Q&A: Keeping Tabs on Risk as Fannie and Freddie Evolve

Alvarez leads the government's effort to set risk-based capital standards for Fannie Mae and Freddie Mac, and ensure that they do not pose a risk to American taxpayers. Ms. Alvarez has said lately that the agencies would likely have to hold more capital once the standards are in place. She began a recent interview by reflecting on her three-and-a-half year tenure as regulator.

* ALVAREZ: I remember all the warnings that I had gotten when I first came on board - about how the job was too big, too difficult, undoable, whatever. I didn't really believe it then, and now I know I was right. We are making a lot of progress on developing the stress test (to set risk-based capital standards.) And I think the enterprises respect us. What is the key business risk Fannie and Freddie face right now? ALVAREZ: Automated underwriting is one area that you want to watch. It's an advantage potentially to the consumer. But the risk is that it has to be tried and proven. And along the way there may be some incorporating of other businesses that may or may not be good. We are actually involved in an examination to look at their business risk. By incorporating, do you mean replacing underwriters and appraisers with computers? ALVAREZ: Exactly. Can you explain further how you do the exams? ALVAREZ: We have a team for each company. We just finished creating an outline of what we want to accomplish (in this exam.) The examiners meet with the appropriate management to lay it out for them. They set up the timetables to try and get this done in a predictable way, and then they go forward and do their research. Before the exam is completed, there's an exit interview with management to get their feedback, and then it gets finalized and sent to the board of directors. Is Sallie Mae's privatization relevant to Fannie and Freddie? ALVAREZ: Sallie Mae does provide an example of a GSE graduating to be purely private. Obviously that's not what Fannie and Freddie or Congress want right now, (but it's) an important example for the continuing evolution of the companies.