Risks and Oversight of Government Sponsored Enterprises

GAO discussed government-sponsored enterprises' (GSE) operations, potential for failure, and federal oversight. GAO noted that: (1) farm credit banks reported profits in 1988 and 1989 after 3 years of losses, but the farm credit system's health heavily relied on the general state of agriculture; (2) while federal home loan banks historically presented little risk of failure, future profitability was questionable, since bank earnings would be used to help pay the costs of thrift failures; (3) the Federal National Mortgage Association posted record profits in 1989 after several years of losses and planned to hold sufficient capital to withstand mortgage defaults in economically depressed areas; (4) the Federal Home Loan Mortgage Corporation and Student Loan Marketing Association consistently reported profitable operations; (5) the College Construction Loan Insurance Association expected few or no losses from credit risk and was not exposed to interest rate risks; (6) the Federal Agriculture Mortgage Corporation has prepared credit standards and methods of operation, but has not yet guaranteed any securities; and (7) the degree of federal oversight differed among GSE, involving GSE managers' and owners' control over daily management and risk-taking activities, state regulation, federal regulations and standards, and federal enforcement efforts. GAO believes that federal oversight of GSE should be strengthened to control risk-taking activities and capital building to protect the government's interest.