In an interview with The Mortagage Marketplace, Aida Alvarez, director of the Office of Federal Housing Enterprise Oversight discusses the creation of HUD's new--and virtually independent--GSE regulatory agency, its progress through early development stages and the command it will hold over the two secondary mortgage market giants in its charge, Fannie Mae and Freddie Mac.
MMP: Where will OFHEO call home?
Alvarez: We hope our home will be at the Office of Thrift Supervision building. We were looking for a suitable place for a small agency. We'd like to have a floor so there is room for some growth. Right now, we just have a handful of people--six employees--but we do anticipate a larger staff.
MMP: What will you focus on first?
Alvarez: There are four [areas] that need concentration first. We need to create a financial model and conduct a stress test, set capital standards, issue regulations and consider potential enforcement. To do this we need legal capacity, policy research and a capital standards examination, as well as regulatory oversight. And we also need financial and administrative [staffing], which are the guts of the agency. But because things tend to shape and reshape themselves, everything is in draft form.
MMP: Have you hired people for these positions?
Alvarez: Not yet. First, I needed to get an independent hiring authority. Even though the [GSE] legislation says I have [the authority to hire outside the normal processes), I still needed a letter from [the Office of Personnel Management] that said that because we were creating a new agency, we needed a "crash" program to staff the agency. That took some time. But I have interviewed people and there are candidates I'm interested in.
MMP: Do you have anyone specifically in mind for those positions?
Alvarex: Yes, but I don't want you to know before their mothers know.
MMP: How many will you hire?
Alvarez: We've discussed our plans through fiscal year '94 and, based on those discussions, we think we could use 60 people, assuming that there are certain functions that we don't contract out--for example, the examination process. We want to develop our own in-house examinations, and that's where we're headed. We want the in-house capacity to develop the model.
MMP: Why do you want to do this in-house?
Alvarez: Because I don't think this agency is a five-year experiment. This is an ongoing regulatory process that will be here long after I'm gone--you just don't want to entrust that to a consultant.
MMP: What issues do you want to tackle first?
Alvarez: The quarterly capital classification, which we've been working on, is the first official act. Frankly, we're not ready to comment on that. Once some conclusions are reached, [it will be issued] in a public document--our first official public act vis-a-vis Fannie and Freddie. The deadline is Aug. 28, but we've talked to key people on the Hill and I think they understand we have to work in a logical way.
MMP: What kind of control will you have over Fannie and Freddie? The act says you can determine the size of capital distribution Fannie and Freddie may have. Is that an accurate assessment?
Alvarez: Really, my job is not to meddle in management or concern the agency with their profit or business decisions. We have some fairly explicit guidelines in the legislation for what we're supposed to be looking at. There is some room for discretion in certain areas, but I don't view that as the job of this agency. Our job is to protect the taxpayer by ensuring adequate capitalization in the event of dire circumstance.
MMP: Have you met with the leaders of Fannie Mae or Freddie Mac?
Alvarez: I've met with each of them. But I thought it was appropriate to meet with them one-on-one so they could get a sense of my thinking, philosophies, accessibility and also give them an opportunity to raise any issues or concerns they might have--I felt the meetings were really constructive.
MMP: The GSE goal is to reach 30% in low- and moderate-income and central city lending--this year Fannie may reach 28%. Both are reportedly upset and feel they are being pushed too hard. As the person overseeing the capital, do you see the possibility of going head-to-head with someone at HUD and having to say "in my mind, you're pushing them too hard"?
Alvarez: I've actually had this conversation with the secretary, [Assistant Secretary for Housing] Nick Retsinas, [Assistant Secretary for Policy, Development and Research] Mike Stegman and the key players--that was the first concern I had. You prevent that by being in ongoing communication and working together. We're here to be constructive, but if we don't communicate, that will happen. The secretary is responsible, he's not going to set any goals that flagrantly violate safety and soundness.
MMP: The act says you have some control over the payment of compensation to Fannie and Freddie's executives. How much control will you have?
Alvarez: We don't set compensation for Fannie or Freddie, but we have the authority to do a study. And if that study showed them to be grossly out of line, then we certainly could make a recommendation. But our job is not to tell them how to run their shops nor what they're supposed to pay their people--but it is to comment on them, particularly if we think they're somehow out of line.
