Established by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, the Office of Federal Housing Enterprise Oversight (OFHEO) ensures that the government-sponsored enterprises (GSEs) are adequately capitalized and operating their businesses in a financially sound manner.

As the GSEs struggle to remake themselves, OFHEO is going through an identity crisis of its own. Its powers may be growing as the GSEs’ powers shrink. Or it may disappear completely if and when GSE reform legislation is enacted. At issue is whether the new regulator will remain at HUD or be transferred to the U.S. Treasury.

OFHEO Director James Lockhart would like to see the GSEs’ regulatory structure mirror that of the banking industry. In that scenario, OFHEO “would, like bank regulators, be able to look at minimum capital and risk-based capital, would be able to look at the full set of risks an organization takes and make sure they don’t grow out of control,” said Lockhart. “It would have independence.”

Key to those powers is the ability of the regulator to put the GSEs into receivership if necessary to make sure that any problems don’t spread to other financial institutions.

Lockhart also envisions the perfect GSE regulator as having the power to sign off on new products, as well as the ability to litigate independently, rather than having to go through the Justice Department. “The third major area is combining the mission, the new product authority which, is now at HUD, with our safety and soundness powers,” Lockhart said. “We’re really the only regulator to have that separated.”

A major question yet to be resolved is how much of a capital cushion the GSEs need to have in order to hedge against risk. The minimum capital and risk-based capital requirements outlined in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 are inflexible, said Lockhart. “The present model is outmoded. There has been a lot of advancement in the risk management area since then.”

But Lockhart doesn’t want to see the GSEs reined in too much. “If the regulator was so strong that it decides to weaken these two companies, to me that would be an unsuccessful regulator,” he said. “A successful regulator would make sure that the companies are not taking unnecessary risk, that they are fulfilling their mission, and to do that they need to have an adequate return on equity and be able to grow with the market.”