Freddie Mac 2006 Annual Report Download - page 20

New Program Approval
We are required under our charter and the GSE Act to obtain the approval of the Secretary of HUD for any new
program for the purchasing, servicing, selling, lending on the security of, or otherwise dealing in, conventional mortgages that
is signiÑcantly diÅerent from programs that have been approved by HUD or that were approved or engaged in before the
date the GSE Act was enacted in 1992; or that represents an expansion of programs above limits expressly contained in any
prior approval regarding the dollar volume or number of mortgages or securities involved. HUD must approve any new
program unless the Secretary determines that the new program is not authorized under our charter or that the program is not
in the public interest.
OÇce of Federal Housing Enterprise Oversight
OFHEO is the safety and soundness regulator for Freddie Mac and Fannie Mae. The GSE Act established OFHEO as
a separate oÇce within HUD, substantially independent of the HUD Secretary. OFHEO is headed by a Director who is
appointed by the President and conÑrmed by the Senate. The OFHEO Director is responsible for ensuring that Freddie
Mac and Fannie Mae are adequately capitalized and operating safely in accordance with the GSE Act. OFHEO's authority
with regard to Freddie Mac and Fannie Mae includes authority to:
‚ issue regulations to carry out its responsibilities;
‚ conduct examinations;
‚ require reports of Ñnancial condition and operation;
‚ develop and apply critical, minimum and risk-based capital standards, including classifying the capital levels not less
than quarterly;
‚ prohibit excessive executive compensation under prescribed standards; and
‚ impose temporary and Ñnal cease-and-desist orders and civil money penalties, provided certain conditions are met.
From time to time, OFHEO also has adopted examination guidance on a number of diÅerent topics, including
accounting practices, corporate governance and compensation practices.
OFHEO also has exclusive administrative enforcement authority that is generally similar to that of other federal
Ñnancial institutions regulatory agencies. That authority can be exercised in the event we fail to meet regulatory capital
requirements; violate our charter, the GSE Act, OFHEO regulations, a written agreement with or order issued by OFHEO;
or engage in conduct that signiÑcantly threatens our Core capital. Core capital consists of the par value of outstanding
common stock (common stock issued less common stock held in treasury), the par value of outstanding non-cumulative,
perpetual preferred stock, additional paid-in capital and retained earnings, as determined in accordance with GAAP.
Consent Order
On December 9, 2003, we entered into a consent order and settlement with OFHEO that concluded its special
investigation of the company related to our restatement. Under the terms of the consent order, we agreed to undertake
certain remedial actions related to governance, corporate culture, internal controls, accounting practices, disclosure and
oversight. We have taken actions to comply with the terms of the consent order and OFHEO continues to monitor our
progress.
Nontraditional Mortgage Product Risks
In December 2006, OFHEO notiÑed us that it expects us to take action consistent with the Interagency Guidance on
Nontraditional Mortgage Product Risks adopted in October 2006 by the federal Ñnancial institutions regulatory agencies.
The Interagency Guidance clariÑes how Ñnancial institutions should oÅer nontraditional mortgage products in a safe and
sound manner and in a way that clearly discloses the risks that borrowers may assume. We have submitted a report to
OFHEO describing the actions we propose to take consistent with the Interagency Guidance. Our proposed actions include
measures to consistently apply the principles of the Interagency Guidance to all of our mortgage purchases. It is possible
that implementation of the Interagency Guidance and the actions we propose to take will reduce the number of mortgages
available to us for purchase and increase the diÇculty we face in meeting our aÅordable housing goals and subgoals. See
""RISK FACTORS Ì Legal and Regulatory Risks.''
Capital Standards
OFHEO's oversight of our safety and soundness includes the implementation, monitoring and enforcement of capital
standards. OFHEO's regulatory capital requirements include ratio-based minimum and critical capital requirements and a
risk-based capital requirement designed to ensure that we maintain suÇcient capital to survive a sustained severe downturn
in the economic environment. The GSE Act requires OFHEO to classify our capital adequacy at least quarterly. OFHEO
has always classiÑed us as ""adequately capitalized,'' the highest possible classiÑcation.
8Freddie Mac