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INDUSTRY INSIGHT Leadership Shift at Fannie and Freddie New chiefs assume their posts at the GSEs amid an employee exodus and lingering questions about what the future holds. By Brian D. Montgomery "It's time to start ratcheting down," our White House policy advisors told us regarding the government-sponsored enterprises (GSEs) in 2007. At the time, I was serving as the commissioner of the Federal Housing Administration (FHA), and the impetus for this new policy direction was Congress' inability to pass meaningful GSE reform legislation and the frustration building around the gridlock on Capitol Hill. In 2008, Congress finally got around to creating the Federal Housing Finance Agency (FHFA) to oversee Fannie Mae and Freddie Mac, but before then, the FHA commissioner historically acted as the "unknown" GSE regulator. With a very modest support staff of about 10, it goes almost without saying that the scope of FHA regulatory efforts was dwarfed by the size of the GSEs. HUD, acting through the Office of Housing, was charged with monitoring the GSEs' charter compliance, reviewing new programs, and serving as a checkpoint to ensure both entities were meeting their (then) politically popular affordable housing goals. Within a few weeks of getting our marching orders to "ratchet down," we secured a well-regarded Atlanta-based law firm to conduct an expanded review of the GSEs' operations. They soon moved 50 into Fannie Mae's facility alongside officials from the Office of Federal Housing Enterprise Oversight (OFHEO), the precursor agency to the FHFA. Auditors began by examining the GSE's ledger sheets, working backward. Soon the focus was on a particular line item known as "Other Assets/ Other Liabilities." Investments that fell within this category were of interest to us because of their limited transparency and potential for charter noncompliance. What the auditors uncovered in this account was revealing to say the least. Wobbly Balance Sheets There was some concern that Fannie Mae was functioning as a lending institution, in particular providing acquisition, development, and construction (ADC) lending as well as direct loans, equity, and mezzanine financing. Moreover, it quickly became apparent that the GSE was not only involved in these activities, but it had also made some questionable, if not ill-advised, investment decisions. In short, there appeared to be legitimate charter concerns over potential violations of authorized activities. Questions were raised regarding the corresponding taxpayer risk and exposure, which was neither understood nor appreciated at the time. In Florida, for example, Fannie Mae helped finance two high-rise condominium properties— one equipped with a cigar room and wine cellar, the other with a separate elevator for residents with pets. Now, it is important to recognize these were small investments when considered alongside the enterprises' trillion-dollar balance sheets. These particular investments were part of a $3 billion portfolio under the American Communities Fund (ACF), which was later changed to the Housing and Community Development program. Most of the investments under the ACF were classified as "Other Assets" on Fannie Mae's balance sheet.

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