Fannie Mae and Freddie Mac received glowing reviews in the Office of Federal Housing Enterprise Oversight's annual safety-and-soundness report.

Both government-sponsored enterprises exceeded standards in all areas the agency examined, including credit and interest rate risk management, liquidity management, audit functions, and strategic direction.

"What they are doing well is continuing to manage their core risk excellently," OFHEO director Armando Falcon said in an interview. "They are well-run companies. They manage their interest rate risk well and they manage their growth prudently."

The GSEs' improved risk management helped them break their profit records in 2000 in the face of lower housing market activity and a 20% drop in mortgage origination volume, the report, issued Friday, said. Their combined net income rose 14%, to $7 billion, Fannie earning $4.5 billion and Freddie $2.5 billion.

One practice singled out was the use of automated underwriting systems: Fannie and Freddie used these systems in 55% of single-family mortgages they purchased, the report said

Automated underwriting "is one of the more important vehicles by which they manage risk," Mr. Falcon said.

The GSEs also continued to reduce their exposure to mortgage credit risk by obtaining credit enhancements on higher-risk single-family loans, the report said.

These practices and the strength of the economy helped Fannie and Freddie reduce their combined credit-related expenses 30% in 2000, to $200 million, despite continued growth in their mortgage asset portfolios and mortgage-backed security issuance.

Growth in the companies' mortgage asset portfolios was not as strong as it was in 1999 but remained Fannie and Freddie's primary source of profit growth, the report noted.

OFHEO also commended the GSES' use of hedging tools such as swaps and swap options to manage their exposure to interest rate risk.

Both companies issued more long-term debt that had call options or rate-adjustment features, which allow them to manage the average expected maturity of their liabilities as interest rates move.


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