What it means
Fannie Mae and Freddie Mac are government-sponsored enterprises, meaning they are privately owned companies created by Congress to support the mortgage market. They buy home loans from banks, package them into securities and guarantee payments to investors.
This frees lenders to make more loans and helps keep mortgage money available. Because these firms became so large, Congress created OFHEO through the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
Its task was to check that they held enough capital and managed risk prudently. It sat within the Department of Housing and Urban Development, though it operated with its own budget and staff.
OFHEO also produced a widely used house price index. The index tracked repeat sales and refinancings of homes with mortgages bought by Fannie Mae and Freddie Mac, and it gave an early picture of national and regional house prices.
That index continues to be published by the agency that took over. Critics argued that OFHEO lacked the powers and independence of other financial regulators, and its capital requirements were slow to change.
It also had to rely on Congress for its budget, which limited its ability to act. When the housing market collapsed in 2008 and both enterprises faced severe losses, Congress passed the Housing and Economic Recovery Act and replaced OFHEO with a stronger regulator.
For managers and analysts, OFHEO is a useful case in regulatory design. It shows how a supervisor with limited powers can struggle to keep pace with large institutions, and it explains why the later agency was given tougher tools.
Historic references to OFHEO appear in older reports on housing finance and in studies of the financial crisis. The agency's story is also a reminder that housing finance is closely tied to the wider economy.
When mortgage lending expands too fast with weak standards, losses spread to lenders, investors and homeowners alike. Supervisors who can see these risks early and act on them protect all of those groups.
In practice
Real-world examples.
Example
A mortgage lender reviews guidance issued by the regulator of Fannie Mae and Freddie Mac before selling a batch of $200,000,000 of home loans. The regulator's rules on capital shape the standards the loans must meet. The lender adjusts its underwriting to match, and it trains its loan officers on the changes so that fewer loans are rejected after they have been approved.
Example
A property economist uses the house price index first published by OFHEO to track price changes in several metropolitan areas. She compares the index with a private price series. The comparison helps her advise a developer on where to build.
Example
A finance student studies the 2008 crisis and the reasons Congress replaced OFHEO. Her paper explains the limits of the agency's powers and funding. She uses the story to argue for strong, independent supervision, with a funding source that does not depend on the institutions being supervised.
Case study
Seen in the real world.
Granite State Mortgage is a fictional lender used to illustrate the role of a housing finance regulator such as OFHEO. In this illustrative story, it originated $300,000,000 of home loans a year and sold most of them to government-sponsored enterprises. Its managers watched the regulator's rules closely, because any change in capital requirements could alter the prices these enterprises paid.
When regulators tightened the standards for loan quality, Granite State found that about 8% of its loans no longer qualified for sale. That meant 300,000,000 x 0.08 = $24,000,000 of loans would have to be kept on its own balance sheet or sold at a lower price. The company raised its underwriting standards and cut the share of ineligible loans to 2%.
The change cost some sales in the short term but reduced the risk of being left holding poor-quality loans. The chief executive said the episode showed why mortgage lenders must follow regulatory signals early and not wait for rules to bite.
Watch out
Common mistakes.
- Thinking OFHEO still exists. It was replaced in 2008 by the Federal Housing Finance Agency.
- Confusing OFHEO with a mortgage lender. It was a supervisor and did not make loans.
- Assuming Fannie Mae and Freddie Mac are government departments. They are companies with a government-backed role, not agencies themselves.
Questions
People also ask.
What did OFHEO do?
It supervised the financial safety and soundness of Fannie Mae and Freddie Mac and published a house price index.
Why was it replaced?
Congress decided it lacked the powers and independence it needed, particularly after the housing crisis exposed the risks.
Who took over its role?
The Federal Housing Finance Agency became the regulator of the two enterprises and continues to publish the house price index.
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