The Office of Federal Housing Enterprise Oversight (OFHEO) was an independent entity within the Department of Housing and Urban Development, responsible for ensuring the stability, liquidity and affordability of the US mortgage market through oversight of two housing government-sponsored enterprises (GSEs) Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) - which together own and/or secure more than 70% of residential mortgage loans in the United States. OFHEO is headed by a Director, appointed by the President to a five-year term, and funded through the GSEs it oversaw. On July 30, 2008, it was incorporated into the newly-created Federal housing Financing Agnecy.
As the primary regulator of the two GSEs, the OFHEO is responsible for supervising their operations and ensuring their stability, capitalization, and compliance with legal requirements and standards.
The Act that created OFHEO implemented a “regulatory oversight structure” for Fannie Mae and Freddie Mac, dividing regulation to address two functions: financial safety and soundness (OFHEO), and the federal government’s affordable housing mission (HUD).
The agency’s 2005 strategic plan outlines support for statutory reform that strengthens their regulatory powers, and for secondary mortgage market policy - promoting national ideals of homeownership and affordable housing. See OFHEO strategic plan or the “Suggested Reforms” section of this article for more information.
OFHEO’s House Price Index (HPI) tracks the movement of single-family house prices. HPI is a weighted, repeat-sales index, measuring average price changes in repeat sales or refinancing on the same properties. Data is obtained from review of repeat mortgage transactions on single-family properties purchased or securitized by one of the Enterprises since 1975. The HPI includes figures for the nine Census Bureau divisions, the 50 U.S. states and D.C., and for Metropolitan Statistical Areas and Divisions.
OFHEO claims the HPI is a broader sample and therefore provides more information than other indices. See below for conflicting opinion, new and more detailed information.
Fannie Mae and Freddie Mac are two of the three mortgage finance GSEs (the third is the 12 Federal Home Loan Banks), which together constitute the largest sector of GSE activity and account for several trillion dollars of (on-balance sheet) assets. At the end of 2007, Fannie and Freddie owned or guaranteed a reported $1.4 trillion in residential mortgages. Although chartered by Congress, the GSEs are private (shareholder-owned) corporations, designed to create a secondary market for residential mortgage loans and keep mortgage funding plentiful. They buy mortgages from banks and other lenders and either hold them, or pool and repackage them as securities to sell to investors, acting as the guarantor if the borrowers default. The idea is that by acting as guarantor, the Enterprises will attract investors who might not otherwise invest in mortgages, thus expanding the funding pool, keeping the market liquid and interest rates low.
Quid pro quo for a public charter that requires them to “to achieve public purposes that include providing stability and liquidity in the secondary mortgage market, providing secondary market assistance relating to mortgages for low- and moderate-income families, and promoting access to mortgage credit throughout the Nation, including underserved areas,” (source: HUD) the GSEs are exempted from state and local taxes (with the exclusion of property taxes) and have “conditional” access to a $2.25 billion line of credit from the U.S. Treasury.
While GSE securities are not “officially” guaranteed by the government, they benefit from an implicit government backing, and perhaps more importantly, they are perceived as such in the market.
The agency is funded by Freddie and Fannie, but it is still subject to Congressional budget approval. New legislation seeks to free OFHEO from the appropriations process, to ensure that it will have funds available in the event of a crisis. The new bill would combine the agency with the Federal Housing Finance Board.
See Reform section for related issues and opinions.
In an ongoing investigation of subprime lending, New York Attorney General Andrew Cuomo filed suit against First American, the parent company of one of the country’s largest appraisal management companies, alleging that they had succumbed to pressures to only use appraisers favored by major client Washington Mutual (WaMu). In November 2007 Cuomo demanded that Freddie Mac and Fannie Mae each appoint an independent Examiner to review mortgages and underlying appraisals the GSEs purchased, with particular emphasis on those from WaMu. Lockhart responded in a letter to Cuomo, noting, in part, that unlike issuers of private label mortgage-backed securities (MBS), the GSEs retain the credit risk by guaranteeing repayment to the purchasers of MBS—and thus, “they have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals.” (Source: Mortgage News Daily)
News surfaced in 2003 that the company had underestimated its earnings by $5 billion, one of the largest corporate restatements in U.S. history. Freddie Mac admitted no wrongdoing and agreed to pay OFHEO a $125 million civil penalty. A 200-page OFHEO report revealed that company earnings were manipulated to meet investors’ expectations and included a scathing indictment of the “corporate culture” that had fostered such flagrant misconduct. (Similar to Fannie Mae Scandal, see below for more information).
In July of 2003 the CEO of Fannie Mae claimed undue damage was being caused to the company’s public image because of the Freddie Mac scandal. By October the company disclosed a $1.2 billion accounting error for the third quarter - which it claimed resulted from a change in accounting rules and didn’t affect net income.
The issue was first made public in 2004 after a preliminary OFHEO probe alleging manipulated earnings (1998-2004), the result of a nearly-3-year civil probe triggered by misstated earnings of about $10.6 billion. The report fingered Fannie Mae for cooking the books to make it look like they had reached earnings targets -triggering the maximum possible payout in bonuses for executives.
Several months before the OFHEO report, a first study was commissioned by the Fannie Mae BoE, who hired Warren B. Rudman (former Republican Senator from New Hampshire) to conduct an investigation. Rudman applied a stricter legal standard than OFHEO and found only one year in which earnings were manipulated to produce bonuses. The OFHEO, on the other hand, concluded that the company had consistently manipulated its books to reach earnings-per-share targets (engaging in certain transactions solely for the purpose of pushing earnings up or down to meet Wall Street profit expectations).
OFHEO also drew attention to what they termed “corporate culture that emphasized stable earnings at the expense of accurate financial disclosures” - meaning Fannie Mae management had intentionally covered up glitches in its earnings in order to give the investors the (false) impression that it was a low-risk option, and gave a detailed account of insiders who allegedly tried to thwart their investigation. Blame was dispersed to “culture” and a weak BoE muscled by the CEO and CFO, who were both later ousted.
The penalty included a $400 million settlement and agreements to various reforms.
(Main Source: Washington Post article. See below for more detailed information)
Long labeled ineffective by lawmakers, the agency responds that it is under funded, and not accorded the broad regulatory powers required to oversee the two Enterprises. In its 2005 strategic plan, the agency outlined (in proposed bill H.R. 1427)the basics of the “strong enforcement powers similar to those of a federal banking regulator” it seeks from lawmakers, including a move to combine OFHEO with the Federal Housing Finance Board (FHFB), consolidating regulatory bodies, regulatory independence (from the appropriations process), full authority over capital and the ability to regulate the Enterprises’ portfolios.
Although the GSE scandals of 2003 and 2004 provided ample reason to increase the regulatory power of OFHEO, there are new challenges indicated for the companies in a post-subprime-crisis market - in which the GSEs are doing clean-up work. Many are responding with alarm to the President’s approval of the February 2008 bill that raises the conforming loan limit (See Debate section) - including OFHEO head Lockhart, who has persistently stressed the need for regulatory reform.
Democrats tend to favor the GSEs as vital institutions for spreading and democratizing home ownership, while Republican critics tend to complain about the potential risks to tax payers and the system if they falter.
In the wake of the massive accounting scandals in recent years (and OFHEO’s inability to prevent or control them), lawmakers have been more willing to approve oversight legislation. (See below).
2008 Loan Limit/ New Legislation
On November 27, 2008 OFHEO Director Lockhart announced that the 2008 maximum loan limit for single-family mortgages purchased by Fannie and Freddie would remain at the 2007 level of $417,000 for one-unit properties in most of the U.S. (Higher limits apply to Alaska, Hawaii, Guam and the U.S. Virgin Islands, as well as properties with more than one unit). Then, in February of 2008, Congress passed an economic stimulus package that would permit the two Enterprises to buy/guarantee mortgages up to 125 % higher than an area’s median home prices (the higher of“125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008”). The maximum is now capped at $729,750, up from $417,000. The temporary increase (in effect through December 31, 2008) would allow GSEs to fund bigger mortgages in areas with high housing costs, and advocates argue it could provide relief to housing markets.
Detractors, including Lockhart, claimed the raise would push the companies—already taxed from buying subprime mortgages and taking up the slack in the housing crisis—deeper into the riskiest Real Estate markets. In response to the increase, Lockhart issued a statement expressing the agency’s “disappointment” and their belief that the decision to increase the conforming loan limit is a “mistake in the absence of comprehensive GSE regulatory reform.” Lockhart has also cited the GSEs’ anticipated difficulties with “jumbo” lending, into which the new limit falls (as opposed to the old limit of $417,000 and conventional conforming loans). See below for more information.
In late February 2008, the OFHEO announced that caps imposed to limit the Enterprises’ market participation in 2006 in response to the their multi-billion dollar accounting scandals (See Controversies) - set at $1.5 billion, would be lifted. OFHEO acted after Fannie Mae published its audited financial results for 2007, which noted a nearly $3.6 billion loss in the fourth quarter of 2007 (the first loss in 22 years, and compared with a profit of $604 million for the same period in the previous year). The company anticipated further losses amid rising home-loan delinquencies. In late February, Freddie Mac announced fourth-quarter losses at a record $2.5 billion. Despite the losses, shares of both Enterprises continued to rise - a reported 16% after the caps were lifted.
The reasoning behind raising the limit is that an expanded ability to hold and buy mortgages would help keep the primary market liquid in case of a credit crisis. OFHEO has argued that there is no market demand for more liquidity, or at least demand is not outpacing the Enterprises’ ability to purchase. However, Lockhart reportedly authorized the increase in light of the companies’ progress regarding regulatory reforms, including Fannie Mae’s publication of its audited financial statements for 2007 (followed shortly thereafter by Freddie Mac’s. See above). Democrats approved the move and urged Lockhart to go further by removing a requirement that the companies maintain a 30-percent capital surplus (over their normal minimum requirements) in case of crisis. In an apparent compromise, Lockhart said in a statement that he would ease the requirement gradually pending compliance with a few remaining remedial actions.
A native of Connecticut, James B. Lockhart III met future president George W. Bush in high school, while both were members of the Philips Academy baseball team. They both attended Yale University and both joined the Delta Kappa Epsilon fraternity. Lockhart earned a bachelor’s degree from Yale and then, like Bush, a master’s from Harvard Graduate School of Business Administration.
Lockhart served as a Lieutenant (j.g.) in the U.S. Navy, working as a supply officer aboard the nuclear submarine USS George W. Carver. He went on to senior positions at National Reinsurance, Smith Barney, Alexander & Alexander and Gulf Oil - both in Europe and the U.S. He has an extensive background in financial services including insurance, investment banking and pensions, and co-founded and served as managing director of NetRisk, a risk management software and consulting firm.
Lockhart served as Deputy Commissioner of Social Security (a Presidentially-appointed and Senate-confirmed position), and in the previous Bush Administration as Executive Director of the Pension Benefit Guaranty Corporation (1989 until 1993).He was nominated by President George W. Bush to become the Director of OFHEO, and subsequently confirmed by the U.S. Senate on June 15, 2006.