Detailed Information on the
Office of Federal Housing Enterprise Oversight Assessment

Proposing to abolish OFHEO and establish a new regulator with receivership authority, flexible authority to set capital standards, and a full range of enforcement powers.

Implement the GSE Enterprise Risk assessment structure to serve as the basis for two new performance measures by updating the Supervision Handbook, training new supervision staff, updating the quality assurance function and modifying the automated supervisory tool to accomodate the new structure.

Report Enterprise performance using the composite and category-level ratings under the GSE Enterprise Risk assessment structure, where No or Minimal Concerns is the highest rating possible and Critical Concerns is the lowest.

Reporting Enterprise performance with bank-like risk measures rating Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk and Operational risk on a scale of 1-5

Reporting on a complementary measure rating five risk assessment categories (Governance, Market, Credit, Operational, and Model) by a combination of quantity of risk and quality of risk management.

Measure: The percentage of Enterprises with an overall GSE Enterprise risk safety and soundness rating of "Limited Concerns" or better. (New measure, added February 2008)

Explanation:This measure replaces the performance measure based on CAMELSO that OFHEO used through calendar year 2007. GSE Enterprise Risk is a simplified rating structure used by OFHEO as a comprehensive indicator of safety and soundness based on Enterprise risks. This composite measure captures an assessment of the Enterprises Governance, Solvency, and Earnings (GSE), as well as, credit, market, and operational risks (captured in the term Enterprise Risk). Each Enterprise receives a rating of No or Minimal Concerns, Limited Concerns, Significant Concerns or Critical Concerns. With only two institutions to regulate, OFHEO's target of 100% represents the highest possible standard. This measure follows the same calendar year as the annual examination process. Each fiscal year, OFHEO reports the actual experience as of the end of the prior calendar year.

Measure: For both Enterprises, the percentage of GSE Enterprise Risk categories (Governance, Solvency, and Earnings, market, credit and operational risk) with a safety and soundness rating of "Limited Concerns" or better. (New measure, added February 2008)

Explanation:This measure replaces the performance measure based on the prior risk assessment structure that OFHEO used through calendar year 2007. This measure focuses on component categories of the GSE Enterprise Risk rating structure that OFHEO use for the composite indicator of safety and soundness. GSE stands for Governance, Solvency, and Earnings (GSE), as well as, credit, market, and operational risks (captured in the term Enterprise Risk). Each Enterprise receives a rating of No or Minimal Concerns, Limited Concerns, Significant Concerns or Critical Concerns. This measure serves as an early warning system allowing OFHEO to refocus resources to address an area of concern before it leads to more significant safety and soundness issues. This measure follows the same calendar year as the annual examination process. Each fiscal year, OFHEO reports the actual experience as of the end of the prior calendar year.

Measure: Number of total quarters each fiscal year that both Enterprises (8 maximum--4 for each Enterprise) are determined to be adequately capitalized.

Explanation:Adequate capital protects an Enterprise from severe losses due to unexpected events. Regulatory capital standards are designed to provide protection in circumstances more adverse than those against which an Enterprise may choose to hold capital. OFHEO's Director determines quarterly whether each Enterprise is adequately capitalized, based on a minimum capital requirement, a risk-based capital requirement and other factors at the Director's discretion. Previously OFHEO had directed both Enterprises to achieve a capital level at least 30% above the minimum capital level to reflect operational issues that each Enterprise is addressing. In March 2008, as part of an initiative to increase mortgage market liquidity, OFHEO reduced the additional required capital level to 20% for both Enterprises in light of their progress in remediating prior weaknesses, their pubic purpose, the ongoing market conditions, and their commitment to raise significant capital. In June 2008, OFHEO further reduced the directed level for Fannie Mae to 15% in light of their raising significant additional capital, and intends to do the same for Freddie Mac when they take actions to raise significant capital.

Measure: Percentage of survey respondents visiting OFHEO's website who find it a useful resource.

Explanation:OFHEO's web site is the repository for all of the information that OFHEO provides to enhance public understanding of the nation's housing finance system. This information includes quarterly House Price Index reports and the annual Report to Congress on the status of the Enterprises. OFHEO also publishes working papers, research papers, capital adequacy determinations and analysis, proposed regulations and comments on those regulations, special reports such as the Report of Findings-to-Date on the Fannie Mae Special Examination, annual conforming loan limits, annual and long-term plans, and other guidance, policies and notices that relate to the Enterprises and OFHEO's operations. Given the large amount of information that OFHEO publishes on its website, the web survey measure is the best mechanism to capture the public's view of the value of OFHEO's products. OFHEO uses the feedback received in the survey to make improvement in the program as a whole and the information and presentation on the web site. This measure captures the outcome related to OFHEO's performance goal of communicating effectively with the agency's stakeholders, which falls under OFHEO's second strategic goal of supporting the national policy of an efficient secondary mortgage market. These goals help to achieve OFHEO's mission of promoting housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac. OFHEO set the target for 2006 before developing the web survey. The 2006 actual experience should be considered a baseline. After data has been gathered for a full year, OFHEO will revise its targets.

Measure: The percentage of actions required by formal regulatory agreements with the Enterprises that are resolved as planned.

Explanation:OFHEO has entered into several formal agreements with the Enterprises to make significant improvements to their operations. Many aspects of these agreements are based on findings in the special examinations for each Enterprise. OFHEO established these formal agreements to specify improvements the Enterprises must make to ensure their safety and soundness in areas such as capital plans, internal controls and reports and disclosure. Each of the agreements has its own set of required actions and a new agreement may supersede another over time. This measure tracks the Enterprises' compliance with those agreements by item. Compliance means the Enterprise's corrective actions are consistent in all material respects with the regulatory agreement, and that these actions are sustainable and have been validated by OFHEO. Compliance with consent orders and agreements does not indicate that the Enterprise has fully resolved the underlying problem. This measure serves as a proxy for the outcome related to OFHEO's goal of ensuring the Enterprises' comply with applicable laws, regulations and directives. Compliance is a critical component of the results from OFHEO's supervision of the Enterprises. OFHEO tracks this information as part of its overall supervision process, including annual examinations, and focuses attention to those areas that still need to be completed by Fannie Mae or Freddie Mac. This measure follows the same calendar year cycle as the annual examination process. Each fiscal year, OFHEO will report actual experience as of the end of the prior calendar year. Completion of all of the agreed-upon improvements within the timeframe is OFHEO's goal in order to ensure safe and sound practices at the Enterprises.

Measure: Long Term: By 2010, the Percentage of Enterprises with CAMELSO rating of 1 or 2 will be 100%. Annual: The percentage of Enterprises with CAMELS ratings of 1, 2, or 3 (2007-2009) and 1 or 2 (2010- 2011).

Explanation:CAMELSO is similar to the uniform rating system used by financial institution regulators as a leading indicator of safety and soundness. The ratings for Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk, and Operational risk range from 1 to 5, with 5 as the lowest. With only two institutions to regulate, OFHEO's target of 100% represents the highest possible standard. This measure will follow the same calendar year cycle as the annual examination process. Each fiscal year, OFHEO will report actual experience as of the end of the prior calendar year.

Measure: Long Term: By 2009, the percentage of OFHEO's five risk assessment categories (Governance, Market, Credit, Operational, Model) with a risk profile not rated high risk quantity and weak risk management quality for both Enterprises will be 100%. Annual: For both Enterprises, the percentage of OFHEO's five risk assessment categories (Governance, Market, Credit, Operational, Model) with a risk profile not rated high risk quantity and weak risk management quality.

Explanation:OFHEO's risk assessment system marries the quantity of risk (high, moderate, low) with the quality of risk management (4 gradations from weak to strong) for each area of risk. The combination of high quantity of risk and weak risk management for any one category at either Enterprise represents the greatest safety and soundness concern for OFHEO. The existence of risk in any area is not necessarily a concern, so long as management exhibits the ability to effectively manage that risk. This measure serves as an early warning system by focusing on the most problematic combination of risk and risk management for any risk category - high quantity of risk and weak risk management - allowing OFHEO to refocus resources to address this area before it leads to more significant safety and soundness issues. This measure will follow the same calendar year cycle as the annual examination process. Each fiscal year, OFHEO will report actual experience as of the end of the prior calendar year.

Measure: Average number of days to issue report of examinations to Enterprise Boards of Directors after field work is complete.

Explanation:OFHEO is measuring its efficiency through the timeliness of meeting with each Enterprise Board of Directors to discuss the annual Report of Examination. While OFHEO brings safety and soundness issues to Enterprise management and some to Board committees throughout the year, this report consolidates the findings and presents a comprehensive assessment to the full Board. By meeting with OFHEO after they have a chance to review the report, the Board can see the full picture, and discuss any common threads or root causes. They can use the information to ask Enterprise managers to make changes or take more systemic actions, and hold them accountable. The briefing is the last step in bringing closure to the annual examination. The annual examination is on a calendar year schedule and it has taken 147 to 157 days in the last two years to meet with the Boards after the field work has concluded. The timing depends on the timing of Board meetings and the complexity of issues that must be addressed. OFHEO schedules the meetings to include the results of recent special examinations and other significant actions that take place after the year is over so that the meetings are comprehensive and meaningful to the Boards by including relevant contemporaneous issues or findings that relate to the examination year.

Measure: OFHEO net costs per value of the Enterprises' total book of business (in basis points).

Explanation:Fannie Mae's and Freddie Mac's mission is to provide stability, liquidity and affordability to the mortgage market. By fulfilling their mission, they lower the cost of mortgages. Their impact is reflected in their total book of business??the mortgages they hold in portfolio and their mortgage backed securities outstanding. OFHEO's costs are a small fraction of the size of the Enterprises that it regulates??just a fraction of a basis point of their total book of business, and OFHEO uses this as a measure of its efficiency. While OFHEO's costs will continue to grow, they will continue to be a small fraction of the Enterprises' and are unlikely to outstrip the growth in the Enterprises and the mortgage market.

Is the program purpose clear?

Explanation: The Office of Federal Housing Enterprise Oversight (OFHEO) ensures the safety and soundness and capital adequacy of two government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. By reducing the risk of failure of the GSEs, OFHEO can ensure that the GSEs support the secondary market for residential mortgages by supplying liquidity to the primary mortgage market.

Evidence: The program purpose and objectives are outlined in Section 1313, 1317, 1361, and 1364 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, and in OFHEO's Strategic Plan 2003-2008, 2005 Performance and Accountability Report, and 2006 Performance Plan. The Enterprises' objectives are outlined in the Federal National Mortgage Association Charter Act, 12 U.S.C. 1716 et seq., in the Federal Home Loan Mortgage Corporation Act, 12 U.S.C. 1451 et seq.

Does the program address a specific and existing problem, interest, or need?

Explanation: OFHEO addresses a specific and existing need. Without a supervisory and oversight regulator, Fannie Mae and Freddie Mac may not operate in a safe and sound manner that ensures they have the capital required to fulfill their missions in the housing market. The program purpose is still relevant given the dramatic growth of the housing GSEs in the last decade. The GSE's recent accounting and operational problems have warranted OFHEO's higher capital standard and a capital restoration plan from the Enterprises.

Evidence: OFHEO Annual reports to Congress, especially for 2004 and 2005, OFHEO Report of the Special Examination of Freddie Mac (December 2003), OFHEO Report of Findings-to-date: Special Examination of Fannie Mae (September 2004), the OFHEO 2005 Performance and Accountability Report, and the Report of the Special Examination of Fannie Mae (May 2006) all describe recent events at the Enterprises that demonstrate the need for their supervision. "A Report to the Special Review Committee of the Board of Directors of Fannie Mae", February 23, 2006 and the "Report to the Board of Directors [Freddie Mac]: Internal Investigation of Certain Accounting Matters" 11/18/03, each commissioned by the Board of Directors of the respective Enterprises, also describe the Enterprises' accounting and operational problems.

Is the program designed so that it is not redundant or duplicative of any other Federal, state, local or private effort?

Explanation: OFHEO is exclusively charged with supervising the safety and soundness of Fannie Mae and Freddie Mac, the two large government-sponsored institutions that comprise a substantial share of the secondary mortgage market. The U.S. Department of Housing and Urban Development has responsibility for supervising the affordable housing mission of the Enterprises. The U.S. Securities and Exchange Commission has responsibility for financial information disclosure requirements affecting registered companies (Fannie Mae is registered; Freddie Mac has announced its intention to register as soon as possible upon resolving its accounting issues). No other programs at any level of government supervise the safety and soundness of these two financial institutions.

Evidence: The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (The Act) describes OFHEO authorities and HUD authorities. Other regulators' authorities are outlined in their enabling legislation: Office of the Comptroller of the Currency -- Currency Act of 1863, Office of Thrift Supervision -- Home Owners' Loan Act, Federal Deposit Insurance Corporation -- Federal Deposit Insurance Act, NCUA -- Federal Credit Union Act, U.S Securities and Exchange Commission -- Securities Exchange Act of 1934, Investment Advisers Act of 1940, Investment Company Act of 1940 and the Sarbanes-Oxley Act of 2002.

Is the program design free of major flaws that would limit the program's effectiveness or efficiency?

Explanation: OFHEO's program design is restricted by legislatively-limited authority. OFHEO does not have express powers similar to those of other safety and soundness regulators, such as receivership authority, independent litigation authority, and a full range of enforcement powers (e.g. removal authority) provided to financial regulators. OFHEO also does not have broader authority in setting capital standards, as do other safety and soundness regulators. This authority would help meet the changing mix of Enterprise business, the market environment in which they operate, and the changing nature of risk measurements themselves. OFHEO is funded through direct assessments on the Enterprises and does not use any taxpayer funds. However, OFHEO is the only safety and soundness regulator whose funding is subject to the timing and amount approved in an annual appropriations bill. Similar to the other regulators, OFHEO should have budget flexibility through permanent funding, which is critical to ensuring the agency can adapt and respond quickly to changing circumstances at either Enterprise. OFHEO would be strengthened by having mission and new product authority located within the same office that oversees the Enterprises' safety and soundness, similar to that of other financial regulators.

Evidence: The Federal Housing Enterprises Financial Safety and Soundness Act of 1992. (Funding Section 1316) and OFHEO Assessment Regulation (12 CFR Part 1701), describe the funding process. Statement of Administration Policy October 26, 2005, regarding HR 1461, the Federal Housing Finance Reform Act of 2005, and S 190??The Federal Housing Enterprise Regulatory Reform Act of 2005, reflects the additional powers a new regulator of the Enterprises would have. Testimony by OFHEO Director Armando Falcon before House Financial services Committee, Sept 25, 2003 and before the Senate Banking, Housing and Urban Affairs Committee October 23, 2003, and testimony by Acting Director James B. Lockhart III before the Senate Banking, Housing and Urban Affairs Committee June 8, 2006, describe the additional authority and powers that OFHEO needs to properly do its job. Testimony by David Walker, Comptroller General before the Senate Banking, Housing and Urban Affairs Committee April 21, 2005. GAO-01-322R Financial Regulators' Enforcement Authorities compares the various regulatory regimes.

Is the program design effectively targeted so that resources will address the program's purpose directly and will reach intended beneficiaries?

Explanation: The program's organizational structure and risk-based approach to supervision are designed to allocate available resources in an effective manner. The organizational structure was realigned to complement the ongoing risk-focused examinations of the Enterprises by strengthening the internal capability to examine compliance, internal controls and accounting treatments. Examinations are risk-focused and all relevant information raised is referred for in-depth analysis. After the risk-based capital stress test was developed, OFHEO shifted its capital oversight focus to a more comprehensive supervision and analysis of Enterprise capital. OFHEO reevaluates the Enterprises' risk profiles at least quarterly, and reallocates priorities and resources accordingly to proactively address emerging risks.

Evidence: OFHEO's organizational structure is described in its Annual Performance Budgets (FY 2003-2006), Annual Performance Reports (FY 2003 through 2004) and the 2005 Performance and Accountability Report. OFHEO organization and functions regulation also reflects OFHEO's structure. Supervision Handbook identifies risk areas and criteria.

Does the program have a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: OFHEO has a limited number of specific long-term performance measures that focus on outcomes and meaningfully reflect its purpose. To fulfill its mission, OFHEO has four critical performance measures that track the health of the Enterprises. 1) Beginning FY 2007, OFHEO is adopting as a long-term measure a rating system similar to that used by financial institutions regulators--the CAMELSO rating, (for Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to Market Risk, and Operational Risk). This "score card" for the condition and performance of the Enterprises is based on the findings and conclusions of the annual safety and soundness examinations. 2) OFHEO is also adding a complementary measure, rating five risk assessment categories (Governance, Market, Credit, Operational and Model) by a combination of quantity of risk and quality of risk management. The resulting risk profile for each Enterprise guides current and future supervisory activities, and is communicated to the Boards of Directors of the Enterprises in the Report of Examination. 3) To measure capital adequacy, OFHEO is continuing to measure the number of quarters each fiscal year that both Enterprises are determined to be adequately capitalized. By looking at the Enterprises through three different lenses that evaluate risk and its management, the performance measures ensure that the Enterprises operate in a safe and sound manner and remain adequately capitalized. 4) To measure the Enterprises' improvements to their operations, OFHEO is continuing to measure the Enterprises' compliance with its agreements. OFHEO has an additional long-term performance measure to assess the goal of enhancing public understanding of the nation's housing finance system. This measure is: The percentage of survey respondents visiting OFHEO's web site, which includes OFHEO's publications and other public information, who find it a useful resource. OFHEO's web site is the repository for all of the information that OFHEO provides to the public in order to inform them about the Enterprises, OFHEO's operations, the secondary mortgage market and other housing finance issues. These long term performance measurements will be published in all future GPRA documents.

Evidence: OFHEO FY 2007 Performance Budget describes OFHEO's goals and measures. OFHEO will publish these measures in all of its GPRA documents. OFHEO's web site www.ofheo.gov displays the publications and information generated by OFHEO that are available to the public. The Supervision Handbook describes risk assessment profile criteria. Consent orders and agreements with the Enterprises: May 23, 2006 Agreement with Fannie Mae, September 2, 2005 Agreement with both Enterprises on subordinated debt and disclosures, March 8, 2005 supplemental agreement with Fannie Mae, September 27, 2004 agreement with Fannie Mae, December 9, 2003 consent order with Freddie Mac. Note that the May 23, 2006 agreement with Fannie Mae supersedes the other two agreements with Fannie Mae. Internal follow-up reports track progress.

Does the program have ambitious targets and timeframes for its long-term measures?

Explanation: OFHEO's long-term measures have ambitious targets and timeframes for its long-term measures. The target for the capital adequacy measure calls for the Enterprises to have adequate capital every quarter. The CAMELSO ratings, the risk assessment profile ratings, and the capital adequacy standards serve as the foundation for OFHEO's risk-based supervision program. Complementing the CAMELSO rating system, OFHEO is using its new risk assessment standards and sets a low tolerance level for the riskiest category for a risk assessment profile. The size and complexity of the Enterprises may create significant risk exposures and OFHEO's performance measures establish ambitious goals for the condition and performance of large, complex financial institutions. OFHEO began soliciting feedback from the public about the value of its web site for the first time in FY 2006. With no experience, OFHEO set a target that a majority of visitors found the web site valuable. Because the response in the first quarter was so much greater than the first year target, OFHEO is raising the target for FY 2007 to exceed the actual for 2006, and will set future targets as a moving average of the prior three years.

Evidence: The September 2004 agreement with Fannie Mae Board of Directors and OFHEO's capital directive to Freddie Mac in January 2004 requires each Enterprise to maintain a 30% capital surplus. The Supervision Handbook describes risk assessment profile criteria. Actual data for the Web site survey results is in the performance measure section. OFHEO will publish these targets and actual results in all of its GPRA documents.

Does the program have a limited number of specific annual performance measures that can demonstrate progress toward achieving the program's long-term goals?

Explanation: Several of OFHEO's annual goals are the same as its long term goals. For its key strategic goal -- Ensure the Enterprises comply with safety and soundness standards, are adequately capitalized and comply with other legal requirements -- OFHEO has four critical performance measures that it uses annually to track the health of the Enterprises. 1) Beginning FY 2007, OFHEO is adopting as an annual measure as well as a long-term measure a rating system similar to that used by financial institutions regulators??the CAMELSO rating, for (Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to Market Risk, and Operational Risk). This rating for the condition and performance of the Enterprises is based on the findings and conclusions of the annual safety and soundness examinations. 2) OFHEO is adopting a risk assessment profile performance measure as an annual performance measures as well as a long-term measure. On an annual basis, it will also serve as an early warning system. OFHEO is rating five risk assessment categories (Governance, Market, Credit, Operational and Model) by a combination of quantity of risk and quality of risk management. The resulting risk profile for each Enterprise guides current and future supervisory activities, and is communicated to the Boards of Directors of the Enterprises in the Report of Examination. 3) To measure capital adequacy, OFHEO is continuing to measure the number of quarters each fiscal year that each Enterprise is determined to be adequately capitalized. 4) OFHEO is also using a fourth annual performance measure beginning FY 2007: The percentage of safety and soundness issues outlined in formal agreements with the Enterprises that are resolved as planned. This measure captures the Enterprises' progress in making specific significant improvements to their operations. Many aspects of these agreements are based on the findings in the special examinations for each Enterprise. OFHEO has an additional annual performance measure to assess the goal of enhancing public understanding of the nation's housing finance system. This measure, also used as a long term measure is: The percentage of survey respondents visiting OFHEO's web site, which includes OFHEO's publications and other public information, who find it a useful resource. These annual performance measurements will be published in all future GPRA documents.

Evidence: OFHEO FY 2007 Performance Budget describes OFHEO's goals and measures. OFHEO's web site www.ofheo.gov displays the publications and information generated by OFHEO that are available to the public. The Supervision Handbook describes risk assessment profile criteria.

Does the program have baselines and ambitious targets for its annual measures?

Explanation: OFHEO has baselines and ambitious targets for almost all of its annual measures. The target for the capital adequacy measure calls for the Enterprises to have adequate capital every quarter. In response to the Findings of the special examinations and need for financial restatements at both Enterprises, OFHEO recently increased the minimum capital requirement for each by 30%. Since the dollar value of the minimum capital required changes as the Enterprises' assets and off-balance sheet obligations change, a target of 8 for the number of quarters that both Enterprises are determined to be adequately capitalized (four quarters for each Enterprise) is ambitious. Complementing the CAMELSO rating system as a long-term measure, OFHEO is using its new risk assessment standards and sets a low tolerance level for the riskiest category for a risk assessment profile. While most annual measures have baselines, the annual measure, "The percentage of Enterprises with CAMELS ratings of 1, 2, or 3 does not." The baseline for this measure will be established in FY2007.

Evidence: The September 2004 agreement with Fannie Mae Board of Directors and OFHEO's capital directive to Freddie Mac in January 2004 requires each Enterprise to maintain a 30% capital surplus. The Supervision Handbook describes risk assessment profile criteria. Actual data for the Web site survey results is in the performance measure section.

Do all partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) commit to and work toward the annual and/or long-term goals of the program?

Explanation: Although OFHEO has contractors that perform support functions and specialized services that support the agency's goals, OFHEO does not have partners within the meaning of the question.

Evidence:

Are independent evaluations of sufficient scope and quality conducted on a regular basis or as needed to support program improvements and evaluate effectiveness and relevance to the problem, interest, or need?

Explanation: An independent evaluation of sufficient scope and quality has not been conducted. The GAO evaluated OFHEO's development of its supervisory program in 1998. Since then, the GAO evaluated aspects of the supervisory program and the HUD IG has audited aspects of OFHEO's administrative and financial management. OFHEO continues to grow, focusing its resources on supervision and litigation. At this time, the Office does not have an operational internal evaluation function or a current evaluation by an external party. With the new organizational structure in place, OFHEO will establish a regular cycle of evaluation of its supervisory program beginning in 2008.

Evidence:

Are Budget requests explicitly tied to accomplishment of the annual and long-term performance goals, and are the resource needs presented in a complete and transparent manner in the program's budget?

Explanation: OFHEO directly ties budget development to achieving its strategic and annual goals and presents the resources needed to accomplish its strategic goals in the Office's Performance Budget. Through an integrated process, the Office's budget development follows an annual review of the strategic plan and parallels the development of the performance plan for the budget year. The OFHEO Director establishes goals, priorities and other budget formulation guidance. Each office director develops a zero-based budget request that reflects the resources necessary to accomplish performance goals, and identifies each requested item by strategic goal. The Annual Performance Budget is approved by the Director of OFHEO. Once the budget level is enacted, the approved operating budget continues to link each item budgeted or purchased to a strategic goal. Budget execution data is captured in the Office's accounting system for each office and for each strategic goal.

Evidence: OFHEO's Annual Performance Budgets are aligned with the program's strategic goals.

Has the program taken meaningful steps to correct its strategic planning deficiencies?

Explanation: OFHEO has taken meaningful steps to correct its strategic planning deficiencies. In particular, OFHEO has reduced the number of performance measures to sharpen the Office's focus. Recently, OFHEO has adopted three performance measures for FY 2007 that capture different aspects of the outcome of the program's oversight efforts to ensure the safety and soundness of the Enterprises, and has made minor changes to a fourth measure that captures their capital adequacy. The result is a limited set of measures that are quantifiable and outcome-oriented. These measures will be incorporated into strategic and performance plans going forward. OFHEO reviews its strategic plan annually before developing annual performance budgets and updates the plan at least every three years, with the guidance and direction of OFHEO's Director and the input of stakeholders. The means and strategies to achieve annual performance goals are developed in concert with budget requirements, based on priorities set by the Director.

Evidence: The OFHEO Strategic Plan 2000-2005, OFHEO Strategic Plan 2003-2008, and Annual Performance Plans and Performance Budgets show reduction in number of performance measures over time.

Are all regulations issued by the program/agency necessary to meet the stated goals of the program, and do all regulations clearly indicate how the rules contribute to achievement of the goals?

Explanation: Most regulations are designed to ensure the capital adequacy of the Enterprises and safety and soundness of their operations. Specific regulations OFHEO has adopted establish minimum supervisory standards and procedures affecting corporate governance, executive compensation, reporting of mortgage fraud, minimum safety and soundness standards, and statutorily-mandated capital standards. Planned rulemakings include several technical amendments to existing regulations affecting capital requirements, and enhancement of corporate governance standards to incorporate recent changes in law and supervisory experience, as well as emerging industry practices and standards.

Evidence: Capital standards are mandated by the 1992 Act. OFHEO has established a regulatory review procedure (Doc. # PG-01-001, issued April 2, 2001) that provides for a five-year scheduled review of all regulations to determine the justification for and burden of the Office's regulations. In response to such a recently published request for public comment, OFHEO received a few comments and suggestions to clarify and enhance existing rules affecting a range of issues.

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: OFHEO collects both internal information and information from the Enterprises to manage program performance. OFHEO receives financial and program performance information from the Enterprises through its processes of continuous supervision, periodic targeted examinations, and capital classification. OFHEO uses this information??data, documents, reports, and interviews with Enterprise management and key personnel--as it monitors Enterprise status against the risk assessment factors and the capital standards that are the basis of the performance measures. The Enterprises submit some information routinely, such as weekly and quarterly capital calculations and analytics, other information as scheduled to carry out an enforcement agreement, such as the capital restoration plan, or as periodic progress reports in addressing safety and soundness concerns. They also submit additional information as requested by special examinations or as events occur. OFHEO validates the information submitted by the Enterprises to ensure accuracy and the credibility of compliance by the Enterprises. OFHEO uses the information to update Enterprise risk profiles, reevaluate Enterprise risks and risk management, assess each Enterprise's condition, determine the need for an Enterprise to address safety and soundness issues, and redirect OFHEO's own risk-based supervisory efforts. OFHEO closely monitors the performance of its contractors to ensure that they meet performance standards. OFHEO tracks cost and scheduling information for its contracts and reviews contractor products and deliverables to ensure that OFHEO is able to accomplish its work and achieve its goals.

Evidence: The automated supervisory tool tracks and stores data and the timeliness of routine information submissions from the Enterprises. The Enterprises submit monthly minimum capital reports and quarterly Risk-Based Capital Reports to OFHEO.

Are Federal managers and program partners (including grantees, sub-grantees, contractors, cost-sharing partners, and other government partners) held accountable for cost, schedule and performance results?

Explanation: OFHEO's Performance Evaluation Management System (PEMS) ties employee performance to achieving the Office's goals. OFHEO's senior managers are assigned responsibility for achieving the Office's annual performance goals, and meet quarterly with the Director to report on the status. Through PEMS, all employees have Job Performance Plans and a performance rating system that links to Office program performance. Job Performance elements for all employees include that the employee demonstrate an understanding of OFHEO's mission by setting priorities and delivering services and products to meet goals in the strategic, annual performance and operating plans. Unlike General Schedule agencies, OFHEO has a pay-for-performance system; the only pay increases received by OFHEO employees are performance-based (i.e., no cost-of-living increases). To receive any pay increase, employees must demonstrate fully successful performance or higher. Managers received annual refresher training before completing evaluations and assigning ratings for the 2005-2006 performance evaluation management cycle. Moreover, OFHEO has performance requirements for the Enterprises that tie to its performance measurement goals. To measure actual performance, OFHEO collects data from the Enterprises. Contractors are also accountable to meet contract deadlines. In particular, if contractors fail to fulfill their contract responsibilities, OFHEO negotiates invoice discounts.

Evidence: OFHEO has policies and procedures for employee job performance plans, performance evaluations, merit pay, and performance reporting. Individual contracts contain a performance clause with discounts negotiated if the contractor fails to meet performance timelines. Capital classification press releases. Consent orders and agreements with the Enterprises: May 23, 2006 Agreement with Fannie Mae, September 12, 2005 consent order with Freddie Mac, September 2, 2005 Agreement with both Enterprises on subordinated debt and disclosures, March 8, 2005 supplemental agreement with Fannie Mae, September 27, 2004 agreement with Fannie Mae, December 9, 2003 consent order with Freddie Mac.

Are funds (Federal and partners') obligated in a timely manner, spent for the intended purpose and accurately reported?

Explanation: Funds are obligated in a timely manner and spent for the intended purpose. For FY 2005, OFHEO obligated nearly 100% ($64.34 million) of its operating budget of $64.36 million, which included a supplemental appropriation of $5 million for increased costs of the special examinations of Fannie Mae and Freddie Mac and associated litigation. OFHEO obligated 94% of its resources for Strategic Goal 1: Ensure the Enterprises comply with safety and soundness standards, are adequately capitalized, and comply with other legal requirements. This exceeds the FY 2005 appropriations requirement that OFHEO spend no less than 80% of its resources on examination, supervision and capital oversight. Historically, OFHEO has obligated nearly all of its annual funding each year, and exceeded a similar appropriations requirement in FY 2004. At least monthly, senior management officials receive financial briefings that include an analysis of current spending and forecasts of year-end financial position against the operating budget plan. As part of OFHEO's mid-year review, OFHEO managers identify planned expenditures for the remainder of the year, and senior management realigns resources as necessary to meet OFHEO's goals. On a daily basis, OFHEO uses centralized budget control to ensure that funds are obligated for the intended purpose and has implemented both manual and electronic funds controls to prevent an Antideficiency Act violation.

Evidence: Annual Performance Budgets describe OFHEO's expenditure by strategic goal. FY 2005 audited financial statements and unqualified opinions show strong financial management practices.

Does the program have procedures (e.g. competitive sourcing/cost comparisons, IT improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: To measure efficiencies in program execution, OFHEO has adopted an efficiency measure on the timeliness of completing examinations. Moreover, OFHEO has developed processes that help it make cost-effective decisions. OFHEO has invested in an automated supervisory tool to improve the examination process and secure productivity gains. The automated supervisory tool reduces the staff time needed to complete exam-related tasks by allowing for more efficient storage and recall of materials, data sharing between examiners and management tracking of examination workflow. This system, implemented in 2005, will continue to be enhanced. OFHEO implemented an Information Technology Investment Review Board (IRB) in 2005 to ensure that IT resources are appropriately directed toward achieving the mission of the Office. The IRB reviews all IT-related budget requests and purchases along multiple criteria that include benefits to the Office, comprehensive costs, impacts on other IT systems, alternative solutions, and support for accomplishing OFHEO's performance goals. This procedure directs IT resources toward Office priorities and ensures their most efficient use. OFHEO has an integrated financial management system and related procedures in order to ensure effective budget monitoring and use of resources. With this financial management system and staff time studies that OFHEO completes quarterly, OFHEO monitors the cost and staff time resources that it takes to achieve the Office's strategic goals.

Evidence: OFHEO's efficiency measure. Annual financial statements.

Does the program collaborate and coordinate effectively with related programs?

Explanation: OFHEO closely collaborates and coordinates with other Federal agencies in matters pertaining to joint responsibilities for the supervision of the Enterprises. For example, although each Office conducted separate investigations, OFHEO worked closely with the Securities and Exchange Commission during the special examination of Fannie Mae to ensure coordination on complex accounting issues related to the restatement of financial results. OFHEO also coordinated its activities with the Public Company Accounting Oversight Board and the U.S. Attorney's Office regarding findings related to the accounting practices of Fannie Mae. OFHEO collaborates with the Financial Crimes Enforcement Network (FinCEN) in the Treasury Department to investigate cases of mortgage fraud. As OFHEO identifies issues of potential mortgage fraud, the Office reports these to FinCEN for further action. OFHEO has also provided the FBI and FDIC training on mortgage fraud and continues to provide a small agency perspective on the President's Corporate Fraud Task Force. OFHEO works together with the Office of GSE Oversight in HUD to review new products, charter issues and proposed regulations. OFHEO commented on the safety and soundness impact of HUD's proposed regulation revising the affordable housing goals for the Enterprises. OFHEO provided its review of safety and soundness issues related to Fannie Mae's Acquisition Development and Construction (ADC) program to HUD. OFHEO also reported charter issues to HUD on Commercial Mortgage-Backed Securities (CMBS) and cooperated with them on their response. OFHEO also actively participates with other government entities or standard-setting organizations to address common issues of concern. For example, OFHEO worked with the SEC and Treasury Department to produce a report on mortgage-backed securities disclosure. The program also participates in several joint task forces, including the Interagency Task Force on Fair Lending.

Evidence: The 2005 Performance and Accountability Report under goal 3.1 reflects OFHEO's coordination and collaboration with other agencies. The SEC issued a decision on Fannie Mae's accounting practices related to FAS 133 on December 15, 2004. OFHEO and the SEC worked together to develop the settlements reached with Fannie Mae on May 23, 2006. Memorandum of Understanding with FinCEN, May 2006. Joint SEC/Treasury/OFHEO MBS disclosure report, January 2003.

Does the program use strong financial management practices?

Explanation: No significant control weaknesses were noted by the HUD OIG, the GAO, independent auditors of OFHEO's financial statements, external reviewers of OFHEO's computer security, or OPM reviews. OFHEO received unqualified audit opinions for 1998-2005 demonstrating its strong financial management practices. The HUD OIG recommended that OFHEO establish and implement controls to ensure that the Office accurately allocates and reports its use of personal services funding for examination, capital oversight and supervision. OFHEO developed a quarterly time study and demonstrated its capability to monitor and accurately report how personal services funds were used to accomplish strategic goals. OFHEO also prepared a Performance and Accountability Report (PAR) for FY 2005, including audited financial statements receiving unqualified opinions.

Evidence: Unqualified audit opinions for 1998-2005. 1999-2004 OFHEO Reports to Congress, 2004 audited financial statements, and OFHEO 2005 Performance and Accountability Report. HUD OIG report 2004-KC-0002.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: OFHEO has taken steps to address its management deficiencies. In response to deficiencies identified at both regulated entities, OFHEO re-organized and strengthened management controls. First, to provide targeted, independent examination of the GSEs, OFHEO hired an additional Examiner-In Charge. Now, there is one Examiner-In-Charge for each Enterprise. OFHEO also established dedicated resources for in-depth focus on accounting and compliance. Second, OFHEO enhanced coordination and management of examination, capital and regulatory policy activities by creating a Director of Supervision position to oversee and coordinate all supervisory-related functions. Third, OFHEO strengthened the supporting infrastructure activities by creating the Office of the Executive Director, elevating the Office's focus on the management of human resources through a Chief Human Capital Officer, and providing improved coordination among administrative and technology functions.

Evidence: OFHEO's Organization Chart and Organization Regulation. The HUD OIG report 2004-KC-0002 notes no significant control weakness and the close out email of 09/01/2005 captures the establishment of a quarterly time study based on the IG's recommendations.

Did the program seek and take into account the views of all affected parties (e.g., consumers; large and small businesses; State, local and tribal governments; beneficiaries; and the general public) when developing significant regulations?

Explanation: In developing significant regulations promulgated in the last five years the Office has solicited public comment from all potentially affected parties through publication in the Federal Register, on OFHEO's web site, and through press releases and documents made available in a public reading room. OFHEO has also extended comment periods on regulations several times at the request of stakeholders. However, because OFHEO regulates only Fannie Mae and Freddie Mac, comments are rarely filed by anyone other than the Enterprises themselves, and occasionally industry participants. OFHEO posts comments received from stakeholders on its web site and considers them before issuing final regulations.

Evidence: September 7, 2005: Request for Comments. OFHEO's risk-based capital and corporate governance regulations.

Did the program prepare adequate regulatory impact analyses if required by Executive Order 12866, regulatory flexibility analyses if required by the Regulatory Flexibility Act and SBREFA, and cost-benefit analyses if required under the Unfunded Mandates Reform Act; and did those analyses comply with OMB guidelines?

Explanation: OFHEO has completed a regulatory impact analysis of an economically significant rule on one occasion, for the risk-based capital standards issued in 2001. OFHEO considers the impact of its proposed rules under the Regulatory Flexibility Act. The Office certifies in each instance that the proposed rules will not have a significant economic impact on a substantial number of small business entities. While most regulations issued by OFHEO have prepared adequate regulatory impact analyses as required by Executive Order 12866, OFHEO submitted an indemnification rule that was returned by the Office of Management and Budget in December 2005. The return letter for this rule states that the rule did not meet two provisions of E.O. 12866 (Sections 1(b)(7) and 1 (b)(3)). This rule did not consider alternatives to regulation or fully analyzed the consequences of the regulation. In particular, the rule did not adequately address the following questions: "What effects would the rule have on existing indemnification agreements? Would it prohibit indemnification for acts occurring before the rule becomes final? Similarly, what possible effects might the rule have on the retention of directors and officers???"

Evidence: Risk-based capital standard in 2001 (66 FR 47730, September 13, 2001), 12 CFR Part 1750. The rule that was returned for reconsideration was Corporate Governance--Prohibition on Indemnification Payments (RIN: 2550-AA32).

Are the regulations designed to achieve program goals, to the extent practicable, by maximizing the net benefits of its regulatory activity?

Explanation: All regulations promulgated by OFHEO over the past five years have been designed to improve the supervision of the Enterprises while balancing the associated burden and costs with the desired benefit. OFHEO's capital and executive compensation standards are required by statute and implemented through regulation. OFHEO regulations establish certain thresholds for ascertaining the financial health of the Enterprises; however, OFHEO does not attempt to mandate the Enterprises' business decisions to achieve a supervisory goal. For example, OFHEO sets capital standards but does not dictate the approach the Enterprises must take to meet the standards. Other regulations promulgated by OFHEO in the past five years have generally sought to ensure greater transparency for regulatory standards and enhanced disclosure of, and accountability for, the Enterprises' conduct.

Evidence: OFHEO's capital regulation (12 C.R.R. 1750). OFHEO's corporate governance regulation (12 C.F.R. 1710). OFHEO's disclosure regulation (12 C.F.R. 1730). OFHEO's safety and soundness regulation (12 C.F.R. 1720).

Has the program demonstrated adequate progress in achieving its long-term performance goals?

Explanation: OFHEO has demonstrated progress in achieving its long-term performance goals to a small extent. The Enterprises have been adequately capitalized each quarter since OFHEO began measuring minimum capital in 1993 with exception of two quarters for Fannie Mae (third and fourth quarter of Calendar year 2004). Since then, Fannie Mae has returned to being adequately capitalized. As such, actual experience for FY 2004 and FY2005 was less than targets set. OFHEO has recently adopted three long-term/annual performance measures for its safety and soundness goal. Because these are new measurement systems for the Office, OFHEO does not have a specific performance history for them and as such does not have data for all of the measures. OFHEO's performance measure of customer satisfaction with the Office's web site had a strong response the first quarter that it was implemented, surpassing the target set.

Evidence: OFHEO's 2005 Performance and Accountability Report. OFHEO's quarterly press releases describing whether each Enterprise was adequately capitalized and the dollar amounts and details of the various capital requirements and Enterprise capital levels. OFHEO's FY 2007 Performance Budget identifies the goal and measures for the Office.

Does the program (including program partners) achieve its annual performance goals?

Explanation: OFHEO has the same goals and measures for its long term and annual goals. OFHEO has demonstrated progress in achieving its annual performance goals to a small extent. The Enterprises have been adequately capitalized each quarter since OFHEO began measuring minimum capital in 1993 with exception of two quarters for Fannie Mae (third and fourth quarter of calendar year 2004). Since then, Fannie Mae has returned to being adequately capitalized. As such, actual experience for FY 2004 and FY 2005 was less than targets set. OFHEO has recently adopted three long-term/annual performance measures for its safety and soundness goal. Because these are new measurement systems for the Office, OFHEO does not have a specific performance history for them and as such does not have data for all of the measures. OFHEO's performance measure of customer satisfaction with the Office's web site had a strong response the first quarter that it was implemented, surpassing the target set.

Evidence: OFHEO's 2005 Performance and Accountability Report. OFHEO's quarterly press releases describing whether each Enterprise was adequately capitalized and the dollar amounts and details of the various capital requirements and Enterprise capital levels. OFHEO's FY 2007 Performance Budget identifies the goal and measures for the Office.

Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?

Explanation: OFHEO demonstrates improved efficiency in achieving program goals each year to a large extent. Between 2005 and 2006, the average number of days between the end of field work for the annual examination (December 31) and meeting with the Enterprise Boards of Directors on the Report of Examination increased. Although this actual experience appears to show a decrease in efficiency, OFHEO extended the time between the end of field work for the CY 2005 examination and Board of Directors meetings in 2006 so that recent events and actions related to the CY 2005 examination, the Special Examination of Fannie Mae and resulting Consent Order (May 23, 2006) and delayed release of the Freddie Mac year-end financial results (May 31, 2006) could be meaningfully integrated. OFHEO's management practice includes identifying the most efficient mechanism for meeting its mission needs. In order to support the Office's litigation efforts in the last few years, OFHEO hired temporary litigation attorneys whenever practicable. This achieved a costs savings over contracting costs, but did not commit long-term Federal dollars for a short-term need. OFHEO also contracted out much of its Information Technology Customer Service function and achieved a cost savings through renegotiation of the contract in 2006.

Evidence: Report of the Special Examination of Fannie Mae. Consent Order of May 23, 2006. Freddie Mac 2005 financial results published on May 31, 2006. Contract memos.

Does the performance of this program compare favorably to other programs, including government, private, etc., with similar purpose and goals?

Explanation: Because other financial regulatory agencies supervise different types and larger numbers of financial institutions and have different outcome measures, it is difficult to compare OFHEO's program performance with theirs. OFHEO is unique among regulators in its statutory requirement to report publicly on annual examination findings and capital adequacy determinations. Other financial regulators do not report at the same level of detail and regulate many more institutions of varied size, making direct comparisons difficult. However, OFHEO has adopted similar measures to other financial regulatory agencies (e.g. CAMELSO ratings) beginning in 2007 which will allow for more direct comparisons in the future.

Evidence:

Do independent evaluations of sufficient scope and quality indicate that the program is effective and achieving results?

Explanation: An independent evaluation of sufficient scope and quality has not been conducted.

Evidence:

Were programmatic goals (and benefits) achieved at the least incremental societal cost and did the program maximize net benefits?

Explanation: OFHEO relies on transparency of regulatory standards, management accountability, and the meaningful disclosure of regulated entities' conduct in order to achieve its program goals. Whenever possible, this approach is adopted over alternative supervisory actions which would entail more costly direct intervention into business operations and/or enforcement actions. The regulations put in place over the last five years, except as mandated by law (i.e., capital and executive compensation rules), generally encourage self-policing of conduct by the Enterprises, and more transparency and accountability in the Enterprises' practices, thereby diminishing the need for direct regulatory intervention and sanctions to achieve safety and soundness goals of the Office. OFHEO conducts a comprehensive regulatory review every five years to determine whether its rules and regulations should be revised to reduce regulatory burden, adopt a more efficient method of achieving the same supervisory purpose, incorporate legal developments, or facilitate compliance.

Evidence: OFHEO Policy Guidance on regulatory review (Doc # PG-01-001).