In their quest to seek new business opportunities, Fannie Mae and Freddie Mac have prompted many public policy questions recently regarding their expansion into endeavors that many market observers do not consider part of their core missions.
To address and analyze these concerns, the Office of Federal Housing Enterprise Oversight (OFHEO) has begun widening its supervision over the government-sponsored enterprises to include how they affect the entire mortgage industry.
OFHEO Director Armando Falcon addressed this matter at the America's Community Bankers annual National Real Estate Lending Conference in Scottsdale, Ariz. last week. He also gave an update on the risk-based capital regulations set to go in effect later this year, and stated that OFHEO is seeking exemption from the appropriations process.
"I view OFHEO's primary role as protecting the integrity of the secondary mortgage market," Falcon said, indicating that the financial safety and soundness of the GSEs is pivotal in fulfilling OFHEO's mission.
However, because of the rapid growth of Fannie Mae and Freddie Mac over the past several years, and pressures to maintain shareholder returns, they are actively seeking out new business opportunities, including home-equity and subprime lending.
While stating that "no one should deny them the proper credit for all the good they have done," Falcon also sees "the growing tension that exists between the enterprises and other participants in the mortgage market."
The enterprises have become the largest issuers of debt, aside from the U.S. Treasury, with portfolio holdings exceeding $800 million. They play a large role in the housing market, and that influence "extends to every step of the mortgage process," Falcon noted.
"Therefore, to complement this strong foundation," he added, "we are enhancing our already active research and analysis capability" of understanding the policy implications of new activities, as well as the safety and soundness implications.
Risk-Based Capital Update
Recently, OFHEO granted a public-comment extension on the risk-based capital proposal to March 10, 2000 (MBSL, 11/1/99), to give sufficient time to comment on the rule. The proposal is considered a "stress test" to determine whether the GSEs are adequately capitalized if an emergency should occur. "My highest priority as OFHEO's director is to bring the rule-making process to a conclusion as soon as possible and implement a strong and fair risk-based capital standard," said Falcon.
The stress test is expected to evolve and change over time, taking into account new techniques for measuring risk, as well as new products and innovations in risk management. "In the end, I want a strong capital rule that ensures the enterprises are able to perform their public mission, even in stressful economic conditions," he added.
Freddie Mac, one of the GSEs that OFHEO oversees, has been cooperative with the agency. "OFHEO is our safety and soundness regulator and we fully expect them to focus on the safety and soundness implications of everything we do and incorporate that into their risk-based capital standards," said Sharon McHale, a spokeswoman for Freddie Mac.
Appropriations Exemption Sought
Falcon noted that OFHEO funds its regulatory activities through direct assessments on the GSEs, but that it is the only financial regulator that must get prior approval from Congress to levy the assessments. "This hampers my ability as a regulator to ensure that I have adequate resources for the task," he said.
Therefore, he said that OFHEO should be exempt from the appropriations process, because "OFHEO needs the capacity to operate ... free from the uncertainties of the appropriations process." He noted that if a GSE were to ever experience a severe downturn, requiring OFHEO to hire additional examiners, the agency would not be able to do so because of the appropriations requirement.
"This is vital to have effective and independent regulation of Fannie Mae and Freddie Mac," Falcon added.
"We fully expect him to look at those issues and we'd cooperate with OFHEO as we always have in providing them the information they need to do their job to look at risk more broadly," said McHale.