HUD's FY 99 Budget
Congressional Justifications
Office of Federal Housing Enterprise Oversight

Salaries and Expenses

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992, [P. L. 102-550, Section 1313(a)], Title XIII of the Housing and Community Development Act of 1992 (1992 Act), established the Office of Federal Housing Enterprise Oversight (OFHEO) as an independent office in the Department of Housing and Urban Development (HUD). The Act requires OFHEO to develop a stress test to determine risk-based capital requirements and to conduct other research and financial analysis necessary for effective regulatory oversight of the two largest government sponsored enterprises (GSEs)--the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). OFHEO is also required by statute to conduct on-site, annual examinations at Fannie Mae and Freddie Mac to determine the condition of each Enterprise for the purpose of ensuring their financial safety and soundness.

OFHEO�s Mission Statement

OFHEO effectively protects the interests of the American taxpayer and contributes to the strength and vitality of the nation�s housing finance system through independent and fair safety and soundness regulation of Fannie Mae and Freddie Mac.

The assets of the Enterprises have roughly doubled in the past four years and continue to grow rapidly. At the end of September, 1997, Fannie Mae and Freddie Mac together managed the credit risk of $1.5 trillion in mortgages and had more than $1 trillion in mortgage-backed securities outstanding. Over the past twelve months, their liabilities have grown by 11 percent, and their mortgages held in portfolio, where the risk is concentrated, have grown by 14 percent. The Enterprises' growth in both of these areas is expected to continue at about these rates in the next couple of years.

To finance their growing portfolios, the Enterprises have expanded their global debt facilities to issue debt securities to international investors. At the same time, mortgage finance markets are undergoing major changes, including increased automation and consolidation. The Enterprises are also expanding the scope of their new housing finance activities, including entry into the subprime loan market. It is critical that OFHEO fully develop and maintain its capacity to assess risks and market conditions as they impact the financial safety and soundness of Fannie Mae and Freddie Mac.

APPROPRIATION HIGHLIGHTS

Although subject to the appropriations process, OFHEO is not funded with taxpayer dollars. Section 1316 of the 1992 Act authorizes the collection of annual assessments from Fannie Mae and Freddie Mac to cover OFHEO's annual operating costs to the extent appropriated. The following table summarizes the funding and staffing included in this request.

1. The $40,000 in 1997 represents the Participating Agency Service Agreement (PASA) between OFHEO and the Agency for International Development (AID) in support of the US-Mexico Binational Commission's efforts to assist Mexico in its development of a secondary mortgage market. OMB apportioned this amount to OFHEO for obligation during 1997. OFHEO obligated $39,999 of the $40,000 during 1997.
2. The unobligated balance for fiscal year 1997 is credited to the annual assessment for fiscal year 1998 as required by the 1992 Act.
3. Full-time permanent figures are estimates based on a calculation of the permanent positions made affordable by full-time equivalents with the personal services dollars as budgeted. They are not control numbers and may vary depending on conditions. The 61 FTPs for fiscal year 1997 include two Presidential Management Interns (PMIs) having a 2-year appointment who are expected to be converted to FTPs at the end of the PMI appointment in fiscal year 1999.

SUMMARY OF 1999 BUDGET REQUEST

For fiscal year 1999, OFHEO requests $16,551,000, an increase of 3 percent over the fiscal year 1998 estimated budget of $16 million. This reflects an adjustment for inflation and holds OFHEO constant in real dollar terms at the current level. The fiscal year 1999 Budget represents no new program initiatives.

For personnel, both the 78 FTEs and the 72 full-time permanent positions requested represent no change from the enacted fiscal year 1997 and 1998 levels.

The resources in this Budget request will permit OFHEO to proceed effectively in all facets of the regulatory agenda assigned by Congress. These include financial safety and soundness examinations of the Enterprises; ongoing development and implementation of the risk-based capital standards and associated rulemaking; and other financial, analytical and policy tools required for effective regulatory oversight.

The secondary mortgage market continues to evolve and increase in complexity. This request will enable OFHEO to continue to strengthen its institutional knowledge base, maintain quality oversight and ensure timeliness of its activities, as well as continue to enhance its expertise in the secondary mortgage market.

OFHEO�s complex financial and regulatory mission requires specialized expertise, notably, the skills required to examine and analyze the business operations of the GSEs as well as related capital markets and mortgage market issues. It also requires the ability to maintain and enhance the Financial Simulation Model (FSM) and implement the stress test that determines risk-based capital standards for Fannie Mae and Freddie Mac. To function as an efficient and effective financial regulator and anticipate potential threats to taxpayers, OFHEO must have the capacity to anticipate and assess economic and market issues that could affect the GSEs. Additionally, OFHEO must be responsive to Congress as it relates to emerging issues that could affect the GSEs.

Funding

The following table summarizes obligations for OFHEO by object class.

1.CHANGES FROM ESTIMATES INCLUDED IN 1998 BUDGET

OFHEO utilized nearly all of its budget authority during 1997 having just under $56,000 unobligated at the end of the year. As required by statute, OFHEO credits the current year's assessment of the GSEs with the amount of the assessment unobligated from the previous year. Consequently, OFHEO does not have an increase of funds available in one year because of amounts carried forward from the previous year.

During 1997, OFHEO experienced normal turnover and recruitment difficulty for highly skilled, technical positions. OFHEO aggressively recruited for vacancies and filled a number of vacancies during the year. At the same time, OFHEO monitored the use of its budgetary resources and was challenged to absorb the difference between OFHEO�s budget request and the amounts enacted for both fiscal year 1997 and fiscal year 1998. OFHEO reallocated funds internally to increase the level of resources available for additional contract support for the development of the FSM and to support the regulatory effort underway pertaining to the risk-based capital stress test.

OFHEO requested $16.3 million for fiscal year 1998 and received $16 million in enacted budget authority. OFHEO will absorb the reduction from its budget request by reallocating resources internally. The reallocation will include lapse in filling vacant positions and reductions in other services and travel where feasible.

2. ANALYSIS OF INCREASES AND DECREASES

EXPLANATION BY OBJECT CLASS

Personal Services. OFHEO's fiscal year 1999 Budget request is 2 percent higher than the Current Estimate for fiscal year 1998, but about 2 percent less than the 1998 level would be if it were adjusted for an inflationary increase for fiscal year 1999. For the 1999 Budget, OFHEO is requesting fewer resources than required for a full complement of staff for the entire year. This is the first year that OFHEO has reduced its Budget request in anticipation of normal turnover lapse.

In the past couple of years, OFHEO has realized budgetary lapse in its personal services budget, and OFHEO has been able to reallocate unused personal services funds to contract services to secure contract support for regulatory activities. During fiscal year 1998, OFHEO plans to achieve a full staff complement as authorized and will have less budgetary lapse in personal services. OFHEO projects that it will have little unbudgeted lapse in personal services in fiscal year 1999. Consequently, OFHEO will require in full the resources requested for personal services in fiscal year 1999. OFHEO will not have the capability in fiscal year 1999 to shift unused personal services funding to contracts for specialized services.

OFHEO continues to incur additional costs attributed to hiring and retaining staff for very specialized, technical jobs in the mission areas. The type of skills required in examination, oversight, and financial modeling functions are highly marketable in the private sector. OFHEO has had difficulty recruiting staff in these areas.

OFHEO's personal services budget and its administration differ from most other Federal agencies' because OFHEO, by statute, is exempt from Title 5 pay and classification standards administered by the Office of Personnel Management and is required by statute to maintain compensation comparability with other federal financial institution regulators. OFHEO has no automatic within-grade pay increases and does not give the annual cost of living increase approved for most federal employees. OFHEO distributes performance-based merit increases as base pay increases and/or lump sum payouts. The personal services budget increase includes a continuation of the standard federal benefits package and does not provide funding for additional benefits.

Also included in the fiscal year 1999 request are funds for a limited amount of support from intermittent experts for services related to the FSM and risk-based capital stress test. The request continues the cost-effective use of temporary appointments in lieu of contract support for positions that fill a temporary need at OFHEO. The budget request also continues funding for detailees during fiscal year 1999 for the examination function.

Travel. OFHEO is requesting an 8 percent decrease in travel. This decrease represents a re-evaluation of travel needs which included historical travel data. In addition, the 1999 request supports travel associated with facilitating public hearings on the proposed risk-based capital regulation and presentation of the stress test in various industry forums. The 1999 request continues to support a public communication strategy for the risk-based stress test. The request also supports targeted travel to the regional offices of the Enterprises for examinations, and activities related to financial modeling and research. It also includes travel for intermittent experts and expenses associated with the temporary detail of examiners from other Federal financial institution regulators, whose duty stations may be outside the local area. The request supports continued participation of OFHEO staff in professional seminars and meetings which benefit mission related work and support activities.

Transportation of Things. OFHEO's fiscal year 1999 Budget request reflects a $15,000 or 17 percent increase over the 1998 estimate. This reflects the assumption that OFHEO will need to fill vacant positions and pay relocation benefits. The estimate reflects the more generous relocation allowance for real estate costs authorized in 1997 by the General Services Administration. As actual moves are made, some of these funds may be reallocated to personal services to support relocation costs properly reflected as benefits. It also reflects a small budget for shipping charges for supplies, subscriptions and equipment.

Rent, Communications and Utilities. The fiscal year 1999 Budget request includes a 2 percent increase over fiscal year 1998 and reflects an increase in the rental charges for the existing space OFHEO occupies, and continuing charges for Internet access, telephone use and copy machine rental.

Printing and Reproduction. OFHEO believes that printing costs will double in fiscal year 1999 over the Current Estimate for fiscal year 1998. This reflects the publication of the NPR for the risk-based capital stress test. The NPR will be a large document and the costs are fixed by the Federal Register. OFHEO also expects to publish technical and analytical studies, print manuals and handbooks to support operations, as well as publish OFHEO�s Annual Report to Congress and quarterly House Price Index.

Other Services. Other services for 1999 reflect a 10 percent increase of $395,000 over the current 1998 estimate. It supports specialized technical services necessary to complete technical documentation and validation of the risk-based capital stress test, refinements or modifications to the stress test, continued development of a data warehouse for Enterprise information, and continued maintenance of the computer hardware and software used for the stress test and data warehouse. This category includes costs for technical experts on an as-needed basis to support project-specific examination activities including the automation of an off-site monitoring system. It also includes contractual support for administrative activities for specialized needs and projects, such as operating and maintenance services for OFHEO�s office automation system.

Supplies and Materials. This includes an increase of $43,000. It represents an estimate of the cost of office supplies for a full complement of staff and contractors on site, as well as subscriptions, computer supplies, standard software, and copier supplies.

Furniture and Equipment. 1999 Budget reflects a large decrease (44 percent) from the Current Estimate for fiscal year 1998. This is attributed to the cost planned during fiscal year 1998 to upgrade OFHEO�s office automation network by replacing the operating system. The current system is rapidly becoming outdated and OFHEO is finding that new software applications cannot be supported by the older system. The 1999 Budget includes a small budget for upgrades for the FSM computer hardware and software and minimal replacement of other equipment.

STAFFING SUMMARY

1.SCOPE OF ACTIVITY

OFHEO functions as an independent office within HUD, responsible for regulation of Fannie Mae and Freddie Mac in matters of capital adequacy and financial safety and soundness. The Office is headed by the Director who is appointed by the President for a five-year term and is responsible for the overall operation of OFHEO.

The Act requires OFHEO to develop a stress test to determine risk-based capital requirements and to conduct other research and financial analysis necessary for effective regulatory oversight of the GSEs.

OFHEO is also required by statute to conduct on-site, annual regulatory examinations at Fannie Mae and Freddie Mac to determine the condition of each Enterprise for the purpose of ensuring their financial safety and soundness. The examinations are designed to identify the overall risks in the business activities of the Enterprises, and to determine if those risks are being prudently managed, controlled, and monitored. Additional special examinations may be conducted as necessary, as determined by the Director.

Additionally, the Office is required to: issue regulations; report annually to Congress; determine quarterly capital levels, take needed enforcement actions, and prohibit excessive executive compensation at the Enterprises.

OFHEO has been organized broadly into six offices:

1.Research, Analysis and Capital Standards

2.Examination and Oversight

4.General Counsel

5.Congressional and Public Affairs

6.Policy Analysis

2.WORKLOAD

A.1997 Accomplishments

Following are specific accomplishments during 1997.

RULEMAKING

• Commenced a series of informal meetings on the risk-based capital stress test with representatives from OMB, Treasury, HUD and OTS, to familiarize them with the FSM and stress test policy issues, and facilitate formal interagency review of OFHEO�s planned second Notice of Proposed Rulemaking on risk-based capital.

RESEARCH AND POLICY ANALYSIS

• Classified each of the Enterprises as "adequately capitalized" each quarter applying minimum regulatory capital standards.

• Continued quarterly publication of OFHEO�s House Price Index (HPI) documenting changes in home prices for the nation, each state and the nine Census regions.

• Received and reviewed public comments on OFHEO�s first Notice of Proposed Rulemaking on Risk-Based Capital, which proposed the benchmark, loss experience, the basis for Enterprise credit losses in the stress test, and OFHEO�s intent to use its House Price Index in the stress test.

• Completed basic development of OFHEO�s Financial Simulation Model (FSM), the platform for completing the development and running of the risk-based capital stress test.

• Made substantial progress testing and debugging the FSM software.

• Completed the first stage of building a "data warehouse." The data warehouse will house the large volume of data that OFHEO received from the Enterprises, and enhance the efficiency of the FSM and stress test operations and OFHEO�s supervisory off-site monitoring capability.

• Conducted original research in the areas of single- and multi-family mortgage performance to enhance OFHEO�s understanding of the risks taken by the Enterprises with these types of activities.

• Determined that two new programs proposed by Fannie Mae--Mortgage Protection Plan and FASIT program--would not risk significant deterioration of Fannie Mae�s financial condition. Notified the HUD Secretary by letter of these determinations.

• Completed the first phase of the work for establishing a comprehensive framework for determining the comparability of executive compensation and the reasonableness of any termination packages at the Enterprises.

• Published an Annual Report to the Congress on June 15, 1997.

• Conducted examinations of business risk, focusing on the single-family business, at the Enterprises. Issued reports of examination, met with the boards of directors of both Enterprises, and made recommendations to enhance the business risk management of the Enterprises.

• Conducted an examination of Enterprise data integrity. Issued a report of examination, met with the board of directors, and established procedures to ensure accurate and timely receipt of data from the Enterprises.

• Planned, scoped, staffed, and initiated field work for examinations of the information systems and technology risk of the Enterprises.

• Commenced "Year 2000" examination procedures to assess the adequacy of Enterprise plans and schedules for addressing "Year 2000" issues. Established a program to monitor the progress of the Enterprises for "Year 2000" compliance, including regular briefings by the Enterprises.

• Planned and scoped examinations of operations risk management and internal audit at the Enterprises.

• Maintained and enhanced the monitoring and financial analysis programs.

• Determined that the examination of the Enterprises would employ an annual continuous risk-based examination format.

INFRASTRUCTURE

• Submitted Quarterly Reports to the HUD Secretary.

• Formulated OFHEO�s Strategic Plan for fiscal year 1997-2002.

• Improved OFHEO�s ability to manage its budgetary resources effectively, and contribute accurate financial data to Treasury and OMB.

• Streamlined travel management. OFHEO implemented a travel management software program that provides the electronic preparation, routing, and approval of travel documents.

• Received delegated examining authority from the Office of Personnel Management to conduct recruitment for OFHEO positions.

• Implemented policies and procedures for OFHEO's operation as part of the competitive service rather than the excepted service.

• Enhanced the review of information technology resource investments by instituting an Information Technology Resources Management Working Group.

• Provided Internet access and training to all employees.

• Published the OFHEO Handbook which is a compilation of selected statutes and regulations that will be updated periodically governing the operations of OFHEO and the Enterprises.

B.1998 Plan

RULEMAKING

• Continue interagency communication with OMB, Treasury, and HUD on the second notice of proposed rulemaking on the risk-based capital stress test.

• Submit for formal inter-agency clearance the second notice of proposed rulemaking on the stress test for determining risk-based capital.

• Issue final regulation on release of information, which implements the provisions of the Freedom of Information Act.

• Issue proposed regulation establishing the Rules of Practice and Procedure related to the conduct of enforcement actions.

• Issue interim and final regulation implementing the Privacy Act.

• Issue a final regulation providing an inflation adjustment for civil money penalties.

RESEARCH AND POLICY ANALYSIS

• Continue quarterly classification of the capital adequacy of the Enterprises, applying minimum capital regulatory standards.

• Continue quarterly publication of OFHEO�s HPI, documenting changes in home prices for the nation, each state and the nine census regions.

• Make a full and complete report to Congress on OFHEO's activities and condition of the Enterprises.

• Finish testing of policy alternatives necessary to complete the stress test, in order to create a second Notice of Proposed Rulemaking presenting the full stress test for public comment.

• Continue work on a comprehensive data warehouse that will house Enterprise data necessary to generate the starting positions for the stress test and to support off-site monitoring and financial analysis.

• Finalize and implement a comprehensive framework for determining the comparability of executive compensation and the reasonableness of any termination packages at the Enterprises.

• Continue to evaluate new programs proposed by either Enterprise to determine if they would risk significant deterioration of the financial condition of that Enterprise

• Complete the examinations of information systems and technology risk at the Enterprises, including reports of examination and meetings with the boards of directors.

• Complete the operations risk and internal audit examinations of the Enterprises, including field work, reports of examination, and meetings with the boards of directors.

• Conduct flood insurance compliance reviews of the Enterprises to assess the adequacy of procedures at the Enterprises to comply with the requirements of applicable laws pertaining to flood insurance and report on the adequacy of compliance in the OFHEO Annual Report.

• Initiate an annual continuous risk-based examination process with regular risk assessments of the core risks of the Enterprises to ensure a comprehensive, ongoing assessment of the safety and soundness of the Enterprises. Supplement OFHEO examination staff with examiners from other federal financial institution regulatory agencies to enhance the effectiveness and efficiency of the examination process.

• Issue an Examination Handbook to codify the continuous risk-based examination approach, including supervisory philosophy, examination policies and procedures, and standards for risk management practices.

• Maintain and enhance off-site monitoring programs to ensure that the surveillance function provides a comprehensive and timely assessment of the safety and soundness of the Enterprises. Analyze the financial condition and performance of the Enterprises as well as specific activities and risks of the Enterprises.

• Complete OFHEO�s Strategic Plan and fiscal year 1999 Performance Plan, and develop and implement an appropriate measurement system.

• Further enhance OFHEO�s financial management system by implementing an automated download from the travel management software to the financial accounting system. This will eliminate most data entry required to record travel transactions in the accounting system.

• Revise OFHEO�s Performance Evaluation Management System based on evaluation recommendations.

• Maintain technical competence by upgrading office automation operating system and training staff to use improved capabilities effectively.

• Continue to develop, implement and improve administrative systems and policies to support OFHEO�s activities using the principles of the National Performance Review, the Government Performance and Results Act the Government Management Reform Act, and the Information Technology Management Reform Act.

• Submit Quarterly Reports to the HUD Secretary.

C.1999 GOALS

RULEMAKING

• Publication of the second proposed notice on risk-based capital setting forth the stress test for determining risk-based capital.

• Publication of proposed regulation implementing the Equal Access to Justice Act.

• Publication of proposed regulation implementing the prompt corrective action provisions of the 1992 Act.

• Publication of final regulation establishing the Rules of Practice and Procedure related to the conduct of enforcement actions.

• Publication of proposed regulation implementing the Debt Collection Act.

RESEARCH AND POLICY ANALYSIS

• Classify the capital adequacy of the Enterprises quarterly, applying minimum regulatory capital standards.

• Continue quarterly publication of OFHEO�s House Price Index.

• Produce a report to Congress on OFHEO's activities and condition of the Enterprises.

• Review and analyze all comments on the second risk-based capital Notice of Proposed Rulemaking and undertake follow-up work and/or evaluation of alternatives necessary to complete a final risk-based capital regulation.

• Complete development of a flexible reporting interface for the comprehensive Enterprise data warehouse to facilitate off-site monitoring and Enterprise analysis.

• Continue to monitor comparability of executive compensation at the Enterprises and determine the reasonableness of any termination packages.

• Continue to evaluate new programs proposed by either Enterprise to determine if the new program would risk significant deterioration of the financial condition of that Enterprise.

EXAMINATION AND OVERSIGHT

• Enhance the continuous annual risk-based examination process to maintain the effectiveness of communications between OFHEO examination staff and the Enterprises and to ensure the timely implementation of examination recommendations by the Enterprises. Conduct periodic meetings with the boards of directors and management�s of the Enterprises and issue annual reports of examination to the Enterprises. Use OFHEO�s FSM to independently and consistently evaluate the interest rate risk and credit risk of the Enterprises as part of the examination process. Supplement OFHEO examination staff with examiners from other federal financial institution regulatory agencies to enhance the effectiveness and efficiency of the examination process.

• Maintain and enhance off-site monitoring programs to ensure that the surveillance function (including staffing, analytics, and data bases) provides a comprehensive and timely assessment of the safety and soundness of the Enterprises.

• Conduct a comprehensive program of off-site financial analysis to ensure that OFHEO is knowledgeable of all risk exposures of the Enterprises. Prepare reports on the financial condition and performance of the Enterprises as well as specific activities and risks of the Enterprises.

INFRASTRUCTURE

• Continue to evaluate and improve the efficiency and effectiveness of financial and administrative programs and systems.

• Continue to provide administrative support services in a cost effective manner which also meet OFHEO's operating needs.

• Submit Quarterly Reports to the HUD Secretary.

3.SUMMARY OF STAFFING REQUIREMENTS

All personnel in this office are assigned to Headquarters. OFHEO has no field offices. The FTE staff is as follows:

4.SUMMARY OF STAFFING BY PAY LEVEL

The Director of OFHEO, through the Act, may appoint and fix compensation of the officers and employees of the Office without regard to Title5, United States Code, relating to classification and General Schedule pay rates. OFHEO maintains comparability with federal banking agencies, as required by Section 1315 of the Act. The Office has a lean, flat organizational structure staffed by highly-qualified senior individuals. The following chart depicts full time permanent positions.

PAY BAND