GOVERNMENTSPONSORED

ENTERPRISES

Creation of a Single

Housing GSE Regulator

Statement of Thomas J. McCool, Director

Financial Institutions and Market Issues

General Government Division

United States General Accounting Office

GAO Testimony

Before Subcommittee on Capital Markets, Securities and

Government-Sponsored Enterprises, Committee on

Banking and Financial Services House of Representatives

For Release on Delivery

Expected at

1:30 p.m. EDT

on Tuesday,

September 12, 2000

GAO/T-GGD-00-200

Statement

Government-Sponsored Enterprises: Creation

of a Single Housing GSE Regulator

Page 1 GAO/T-GGD-00-200

Mr. Chairman and Members of the Subcommittee:

We appreciate the invitation to participate in this roundtable discussion on

regulation of the housing government-sponsored enterprises (GSE). In

your invitation, you asked us to express our views in writing on the topics

raised in H.R. 3703 and other issues related to the housing GSEs. For this

purpose, we cite here three previous testimonies that summarize relevant

work we have conducted on these issues. Housing Enterprises:

Advantages and Disadvantages of Creating a Single Housing GSE

Regulator (GAO/T-GGD-97-160, July 24, 1997) discusses the advantages

and disadvantages of creating a single housing GSE regulator. Housing

Enterprises: The Roles of Fannie Mae and Freddie Mac in the U.S. Housing

Finance System (GAO/T-GGD-00-182, July 25, 2000) discusses Fannie Mae,

Freddie Mac, and their regulators. Federal Housing Finance Board: Actions

Needed to Improve Regulatory Oversight (GAO/T-GGD-98-185, Sept. 24,

1998) summarizes our 1998 review of the Federal Housing Finance Board

(FHFB), the safety and soundness and mission regulator of the Federal

Home Loan Bank System (FHLBank System).

We continue to support a single housing GSE regulator for Fannie Mae,

Freddie Mac, and the FHLBank System. A single regulatory body best fits

our criteria of being (1) independent and objective, (2) prominent in

government, (3) able to achieve economy and efficiency, and (4) able to

provide consistency in regulation. Regulation of mission and safety and

soundness would be more effective if combined. One regulator could

oversee both compliance with the statutory purposes and the financial

health of a GSE, provided that the regulator does not have other

responsibilities, such as corporate governance, that could create a conflict

of interest in its oversight. We concluded that selecting a “stand-alone”

agency with a governing board would better ensure the independence and

prominence of the regulator and allow it to act independently of the

influence of the housing GSEs, which are large and politically influential.

A governing board also has the advantage of allowing different

perspectives, providing stability, and bringing prestige to the regulator.

Currently, the Office of Federal Housing Enterprise Oversight (OFHEO)

regulates Fannie Mae and Freddie Mac on matters of safety and

soundness, while the Department of Housing and Urban Development

(HUD) is the mission regulator. In 1992, Congress passed the Federal

Housing Enterprises Financial Safety and Soundness Act (act) to minimize

the risks that the enterprises pose to U.S. taxpayers while ensuring that

they meet the housing needs of all Americans. OFHEO’s primary

strategies to fulfilling its mission are to establish risk-based capital
Statement

Government-Sponsored Enterprises: Creation of a Single Housing GSE Regulator

Page 2 GAO/T-GGD-00-200

standards and an examination program. Although OFHEO got off to a

slow start in implementing its responsibilities, the risk-based capital

standards are to be established by year-end 2000, and the examination

program is in place.

The act directed HUD to set housing goals, which require the enterprises

to meet specified criteria for the purchase of mortgages serving low- and

moderate-income individuals. In 1995, HUD established conservative

housing goals for the enterprises. In March of this year, HUD proposed a

new rule that would require the enterprises to meet higher housing goals

for the period 2000 through 2003. Congress recognized, in passing the Act,

that the enterprises face a natural tension between maximizing

profitability for their shareholders and fulfilling their housing mission.

Therefore, the act also defined HUD’s general regulatory authority to

ensure that the enterprises’ activities are consistent with their housing

mission. HUD failed to promptly implement this authority, as evidenced

by the fact that HUD has not yet implemented a rule to govern the

enterprises’ nonmortgage investments, such as long-term corporate bonds.

Our review of FHFB raised several questions about its oversight.

Specifically, we found (1) that FHFB did not ensure that its annual

examinations met its internal standards for assessing safety and

soundness, (2) that its off-site monitoring and supervisory enforcement

program needed improvements, and (3) that its mission oversight lacked

comprehensive policies and procedures to determine whether the

FHLBanks were supporting their public mission. In addition, we found

that FHFB’s involvement in FHLBank System corporate governance and

promoting certain programs could complicate its primary duty as a safety

and soundness regulator and raised questions about its objectivity. Since

our review, it has addressed some of our concerns relating to its

examination program, and in June 2000, FHFB approved a rule governing

mission activities. The Gramm-Leach-Bliley Act of 1999 partially removed

FHFB from corporate governance of the FHLBank System.
Page 3 GAO/T-GGD-00-200
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