CUNA Regulatory Comment Call




November 6, 2000

Study of Possible Systemic Risk Posed by Freddie Mac and Fannie Mae

EXECUTIVE SUMMARY

The Office of Federal Housing Enterprise Oversight (OFHEO) is requesting comments for a study on the risks that the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) may pose to the financial system and to housing finance markets. OFHEO regulates the activities of Freddie Mac and Fannie Mae.

The study will examine the nature and magnitude of any risks posed by these government-sponsored enterprises (GSEs), whether and to what extent these GSEs contribute or mitigate systemic risks, and actions that OFHEO and others may take to limit these possible risks.

Comments on the study are due by January 29, 2001. Please submit your comments to CUNA by January 22, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the request for comment or you may access it on the Internet at the following address:

http://www.ofheo.gov/docs/press/PRsystemicrisk.PDF

BACKGROUND

Congress created OFHEO in 1992 as an independent office within the Department of Housing and Urban Development to ensure that these GSEs are adequately capitalized and operating safely. In fulfilling this mission, OFHEO imposes capital requirements on Freddie Mac and Fannie Mae, conducts an examination of each of these GSEs, and engages in broad research programs. Up until now, OFHEO has consistently classified these GSEs as adequately capitalized pursuant to the minimum capital requirements, and OFHEO’s examinations have found these GSEs to be financially sound and well managed.

DESCRIPTION OF THE REQUEST FOR COMMENT

OFHEO is now requesting comments for a study on the risks that Freddie Mac and Fannie Mae may pose to the financial system and to housing finance markets. The study will examine the nature and magnitude of any risks posed by these GSEs, whether and to what extent these GSEs contribute or mitigate systemic risks, and actions that OFHEO and others may take to limit these possible risks.

The concern is that unexpected future economic shocks, management failures, or other factors could at some point cause either of these GSEs to fail to meet OFHEO’s safety and soundness standards. Because of their fast rate of growth and their increasingly central role in the mortgage and financial markets, significant financial distress or failure of either of these GSEs could disrupt the U.S. financial system and housing finance markets to such an extent that the U.S. and international economies would be adversely affected.

The study will focus on systemic risk. OFHEO generally defines systemic risk as the possibility that the direct or indirect effects of the failure of a large financial firm would cause disruptions in the financial system significant enough to have a substantial effect on real output and employment. An event that caused changes in asset values, even substantial losses in values, would not rise to a systemic threat if it were not expected to induce a loss in employment or economic output.

As part of the study, OFHEO is currently seeking comment on a number of specific research questions that the study may address, in addition to other topics that commenters believe should be addressed by the study. OFHEO is encouraging commenters to provide specific analysis and to suggest research methodologies that would be applicable to some or all of the questions.

QUESTIONS TO CONSIDER REGARDING THE REQUEST FOR COMMENT

(The following are the specific research questions, listed under three broad categories)
Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com


Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com


Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com


Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com