Rep. Richard Baker's hearing today on the Office of Federal Housing Enterprise Oversight could be lively.

It will consider the General Accounting Office's recent report suggesting that the oversight office isn't up to the challenge of regulating Fannie Mae and Freddie Mac.

In its report, the GAO pointed out that the oversight office is nearly three years behind schedule in setting risk-based capital standards for Fannie and Freddie. The standards were due in December 1994.

And given the record of delays, the oversight office may not meet its latest estimate-that the capital rules will be ready by 1999, the report added.

It said the oversight office had also fallen short of achieving its other key function-namely, examining Fannie and Freddie. In 1994, the office laid out a two-year plan to examine six core types of risk at each agency. But nearly three years later, the exams are incomplete, the GAO said.

The agency's "relatively long examination cycle and limited examination coverage raise questions about the organization's ability to fully monitor the enterprises' financial activities and risks," GAO said.

"In particular, with its current examination schedule," the agency "may not be able to do another on-site examination of the enterprises' interest rate risks until 1999 or 2000," GAO added.

It may be fear that the government isn't keeping strict tabs on interest rate risk at the giant mortgage enterprises that prompted Rep. Baker to declare the regulator is "flying blind." In an interview with American Banker last week, Rep. Baker promised to explore the matter at the hearing.

The oversight office says it has completed the model it will use to devise a stress test and risk-based capital standards. The test is meant to gauge whether the two mortgage agencies can withstand extreme changes in interest rates and credit conditions.

It has begun to brief the government agencies likely to weigh in on the risk-based capital standards. Among them are the Office of Management and Budget, which vets all government regulations; the Treasury Department; and the Department of Housing and Urban Development.

It will begin the complex task of converting the financial model into capital regulations in January and send those rules to the budget office for review in September 1998.

Also in January, the oversight office plans to begin an annual examination of key risk areas at both agencies. The examinations will be directed by Scott Calhoun, the former risk czar at the Office of the Comptroller of the Currency. The regulator's previous-and first-director of examinations, Marianne Wright, died in January, setting back the effort for a time.

There is still no word on when the Clinton administration will formally nominate Ginnie Mae president Kevin G. Chavers to be director of the oversight office. Aida Alvarez, its first director, left in February to head the Small Business Adminstration.

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