................17 

Examination Strategies .......................................................................................................................17 

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

Management ......................................................................................................................................... 18 

Evaluation Criteria, Assessment Factors and Examination Objectives................................. 19 

Communication of Examination Findings....................................................................................20 

Effect Changes and Follow Up ........................................................................................................20 

Fannie Mae Examination Results and Conclusions ...................................................................22 

Box 3.1. Derivatives - Fannie Mae ...................................................................................................25 

Box 3.2. Audit Program - Fannie Mae............................................................................................32

Box 3.3. Board Governance - Fannie Mae .....................................................................................38 

Freddie Mac Examination Results and Conclusions .................................................................43 

Box 3.4. Derivatives Freddie Mac .................................................................................................. 46 

Box 3.5 Audit Program - Freddie Mac...........................................................................................53 

Box 3.6. Board Governance - Freddie Mac ...................................................................................59 
TABLE OF CONTENTS 

CHAPTER FOUR – FINANCING OFHEO'S OPERATIONS ..................................................... 64 

OFHEO's BUDGET............................................................................................................................ 64 

OFHEO CONTINUES TO RECEIVE UNQUALIFIED AUDIT OPINION IN FY 2001...65 

AUDIT OF OFHEO ............................................................................................................................66 

CHAPTER FIVE – HISTORICAL DATA TABLES...........................................................................97 

Table 1. Fannie Mae Mortgage Purchases.....................................................................................98 

Table 2. Fannie MBS Issuances .......................................................................................................99 

Table 3. Fannie Mae Earnings........................................................................................................100 

Table 3a. Fannie Mae Earnings ......................................................................................................101 

Table 4. Fannie Mae Balance Sheet..............................................................................................102

Table 5. Fannie Mae Retained Mortgage Portfolio Detail......................................................103 

Table 6. Fannie Mae Financial Derivatives ................................................................................104 

Table 7. Fannie Mae Non-Mortgage Investments .................................................................... 105 

Table 8. Fannie Mae Asset-Liability Mix ...................................................................................106 

Table 9. Fannie Mae Mortgage Asset Quality ........................................................................... 107 

Table 10. Fannie Mae Capital ........................................................................................................ 108 

Table 11. Freddie Mac Mortgage Purchases...............................................................................109 

Table 12. Freddie Mac MBS Issuances..........................................................................................110 

Table 13. Freddie Mac Earnings ..................................................................................................... 111 

Table 13a. Freddie Mac Earnings ...................................................................................................112 

Table 14. Freddie Mac Balance Sheet............................................................................................113 

Table 15. Freddie Mac Retained Mortgage Portfolio Detail ...................................................114 

Table 16. Freddie Mac Financial Derivatives ..............................................................................115 

Table 17. Freddie Mac Non-Mortgage Investments..................................................................116 

Table 18. Freddie Mac Asset Mix................................................................................................... 117 

Table 19. Freddie Mac Mortgage Asset Quality.........................................................................118 

Table 20. Freddie Mac Capital .......................................................................................................119 

Table 21. Aggregate Purchases.......................................................................................................120 

Table 22. Aggregate MBS Issuances..............................................................................................121

Table 23. Aggregate Earnings ........................................................................................................122 

Table 24. Aggregate Balance Sheet............................................................................................... 123 

Table 25. Aggregate Retained Mortgage Portfolio Detail......................................................124 

Table 26. Aggregate Financial Derivatives ................................................................................. 125 

Table 27. Aggregate Non-Mortgage Investments.....................................................................126 

Table 28. Aggregate Capital........................................................................................................... 127 

Table 29. Loan Limits ...................................................................................................................... 128 

Table 30. Mortgage Interest Rates .............................................................................................. 129 

Table 31. Housing Market Activity .............................................................................................. 130

Table 32. Weighted Repeat Sales House Price Index...............................................................131 
CHAPTER ONE - YEAR IN REVIEW 

CHAPTER ONE – Year in Review 

During 2001 OFHEO continued to ensure the Enterprises are financially safe and sound 

and, thereby, able to foster the strength and vitality of the nation’s housing finance system. 

OFHEO conducted risk-based examinations of both Enterprises, determined each Enterprise 

met its regulatory capital requirement throughout the year, finalized its risk-based capital rule, 

and continued to adapt its regulatory program to the evolution of the nation’s housing finance 

system and changes in the mortgage industries’ use of technology. 

HOUSING MARKET FLOURISHES AMID A FALTERING ECONOMY 

The year 2001 marked the end of the longest economic expansion in U.S. history, with the first 

recession in 10 years starting in March. Economic activity declined slightly during the late 

spring and summer, then more sharply for a brief period after September 11, before improving 

late in the year. On balance, the rate of economic output ended the year close to its rate at the 

end of the previous year, but the unemployment rate rose from 4 percent to 5.8 percent. In 

response, the Federal Reserve cut its Federal Funds rate target sharply over the course of the 

year from 6.5 percent to 1.75 percent. Mortgage interest rates, which had been declining in the 

latter half of 2000, fell somewhat further to the lowest rates since the 1960s. Rates on long-term, 

fixed-rate loans averaged a full percentage point below the 2000 average. 

The housing market showed remarkable strength in 2001, despite the terrorist attacks and 

recession. Aided by the low interest rates, single-family housing starts exceeded 1.3 million 

units. Similarly, low mortgage rates resulted in strong home sales in 2001. Combined sales of 

new and existing homes totaled 6.2 million units, the best year ever, exceeding the 6.1 million 

record level of units set in 1999. Spurred by heavy refinancing activity, originations of singlefamily mortgages doubled the previous year’s level, topping the $2.1 trillion mark. Originations 

in 2001 exceeded the previous record of $1.45 trillion set in 1998 by 45 percent. The expansion 

in home sales translated into increased homeownership. The homeownership rate increased to a 

record high 68 percent. 

Home values, stimulated by heavy demand, continued their upward trend in 2001, albeit at more 

moderate rates than in 2000. Single-family home prices, as measured by OFHEO’s House Price 

Index (HPI), increased 7.41 percent from the fourth quarter of 2000 to the fourth quarter of 

2001. During the previous year average appreciation was 8.1 percent.1 

1 See House Price Index table (Table 32) on page 131 in Chapter Five - Historical Data Tables for more detailed 

HPI data. 

1 
CHAPTER ONE - YEAR IN REVIEW 

House Price Appreciation 

Fourth Quarter 2000 to Fourth Quarter 2001 

Average U.S. appreciation was 7.41 percent 

*States with house price appreciation above 10 percent are bolded for emphasis: 

California, District of Columbia, Florida, Maine, Massachusetts, Minnesota, New Hampshire, 

and Rhode Island

2 
CHAPTER ONE - YEAR IN REVIEW 

The Enterprises’ Financial Performance 

Fannie Mae and Freddie Mac each had a very successful year in 2001. Both Enterprises’ 

mortgage purchase volumes and securitizations were at record levels. Favorable market 

conditions also stimulated growth in the Enterprises’ mortgage asset portfolios. The combined 

assets of Fannie Mae and Freddie Mac increased 25 percent in 2001, to $1.4 trillion. Portfolio 

growth and widening spreads between asset yields and debt yields enhanced the Enterprises’ 

earnings. The Enterprises’ combined operating net income (GAAP net income adjusted to better 

reflect the profitability of continuing operations) increased 21 percent in 2001, to $8.5 billion. 

That income growth enabled the Enterprises to continue their long histories of high rates of 

return on equity. 

Fannie Mae and Freddie Mac continued to actively manage their exposure to credit risk. The 

proportion of single-family mortgages purchased that were evaluated using the Enterprises’ 

automated underwriting systems prior to sale approached or exceeded 60 percent in 2001. The 

Enterprises also continued to limit their exposure to mortgage credit risk by obtaining credit 

enhancements on higher-risk single-family loans. Credit-related expenses – foreclosed property 

expenses plus provision for losses – declined at Fannie Mae and Freddie Mac despite the growth 

in their mortgage asset portfolios and mortgage-backed securities (MBS) held by other investors 

and generally weak economic conditions. Combined Enterprise credit-related expenses fell 19 

percent during the year to an historically low $162 million. 

Despite sizeable changes in interest rates in 2001, the Enterprises effectively managed their 

exposure to interest rate risk. This was accomplished by hedging asset acquisitions, making 

substantial use of derivatives, rebalancing hedges as interest rates changed, and continuing 

judicious risk management oversight. 

Examination Activities 

OFHEO conducted annual risk-based examinations of Fannie Mae and Freddie Mac in 2001, and 

provides the results and conclusions of the examinations in Chapter 3 of this report. Each 

quarter, the examination staff updates its evaluations using assessment factors covering more 

than 160 features of financial safety and soundness, which provides OFHEO with a 

comprehensive and timely understanding of the Enterprises’ financial conditions and 

performance. The assessments provided by examiners evaluate the key aspects of risk and risk 

management and cover credit risk, interest rate risk, liquidity management, model risk, 

information technology, internal controls, business process controls, internal and external 

audits, management information, management processes, and the governance provided by the 

Enterprises’ boards of directors. 

Conducting comprehensive risk-based examinations is an important tool OFHEO employs to 

ensure the Enterprises operate prudently and remain safe and sound. We are committed to 

maintaining an excellent examination program by focusing on four core competencies: 

maintaining a quality examination framework; employing highly skilled personnel to conduct 

the program; utilizing tools that enhance the effectiveness and efficiency of examiners; and 

3 
CHAPTER ONE - YEAR IN REVIEW 

engaging in a quality improvement process to ensure continuous improvement as a cornerstone 

of the program. 

Like the examination programs of other financial safety and soundness regulators, OFHEO’s 

includes both on-site examinations and off-site surveillance and monitoring. It is through the 

on-site examinations that specialists make hands-on assessments of qualitative factors – such as 

management capabilities, risk management strategies, and internal control processes – which 

cannot be reflected in routine regulatory reporting. Trained examiners with specialty skills test 

and verify the quality and integrity of risk management tools, risk measurements, financial and 

management reports, operational controls, documentation standards, and a host of other 

qualitative and quantitative judgments. 

OFHEO’s off-site surveillance and monitoring examination function is also an important 

element of prudential oversight. By (1) studying trends, (2) analyzing performance within the 

context of the broader marketplace, and (3) performing sophisticated analysis on features of risk 

at the Enterprises, the examination teams are well prepared to conduct on-site testing and 

evaluate the Enterprises critically. 

Given the speed of change in the financial markets and at the Enterprises, OFHEO continuously 

improves its examination program and augments its examination specialties. The Office’s 

commitment to innovation is reflected in the quality-improvement process embedded within 

the examination program, which incorporates self- and peer-assessments and a formal feedback 

process. OFHEO’s examination activities continue to evolve to better capture the specific risks 

at the Enterprises. 

4 
CHAPTER ONE - YEAR IN REVIEW 

CAPITAL REQUIREMENTS 

Minimum Capital – OFHEO continued to enforce compliance with quarterly minimum capital 

standards for each Enterprise. The minimum capital requirements, which are required by the 

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 Act), are 

similar to a bank’s leverage capital requirement. Since the test has been applied to the 

Enterprises (second quarter of 1993), both companies have exceeded their minimum capital 

requirements and have always been classified as adequately capitalized. The chart below 

illustrates each Enterprise’s capital in terms of their minimum capital requirement and the core 

capital they held each quarter for the past year. 

Both Enterprises met their quarterly capital requirements in 2001. 

FREDDIE MAC FANNIE MAE 

17.34 18.52 

16.30 15.16 16.87 

17.74 19.34 

15.77 

0 

5 

10 

15 

20 

25 

30 

1Q01 2Q01 3Q01 4Q01 

$ in billions 

21.03 22.18 

23.13 24.18

21.48 

23.78 25.18 22.98 

0 

5 

10 

15 

20 

25 

30 

1Q01 2Q01 3Q01 4Q01 

$ in billions 

Risk-Based Capital – In addition to minimum capital, the 1992 Act requires OFHEO to 

establish risk-based capital requirements for Fannie Mae and Freddie Mac. The Office is 

required to use a stress test – a model that simulates the financial performance of the Enterprises 

under specified adverse economic conditions – to establish those requirements. On September 

13, 2001, OFHEO published a final risk-based capital regulation. In addition to making minor 

technical corrections to the regulation, OFHEO also proposed changes to the risk-based capital 

regulation which were finalized March 15, 2002, after a public comment period. OFHEO 

continues to evaluate and analyze new financial instruments and new risk measurement 

techniques to improve the stress test and align the capital requirements more closely to each 

Enterprise’s risk. 

5 
CHAPTER ONE - YEAR IN REVIEW 

OFHEO RULEMAKING 

During 2001, OFHEO continued a comprehensive review of its regulatory infrastructure to 

enhance transparency and ensure the enforceability of supervisory standards. To address 

risk-based capital and further OFHEO’s Regulatory Infrastructure Project, which was 

initiated in July of 2000 to enhance transparency and ensure the enforceability of 

supervisory standards, OFHEO adopted and proposed rules and regulations including: 

Civil Money Penalty Adjustment – On January 4, 2001 OFHEO amended its enforcement 

regulations to provide for the increase of available civil money penalties pursuant to the 

Federal Civil Money Penalties Inflation Adjustment Act. This maintains the civil money 

penalty section of OFHEO’s regulations at appropriate levels as required by law. 

Assessments – On April 5, 2001 OFHEO published a final rule on the manner and 

procedures for collecting assessments from the Enterprises. The rule, which became 

effective May 7, 2001, recounts the agency’s assessment procedures and addresses various 

possible problems that could result from delays in enactment of appropriations legislation. 

The rule provides for an orderly and predictable regime for collecting assessments. 

Enforcement Procedures – On April 5, 2001, OFHEO published amendments to its 

enforcement regulations that clarify and elaborate on its procedures for imposing sanctions, 

including civil money penalties and cease and desist orders, on an Enterprise, its officers or 

directors. The rule provides a summation of processes and procedures for enforcement 

actions along with an explanation of the legal underpinnings of OFHEO’s enforcement 

authorities. 

Prompt Supervisory Response and Prompt Corrective Action – On April 10, 2001, 

OFHEO proposed for public comment a regulation to set forth procedures under which the 

agency would take prompt corrective action in response to specified declines in capital of an 

Enterprise, and to implement a system of prompt supervisory responses to specified 

developments that might warrant special supervisory review by the agency. The public 

comment period closed July 9, 2001, and a final regulation was adopted in early 2002. The 

rule clarifies procedures under the statutory system for employing capital as a measure for 

regulatory actions and goes further to create a process of action for issues of regulatory 

concern not tied to capital that fits within OFHEO’s statutory authorities. 

Capital – On July 31, 2001, OFHEO completed work on a final risk-based capital regulation, 

which was published on September 13, 2001. On December 18, 2001, OFHEO proposed for 

comment a set of amendments intended to refine and clarify certain aspects of the 

regulation. The rule, as amended, will complete a risk-sensitive and flexible regulatory 

capital structure for the Enterprises. 

Executive Compensation – On September 12, 2001, OFHEO adopted a final regulation to 

codify policies and procedures involved in the agency’s review of executive compensation 

policies and practices of the Enterprises. The rule largely formalizes procedures used by the 

6 
CHAPTER ONE - YEAR IN REVIEW 

agency in performing its executive compensation oversight responsibilities and requires 

submission of relevant information by the Enterprises on a timely basis. 

Corporate Governance – On September 12, 2001, OFHEO republished for public comment 

proposed regulations to address the applicability of minimum corporate governance 

standards to the Enterprises. The public comment period thereon was extended to 

November 9, 2001. The rule would strengthen OFHEO’s enforcement of the corporate 

governance standards it applies to the Enterprises. 

Flood Insurance – On September 12, 2001, OFHEO proposed and thereafter adopted on 

December 18, 2001, a regulation to codify the authority of the agency to oversee and enforce 

certain statutory requirements affecting the operations of the Enterprises regarding the 

National Flood Insurance Program, and to effect statutorily mandated adjustments to the 

civil money penalties applicable to violations of that statutory regime. 

OFHEO POLICY GUIDANCES 

Regulatory Review – On April 2, 2001, OFHEO issued a written Policy Guidance 

announcing a process for routine review of its rules and regulations to determine whether 

they have become inefficient or create unwarranted burden, and, where appropriate, to 

identify possible revisions or repeal where such conditions are found. 

Safety and Soundness Standards for Information – On December 19, 2001, OFHEO issued 

a written Policy Guidance that addresses standards for the Enterprises to be used in 

developing and implementing administrative, technical, and physical safeguards to protect 

the security, confidentiality, and integrity of information that is handled or maintained by or 

on behalf of an Enterprise. 

OFHEO ACTIONS ON EXECUTIVE COMPENSATION 

The Director of OFHEO, under OFHEO’s enabling statute and the Enterprises’ charter acts, has 

oversight responsibility in the area of executive compensation. OFHEO’s statute requires the 

Director to prohibit the Enterprises from providing excessive compensation to any executive 

officer. Additionally, the Enterprises must obtain the prior approval of the Director before 

entering into or changing termination agreements with their executive officers. 

During 2001, an executive compensation consultant retained by OFHEO began a study 

comparing compensation provided by each Enterprise to its executive officers to that provided 

by similar businesses to executive officers with similar duties and responsibilities. That study, 

which is scheduled for completion in 2002, supplements the Director’s ongoing review of 

executive compensation and updates an earlier study completed in 1997. Also in 2001, OFHEO 

approved a termination benefit provided under an agreement by an Enterprise to its executive 

officers. 

7 
CHAPTER ONE - YEAR IN REVIEW 

OFHEO RESEARCH 

During 2001, OFHEO continued research and analysis on a variety of topics. These include the 

potential effects of Fannie Mae and Freddie Mac on systemic risk, subprime loans and the 

housing market, credit scores as determinants of mortgage prepayment and default, improving 

the precision of repeat sales house price indices, and developing alternate models to project 

Enterprise performance. OFHEO established an interdisciplinary Research Council to 

coordinate research plans and activities and ensure that research and analysis is focused on 

OFHEO’s achieving its strategic objectives and goals. In future years, OFHEO anticipates 

undertaking additional research and analysis, including looking at issues that arose in comments 

on the proposed risk-based capital rule and using the risk-based capital stress test to assess 

alternative stress scenarios to continue to analyze the Enterprises’ safety and soundness. 

8 
CHAPTER TWO – CAPITAL REGULATION 

CHAPTER TWO – Capital Regulation 

OFHEO was required by the 1992 Act to establish minimum and risk-based capital standards as 

part of its role as safety and soundness regulator. These capital requirements are intended to 

ensure both Enterprises continue to operate and perform their crucial roles in the secondary 

mortgage market, keeping constant the flow of funds to mortgage lenders and prospective 

American homeowners. By ensuring the Enterprises are adequately capitalized, OFHEO 

minimizes the risk that American taxpayers will ever be asked to pay for losses at these complex 

financial institutions. 

OFHEO evaluates capital adequacy from other perspectives as well. OFHEO’s examination 

program conducts continuous, comprehensive examinations of the Enterprises to ensure they 

are operating under standards of financial safety and soundness. OFHEO’s examination of the 

Enterprises provides a qualitative assessment of capital adequacy. The more direct and 

quantitative tools are OFHEO’s minimum and risk-based capital standards, which are 

supplemented with other tests and analyses. OFHEO’s minimum capital standard is calculated 

based on specific percentages for assets and off-balance sheet guarantees. The minimum capital 

level is therefore determined more by the size of the Enterprise than its specific risks. The riskbased standard, in contrast, requires that Fannie Mae and Freddie Mac each have enough capital 

to survive prolonged, severe problems in financial and economic markets, as well as management 

or operational failures. It, therefore, is directly related to the risks the Enterprises are exposed 

to in their current business. 

Capital Classification Process 

Each quarter, OFHEO calculates a minimum capital requirement, which includes both a 

‘minimum’ and a lower ‘critical’ level, and a risk-based capital requirement for each Enterprise. 

OFHEO classifies an Enterprise as adequately capitalized if it meets both its minimum and riskbased capital requirements. 

Each quarter, OFHEO proposes a capital classification in writing to each Enterprise. Each 

Enterprise has up to 30 days to review and comment on its proposed classification. After 

reviewing any comments from the Enterprise, OFHEO makes a final capital classification and 

releases it to the public. 

Failure to meet the requirements triggers a range of regulatory responses, depending upon the 

capital classification of an Enterprise. 

Implementation Period 

When OFHEO published the final risk-based capital regulation on September 13, 2001, it 

became effective immediately. However, Congress mandated a one-year implementation period 

between the effective date of the regulation and the date when OFHEO enforces the rule. This 

period provides the Enterprises an opportunity to understand and manage to the requirements 

9 
CHAPTER TWO - CAPITAL REGULATION 

of the regulation. The first quarter that the risk-based capital calculation will be used to classify 

the Enterprises is the third quarter of 2002. 

Risk-Based Capital Standard 

OFHEO’s risk-based capital standard is unique among financial regulators. Unlike ratio-based 

capital rules, OFHEO’s standard is based on a 10-year stress test. A stress test measures risk in 

the context of a company’s overall portfolio, including the effectiveness of a company’s risk 

management activities. While companies often use stress tests for internal risk management, 

and rating agencies use stress tests to rate companies and securities, OFHEO is among the first 

financial institution regulators to use its own stress test to determine capital adequacy. 

OFHEO’s stress test simulates an Enterprise’s financial performance over a 10-year period under 

severe economic conditions. (Box 2.1.) Key conditions describing the severe economic 

conditions used in OFHEO’s stress test are defined in the 1992 Act and further specified in 

OFHEO’s risk-based capital regulation. These conditions include high levels of mortgage 

defaults, with associated losses and large, sustained movements in interest rates. 

OFHEO uses a sophisticated computer model to simulate each Enterprise’s cash flows 

associated with mortgages and other financial assets and obligations under the severe economic 

conditions of the stress test. 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 OFHEO’s risk-based capital standard, each Enterprise must 

have sufficient capital to survive the losses under these severe economic conditions plus an 

additional 30 percent for unspecified management and operations risks. 

OFHEO’s stress test aligns the capital requirement for each Enterprise with its specific risk 

profile. In doing so, it provides Enterprise management with incentives to carefully manage risk. 

For example, risk reduction activities such as the effective use of interest rate derivatives, the 

use of private mortgage insurance (PMI) for high loan-to-value (LTV) mortgages, and the use of 

callable long-term debt all work to lower the risk-based capital requirement. Conversely, 

activities that increase risk, such as taking on unhedged interest rate exposures, serve to 

increase the risk-based capital requirement. 

An Enterprise’s risk-based capital requirement is also sensitive to changing economic conditions 

that are beyond the control of management. For example, OFHEO’s stress test relates economic 

conditions to mortgage performance and, ultimately, to capital requirements. House price 

growth influences mortgage credit losses. When house prices increase, homeowner equity rises, 

and, all else being equal, the probability of borrowers defaulting declines. Thus, rising house 

prices tend to lower capital requirements. On the other hand, falling house prices tend to 

increase capital requirements by lowering homeowners’ equity which makes mortgages more 

risky. 

Changes in interest rates also affect the risk-based capital calculation. For example, a change in 

interest rates influences mortgage prepayments and income generated from adjustable rate 

mortgages. Changes in interest rates also influence how much it costs the Enterprises to issue 

10 
CHAPTER TWO – CAPITAL REGULATION 

new debt in the stress test, and the timing of the Enterprises’ exercise of call options on existing 

debt. 

The dynamic nature of a stress test facilitates OFHEO’s understanding of how changes in the 

economy could impact the Enterprises. It will also help OFHEO uncover changes in capital 

needs before there could be a significant impact on the Enterprises’ balance sheets. In contrast, 

capital standards based on static ratios are affected only after economic changes impact the 

balance sheet. 

OFHEO’s stress test provides the Enterprises with transparency, certainty, and flexibility in 

meeting their regulatory capital requirements. Both Enterprises have copies of OFHEO’s stress 

test and have incorporated the test into their everyday business processes. An Enterprise can 

comply with OFHEO’s risk-based capital standard by reducing risk or raising capital, or a 

combination of both. Therefore, each Enterprise can follow its own unique strategy to comply 

with OFHEO’s risk-based capital standard. 

11 
CHAPTER TWO - CAPITAL REGULATION 

Box 2.1. 

OFHEO’s Stress Test 

OFHEO developed a stress test, as described by law, which is tailored to 

the specific risks of Fannie Mae and Freddie Mac – namely, the risks 

associated with guaranteeing and investing in mortgages. To run the 

stress test, OFHEO built a sophisticated financial simulation model to 

project separate financial performances for Fannie Mae and Freddie Mac 

over a 10-year period under severe economic conditions. 

actual data from the Enterprises to project cash flows for all of an 

Enterprise’s assets, liabilities, and off-balance sheet obligations. 

model calculates gains and losses and determines the amount of capital 

that each Enterprise must hold at the beginning of the stress test in order 

to maintain positive capital over the entire 10-year stress period. 

The model uses 

The 

12
CHAPTER TWO – CAPITAL REGULATION 

Enterprise Data 

The Enterprises provide OFHEO with the necessary data to run the stress test in their quarterly 

risk-based capital (RBC) data submissions. The data are sufficient to replicate the actual 

financial position of an Enterprise on the last day of the quarter, including assets, liabilities, and 

off-balance sheet obligations (e.g., guaranteed MBS and derivatives). These data represent the 

starting position of the Enterprises at the beginning of the stress test. 

The data submissions are detailed enough to accurately project the cash flows associated with 

all of an Enterprise’s on- and off-balance sheet items. In the case of mortgage loans, for example, 

data are aggregated by a common set of mortgage risk factors, such as mortgage type and loanto-value ratios. In other cases, such as derivative and debt instruments, data are needed at the 

instrument level, including any specific contractual terms, to accurately measure their cash 

flows. 

The stress test assumes no new business occurs during the stress period, except that mortgages 

the Enterprises have committed to purchase through written agreements with their 

seller/servicers are added to their positions during the first year of the stress test. 

Economic Conditions 

The economic conditions describing the severity of the stress test are prescribed by law and 

affect the Enterprises through large and prolonged changes in interest rates and severe mortgage 

defaults and their associated losses. In general, the Treasury 10-year constant maturity yield 

either goes up by 75 percent or down by 50 percent, with a 600 basis point cap. All other 

interest rates used in the stress test (federal funds rate, LIBOR, federal agency cost of funds, etc.) 

are tied to movements in Treasury rates. 

The 1992 Act requires that OFHEO impose credit losses on all mortgage loans owned or 

guaranteed by an Enterprise. These losses must be reasonably related to an Enterprise’s worst 

regional experience, known as the benchmark loss experience.

2 The benchmark loss experience 

entails 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. In the stress test, loss rates are adjusted to 

reflect differences between mortgage characteristics, collateral values, and economic conditions 

affecting current loans and those affecting loans in the benchmark loss experience. OFHEO also 

calibrated losses on adjustable-rate single-family loans and on multifamily loans, as required by 

law, to be reasonably related to the benchmark loss experience. 

Current economic conditions are reflected in the starting position data. For example, OFHEO 

uses its House Price Index (HPI) to estimate the current amount of homeowner equity in the 

2

 The worst regional loss experience identified by OFHEO occurred for mortgages originated in Oklahoma, 

Arkansas, Louisiana and Mississippi from 1983 to 1984. 

13 
CHAPTER TWO - CAPITAL REGULATION 

Enterprises’ single-family mortgage portfolios. The amount of homeowner equity in a property 

is a key factor in determining whether a loan will default. 

Mortgage Performance 

Mortgage performance refers to whether a loan will stay current, prepay, or default during the 

stress test, and if a loan defaults, how severe the loss will be to the Enterprise. OFHEO uses 

sophisticated statistical models to simulate mortgage performance over the 10-year stress 

period. These models project rates of prepayment, default, and loss severity. OFHEO uses 

different models for single-family and multi-family mortgages. For single-family mortgages, for 

example, the models use a variety of factors, such as mortgage type (fixed vs. adjustable), age of 

the loan, the current amount of equity in the property, and the difference between current 

mortgage rates and stated loan rate, to determine which mortgages default or prepay. 

Other Credit Factors 

Once the stress test has calculated how much an Enterprise would lose if a mortgage defaulted, 

the model will adjust the losses downward to account for any third-party credit enhancements 

applicable to the defaulted loan. The primary credit enhancement used by the Enterprises is 

private mortgage insurance, but other types of credit enhancements are used such as spread 

accounts and lender recourse. Information on credit enhancements is contained in each 

Enterprise’s quarterly RBC data submission to OFHEO. 

To account for the strength of third party credit guarantees, OFHEO adjusts the value of the 

guarantees to the Enterprises based on the public credit ratings of the third party. Third party 

guarantees include private mortgage insurance and derivative counterparties. The lower the 

credit rating, the larger the ‘haircut’ (downward adjustment) applied to the value of the 

guarantee. OFHEO phases in the haircuts over the course of the stress test. 

Cash Flows 

OFHEO’s simulation model projects the cash flows of all assets, liabilities, and off-balance sheet 

obligations for each Enterprise on a monthly basis over the 10-year stress test. Cash flows for 

each Enterprise are largely determined by the performance of its mortgage portfolio during the 

stress test, interest payments made on its outstanding debt, and the cash flows associated with 

its derivatives positions. 

To generate cash flows for items where there are insufficient data, the activity is new, or the 

activity is so small that a specific treatment has not yet been included in the current RBC 

regulation, OFHEO uses Alternative Modeling Treatments (AMTs). AMTs are a series of 

simple, conservative rules which, when applied to a particular activity, allow OFHEO to 

generate reasonable cash flows for the activity. AMTs ensure all Enterprise activities are 

incorporated in the stress test. 

14 
CHAPTER TWO – CAPITAL REGULATION 

Operating and Accounting Rules 

There are additional operating and accounting rules that influence the amount and timing of 

cash flows. These include rules on dividend payouts, rules that determine when a financial 

option is exercised (calls and puts), assumptions about operating costs, and accounting rules 

that determine tax payments. In addition, because of the ‘no new business assumption’ and the 

need to keep the financial statements in balance each month, OFHEO developed rules for 

investing excess funds and issuing new debt. 

The resulting cash flows from the simulation model are used to generate pro forma financial 

statements for each Enterprise on a monthly basis during the 10-year stress test. These 

statements are generated using a close approximation to Generally Accepted Accounting 

Principles (GAAP). These financial statements show the resulting capital positions of each 

Enterprise for each month of the stress test. 

Using the pro forma financial statements, the stress test determines the amount of capital needed 

to maintain positive capital throughout the 10-year stress period. Once that amount of capital 

has been determined, an additional 30 percent is added to protect against management and 

operations risks, which are not quantifiable. The total for each Enterprise is its risk-based 

capital requirement. 

15 
Interest Rate Risk 

Liquidity Management 

• Strategy Tailored for Fannie Mae 

• Strategy Tailored for Freddie Mac 

Examination Strategies 

Categories of risk and 

risk management 

- these remain 

constant 

Program areas for risk 

based examinations 

- these remain constant 

Annual risk based examination 

plan 

- reviewed and updated quarterly 

OFHEO’s risk profile for each 

Enterprise 

- updated quarterly 

Constant changes at each Enterprise 

Credit Market Credit Risk 

Operations Information Technology Business Process Controls 

Internal Controls 

Board Governance 

Management 

Audits 

Management Information 

Models Corporate Governance Model Risk Processes 

CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Assessment Factors 

Examination Objectives 

Evaluation Criteria 

Communicate 

Examination 

Findings; 

Effect Changes 

and Follow Up 

Table 3.1 

OFHEO’s Comprehensive 

Risk-Based 

Examination Program 

Basis for evaluating the 

quantitative and qualitative 

features of risk and 

risk management 

- these remain constant 

Continuous communications 

and follow-up 

4 

5 

Assessment Factors 

Examination Objectives 

Evaluation Criteria 

Communicate 

Examination 

Findings; 

Effect Changes 

and Follow Up 

Table 3.1 

OFHEO’s Comprehensive 

Risk-Based 

Examination Program 

Basis for evaluating the 

quantitative and qualitative 

features of risk and 

risk management 

- these remain constant 

Continuous communications 

and follow-up 

4 

5 

Credit Credit Risk 

Interest Rate Risk 

Liquidity Management 

Market Operations Information Technology Business Process Controls 

Internal Controls 

Models Model Risk 

Board Governance 

Management Processes 

Audits 

Management Information 

Corporate Governance 

Examination Strategies 

• Strategy Tailored for Fannie Mae 

• Strategy Tailored for Freddie Mac 

Categories of risk and 

risk management 

- these remain 

constant 

3

Program areas for risk 

based examinations 

- these remain constant 

2

Annual risk based examination 

plan 

Freddie Mac Risk Profile 

• Balance Sheet and OBS 

• Strategy 

• Business Initiatives 

• Management of Risks 

• Balance Sheet and OBS 

• Strategy 

• Business Initiatives 

• Management of Risks 

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 

Fannie Mae Risk Profile 

- reviewed and updated quarterly 

OFHEO’s risk profile for each 

Enterprise 

- updated quarterly 

1

Constant changes at each Enterprise 

16 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

CHAPTER THREE – OFHEO’s Examination Program 

INTRODUCTION 

OFHEO’s annual risk-based examination program is an integral part of a system designed to 

ensure the ongoing safety and soundness of Fannie Mae and Freddie Mac. The examination 

program assesses the appropriateness and effectiveness of the Enterprises’ policies and processes 

for 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 contributes to OFHEO’s capital adequacy framework, by further 

informing the Director’s evaluation about the appropriateness of the balance of risk and capital 

at each Enterprise. The 2001 examinations found both Enterprises to be financially sound 

and well- managed. 

The process OFHEO employed in its comprehensive annual risk-based examinations to reach 

these conclusions is briefly described below, and depicted in Table 3.1. 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 Table 3.1, 

beginning with the base of the chart and concluding at the top. Numeric references to the chart 

are included in the text that describes the examination process. 

OFHEO’s Examination Program 

Risk Profiles 

1 

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 2 

Based upon OFHEO’s unique position to understand the Enterprises’ risk profiles, 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 for the next year. The examination strategies are 

reviewed and updated quarterly based on Enterprise, industry and economic developments. In 

17 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

conjunction with the strategies, OFHEO creates work plans that describe how the strategies 

will be achieved. The work plans outline the scope, timing and resources needed to meet the 

objectives and examination activities set forth in the strategies. 

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

Management 3 

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 focus of the eleven 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. 

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 an Enterprise’s inability to 

efficiently meet its obligations as they come due and to transact the next incremental dollar 

of business cost effectively. 

MODEL EXPOSURE 

� Model Risk Program – the risk that could arise from inappropriate results or application of 

financial models used for decision support in selecting, pricing and managing risk. 

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. 

18 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

� 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: goals and objectives are met; resource use is consistent with laws, 

regulations and policies; resources are safeguarded against waste, loss and misuse; and 

reliable data are obtained, maintained and fairly disclosed in reports. 

CORPORATE GOVERNANCE 

� Audit Program – the risk that the Board or management’s reliance on internal or external 

audits is misplaced. 

� Management Information Program – the risk that management will make decisions based 

on ineffective, inaccurate or incomplete information or reports. 

� Management Processes Program – the processes used to drive behaviors to support the 

Enterprise’s defined corporate goals, standards and risk tolerances. 

� Board Governance Program – the manner in which the Board discharges its duties and 

responsibilities. 

Evaluation Criteria, Assessment Factors and Examination Objectives 4 

OFHEO conducts examination work in each of the 11 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 the 

examination work is consistent at both Enterprises by creating transparency and understanding 

of the framework within which examiners make judgments. 

Examiners use the information and data from the evaluation criteria to form their expert 

opinions about the almost 100 assessment factors which in turn link directly to one or more of 

the examination objectives for each of the program areas. Sources for the assessment factors 

include industry standards and benchmarks, best practices and examiner expertise. 

For each program area there are four or five examination objectives. These are the broad 

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

program areas. 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. 

19 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Communication of Examination Findings 5 

Throughout the course of conducting examinations, OFHEO communicates with Enterprise 

personnel not only to gather information, but also to share findings and discuss observations. 

OFHEO is committed to continuous, effective communication with the Enterprises. OFHEO has 

the same goal for all communications; that the free flow of information furthers the objective of 

ensuring the safe and sound operations of the Enterprises. Communications are tailored to the 

individual structure and dynamics of the Enterprise, and the timing of the communication 

depends on the situation being addressed. OFHEO keeps executive management and the Board 

appropriately informed and communicates directly with them as often as required by the 

Enterprise’s condition and the findings from examination activities. OFHEO brings those issues 

that introduce an exposure to the stable operation of the Enterprise, otherwise fall under the 

normal duties and responsibilities of the Board, or warrant the Board’s attention to the 

immediate attention of the Board and executive management. Technical issues and matters 

relating to a single line of business or activity are generally brought to the attention of operating 

managers with the Board and executive management kept appropriately informed. 

Throughout the 2001 annual examination cycle, OFHEO’s examiners had ongoing dialogues 

with the operating management at both Enterprises about the operations and processes covered 

by each of the 11 examination program areas. In these discussions, the examiners shared their 

views about discrete opportunities the companies had to strengthen their operations and 

processes, including initiatives that, if implemented, would enhance existing tools and processes 

and minimize the resulting exposure to financial risk. The goal of ensuring the Enterprises’ 

operations meet or exceed financial safety and soundness standards at any given point in time is 

supported by this iterative process and netted results that found both companies to be wellmanaged and financially sound. 

Effect Changes and Follow Up 5 

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 it identifies the steps or methods required to cure the root 

causes of significant deficiencies, and determines whether the plan is likely to resolve the 

significant issues within an appropriate time frame. As part of follow-up, OFHEO verifies the 

action plan has been executed and evaluates 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. 

20 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

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. 

In accordance with our examination program, the results and conclusions for each program area 

are reported in relation to safety and soundness standards – whether they meet, exceed, or fail to 

meet safety and soundness standards. Throughout the annual examination cycle, January 

through December 2001, OFHEO’s examiners had ongoing dialogues with operating 

management at Fannie Mae and Freddie Mac about each company’s operations and processes in 

the program areas covered by Credit Risk, Market Risk, Operations Risk, Model Risk, and 

Corporate Governance. In these discussions, the examiners shared their views about discrete 

opportunities the company had to strengthen its operations and processes, including initiatives 

that, if implemented, would enhance existing tools and processes and minimize the resulting 

exposure to financial risk. The goal of ensuring the Enterprises’ operations meet or exceed 

financial safety and soundness standards at any given point in time is supported by this iterative 

examination process. At year-end 2001, both Fannie Mae and Freddie Mac exceeded safety and 

soundness standards in all examination program areas. 

Throughout the year, operating management at both Fannie Mae and Freddie Mac were 

responsive and effective in addressing issues raised for their attention and action. 

The results which are reported below reflect the examination work conducted from January 

through December 2001, and do not necessarily reflect the current condition or operations of the 

Enterprises. The results and conclusions presented for 2001 are similar to the results and 

conclusions reported in 2000. As described above, OFHEO’s comprehensive risk-based 

examinations apply a consistent set of standards to assess and evaluate each Enterprise’s 

financial condition, business operations, and internal controls. These standards remain 

consistent from year-to-year and are appropriately updated to reflect enhancements in 

regulatory best practice, developments in risk management or market practices, and innovations 

at either Enterprise. The similarity between the 2000 and 2001 examination results and 

conclusions stems from the Enterprises’ continuing strong financial performance, their 

maintenance of sound financial fundamentals, their maintenance of effective risk management 

and control practices, and a favorable business environment. 

21 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Fannie Mae Examination Results and Conclusions 

Fannie Mae’s credit risk management and credit risk management framework exceed safety and 

soundness standards, and they have resulted in a high-quality portfolio and manageable credit 

exposure. The portfolio is diversified and the profile of credit risk is in compliance with the 

internally prescribed limits that examiners have deemed to be appropriate. Policies, procedures, 

internal controls and management reporting for the credit function are effective. Fannie Mae is 

appropriately compensated for the credit risk it assumes. Management prudently manages 

counterparty exposure. New products and initiatives are well researched prior to 

implementation. The process for determining the reserve for losses and credit risk sharing 

strategies are effective, as are the tools used to manage credit risk. Fannie Mae effectively 

identifies, quantifies and tracks its credit risk exposures. Management has an effective means 

for following up on credit-related issues. The technology and controls supporting the credit risk 

management function are effective. Management effectively reconciles differences between 

actual and expected credit portfolio performance. 

Fannie Mae’s interest rate risk management exceeds safety and soundness standards. The 

policies, procedures, internal controls and management reporting relating to interest rate risk 

are appropriate and effective. Management has a meaningful methodology for quantifying and 

monitoring the level and nature of interest rate risk. Fannie Mae’s management effectively 

follows up on issues related to interest rate risk. Fannie Mae appropriately researches and 

controls the extent to which new products and initiatives may impact the interest rate risk 

profile. The technology and controls supporting the interest rate risk management function are 

effective. The tools used to model interest rate risk, and the strategies to alter the exposures to 

interest rates are prudent and effective. Management effectively incorporates tactical and 

strategic issues into the management of interest rate risk. The responsibilities for strategy and 

analytics functions are appropriately separated from those for the execution functions. 

Derivative instruments are used prudently for hedging risks and in accordance with the 

standards used by other large financial intermediaries. (Box 3.1.) 

Fannie Mae’s liquidity management exceeds safety and soundness standards. The policies, 

procedures, internal controls and management reporting relating to liquidity management are 

appropriate and effective. Management has an effective methodology for quantifying and 

monitoring liquidity, and management appropriately evaluates the impact of various events and 

alternative environments when developing and updating contingency plans. The planning 

process for liquidity management is effective. Fannie Mae appropriately considers the impact 

new products and initiatives may have on liquidity. Management effectively follows up on 

issues and initiatives that influence liquidity. Technology and controls for liquidity 

management are prudent and effective. The quality of tools Fannie Mae uses to manage and 

monitor liquidity, and the quality of tools used to perform scenario analyses are comprehensive 

and effective. An appropriate separation of duties exists between the strategy and analytics 

functions and the execution function. Fannie Mae effectively analyzes and is well positioned to 

respond to trends and anomalies in the market and funding spreads. Liquidity management is 

appropriately integrated with other management and financial performance issues. 

22 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

The information technology infrastructure and surrounding risk management framework exceed 

safety and soundness standards. Operating processes are in place to ensure secure, effective and 

efficient data center processing and problem management. There are effective policies and 

processes in place to ensure 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 and these are routinely tested 

and enhanced. Management has processes in place that ensure information technology plans 

effectively address business unit and corporate objectives. Effective processes are in place to 

ensure appropriate controls are implemented and maintained. Documentation for system 

development and maintenance is complete. Fannie Mae has implemented effective processes to 

ensure data and information are processed accurately and in a timely manner. Effective controls 

are in place and regularly tested to secure networks and/or firewalls from unauthorized or 

inappropriate actions. Fannie Mae has policies and procedures to ensure the conduct of ecommerce is secure. Fannie Mae has effective controls over end-user computing. 

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

and soundness standards. Management has an accurate and reliable process for identifying risks 

to business processes and implementing appropriate controls. Implemented controls properly 

address risks assessed by management. Management has a reliable process for ensuring the 

timely resolution of control-related issues. Internal Audit appropriately identifies and 

communicates control deficiencies to management and the Board of Directors. There are 

established policies and procedures that delineate internal control process and standards 

resulting in a sound control environment. Management routinely tests and ensures compliance 

with established internal controls. 

The framework for business process controls and the management of that framework exceeds 

safety and soundness standards. The processes and control environment used when Fannie Mae 

considers and/or develops new or substantially revised business initiatives are effective. The use 

of pilot programs and the communication flows surrounding new or substantially revised 

business initiatives are effective. The balance between risk management, internal controls and 

the pressure to develop new or substantially revised business initiatives is appropriate. Fannie 

Mae’s corporate culture fosters the introduction of new ideas and values intellectual capital. 

Both the analysis and review conducted for potential new or substantially revised business 

initiatives, and the periodic analysis conducted after a new or substantially revised business 

initiative is launched, are effective and comprehensive. 

The audit functions exceed safety and soundness standards. (Box 3.2.) The Internal and 

External Audit functions have the appropriate independence. Auditors performing the work 

possess appropriate professional proficiency. The scope of Internal and External Audit work 

performed is appropriate and comprehensive, and the audit work is documented and complete. 

The management of the Internal Audit department is effective. Executive management and the 

Board of Directors are appropriately involved with and follow up on identified audit issues. The 

auditor’s risk assessment process is effective. Internal Audit is appropriately involved in new 

products and new initiatives. 

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

soundness standards. (Box 3.3.) In discharging its duties and responsibilities, the Board of 

23 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Directors operates with the appropriate independence. The Board is appropriately engaged in 

the development of a strategic direction for the company, and the Board ensures management 

appropriately defines the operating parameters and risk tolerances of the Enterprise in a manner 

consistent with the strategic direction; legal standards; and ethical standards. The Board has an 

effective process for hiring and maintaining a quality executive management team, and the Board 

effectively holds the executive management team accountable for achieving the defined goals 

and objectives. The Board is appropriately informed of the condition, activities and operations 

of the Enterprise, and has sufficient, well-organized time to carry out its responsibilities. 

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

soundness standards and provides end-users with accurate and reliable information. 

Management and the Board of Directors receive complete and comprehensive reports on Fannie 

Mae’s performance relative to established goals and objectives. Management reporting provides 

the levels of management with the necessary information to carry out their responsibilities 

efficiently and effectively. Management reporting permits management to evaluate and gauge 

the quality of their decisions. Information systems are linked to Fannie Mae’s overall strategy, 

and are developed and refined consistent with the strategic direction and plan. The reports 

management uses for decision making are accurate. Enterprise strategy, roles and responsibility 

are effectively communicated. Employees have effective channels of communication to provide 

feedback, report suspected improprieties and suggest enhancements. Communications across 

the company are effective. 

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

soundness standards. The strategic planning process is comprehensive. Business unit goals, 

implementation plans and programs designed to achieve the corporate plan are effective. 

Management is able to monitor and manage change. Key performance measures are appropriate, 

effective and align with strategy. The behavior management programs are effectively designed 

to achieve corporate goals and objectives. Fannie Mae has effective programs for career and 

management development, and for identifying and recruiting competent people. Fannie Mae’s 

proprietary risk management programs and systems are effective. Management effectively 

conveys an appropriate message of integrity and ethical values. Management’s philosophy and 

operating style are consistent, and they have a pervasive effect on the company. The 

organizational structure and the assignment of responsibility provide for accountability and 

sound controls. 

24 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.1. 

DERIVATIVES – FANNIE MAE 

Fannie Mae is an end-user of derivatives to manage its business more effectively 

and mitigate financial risks. 

associated with the purchase of mortgage assets; to reduce market risks 

associated with the issuance of debt; and to effectively match the Enterprise’s 

funding composition with changes occurring in the interest-rate characteristics of its 

mortgage assets that result from changes occurring in the overall interest rate 

environment. 

that are common in the financial markets and widely used for risk management 

activities. 

are transacted in accordance with approved policies and procedures and closely 

supervised and scrutinized by senior management and the Board of Directors. 

Derivatives are important instruments for Fannie Mae’s management of its 

business and risk exposures. The volume of derivatives increased from $324.7 

billion notional amount on December 31, 2000 to $533.1 billion notional amount on 

December 31, 2001. 

the volume of derivatives, but it does not accurately reflect the market and credit 

risk associated with derivatives. 

derivatives is the replacement cost for the economic value of contracts. 

Replacement cost for derivative positions will regularly fluctuate along with 

changes in the market. 

cost of $110 million for its $533.1 billion notional principal amount in derivatives. 

OFHEO carefully scrutinizes Fannie Mae’s use of derivatives. 

exposures are incorporated into regulatory capital requirements, both minimum 

and risk-based, and OFHEO conducts on-site examinations that include a review 

of derivatives activity. 

strategies and practices during on-site examinations, which include: 

transactions and controls; (b) evaluating strategies and their implementation; (c) 

evaluating the quality of tools used to identify, measure, and monitor risk – 

including the tools and methodology for valuing derivatives and the off-setting cash 

positions; (d) testing for the level of compliance with limit structures and for the 

quality of analyses that forms and defines the limit structure; (e) testing the integrity 

of the audit program and the accuracy of financial records; (f) evaluating the quality 

of technology that supports the business and the integrity of the security framework 

for that technology; (g) evaluating the quality of personnel, management, and 

board oversight; (h) evaluating the quality of policies and procedures and testing 

for adherence to these policies and procedures; (i) critiquing the quality of 

counterparty credit risk analysis and maintenance of the ongoing analysis; (j) 

proctoring the implementation of FAS 133 and ongoing compliance; (k) making 

recommendations that can strengthen systems, processes and practices; and (l) 

requiring remedial actions to address weaknesses, where appropriate. 

The following table highlights selected observations from OFHEO’s testing and 

verification work that is regularly conducted on Fannie Mae’s derivative activities. 

The information in this table augments the overall opinions on derivatives that are 

expressed on page 22. 

Its goals for using derivatives are: to lower debt costs 

In pursuing these goals, Fannie Mae enters into derivative contracts 

Management does not speculate with derivatives. Derivative activities 

Notional principal amount is a commonly used measure for 

A better measure for the exposure to risk in 

On December 31, 2001, Fannie Mae had a replacement 

Derivative 

Examiners verify and evaluate a variety of risk management 

(a) testing 

25
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.a. Topic: Derivatives activity is governed by sound policies, procedures and effective internal controls 

and consistent with the prescribed purpose. 

• OFHEO evaluates the appropriateness of policies, 

procedures, internal controls, and reports. 

• OFHEO evaluates the process for establishing 

limits, the appropriateness of limit structures, and 

the appropriateness of prescribed practices. 

• OFHEO evaluates the level of directorate and 

management oversight and reporting. 

• OFHEO’s evaluations reflect, among other things, 

the perspective gained from years of examination 

and market experience, comparisons with 

practices at other large financial intermediaries 

and end-users, and emerging best practices. 

• Management operates with policies and procedures 

that cover the use of derivatives. (Examiners verify 

and evaluate.) 

• Clear lines of responsibility and accountability exist, 

including independent risk oversight. (Examiners verify 

and evaluate.) 

• Controls are in place that safeguard the integrity of 

data used for models, reporting, and decision-making. 

(Examiners test, verify, and evaluate.) 

• Models are independently validated, subject to formal 

change management, and controlled to preclude 

unauthorized & untested changes to the models. 

(Examiners verify and evaluate.) 

• Contingency plans and business continuity plans 

provide for disaster recovery and enable continued 

monitoring of risk positions in the event of business 

interruption. (Examiners verify and evaluate.) 

• Technology, tracking systems, and records are 

effective enabling the Enterprise to document, analyze, 

and monitor risk positions and compliance with risk 

limits. (Examiners verify and evaluate.) 

• Derivative reporting is appropriately comprehensive 

and tailored to meet the respective audience’s needs. 

(Examiners test, verify, and evaluate.) 

• Management systems and reporting for derivatives are 

comprehensive and capture the risks and other 

important attributes for consideration. (Examiners test, 

verify, and evaluate.) 

• Compliance programs and audit coverage are effective 

in policing compliance with policies, procedures, limits, 

strategies, and internal controls for derivatives 

transactions and activities. (Examiners verify and 

evaluate.) 

• There is appropriate separation of duties among 

personnel working with derivatives and overseeing 

derivatives activities. Independent risk oversight 

proctors activities and compliance. There is 

adherence to risk limits and formal reports are 

regularly generated that track compliance, usage, and 

approved exceptions to limits. (Examiners test and 

verify.) 

• Reporting and risk management protocols exist for 

new initiatives and require detailed tracking, reporting, 

and analysis to evaluate performance or any 

unexpected outcomes. (Examiners verify and 

evaluate.) 

26
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.b. Topic: Risk management techniques are employed to effectively manage risk. 

• OFHEO evaluates the quality of the process and 

the results of credit analyses and limit setting for 

derivatives counterparty. 

• OFHEO evaluates the documents, philosophy, 

methods and practices employed in netting 

exposures for derivatives. 

• OFHEO evaluates the policy, practices, and 

approaches employed in managing collateral for 

derivatives. 

• The measurement of credit risk and fair market value 

for derivatives is independent and separate from any 

influence of portfolio management activities. 

(Examiners verify and evaluate.) 

• The methodology for determining mark-to-market 

exposure for collateral requirements is based on real 

market prices and prudent modeling techniques & 

practices. (Examiners test, verify, and evaluate.) 

• There are comprehensive credit analyses performed 

for derivatives counterparties by credit specialists who 

are separate from portfolio operations. Credit limits 

and procedures are prescribed along with collateral 

requirements. 

• Counterparties are required to meet credit ratings that 

exceed investment grade as determined by leading 

outside credit rating agencies and management has 

procedures to ensure creditworthiness of its 

counterparties in the event there is a material adverse 

change. (Examiners test and verify.) 

• The credit exposure for derivatives counterparties is 

continuously monitored, including collateral positions, 

by an independent risk management function. 

• Derivatives activities are conducted with an 

appropriately diverse set of derivatives counterparties. 

The credit quality of these counterparties is routinely 

monitored with corrective measures employed when 

needed or warranted. (Examiners test, verify, and 

evaluate.) 

• Collateral posting requirements are clearly delineated, 

and consistently implemented. (Examiners test, verify, 

and evaluate.) 

• Derivative transactions are governed by master 

agreements. (Examiners verify and evaluate.) 

• Netting is employed to mitigate counterparty exposure 

levels. (Examiners verify and evaluate.) 

• Derivative positions are regularly revalued with net 

exposures effectively managed, including the 

requirement of additional collateral when required 

under credit policies. (Examiners verify and evaluate.) 

• Counterparties are recognized, reputable, and 

creditworthy with substantial presence in the 

derivatives market. (Examiners verify and evaluate.) 

27
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.c. Topic: Derivatives activities are governed by and implemented through qualified and experienced 

professionals and subject to effective limits and reporting. 

• OFHEO evaluates the qualifications and expertise 

of individuals and groups charged with planning, 

implementing, overseeing, and auditing the use of 

derivatives. 

• OFHEO evaluates the appropriateness and 

effectiveness of limit structures and due diligence 

process. 

• Personnel involved in executing, managing, and 

overseeing derivatives activities are experienced 

technicians and practitioners. (Examiners verify and 

evaluate.) 

• There is the appropriate separation of duties between 

transactors, operations, analytics, and risk governance 

personnel. (Examiners test and verify.) 

• There is an effective risk oversight framework staffed 

with qualified individuals and representing the 

appropriate disciplines needed to achieve 

comprehensive oversight. (Examiners verify and 

evaluate.) 

• Sufficient human and financial resources are dedicated 

to provide quality risk management technology and 

tools that enable quality management of interest rate 

risk, hedging activities, and derivatives use. 

(Examiners verify and evaluate.) 

• The risk management function is staffed with 

specialists. (Examiners verify and evaluate.) 

• Analyses are comprehensive, including evaluations 

performed under multiple & different scenarios. 

(Examiners verify and evaluate.) 

• Qualified and experienced staff perform analyses, 

accounting, and operations functions. (Examiners 

verify and evaluate.) 

• Effective and timely systems enable management to 

monitor compliance with limits and determine intra-day 

risk exposures and changes in risk & risk positions. 

(Examiners verify and evaluate.) 

• Risk limits are routinely evaluated and updated with 

timely reporting of compliance with those limits. 

(Examiners verify and evaluate.) 

• Risk management systems and practices preclude 

individuals from taking risk positions that are 

undetected by management and the risk oversight 

activities. (Examiners verify and evaluate.) 

• The board of directors and senior management are 

appropriately involved in the process for establishing 

limits and monitoring performance against risk limits, 

including derivatives. (Examiners verify and evaluate.) 

• Derivatives activities are subject to regular and 

frequent coverage by Internal Audit. (Examiners test, 

verify, and evaluate.) 

28
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.d. Topic: Derivatives strategies and positions are appropriate and well-documented. 

• OFHEO evaluates hedging strategies, derivatives 

transactions, risk exposures, and analysis of 

hedge effectiveness. 

• OFHEO evaluates the process and actions 

employed to rebalance the portfolio. 

• OFHEO evaluates the funding strategies and the 

use of derivatives to implement those funding 

strategies. 

• OFHEO evaluates the appropriateness of GAAP 

accounting for derivatives. 

• Derivatives are not used for speculative purposes. 

(Examiners verify and evaluate.) 

• Interest rate risk, changes in that risk, and the funding 

environment are continuously monitored. 

Management takes prompt action to rebalance and 

remain within desirable risk tolerances and be in 

adherence with risk limits. (Examiners verify and 

evaluate.) 

• Strategies are formal and regularly re-evaluated and 

refined or altered to effectively manage risk positions, 

including how derivatives are used. (Examiners verify 

and evaluate.) 

• Management considers multiple scenarios, interest 

rate environments, and market conditions when 

performing its analyses, and develops comprehensive 

contingency plans. (Examiners verify and evaluate.) 

• Hedge performance and hedge strategies are tracked 

and compared to expected performance. (Examiners 

verify and evaluate.) 

• Management augments its analyses with ’stresstesting’ and ‘back-testing’ and considers the results of 

these tests in its planning. (Examiners verify and 

evaluate.) 

• All derivatives are included in risk and sensitivity 

analyses and cash management forecasts. (Examiners 

test and verify.) 

• The methodology employed in performing valuations 

for derivatives is sound, and the controls surrounding 

that independent methodology produces reliable 

values. (Examiners test, verify, and evaluate.) 

• Derivatives are regularly marked-to-market. 

(Examiners test and verify.) 

• FAS 133 implementation has been deliberate and welldocumented with the necessary investments made to 

provide systems needed to ensure ongoing 

compliance. (Examiners test, verify, and evaluate.) 

29
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.e. Topic: The Enterprise is an end-user of derivatives. Derivatives instruments are used exclusively for 

risk management purposes and not for speculative purposes. 

• OFHEO evaluates the types, maturities, and 

amounts of derivative transactions. 

• OFHEO evaluates policies and procedures and 

patterns of derivatives transactions. 

• OFHEO evaluates management’s timing and 

rationale associated with use of certain 

derivative instruments and transactions. 

• OFHEO evaluates how derivatives are being 

used. 

• The use of derivatives is limited to end-use. 

(Examiners verify and evaluate.) 

• The derivatives being used are limited to those 

instruments that are common in the financial markets 

to conduct risk management activities. (Examiners 

verify and evaluate.) 

• The derivatives used are not exotic instruments. 

(Examiners verify and evaluate.) 

• Corporate policies prohibit speculative positions in 

derivatives. (Examiners test and verify) 

• Hedge records and accounting records reflect how 

derivatives are used. (Examiners test, verify, and 

evaluate.) 

• Derivatives are used in a manner consistent with 

formally approved risk management policies and 

procedures. (Examiners verify and evaluate.) 

• Automated systems, operating procedures, controls 

and management oversight safeguard against 

unauthorized derivatives transactions. (Examiners test 

and verify.) 

• Metrics, management reports, and follow-up analyses 

demonstrate and confirm the appropriateness of 

derivatives transactions when evaluated in context with 

the hedging strategies and the risk management 

objectives. (Examiners verify and evaluate.) 

• The specific types, the terms, and the volume of 

derivative transactions are consistent with the 

approved hedging strategies and comport with the 

nature and level of risk being managed – and are 

consistent with the prevailing conditions and liquidity in 

the marketplace. (Examiners verify and evaluate.) 

30
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.1. 

DERIVATIVES - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.1.f. Topic: A meaningful methodology is employed to quantify and monitor the risks associated with 

derivatives. 

• OFHEO evaluates the quality and appropriateness 

of valuation methodologies for derivatives. 

• OFHEO evaluates the quality of analyses and 

tools to gauge the future value of derivatives 

instruments and positions under alternate 

scenarios. 

• Systems for data capture, processing, settlement, and 

management reporting are prudent and provide 

accurate and reliable information. (Examiners verify 

and evaluate.) 

• Model assumptions and parameters are independently 

validated and continuously reviewed for 

reasonableness. (Examiners test, verify, and 

evaluate.) 

• Changes to model assumptions are thoroughly 

reviewed, monitored for reasonableness, and 

revalidated. (Examiners test, verify and evaluate.) 

• Management has effective processes and controls to 

detect and report changes to the model assumptions 

or operations. Changes to the model’s assumptions or 

operations are documented and tracked. (Examiners 

verify and evaluate.) 

• Robust tools are employed for pricing and evaluating 

the effect of changes to interest rates or changes in 

the shape of the yield curve that cover all categories of 

the balance sheet, including derivatives. (Examiners 

verify and evaluate.) 

• Robust prepayment models consider a wide variety of 

factors that can affect prepayment speeds. 

Performance of prepayment models is regularly 

evaluated and tracked. (Examiners test, verify, and 

evaluate.) 

• Valuations produced by the model are validated using 

actual market quotes where appropriate. (Examiners 

verify and evaluate.) 

31
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.2. 

AUDIT PROGRAM – FANNIE MAE 

Central to an effective internal control system and the safe and sound operation of 

any financial organization is an independent and professional audit program. 

When properly structured and conducted, an audit program provides the directors 

and senior management with important information about weaknesses in the 

system of internal controls. 

board of directors and senior officers to take prompt, remedial action when 

necessary, and enables a company’s board of directors and senior officers to meet 

their responsibilities to ensure that the system of controls operates effectively 

resulting in: 

(c) compliance with laws, regulations, policies and procedures. 

OFHEO, like the banking regulators, reviews and evaluates Fannie Mae’s audit 

program 

improvements. 

conducted by the internal auditors and the external auditors and evaluate: 

level of independence, (b) the appropriateness of the scope, (c) the quality of the 

work and its documentation, (d) the quality of communications associated with the 

results, and (e) the quality of board and senior management action and follow-up. 

The following table highlights selected observations from OFHEO’s testing and 

verification work that is regularly conducted on Fannie Mae’s internal and external 

audit programs. ons on the 

audit programs that are expressed on page 23. 

An effective audit program positions a company’s 

(a) assets being safeguarded, (b) financial reports being reliable, and 

and when necessary, makes recommendations for needed 

In evaluating the audit program, examiners test the work 

(a) the 

The information in this table augments the overall opini

32
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.2. 

AUDIT PROGRAM - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.2.a. Topic: Audit activities are directed and governed by the Board of Directors and supervised on an 

ongoing basis by a qualified Board Audit Committee. 

• OFHEO evaluates the level of expertise in the 

Board and on each of the Board Committees. 

• OFHEO evaluates the agendas, information 

packages, presentations and minutes of the 

Board and its Committees, including the Audit 

Committee. 

• OFHEO’s evaluations reflect, among other 

things, the perspective gained from years of 

examination experience, comparisons with 

practices at other large financial intermediaries, 

best practices identified by groups such as the 

National Association of Corporate Directors 

(NACD), Blue Ribbon Commission, the New York 

Stock Exchange (NYSE), and the Business 

Roundtable. 

• Audit Committee adopted and Board approved a 

comprehensive charter for the Audit Committee. 

(Examiners verify the process and evaluate the content 

of the charter.) 

• Audit Committee charter is reviewed at least annually 

and ratified/revised as warranted. (Examiners verify the 

process and evaluate the quality and appropriateness 

of revisions.) 

• Each Audit Committee member is an independent 

outside director. (Examiners verify.) 

• Audit Committee members meet the Blue Ribbon 

Commission/NYSE standards, including those for 

independence, financial literacy and expertise. 

(Examiners verify.) 

• Audit Committee appropriately reports its views to the 

entire Board, and keeps the entire Board informed of 

significant matters raised or considered by the 

Committee. (Examiners test and verify.) 

• Materials provided to the Audit Committee in advance 

of its meetings permit the members to conduct the 

oversight prescribed by the Audit Committee charter 

and identified by the Blue Ribbon Commission as best 

practice. (Examiners verify, test and evaluate.) 

• Audit Committee approves the annual audit plan for 

both the internal and external audit activities. 

(Examiners test and verify the process and evaluate the 

plan.) 

• Audit Committee is kept informed about the progress of 

the audit activities against the approved audit plan. 

(Examiners test and verify the process and evaluate the 

follow-up.) 

• Results of all internal audit activities are provided to the 

Audit Committee on a timely basis, and the level of 

detail provided to the Audit Committee about specific 

internal audit activities appropriately reflects the findings 

and impact on the corporate risk profile. (Examiners 

test and verify.) 

• Audit Committee meets regularly in executive session 

with the head of Internal Audit. (Examiners verify.) 

• Results and observations of external audit activities are 

routinely shared with the Audit Committee. (Examiners 

test and verify the process and evaluate the materials 

provided to the Audit Committee.) 

• Audit Committee, comprised of independent outside 

directors, meets regularly in executive session with the 

External Auditor. (Examiners verify.) 

33
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.2. 

AUDIT PROGRAM - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.2.b. Topic: The Board and Audit Committee are regularly apprised of OFHEO’s view of the quality of the 

internal and external audit programs, and the quality and effectiveness of management’s follow-up on issues 

identified through the audit process. 

• OFHEO regularly communicates with the Board 

of Directors to share its results, conclusions, 

recommendations and follow-up for all areas of 

the examination. 

• OFHEO’s communications specifically address 

the quality of both the internal and external audit 

functions, and the level of reliance OFHEO 

believes is appropriate for the Board and Audit 

Committee to place on those functions. 

• OFHEO’s communications are directed to both 

the Audit Committee, comprised entirely of 

independent outside Directors, and to all 

members of the Board. 

• OFHEO conducts meetings with outside 

Directors. 

• OFHEO’s regular communications about examination 

activities, including those related to internal and 

external audit functions, are provided to each Board 

member and are included in the Board packages and 

official Board records. (Examiners verify.) 

• Fannie Mae management shares specific examination 

observations directed to management with the Board, 

including observations related to internal and external 

audit functions. (Examiners test and verify.) 

• The Board and Audit Committee discuss and consider 

OFHEO’s communications about examination activities. 

(Examiners verify.) 

• The Audit Committee, comprised solely of independent 

outside directors, meets with OFHEO’s Chief Examiner 

and the substance of the communications are 

documented. (Examiners verify.) 

34
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.2. 

AUDIT PROGRAM - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.2.c. Topic: The nationally recognized CPA firm that certifies Fannie Mae’s financial statements adheres to 

prescribed auditing standards, including those that relate to the scope of audit activities required to be 

conducted before the CPA firm can opine on the financial statements. 

• OFHEO evaluates the external auditor’s annual 

audit plan against best practices, AICPA 

standards, and other relevant standards, 

including those established by regulators for 

Federally insured financial institutions. 

• OFHEO evaluates the qualifications, experience 

and expertise of the individuals assigned to 

conduct the external audit. 

• OFHEO tests the results and conclusions of the 

external auditor’s work against the annual audit 

plan, and against professional standards. 

• OFHEO evaluates the quality of the products 

produced by the external auditor, and tests the 

sufficiency of work and workpapers that support 

the external auditor’s conclusions. 

• The external auditor’s audit plan includes all activities 

and operations necessary to opine on Fannie Mae’s 

financial statements and the quality of the company’s 

controls. (Examiners verify and evaluate.) 

• The external auditor’s audit plan appropriately reflects 

the complexity of Fannie Mae’s corporate structure, 

operations and the volume of transactions. (Examiners 

test, verify and evaluate.) 

• The engagement team possesses significant auditing 

experience of large complex financial intermediaries 

and technology dependent companies. (Examiners 

verify.) 

• Individual assignments for external audit activities 

appropriately take into consideration each auditor’s 

qualifications, experience and expertise. Auditors with 

specialized expertise are appropriately assigned to 

specific audit activities. (Examiners verify.) 

• The communications from the external auditor to the 

Audit Committee are comprehensive, clear, direct and 

effective. (Examiners test, verify and evaluate.) 

• The communications from the external auditor to the 

Audit Committee address all matters required by among 

others, the AICPA, the SEC and recognized best 

practices. (Examiners test, verify and evaluate.) 

• The communications from the external auditor to the 

Audit Committee tie directly to the approved audit plan. 

(Examiners test and verify.) 

• The external auditor’s individual and overall conclusions 

are supported by workpapers that comport with 

established standards and among other things, 

demonstrate the extent of testing and verification 

performed by the external auditor. (Examiners test and 

evaluate.) 

35
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.2. 

AUDIT PROGRAM - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.2.d. Topic: The external audit firm is independent. 

• OFHEO verifies and tests the practice of hiring 

individuals from the external auditor into 

positions of influence at Fannie Mae. 

• OFHEO evaluates the nature and extent of nonaudit services provided by the external audit firm. 

• OFHEO verifies the composition of the teams 

that perform each of the non-audit services. 

• OFHEO evaluates the quality of audit services 

provided by the external auditor, including the 

communications from the external auditor to the 

Board and its Audit Committee about its findings 

and observations. 

• External Auditor does not perform internal audit 

functions. (Examiners verify.) 

� February 2002 policy amendment which 

formalized existing practice prohibits use 

of external auditor to perform internal 

audit functions. 

• External Auditor discloses any relationships that might 

bear on independence. (Examiners verify.) 

• Independence is a factor in the decision to appoint the 

External Auditor. (Examiners verify and test.) 

• Engagement of External Auditor is negotiated at arms 

length. (Examiners verify and evaluate.) 

• External Auditor’s engagement partner changes more 

frequently than required by SEC. (Examiners verify.) 

• External auditor meets regularly in executive session 

with Audit Committee. (Examiners verify.) 

• Examiners tested a three-year period (1999-2001) and 

during that period no one from the External Auditor was 

hired at or above the Vice President level. (Examiners 

verify and test.) 

� February 2002 policy amendment which 

formalized existing practices precludes 

Fannie Mae from hiring any member or 

employee of the external audit firm who 

worked on the Fannie Mae account within 

the preceding three-year period, or 

assisted in the evaluation of Fannie Mae 

external reporting systems, or provided 

consulting services related to external 

financial reporting systems. 

• External Auditor tests management reports and 

information to evaluate their reliability. (Examiners test, 

verify and evaluate.) 

• External Auditor maintains complete supporting 

workpapers for 7 audit cycles. (Examiners test.) 

• Nature and extent of non-audit services provided by 

External Auditor consistent with statements of SEC 

Chairman Pitt and emerging best practices guidance. 

(Examiners test, verify and evaluate.) 

� February 2002 policy amendment 

precludes External Auditor from 

performing information system design and 

implementation work. 

• Audit Committee assesses and reviews the full range of 

services provided by the External Auditor, including the 

non-audit services its provides. (Examiners verify.) 

36
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.2. 

AUDIT PROGRAM - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.2.e. Topic: The qualified Fannie Mae professionals who perform the internal audit function report, through 

the head of Internal Audit, to the Board’s Audit Committee. 

• OFHEO evaluates the structure and reporting 

relationship of the Internal Audit unit against, 

among others, the Institute of Internal Auditors 

(IIA) and other professional standards, best 

practices and guidance provided by regulators of 

Federally insured financial institutions. 

• OFHEO evaluates the qualifications, experience 

and expertise of the Internal Audit staff and 

management 

• OFHEO evaluates the quality of the management 

of the Internal Audit function, including the 

appropriateness and effectiveness of the annual 

audit plan. 

• OFHEO evaluates the quality of the audit reports 

generated by the Internal Audit staff 

• OFHEO evaluates the quality and sufficiency of 

the Internal Audit workpapers 

• Head of Internal Audit regularly meets in executive 

session with Audit Committee and separately with the 

Chair of Audit Committee prior to each Audit Committee 

meeting. (Examiners verify.) 

• Audit Committee oversees and evaluates the 

performance of the head of Internal Audit. (Examiners 

verify and evaluate.) 

• Internal Audit Reports contain the weaknesses and 

control deficiencies identified in audit activities. 

(Examiners test and verify.) 

• Internal Audit informs senior management and the 

Board about the weaknesses and control deficiencies 

identified in audit activities. (Examiners test and verify.) 

• Management’s views about the Internal Audit findings 

are documented and shared with Audit Committee. 

(Examiners test, verify and evaluate.) 

• Internal Audit follows up on and tracks management’s 

actions to address control deficiencies and 

weaknesses, and routinely provides this information to 

the Audit Committee. (Examiners test, verify and 

evaluate.) 

• Internal audit practices adhere to IIA standards. 

(Examiners test and verify.) 

• Internal Audit’s risk assessment process covers all 

business units and processes. (Examiners verify and 

evaluate.) 

• Business units do not control ordirect the timing or 

scope of audit work. (Examiners test and verify.) 

• Fannie Mae budgets sufficient resources to complete all 

planned internal audit activities, and to conduct 

significant additional, unanticipated audit activities. 

(Examiners verify and evaluate.) 

37
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.3.

BOARD GOVERNANCE – FANNIE MAE

Central to the safe and sound operation of any financial organization is an 

independent and effective board of directors. Fannie Mae’s directors are 

placed in positions of trust either by the shareholders or by the President of 

the United States. Responsibility for the prudential operations of the 

company rests squarely with the board of directors. The board should 

delegate the day-to-day conduct of business to the Enterprise’s officers and 

employees, but the board cannot delegate its responsibility for the 

consequences of unsound or imprudent policies and practices. 

Recognizing the importance of an independent and effective board of 

directors, OFHEO reviews and evaluates the way and means by which the 

directors discharge their duties and responsibilities. Examiners review and 

evaluate the processes employed by the board and its committees 

including: (a) the communication flows between senior management and 

the board, (b) the communications with the auditors or consultants engaged 

by the board, (c) the information and presentations that are provided to the 

board, (d) the planning and execution of board agendas, and (e) the 

documentation materials and follow-up process for open items. In 

evaluating the effectiveness of the board of directors, examiners consider a 

variety of governance features, including but not limited to: the process for 

director recruitment, training and selection; the independence exercised by 

the board and its committees; the process for selecting executive officers 

and the process and measures for how these officers are compensated and 

held accountable for performance; the process and tools used to supervise 

Fannie Mae’s affairs; the role and involvement of the board in adopting, 

monitoring and enforcing adherence to sound policies and objectives; the 

methods employed to identify and proctor ethical conduct; and the efforts to 

ensure the maintenance of a sound system of internal controls. 

The following table highlights selected observations covering OFHEO’s 

routine examination activities of Fannie Mae’s board governance. The 

information in this table augments the overall opinion on board governance 

that is expressed on pages 23 – 24. 

38 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.3. 

BOARD GOVERNANCE - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.3.a. Topic: Board governance is performed by a capable and knowledgeable group of Directors. 

• OFHEO evaluates the processes used to identify 

and nominate potential shareholder elected 

Directors. 

• OFHEO evaluates the Nominating and Corporate 

Governance Committee’s charter. 

• OFHEO evaluates the actions of the Nominating 

and Corporate Governance Committee and the 

support and rationale for its recommendations. 

• OFHEO assesses the experience, expertise and 

capabilities of the Board as a whole, of each of the 

Board committees, and of each Director. 

• The Nominating and Corporate Governance 

Committee is comprised solely of outside directors. 

(Examiners verify.) 

• The Nominating and Corporate Governance 

Committee appropriately considers the current make 

up of the Board, Fannie Mae’s current operations and 

its future plans when identifying potential nominees to 

the Board. (Examiners verify and evaluate.) 

• The Board and each of its committees are comprised 

of individuals with appropriate experience and 

expertise, including expertise in housing, finance, 

control, audit and board governance. (Examiners 

verify and evaluate.) 

3.3.b. Topic: Fannie Mae’s Board of Directors is appropriately informed of the company’s condition, 

activities and operations. 

• OFHEO evaluates the scope, quality and timeliness 

of materials provided to the Board and to its 

Committees. 

• OFHEO evaluates the agendas, information 

packages, presentations and minutes of the 

meetings of the Board and its committees. 

• OFHEO evaluates the Board’s opinion about the 

scope, quality and timeliness of materials provided 

to the Board and its Committees. 

• Comprehensive, yet meaningful and manageable 

materials about Fannie Mae’s condition, activities and 

operations are provided sufficiently in advance of all 

Board and Committee meetings. (Examiners verify 

and evaluate.) 

• Information provided to the Board and its committees 

comes from appropriate sources within the company, 

and from appropriate external sources. (Examiners 

verify.) 

• The Board and its committees are provided point-intime, trend and forecasted information. (Examiners 

verify, test and evaluate.) 

• The Board and its committees are provided both 

financial and non-financial information about Fannie 

Mae’s condition, activities, operations and controls. 

(Examiners verify and evaluate.) 

• Materials provided to the Board and its committees 

include information and metrics related to risks and 

risk management within particular business units 

and/or processes as well as to risks and risk 

management across the company. (Examiners verify, 

test and evaluate.) 

• The Board is appropriately informed about progress 

against annual and multi-year plans. (Examiners 

verify and test.) 

• OFHEO’s Chief Examiner communicates regularly 

with the Board and meets with the Directors. 

39
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.3. 

BOARD GOVERNANCE - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.3.c. Topic: Fannie Mae’s Board of Directors is appropriately informed about compliance with the 

company’s Code of Business Conduct. 

• OFHEO evaluates the Code of Business Conduct 

and compares it to best practices. 

• OFHEO evaluates the processes surrounding the 

administration of the Code of Business Conduct, 

including the type, frequency and effectiveness of 

communications about the Code of Business 

Conduct and its provisions. 

• OFHEO evaluates the reporting processes related 

to the Code of Business Conduct . 

• OFHEO evaluates the number and nature of 

violations of the Code of Business Conduct. 

• OFHEO evaluates the quality and timeliness of 

information provided to the Board about 

compliance with the Code of Business Conduct. 

• Fannie Mae has a comprehensive and rigorous Code 

of Business Conduct that embodies best practices 

and includes strong and comprehensive restrictions 

on actual and potential conflicts of interest. 

(Examiners verify, test and evaluate.) 

• The Code of Business Conduct is supported by 

effective administrative processes that reinforce the 

specific provisions of the Code as well as its general 

intent. (Examiners verify and evaluate.) 

• Actual and potential conflicts of interest are reported 

accurately and in a timely manner. (Examiners verify 

and test.) 

• Appropriate restrictions are placed on individuals with 

actual or potential conflicts. (Examiners verify and 

test.) 

• Violations of the Code of Business Conduct are 

infrequent, but are dealt with quickly and seriously. 

(Examiners verify, test and evaluate management 

and Board actions.) 

• The Audit Committee regularly receives accurate 

reports about compliance with the Code of Business 

Conduct and about violations, including 

management’s response to violations. (Examiners 

verify and test.) 

• The Audit Committee appropriately reports to the full 

Board significant matters relating to: the Code of 

Business Conduct and its administration; compliance 

with the Code of Business Conduct; and violations of 

the Code of Business Conduct. (Examiners verify and 

test.) 

40
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.3. 

BOARD GOVERNANCE - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.3.d. Topic: Fannie Mae’s Board of Directors and the Board committees are independent and empowered 

to operate independently from management. 

• OFHEO evaluates the nature and extent of the 

relationship(s) each Director has with Fannie Mae. 

• OFHEO evaluates the nature and extent of the 

relationship(s) each Director on every committee 

has with Fannie Mae. 

• OFHEO evaluates the charter for each Board 

committee. 

• OFHEO evaluates the process available to the 

Board and its committees to independently marshal 

monies and contract resources to assist them in 

fulfilling their duties and responsibilities. 

• Three of the 18 Directors are Fannie Mae employees. 

(Examiners verify.) 

• Three of the 15 outside Directors are or have been 

associated with companies or institutions that have 

business dealings with Fannie Mae. (Examiners 

verify and evaluate.) 

• The full Board meets regularly in executive session 

(without management present), as do the Audit, 

Compensation, and Nominating and Corporate 

Governance committees. (Examiners verify.) 

• All members of the Compensation, Audit, and the 

Nominating and Corporate Governance committees 

are outside directors, and all meet the definition of 

independence of the Blue Ribbon 

Commission/NYSE. (Examiners verify.) 

• Agendas for meetings of the Board of Directors and 

its committees are under the direction of the Directors 

and committee chairs. (Examiners verify.) 

• Board committees have the authority to undertake 

investigations and engage independent resources 

they deem necessary. (Examiners verify.) 

3.3.e. Topic: Fannie Mae’s Board of Directors and its committees have formal processes, independent of 

management, to hire, compensate and replace the executive management team. 

• OFHEO evaluates the composition of the Board’s 

Compensation Committee. 

• OFHEO evaluates the charter for the Board’s 

Compensation Committee. 

• OFHEO evaluates the information provided to and 

considered by the Compensation Committee when 

it considers hiring executive management. 

• OFHEO evaluates the information provided to and 

considered by the Compensation Committee when 

it establishes compensation for the executive 

management team. 

• OFHEO reviews and approves the compensation 

packages for Fannie Mae’s executives. 

• OFHEO evaluates the process by which the 

Compensation Committee assesses the 

performance of each member of the executive 

management team. 

• OFHEO evaluates the quality of communications 

from the Compensation Committee to the full Board 

concerning the hiring, compensation and 

performance of executive management. 

• The Compensation Committee is comprised solely of 

outside directors, each of whom meets the Blue 

Ribbon Commission/NYSE standards for 

independence. (Examiners verify and evaluate.) 

• The Compensation Committee has access to, and 

receives assistance from qualified independent 

compensation and executive placement experts. 

(Examiners verify.) 

• The Compensation Committee evaluates the 

knowledge, skills and abilities of existing 

management, as well as the direction the Board 

envisions for the company when considering 

individuals for executive management positions. 

(Examiners verify and review.) 

• The Compensation Committees employs appropriate, 

formal metrics and measures when evaluating the 

performance of the executive management team. 

(Examiners verify.) 

• The recommendations from the Compensation 

Committee to the Board are well supported and 

timely. (Examiners verify, test and review.) 

• The Board in executive session makes final decisions 

about executive management’s performance-based 

compensation. (Examiners verify.) 

41
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.3. 

BOARD GOVERNANCE - FANNIE MAE 

WHAT OFHEO DOES OBSERVATIONS ON FANNIE MAE 

3.3.f. Topic: Fannie Mae has a comprehensive, formal orientation program for new directors and a process 

for any director to obtain more information or knowledge about any topic. 

• OFHEO evaluates the orientation process and 

materials for new directors. 

• OFHEO evaluates the opportunities Fannie Mae 

provides its directors to enhance their knowledge 

about matters related to their duties and 

responsibilities as directors. 

• Orientation for new directors is comprehensive and 

includes information about directors’ roles and 

responsibilities – including their ethical and legal 

responsibilities – as well as information about Fannie 

Mae’s activities, condition and operating environment. 

(Examiners verify and evaluate.) 

• The materials provided during director orientation are 

comprehensive and current, and serve as a valuable 

reference tool. (Examiners verify and evaluate.) 

• The orientation programs for new directors are the 

same, whether the directors are shareholder-elected 

or Presidential appointees. (Examiners test and 

verify.) 

• ‘Continuing education’ opportunities are provided for 

all directors. Board members have easy access to 

additional information and/or Fannie Mae personnel 

about any aspect of Fannie Mae’s operations or any 

aspect of board governance. (Examiners verify.) 

42
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Freddie Mac Examination Results and Conclusions 

Freddie Mac’s credit risk management and credit risk management framework exceed safety 

and soundness standards, and they have resulted in a high-quality portfolio and manageable 

credit exposure. The portfolio is diversified and the credit risk profile is in compliance with the 

internally prescribed limits that examiners have deemed to be appropriate. Policies, procedures, 

internal controls and management reporting for the credit function are effective. Freddie Mac is 

adequately compensated for the credit risk it assumes and its credit risk models produce reliable 

results. Management prudently manages counterparty exposure. New products and initiatives 

are well researched prior to implementation. The process for determining the reserve for credit 

losses, the credit risk sharing strategies, and the credit risk management tools all are effective. 

Freddie Mac effectively identifies, quantifies and tracks its credit risk exposures. Management 

has an effective means for following up on credit-related issues. The technology and controls 

supporting the credit risk management function are effective. Management effectively 

reconciles differences between actual and expected credit portfolio performance. 

Freddie Mac’s interest rate risk management exceeds safety and soundness standards. The 

policies, procedures, internal controls and management reporting relating to interest rate risk 

are appropriate and effective. Management has a meaningful methodology for quantifying and 

monitoring the level and nature of interest rate risk. Freddie Mac’s management effectively 

follows up on issues related to interest rate risk. Freddie Mac appropriately researches and 

controls the extent to which new products and initiatives may impact the interest rate risk 

profile. The technology and controls supporting the interest rate risk management function are 

effective. The tools used to model interest rate risk and the strategies to alter the exposures to 

interest rates are prudent and effective. Management effectively incorporates tactical and 

strategic issues into the management of interest rate risk. The responsibilities for the strategy 

and the analytics functions are appropriately separated from those for the execution functions. 

Derivative instruments are used prudently for hedging risks and in accordance with the 

standards used by other large financial intermediaries. (Box 3.4.) 

Freddie Mac’s liquidity management framework exceeds safety and soundness standards. The 

policies, procedures, internal controls and management reporting relating to liquidity 

management are deemed to be appropriate and effective. Management has an effective 

methodology for quantifying and monitoring liquidity, and management appropriately evaluates 

the impact of various events and alternative environments when developing and updating 

contingency plans. The planning process for liquidity management is effective. Freddie Mac 

appropriately considers the impact new products and initiatives may have on liquidity. 

Management effectively follows up on issues and initiatives that influence liquidity. Technology 

and controls for liquidity management are prudent and effective. The quality of tools Freddie 

Mac uses to manage and monitor liquidity, and the quality of tools used to perform scenario 

analyses are comprehensive and effective. An appropriate separation of duties exists between 

the strategy and analytics functions and the execution function. Freddie Mac effectively 

analyzes and is well positioned to respond to trends and anomalies in market and funding 

spreads. Liquidity management is appropriately integrated with other management and with 

financial performance issues. 

43 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

The information technology infrastructure and surrounding risk management framework exceed 

safety and soundness standards. Operating processes are in place to ensure secure, effective and 

efficient data center processing and problem management. There are effective policies and 

processes in place to ensure that data, information and computing resources are secure and 

accessed only by authorized users and that the conduct of E-commerce is secure. There are 

effective policies and processes in place to ensure the timely and appropriate resumption of 

business in the event of a disaster and these are routinely tested and enhanced. Management has 

processes in place to ensure information technology plans effectively address business unit and 

corporate objectives. Effective processes are in place to ensure appropriate controls are 

implemented and maintained. Documentation for system development and maintenance is 

complete. The controls over end-user computing are effective and there are controls that secure 

networks and firewalls from inappropriate or unauthorized actions with an appropriate level of 

testing conducted on these controls. Freddie Mac has processes in place to ensure data and 

information are processed accurately and in a timely manner. 

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

soundness standards. Management has an accurate and reliable process for identifying risks to 

business processes and implementing appropriate controls. Implemented controls properly 

address risks assessed by management. Management has a reliable process for ensuring the 

timely resolution of control related issues. Internal Audit appropriately identifies and 

communicates control deficiencies to management and the Board of Directors. There are 

established policies and procedures that delineate internal control process and standards 

resulting in a sound control environment. Management routinely tests and ensures compliance 

with established internal controls. 

Business process controls exceed safety and soundness standards. Freddie Mac’s corporate 

environment fosters the introduction of new ideas and values intellectual capital. The process 

and control environment used when considering or developing new or substantially revised 

business initiatives is effective. The criteria Freddie Mac uses to subject a business initiative to 

review as new or substantially revised are comprehensive and appropriate. The analysis and 

review of new or substantially revised business initiatives are effective. Pilot programs are 

effectively used and the analysis and review conducted after the launch of a new or substantially 

revised business initiative is thorough and appropriate. The communications associated with 

new or substantially revised business initiatives are effective. Freddie Mac appropriately 

balances risk management, internal controls and the pressure to deliver new or substantially 

revised business initiatives. 

The audit functions exceed safety and soundness standards. (Box 3.5.) The Internal and 

External Audit functions have the appropriate independence. Auditors performing the work 

possess appropriate professional proficiency. The scope of Internal and External Audit work 

performed is appropriate and comprehensive, and the audit work is documented and complete. 

The management of the Internal Audit department is effective. Executive management and the 

Board of Directors are appropriately involved with and follow up on identified audit issues. The 

auditor’s risk assessment process is effective. Internal Audit is appropriately involved in new 

products and new initiatives. 

44 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

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

soundness standards. (Box 3.6.) In discharging its duties and responsibilities, the Board of 

Directors operates with the appropriate independence. The Board is appropriately engaged in 

the development of a strategic direction for the company and ensures that management 

appropriately defines the operating parameters and risk tolerances of the Enterprise in a manner 

consistent with the strategic direction; legal standards; and ethical standards. The Board has an 

effective process for hiring and maintaining a quality executive management team, and has 

processes in placed designed to hold the executive management team accountable for achieving 

the defined goals and objectives. The Board is appropriately informed of the condition, activities 

and operations of the Enterprise, and has sufficient, well-organized time to carry out its 

responsibilities. 

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

soundness standards. Management and the Board of Directors receive complete and 

comprehensive reports on Freddie Mac’s performance relative to established goals and 

objectives. Management reporting provides the levels of management with the necessary 

information to carry out their responsibilities efficiently and effectively. Management reporting 

permits management to evaluate and gauge the quality of their decisions. Information systems 

are linked to Freddie Mac’s overall strategy, and are developed and refined consistent with the 

strategic direction and plan. The reports management uses for decision making are accurate. 

There are communications across the company and management communicates Enterprise 

strategy, roles and responsibility. Employees have effective channels of communication to 

provide feedback, report suspected improprieties and suggest enhancements. 

Key management processes that influence corporate-wide behaviors exceed safety and 

soundness standards. The strategic planning process is comprehensive and dynamic. Business 

unit goals are effective and implementation efforts reflect changing priorities. Management has 

the ability to monitor and manage change. Key performance measures are appropriate, effective 

and align with strategy. The behavior management programs are effectively designed to achieve 

corporate goals and objectives. Freddie Mac has programs for career and management 

development, and for identifying and recruiting competent people. Freddie Mac’s proprietary 

risk management programs and systems are effective. Management effectively conveys an 

appropriate message of integrity and ethical values. Management’s philosophy and operating 

style have a pervasive effect on the company. The organizational structure and the assignment 

of responsibility provide for accountability and sound controls. 

45 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.4.

DERIVATIVES – FREDDIE MAC

Freddie Mac is an end-user of derivatives to manage its business more effectively 

and mitigate financial risks. Its goals for using derivatives are: to lower debt costs 

associated with the purchase of mortgage assets; to reduce market risks 

associated with the issuance of debt; and to effectively match the Enterprise’s 

funding composition with changes occurring in the interest-rate characteristics of its 

mortgage assets that results from changes occurring in the overall interest rate 

environment. In pursuing these goals, Freddie Mac enters into derivative contracts 

that are common in the financial markets and widely used for risk management 

activities – both OTC derivatives and exchange-traded options. Management does 

not speculate with derivatives. Derivative activities are transacted in accordance 

with approved policies and procedures and closely supervised and scrutinized by 

senior management and the Board of Directors. 

Derivatives are important instruments for Freddie Mac’s management of its 

business and risk exposures. The volume of derivatives increased from $474.5 

billion notional amount on December 31, 2000 to $1,052.4 billion notional amount 

on December 31, 2001. Notional principal amount is a commonly used measure 

for the volume of derivatives, but it does not accurately reflect the market and 

credit risk associated with derivatives. A better measure for the exposure to risk in 

derivatives is the “replacement cost” for the economic value of contracts. 

Replacement cost for derivatives positions will regularly fluctuate along with 

changes in the market. On December 31, 2001, Freddie Mac had a replacement 

cost of $69 million for its $1,052.4 billion notional principal amount in derivatives. 

OFHEO carefully scrutinizes Freddie Mac’s use of derivatives. Derivative 

exposures are incorporated into regulatory capital requirements, both minimum 

and risk-based, and OFHEO conducts on-site examinations that include a review 

of derivatives activity. Examiners verify and evaluate a variety of risk management 

strategies and practices during on-site examinations, which includes: (a) testing 

transactions and controls; (b) evaluating strategies and their implementation; (c) 

evaluating the quality of tools used to identify, measure, and monitor risk – 

including the tools and methodology for valuing derivatives and the off-setting cash 

positions; (d) testing for the level of compliance with limit structures and for the 

quality of analyses that forms and defines the limit structure; (e) testing the integrity 

of the audit program and the accuracy of financial records; (f) evaluating the quality 

of technology that supports the business and the integrity of the security framework 

for that technology; (g) evaluating the quality of personnel, management, and 

board oversight; (h) evaluating the quality of policies and procedures and testing 

for adherence to these policies and procedures; (i) critiquing the quality of 

counterparty credit risk analysis and maintenance of the ongoing analysis; (j) 

proctoring the implementation of FAS 133 and ongoing compliance; (k) making 

recommendations that can strengthen systems, processes and practices; and (l) 

requiring remedial actions to address weaknesses, where appropriate. 

The following table highlights selected observations from OFHEO’s testing and 

verification work that is regularly conducted on Freddie Mac’s derivative activities. 

The information in this table augments the overall opinions on derivatives that are 

expressed on page 43. 

46 
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.a. Topic: Derivatives activities are governed by sound policies, procedures and effective internal 

controls and consistent with the prescribed purpose. 

• OFHEO evaluates the appropriateness of 

policies, procedures, internal controls, and 

reports. 

• OFHEO evaluates the process for establishing 

limits, the appropriateness of limit structures, and 

the appropriateness of prescribed practices. 

• OFHEO evaluates the level of directorate and 

management oversight and reporting. 

• OFHEO’s evaluations reflect, among other things, 

the perspective gained from years of examination 

and market experience, comparisons with 

practices at other large financial intermediaries 

and end-users, and emerging best practices. 

• Management operates with policies and procedures 

that cover the use of derivatives. (Examiners verify 

and evaluate.) 

• Responsibility and accountability, including 

independent risk oversight, are clearly 

communicated. (Examiners verify and evaluate.) 

• The integrity of data used for models, reporting and 

decision-making are safeguarded with appropriate 

controls. (Examiners test, verify, and evaluate.) 

• Models are independently validated, subject to 

formal change management, and controlled to 

preclude unauthorized & untested changes to the 

models. (Examiners verify and evaluate.) 

• Contingency plans and business continuity plans 

provide for disaster recovery and enable continued 

monitoring of risk positions in the event of business 

interruption. (Examiners verify and evaluate.) 

• The Enterprise documents, analyzes and monitors 

risk positions and risk limit compliance through 

effective technology, tracking systems, and reliable 

records. (Examiners verify and evaluate.) 

• Comprehensive derivative reporting is tailored 

appropriately to meet the respective audience’s 

needs. (Examiners test, verify, and evaluate.) 

• Management systems and reporting for derivatives 

are comprehensive and capture the risks and other 

important attributes for consideration. (Examiners 

test, verify, and evaluate.) 

• Compliance with policies, procedures, limits, 

strategies and internal controls for derivatives 

activities and transactions are policed through 

effective compliance programs and audit coverage. 

(Examiners verify and evaluate.) 

• Appropriate separation of duties exists among 

derivatives personnel. Derivatives activities and 

compliance with policies and limits are monitored by 

a qualified and independent risk oversight function. 

(Examiners test and verify.) 

• The enterprise has a framework for evaluating the 

impact of new initiatives. The framework requires 

detailed tracking, reporting and analysis of 

performance and/or unexpected outcomes. 

(Examiners verify and evaluate.) 

47
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.b. Topic: Risk management techniques are employed to effectively manage risk. 

• OFHEO evaluates the quality of the process and 

the results of credit analyses and limit setting for 

derivatives counterparty. 

• OFHEO evaluates the documents, philosophy, 

methods and practices employed in netting 

exposures for derivatives. 

• OFHEO evaluates the policy, practices, and 

approaches employed in managing collateral for 

derivatives. 

• Measurement and monitoring of credit risk and fair 

market value for derivatives is independent and 

separate from any influence of portfolio management 

activities. (Examiners verify and evaluate.) 

• Collateral is independently marked-to-market based 

on actual market prices and prudent modeling 

techniques & practices. (Examiners test, verify, and 

evaluate.) 

• Comprehensive credit analyses of derivatives 

counterparties are performed by credit specialists 

who are separate from portfolio operations. Credit 

limits and procedures are prescribed along with 

collateral requirements. (Examiners verify and 

evaluate.) 

• Counterparties are required to meet credit ratings that 

exceed minimum investment grade as determined by 

leading outside credit rating agencies and 

management has procedures to ensure the 

creditworthiness of its counterparties in the event 

there is a material adverse change. (Examiners test 

and verify.) 

• Prudent credit limits, procedures, and collateral 

requirements are clearly delineated, and consistently 

implemented. (Examiners test, verify, and evaluate) 

• An independent risk management function monitors 

and tracks the credit exposure for derivatives 

counterparties, including collateral positions. 

(Examiners verify and evaluate.) 

• Derivatives activities are conducted with an 

appropriately diverse set of derivatives 

counterparties. The credit quality of these 

counterparties is routinely monitored with corrective 

measures employed when needed or warranted. 

(Examiners test, verify, and evaluate) 

• Collateral posting requirements are clearly delineated, 

and consistently implemented. (Examiners verify and 

evaluate.) 

• Derivative transactions are governed by master 

agreements. (Examiners verify and evaluate.) 

• Netting is employed to mitigate counterparty exposure 

levels. (Examiners verify and evaluate.) 

• Derivative positions are regularly revalued with net 

exposures effectively managed, including the 

requirement additional collateral when required under 

credit policies. (Examiners verify and evaluate.) 

• Counterparties are recognized, reputable, and 

creditworthy with substantial presence in the 

derivatives market. (Examiners verify and evaluate.) 

48
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.c. Topic: Derivatives activities are governed by and implemented through qualified and experienced 

professionals and subject to effective limits and reporting. 

• OFHEO evaluates the qualifications and 

expertise of individuals and groups charged with 

planning, implementing, and overseeing the use 

of derivatives. 

• OFHEO evaluates the appropriateness and 

effectiveness of limit structures and due diligence 

process. 

• Personnel with the requisite knowledge, 

qualifications, and experience are involved in 

executing, managing, and overseeing derivatives 

activities. (Examiners verify and evaluate.) 

• Appropriate separation of duties between 

transactors, operations, analytics, and risk 

governance personnel exists. (Examiners test and 

verify.) 

• There is a comprehensive and effective risk 

oversight framework staffed with qualified 

individuals representing the appropriate disciplines. 

(Examiners verify and evaluate.) 

• The enterprise has dedicated the appropriate 

human and financial resources that support the 

development and implementation of quality 

technology and tools that enable effective 

management of interest rate risk, hedging, and 

derivatives activities. (Examiners verify and 

evaluate.) 

• The risk management function is staffed with 

specialists. (Examiners verify and evaluate.) 

• Analyses are comprehensive, including evaluations 

performed under multiple & different scenarios. 

(Examiners verify and evaluate.) 

• Staff performing analysis, accounting and 

operations functions are qualified and experienced. 

• Effective and timely systems enable management 

to monitor compliance with limits and determine 

intra-day risk exposures and changes in risk and 

risk positions. (Examiners verify and evaluate.) 

• Risk limits are routinely evaluated and updated with 

timely reporting of compliance with those limits. 

(Examiners verify and evaluate.) 

• Individuals are precluded from taking risk positions 

that go undetected by management and the risk 

oversight function by effective risk management 

systems, practices, and controls. (Examiners verify 

and evaluate.) 

• The board of directors and senior management are 

appropriately involved in the process for 

establishing limits and monitoring performance 

against risk limits. (Examiners verify and evaluate.) 

• Derivatives activities are subject to regular and 

frequent coverage by the Internal Audit. 

(Examiners test, verify, and evaluate.) 

49
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.d. Topic: Derivatives strategies and positions are appropriate and well-documented. 

• OFHEO evaluates hedging strategies, derivatives 

transactions, risk exposures, and analysis of 

hedge effectiveness. 

• OFHEO evaluates the process and actions 

employed to rebalance the portfolio. 

• OFHEO evaluates the funding strategies and the 

use of derivatives to implement those funding 

strategies. 

• OFHEO evaluates the appropriateness of GAAP 

accounting for derivatives. 

• Derivative instruments are not used for speculative 

purposes. (Examiners verify and evaluate.) 

• Management continuously monitors interest rate 

risk, changes in that risk and the funding 

environment and takes prompt action to rebalance 

and remain within desired risk tolerances and risk 

limits. (Examiners verify and evaluate.) 

• Strategies are formal and regularly re-evaluated 

and refined or altered to effectively manage risk 

positions, including how derivatives are used. 

(Examiners verify and evaluate.) 

• A variety of market conditions, interest rate 

environments and scenarios are considered, 

analyzed and used to develop comprehensive 

contingency plans. (Examiners verify and 

evaluate.) 

• Hedge performance and hedge strategies are 

tracked and compared to expected performance. 

(Examiners verify and evaluate.) 

• ‘Stress-testing’ and ‘back-testing’ augments regular 

analyses with results considered in management’s 

plans and strategies. (Examiners verify and 

evaluate.) 

• All derivatives are included in risk and sensitivity 

analyses and cash management forecasts. 

(Examiners test and verify.) 

• The methodology employed in performing 

independent valuations of derivatives is sound and 

that methodology is surrounded with the appropriate 

controls. (Examiners test, verify, and evaluate.) 

• Derivatives are marked-to-market regularly. 

(Examiners test and verify). 

• FAS 133 implementation has been deliberate and 

well-documented. The appropriate investments 

were made, and continue to be made, to the 

infrastructure that ensures ongoing compliance with 

FAS 133. (Examiners test, verify, and evaluate.) 

50
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.e. Topic: The Enterprise is an end-user of derivatives. Derivatives instruments are used exclusively for 

risk management purposes and not for speculative purposes. 

• OFHEO evaluates the types, maturities, and 

amounts of derivative transactions. 

• OFHEO evaluates policies and procedures and 

patterns of derivatives transactions. 

• OFHEO evaluates management’s timing and 

rationale associated with use of certain derivative 

instruments and transactions. 

• OFHEO evaluated how derivatives are being used. 

• The derivatives being used are limited to those 

instruments that are common in the financial markets 

to conduct risk management activities. (Examiners 

verify and evaluate.) 

• The derivatives being used are not exotic 

instruments. (Examiners verify and evaluate.) 

• The use of derivatives is limited to end-use. 

(Examiners verify and evaluate.) 

• Corporate policies prohibit speculative positions in 

derivatives. (Examiners test and verify) 

• Derivatives are used in a manner consistent with the 

formally approved risk management policies and 

procedures. (Examiners verify and evaluate.) 

• Hedge records and accounting records reflect how 

derivatives are used. (Examiners test, verify, and 

evaluate.) 

• Automated systems, operating procedures, controls 

and management oversight safeguard against 

unauthorized derivatives transactions. (Examiners 

test and verify.) 

• Metrics, management reports, and follow-up analyses 

demonstrate and confirm the appropriateness of 

derivatives transactions when evaluated in context 

with the hedging strategies and the risk management 

objectives. (Examiners verify and evaluate.) 

• The specific types, the terms, and the volume of 

derivative transactions are consistent with the 

approved hedging strategies and comport with the 

nature and level of risk being managed – and are 

consistent with the prevailing conditions and liquidity 

in the marketplace. (Examiners verify and evaluate.) 

51
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.4. 

DERIVATIVES – FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ABOUT FREDDIE MAC 

3.4.f. Topic: A meaningful methodology is employed to quantify and monitor the risks associated with 

derivatives. 

• OFHEO evaluates the quality and appropriateness 

of valuation methodologies for derivatives. 

• OFHEO evaluates the quality of analyses and tools 

to gauge the future value of derivatives instruments 

and positions under alternate scenarios. 

• Systems for data capture, processing, settlement and 

management reporting are prudent and provide 

accurate and reliable information. (Examiners verify 

and evaluate.) 

• Independent validation of model assumptions and 

parameters is performed with these assumptions and 

parameters continuously reviewed for 

reasonableness and regularly revalidated. 

• Changes to model assumptions are thoroughly 

reviewed, monitored for reasonableness, and 

revalidated. (Examiners test, verify, and evaluate.) 

• Management has effective processes and controls to 

detect and report changes to the model assumptions 

or operations. Changes to the model’s assumptions 

or operations are documented and tracked. 

(Examiners verify and evaluate.) 

• Actual market prices are used to validate model 

pricing where appropriate. (Examiners verify and 

evaluate.) 

• Robust tools are employed for pricing and evaluating 

the effect of changes to interest rates or changes in 

the shape of the yield curve that cover all categories 

of the balance sheet, including derivatives. 

(Examiners verify and evaluate.) 

• Robust prepayment models consider a wide variety of 

factors that can affect prepayment speeds. 

Performance of prepayment models is regularly 

evaluated and tracked. (Examiners test, verify, and 

evaluate.) 

52
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.5.

AUDIT PROGRAM – FREDDIE MAC

Central to an effective internal control system and the safe and sound operation of 

any financial organization is an independent and professional audit program. 

When properly structured and conducted, an audit program provides the directors 

and senior management with important information about weaknesses in the 

system of internal controls. An effective audit program positions a company’s 

board of directors and senior officers to take prompt, remedial action when 

necessary, and enables a company’s board of directors and senior officers to meet 

their responsibilities to ensure that the system of controls operates effectively 

resulting in: (a) assets being safeguarded, (b) financial reports being reliable, and 

(c) compliance with laws, regulations, policies and procedures. 

OFHEO, like the banking regulators, reviews and evaluates Freddie Mac’s audit 

program and when necessary, makes recommendations for needed 

improvements. In evaluating the audit program, examiners test the work 

conducted by the internal auditors and the external auditors and evaluate: (a) the 

level of independence, (b) the appropriateness of the scope, (c) the quality of the 

work and its documentation, (d) the quality of communications associated with the 

results, and (e) the quality of board and senior management action and follow-up. 

The following table highlights selected observations from OFHEO’s testing and 

verification work that is regularly conducted on Freddie Mac’s internal and external 

audit programs. The information in this table augments the overall opinions on the 

audit programs that are expressed on page 44. 

53 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.5. 

AUDIT PROGRAM - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.5.a. Topic: Audit activities are directed and governed by the Board of Directors and supervised on an 

ongoing basis by a qualified Board Audit Committee. 

• OFHEO evaluates the level of expertise in the Board 

and on each of the Board Committees. 

• OFHEO evaluates the agendas, information 

packages, presentations and minutes of the Board 

and its Committees, including the Audit Committee. 

• OFHEO’s evaluations reflect, among other things, the 

perspective gained from years of examination 

experience, comparisons with practices at other large 

financial intermediaries, best practices identified by 

groups such as the National Association of Corporate 

Directors (NACD), Blue Ribbon Commission, the New 

York Stock Exchange (NYSE), and the Business 

Roundtable. 

• Audit Committee adopted and Board approved a 

comprehensive charter for the Audit Committee. 

(Examiners verify the process and evaluate the 

content of the charter.) 

• Audit Committee charter is reviewed at least annually 

and ratified/revised as warranted. (Examiners verify 

the process and evaluate the quality and 

appropriateness of revisions.) 

• Each Audit Committee member is an outside director. 

(Examiners verify.) 

• Audit Committee members meet the Blue Ribbon 

Commission/NYSE standards for financial literacy, 

expertise and independence. (Examiners verify.) 

• Audit Committee appropriately reports its views to the 

entire Board, and keeps the entire Board informed of 

significant matters raised or considered by the 

Committee. (Examiners test and verify.) 

• Materials provided to the Audit Committee in advance 

of its meetings permit the members to conduct the 

oversight prescribed by the Audit Committee charter 

and identified by the Blue Ribbon Commission as 

best practice. (Examiners test, verify and evaluate the 

quality of materials.) 

• Audit Committee approves the annual audit plan for 

both the internal and external audit activities. 

(Examiners test and verify the process and evaluate 

the plan.) 

• Audit Committee is kept informed about the progress 

of the audit activities against the approved audit plan. 

(Examiners test and verify the process and evaluate 

the follow-up. 

• Results of all internal audit activities are provided to 

the Audit Committee on a timely basis, and the level 

of detail provided to the Audit Committee about 

specific internal audit activities appropriately reflects 

the findings and impact on the corporate risk profile. 

(Examiners test and verify.) 

• Audit Committee meets regularly in executive session 

with the Senior Vice President – General Auditor. 

(Examiners verify.) 

• Results and observations of external audit activities 

are routinely shared with the Audit Committee. 

(Examiners test and verify the process and evaluate 

the materials provided to the Audit Committee.) 

• Audit Committee meets regularly in executive session 

with the External Auditor. (Examiners verify.) 

54
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.5. 

AUDIT PROGRAM - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.5.b. Topic: The Board and Audit Committee are regularly apprised of OFHEO’s view of the quality of the 

internal and external audit programs, and the quality and effectiveness of management’s follow-up on issues 

identified through the audit process. 

• OFHEO regularly communicates with the Board of 

Directors to share its results, conclusions, 

recommendations and follow-up for all areas of the 

examination. 

• OFHEO’s communications specifically address the 

quality of both the internal and external audit 

functions, and the level of reliance OFHEO believes 

is appropriate for the Board and Audit Committee to 

place on those functions. 

• OFHEO’s communications are directed to both the 

Audit Committee comprised entirely of outside 

directors, and to all members of the Board. 

• OFHEO conducts meetings with outside Directors. 

• OFHEO’s regular communications about examination 

activities, including those related to internal and 

external audit functions, are provided to each Board 

member and are included in the Board packages and 

official Board records. (Examiners verify.) 

• Freddie Mac management shares specific 

examination observations directed to management 

with the Board, including observations related to 

internal and external audit functions. (Examiners test 

and verify.) 

• The Board and Audit Committee discuss and 

consider OFHEO’s communications about 

examination activities. (Examiners verify.) 

• The Audit Committee, comprised solely of outside 

directors, meets with OFHEO’s Chief Examiner. 

55
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.5. 

AUDIT PROGRAM - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.5.c. Topic: The nationally recognized CPA firm that certifies Freddie Mac’s financial statements adheres to 

prescribed auditing standards, including those that relate to the scope of audit activities required to be 

conducted before the CPA firm can opine on the financial statements. 

• OFHEO evaluates the external auditor’s annual audit 

plan against best practices, AICPA standards, and 

other relevant standards, including those established 

by regulators for Federally insured financial 

institutions. 

• OFHEO evaluates the qualifications, experience and 

expertise of the individuals assigned to conduct the 

external audit. 

• OFHEO tests the results and conclusions of the 

external auditor’s work against the annual audit plan, 

and against professional standards. 

• OFHEO evaluates the quality of the products 

produced by the external auditor, and tests the 

sufficiency of work and workpapers that support the 

external auditor’s conclusions. 

NOTE: The following comments relate to the external 

audit activities conducted through the conclusion of 

the 2001 audit. 

• The external auditor’s audit plan includes all activities 

and operations necessary to opine on Freddie Mac’s 

financial statements and the quality of the company’s 

controls. (Examiners verify and evaluate.) 

• The external auditor’s audit plan appropriately reflects 

the complexity of Freddie Mac’s corporate structure, 

operations and the volume of transactions. 

(Examiners test, verify and evaluate.) 

• The engagement team possesses significant auditing 

experience of large complex financial intermediaries 

and technology dependent companies. (Examiners 

verify.) 

• Individual assignments of external audit activities 

appropriately take into consideration each auditor’s 

qualifications, experience and expertise. Auditors 

with specialized expertise are appropriately assigned 

to specific audit activities. (Examiners verify.) 

• The communications from the external auditor to the 

Audit Committee are comprehensive, clear, direct 

and effective. (Examiners test, verify and evaluate.) 

• The communications from the external auditor to the 

Audit Committee address all matters required by 

among others, the AICPA, the SEC and recognized 

best practices. (Examiners test, verify and evaluate.) 

• The communications from the external auditor to the 

Audit Committee tie directly to the approved audit 

plan. (Examiners test and verify.) 

• The external auditor’s individual and overall 

conclusions are supported by workpapers that 

comport with established standards and among other 

things, demonstrate the extent of testing and 

verification performed by the external auditor. 

(Examiners test and evaluate.) 

56
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.5. 

AUDIT PROGRAM - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.5.d. Topic: The external audit firm is independent. 

• OFHEO verifies and tests the practice of hiring 

individuals from the external auditor into positions of 

influence at Freddie Mac. 

• OFHEO evaluates the nature and extent of non-audit 

services provided by the external audit firm. 

• OFHEO verifies the composition of the teams that 

perform each of the non-audit services. 

• OFHEO evaluates the quality of audit services 

provided by the external auditor, including the 

communications from the external auditor to the 

Board and its Audit Committee about its findings and 

observations. 

NOTE: The following comments relate to the external 

audit firm that conducted audits through 2001. 

• External Auditor does not perform internal audit 

functions. (Examiners verify.) 

• External Auditor discloses any relationships that 

might bear on independence. (Examiners verify.) 

• Independence is a factor in the decision to appoint 

the External Auditor. (Examiners verify and test.) 

• Engagement of External Auditor is negotiated at arms 

length. (Examiners verify.) 

• External Auditor’s engagement partner changes 

consistent with SEC requirements. (Examiners 

verify.) 

• External auditor meets regularly in executive session 

with Audit Committee. (Examiners verify.) 

• Examiners tested a three year period (1999 – 2001) 

and during that period no one from the External 

Auditor was hired at or above the Vice President 

level. (Examiners verify and test.) 

� An employee of Freddie Mac’s previous 

external auditor was hired in April 2002 

as SVP Control and Accounting. 

• External Auditor tests management reports and 

information to evaluate their reliability. (Examiners 

test, verify and evaluate.) 

• External Auditor maintains complete supporting 

workpapers for 7 audit cycles. (Examiners test.) 

• Nature and extent of non-audit services provided by 

External Auditor consistent with statements of SEC 

Chairman Pitt and emerging best practices guidance. 

(Examiners test, verify and evaluate.) 

• Audit Committee assesses and reviews the full range 

of services provided by the External Auditor, including 

the non-audit services its provides. (Examiners 

verify.) 

57
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.5. 

AUDIT PROGRAM - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.5.e. Topic: The qualified Freddie Mac professionals who perform the internal audit function report, through 

the head of Internal Audit, to the Board’s Audit Committee. 

• OFHEO evaluates the structure and reporting 

relationship of the Internal Audit unit against, among 

others, the Institute of Internal Auditors (IIA) and 

other professional standards, best practices and 

guidance provided by regulators of Federally insured 

financial institutions. 

• OFHEO evaluates the qualifications, experience and 

expertise of the Internal Audit staff and management. 

• OFHEO evaluates the quality of the management of 

the Internal Audit function, including the 

appropriateness and effectiveness of the annual audit 

plan. 

• OFHEO evaluates the quality of the audit reports 

generated by the Internal Audit staff. 

• OFHEO evaluates the quality and sufficiency of the 

Internal Audit workpapers 

• Senior Vice President – General Auditor regularly 

meets in executive session with Audit Committee and 

separately with the Chair of Audit Committee prior to 

each Audit Committee meeting. (Examiners verify.) 

• Audit Committee oversees and evaluates the 

performance of the Senior Vice President – General 

Auditor. (Examiners verify and evaluate.) 

• Internal Audit Reports contain the weaknesses and 

control deficiencies identified in audit activities. 

(Examiners test and verify.) 

• Internal Audit informs senior management and the 

Board about the weaknesses and control deficiencies 

identified in audit activities. (Examiners test and 

verify.) 

• Management’s views about the Internal Audit findings 

are documented and shared with Audit Committee. 

(Examiners test, verify and evaluate.) 

• Internal Audit follows up on and tracks management’s 

actions to address control deficiencies and 

weaknesses, and routinely provides this information 

to the Audit Committee. (Examiners test, verify and 

evaluate.) 

• Internal audit practices adhere to IIA standards. 

(Examiners test and verify.) 

• Internal Audit’s risk assessment process covers all 

business units and processes. (Examiners verify and 

evaluate.) 

• Business units do not control or direct the timing or 

scope of audit work. (Examiners test and verify.) 

• Freddie Mac budgets sufficient resources to complete 

all planned internal audit activities, and to conduct 

significant additional, unanticipated audit activities. 

(Examiners verify and evaluate.) 

58
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

Box 3.6.

BOARD GOVERNANCE – FREDDIE MAC

Central to the safe and sound operation of any financial organization is an 

independent and effective board of directors. Freddie Mac’s directors are placed in 

positions of trust either by the shareholders or by the President of the United 

States. Responsibility for the prudential operations of the company rests squarely 

with the board of directors. The board should delegate the day-to-day conduct of 

business to the Enterprise’s officers and employees, but the board cannot delegate 

its responsibility for the consequences of unsound or imprudent policies and 

practices. 

Recognizing the importance of an independent and effective board of directors, 

OFHEO reviews and evaluates the way and means by which the directors 

discharge their duties and responsibilities. Examiners review and evaluate the 

processes employed by the board and its committees including: (a) the 

communication flows between senior management and the board, (b) the 

communications with the auditors or consultants engaged by the board, (c) the 

information and presentations that are provided to the board, (d) the planning and 

execution of board agendas, and (e) the documentation materials and follow-up 

process for open items. In evaluating the effectiveness of the board of directors, 

examiners consider a variety of governance features, including but not limited to: 

the process for director recruitment, training and selection; the independence 

exercised by the board and its committees; the process for selecting executive 

officers and the process and measures for how these officers are compensated 

and held accountable for performance; the process and tools used to supervise 

Freddie Mac’s affairs; the role and involvement of the board in adopting, monitoring 

and enforcing adherence to sound policies and objectives; the methods employed 

to identify and proctor ethical conduct; and the efforts to ensure the maintenance of 

a sound system of internal controls. 

The following table highlights selected observations covering OFHEO’s 

examination activities of Freddie Mac’s board governance. The information in this 

table augments the overall opinion on board governance that is expressed on page 

45. 

59 
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.6. 

BOARD GOVERNANCE - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.6.a. Topic: Board governance is performed by a capable and knowledgeable group of Directors. 

• OFHEO evaluates the processes used to identify and 

nominate potential shareholder elected Directors. 

• OFHEO evaluates the Human Resources Committee’s 

charter. 

• OFHEO evaluates the actions of the Human 

Resources Committee and the support and rationale 

for its recommendations. 

• OFHEO assesses the experience, expertise and 

capabilities of the Board as a whole, of each of the 

Board committees, and of each Director. 

• The Human Resources Committee (whose 

responsibilities include board nominations) is 

comprised solely of outside directors. (Examiners 

verify.) 

• The Human Resources Committee appropriately 

considers the current make up of the Board, Freddie 

Mac’s current operations and its future plans when 

identifying potential nominees to the Board. 

(Examiners verify and evaluate.) 

• The Board and each of its committees are 

comprised of individuals with appropriate experience 

and expertise, including expertise in housing, 

finance, control, audit and board governance. 

(Examiners verify and evaluate.) 

3.6.b. Topic: Freddie Mac’s Board of Directors is appropriately informed of the company’s condition, activities 

and operations. 

• OFHEO evaluates the scope, quality and timeliness of 

materials provided to the Board and to its Committees. 

• OFHEO evaluates the agendas, information packages, 

presentations and minutes of the meetings of the 

Board and its committees. 

• OFHEO evaluates the Board’s opinion about the 

scope, quality and timeliness of materials provided to 

the Board and its Committees. 

• Comprehensive yet manageable and meaningful 

materials about Freddie Mac’s condition, activities 

and operations are provided sufficiently in advance 

of all Board and Committee meetings. (Examiners 

verify and evaluate.) 

• Information provided to the Board and its 

committees comes from appropriate sources within 

the company, and from appropriate external 

sources. (Examiners verify.) 

• The Board and its committees are provided point-intime, trend and forecasted information. (Examiners 

verify, test and evaluate.) 

• The Board and its committees are provided both 

financial and non-financial information about Freddie 

Mac’s condition, activities, operations and controls. 

(Examiners verify and evaluate.) 

• Materials provided to the Board and its committees 

include information and metrics related to risks and 

risk management within particular business units 

and/or processes as well as to risks and risk 

management across the company. (Examiners 

verify, test and evaluate.) 

• The Board is appropriately informed about progress 

against annual and multi-year plans. (Examiners 

verify and test.) 

• OFHEO’s Chief Examiner communicates regularly 

with the Board and meets with Directors. 

60
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.6. 

BOARD GOVERNANCE - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.6.c. Topic: Freddie Mac’s Board of Directors is appropriately informed about compliance with the 

company’s Codes of Conduct. 

• OFHEO evaluates the Codes of Conduct and 

compares them to best practices. 

• OFHEO evaluates the processes surrounding the 

administration of the Codes of Conduct, including the 

type, frequency and effectiveness of communications 

about the Codes of Conduct and their provisions. 

• OFHEO evaluates the reporting processes related to 

the Codes of Conduct. 

• OFHEO evaluates the number and nature of violations 

of the Codes of Conduct. 

• OFHEO evaluates the quality and timeliness of 

information provided to the Board about compliance 

with the Codes of Conduct. 

• Freddie Mac has comprehensive and rigorous 

Codes of Conduct for its employees and for the 

Board that embody best practices and include 

strong and comprehensive restrictions on actual and 

potential conflicts of interest. (Examiners verify, test 

and evaluate.) 

• The Codes of Conduct are supported by effective 

administrative processes that reinforce the specific 

provisions of the Codes as well as their general 

intent. (Examiners verify and evaluate.) 

• Actual and potential conflicts of interest are reported 

accurately and in a timely manner. (Examiners verify 

and test.) 

• Appropriate restrictions are placed on individuals 

with actual or potential conflicts. (Examiners verify 

and test.) 

• Violations of the Codes of Conduct are infrequent, 

but are dealt with quickly and seriously. (Examiners 

verify and test, and evaluate management and 

Board actions.) 

• The Human Resources Committee regularly 

receives accurate reports about compliance with the 

Codes of Conduct and about violations, including 

management’s response to violations. (Examiners 

verify and test.) 

• The Human Resources Committee appropriately 

reports to the full Board significant matters relating 

to: the Codes of Conduct and their administration; 

compliance with the Codes of Conduct; and 

violations of the Codes. (Examiners verify and test.) 

61
CHAPTER THREE - OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.6. 

BOARD GOVERNANCE - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.6.d. Topic: Freddie Mac’s Board of Directors and the Board committees are independent and empowered to 

operate independently from management. 

• OFHEO evaluates the nature and extent of the 

relationship(s) each Director has with Freddie Mac. 

• OFHEO evaluates the nature and extent of the 

relationship(s) each Director on every committee has 

with Freddie Mac. 

• OFHEO evaluates the charter for each Board 

committee. 

• OFHEO evaluates the processes available to the 

Board and its committees to independently marshal 

monies and contract resources to assist them in 

fulfilling their duties and responsibilities. 

• Two of the 18 Directors are Freddie Mac employees. 

(Examiners verify.) 

� Note, for part of 2001 a third Freddie 

Mac employee filled the vacancy 

caused by the resignation of an 

outside director and served only until a 

new outside director was named. 

• Three of the 16 outside Directors are or have been 

associated with companies or institutions that have 

business dealings with Freddie Mac. (Examiners 

verify and evaluate.) 

• The full Board meets regularly in executive session, 

as do the Audit and Human Resources committees. 

(Examiners verify.) 

• All members of the Audit and Human Resources 

committees are outside directors and meet the Blue 

Ribbon Commission/NYSE requirements. 

(Examiners verify.) 

• Agendas for meetings of the Board of Directors and 

its committees are under the direction of the 

Directors and committee chairs. (Examiners verify.) 

• Board committees have the authority to undertake 

investigations and engage independent resources 

they deem necessary. (Examiners verify.) 

62
CHAPTER THREE – OFHEO’S EXAMINATION PROGRAM AND RESULTS 

BOX 3.6. 

BOARD GOVERNANCE - FREDDIE MAC 

WHAT OFHEO DOES OBSERVATIONS ON FREDDIE MAC 

3.6.e. Topic: Freddie Mac’s Board of Directors and its committees have formal processes, independent of 

management, to hire, compensate and replace the executive management team. 

• OFHEO evaluates the composition of the Board’s 

Human Resources Committee. 

• OFHEO evaluates the charter for the Board’s Human 

Resources Committee. 

• OFHEO evaluates the information provided to and 

considered by the Human Resources Committee when 

it considers hiring executive management. 

• OFHEO evaluates the information provided to and 

considered by the Human Resources Committee when 

it establishes compensation for the executive 

management team. 

• OFHEO reviews and approves the compensation 

packages for Freddie Mac’s executives. 

• OFHEO evaluates the process by which the Human 

Resources Committee assesses the performance of 

each member of the executive management team. 

• OFHEO evaluates the quality of communications from 

the Human Resources Committee to the full Board 

concerning the hiring, compensation and performance 

of executive management. 

• The Human Resources Committee is comprised 

solely of outside directors, each of whom meets the 

Blue Ribbon Commission/NYSE standards for 

independence. (Examiners verify and evaluate.) 

• The Human Resources Committee has access to, 

and receives assistance from qualified independent 

compensation and executive placement experts. 

(Examiners verify and review.) 

• The Human Resources Committee evaluates the 

knowledge, skills and abilities of existing 

management, as well as the direction the Board 

envisions for the company when considering 

individuals for executive management positions. 

(Examiners verify and review.) 

• The Human Resources Committees employs 

appropriate formal metrics and measures when 

evaluating the performance of the executive 

management team. (Examiners verify.) 

• The recommendations from the Human Resources 

Committee to the Board are well supported and 

timely. (Examiners verify, test and review.) 

• The Board in executive session (without 

management present) makes final decisions about 

executive management’s performance-based 

compensation. (Examiners verify.) 

3.6.f. Topic: Freddie Mac has a comprehensive, formal orientation program for new directors and a process 

for any director to obtain more information or knowledge about any topic. 

• OFHEO evaluates the orientation process and 

materials for new directors. 

• OFHEO evaluates the opportunities Freddie Mac 

provides its directors to enhance their knowledge 

about matters related to their duties and 

responsibilities as directors. 

• Orientation for new directors is comprehensive and 

includes information about directors’ roles and 

responsibilities – including their ethical and legal 

responsibilities – as well as information about 

Freddie Mac’s activities, condition and operating 

environment. (Examiners verify and evaluate.) 

• The materials provided during director orientation 

are comprehensive and current, and serve as a 

valuable reference tool. (Examiners verify and 

evaluate.) 

• The orientation programs for new directors are the 

same, whether the directors are shareholder-elected 

or Presidential appointees. (Examiners test and 

verify.) 

• ‘Continuing education’ opportunities are provided for 

all directors. Board members have easy access to 

additional information and/or Freddie Mac personnel 

about any aspect of Freddie Mac’s operations or any 

aspect of board governance. (Examiners verify.) 

63
CHAPTER FOUR – FINANCING OFHEO’S OPERATIONS 

CHAPTER FOUR – 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. 

The President’s Budget for Fiscal Year 2003 includes a proposal to remove OFHEO from the 

appropriations process. OFHEO Director Armando Falcon has continuously stated that the 

lengthy appropriations process may not allow OFHEO the flexibility necessary to address 

evolving, dynamic issues before those issues impact the financial safety and soundness of the 

Enterprises or funding for the housing market. The Administration is seeking the authority for 

OFHEO to operate like all other financial safety and soundness regulators, such as the Office of 

the Comptroller of the Currency and the Office of Thrift Supervision. OFHEO’s operations 

would remain subject to the oversight of Congress, but its budget would be free from the 

unpredictability of the annual appropriations process. 

For fiscal year 2001, OFHEO’s budgetary resources totaled $22,605,000. Budgetary resources 

represent $22 million appropriated to OFHEO for fiscal year 2001 plus recovery of $605,000 

prior year funds. The fiscal year 2001 operating budget supported the completion of a long 

awaited milestone by publishing the Final Risk-Based Capital regulation. The office continued 

to conduct comprehensive annual risk-based examinations of Fannie Mae and Freddie Mac, 

reviewed and classified the capital adequacy of each Enterprise quarterly, and performed other 

safety and soundness related regulatory activities. 

For fiscal year 2002, OFHEO received its full budget request of $27,000,000. OFHEO will use 

these resources to maintain existing staffing levels, continue current examination and oversight 

programs and upgrade OFHEO’s computing capacity which is critical to the efficient 

implementation of the risk-based capital regulation and to support needed research and analysis 

on the ever-changing risk profiles of the Enterprises. 

OFHEO’s fiscal year 2003 budget request totals $30,843,000. These resources will maintain 

existing oversight activities plus two initiatives. The first initiative is to strengthen OFHEO’s 

safety and soundness programs. This will be done by bolstering OFHEO’s capacity to oversee 

Enterprise risk management activities, by improving OFHEO’s capacity to analyze stress test 

outputs, and by improving OFHEO’s capacity to analyze developments in the mortgage and 

securities markets. In addition, OFHEO will expand its data warehouse and improve the 

efficiency of using these data to improve the productivity of regulatory staff. The second 

initiative is to strengthen OFHEO’s infrastructure. This will be done primarily by creating an 

integrated administrative and financial management system. 

64 
CHAPTER FOUR - FINANCING OFHEO’S OPERATIONS 

OFHEO CONTINUES TO RECEIVE UNQUALIFIED AUDIT OPINION IN 

FY 2001 

In conjunction with the government’s goal of improved accountability, OFHEO voluntarily 

prepared financial statements for fiscal year 2001 and subjected these statements and underlying 

processes to an independent audit. The certified public accounting firm of Dembo, Jones, Healy, 

Pennington and Marshall audited the statements. The firm issued an unqualified audit opinion 

on OFHEO’s fiscal year 2001 Financial Statements. The complete audit report follows. 

65 

Office of Federal Housing Enterprise Oversight 

Table of Contents 

Page

Management's Discussion and Analysis 1 

Independent Auditors' Opinion of the Financial Statements 10

Report of Independent Auditors on Internal Control 12

Report of Independent Auditors on Compliance with Laws and Regulations 14

Financial Statements 

Balance Sheets

Statements of Net Cost

Statements of Changes in Net Position

Statements of Budgetary Resources

Statements of Financing

Notes to Financial Statements

Required Supplementary Information

16 

17 

18 

19 

20 

21 

29 
 OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT 

FISCAL YEAR 2001 

MANAGEMENT‘S DISCUSSION AND ANALYSIS 

Mission Statement 

OFHEO promotes housing and a strong economy by ensuring the safety and soundness of Fannie 

Mae and Freddie Mac and fostering the strength and vitality of the nation‘s housing finance system. 

Overview 

The Office of Federal Housing Enterprise Oversight (OFHEO) was established by Title XIII of the 

Housing and Community Development Act of 1992, Public Law Number 102-550, known as the 

Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (1992 Act). OFHEO is an 

independent office within the Department of Housing and Urban Development (HUD) with 

responsibility for examining and regulating the Federal Home Loan Mortgage Corporation (Freddie 

Mac) and the Federal National Mortgage Association (Fannie Mae) (collectively, the Enterprises) and 

ensuring that they are adequately capitalized. 

A Director appointed by the President and confirmed by the Senate for a five-year term heads OFHEO. 

In October 1999, Armando Falcon, Jr. was sworn in as OFHEO‘s second Director. Under Director 

Falcon‘s leadership, during FY 2001, OFHEO continued to effectively regulate the Enterprises through 

an integrated program of ensuring that the Enterprises were adequately capitalized and operating in a 

safe and sound manner, promoting an efficient secondary mortgage market through an independent and 

balanced approach of oversight of the Enterprises and ensuring that the Enterprises comply with all laws 

under OFHEO‘s jurisdiction. 

To ensure that the Enterprises are adequately capitalized, OFHEO is required by law to develop a stress 

test to determine risk-based capital requirements. During FY 2001, Director Falcon devoted 

considerable resources to the critical task of completing the Risk-Based Capital Rule and readying the 

stress test for implementation. OFHEO issued a final Risk-Based Capital Rule in September 2001. 

OFHEO is required by law to conduct on-site comprehensive examinations at Fannie Mae and Freddie 

Mac to determine the overall safety and soundness of the two companies. The examinations are 

designed to identify the risks in the business activities of the Enterprises, and to determine if those risks 

are being prudently managed, controlled, and monitored. Director Falcon has maintained focus on 

OFHEO‘s examination and oversight function and plans to add resources in this area over a three-year 

period beginning in FY 2003. These additional resources are required to keep pace with the tremendous 

growth in the size and complexity of the Enterprises‘ operations. 

Since OFHEO began operations in 1993, the Enterprises have more than doubled in size and 

fundamentally shifted their business mix from guarantors of mortage-backed securities to asset 

managers. In response to more ambitious affordable housing goals and the shift in business strategy, 

the Enterprises have also expanded business products and structured programs to purchase high loan-tovalue mortgages to support the drive to higher rates of homeownership, to promote the expansion of 

reverse mortgages for elderly homeowners, and to develop the means to reach less credit worthy 

1
borrowers. To fund their expanded portfolios, the Enterprises issued innovative debt instruments, 

including instruments denominated in foreign currencies and a program of regular issuances that 

frequently serves as an alternative to U.S. Treasury securities. The Enterprises have also increased their 

use of derivative instruments from a notional amount of $72 billion at year-end 1993 to $1.6 trillion on 

September 30, 2001, representing a more than twenty-fold increase. Each of these initiatives represents 

a heightening of the sophistication and complexity embedded in the risk profiles of Fannie Mae and 

Freddie Mac. 

At the same time, dramatic advances in technology represent the foundation for the Enterprises new 

business initiatives. The Enterprises employ cutting edge risk management techniques, built on 

quantitative models, to manage the many alterations of their risk profiles. Automated underwriting and 

related technology innovations by Fannie Mae and Freddie Mac have revolutionized the mortgage 

finance process and have led to significant shifts in the structure of the mortgage finance industry. 

These technologies carry with them operational challenges that not only permit the Enterprises to 

leverage their resources but also heighten their operational risks. These developments and trends have 

challenged the resources of OFHEO in its oversight role. 

An increase in staffing is imperative to ensure that OFHEO has the capability to assess the 

consequences of further growth and innovation by Fannie Mae and Freddie Mac. OFHEO also must 

share a commitment to technology that will permit OFHEO to leverage the expertise and skills of its 

staff. Consequently, the Director‘s budget strategy includes the enhancement of OFHEO‘s computing 

capacity in FY 2002 followed by integration of commercial automated analytic tools into OFHEO‘s 

regulatory and oversight systems in FY 2003. The phased expansion in staffing is targeted to begin in 

FY 2003 with the addition of 24 positions. 

OFHEO IS GROWING BUT REMAINS FLEXIBLE AND EFFICIENT 

OFHEO is located at 1700 G Street NW in the District of Columbia. The Director and Deputy Director 

carry out OFHEO‘s mission through the coordinated efforts of eight offices. These offices are: (1) 

General Counsel, (2) Risk Analysis and Model Development, (3) Policy Analysis and Research, (4) 

Information Technology, (5) External Relations, (6) Examination and Oversight, (7) Finance and 

Administration, and (8) Strategic Planning and Management. 

Director 

Deputy Director 

Associate Director for 

External Relations 

General Counsel 

Associate Director for 

Risk Analysis & Model 

Development 

Associate Director for 

Examination and Oversight 

(Chief Examiner) 

Associate Director for 

Policy Analysis and 

Research 

(Chief Economist) 

Associate Director for 

Finance & Administration 

Associate Director for 

Information Technology 

(Chief Information 

Officer) 

Associate Director for 

Strategic Planning 

and Management 

January 17, 2001 

2
During FY 2001, OFHEO finalized the Risk-Based Capital Rule and strengthened examination and 

oversight by employing about 105 full time equivalent (FTE) workyears, up 21 percent from FY 2000. 

The nature of OFHEO‘s mission requires a highly skilled, motivated, and diverse workforce to provide 

institutional capacity in mission-critical areas at all times. The Director‘s long-term strategy would 

continue to increase staffing through FY 2006 and strengthen OFHEO‘s capacity to perform oversight 

of the evolving risk profiles of the Enterprises. 

0 

50 

100 

150 

63% Staffing Increases Planned from FY 2000 - 2003 

Actual FTE 87 105 

Planned FTE 118 142 

FY 2000 FY 2001 FY 2002 FY 2003 

OFHEO OPERATIONS ARE NOT FINANCED BY TAXES 

While OFHEO‘s budget is currently subject to the annual congressional appropriations process, it is not 

funded by tax dollars. Fannie Mae and Freddie Mac bear the full cost of OFHEO‘s operations through 

an annual assessment based on OFHEO‘s annual operating budget as appropriated. Each Enterprise 

pays a pro rata share of the annual assessment. The combined assets and off-balance sheet obligations 

of each Enterprise determine the pro rata shares. OFHEO receives the annual assessment in semi-annual 

payments each fiscal year. By statute these payments are due to OFHEO October 1, and April 1, of 

each fiscal year, excluding years when the Enterprises must also pay based on temporary funding 

resolutions. 

The President‘s FY 2003 budget contains an administrative provision that would provide direct funding 

to OFHEO eliminating the appropriations requirement. Without passage of this provision, OFHEO, 

unlike most other federal financial regulators, must submit a request for an annual operating budget to 

the Office of Management and Budget (OMB) and the Congress. This process diminishes the efficiency 

and effectiveness of OFHEO‘s programs by requiring the Office to predict in advance the resources that 

it may need to respond to external events that will not arise for over two years. OFHEO has no 

operating funds for a fiscal year until appropriation legislation is enacted by Congress and signed by the 

President. OFHEO‘s budget is bundled with the Department of Veterans Affairs (VA), HUD, and a 

variety of independent agencies such as the National Science Foundation. When the Congress and the 

Administration are unable to reach timely budget agreements, it results in OFHEO‘s not having an 

enacted budget until after the fiscal year has commenced. The appropriations process has forced 

OFHEO to trim operations until large, unrelated budget issues are resolved between the executive and 

legislative branches. 

Director Falcon has repeatedly voiced concern about the potential impacts of OFHEO‘s current funding 

strategy and has asked Congress to remove OFHEO from the appropriations process. He is concerned 

that the appropriations process constrains OFHEO‘s ability to respond appropriately to new 

3
unanticipated developments that could impair the financial safety and soundness of the Enterprises and 

prohibit the Enterprises from performing their important public missions. Removal from the 

appropriations process would put OFHEO on par with bank and thrift regulatory agencies and would 

allow the office to operate more efficiently and effectively while maintaining vigorous congressional 

oversight. 

KEY FINANCIAL INFORMATION 

OFHEO had $22.6 million available for obligation during FY 2001. Obligations represent monies 

awarded to specific contractors, payroll costs for FY 2001, and other expenses such as equipment 

purchases and employee travel costs for the fiscal year. All but $6,713 was obligated by the end of the 

year on September 30, 2001. As required by law, the $6,713 was credited against the FY 2002 annual 

assessment to be paid by the Enterprises. 

Of the $22.6 million obligated during FY 2001, over $14 million (64%) were obligated for purchases 

that directly support mission activities such as examination and oversight, capital adequacy, and 

financial research related to housing finance. This is up 2% over the funds obligated in FY 2000 for 

direct mission activities. The balance of funds were obligated for activities supporting the 

accomplishment of the mission such as rent, internal financial and administrative management, external 

relations to the Congress and the public, and non-mission legal support. 

Distribution of FY 2001 Re source s 

Across Programs 

Technology 

20% 

Capital 

16% 

Exam 

16% 

All Other 

36% 

Research

6% 

Legal 

6% 

As OFHEO matures and staffing levels expand to meet the demand of regulating the Enterprises, the net 

cost of OFHEO‘s operations is rising. Net cost represents assessment collections, from Fannie Mae and 

Freddie Mac, that have been expensed for salaries and operating expenses, including retirement benefits 

financed by the Office of Personnel Management, to support OFHEO during the fiscal year. The net 

cost of operations for FY 2001 was over $19.9 million, up about 28% from FY 2000. 

4
The nearly $4.4 million increase in net cost is associated with staffing, rent and contract services. Over 

61% of the increase is in salary and benefits largely attributable to hiring vacancies to support 

examination, capital, information technology (IT) and legal programs. The second largest category in 

the net cost increase is contract services at 33%. The components included in the contract services 

increase are direct, risk-based capital expenses, the redesign of space, improvements to the IT 

infrastructure, and miscellaneous support services. 

The small increase of net cost associated with rent resulted from advance payments of rent necessary to 

secure additional space for a growing staff required in the 1700 G Street location. In addition, OFHEO 

required more space to house its computer systems required to implement the risk-based capital stress 

test. 

61% of the $4.3 Million Increase in Net Cost is Staffing

Other 

-3% 

Rent 

9% 

Services 

33% 

Salary & Benefits 

61% 

FINANCIAL MANAGEMENT ACHIEVEMENTS AND IMPROVEMENTS 

Financial Statement Audit. OFHEO has received unqualified audit opinions for the last three years on 

it‘s financial statements, internal controls and compliance with laws and regulations. 

Federal Managers‘ Financial Integrity Act (FMFIA). In letters dated December 13, 2001, Director 

Falcon advised the President and the Congress that OFHEO was in compliance with FMFIA as of the 

end of FY 2001 (September 30, 2001). During FY 2001, OFHEO‘s managers continued to monitor 

internal controls and reported on the effectiveness of controls to the Director. No reportable material 

weaknesses were identified. 

FY 2000 

$15,585,647 

$4.3 Increase 

from FY 2000 

FY 2001 

Net Cost $19,886,191

$0 

$10,000,000 

$20,000,000 

Net Cost Increased 28% During FY 2001

5
Compliance with Prompt Payment Act. OFHEO maintains excellent compliance with the Prompt 

Payment Act and OMB circular A-125, which 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.“ This means that OFHEO must pay its bills within a narrow window œ not too 

early and not late. 

During FY 2001, OFHEO further reduced the amount it paid for interest penalties to a miniscule $445 in 

relation to a growing amount of disbursements, over $6.5 million, covered by the Prompt Payment Act. 

This reduction follows an outstanding performance in FY 2000 when OFHEO paid only $517 in interest 

penalties relating to nearly $5 million in disbursements. OFHEO accomplished this reduction in interest 

penalties by reducing the number of invoices paid late through enhanced tracking procedures for credit 

card statement payments. 

Federal Financial Management Information Act (FFMIA) of 1996 

The FFMIA codified in law certain financial management system requirements that were already in 

place by Executive Branch policies and added one new requirement. The Act established new 

requirements for auditors to report on agency compliance with system requirements and for agency 

heads and agency management to correct deficiencies within a reasonable time period. 

OFHEO contracts certain administrative and financial services from other government agencies. Since 

OFHEO is small, these cross servicing arrangements with larger agencies provide a cost-effective means 

for the use of systems, which are generally expensive to purchase and maintain. OFHEO maintains its 

financial accounting on a system owned by VA. The National Finance Center (NFC), operated by the 

Department of Agriculture, provides OFHEO with payroll systems and services. HUD provides 

personnel action processing services and systems and a human resources data interface with the NFC 

systems. 

FY 2001 MARKS KEY PERFORMANCE ACCOMPLISHMENTS FOR OFHEO 

OFHEO‘s FY 2001 Annual Performance Plan and its operations were designed to achieve the Office‘s 

three strategic goals, described in the FY 1998-2003 Strategic Plan: 

1. To effectively regulate the Enterprises by ensuring that they are adequately capitalized and operate 

in a safe and sound manner; 

2. To promote an efficient secondary mortgage market through an independent and balanced approach 

to regulatory oversight of the Enterprises; and 

3. To effectively regulate the Enterprises by ensuring that they comply with all laws under our 

jurisdiction. 

Through the FY 2001 Annual Performance Plan, OFHEO set its performance goals for the year and 

outlined means and strategies to achieve them. Highlights of the goals and accomplishments that relate 

to each of these strategic goals are described below. In accordance with the Government Performance 

and Results Act, the FY 2001 Annual Performance Report will contain a more detailed description of 

OFHEO‘s performance, and will be issued by March 29, 2002. 

6
OFHEO‘s ACCOMPLISHMENTS 

At year-end, two of OFHEO‘s major criteria for achieving the mission have been satisfied. OFHEO has 

classified the Enterprises as adequately capitalized each quarter and determined through examinations 

that they meet or exceed safety and soundness standards. OFHEO has also achieved a long-awaited 

milestone by publishing a Final Risk-Based Capital Rule on September 13, 2001. 

OFHEO established three strategic goals and 22 performance goals in the FY 2001 Performance Plan 

that it presented to Congress in February 2000 with the budget request. As FY 2001 began the 

following October, the enacted budget was less than the requested level, and OFHEO was revising the 

schedule for promulgating the Risk-Based Capital Rule. While recognizing that the Office would be 

unable to meet five performance goals as originally set, OFHEO did not revise the performance plan. 

The year concluded with these expectations met. OFHEO published the capital rule later in the year to 

achieve one of the goals. Achieving three goals related to the rule‘s implementation would be deferred 

to FY 2002. The last of these five goals may be considered in a future year, as resources are available. 

Strategic Goal 1: To effectively regulate the Enterprises by ensuring that they are adequately 

capitalized and operate in a safe and sound manner. 

During FY 2001, OFHEO completed its comprehensive annual risk-based examinations. Through these 

examinations for calendar year 2000, OFHEO determined that both Enterprises were financially sound 

and well managed. As in prior years, before conducting the examinations, the Office established and 

shared with the Enterprises safety and soundness standards that reflect various components of risk and 

risk management. For these examinations, OFHEO considers four major areasœcredit risk, market risk, 

operations risk, and corporate governance. These risk areas contain 10 program areas, such as interest 

rate risk, liquidity management, and information technology, for which over 100 factors are assessed at 

the start of the year and updated quarterly to reflect changes. The examination process and results are 

described in more detail in OFHEO‘s 2001 Report to Congress. Both examinations were completed on 

schedule and both Enterprises responded appropriately to examination issues. For the calendar year 

2001 examination, which OFHEO initiated in FY 2001, OFHEO began implementation of an additional 

examination program area–exposures arising from the Enterprises‘ use of computer-based financial 

models. Model risk and OFHEO‘s oversight in this program area are described more fully in OFHEO‘s 

2001 Report to Congress. OFHEO accomplished its performance goals in these examination areas. 

The Enterprises met applicable capital standards quarterly, and OFHEO met its goal in this area. Each 

quarter, OFHEO applied the minimum capital standard to each Enterprise‘s financial position and 

determined that they met the standards. OFHEO also continues to monitor the Enterprises‘ minimum 

capital levels on a monthly basis. OFHEO is planning to update the minimum capital regulation, and 

will seek public comments on the proposed amendments during FY 2002. 

In September 2001, OFHEO published a final Risk-Based Capital rule, although later than the target 

date originally set in the performance plan. By law, OFHEO cannot enforce compliance with the riskbased capital regulation until one year after it was issued in final. Until then, the minimum capital 

standard is the only one used to classify the Enterprises for capital adequacy. Once the Risk-Based 

Capital Rule is enforceable, OFHEO will calculate Risk-Based Capital levels for each Enterprise on at 

least a quarterly basis. In FY 2001, after the final rule was announced, OFHEO established a RiskBased Capital Task Force to facilitate the rule‘s implementation. As part of that effort, OFHEO began 

7
working with the Enterprises to ensure that they can run the stress test and have an opportunity to 

integrate the rule into their risk management framework. OFHEO also began work in FY 2001 to 

ensure that the Risk-Based Capital Model and Rule are updated and enhanced. In the first quarter of FY 

2002, OFHEO published a notice of proposed rulemaking to make improvements that better tie capital 

to risk. OFHEO‘s performance goals related to implementation of the capital rule are being deferred to 

FY 2002. 

Strategic Goal 2: To promote an efficient secondary mortgage market through an independent and 

balanced approach to regulatory oversight of the Enterprises. 

OFHEO continued to strengthen its independent capacity to analyze the Enterprises and mortgage 

markets by continuing to bolster its staffing levels in key mission-related areas. OFHEO met its 

performance goals by continuing to issue internal reports analyzing Enterprise risks throughout FY 

2001. The Office met its goals for maintaining the examination cadre‘s objectivity and expertise. 

Examination staff participated in professional development and training programs, and interagency 

assignments and forums. Because OFHEO‘s FY 2001 budget was enacted at a lower level than 

requested, and available resources were diverted to the Risk-Based Capital project, the Office did not 

meet its performance goal to develop the automated Surveillance and Monitoring System as originally 

planned. 

During FY 2001, OFHEO initiated several research projects, including a study of the systemic risk in 

the financial markets and the housing markets that the Enterprises may pose and/or mitigate. At the 

onset of the study, OFHEO sought public comment through its web site and the Federal Register, and 

then posted on the web site the comments received. During FY 2001, OFHEO developed a preliminary 

research agenda that it is refining in FY 2002, and established an interdisciplinary Research Council to 

coordinate research plans and activities. In future years, OFHEO anticipates undertaking additional 

research and analysis, including exploring issues that arose in comments on the proposed risk-based 

capital rule and using the risk-based capital stress test to assess alternative stress scenarios to continue to 

analyze the Enterprises. 

Strategic Goal 3: To effectively regulate the Enterprises by ensuring that they comply with all laws 

under our jurisdiction. 

During FY 2001, OFHEO found no violations of the Enterprises‘ Charter Acts or other applicable laws. 

As part of OFHEO‘s responsibility to prohibit excessive executive compensation at the Enterprises, 

OFHEO reviewed four termination agreements of executives who left the Enterprises, and found them 

satisfactory. During FY 2002, OFHEO will conduct a study of executive compensation at the 

Enterprises by comparing their executives‘ compensation with executive compensation at peer firms. 

OFHEO met its performance goals in this area. 

FY 2002 and the Future 

Beginning with FY 2002, OFHEO‘s Annual Performance Plans tie to OFHEO‘s new FY 2000-2005 

Strategic Plan. This Plan was developed during the last quarter of FY 2000, in accordance with the 

Government Performance and Results Act. This plan provides a framework for OFHEO‘s future 

Annual Performance Plans and operations. Taking OFHEO to its next stage, the plan details OFHEO‘s 

mission, goals and objectives for the five-year period and provides a blueprint for achieving them. 

8
The new plan reflects OFHEO‘s congressional mandate to ensure the safety and soundness of Fannie 

Mae and Freddie Mac and emphasizes the need to foster the strength and vitality of the nation‘s housing 

finance system. It also recognizes that success in carrying out this mission promotes a robust housing 

sector and a strong economy. The strategic objectives continue OFHEO‘s focus on ensuring the 

Enterprises are adequately capitalized and that they comply with safety and soundness standards and 

other legal requirements. The objectives also place increased emphasis on enhancing public 

understanding of the nation‘s housing finance system and contributing to Federal efforts to promote 

efficient and effective financial markets and homeownership. OFHEO‘s three primary regulatory 

responsibilities are incorporated in the plan: Ensuring that the Enterprises are adequately capitalized, 

conducting safety and soundness examinations, and undertaking research and analysis on emerging 

Enterprise-related matters. 

LIMITATIONS OF THE FINANCIAL STATEMENTS 

While OFHEO is not specifically covered by the requirements in the CFO 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 in 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, 2001, and September 30, 2000. 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, 2001. 

9
Dembo, Jones, Healy, Pennington & Marshall, P.C. 

Certified Public Accountants and Consultants 

Independent Auditors’ Opinion 

on the Financial Statements 

Mr. Armando Falcon 

Director 

Office of Federal Housing Enterprise Oversight 

We have audited the accompanying Principal Statements and related notes of the Office of Federal 

Housing Enterprise Oversight as of September 30,2001 and 2000, and for the years then ended. These 

Principal Statements (hereinafter referred to as “-financial statements”) comprised of the balance 

sheets, the statements of net cost, changes in net position, budgetary resources and financing, and their 

related notes, are the responsibility of the agency’s management. Our responsibility is to express an 

opinion on these financial statements based on our audits. 

We conducted our audits in accordance with auditing standards generally accepted in the United States 

of America; Government Auditing Standards, issued by the Comptroller General of the United States; 

and Oflice of Management and Budget (OMB) Bulletin No. 01-02, “Audit Requirements for Federal 

Financial Statements.” These standards require that we plan and perform the audits to obtain 

reasonable assurance about whether the financial statements are free of material misstatement. An 

audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 

financial statements. An audit also includes assessing the accounting principles used and significant 

estimates made by management, as well as evaluatingthe overall financial statement presentation. We 

believe that our audits provide a reasonable basis for our opinion. 

In our opinion, the financial statements referred to above present fairly, in all material respects, the 

assets, liabilities, and net position; net costs; changes in net position; budgetary resources; and 

reconciliation of net costs to budgetary obligations of the Office of Federal Housing Enterprise 

Oversight as of September 30, 2001 and 2000, and for the years then ended in conformity with 

accounting principles generally accepted in the United States of America. 

The Management Discussion and Analysis and the Required Supplemental Information sections are 

not required parts of the basic fmancial statements of the Office of Federal Housing Enterprise 

Oversight but are supplementary information required by the Federal Financial Accounting Standards 

Board. We have applied certain limited procedures, which consisted principally of inquiries of 

management regarding the methods of measurement and presentation of the Management Discussion 

and Analysis and the Required Supplementary Information. However, we did not audit the 

information and express no opinion on it. 

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MEMZER: A” INSTi”E OF CERTIFIED PUBLIC ACCOUNTANIS AND POUWS I”An0NAL 
In accordance with Governmental Auditing Standards, we have also issued a report dated February 14, 

2002, on our consideration of the Office of Federal Housing Enterprise Oversight’s internal control 

over hancial reporting and a report dated February 14, 2002 on our tests of the Office of Federal 

Housing Enterprise Oversight’s compliance with certain provisions of laws and regulations. These 

reports are an integral part of an audit performed in accordance with Government Auditing Standards 

and should be read in conjunction with this report in considering the results of the audits. 

This report is intended solely for the information and use of the management of the Office of Federal 

Housing Enterprise Oversight, OMB and Congress, and is not intended to be and should not be used by 

anyone other thanthese specified parties. 

February 14, 2002 

11 

Dembo, Jones,Healy, Pennington & Marshall, P.C. 

Ceriified Public Accountants and Consultantr 
, 

Dembo, Jones, Healy, Pennington & Marshall, P.C. 

Certified Public Accountanis and Consuttants 

Report of Independent Auditors 

on Internal Control 

Mr. Armando Falcon 

Director 

Office of Federal Housing Enterprise Oversight 

We have audited the Principal Statements (bereinafter referred to as “financial statements”) of the 

Office of Federal Housing Enterprise Oversight as of and for the years ended September 30,2001 and 

2000, and have issued our report thereon dated February 14, 2002. We conducted our audits in 

accordance with auditing standards generally accepted in the United States of America; the standards 

applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller 

General of the United States; and Office of Management and Budget (OMB) Bulletin No. 01-02, 

“Audit Requirements for Federal Financial Statements.” 

In planning and performing our audits, we considered the Office of Federal Housing Enterprise 

Oversight’s internal control over fmancial reporting by obtaining an understanding of the agency’s 

internal control, determined whether internal controls bad been placed in operation, assessed control 

risk, and performed tests of controls in order to determine our auditing procedures for the purpose of 

expressing our opinion on the fmancial statements. We limited our internal control testing to those 

controls necessav to achieve the objectives described in OMB Bulletin No. 01-02. We did not test all 

internal controls relevant to operating objectives as broadly defined by the Federal Managers’ 

Financial Integrity Act of 1982, such as those controls relevant to ensuring efficient operations. The 

objective of ow audits was not to provide assurance on internal control. Consequently, we do not 

provide an opinion on internal control. 

Our consideration of the internal control over financial reporting would not necessarily disclose all 

matters in the internal control over financial reporting that might be reportable conditions. Under 

standards issued by the American Institute of Certified Public Accountants, reportable conditions are 

matters coming to our attention relating to significant deficiencies in the design or operation of the 

internal control that, in our judgment, could adversely affect the agency’s ability to record, process, 

summarize, and report financial data consistent with the assertions by management in the financial 

statements. Material weaknesses are reportable conditions in which the design or operation of one or 

more of the internal control components does not reduce to a relatively low level the risk that 

misstatements in amounts that would be material in relation to the financial statements being audited 

may occur and not be detected within a timely period by employees in the normal course of performing 

their assigned functions. Because of inherent limitations in internal controls, misstatements, losses, or 

noncompliance may nevertheless occur and not be detected. However, we noted no matters involving 

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IvlEhmEn: AKmICAN INmm OF CERTmED PUBLIC ACCOUNTANTS AND POLARlS INTERNATIONAL 
the internal control and its operation that we considered to be inaterial weaknesses as defined above. 

However, we noted other matters involving the internal control over financial reporting, which we have 

reported to management of the Office of Federal Housing Enterprise Oversight in a separate letter 

dated February 14,2002. 

Finally, with respect to internal control related to performance measures reported in the annual 

performance plan, we obtained an understanding of the design of significant internal controls relating 

to the existence and completeness assertions, as required by OMB Bulletin No. 01-02. Our procedures 

were not designed to provide assurance on internal control over reported performance measures, and, 

accordingly, we do not provide an opinion on such controls. 

This report is intended solely for the information and use of the management of the Office of Federal 

Housing Enterprise Oversight, OMB and Congress, and is not intended to be and should not be used by 

anyone other than these specified parties. 

Februaly 14,2002 

13 

Dembo, Jones,Healy, Pennington & Marshall, P.C. 

Certified Public Accountants and Consultants 
Dembo, Jones, Healy, Pennington & Marshall, P.C. 

Certified Public Accountants and Consuhnts 

Report of Independent Auditors 

on Compliance with Laws and Regulations 

Mi. Armando Falcon 

Director 

Office of Federal Housing Enterprise Oversight 

We have audited the Principal Statements (hereinafter referred to as “financial statements”) of the 

Office of Federal Housing Enterprise Oversight as of and for the years ended September 30,2001 and 

2000, and have issued our report thereon dated February 14, 20002. We conducted our audits in 

accordance with auditing standards generally accepted in the United States of America; the standards 

applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller 

General of the United States; and, Office of Management and Budget (OMB) Bulletin No. 01-02, 

“Audit Requirements for Federal Financial Statements.” 

The management of the Office of Federal Housing Enterprise Oversight is responsible for complying 

with laws and regulations applicable to the agency. As part of obtaining reasonable assurance about 

whether the agency’s financial statements are free of material misstatement, we performed tests of its 

compliance with certain provisions of laws and regulations, noncompliance with which could have a 

direct and material effect on the determination of financial statement amounts and certain other laws 

and regulations specified in OMB Bulletin No. 01-02, including the requirements referred to in the 

Federal Financial Management Improvement Act (FFMIA) of 1996. We limited our tests of 

compliance to these provisions and we did not test all laws and regulations applicable to the Office of 

Federal Housing Enterprise Oversight. 

The results of our tests of compliance with the laws and regulations described in the preceding 

paragraph exclusive of FFMIA disclosed no instances of noncompliance that are required to be 

reported under Government Auditing Standards or OMB Bulletin No. 01-02. OMB Bulletin No. 97-

01, “Form and Content of Agency Financial Statements”, as amended, defines the form and content of 

financial statements of the executive departments and agencies listed in the attachment to the Bulletin. 

The Offce of Federal Housing Enterprise Oversight is not required to follow OMB Bulletin No. 97-01 

but has voluntarily adopted the Bulletin’s requirements. 

Under FFMIA, we are required to report whether the agency’s financial management systems 

substantially comply with the Federal financial management systems requirements, applicable Federal 

accounting standards, and the United States Government Standard General Ledger at the transaction 

level. To meet this requirement, we performed tests of compliance with FFMIA section 803(a) 

requirements. 

60 10 Executive Boulevard * Suite 900 * Rockville. Maryland 20852 1“ 

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MEMBERAMERICAN INSTITUTEOF CPXlTFED PUBLIC ACCOUNTANTS AND POWS 1NrERNATION.X 
The results of our tests disclosed no instances in which the agency’s financial management systems did 

not substantially comply with the three requirements discussed in the preceding paragraph. 

Providing an opinion on compliance with certain provisions of laws and regulations was not an 

objective of our audits and, accordingly, we do not express such an opinion. 

This report is intended solely for the information of the management of the Office of Federal Housing 

Enterprise Oversight, OMB and Congress, and is not intended to be and should not be used by anyone 

other than these specified parties. 

February 14, 2002 

15 

Dembo, Jones,Healy, Pennington & Marshall, P.C. 

Certified PublicAccountants and Consultants 
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

BALANCE SHEETS

AS OF SEPTEMBER 30, 2001 AND 2000

2001 2000 

ASSETS 

Intragovernmental Assets 

Fund Balance with Treasury - Note 2 $ 4,628,495 $ 5,939,763 

Accounts Receivable 46,459 -

Advances/Prepayments - Note 3 575,339 460,142 

Total Intragovernmental Assets 5,250,293 6,399,905 

Accounts Receivable 2,871 -

Property, Plant and Equipment, Net - Note 4 15,176,690 10,935,914 

TOTAL ASSETS $ 20,429,854 $ 17,335,819 

LIABILITIES 

Liabilities Covered by Budgetary Resources: 

Intragovernmental Liabilities 

Accrued Liabilities $ 157,304 $ 146,555 

Total Intragovernmental Liabilities 

Other Payables and Liabilities 

Accounts Payable 

Other Liabilities 

Total Other Payables and Liabilities - Note 5 

Total Liabilities Covered by Budgetary Resources 

Liabilities Not Covered by Budgetary Resources: 

Governmental 

Accrued Annual Leave 

157,304 146,555 

1,433,217 1,349,098 

859,872 688,166 

2,293,089 2,037,264 

2,450,393 2,183,819 

890,745 673,519 

Total Liabilities Not Covered by Budgetary Resources - Note 6 890,745 673,519 

TOTAL LIABILITIES $ 3,341,138 $ 2,857,338 

NET POSITION 

Unexpended Appropriations $ 2,212,149 $ 3,754,738 

Cumulative Results of Operations 14,876,567 10,723,743 

Total Net Position - Note 7 17,088,716 14,478,481 

TOTAL LIABILITIES AND NET POSITION $ 20,429,854 $ 17,335,819 

The accompanying notes are an integral part of these statements. 

16 
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENTS OF NET COST

FOR THE FISCAL YEARS ENDED

SEPTEMBER 30, 2001 AND 2000 

2001 2000 

Program Costs 

Production Costs 

Public Production $ 16,775,503 $ 13,263,439 

Federal Production 

Total Production Costs - Note 8 

Non-Production Costs 

Imputed Financing Sources - Note 9 

Financing Sources Yet to be Provided - Note 10 

Total Non-Production Costs 

Total Program Costs 

2,387,275 2,173,453 

19,162,778 15,436,892 

506,187 389,794 

217,226 (241,039) 

723,413 148,755 

19,886,191 15,585,647 

Net Cost of Operations $ 19,886,191 $ 15,585,647 

The accompanying notes are an integral part of these statements. 

17 
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENTS OF CHANGES IN NET POSITION

FOR THE FISCAL YEARS ENDED

SEPTEMBER 30, 2001 AND 2000

2001 2000 

Net Cost of Operations $ (19,886,191) $ (15,585,647) 

Financing Sources 

Appropriations Used 23,534,034 18,067,103 

Imputed Financing Sources - Note 9 506,187 389,794 

Total Financing Sources 24,040,221 18,456,897 

Net Change in Cumulative Results of Operations 4,154,030 2,871,250 

Increase / (Decrease) in Unexpended Appropriations (1,543,795) 1,415,116 

Changes in Net Position 2,610,235 4,286,366 

Net Position - Beginning of Period 14,478,481 10,192,115 

Net Position - End of Period - Note 7 $ 17,088,716 $ 14,478,481 

The accompanying notes are an integral part of these statements. 

18 
19 

OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENTS OF BUDGETARY RESOURCES

FOR THE FISCAL YEARS ENDED

SEPTEMBER 30, 2001 AND 2000

2001 2000 

Budgetary Resources 

Appropriations $ 22,000,000 $ 19,493,000 

Unobligated Balance Brought Forward October 1 9,762 10,780 

Adjustments 

Recoveries of Prior Year Obligations - Note 11 605,000 133,203 

Permanently not available Pursuant to Public Law 102-550 (9,762) (10,780) 

Total Budgetary Resources $ 22,605,000 $ 19,626,203 

Status of Budgetary Resources 

Obligations Incurred $ 22,598,287 $ 19,616,441 

Unobligated Balance Not Available 6,713 9,762 

Total Status of Budgetary Resources $ 22,605,000 $ 19,626,203 

Outlays 

Obligations Incurred $ 22,598,287 $ 19,616,441 

Less: Spending Authority from Collections/Adjustments 

Receivable from Federal Sources 

Actual Recoveries of Prior Year Obligations - Note 11 

Obligated Balance, Net - Beginning of Period 

Obligated Balance, Net - End of Period 

Undelivered Orders 

Accounts Payable 

Total Obligated Balance, Net - End of Period 

34,047 - 

(605,000) (133,203) 

22,027,334 19,483,238 

5,930,001 4,354,541 

(2,205,436) (3,746,183) 

(2,450,393) (2,183,818) 

(4,655,829) (5,930,001) 

Total Outlays $ 23,301,506 $ 17,907,778 

Disbursements $ 23,306,279 $ 17,923,953 

Collections (4,773) (16,175) 

Total Outlays $ 23,301,506 $ 17,907,778 

The accompanying notes are an integral part of these statements. 
OFFICE OF FEDERAL HOUSING ENTERPRISE OVERSIGHT

STATEMENTS OF FINANCING

FOR THE FISCAL YEARS ENDED

SEPTEMBER 30, 2001 AND 2000

2001 2000 

Obligations and Nonbudgetary Resources 

Obligations Incurred $ 22,598,287 $ 19,616,441 

Less: Spending Authority from Offsetting Collections/Adjustments 

Earned Reimbursements 

Receivables from Federal Sources (12,412) -

Recoveries of Prior Year Obligations - Note 11 (605,000) (133,203) 

Other - Imputed Financing Sources - Note 9 506,187 389,794 

Exchange Revenue Not in the Entity's Budget (2,871) 1,206 

Total Obligations as Adjusted and Nonbudgetary Resources 22,484,191 19,874,238 

Resources That Do Not Fund Net Cost of Operations 

Change in Goods/Services/Benefits Ordered but not Provided (Increases) 1,425,550 (1,877,483) 

Costs Capitalized on the Balance Sheet (Increases) 

General Property, Plant and Equipment (4,240,776) (2,170,069) 

Total Resources That Do Not Fund Net Costs of Prior Periods (2,815,226) (4,047,552) 

Financing Sources Yet to be Provided 

Annual Leave 217,226 188,971 

Future Workers' Compensation - (430,010) 

Total Financing Sources Yet to be Provided - Note 10 217,226 (241,039) 

Net Cost of Operations $ 19,886,191 $ 15,585,647 

The accompanying notes are an integral part of these statements. 

20 
NOTES TO FINANCIAL STATEMENTS 

NOTE 1 œ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

• Reporting Entity 

The Office of Federal Housing Enterprise Oversight (OFHEO) was established as an 

independent office within the Department of Housing and Urban Development (HUD) by 

the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (title XIII 

of P.L. 102-550). 

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 from two government sponsored enterprises, Fannie Mae and Freddie Mac 

(the ìEnterprisesî) 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 assessments of the Enterprises and ensures that taxpayer funds are not used for 

OFHEOís operations. 

OFHEOís enabling statute requires that OFHEO return to the Enterprises, in the form of 

a credit against the next yearís annual assessment, any unobligated assessment funds at 

the end of the fiscal year. This effectively makes OFHEO operate like a hybrid annual 

appropriation with no-year authority -- OFHEOís annual resources are available for 

obligation and expenditure without regard to any fiscal year limitation. OFHEO reduces 

the current yearís 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 the annual assessment is adjusted by the credit given to the Enterprises each year. 

The accompanying financial statements reflect the activities of OFHEO. OFHEO has 

only entity activities and the financial statements reflect those activities, which include 

the appropriation received to conduct operations. OFHEO does not perform custodial 

activities on behalf of other federal agencies. 

• Basis of Presentation 

OFHEO is not covered by the Chief Financial Officerís (CFO) Act and is not required to 

follow the Office of Management and Budget (OMB) Bulletin 97-01, as amended on 

form and content. However, OFHEO adopted OMBís requirements for CFO Act 

financial statements. The principal statements were prepared from the official financial 

records and general ledger of OFHEO in accordance with Generally Accepted 

Accounting Principles (GAAP) as established through the Federal Accounting Standards 

Advisory Board (FASAB) standards. 

21
NOTE 1 œ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 

• 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 the American Institute of Certified Public Accountants 

(AICPA) through Statement on Auditing Standards (SAS) No. 69, as amended by SAS 

No.91, Federal GAAP Hierarchy, of accounting principles for the Federal Government: 

Federal Accounting Standards Advisory Board (FASAB) Statements and 

Interpretations plus AICPA and Financial Accounting Standards Board 

(FASB) pronouncements if made applicable to the Federal governmental 

entities by a FASAB Statement or Interpretation; 

FASAB Technical Bulletins and the following pronouncements if 

specifically made applicable to Federal governmental entities by the 

AICPA and cleared by the FASAB: AICPA Industry Audit and 

Accounting Guides and AICPA Statements of Position; 

AICPA Accounting Standards Executive Committee (ACSEC) Practice 

Bulletins if specifically made applicable to Federal governmental entities 

and cleared by the FASAB and Technical Releases of the Accounting 

and Auditing Policy Committee of the FASAB; 

Implementation guides published by the FASAB staff and practices that 

are widely recognized and prevalent in the Federal government; and 

Accounting policy and procedures established by OFHEO to enhance 

consistency or to provide guidance in the absence of government-wide 

standards. 

• Funds with the U.S. Treasury 

OFHEO cash receipts and disbursements are processed by the United States Department 

of the Treasury (Treasury). The funds with Treasury are primarily assessment funds that 

are available to pay current liabilities and to finance authorized purchase commitments. 

OFHEO does not have monetary assets held outside OFHEOís 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. OFHEO does not operate a direct 

loan or loan guarantee program. 

22
NOTE 1 œ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 

• Property and Equipment 

OFHEOís property and equipment is recorded at cost and is depreciated using the 

straight-line method over the estimated service lives of the assets. Service lives have 

been established as three years for computer related systems and up to 20 years for other 

equipment. Leasehold improvements are depreciated over the remaining term of the 

lease agreement. OFHEO has an established capitalization threshold of $5,000 to 

conform with the materiality approach for the accounting that supports OFHEOís 

independent financial statements. Other property items, normal repairs, and maintenance 

are charged to expense as incurred. 

At present, internally developed software is being created at OFHEO. 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 the examination of the Enterprises. 

The software is being developed internally. The asset had not been placed in service as 

of September 30, 2001 and no depreciation has been recorded. 

OFHEO has no capitalized leases, no real property holdings, and no heritage assets. 

• 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. 

• Accounts Receivable 

OFHEOís Accounts Receivable consists of receivables and reimbursements due from 

others. No account is estimated as uncollectable. 

• Liabilities 

Liabilities represent the amount of funds that are likely to be paid by OFHEO as the 

result of a transaction or event that has already occurred. 

OFHEO reports its liabilities under two categories: Liabilities covered by Budgetary 

Resources and Liabilities Not Covered by Budgetary Resources. 

OFHEOís Liabilities Covered by Budgetary Resources are liabilities that are funded by a 

current appropriation or other funding source. Both intragovernmental (payable to other 

federal entities) and governmental liabilities, consist of accounts payable and accrued 

liabilities. Accounts payable reflect invoices processed for payment during the fiscal 

year which are yet unpaid as of the end of the fiscal year due to scheduling of payments 

to reflect prompt payment guidelines. Accrued liabilities consist of both estimates of 

accounts payable for the value of services received during the fiscal year for which 

OFHEO had not been billed as of the end of the fiscal year and payroll accruals 

23
NOTE 1 œ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 

• Liabilities (continued) 

reflecting payroll costs earned by employees during the fiscal year which are not paid 

until the next fiscal year. 

OFHEOís Liabilities Not Covered by Budgetary Resources are liabilities that are not 

funded by any current appropriation or other funding source. These liabilities consist of 

accrued annual leave at the end of the fiscal year. Reimbursements owed to the 

Department of Labor for claims already paid under the Federal Employees Compensation 

Act would also be reported under this liability category: however, OFHEO has no claims 

outstanding in FY 2001 and 2000. In addition, a liability for any future claims (future 

workerís compensation) would be reported in this category. The agencyís methodology 

for estimating this future workerís compensation liability determined that the liability 

would be negligible and therefore no liability is recorded for fiscal years 2001 or 2000. 

• Retirement Plans 

OFHEO participates in the retirement plans offered by the Office of Personnel 

Management (OPM) and does not maintain any private retirement plans. The majority of 

OFHEOís 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. 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 

OFHEOís program in accordance with GAAP. 

• Net Position 

OFHEOís net position is comprised of the following components: 

1. Undelivered orders and unobligated balances of OFHEOís funds. 

2. Invested capital represents U.S. Government resources invested in OFHEOís 

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 accumulated annual leave earned but not taken 

as of the financial statement date. The expense for these accruals is not funded from 

current assessments, but will be funded from future assessments as the expenses are 

incurred. 

4. Prepayments and advances of OFHEOís funds. 

24
NOTE 2 - FUND BALANCE WITH TREASURY 

Fund Balance with Treasury consists of the following as of September 30, 2001 and 2000: 

Unobligated 

Obligated Available Unavailable 2001 2000 

General Funds $4,621,782 $6,713 $4,628,495 $5,939,763 

The FY 2001 Fund Balance with Treasury reflects an erroneous OPAC that was charged by OTS 

in error, in the amount of $34,047. 

NOTE 3 œ ADVANCES/PREPAYMENTS 

The Advances/Prepayments are payments made to the Office of Thrift Supervision (OTS) for 

additional occupancy space contracted for in fiscal year 2000 but not occupied until fiscal year 

2001 and for additional occupancy space contracted for in fiscal year 2001 but not to be occupied 

until fiscal year 2002. 

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT 

Property, Plant and Equipment balances as of September 30, 2001 and 2000 are as follows: 

2001 2000 

Acquisition Accumulated Net Net 

Asset Type Cost Depreciation Book Value Book Value 

Equipment $ $796,600 $ $ 

Leasehold Improvements 474,997 9,200 465,797 - 

Information Technology Software 14,005,769 - 14,005,769 10,210,295 

Total $15,982,490 $805,800 $15,176,690 $10,935,914 

1,501,724 705,124 725,619 

NOTE 5 œ OTHER PAYABLES AND LIABILITIES 

2001 2000 

Accounts Payable in Process $ $ 

Accrued Accounts Payable 1,243,127 1,085,619 

Sub-Total Other Payables and Liabilities $1,433,217 $1,349,098 

Accrued Payroll and Benefits 859,872 688,166 

Total Other Payables and Liabilities $2,293,089 $2,037,264 

190,090 263,479 

25
NOTE 6 œ LIABILITIES NOT COVERED BY BUDGETARY RESOURCES 

Liabilities Not Covered by Budgetary Resources consists of Accrued Annual Leave earned but 

not used as of September 30, 2001. The accrued annual leave liability is adjusted as leave is 

earned and used through out the year. The expense for these accruals will be funded from future 

assessments as the expenses are incurred. 

NOTE 7 - NET POSITION 

Net Position consists of the following as of September 30, 2001 and 2000: 

2001 2000 

Unobligated ñ Available $ $ 

Undelivered Orders 2,205,436 3,746,182 

Refund ñ Collection - (1,206) 

Total Unexpended Appropriations $ $ 

Invested Capital $15,176,690 $10,935,914 

Future Funding Requirements (890,745) (673,519) 

Advances/Prepayments 575,339 460,142 

Accounts Receivable 15,283 1,206 

Total Cumulative Results of Operations $14,876,567 $10,723,743 

Total Net Position $17,088,716 $14,478,481 

6,713 9,762 

2,212,149 3,754,738 

NOTE 8 - PRODUCTION COSTS 

OFHEO is a single program providing financial safety and soundness oversight of Fannie Mae 

and Freddie Mac. OFHEO does not have any stewardship responsibilities for federal lands. 

Production Costs represent assessment collections, from Fannie Mae and Freddie Mac, that have 

been expensed for salaries and operating expenses to support OFHEO during the fiscal years 

ended September 30, 2001 and 2000. Production Costs are distributed into two categories: Public 

and Federal. Public costs result from contracts with the private sector for goods or services. 

Federal costs are a result of OFHEO contracting with other federal agencies for goods and/or 

services (e.g. purchase of supplies from the General Services Administration). 

2001 2000 

Public Production Costs Paid $15,228,681 $11,907,319 

Accrued Accounts Payable Public 1,243,127 1,085,619 

Depreciation Expense 303,695 270,501 

Total Public Production Costs $16,775,503 $13,263,439 

Federal Production Costs Paid $ $ 

Accrued Accounts Payable Federal 157,304 146,555 

Total Federal Production Costs $ $ 

Total Production Costs $19,162,778 $15,436,892 

2,229,971 2,026,898 

2,387,275 2,173,453 

26
NOTE 9 - IMPUTED FINANCING 

Imputed Financing represents the post retirement benefits funded by OPM for OFHEO 

employees. 

2001 2000 

CSRS Imputed $244,098 $198,115 

FERS Imputed (5,141) (14,985) 

CSRS Offset Imputed 14,913 5,776 

Life Insurance Imputed 1,630 1,189 

Health Insurance Imputed 250,687 199,699 

Total Imputed Financing ñ Post Employment $506,187 $389,794 

NOTE 10 - FINANCING SOURCES YET TO BE PROVIDED 

Financing Sources Yet to be Provided reflects potential future costs for accrued annual leave and 

future workerís compensation (FWC), which are not funded by current budgetary resources. The 

amounts reported are the net change of the accrued annual leave and the FWC liability from the 

prior year. 

2001 2000 

Annual Leave Expense $217,226 $ 188,971 

Future Workerís Compensation - (430,010) 

Total Financing Sources Yet To Be Provided $217,226 ($241,039) 

NOTE 11 - RECOVERIES OF PRIOR YEAR OBLIGATIONS 

Recoveries of prior year obligations consist of the reapportionment of prior year funds by OMB. 

OFHEO requested and received the authority to re-obligate these prior year funds in FY 2001 and 

also in FY 2000. 

NOTE 12 œ PENSION EXPENSE 

OFHEO recognizes the full cost of providing future pension benefits to eligible employees while 

they are working. The excess of total pension expense over the amounts contributed by OFHEO 

and its employees must be financed by OPM. OFHEO recognizes an imputed financing source 

equal to this excess amount. Pension expense in FY 2001 and 2000 consisted of the following: 

Accumulated 2001 2000 

Employer Costs Imputed Total Pension Total Pension 

Contributions to OPM Expense Expense 

Civil Services Retirement $ $259,011 $ $ 

Federal Employeeís 

Retirement 

841,929 (5,141) 836,788 634,174 

Thrift Savings Plan 317,749 - 317,749 228,722 

Total Pension Expense $1,428,444 $253,870 $1,682,314 $1,280,447 

268,766 527,777 417,551 

27
NOTE 13 œ OPERATING LEASE 

OFHEO has an occupancy lease with the Office of Thrift Supervision (OTS) that covers office 

space and building services which 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, with the option to renew for three 5- 

year terms. OFHEO has exercised the first of the three option terms. Total rent expense for years 

ending September 30, 2001 and 2000 was approximately $1.8 million and $1.7 million 

respectively. 

OFHEO may terminate the lease agreement in whole or in part. In the event of a termination at 

OFHEOís discretion, OFHEO would be required to pay two months rent, at an approximate cost 

of $300,000 (based on September 2001 rate). OFHEOís obligation to make payments ceases on 

the date that the space is rented. If either party ceases 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 party is liable for further costs, fees, damages or other monies due to 

the termination, except for payments through the date of termination. During FY 2000 OFHEO 

rented additional space from OTS, which was not ready for occupancy until FY 2001, also during 

FY 2001 OFHEO rented additional space from OTS, which will not be ready for occupancy until 

FY 2002, therefore, OFHEO is reflecting these rental payments as Advances/Prepayments. 

28
Office of Federal Housing Enterprise Oversight

Required Supplementary Information 

Intra-governmental Trading Partners 

As of September 30, 2001 and 2000 

Intra-governmental Assets 

Trading Partner Agency 2001 2000 

Department of Treasury1 $ 4,628,495 $ 5,939,763 

National Finance Center2 12,412 -

Office of Thrift Supervision 3, 4 609,386 460,142 

$ 5,250,293 $ 6,399,905 

1 Fund balance with Treasury consists of assessment funds that are available to pay current liabilities 

and to finance authorized purchase commitments. 

2 During FY 2001, duplicate award payments to OFHEO employees were processed by the National 

Finance Center (NFC) and charged to OFHEO. Employees receiving the duplicate payments have 

submitted checks to NFC for repayment. However, OFHEO is awaiting refund from NFC for the 

duplicate charge. 

3 During FY 2001 OFHEO rented additional space from OTS, this space will not be occupied until FY 2002, 

therefore, OFHEO reflected this rental payment for additional space as a Prepayment. This amount 

also includes an erroneous OPAC charge of $34,047, that was rejected on October 1, 2001. 

4

 During FY 2000 OFHEO rented additional space from OTS, this space was not ready for occupancy 

until FY 2001. OFHEO began expensing this prepayment during FY 2001 when OFHEO took 

possession of the additional space. 

Intra-governmental Liabilities 

Trading Partner Agency 2001 2000 

Comptroller of the Currency $ 100 $ -

Federal Deposit Insurance Corp 46,000 3,248 

Department of Treasury 1,592 9,305 

Office of Thrift Supervision 15,902 -

Department of Veteran's Affairs 44,196 27,397 

Department of Housing and Urban Development 40,827 95,827 

Federal Reserve Board - 3,500 

Department of Commerce 8,507 3,500 

Office of Personnel Management - 3,112 

Department of State 180 -

Department of Agriculture - 666 

$ 157,304 $ 146,555 

OFHEO's intra-governmental liabilities consist of accrued liabilities for the value of services received during 

the fiscal year for which OFHEO had not been billed as of the end of the fiscal year. 

29
CHAPTER FIVE – HISTORICAL DATA TABLES 

CHAPTER FIVE - HISTORICAL DATA TABLES 

Table 1. Fannie Mae Mortgage Purchases.......................................... 98


Table 2. Fannie Mae MBS Issuances ................................................. 99


Table 3. Fannie Mae Earnings ........................................................ 100


Table 3a. Fannie Mae Earnings ........................................................ 101


Table 4. Fannie Mae Balance Sheet................................................. 102


Table 5. Fannie Mae Retained Mortgage Portfolio Detail ................. 103


Table 6. Fannie Mae Financial Derivatives ...................................... 104


Table 7. Fannie Mae Non-Mortgage Investments ............................ 105


Table 8. Fannie Mae Asset-Liability Mix ......................................... 106


Table 9. Fannie Mae Mortgage Asset Quality .................................. 107


Table 10. Fannie Mae Capital .......................................................... 108


Table 11. Freddie Mac Mortgage Purchases....................................... 109


Table 12. Freddie Mac MBS Issuances.............................................. 110


Table 13. Freddie Mac Earnings....................................................... 111


Table 13a.Freddie Mac Earnings....................................................... 112


Table 14. Freddie Mac Balance Sheet................................................ 113


Table 15. Freddie Mac Retained Mortgage Portfolio Detail................ 114


Table 16. Freddie Mac Financial Derivatives ..................................... 115


Table 17. Freddie Mac Non-Mortgage Investments ........................... 116


Table 18. Freddie Mac Asset Mix ..................................................... 117


Table 19. Freddie Mac Mortgage Asset Quality ................................. 118


Table 20. Freddie Mac Capital......................................................... 119


Table 21. Aggregate Purchases.......................................................... 120


Table 22. Aggregate MBS Issuances .................................................. 121


Table 23. Aggregate Earnings........................................................... 122


Table 24. Aggregate Balance Sheet.................................................... 123


Table 25. Aggregate Retained Mortgage Portfolio Detail.................... 124


Table 26. Aggregate Financial Derivatives ......................................... 125


Table 27. Aggregate Non-Mortgage Investments ............................... 126


Table 28. Aggregate Capital ............................................................. 127


Table 29. Loan Limits .................................................................... 128


Table 30. Mortgage Interest Rates .................................................... 129


Table 31. Housing Market Activity .................................................. 130


Table 32. Weighted Repeat Sales House Price Index .......................... 131


97 
98 

Table 1. Fannie Mae Mortgage Purchases

Business Activity ($ in Millions)

 Period 

 Purchases 

 Single-Family

($)

 Multifamily

($)

 Total 1

($)

 Mortgage Securities2

($)

4Q01 177,446 4,366 181,812 59,668 

3Q01 150,044 4,846 154,890 47,411 

2Q01 151,873 5,484 157,357 49,179 

1Q01 88,310 4,435 92,745 48,242 

Annual Data

2001 567,673 19,131 586,804 204,500 

2000 227,069 10,377 237,446 126,034 

1999 316,136 10,012 326,148 166,431 

1998 354,920 11,428 366,348 144,461 

1997 159,921 6,534 166,455 48,848 

1996 164,456 6,451 170,907 45,016 

1995 126,003 4,966 130,969 34,036 

1994 158,229 3,839 162,068 24,552 

1993 289,826 4,135 293,961 6,275 

1992 248,603 2,956 251,559 4,930 

1991 133,551 3,204 136,755 2,384 

1990 111,007 3,180 114,187 977 

1989 80,510 4,325 84,835 Not 

Applicable 

Before 

1990 

1988 64,613 4,170 68,783 

1987 73,942 1,733 75,675 

1986 77,223 1,877 79,100 

1985 42,543 1,200 43,743 

1984 27,713 1,106 28,819 

1983 26,339 140 26,479 

1982 25,929 10 25,939 

1981 6,827 2 6,829 

1980 8,074 27 8,101 

1979 10,798 9 10,807 

1978 12,302 3 12,305 

1977 4,650 134 4,784 

1976 3,337 295 3,632 

1975 3,646 674 4,320 

1974 4,746 2,273 7,019 

1973 4,170 2,082 6,252 

1972 2,596 1,268 3,864 

1971 2,742 1,298 4,040 

Source: Fannie Mae 

1 Cash purchases plus securitizations; excludes non-Fannie Mae securities and repurchased Fannie Mae MBS. 

2 Not included in total purchases. 
99 

Table 2. Fannie Mae MBS Issuances

Business Activity ($ in Millions)

 Period 

MBS Issuances

 Single-Family MBS

($)

 Multifamily MBS

($)

 Total MBS

($)

Multiclass MBS1

($)

4Q01 159,387 2,955 162,342 81,551 

3Q01 135,964 3,452 139,416 26,349 

2Q01 138,983 4,376 143,359 18,191 

1Q01 80,287 3,018 83,305 13,312 

Annual Data

2001 514,621 13,801 528,422 139,403 

2000 204,066 7,596 211,662 39,544 

1999 292,192 8,497 300,689 55,160 

1998 315,120 11,028 326,148 84,147 

1997 143,615 5,814 149,429 85,415 

1996 144,201 5,668 149,869 30,780 

1995 106,269 4,187 110,456 9,681 

1994 128,385 2,237 130,622 73,365 

1993 220,485 959 221,444 210,630 

1992 193,187 850 194,037 170,205 

1991 111,488 1,415 112,903 112,808 

1990 96,006 689 96,695 68,291 

1989 66,489 3,275 69,764 41,715 

1988 51,120 3,758 54,878 17,005 

1987 62,067 1,162 63,229 9,917 

1986 60,017 549 60,566 2,400 

1985 23,142 507 23,649 Not 

Issued 

Before 

1986 

1984 13,087 459 13,546 

1983 13,214 126 13,340 

1982 13,970 Not 

Issued 

Before 

1983 

13,970 

1981 717 717 

Not 

Issued 

Before 

1981 

Not 

Issued 

Before 

1981 

Source: Fannie Mae 

The majority qualify as Real Estate Mortgage Investment Conduits (REMICs) and are also known as structured securitizations. 1 
Table 3. Fannie Mae Earnings

Earnings ($ in Millions)

Period

Operating

Net Interest

Income1

($)

Guarantee

Fee

 Income

($)

Average

Guarantee

Fee Rate

(BasisPoints)

Administrative

Expenses

($)

Credit-related

Expenses2

($)

Operating Net

Income3

($)

4Q01 2,165 398 18.9 251 16 1,438 

3Q01 1,892 384 19.2 273 15 1,377 

2Q01 1,800 357 18.9 254 18 1,314 

1Q01 1,643 343 19.1 239 29 1,238 

Annual Data

2001 7,500 1,482 19.0 1,017 78 5,367 

2000 5,674 1,351 19.5 905 94 4,448 

1999 4,894 1,282 19.3 800 127 3,912 

1998 4,110 1,229 20.2 708 261 3,418 

1997 3,949 1,274 22.7 636 375 3,056 

1996 3,592 1,196 22.4 560 409 2,725 

1995 3,047 1,086 22.0 546 335 2,144 

1994 2,823 1,083 22.5 525 378 2,132 

1993 2,533 961 21.3 443 305 1,873 

1992 2,058 834 21.2 381 320 1,623 

1991 1,778 675 21.0 319 370 1,363 

1990 1,593 536 21.1 286 310 1,173 

1989 1,191 408 21.3 254 310 807 

1988 837 328 21.6 218 365 507 

1987 890 263 22.1 197 360 376 

1986 384 175 23.8 175 306 105 

1985 139 112 25.6 142 206 (7) 

1984 (90) 78 26.2 112 86 (71) 

1983 (9) 54 26.3 81 48 49 

1982 (464) 16 27.2 60 36 (192) 

1981 (429) 0 25.0 49 (28) (206) 

1980 21 Not 

Applicable 

Before 

1981 

Not 

Applicable 

Before 

1981 

44 19 14 

1979 322 46 35 162 

1978 294 39 36 209 

1977 251 32 28 165 

1976 203 30 25 127 

1975 174 27 16 115 

1974 142 23 17 107 

1973 180 18 12 126 

1972 138 13 5 96 

1971 49 15 4 61 

Source: Fannie Mae 

1 Interest income net of interest expense, nominal basis, adjusted to remove FAS 133 effects starting in 2001.

2 Credit-related expenses are mortgage loan loss provision plus real estate owned expenses.

3 Net income adjusted to remove FAS 133 starting in 2001.

100 
Table 3a. Fannie Mae Earnings

Earnings ($ in Millions)

Period

Net

Income

($)

Purchased

Option

(Income)

Expense

($)

Purchased

Option

Amortization

Expense

 ($)

Cumulative

Gain on

Adoption of

FAS 133

($)

Tax Effects of

Adjustments

($)

Operating

Net Income1

($)

Return on

Adjusted

Common

Equity2

(%)

4Q01 1,969 (578) (239) 0 286 1,438 25.4 

3Q01 1,229 413 (186) 0 (79) 1,377 25.5 

2Q01 1,403 (36) (100) 0 47 1,314 25.5 

1Q01 1,293 238 (65) (258) 30 1,238 25.3 

Annual Data

2001 5,894 37 (590) (258) 284 5,367 25.4 

2000 4,448 Not Not Not Not 4,448 25.2 

1999 3,912 Applicable Applicable Applicable Applicable 3,912 25.0 

1998 3,418 Before Before Before Before 3,418 25.2 

1997 3,056 2001 2001 2001 2001 3,056 24.6 

1996 2,725 2,725 24.1 

1995 2,144 2,144 20.9 

1994 2,132 2,132 24.3 

1993 1,873 1,873 25.3 

1992 1,623 1,623 26.5 

1991 1,363 1,363 27.7 

1990 1,173 1,173 33.7 

1989 807 807 31.1 

1988 507 507 25.2 

1987 376 376 23.5 

1986 105 105 9.5 

1985 (7) (7) (0.7) 

1984 (71) (71) (7.4) 

1983 49 49 5.1 

1982 (192) (192) (18.9) 

1981 (206) (206) (17.2) 

1980 14 14 0.9 

1979 162 162 11.3 

1978 209 209 16.5 

1977 165 165 15.3 

1976 127 127 13.8 

1975 115 115 14.1 

1974 107 107 14.7 

1973 126 126 20.3 

1972 96 96 18.8 

1971 61 61 14.4 

Source: Fannie Mae 

1 Reported net income adjusted for net effect of the reconciliation. 

2 Operating net income divided by average adjusted common equity (common stock, retained earnings additional paid-in capital, and common stock in 

treasury) -- non-GAAP basis. 

101 
Table 4. Fannie Mae Balance Sheet

Balance Sheet 

($ in Millions)

Mortgage Backed

 Securities Outstanding 

($ in Millions)

End of 

Period

Total

Assets

 ($)

Retained

Mortgage

Portfolio1

($)

Non-Mortgage

Investments2

 ($)

Debt

Outstanding

($)

Shareholders’

Equity3

($)

 Core

Capital 4

($)

Total MBS

Outstanding5

 ($)

Multiclass MBS

Outstanding6

($)

4Q01 799,791 705,372 74,554 763,467 18,118 25,182 858,867 392,457 

3Q01 766,650 687,002 57,875 726,992 13,778 23,778 816,724 349,727 

2Q01 737,151 663,199 58,259 702,334 19,431 22,978 773,836 333,468 

1Q01 700,977 640,934 44,102 666,592 16,086 21,482 725,685 335,918 

Annual Data

2001 799,791 705,372 74,554 763,467 18,118 25,182 858,867 392,457 

2000 675,072 607,602 54,982 642,682 20,838 20,827 706,684 334,508 

1999 575,167 522,977 39,751 547,619 17,629 17,876 679,169 335,514 

1998 485,014 415,434 58,515 460,291 15,453 15,465 637,143 361,613 

1997 391,673 316,592 64,596 369,774 13,793 13,793 579,138 388,360 

1996 351,041 286,527 56,606 331,270 12,773 12,773 548,173 339,798 

1995 316,550 252,868 57,273 299,174 10,959 10,959 513,230 353,528 

1994 272,508 220,815 46,335 257,230 9,541 9,541 486,345 378,733 

1993 216,979 190,169 21,396 201,112 8,052 8,052 471,306 381,865 

1992 180,978 156,260 19,574 166,300 6,774 Not 

Applicable 

Before 

1993 

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 

1 Gross retained portfolio net of unamortized purchase premium, discounts and deferred price adjustments.

2 Prior to 1982 balances primarily composed of U.S. government and agency securities.

3 GAAP basis.

4 The sum of common stock, noncumulative preferred stock, paid-in capital and retained earnings. 

5 Total MBS outstanding net of MBS in portfolio.

6 The majority qualify as REMICs and are also known as structured securitizations. 

102 
Table 5. Fannie Mae Retained Mortgage Portfolio Detail

($ in Millions)1

End of 

Period

Whole

Loans

($)

Fannie Mae

Securities

($)

Other

Mortgage-Related

Securities

($)

Total Retained

Mortgage Portfolio

($)

4Q01 165,957 431,484 110,035 707,476 

3Q01 161,858 411,407 116,283 689,548 

2Q01 157,362 390,142 118,231 665,735 

1Q01 154,241 373,364 115,775 643,380 

Annual Data

2001 165,957 431,484 110,035 707,476 

2000 152,505 351,066 106,551 610,122 

1999 149,105 281,714 93,122 523,941 

1998 155,779 197,375 61,361 414,515 

1997 160,102 130,444 26,132 316,678 

1996 167,891 102,607 16,554 287,052 

1995 171,481 69,729 12,301 253,511 

1994 170,909 43,998 7,150 225,057 

1993 163,149 24,219 3,493 190,861 

1992 134,597 20,535 2,987 158,119 

1991 109,251 16,700 3,032 128,983 

1990 101,797 11,758 3,073 116,628 

1989 95,729 11,720 3,272 110,721 

1988 92,220 8,153 2,640 103,013 

1987 89,618 4,226 2,902 96,746 

1986 94,167 1,606 2,060 97,833 

1985 97,421 435 793 98,649 

1984 87,205 477 427 88,109 

1983 77,983 273 78,256 

1982 71,777 37 71,814 

1981 61,411 1 61,412 

1980 57,326 1 57,327 

1979 51,096 1 51,097 

1978 43,315 43,315 

1977 34,377 34,377 

1976 32,937 32,937 

1975 31,916 31,916 

1974 29,708 29,708 

1973 24,459 24,459 

1972 20,326 20,326 

1971 18,515 18,515 

Source: Fannie Mae 

1 Gross retained portfolio (total unpaid principal balance). 

103

Table 6. Fannie Mae Derivatives

Financial Derivatives - Notional Amount Outstanding

($ in Millions)

End of 

Period

Interest

Rate

Swaps

($)

Interest

Rate Caps,

Floors, and

Corridors

($)

Foreign

Currency

($)

OTC

Futures,

Options

and

Forward

Rate

Agreements

($)

ExchangeTraded

Futures,

Options,

and Other

Derivatives

($)

Other

($)

 Total

($)

4Q01 299,953 75,893 8,493 148,800 0 0 533,139 

3Q01 295,990 66,193 8,470 116,165 0 0 486,818 

2Q01 285,103 59,443 8,477 101,765 262 600 455,650 

1Q01 246,822 53,413 8,526 60,215 2,000 3,335 374,311 

Annual Data

2001 299,953 75,893 8,493 148,800 0 0 533,139 

2000 227,651 33,663 9,511 48,865 0 0 319,690 

1999 192,032 28,950 11,507 41,081 0 1,400 274,970 

1998 142,846 14,500 12,995 13,481 0 3,735 187,557 

1997 149,673 100 9,968 0 0 1,660 161,401 

1996 158,140 300 2,429 0 0 350 161,219 

1995 125,679 300 1,224 29 0 975 128,207 

1994 87,470 360 1,023 0 0 1,465 90,317 

1993 49,458 360 1,023 0 0 1,425 52,265 

1992 24,130 0 1,177 0 0 1,350 26,658 

1991 9,100 0 Not 

Available 

Before 

1992 

50 0 1,050 10,200 

1990 4,800 0 25 0 1,700 6,525 

Source: Fannie Mae 

104

Table 7. Fannie Mae Non-Mortgage Investments

 Non-Mortgage Investments ($ in Millions)

End of 

Period

 Federal Funds

and Eurodollars

($)

Asset Backed

Securities

($)

Repurchase

Agreements

($)

Commercial

Paper and

Corporate Debt

($)

Other

($)

 Total1

($)

4Q01 16,089 20,941 9,380 23,837 4,343 74,590 

3Q01 6,359 20,484 5,436 15,550 10,043 57,872 

2Q01 5,271 19,387 7,435 15,458 10,705 58,256 

1Q01 1,172 17,703 7,677 8 17,540 44,100 

Annual Data

2001 16,089 20,941 9,380 23,837 4,343 74,590 

2000 7,539 17,512 2,722 8,893 18,316 54,982 

1999 4,837 19,207 2,574 1,723 11,410 39,751 

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

1 Prior to 1982, the majority of non-mortgage investments was comprised of U.S. government securities and agency securities.

105

Table 8. Fannie Mae Asset - Liability Mix

Asset - Liability Ratios 

Asset Mix Liability Mix

End of 

Period

Retained Portfolio /

Total Assets

(%)

Non-Mortgage

Investments /

Total Assets

(%)

Callable Debt /

Total Effective

Long-Term Debt1

(%)

Total Effective

Long-Term Debt /

Total Debt2

 (%)

4Q01 88.2 9.3 37.1 82.2 

3Q01 89.6 7.5 36.1 80.3 

2Q01 89.9 7.9 36.1 80.2 

1Q01 91.4 6.3 35.3 77.4 

Annual Data

2001 88.2 9.3 37.1 82.2 

2000 90.0 8.1 42.9 84.6 

1999 90.9 6.9 43.4 87.1 

1998 85.7 12.1 42.9 76.4 

1997 80.8 16.5 46.4 79.4 

1996 81.6 16.1 47.5 80.5 

1995 79.9 18.1 48.0 73.9 

1994 81.0 17.0 54.6 72.6 

1993 87.6 9.9 58.1 80.0 

1992 86.3 10.8 48.8 77.9 

1991 86.1 6.7 36.0 85.5 

1990 85.7 7.4 21.9 82.6 

1989 86.9 6.7 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 

1 Callable debt includes derivative financial instruments that provide interest-rate protection similar to callable debt. 

2 Total effective long-term debt represents debt with an effective repricing date greater than one year. 

106 
Table 9. Fannie Mae Mortgage Asset Quality

Mortgage Asset Quality 

End of 

Period

Single-Family

Delinquency

Rate1

(%)

Multifamily

Delinquency

Rate2

(%)

Credit Losses /Total

MBS Outstanding

plus Retained

Portfolio3

(%)

REO / Total MBS

Outstanding

plus Retained

Portfolio4

(%)

Credit-Enhanced

Outstanding / Total

MBS Outstanding plus

Retained Portfolio5

(%)

4Q01 0.49 0.32 0.01 0.04 15.5 

3Q01 0.45 0.10 0.01 0.04 17.0 

2Q01 0.43 0.07 0.01 0.04 17.8 

1Q01 0.44 0.05 0.01 0.05 19.3 

Annual Data

2001 0.49 0.32 0.01 0.04 15.5 

2000 0.45 0.05 0.01 0.05 20.3 

1999 0.48 0.12 0.01 0.06 20.9 

1998 0.58 0.29 0.03 0.08 17.5 

1997 0.62 0.37 0.04 0.10 12.8 

1996 0.58 0.68 0.05 0.11 10.5 

1995 0.56 0.81 0.05 0.08 10.6 

1994 0.47 1.21 0.06 0.10 10.2 

1993 0.48 2.34 0.04 0.10 10.6 

1992 0.53 2.65 0.04 0.09 15.6 

1991 0.64 3.62 0.04 0.07 22.0 

1990 0.58 1.70 0.06 0.09 25.9 

1989 0.69 3.20 0.07 0.14 Not 

Available 

Before 

1990 

1988 0.88 6.60 0.11 0.15 

1987 1.12 Not 

Available 

Before 

1988 

0.11 0.18 

1986 1.38 0.12 0.22 

1985 1.48 0.13 0.32 

1984 1.65 0.09 0.33 

1983 1.49 0.05 0.35 

1982 1.41 0.01 0.20 

1981 0.96 0.01 0.13 

1980 0.90 0.01 0.09 

1979 0.56 0.02 0.11 

1978 0.55 0.02 0.18 

1977 0.46 0.02 0.26 

1976 1.58 0.03 0.27 

1975 0.56 0.03 0.51 

1974 0.51 0.02 0.52 

1973 Not 

Available 

Before 

1974 

0.00 0.61 

1972 0.02 0.98 

1971 0.01 0.59 

Source: Fannie Mae 

1 Includes conventional loans for which Fannie Mae has primary risk of loss that are 90 or more days delinquent or are in the process of foreclosure. 

Data prior to 1992 includes loans in relief or bankruptcy, even if they are less than 90 days delinquent. 

2 Includes loans that are two or more months delinquent based on the dollar amount of such loans in the portfolio and underlying MBS. 

3 Credit losses are charge-offs plus real estate owned expense; average balances used to calculate ratios subsequent to 1994; quarterly data are

annualized. 

4 Real Estate Owned balances reflect end-of-period amounts. Beginning with 1995, data reflect adoption of SFAS 114. 

5 The proportion of loans that has additional recourse from a third party to accept some or all of the expected losses on defaulted mortgages. 

107 
Table 10. Fannie Mae Capital

Capital ($ in Millions)

End of 

Period

Core

Capital

($)

Regulatory

Minimum Capital

Requirement1

($)

Regulatory

Capital

Surplus

(Deficit)2

($)

Market

Capitalization3

 ($)

Core Capital /

Total Assets

(%)

Core Capital /

Outstanding

MBS plus Total

Assets

(%)

Common Share

Dividend

Payout Rate4

(%)

4Q01 25,182 24,182 1,000 79,281 3.15 1.52 21.4 

3Q01 23,778 23,130 648 80,055 3.10 1.50 22.4 

2Q01 22,978 22,177 801 85,239 3.12 1.52 23.5 

1Q01 21,482 21,033 448 79,628 3.06 1.51 24.9 

Annual Data

2001 25,182 24,182 1,000 79,281 3.15 1.52 23.0 

2000 20,827 20,294 533 86,643 3.09 1.51 26.0 

1999 17,876 17,770 106 63,651 3.11 1.43 28.8 

1998 15,465 15,334 131 75,881 3.19 1.38 29.5 

1997 13,793 12,703 1,090 59,167 3.52 1.42 29.4 

1996 12,773 11,466 1,307 39,932 3.64 1.42 30.4 

1995 10,959 10,451 508 33,812 3.46 1.32 34.6 

1994 9,541 9,416 126 19,882 3.50 1.26 30.8 

1993 8,052 7,864 176 21,387 3.70 1.17 26.8 

1992 Not 

Applicable

Before 

1993 

Not 

Applicable

Before 

1993 

Not 

Applicable

Before 

1993 

20,874 Not 

Applicable

Before 

1993 

Not 

Applicable

Before 

1993 

23.2 

1991 18,836 21.3 

1990 8,490 14.7 

1989 8,092 12.8 

1988 3,992 11.2 

1987 2,401 11.7 

1986 3,006 8.0 

1985 1,904 30.1 

1984 1,012 Not Applicable 

1983 1,514 13.9 

1982 1,603 Not Applicable 

1981 502 Not Applicable 

1980 702 464.2 

1979 Not 

Available 

Before 

1980 

45.7 

1978 30.3 

1977 31.8 

1976 33.6 

1975 31.8 

1974 29.6 

1973 18.1 

1972 15.2 

1971 18.7 

Source: Fannie Mae and OFHEO 

1 Minimum capital requirement in accordance with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

2 The difference between Core Capital and Minimum Regulatory Capital Requirement.

3 Stock price multiplied by number of outstanding common shares.

4 Common dividends paid as a percentage of net income available to common shareholders.

108 
Table 11. Freddie Mac Mortgage Purchases

Business Activity ($ Millions)

Purchases

Period

 Single-Family

($)

 Multifamily

($) Total Mortgages1

($)

 Mortgage Securities2

($)

4Q01 123,151 4,068 127,219 63,791 

3Q01 109,665 2,048 111,713 56,853 

2Q01 104,935 1,955 106,890 54,985 

1Q01 55,404 1,438 56,842 55,285 

Annual Data

2001 393,155 9,509 402,664 230,914 

2000 168,013 6,030 174,043 91,896 

1999 232,612 7,181 239,793 101,898 

1998 263,490 3,910 267,400 128,446 

1997 115,160 2,241 117,401 35,385 

1996 122,850 2,229 125,079 36,824 

1995 89,971 1,565 91,536 39,292 

1994 122,563 847 123,410 19,817 

1993 229,051 191 229,242 Not 

Available 

Before 

1994 

1992 191,099 27 191,126 

1991 99,729 236 99,965 

1990 74,180 1,338 75,518 

1989 76,765 1,824 78,589 

1988 42,884 1,191 44,075 

1987 74,824 2,016 76,840 

1986 99,936 3,538 103,474 

1985 42,110 1,902 44,012 

1984 Not 

Available 

Before 

1985 

Not 

Available 

Before 

1985 

21,885 

1983 22,952 

1982 23,671 

1981 3,744 

1980 3,690 

1979 5,716 

1978 6,524 

1977 4,124 

1976 1,129 

1975 1,716 

1974 2,185 

1973 1,334 

1972 1,265 

1971 778 

Source: Freddie Mac 

1 Loans purchased from lenders; excluding non-Freddie Mac mortgage securities and repurchased Freddie Mac MBS. 

2 Not included in total purchases. 

109 
Table 12. Freddie Mac MBS Issuances

Business Activity ($ in Millions)

MBS Issuances

Period

 Single-Family MBS

($)

 Multifamily MBS

($)

Total MBS

($)

 Multiclass MBS1

($)

4Q01 119,306 1,830 121,136 70,074 

3Q01 110,920 253 111,173 50,521 

2Q01 102,964 58 103,022 48,250 

1Q01 54,065 215 54,280 23,592 

Annual Data

2001 387,255 2,356 389,611 192,437 

2000 165,115 1,786 166,901 48,202 

1999 230,986 2,045 233,031 119,565 

1998 249,627 937 250,564 135,162 

1997 113,758 500 114,258 84,366 

1996 118,932 770 119,702 34,145 

1995 85,522 355 85,877 15,372 

1994 116,901 209 117,110 73,131 

1993 208,724 0 208,724 143,336 

1992 179,202 5 179,207 131,284 

1991 92,479 0 92,479 72,032 

1990 71,998 1,817 73,815 40,479 

1989 72,931 587 73,518 39,754 

1988 39,490 287 39,777 12,985 

1987 72,866 2,152 75,018 0 

1986 96,798 3,400 100,198 2,233 

1985 37,583 1,245 38,828 2,625 

1984 Not 

Available 

Before 

1985 

Not 

Available 

Before 

1985 

18,684 1,805 

1983 19,691 1,685 

1982 24,169 Not 

Issued 

Before 

1983 

1981 3,526 

1980 2,526 

1979 4,546 

1978 6,412 

1977 4,657 

1976 1,360 

1975 950 

1974 46 

1973 323 

1972 494 

1971 65 

Source: Freddie Mac 

1 The majority qualify as Real Estate Mortgage Investment Conduits (REMICs), and are also known as structured securitizations. 

In years 1983 - 1986, data consist of collateralized mortgage obligations (CMOs) and mortgage cash flow obligations (MCFs). 

110 
Table 13. Freddie Mac Earnings

Earnings ($ in Millions)

Period

Operating

 Net Interest

Income1, 2, 3

($)

Guarantee

Fee

Income 2,3

($)

Average

Guarantee

Fee 2,3

(basis points)

Administrative

Expenses

($)

Credit-related

Expenses4

($)

Operating Net

Income 5

($)

4Q01 1,194 297 18.6 259 24 853 

3Q01 1,015 287 18.5 201 18 813 

2Q01 904 274 18.8 194 18 769 

1Q01 819 272 19.0 190 24 719 

Annual Data

2001 3,932 1,130 18.7 844 84 3,154 

2000 3,270 1,057 19.3 713 106 2,547 

1999 2,926 1,019 19.8 655 159 2,223 

1998 2,215 1,019 21.4 578 342 1,700 

1997 1,847 1,082 22.9 495 529 1,395 

1996 1,705 1,086 23.4 440 608 1,243 

1995 1,396 1,087 23.8 395 541 1,091 

1994 1,112 1,108 24.4 379 425 983 

1993 772 1,009 23.8 361 524 786 

1992 695 936 24.7 329 457 622 

1991 683 792 23.7 287 419 555 

1990 619 654 22.4 243 474 414 

1989 517 572 23.4 217 278 437 

1988 492 465 21.5 194 219 381 

1987 319 472 24.2 150 175 301 

1986 299 301 22.4 110 120 247 

1985 312 188 22.1 81 79 208 

1984 213 158 24.7 71 54 144 

1983 125 132 26.2 53 46 86 

1982 30 77 24.5 37 26 60 

1981 34 36 19.5 30 16 31 

1980 54 23 14.3 26 23 34 

1979 55 18 13.2 19 20 36 

1978 37 14 14.9 14 13 25 

1977 31 9 18.9 12 8 21 

1976 18 3 13.6 10 (1) 14 

1975 31 3 24.8 10 11 16 

1974 42 2 25.5 8 33 5 

1973 31 2 32.4 7 15 12 

1972 10 1 39.4 5 4 4 

1971 10 1 Not Available 

Before 1972 

Not Available 

Before 1972 

Not Available 

Before 1972 

6 

Source: Freddie Mac 

1 Interest income net of interest expense, nominal basis, adjusted to remove FAS 133 effects starting in 2001. 

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 uncollectible interest on single-family mortgages. Pre-1993 amounts do not reflect this 

change. 

4 Credit-related expenses are mortgage loan loss provision plus real estate owned expense. From 1988 to 1990, data include real estate 

owned disposition loss provisions instead of expense, and before 1988, only mortgage loan loss provision. 

5 Net income adjusted to remove FAS 133 effects starting in 2001. 

111 
Table 13a. Freddie Mac Earnings

Earnings ($ in Millions)

Period

Net

Income

($)

Remove

Certain FAS

133 Hedged

Item

Amortization

($)

Include

Straight-line

Option

Premium

Amortization

($)

Remove

FAS 133

"Fair Value

Gains

(Losses)"

($)

Tax

Effects of

Preceeding

Adjustments

($)

Cumulative

Gain on

Adoption of

FAS 133

($)

Operating

Net

Income1

($)

Return on

Adjusted

Common

Equity2

(%)

4Q01 1,364 (316) (366) (105) 276 - 853 22.5 

3Q01 1,032 (118) (305) 85 119 - 813 23.2 

2Q01 914 (68) (218) 64 77 - 769 23.5 

1Q01 837 (17) (140) (17) 61 (5) 719 23.4 

Annual Data

2001 4,147 (519) (1,029) 27 533 (5) 3,154 23.1 

2000 2,547 Not Not Not Not Not 2,547 23.7 

1999 2,223 Applicable Applicable Applicable Applicable Applicable 2,223 25.5 

1998 1,700 Before Before Before Before Before 1,700 22.6 

1997 1,395 2001 2001 2001 2001 2001 1,395 23.1 

1996 1,243 1,243 22.6 

1995 1,091 1,091 22.1 

1994 983 983 23.3 

1993 786 786 22.3 

1992 622 622 21.2 

1991 555 555 23.6 

1990 414 414 20.4 

1989 437 437 25.0 

1988 381 381 27.5 

1987 301 301 28.2 

1986 247 247 28.5 

1985 208 208 30.0 

1984 144 144 52.0 

1983 86 86 44.5 

1982 60 60 21.9 

1981 31 31 13.1 

1980 34 34 14.7 

1979 36 36 16.2 

1978 25 25 13.4 

1977 21 21 12.4 

1976 14 14 9.5 

1975 16 16 11.6 

1974 5 5 4.0 

1973 12 12 9.9 

1972 4 4 3.5 

1971 6 6 5.5 

Source: Freddie Mac 

1 Reported net income adjusted for net effect of the reconciliation. 

2 Annual computation reflects the simple average of quarterly returns. Calculated as annualized operating earnings available for common 

shareholders divided by average realized common stockholders’ equity (common stockholders’ equity excluding "Accumulated other

comprehensive income, net of taxes"). 

112 
Table 14. Freddie Mac Balance Sheet

Balance Sheet 

($ in Millions)

Mortgage-Backed 

Securities Outstanding ($ 

in Millions)

End of 

Period

Total

Assets

 ($)

Retained

Mortgage

Portfolio1

($)

Non-Mortgage

Investments2

($)

Debt

Outstanding

 ($)

Shareholders’

Equity3

($)

Core

Capital4

($)

Total MBS

Outstanding5

($)

Multiclass MBS

Outstanding6

 ($)

4Q01 617,340 494,585 77,444 565,071 15,373 19,336 646,448 373,552 

3Q01 571,907 475,214 61,344 534,434 14,506 17,743 635,844 350,932 

2Q01 537,590 442,878 58,953 496,712 13,980 16,870 604,057 329,866 

1Q01 497,839 422,085 45,745 461,338 12,821 15,770 572,328 312,246 

Annual Data

2001 617,340 494,585 77,444 565,071 15,373 19,336 646,448 373,552 

2000 459,297 385,451 43,521 426,899 14,837 14,380 576,101 309,185 

1999 386,684 322,914 34,152 360,711 11,525 12,692 537,883 316,168 

1998 321,421 255,670 42,160 287,396 10,835 10,715 478,351 260,504 

1997 194,597 164,543 16,430 172,842 7,521 7,376 475,985 233,829 

1996 173,866 137,826 22,248 156,981 6,731 6,743 473,065 237,939 

1995 137,181 107,706 12,711 119,961 5,863 5,829 459,045 246,366 

1994 106,199 73,171 17,808 93,279 5,162 5,169 460,656 264,152 

1993 83,880 55,938 18,225 49,993 4,437 4,437 439,029 265,178 

1992 59,502 33,629 12,542 29,631 3,570 Not 

Applicable 

Before 

1993 

407,514 218,747 

1991 46,860 26,667 9,956 30,262 2,566 359,163 146,978 

1990 40,579 21,520 12,124 30,941 2,136 316,359 88,124 

1989 35,462 21,448 11,050 26,147 1,916 272,870 52,865 

1988 34,352 16,918 14,607 26,882 1,584 226,406 15,621 

1987 25,674 12,354 10,467 19,547 1,182 212,635 3,652 

1986 23,229 13,093 Not 

Available 

Before 

1987 

15,375 953 169,186 5,333 

1985 16,587 13,547 12,747 779 99,909 5,047 

1984 13,778 10,018 10,999 606 70,026 3,214 

1983 8,995 7,485 7,273 421 57,720 1,669 

1982 5,999 4,679 4,991 296 42,952 Not 

Issued 

Before 

1983 

1981 6,326 5,178 5,680 250 19,897 

1980 5,478 5,006 4,886 221 16,962 

1979 4,648 4,003 4,131 238 15,316 

1978 3,697 3,038 3,216 202 12,017 

1977 3,501 3,204 3,110 177 6,765 

1976 4,832 4,175 4,523 156 2,765 

1975 5,899 4,878 5,609 142 1,643 

1974 4,901 4,469 4,684 126 780 

1973 2,873 2,521 2,696 121 791 

1972 1,772 1,726 1,639 110 444 

1971 1,038 935 915 107 64 

Source: Freddie Mac 

1 Gross retained portfolio net of unamortized purchase premium, discounts and deferred fees. 

2 Excludes mortgage-related securities held for trading purposes. 

3 GAAP basis. 

4 The sum of common stock, noncumulative preferred stock, paid-in capital and retained earnings. 

5 Total MBS outstanding net of repurchased MBS in retained portfolio. 

6 The majority qualify as REMICs and are also known as structured securitizations. In years 1983 - 1999, data also include original issue CMOs and 

MCFs, and structured securitizations and PCs with mandatory purchase obligations. 

113 
Table 15. Freddie Mac Retained Mortgage Portfolio Detail

 ($ in Millions)

End of 

Period

Whole Loans

($)

Freddie Mac

Securities

($)

Other

Mortgage-Related

Securities

($)

Total Retained

Mortgage Portfolio

($)

4Q01 62,792 301,961 129,832 494,585 

3Q01 59,639 291,646 123,929 475,214 

2Q01 61,542 269,693 111,643 442,878 

1Q01 60,111 261,288 100,686 422,085 

Annual Data

2001 62,792 301,961 129,832 494,585 

2000 59,240 246,209 80,002 385,451 

1999 56,676 211,198 55,040 322,914 

1998 57,084 168,108 30,478 255,670 

1997 48,454 103,400 12,689 164,543 

1996 46,504 81,195 11,127 137,826 

1995 43,753 56,006 7,947 107,706 

1994 Not 

Available 

Before 

1995 

30,670 Not 

Available 

Before 

1995 

73,171 

1993 15,877 55,938 

1992 6,394 33,629 

1991 Not 

Available 

Before 

1992 

26,667 

1990 21,520 

1989 21,448 

1988 16,918 

1987 12,354 

1986 13,093 

1985 13,547 

1984 10,018 

1983 7,485 

1982 4,679 

1981 5,178 

1980 5,006 

1979 4,003 

1978 3,038 

1977 3,204 

1976 4,175 

1975 4,878 

1974 4,469 

1973 2,521 

1972 1,726 

1971 935 

Source: Freddie Mac 

114

Table 16. Freddie Mac Financial Derivatives

 Financial Derivatives - Notional Amount Outstanding 

($ in Millions)

End of 

Period

Interest

Rate

Swaps

($)

Interest

Rate Caps,

Floors,

and

Corridors

($)

TreasuryBased

Contracts

($)

Foreign

Currency

($)

 OTC

Futures,

Options,

Forward

Rate

Agreements

($)

ExchangeTraded

Futures,

Options,

and Other

Derivatives

($)

Other

($)

Total

($)

4Q01 442,769 12,178 13,468 23,995 187,487 369,695 2,802 1,052,394 

3Q01 507,976 12,454 8,087 19,606 172,862 369,295 535 1,090,815 

2Q01 373,516 12,517 5,986 19,293 151,675 124,471 5,239 692,697 

1Q01 355,147 12,610 4,040 14,859 122,332 65,590 1,608 576,186 

Annual Data

2001 442,769 12,178 13,468 23,995 187,487 369,695 2,802 1,052,394 

2000 277,888 12,819 2,200 10,208 113,064 22,517 35,839 474,535 

1999 126,580 19,936 8,894 1,097 172,750 94,987 0 424,244 

1998 57,555 21,845 11,542 1,464 63,000 157,832 0 313,238 

1997 54,172 21,995 12,228 1,152 6,000 0 0 95,547 

1996 46,646 14,095 651 544 0 0 0 61,936 

1995 45,384 13,055 24 0 0 0 0 58,463 

1994 21,834 9,003 0 0 0 0 0 30,837 

1993 17,888 1,500 0 0 0 0 0 19,388 

Source: Freddie Mac 

115

Table 17. Freddie Mac Non-Mortgage Investments

Non-Mortgage Investments1 ($ in Millions)

End of 

Period

Federal Funds

and Eurodollars

 ($)

Asset Backed

Securities

($)

Repurchase

Agreements

($)

Commercial

Paper and

Corporate Debt

($)

Other

($)

Total

($)

4Q01 15,846 26,253 5,531 21,424 8,390 77,444 

3Q01 12,930 25,966 4,918 13,840 3,690 61,344 

2Q01 6,421 24,107 6,173 14,365 7,887 58,953 

1Q01 6,150 21,373 6,204 9,545 2,473 45,745 

Annual Data

2001 15,846 26,253 5,531 21,424 8,390 77,444 

2000 2,267 19,063 7,488 7,302 7,401 43,521 

1999 10,545 10,305 4,961 3,916 4,425 34,152 

1998 20,524 7,124 1,756 7,795 4,961 42,160 

1997 2,750 2,200 6,982 3,203 1,295 16,430 

1996 9,968 2,086 6,440 1,058 2,696 22,248 

1995 110 499 9,217 1,201 1,684 12,711 

1994 7,260 0 5,913 1,234 3,401 17,808 

1993 9,267 0 4,198 1,438 3,322 18,225 

1992 5,632 0 4,060 53 2,797 12,542 

1991 2,949 0 4,437 0 2,570 9,956 

1990 1,112 0 9,063 0 1,949 12,124 

1989 3,527 0 5,765 0 1,758 11,050 

1988 4,469 0 9,107 0 1,031 14,607 

1987 3,177 0 5,859 0 1,431 10,467 

Source: Freddie Mac 

Excludes mortgage-related securities held for trading purposes. 

116


1 
Table 18. Freddie Mac Asset Mix

Asset Ratios

End of 

Period

Total Retained

Mortgage Portfolio /

Total Assets

(%)

Non-Mortgage

Investments /

Total Assets

(%)

4Q01 80.1 12.5 

3Q01 83.1 10.7 

2Q01 82.4 11.0 

1Q01 84.8 9.2 

Annual Data

2001 80.1 12.5 

2000 83.9 9.5 

1999 83.5 8.8 

1998 79.5 13.1 

1997 84.6 8.4 

1996 79.3 12.8 

1995 78.5 9.3 

1994 68.9 16.8 

1993 66.7 21.7 

1992 56.5 21.1 

1991 56.9 21.2 

1990 53.0 29.9 

1989 60.5 31.2 

1988 49.2 42.5 

1987 48.1 40.8 

1986 56.4 Not 

Available 

Before 

1987 

1985 81.7 

1984 72.7 

1983 83.2 

1982 78.0 

1981 81.9 

1980 91.4 

1979 86.1 

1978 82.2 

1977 91.4 

1976 86.1 

1975 82.2 

1974 91.5 

1973 87.7 

1972 97.4 

1971 90.1 

Source: Freddie Mac 

117

Table 19. Freddie Mac Mortgage Asset Quality

Mortgage Asset Quality 

End of 

Period

Single-Family

 Delinquency

Rate1

(%)

Multifamily

Delinquency

Rate2,3

(%)

Credit Losses / Total

MBS Outstanding plus

Retained Portfolio4

(%)

REO / Total MBS

Outstanding plus

Retained Portfolio5

(%)

Credit-Enhanced

Outstanding / Total MBS

Outstanding plus

Retained Portfolio6

(%)

4Q01 0.41 0.15 0.01 0.04 29.3 

3Q01 0.38 0.03 0.01 0.03 30.4 

2Q01 0.36 0.02 0.01 0.03 32.3 

1Q01 0.36 0.05 0.01 0.04 32.6 

Annual Data

2001 0.41 0.15 0.01 0.04 29.3 

2000 0.37 0.04 0.01 0.04 31.8 

1999 0.39 0.14 0.02 0.05 29.9 

1998 0.50 0.37 0.04 0.08 27.3 

1997 0.55 0.96 0.08 0.11 15.9 

1996 0.58 1.96 0.10 0.13 10.0 

1995 0.60 2.88 0.11 0.14 9.7 

1994 0.55 3.79 0.08 0.18 7.2 

1993 0.61 5.92 0.11 0.16 5.3 

1992 0.64 6.81 0.09 0.12 Not 

Available 

Before 

1993 

1991 0.61 5.42 0.08 0.14 

1990 0.45 2.63 0.08 0.12 

1989 0.38 2.53 0.08 0.09 

1988 0.36 2.24 0.07 0.09 

1987 0.36 1.49 0.07 0.08 

1986 0.42 1.07 Not 

Available 

Before 

1987 

0.07 

1985 0.42 0.63 0.10 

1984 0.46 0.42 0.15 

1983 0.47 0.58 0.15 

1982 0.54 1.04 0.12 

1981 0.61 Not 

Available 

Before 

1982 

0.07 

1980 0.44 0.04 

1979 0.31 0.02 

1978 0.21 0.02 

1977 Not 

Available 

Before 

1978 

0.03 

1976 0.04 

1975 0.03 

1974 0.02 

Source: Freddie Mac 

1 Based on number of mortgages 90 days or more delinquent. 1994 - 2001 data include only loans for which Freddie Mac has assumed primary

default risk (“at-risk”); includes foreclosures and in process. Excludes loans for which the lender or a third party has retained primary default risk by

pledging collateral or agreeing to accept losses on loans that default and securities guaranteed by agencies or subject to subordination agreements. 

Pre-1994 calculations include both at-risk and non-at-risk loans. 

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. 

4 Credit losses equal to charge-offs plus REO operations expense. Average balances used to calculate ratios subsequent to 1994; quarterly data are

annualized. 

5 Beginning with 1992, data reflect adoption of SFAS 114. 

6 Includes loans for which the lender or third-party has retained primary default risk by pledging collateral or agreeing to accept losses on loans that 

default. Also includes securities guaranteed by agencies or subject to subordination agreements. In some cases, the lender’s or third party’s risk is 

limited to a specific level of losses at the time the credit enhancement becomes effective. 

118 
Table 20. Freddie Mac Capital

Capital ($ in Millions)

End of 

Period

Core

Capital

($)

Regulatory

Minimum

Capital

Requirement1

($)

Regulatory

Capital

Surplus

(Deficit)2

($)

Market

Capitalization3

($)

Core Capital /

Total Assets

(%)

Core Capital /

Total MBS

Outstanding

plus Total

Assets

(%)

Common

Share

Dividend

Payout

Rate4

(%)

4Q01 19,336 18,515 821 45,462 3.13 1.53 17.5 

3Q01 17,743 17,335 408 45,179 3.10 1.47 18.4 

2Q01 16,870 16,303 567 47,221 3.10 1.48 19.4 

1Q01 15,770 15,164 606 44,963 3.17 1.47 20.6 

Annual Data

2001 19,336 18,515 821 45,462 3.13 1.53 19.0 

2000 14,380 14,178 202 47,702 3.13 1.39 20.0 

1999 12,692 12,287 405 32,713 3.28 1.37 20.1 

1998 10,715 10,333 382 44,797 3.33 1.34 20.7 

1997 7,376 7,082 294 28,461 3.79 1.10 21.0 

1996 6,743 6,517 226 19,161 3.88 1.04 21.3 

1995 5,829 5,584 245 14,932 4.25 0.98 21.1 

1994 5,169 4,884 285 9,132 4.87 0.91 20.5 

1993 4,437 3,782 655 9,005 5.29 0.85 21.6 

1992 Not 

Applicable 

Before 

1993 

Not 

Applicable 

Before 

1993 

Not 

Applicable 

Before 

1993 

8,721 Not 

Applicable 

Before 

1993 

Not 

Applicable 

Before 

1993 

23.1 

1991 8,247 21.6 

1990 2,925 23.2 

1989 4,024 24.3 

Not 

Applicable 

Before 

1989 

Not 

Available 

Before 

1989 

Source: Freddie Mac and OFHEO 

1 Minimum capital requirement in accordance with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992. 

2 The difference between Core Capital and Minimum Regulatory Capital Requirement. 

3 Stock price multiplied by number of outstanding common shares. 

4 Common dividends paid as a percentage of operating net income available to common shareholders. 

Annual computations reflect the simple average of quarterly ratios. Quarterly ratios are computed as dividends paid by operating net income available

to common stockholders. 

119 
Table 21. Aggregate Purchases

Business Activity ($ in Millions)

Purchases

Period

 Single-Family

($)

 Multifamily

($)

Total

($) Mortgage Securities1

($)

4Q01 300,597 8,434 309,031 123,459 

3Q01 259,709 6,894 266,603 104,264 

2Q01 256,808 7,439 264,247 104,164 

1Q01 143,714 5,873 149,587 103,527 

Annual Data

2001 960,828 28,640 989,468 435,414 

2000 395,082 16,407 411,489 217,930 

1999 548,748 17,193 565,941 268,329 

1998 618,410 15,338 633,748 272,907 

1997 275,081 8,775 283,856 84,233 

1996 287,306 8,680 295,986 81,840 

1995 215,974 6,531 222,505 73,328 

1994 280,792 4,686 285,478 44,369 

1993 518,877 4,326 523,203 Not 

Available 

Before 

1994 

1992 439,702 2,983 442,685 

1991 233,280 3,440 236,720 

1990 185,187 4,518 189,705 

1989 157,275 6,149 163,424 

1988 107,497 5,361 112,858 

1987 148,766 3,749 152,515 

1986 177,159 5,415 182,574 

1985 84,653 3,102 87,755 

1984 Not 

Available 

Before 

1985 

Not 

Available 

Before 

1985 

50,704 

1983 49,431 

1982 49,610 

1981 10,573 

1980 11,791 

1979 16,523 

1978 18,829 

1977 8,908 

1976 4,761 

1975 6,036 

1974 9,204 

1973 7,586 

1972 5,129 

1971 4,818 

Sources: Fannie Mae and Freddie Mac 

1 Not included in total purchases. 

120

Table 22. Aggregate MBS Issuances

Business Activity ($ in Millions)

MBS Issuances

Period

Single-Family MBS

($)

Multifamily MBS

($)

Total MBS

($)

Multiclass MBS

($)

4Q01 278,693 4,785 283,478 151,625 

3Q01 246,884 3,705 250,589 76,870 

2Q01 241,947 4,434 246,381 66,441 

1Q01 134,352 3,233 137,585 36,904 

Annual Data

2001 901,876 16,157 918,033 331,840 

2000 369,181 9,382 378,563 87,746 

1999 523,178 10,542 533,720 174,725 

1998 564,747 11,965 576,712 219,309 

1997 257,373 6,314 263,687 169,781 

1996 263,133 6,438 269,571 64,925 

1995 191,791 4,542 196,333 25,053 

1994 245,286 2,446 247,732 146,496 

1993 429,209 959 430,168 353,966 

1992 372,389 855 373,244 301,489 

1991 203,967 1,415 205,382 184,840 

1990 168,004 2,506 170,510 108,770 

1989 139,420 3,862 143,282 81,469 

1988 90,610 4,045 94,655 29,990 

1987 134,933 3,314 138,247 9,917 

1986 156,815 3,949 160,764 4,633 

1985 60,725 1,752 62,477 2,625 

1984 Not 

Available 

Before 

1985 

Not 

Available 

Before 

1985 

32,230 1,805 

1983 33,031 1,685 

1982 38,139 Not 

Issued 

Before 

1983 

1981 4,243 

1980 2,526 

1979 4,546 

1978 6,412 

1977 4,657 

1976 1,360 

1975 950 

1974 46 

1973 323 

1972 494 

1971 65 

Sources: Fannie Mae and Freddie Mac 

121

Table 23. Aggregate Earnings1

Earnings ($ in Millions)

Period

Operating Net

Interest Income

($)

Guarantee Fee

Income

($)

Administrative

Expenses

($)

Credit-Related

Expenses

($)

Operating Net

Income

($)

Net Income

($)

4Q01 3,359 695 510 40 2,291 3,333 

3Q01 2,907 671 474 33 2,190 2,261 

2Q01 2,704 631 448 36 2,083 2,317 

1Q01 2,462 615 429 53 1,957 2,130 

Annual Data

2001 11,432 2,612 1,861 162 8,521 10,041 

2000 8,944 2,408 1,618 200 6,995 6,995 

1999 7,820 2,301 1,455 286 6,135 6,135 

1998 6,325 2,248 1,286 603 5,118 5,118 

1997 5,796 2,356 1,131 904 4,451 4,451 

1996 5,297 2,282 1,000 1,017 3,968 3,968 

1995 4,443 2,173 941 876 3,235 3,235 

1994 3,935 2,191 904 803 3,115 3,115 

1993 3,305 1,970 804 829 2,659 2,659 

1992 2,753 1,770 710 777 2,245 2,245 

1991 2,461 1,467 606 789 1,918 1,918 

1990 2,212 1,190 529 784 1,587 1,587 

1989 1,708 980 471 588 1,244 1,244 

1988 1,329 793 412 584 888 888 

1987 1,209 735 347 535 677 677 

1986 683 476 285 426 352 352 

1985 451 300 223 285 201 201 

1984 123 236 183 140 73 73 

1983 116 186 134 94 135 135 

1982 (434) 93 97 62 (132) (132) 

1981 (395) 36 79 (12) (175) (175) 

1980 75 23 70 42 48 48 

1979 377 18 65 55 198 198 

1978 331 14 53 49 234 234 

1977 282 9 44 36 186 186 

1976 221 3 40 24 141 141 

1975 205 3 37 27 131 131 

1974 184 2 31 50 112 112 

1973 211 2 25 27 138 138 

1972 148 1 18 9 100 100 

1971 59 1 Not 

Available 

Before 

1972 

Not 

Available 

Before 

1972 

67 67 

Sources: Fannie Mae and Freddie Mac 

1 See notes to Tables 3 and 13. 

122

Table 24. Aggregate Balance Sheet1

Balance Sheet ($ in Millions)

Mortgage-Backed

Securities Outstanding

($ in Millions)

End of 

Period

Total

Assets

($)

Total

Retained

Mortgage

Portfolio

($)

NonMortgage

Investments

($)

Debt

Outstanding

($)

Stockholders'

Equity

($)

Core

Capital

($)

Total MBS

Outstanding

($)

Multiclass

MBS

Outstanding

($)

4Q01 1,417,131 1,199,957 151,998 1,328,538 33,491 44,518 1,505,315 766,009 

3Q01 1,338,557 1,162,216 119,219 1,261,426 28,284 41,521 1,452,568 700,659 

2Q01 1,274,741 1,106,077 117,212 1,199,046 33,411 39,848 1,377,893 663,334 

1Q01 1,198,816 1,063,019 89,847 1,127,930 28,907 37,252 1,298,013 648,164 

Annual Data

2001 1,417,131 1,199,957 151,998 1,328,538 33,491 44,518 1,505,315 766,009 

2000 1,134,369 993,053 98,489 1,069,581 35,675 35,207 1,282,785 643,693 

1999 961,851 845,891 73,903 908,330 29,154 30,568 1,217,052 651,682 

1998 806,435 671,104 100,675 747,687 26,288 26,180 1,115,494 622,117 

1997 586,270 481,135 81,026 542,616 21,314 21,169 1,055,123 622,189 

1996 524,907 424,353 78,854 488,251 19,504 19,516 1,021,238 577,737 

1995 453,731 360,574 69,984 419,135 16,822 16,788 972,275 599,894 

1994 378,707 293,986 64,143 350,509 14,703 14,710 947,001 642,885 

1993 300,859 246,107 39,621 251,105 12,489 12,489 910,335 647,043 

1992 240,480 189,889 32,116 195,931 10,344 Not 

Available 

Before 

1993 

831,958 531,116 

1991 193,932 153,346 19,792 164,199 8,113 714,447 371,784 

1990 173,692 135,586 21,992 154,344 6,077 604,434 215,402 

1989 159,777 129,429 19,388 142,211 4,907 489,382 117,691 

1988 146,610 117,017 19,896 132,341 3,844 396,503 42,281 

1987 129,133 106,019 13,935 116,604 2,993 348,369 15,011 

1986 122,850 107,216 Not 

Available 

Before 

1987 

108,938 2,135 264,754 5,333 

1985 115,663 108,156 106,732 1,788 154,461 5,047 

1984 101,576 94,153 94,718 1,524 105,764 3,214 

1983 87,378 82,732 81,867 1,421 82,841 1,669 

1982 78,980 74,035 74,605 1,249 57,402 Not 

Available 

Issued

1981 67,904 64,807 64,231 1,330 19,897 

1980 63,357 60,595 59,766 1,678 16,962 

1979 55,948 53,780 52,555 1,739 15,316 

1978 47,203 45,141 44,201 1,564 12,017 

1977 37,481 36,456 35,000 1,350 6,765 

1976 37,225 35,950 35,088 1,139 2,765 

1975 37,495 35,698 35,572 1,003 1,643 

1974 34,572 33,135 32,852 898 780 

1973 27,191 26,110 25,699 801 791 

1972 22,118 21,378 20,878 669 444 

1971 19,629 18,821 18,587 567 64 

Sources: Fannie Mae and Freddie Mac 

1 See notes to Tables 4 and 14. 

123

Table 25. Aggregate Retained Mortgage Portfolio Detail

($ in Millions)

End of 

Period

Aggregate

Whole

Loans

($)

 Aggregate

 Repurchased

Enterprise

Securities

($)

Aggregate

Other

Mortgage-Related

Securities

($)

Aggregate Total

Retained

Mortgage

Portfolio

($)

4Q01 228,749 733,445 239,867 1,202,061 

3Q01 221,497 703,053 240,212 1,164,762 

2Q01 218,904 659,835 229,874 1,108,613 

1Q01 214,352 634,652 216,461 1,065,465 

Annual Data

2001 228,749 733,445 239,867 1,202,061 

2000 211,745 597,275 186,553 995,573 

1999 205,781 492,912 148,162 846,855 

1998 212,863 365,483 91,839 670,185 

1997 208,556 233,844 38,821 481,221 

1996 214,395 183,802 27,681 424,878 

1995 215,234 125,735 20,248 361,217 

1994 Not 

Available 

Before 

1995 

74,668 Not 

Available 

Before 

1995 

295,228 

1993 40,096 246,799 

1992 26,929 191,748 

1991 Not 

Available 

Before 

1992 

155,650 

1990 138,148 

1989 132,169 

1988 119,931 

1987 109,100 

1986 110,926 

1985 112,196 

1984 98,127 

1983 85,741 

1982 76,493 

1981 66,590 

1980 62,333 

1979 55,100 

1978 46,353 

1977 37,581 

1976 37,112 

1975 36,794 

1974 34,177 

1973 26,980 

1972 22,052 

1971 19,450 

Sources: Fannie Mae and Freddie Mac 

124

Table 26. Aggregate Financial Derivatives

Financial Derivatives ($ in Millions)

End of 

Period

Interest

Rate

Swaps

($)

Interest

Rate Caps,

Floors, and

Corridors

($)

TreasuryBased

Contracts

($)

Foreign

Currency

($)

OTC

Futures,

Options,

and

Forward

Rate

Agreements

($)

ExchangeTraded

Futures,

Options,

and Other

Derivatives

($)

Other

($)

Total

($)

4Q01 742,722 88,071 13,468 32,488 336,287 369,695 2,802 1,585,533 

3Q01 803,966 78,647 8,087 28,076 289,027 369,295 535 1,577,633 

2Q01 658,619 71,960 5,986 27,770 253,440 124,733 5,839 1,148,347 

1Q01 601,969 66,023 4,040 23,385 182,547 67,590 4,943 950,497 

Annual Data 

2001 742,722 88,071 13,468 32,488 336,287 369,695 2,802 1,585,533 

2000 505,539 46,482 2,200 19,719 161,929 22,517 35,839 794,225 

1999 318,612 48,886 8,894 12,604 213,831 94,987 1,400 699,214 

1998 200,401 36,345 11,542 14,459 76,481 157,832 3,735 500,795 

1997 203,845 22,095 12,228 11,120 6,000 0 1,660 256,948 

1996 204,786 14,395 651 2,973 0 0 350 223,155 

1995 171,063 13,355 24 1,224 29 0 975 186,670 

1994 109,304 9,363 0 1,023 0 0 1,465 121,154 

1993 67,346 1,860 0 1,023 0 0 1,425 71,653 

Sources: Fannie Mae and Freddie Mac 

125

Table 27. Aggregate Non-Mortgage Investments

Non-Mortgage Investments ($ in Millions)

End of 

Period

Federal Funds

and Eurodollars

($)

Asset Backed

Securities

($)

Repurchase

Agreements

($)

 Commercial

Paper and

Corporate Debt

($)

Other

($)

Total

($)

4Q01 31,935 47,194 14,911 45,261 12,733 152,034 

3Q01 19,289 46,450 10,354 29,390 13,733 119,216 

2Q01 11,692 43,494 13,608 29,823 18,592 117,209 

1Q01 7,322 39,076 13,881 9,553 20,013 89,845 

Annual Data

2001 31,935 47,194 14,911 45,261 12,733 152,034 

2000 9,806 36,575 10,210 16,195 25,717 98,503 

1999 15,382 29,512 7,535 5,639 15,835 73,903 

1998 28,450 28,117 9,312 12,950 21,846 100,675 

1997 21,962 18,839 13,697 14,948 11,580 81,026 

1996 31,702 16,721 11,107 7,249 12,075 78,854 

1995 19,885 10,404 19,392 9,830 10,473 69,984 

1994 24,853 3,796 14,919 8,953 11,622 64,143 

1993 13,763 3,557 8,882 1,438 11,981 39,621 

1992 12,219 4,124 7,249 53 8,471 32,116 

1991 5,903 2,416 6,632 0 4,841 19,792 

1990 6,441 1,780 10,014 0 3,757 21,992 

1989 8,685 1,107 5,765 0 3,831 19,388 

1988 8,594 481 9,107 0 1,714 19,896 

1987 5,736 25 5,859 0 2,315 13,935 

Sources: Fannie Mae and Freddie Mac 

126

Table 28. Aggregate Capital

Capital ($ in Millions)

End of 

Period

Core

Capital

($)

Minimum

Regulatory

Capital

Requirements

($)

Regulatory

Capital

Surplus

(Deficit)

($)

Market

Capitalization

($)

4Q01 44,518 42,697 18,21 124,743 

3Q01 41,521 40,465 1,056 125,234 

2Q01 39,848 38,480 1,368 132,460 

1Q01 37,252 36,197 1,054 124,591 

Annual Data

2001 44,518 42,697 1,821 124,743 

2000 35,207 34,472 735 134,345 

1999 30,568 30,057 511 96,364 

1998 26,180 25,667 513 120,678 

1997 21,169 19,785 1,384 87,628 

1996 19,516 17,983 1,533 59,093 

1995 16,788 16,035 753 48,744 

1994 14,710 14,300 411 29,014 

1993 12,489 11,658 831 30,392 

1992 Not 

Applicable 

Before 

1993 

Not 

Applicable 

Before 

1993 

Not 

Applicable 

Before 

1993 

29,595 

1991 27,083 

1990 11,415 

1989 12,116 

1988 3,992 

1987 2,401 

1986 3,006 

1985 1,904 

1984 1,012 

1983 1,514 

1982 1,603 

1981 502 

1980 702 

Sources: Fannie Mae, Freddie Mac, and OFHEO 

127

Table 29. Loan Limits

Single-Family Conforming Loan Limits1

($)

Year 1-unit 2-units 3-units 4-units

1970 - 1976 33,000 Not Applicable Not Applicable Not Applicable 

1977 - 1978 60,000 Not Applicable Not Applicable Not Applicable 

1979 67,500 Not Applicable Not Applicable Not Applicable 

1980 93,750 120,000 145,000 180,000 

1981 98,500 126,000 152,000 189,000 

1982 107,000 136,800 165,100 205,300 

1983 108,300 138,500 167,200 207,900 

1984 114,000 145,800 176,100 218,900 

1985 115,300 147,500 178,200 221,500 

1986 133,250 170,450 205,950 256,000 

1987 153,100 195,850 236,650 294,150 

1988 168,700 215,800 260,800 324,150 

1989 187,600 239,950 290,000 360,450 

1990 187,450 239,750 289,750 360,150 

1991 191,250 244,650 295,650 367,500 

1992 202,300 258,800 312,800 388,800 

1993 203,150 259,850 314,100 390,400 

1994 203,150 259,850 314,100 390,400 

1995 203,150 259,850 314,100 390,400 

1996 207,000 264,750 320,050 397,800 

1997 214,600 274,550 331,850 412,450 

1998 227,150 290,650 351,300 436,000 

1999 240,000 307,100 371,200 461,350 

2000 252,700 323,400 390,900 485,800 

2001 275,000 351,950 425,400 528,700 

2002 300,700 384,900 465,200 578,150 

Sources: Department of Housing and Urban Development (HUD), Federal Housing Finance Board, Freddie Mac 

Conforming Loan Limits are 50% higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands. 

FHA Single-Family Insurable Limits

($)

1-unit 2-units 3-units 4-units

Low Cost High Cost Low Cost High Cost Low Cost High Cost Low Cost High Cost

Year Area Max Area Max Area Max Area Max Area Max Area Max Area Max Area Max

1997 81,546 170,362 104,310 205,875 126,103 248,888 156,731 309,338 

1998 109,032 197,621 139,512 252,866 168,624 305,631 209,568 379,842 

1999 115,200 208,800 147,408 267,177 178,176 322,944 221,448 401,375 

2000 121,296 219,849 155,232 281,358 187,632 340,083 233,184 422,646 

2001 132,000 239,250 168,936 306,196 204,192 370,098 253,766 459,969 

2002 144,336 261,609 184,752 334,863 223,296 404,724 277,512 502,990 

128


1 
Table 30. Mortgage Interest Rates

Period

Average Commitment Rates on Loans1 Effective Rates on Closed Loans2

Conventional Conventional

30-Year Fixed Rate

(%)

One-Year ARMs

(%)

Fixed Rate

(%)

Adjustable Rate

(%)

4Q01 6.8 5.2 6.8 6.1 

3Q01 7.0 5.7 7.2 6.4 

2Q01 7.1 5.9 7.2 6.5 

1Q01 7.0 6.5 7.3 6.6 

Annual Data

2001 7.0 5.8 7.1 6.4 

2000 8.1 7.0 8.3 7.0 

1999 7.4 6.0 7.5 6.5 

1998 6.9 5.6 7.2 6.5 

1997 7.6 5.6 7.9 7.0 

1996 7.8 5.7 8.0 7.2 

1995 7.9 6.1 8.2 7.4 

1994 8.4 5.3 8.1 6.6 

1993 7.3 4.6 7.5 5.9 

1992 8.4 5.6 8.5 6.9 

1991 9.2 7.1 9.7 8.4 

1990 10.1 8.4 10.4 9.2 

1989 10.3 8.8 10.5 9.3 

1988 10.3 7.9 10.4 8.5 

1987 10.2 7.8 9.9 8.5 

1986 10.2 8.4 10.5 9.4 

1985 12.4 10.0 12.4 10.8 

1984 13.9 11.5 13.2 12.1 

1983 13.2 Not 

Available 

Before 

1984 

13.0 12.3 

1982 16.1 15.2 15.4 

1981 16.6 Not 

Available 

Before 

1982 

Not 

Available 

Before 

1982 

1980 13.8 

1979 11.2 

1978 9.6 

1977 8.8 

1976 8.9 

1975 9.0 

1974 9.2 

1973 8.0 

1972 7.4 

Average Commitment Rates Source: Freddie Mac 

Effective Rates Source: Federal Housing Finance Board 

1 Commitment rates do not reflect points. 

2 Effective rates reflect points. 

129 
Table 31. Housing Market Activity

Period

Housing Starts

units in thousands

Home Sales

units in thousands

Single-Family

Housing

Starts

Multifamily

Housing

Starts

Total

Housing

Starts

New

Single-Family

Home Sales

Existing

Single-Family

Home Sales

4Q01* 1,285 286 1,571 928 5,240 

3Q01* 1,313 288 1,601 867 5,267 

2Q01* 1,330 294 1,624 890 5,330 

1Q01* 1,312 313 1,660 950 5,327 

Annual Data

2001 1,309 292 1,602 906 5,296 

2000 1,298 295 1,593 898 5,031 

1999 1,367 300 1,667 907 5,197 

1998 1,314 303 1,617 886 4,970 

1997 1,179 296 1,474 804 4,382 

1996 1,206 271 1,477 757 4,196 

1995 1,110 244 1,354 667 3,888 

1994 1,233 224 1,457 670 3,916 

1993 1,155 133 1,288 666 3,786 

1992 1,061 139 1,200 510 3,479 

1991 876 138 1,014 509 3,186 

1990 932 260 1,193 534 3,219 

1989 1,059 318 1,376 650 3,325 

1988 1,140 348 1,488 676 3,513 

1987 1,212 409 1,621 671 3,436 

1986 1,263 542 1,805 750 3,474 

1985 1,166 576 1,742 688 3,134 

1984 1,206 544 1,750 639 2,829 

1983 1,181 522 1,703 623 2,697 

1982 743 320 1,062 412 1,991 

1981 796 288 1,084 436 2,419 

1980 962 331 1,292 545 2,973 

1979 1,316 429 1,745 709 3,827 

1978 1,558 462 2,020 817 3,986 

1977 1,573 414 1,987 819 3,650 

1976 1,248 289 1,538 646 3,064 

1975 956 204 1,160 549 2,476 

1974 956 382 1,338 519 2,272 

1973 1,250 795 2,045 634 2,334 

1972 1,451 906 2,357 718 2,252 

1971 1,271 781 2,052 656 2,019 

Components may not add to totals due to rounding.

*Adjusted Annual Rates

Housing Starts Source and New Single-Family Home Sales Source: Bureau of the Census 

Existing Single-Family Home Sales Source: National Association of Realtors

130 
Table 32. Weighted Repeat Sales House Price Index 

Weighted Repeat Sales House Price Index (Annual Data)1 

USA

New

England

MidAtlanticSouth

Atlantic

East

North

Central

West

North

Central

East

South

Central

West

South

Central Mountain Pacific

1Q02 6.05 9.57 7.88 6.26 4.76 6.53 3.58 3.21 4.28 6.64 

4Q01 7.41 10.60 8.68 8.17 4.98 7.16 5.22 5.90 6.43 8.73 

3Q01 8.89 12.04 9.91 9.18 6.22 8.46 6.10 6.90 8.26 11.63 

2Q01 9.01 12.10 9.51 8.90 6.45 8.17 6.25 7.38 8.47 12.57 

1Q01 9.33 12.92 9.84 8.81 6.81 8.41 6.29 7.75 8.82 13.24 

Annual Data

2001 7.41 10.60 8.68 8.17 4.98 7.16 5.22 5.90 6.43 8.73 

2000 8.61 13.42 9.10 7.58 6.86 8.28 4.77 5.84 7.95 12.43 

1999 5.93 10.41 5.71 4.84 5.81 7.74 3.12 5.04 5.17 6.47 

1998 5.19 6.70 4.38 4.77 4.15 4.69 5.03 5.21 4.28 7.62 

1997 4.62 4.70 3.31 4.52 5.23 5.01 4.84 3.87 4.95 5.23 

1996 2.57 1.70 0.26 2.22 5.03 4.12 4.05 2.29 4.31 0.92 

1995 4.45 4.09 3.13 4.27 6.01 5.23 5.47 4.07 7.42 2.77 

1994 0.89 -2.89 -3.19 0.11 5.14 5.48 4.91 1.61 9.30 -3.40 

1993 2.01 0.36 1.33 1.90 3.55 3.80 3.99 3.98 7.85 -1.95 

1992 1.86 -1.07 1.70 2.11 3.88 3.02 3.30 3.42 5.35 -1.39 

1991 2.56 -2.25 1.50 3.04 4.58 3.81 4.08 3.69 4.73 1.36 

1990 0.15 -7.64 -2.88 0.12 3.73 0.54 0.69 0.42 1.81 2.86 

1989 6.06 0.73 2.33 5.08 6.04 3.20 3.07 2.84 2.78 19.48 

1988 6.22 3.68 6.08 6.86 6.74 2.42 2.64 -2.15 0.28 17.47 

1987 6.79 13.23 16.03 6.81 8.00 2.42 3.94 -8.67 -2.83 9.57 

1986 8.23 20.93 17.87 6.05 7.26 4.19 5.81 -0.57 3.23 7.25 

1985 6.69 24.95 14.34 5.56 4.89 4.38 4.59 -1.23 2.33 4.89 

1984 5.46 17.64 13.50 4.26 2.75 4.63 4.40 -0.06 1.88 5.19 

1983 4.14 16.28 9.91 3.39 4.35 4.61 4.55 0.72 -2.62 1.14 

1982 2.29 4.14 4.74 4.69 -5.04 0.04 4.03 5.91 7.36 0.79 

1981 4.39 5.49 0.18 5.60 2.48 0.33 -0.43 12.00 6.37 5.96 

1980 6.77 5.82 9.14 8.40 1.50 3.60 7.17 7.53 6.76 11.32 

1979 11.93 10.91 15.49 11.11 9.31 9.34 5.31 13.48 15.92 16.34 

1978 13.07 17.76 6.51 10.71 13.77 12.74 11.41 16.82 17.67 15.62 

1977 13.13 8.81 11.41 7.41 13.28 14.72 11.28 11.20 17.74 25.66 

1976 7.66 3.31 2.34 5.02 8.06 6.31 5.39 9.75 9.80 20.21 

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 are measured based on percentage change over the previous four quarters. Data from 1976 - 2001 are measured based on fourth quarter

to fourth quarter percentage change. 

131