[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]

                     BY FANNIE MAE AND FREDDIE MAC



                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION


                             MARCH 27, 2001


       Printed for the use of the Committee on Financial Services

                            Serial No. 107-7

71-631                     WASHINGTON : 2001

 For sale by the Superintendent of Documents, U.S. Government Printing 
 Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
               Mail: Stop SSOP, Washington DC 20402-0001


                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice      BARNEY FRANK, Massachusetts
    Chair                            PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska              MAXINE WATERS, California
RICHARD H. BAKER, Louisiana          CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama              LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware          NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma             KEN BENTSEN, Texas
ROBERT W. NEY, Ohio                  JAMES H. MALONEY, Connecticut
BOB BARR, Georgia                    DARLENE HOOLEY, Oregon
SUE W. KELLY, New York               JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                MAX SANDLIN, Texas
CHRISTOPHER COX, California          GREGORY W. MEEKS, New York
DAVE WELDON, Florida                 BARBARA LEE, California
JIM RYUN, Kansas                     FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama                   JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina      CHARLES A. GONZALEZ, Texas
DOUG OSE, California                 STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois               MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin                HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania      RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             RONNIE SHOWS, Mississippi
VITO FOSELLA, New York               JOSEPH CROWLEY, New York
GARY G. MILLER, California           WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia                STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York       MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania         

             Terry Haines, Chief Counsel and Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania

                            C O N T E N T S

Hearing held on:
    March 27, 2001...............................................     1
    March 27, 2001...............................................    43

                        Tuesday, March 27, 2001

Brendsel, Leland C., Chairman and Chief Executive Officer, 
  Freddie Mac....................................................    10
Howard, J. Timothy, Executive Vice President and Chief Financial 
  Officer, Fannie Mae............................................    13


Prepared statements:
    Baker, Hon. Richard H........................................    44
    Oxley, Hon. Michael G........................................    60
    Bentsen, Hon. Ken............................................    47
    Crowley, Hon. Joseph.........................................    48
    Jones, Hon. Stephanie Tubbs..................................    49
    Kanjorski, Hon. Paul E.......................................    52
    Miller, Hon. Gary............................................    59
    Brendsel, Leland C. (with attachment)........................    61
    Howard, J. Timothy...........................................   151

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    OFHEO written response.......................................    54
Brendsel, Leland C.:
    Freddie Mac and Fannie Mae: Their Funding Advantage and 
      Benefits to Consumers......................................   103
    ``GSE Creep into Subprime Could Hurt Margin,'' American 
      Banker, March 26, 2001.....................................   144
    J. William Seidman letter, Dec. 13, 2000.....................   145
Howard, J. Timothy:
    Written response to questions from Hon. Richard H. Baker.....   162

                     BY FANNIE MAE AND FREDDIE MAC


                        TUESDAY, MARCH 27, 2001

              U.S. House of Representatives
        Subcommittee on Capital Markets, Insurance,
               and Government Sponsored Enterprises
                            Committee on Financial Services
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 2:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Richard H. 
Baker, [chairman of the subcommittee], presiding.
    Present: Chairman Baker; Representatives Oxley, Ney, Shays, 
Bachus, Jones, Weldon, Biggert, Ose, Hart, Kanjorski, S. Jones, 
Sherman, Meeks, Ford, Hinojosa, Lucas, Shows, Crowley, Israel 
and Ross.
    Chairman Baker. I'd like to call this hearing of the 
Capital Markets Subcommittee to order and welcome our witnesses 
to the table. And I would like to note that there were Members 
present before the Chairman, who was 5 minutes late because an 
unnamed airline was 3 hours late leaving my fine city this 
morning. But I did make it. We can take a look at that maybe 
    I do welcome my participants to the hearing this morning. 
This hearing is pursuant to an agreement reached last October 
with the Government sponsored enterprises of Fannie Mae and 
Freddie Mac, both of whom had been the subject of study over 
the course of the last year with a series of hearings and 
meetings with Members concerning the accuracy of current 
regulatory oversight and appropriate overview of their business 
operations, given the relationship between their business 
success and the United States taxpayers.
    Last fall, there was an important six-point plan publicly 
agreed to in which the CEOs of both Fannie Mae and Freddie Mac 
appeared and expressed support for this initiative, and second, 
a willingness to work with the committee this session on the 
construction of a new regulatory oversight body.
    The purpose of the hearing today is to receive testimony 
from representatives of both enterprises regarding the 
compliance success with the terms of that agreement since last 
    I certainly am pleased to have read their published reports 
of the success of implementation to date. I'm looking forward 
to a more detailed discussion and feel that this is an 
extraordinarily important first step that we have taken to 
ensure the safety and soundness of these two very important 
business enterprises.
    For Members of the subcommittee who have not been engaged 
in this topic previously, these institutions are the third and 
the seventh largest corporations in America by SSIs, are 
extremely important in providing liquidity in the home 
ownership market, and have for many decades been the reason for 
facilitating access to home ownership to many individuals 
otherwise without such opportunity.
    So they perform excellent work. They are today, as I said 
in all prior meetings on this subject, well managed, highly 
profitable, successful enterprises. But our mission on this 
subcommittee must be to have the long-term view and to ensure 
that appropriate oversight is in place and remains in place in 
the unfortunate circumstance of a downturn in our economy and 
spiraling interest rates and a softening of loan demand, we 
want to ensure that the adequacy of these financial enterprises 
is sufficient to withstand such troubling times.
    Hence, the reason for the agreement of last fall, the 
hearing today, and the work ahead of the subcommittee for the 
next several months with regard to the regulatory structure.
    At this time I would like to recognize Mr. Kanjorski for an 
opening statement.
    [The prepared statement of Hon. Richard H. Baker can be 
found on page 44 in the appendix.]
    Mr. Kanjorski. Mr. Chairman, before commenting further on 
today's proceedings, I must commend you for your continuing 
leadership on Government sponsored enterprise issues. In the 
106th Congress, in addition to passing legislation to modernize 
the Federal Home Loan Bank system, we held hearings over 5 days 
and roundtable discussions on legislation designed to reform 
the regulation of housing GSEs and eliminate some of their 
statutory benefits. Although that bill did not become law, it 
did help lead to the development of six voluntary commitments 
by Fannie Mae and Freddie Mac, the subject of today's hearing. 
You deserve congratulations for playing an important role in 
raising public awareness about these issues.
    During our lengthy hearings last year on GSE regulation, I 
believe we reached consensus on several points.
    First, we agreed that we have the world's most successful 
housing finance system and we gained an appreciation of the 
important role that GSEs play in that system.
    Second, we agreed that Fannie Mae and Freddie Mac have 
grown significantly in recent years.
    Finally, we agreed that we must have strong, independent 
regulators for the housing GSEs. These regulators must also 
have the resources they need to get the job done.
    As one of the few remaining committee Members who 
participated in the entire Congressional dialogue to resolve 
the savings and loan crisis, I am acutely aware of the need to 
protect taxpayers from risk.
    It is in the public's interest to ensure that Fannie Mae 
and Freddie Mac continue to operate safely and soundly. We can 
best achieve this goal by pursuing a three-pronged supervisory 
approach that includes regular Congressional oversight, 
continued effective Government regulation, and increased market 
discipline for the two GSEs.
    Through our extensive studies last year and our hearings 
today, we are fulfilling our obligations in Congress to conduct 
regular oversight of the GSEs.
    In addition, from my perspective, OFHEO operates with 
increasing effectivness as the safety and soundness regulator 
for Fannie Mae and Freddie Mac.
    The agency has, for example, developed and implemented a 
robust, comprehensive and continuous examination program that 
works. And it will soon publish its long-awaited risk-based 
capital standard rounding out the existing capital standards.
    The voluntary commitments recently developed by Fannie Mae 
and Freddie Mac promoting market discipline completes the third 
leg of my supervisory tripod.
    By strengthening capital adequacy and increasing 
transparency, the overall package, in my view, constitutes a 
sound set of measures to supplement OFHEO's formal regulatory 
regime and augment Congressional oversight.
    The voluntary commitments are also consistent with the 
prevailing thinking of leading risk management specialists.
    At our October press conference on the voluntary 
commitments, I noted that the initiatives, when implemented, 
would hopefully become a complement to and not a substitute for 
OFHEO's already strong safety and soundness examination program 
and capital requirements.
    In that vein, I asked OFHEO to review the regulatory 
environment surrounding the voluntary measures in advance of 
today's hearing. In response, Director Falcon notes that these 
enhanced disclosures improve the public's awareness of Fannie 
Mae and Freddie Mac's financial condition and risk management 
    I agree and would ask, Mr. Chairman, unanimous consent to 
submit this letter for the record.
    Chairman Baker. Without objection.
    [The material referred to can be found on page 54 in the 
    Mr. Kanjorski. If we once again decide to pursue 
legislative action affecting the GSEs in the 107th Congress, we 
must be sure not to diminish their ability to work efficiently.
    In my view, we should also explore modernizing their 
mission. For example, the GSEs could work to improve economic 
development in our Nation's distressed areas or to create a 
secondary market for investments made pursuant to the Community 
Reinvestment Act. These worthy ideas merit our prudent 
    Finally, throughout last year's deliberations on GSEs, I 
consistently noted that we must move forward cautiously in this 
area so as to ensure we maintain the delicate balance that has 
lead to more than 67 percent of all American families owning 
their homes.
    On at least one occasion last year, however, our 
committee's actions discouraged investors and raised home 
ownership costs. As we proceed today, we must renew our efforts 
to ensure that we do not repeat that mistake.
    Mr. Chairman, I therefore look forward once again to 
carefully, deliberately and objectively examining the many 
issues relating to housing GSEs in the 107th Congress.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 52 in the appendix.]
    Chairman Baker. Chairman Oxley.
    Mr. Oxley. Thank you, Mr. Chairman. Many Members of our 
subcommittee are taking on an important issue for the first 
time. Government sponsored enterprises, better known as GSEs, 
is one of those issues, and I'm pleased that we are having this 
hearing today so that Members have an opportunity to learn 
about the vital role the GSEs play in our housing finance 
system and overall economy.
    Expanded home ownership is a top priority for all of us. 
Congress created Fannie Mae and Freddie Mac to broaden consumer 
access to mortgage credit. Fannie and Freddie developed a 
secondary market for conventional mortgages, and then a wider 
market for mortgage securities.
    Fannie and Freddie have greatly advanced their housing 
mission and are a real success story. In order to continue 
benefiting America's families, Fannie Mae and Freddie Mac must 
operate according to the highest standards. They are two of the 
leading financial institutions in this country, and they occupy 
a central role in the mortgage and capital markets.
    Fannie and Freddie are well managed, highly sophisticated 
businesses. However, in light of their size and growth, a 
number of concerns have been raised. These include the adequacy 
of their supervision, the nature of their mission, and the risk 
they could pose to the financial system in the event of a 
    The voluntary agreement reached last October addresses many 
of these concerns. And I congratulate you, Mr. Chairman, for 
your leadership, as well as Ranking Member Kanjorski, on this 
meaningful and timely agreement.
    The commitments to meet higher capital, risk management, 
and disclosure standards are impressive and commendable, and I 
look forward to hearing from the witnesses about the specifics 
of those commitments, the progress they have made in 
implementing them, and their future plans.
    In addition, we should take a look at the existing 
framework for regulating Fannie Mae and Freddie Mac. We should 
consider whether the current division of regulation between 
OFHEO and HUD ought to be streamlined, and whether the 
regulators have the powers they need to be effective.
    More effective regulation, along with improved market 
discipline resulting from the voluntary agreement, could give 
Congress and the markets even greater confidence in Fannie and 
    Mr. Chairman, I look forward to this subcommittee's 
responsible oversight of the GSEs, and I yield back.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 60 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Chairman, for your 
interest and participation today. Are there other Members with 
opening statements?
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman.
    Chairman Baker. I'm sorry. I should go to the other side.
    Ms. Jones, did you care to make an opening statement?
    Ms. Jones. Thank you, Mr. Chairman. Good afternoon, Mr. 
Chairman and Ranking Member Kanjorski and Members of this 
subcommittee. I ask unanimous consent that my full statement be 
included in the record.
    Chairman Baker. Without objection, as will all Members' 
statements be included in the record.
    Ms. Jones. We are here again this afternoon to review 
voluntary agreements that were established to improve 
capitalization information disclosure and market discipline.
    Many of us on this subcommittee remember and sat through 
six GSE hearings and then to examine in great detail Fannie Mae 
and Freddie Mac.
    From those hearings, we examined their safety and soundness 
to an exhaustive length, and I must note, at no time did we 
find there to be any safety and soundness issues.
    Both Fannie Mae and Freddie Mac pledged themselves to six 
voluntary commitments, which we will review today and I won't 
go through them. I'm proud to hear of their progress made by 
both, and in stepping up to the challenge and demonstrating 
that they're both solid and sound institutions. Their success 
is America's success.
    I hope our review this afternoon will allow Fannie Mae and 
Freddie Mac to continue to fulfill their housing mission and do 
what they do best. Their mission is an important mission, and I 
am not as concerned about market share, but I am concerned 
about affordable housing in the 11th Congressional District, 
home ownership for those still seeking a piece of the American 
Dream, and also special housing needs of the elderly.
    Housing is still a key public policy concern for all of us.
    GSEs were established to address many of these problems, 
and all I say is, let them do their job. Again, if it ain't 
broke, why fix it? Let Fannie Mae and Freddie Mac continue to 
lead the mortgage finance industry in making credit available 
for low- and moderate-income families.
    I want to skip on just to the closing of my opening 
statement, Mr. Chairman, to say that I hope that our review 
this afternoon serves to clear the record about GSEs' safety 
and soundness. I realize that there is much more to be done by 
these organizations.
    While home ownership rate sits at around 67 percent, and 
some say is close to being saturated, there is still room for 
improvement for those who are left out of this Nation's 
    For example, African Americans are still under 50 percent--
47.8 percent in home ownership. And the Hispanic community is 
also under 50 percent--some 47.5 percent. That's not 
saturation, Mr. Chairman.
    I thank you for the opportunity to present my remarks, and 
I look forward to an opportunity to be heard in this hearing.
    Thank you.
    [The prepared statement of Hon. Stephanie T. Jones can be 
found on page 49 in the appendix.]
    Chairman Baker. Thank you.
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman and Ranking Member 
Kanjorski for calling this hearing this afternoon. I didn't 
serve on the Capital Markets Subcommittee during the 106th, but 
I did take note of the good work that you did.
    You are being commended for your thorough oversight of 
Fannie Mae and Freddie Mac. There can be no doubt of the 
important role that these two companies play in helping to 
provide affordable housing for all Americans.
    In the 18th District that I represent, Freddie Mac has 
provided hundreds of millions of dollars of loans averaging 
$78,200 as the average loan. Fannie Mae has invested a total of 
$759 million over its lifespan. This has made home ownership 
dream a reality for many of my constituents in Appalachia.
    In light of these questions, however, that were raised in 
the 1992 GSE reforms that were passed following the savings and 
loan disaster, Fannie and Freddie made six voluntary agreements 
with Congressman Baker, our Chairman, last year designed to 
strengthen safety and soundness of GSEs by increasing the 
market transparency.
    These agreements brought new levels of transparency to the 
operations of these companies and exceed standards to which 
almost all the private companies are held.
    This hearing, of course, is designed to follow up on these 
agreements and see if they have served the purpose of showing 
that market disclosure can give us the assurances we need to 
trust that Fannie Mae and Freddie Mac continue to fulfill their 
role of providing affordable housing to all Americans while 
remaining the Nation's stable institutions in which we place 
our trust and faith.
    So far, both Fannie and Freddie have been diligent in 
following both the spirit and tenor of the voluntary 
agreements. The lengths to which they have gone to meet these 
six voluntary agreements is commendable, and I look forward to 
hearing the details of the implementation of the six voluntary 
    I also look forward to the discussion on the impact of 
market discipline on safety and soundness.
    Again, thank you, Mr. Chairman and Ranking Member for this 
    Chairman Baker. Thank you very much, Mr. Ney. Are there are 
other opening statements?
    Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman and Ranking Member 
    Home ownership is a key factor in asset and wealth creation 
for individuals all over the world. For many Americans, a home 
is the most significant purchase and/or investment they will 
ever make. Increasing home ownership opportunities for my 
constituents is a major component to my economic development 
    In fact, we go around the district urging the constituency 
to rent the car, but own the house, and we teach them that 
owning the house is an appreciating asset, while owning the car 
is just a depreciating asset.
    This is one of the reasons why I'm organizing a 
Congressional Black Caucus housing summit in my district in 
    Of all the bills and all of the questionable legislation 
that Congress has passed, the creation of GSEs--Fannie Mae, 
Freddie Mac and the Federal Home Loan Bank--was one of its 
wisest and most effective laws. By creating a secondary market 
for the mortgage industry, they have increased the supply of 
cash available to their banking partners while at the same time 
decreasing the credit risk to banks, making them more willing 
to extend credit to many individuals and families seeking 
inclusion in the American Dream.
    The creation and work of the GSEs are critical factors in 
American's nearly reaching a 70 percent rate of home ownership. 
Fannie Mae and Freddie Mac have also had a significant impact 
on ownership in minority communities.
    In the year 2000, Fannie Mae and Freddie Mac assisted over 
500,000 minority families with nearly $60 billion in financing. 
Yet for all the good that has been done, including a nearly 5 
percent increase in minority home ownership since 1994, 
minority home ownership is still lagging the national rate by 
some 20 percent.
    I expect the GSEs, their lending partners and the Members 
of this subcommittee to work together on rectifying this 
    I have reviewed the voluntary initiatives that Freddie and 
Fannie Mae agreed to last year as well as the progress they 
have made toward implementing them. By meeting each of the six 
initiatives, Fannie and Freddie will provide increased public 
confidence in their already well managed and financially 
profitable companies and hopefully allay most of the concerns 
some of my colleagues have about their role in the home 
mortgage industry.
    Many of these initiatives exceed the best practices of any 
of the Nation's most successful financial institutions. Perhaps 
these initiatives will set a new national and international 
standard for risk management and disclosure to help us to avoid 
any future S&L-type debacles.
    I look forward to learning more about Fannie Mae and 
Freddie Mac's progress in achieving the initiatives and working 
with them to maximize the success of their mission.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Meeks.
    Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. First of all, I want 
to commend you, not so much for having this hearing, but for 
fashioning the voluntary agreement last year, which--we're here 
to look at the progress of that agreement.
    So had it not been for your leadership, we wouldn't be here 
today talking about the progress that's been made.
    Chairman Baker. You're kind in describing it in those 
terms. Others have different opinions.
    Mr. Bachus. And I think all our goal, oversight goal, is to 
see that Fannie and Freddie and the other GSEs are properly, 
adequately capitalized; that there is market discipline and 
there is transparency in disclosure. That helps the consumer. 
It helps the taxpayer. It helps the GSE, and it is good for the 
    I would add that over the last several decades, Fannie Mae 
and Freddie Mac have really shaped the secondary mortgage 
market by providing adequate liquidity. They have done a great 
job in improving the distribution of investment capital for 
residential mortgage financing, and we really have the best 
financing system in the world for residential mortgages.
    If you went to Europe, you couldn't even get a 30-year 
mortgage. They are not available. So they have done a 
commendable job.
    We've got the highest rate of home ownership in the world, 
the highest rate ever in this country. And individual consumers 
I believe saved several thousand dollars a year because of what 
was initially a Congressionally chartered effort.
    I do know that there has been some criticism of the GSEs 
because of their Government sponsorship. But I would think to a 
great extent, these advantages are offset with serious 
regulatory restrictions and affordable housing mandates that we 
have put on these GSEs that other ``private sector'' entities 
don't have. And I think we ought to keep that in mind.
    Although Freddie and Fannie did have a 30-year record of 
managing the secondary mortgage activity successfully, as I 
said, we all welcome any additional efforts by the two GSEs 
working with Congress and the oversight agencies to ensure that 
the safety and soundness of their institutions are maintained 
and improved.
    And I think the voluntary initiatives announced last year 
were a good approach to take. I look forward to hearing the 
testimony of our two witnesses.
    I once again commend the Chairman and would note that both 
the GSEs represented today have taken the initial steps in 
complying with certain of the agreements made last year, so I 
commend you for that.
    Chairman Baker. Thank you, Mr. Bachus. Your time has 
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman and Ranking Member 
    As a new Member of this committee and subcommittee, I am 
looking forward to learning more about the issues related to 
Government sponsored enterprises and their work in providing 
affordable housing in the United States.
    I hope to hear from Fannie Mae and Freddie Mac on their 
implementation of the voluntary initiatives announced last 
October on which this hearing is focused.
    I'll just tell you at the start that these companies are 
doing an admirable job providing affordable housing in South 
Texas, and particularly in the Texas border region I represent 
from McAllen, Texas to San Antonio.
    The need for affordable housing along the border is great, 
and the barriers of home ownership are unique. Fannie Mae has 
shown flexibility and creativity in addressing the needs of our 
immigrant population and low-income families who may not have 
the long employment history nor the credit credentials often 
required to get competitive mortgage rates.
    Without these secondary lenders in the marketplace and the 
specific HUD mandates to house minorities and the historically 
underserved populations, I am fearful of the rates and 
requirements that would be imposed upon the most economically 
vulnerable members of our society.
    Mr. Chairman, I think that we all should have an equal 
chance at the American Dream. By partnering with commercial 
banks, Fannie Mae and Freddie Mac, bringing consumers 
affordable rates and flexible downpayment amounts, the system 
appears to be working the way Congress intended in chartering 
these GSEs. They bring competitive rates, creative programs and 
opportunities for increased home ownership to our communities, 
especially the minority communities I represent.
    Some believe that home ownership in the United States has 
reached its saturation point and that Fannie and Freddie may no 
longer be needed. Mr. Chairman, as I look around my district 
and talk to my constituents, I cannot agree with that 
    The rate of home ownership for Hispanic Americans in the 
United States lags an estimated 26.4 percent behind the larger 
Anglo home ownership rate. We need to close that gap. If these 
companies can help, then their job and usefulness is far from 
    In closing, I'll just say I congratulate this subcommittee 
for its vigilance in overseeing the GSEs. I think this hearing 
will be useful in reviewing the steps taken by the GSEs to 
guarantee their financial soundness.
    At the same time, I trust we will be careful not to cause 
unintended adverse consequences in addressing GSEs that would 
have a negative effect on our Nation's housing nor on the 
interest rates paid by consumers.
    I look forward to hearing the testimony of the witnesses, 
Mr. Brendsel from Freddie and Mr. Howard from Fannie Mae.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you very much.
    Mr. Israel.
    Mr. Israel. Thank you, Mr. Chairman and Ranking Member 
    I am also a brand new Member of this subcommittee and 
learned early of the Chairman's concern for enhancing the 
safety and soundness of the GSEs. And I am sure that, 
principally as a result of that concern, both Fannie and 
Freddie embarked on its voluntary commitments that today make 
them better and stronger companies.
    I think we can all agree that the creation of Fannie Mae 
and Freddie Mac is one of those instances where Congress really 
got it right. They are an enormous public policy success. Their 
creation has ensured that our housing system is better than any 
other in the world, but it can be even better.
    Their existence ensures that Americans have ready access to 
mortgage funds at the same rate, no matter where they live in 
the country, no matter what the financial state of the Nation 
or the world.
    The voluntary commitments that Fannie and Freddie agreed to 
last fall are added measures to ensure that they will always 
conduct their business safely and soundly. These commitments 
not only demonstrate their financial strength, but they provide 
not available previously windows to that safety and soundness.
    This Nation is fortunate since no other country has a 
secondary mortgage market created by Fannie Mae and Freddie Mac 
that ensures we have mortgage credit available all the time, no 
matter what happens in other credit sectors.
    These are well run, safe companies that bring down the cost 
of mortgage credit. Our work should strengthen this model, and 
I thank the Chair.
    Chairman Baker. Thank you very much, Mr. Israel.
    There being no further Democrats, I'll go back to Mr. 
    Mr. Sherman. Well, Mr. Chairman, I was going to deliver 
this really eloquent opening statement, but the gentleman from 
New York just delivered it. So I thank him for his remarks and 
the other remarks that preceded his.
    I think that this voluntary agreement does a lot to 
strengthen these two entities and that they do a lot to provide 
for home ownership.
    We obviously have not achieved the home ownership 
percentages that I'd like to see, but we are certainly doing 
better in every sector and with every community than we had 
even 10 years ago. Thank you.
    Chairman Baker. Thank you, Mr. Sherman. If there are no 
further opening statements, at this time I would like to 
introduce our two witnesses for the hearing today. I certainly 
think they are no stranger to the subcommittee.
    I wish to welcome the CEO of Freddie Mac, Mr. Leland 
Brendsel, as well as the Vice President and Chief Financial 
Officer, Mr. Timothy Howard.
    Gentlemen, we will certainly make your complete testimony 
as part of the record. Please feel free to proceed as your 
pleasure. Mr. Brendsel, if you would please, sir. Welcome.

                      OFFICER, FREDDIE MAC

    Mr. Brendsel. Thank you, Chairman Baker. And good 
afternoon. Indeed, I'm pleased to be here and to appear before 
this subcommittee.
    I am the Chairman and Chief Executive Officer of Freddie 
Mac. And I'm certainly pleased that Chairman Oxley could be 
here earlier and look forward to working with him as well as 
Members of this subcommittee as we move forward.
    As you have already said, Chairman Baker, last October 
Congressman Kanjorski, you, Members of the subcommittee, 
Freddie Mac and Fannie Mae joined together in a landmark 
announcement, one that provides, I believe, a model of 
financial management for the new century.
    Freddie Mac committed to a six-point plan that keeps us at 
the vanguard of world financial practices. We did this to put 
to rest any concerns about any future safety or soundness of 
Freddie Mac, since indeed, as has already been said here today, 
there are no concerns currently. Indeed, we are rock solid.
    Freddie Mac plays a vital role in financing home ownership 
and rental housing. It is something we are strongly committed 
to. And we are determined to maintain the confidence of 
Congress, of investors and of the public in our ability to keep 
meeting our mission.
    The commitments that we made last fall and announced with 
you are real, they are significant, and I believe they 
completely outpace the practices of other financial 
institutions, with the single exception of Fannie Mae.
    Even before we made these commitments, Freddie Mac already 
had outstanding risk management and information disclosures for 
investors and the public. But we are now providing more 
relevant information about our condition than any other 
financial company, I believe, in the world.
    Our commitments meet or exceed recommendations of 
international experts in financial regulation. The national 
rating agency, Moody's, said last fall that they set new 
standards not only for us, but also for the global financial 
    We also asked former FDIC Chairman William Seidman for his 
assessment of these commitments. And he concluded, and I quote, 
``This package of disclosures and standards puts you in a 
position of providing more and better public information than 
any other financial institution, both regulated and non-
    Now with your permission, Mr. Chairman, I would like to 
enter his full comments for the record.
    Chairman Baker. Absolutely. Without objection.
    [The prepared statement of William Seidman can be found on 
page 145 in the appendix.]
    Mr. Brendsel. Thank you. Now let me walk through each 
commitment and report on their status of implementation at 
Freddie Mac.
    I'm pleased to report that Freddie Mac's implementation is 
nearly complete.
    Briefly, the first commitment is public disclosure of our 
independent rating. We announced our AA-minus risk-to-the-
Government rating from Standard & Poor's on February 27th.
    To put this in perspective, of the ten largest bank holding 
companies, only two have a rating this high on their senior 
    Originally we planned to obtain a rating once a year, but 
now Freddie Mac has gone beyond that. We asked Standard & 
Poor's for a continuous surveillance rating, which means that 
S&P will notify the public if there is ever a change in our 
financial position that affects our rating.
    Our second commitment ensures that we maintain a high level 
of liquidity. We announced that we met that commitment on March 
8th. Freddie Mac has enough liquid high quality assets so that 
we can meet all our financial obligations even if we are unable 
to issue debt for 3 months. That's a high standard.
    The Basel Committee on Banking Supervision suggested that 
institutions maintain a liquidity reserve of between 1 and 3 
months. We chose the more stringent 3 months. This sets a new 
best practice for industry.
    Our third commitment is semi-annual issuance of 
subordinated debt. We completed our first $2 billion issue on 
March 21st. It will be the first of many issues, of course.
    The benefit of this commitment is twofold. The issuance of 
subordinated debt enhances our already strong financial base. 
In addition, it provides real-time information to the market 
about our financial condition.
    After 3 years, the sum of our core capital and subordinated 
debt will equal at least 4 percent of our assets.
    We expect that there will be an additional $8 to $10 
billion of investor funds standing in front of our senior debt 
    A recent report by the Federal Reserve and the Treasury 
views subordinated debt as a tool to enhance market discipline. 
No bank has committed to a regular program of subordinated 
debt, however. But Freddie Mac, along with Fannie Mae, stepped 
up to the challenge.
    Our fourth commitment is to implement a risk-based capital 
stress test on an interim basis until our regulator, OFHEO, 
completes the final rule. Yesterday, we announced that we 
passed this test. Freddie Mac holds enough capital to survive a 
10-year downturn much like the Great Depression. This is the 
most rigorous test in the financial services industry.
    And again, to put this in perspective, for the thrift 
industry to pass this test, it would have to triple its capital 
    Our fifth commitment is new quarterly disclosure about 
credit risk. Going beyond our already extensive credit risk 
disclosures that we currently provide to investors, Freddie Mac 
has added a new forward-looking disclosure.
    Most credit disclosure, in fact, is backward-looking, 
focusing on charge-offs, loans that were already delinquent. 
Our new measure predicts the impact of a 5 percent decline in 
housing prices nationwide and the impact that would have on 
losses of Freddie Mac.
    We made this disclosure for the first time yesterday and 
will include it for the record. It demonstrates Freddie Mac's 
financial strength and the many layers of protection that we 
have for our mortgage purchases.
    Finally, our sixth commitment is new monthly disclosure of 
interest-rate risk. We will meet this sixth and final 
commitment with our regular monthly disclosure to investors in 
the middle of April.
    This commitment exceeds supervisory guidance made just last 
week by the Federal Reserve and the OCC, I would point out. 
These agencies encouraged large financial institutions to adopt 
the recommendations of the commission headed by former Chase 
Chairman Walter Shipley. They called on banks to move from 
annual to quarterly disclosure of interest risk. Our move is to 
monthly disclosure, which keeps us, I think, a step ahead.
    Taken together, our six commitments represent a watershed 
in financial practices. I think this is important. Because over 
the next 10 years, America's families will need an additional 
$6 trillion to fund their mortgage loans, a net increase, 
reflecting anticipated growth in home ownership as well as the 
growth in this Nation and the strength of its economy.
    Freddie Mac will open doors of opportunity for the home 
buyer of the future who is more likely to be a low-income, 
minority or immigrant family eager to realize the American 
    To meet our mission, Freddie Mac is wringing out every 
unnecessary cost and barrier to home ownership. We're pushing 
the limits of technology. We're searching the globe to find the 
lowest cost funds for housing. Indeed, housing is one of the 
few bright spots on today's economic horizon. More than ever, 
the country needs Freddie Mac's strength and vitality, and the 
six commitments demonstrate our determination to remain safe 
and sound and to finance housing for generations to come.
    So, Mr. Chairman and Members of the subcommittee, I 
appreciate your support when we announced these commitments, 
and I look forward to working with you in the future to secure 
the future of America's housing finance system and with it the 
dreams of millions of families.
    Thank you very much.
    [The prepared statement of Leland C. Brendsel can be found 
on page 61 in the appendix.]
    Chairman Baker. Thank you, Mr. Brendsel.
    Mr. Tim Howard.


    Mr. Howard. Mr. Chairman, Congressman Kanjorski, Members of 
the subcommittee, I'd like to thank you for the opportunity to 
come before you today.
    My name is Timothy Howard and I am Chief Financial Officer 
and a member of the Office of the Chairman of Fannie Mae.
    Mr. Chairman, last October Fannie Mae's Chairman and Chief 
Executive Officer, Frank Raines, was pleased to join you, 
Congressman Kanjorski and others in Congress to announce that 
Fannie Mae would adopt a series of six voluntary initiatives to 
further strengthen our liquidity, transparency, market 
discipline and capital.
    Under your leadership, this was a signal achievement for 
the safety and soundness of the financial system.
    Consolidation and globalization in the financial services 
industry is a reality today. In the last decade, the total 
number of banks in America has fallen by 40 percent, and the 
share of assets in the eight largest banks has almost doubled, 
from 21 percent to 41 percent.
    America's two largest banks now hold 19 percent of all bank 
assets, nearly double the concentration of 8 years ago.
    As financial institutions become larger, more global, more 
complex and more interconnected, financial supervisors and 
policymakers worldwide are proposing new strategies to 
strengthen their safety and soundness and reduce the potential 
for systemic risk.
    Every large financial institution has the potential to 
affect the fundamental safety and soundness of the financial 
system. Fannie Mae is no exception.
    With that in mind, over the last year, we engaged in a 
series of discussions with key policymakers, including people 
at Treasury, the Federal Reserve, and our own regulator, the 
Office of Federal Housing Enterprises Oversight, to determine 
how best to ensure that Fannie Mae's safety and soundness 
protections are at the vanguard of evolving world practices.
    And I would add, Mr. Chairman, that the hearings and 
oversight by this subcommittee under your leadership has played 
a critical role in our review.
    We learned much that was useful. For example, the Basel 
Committee on Banking Supervision supports the use of risk-based 
capital standards with an economic stress test. The Working 
Group on Public Disclosure chaired by Walter Shipley recommends 
increased transparency as a means to enhance market discipline. 
And a recent study by the U.S. Treasury and the Federal Reserve 
suggests that issuing subordinated debt can strengthen market 
discipline in a powerful way.
    In the end, I believe the discussions we engaged in greatly 
raise the level of understanding of Fannie Mae's role in the 
housing finance system and our risk management strategies. They 
also reaffirmed the fundamental wisdom of the changes to our 
charter made by Congress in 1992.
    Through these charter revisions, Congress provided for a 
dedicated financial regulator, continuous on-site examination 
with results disclosed to the public, and most far-reaching of 
all, a risk-based capital standard with a severe economic 
stress test long before the Basel Committee proposed this model 
for others.
    These measures in 1992 put Fannie Mae at the cutting edge 
of regulatory discipline. But our discussions last year with 
policymakers made it clear that Fannie Mae had the opportunity 
to build on this cutting edge regulatory discipline by adopting 
measures to enhance our market discipline.
    That led to the joint announcement by Fannie Mae and 
Freddie Mac last October 19th committing to the six voluntary 
    Mr. Chairman, Congressman Kanjorski, I am pleased to report 
to you today that Fannie Mae now has implemented all six of 
these voluntary initiatives during the first quarter of this 
year, and in some cases, we have gone beyond our commitment.
    In January we did our first issuance of subordinated debt. 
This $1.5 billion, 10-year issue was rated AA-2 by Moody's and 
AA-minus by Standard & Poor's. We priced it at a spread of 22 
basis points over our senior debt. And since that time, it has 
traded in a range of 18 to 28 basis points over our senior 
    That is a higher spread to senior debt than the 
subordinated debt of many high quality commercial banks, and it 
shows that investors do believe that our subordinated debt is 
in a different risk category from our senior debt.
    In late January we obtained and disclosed ``a risk to the 
Government'' rating of AA-minus from Standard & Poor's. This 
rating measures our inherent credit quality without assuming 
Government support. No U.S. commercial bank holding company or 
thrift institution has an S&P rating higher than AA-minus.
    And we went beyond the October 19th commitment by seeking 
this rating on a surveillance basis, which means that S&P will 
change its rating during the year if our financial condition 
    We announced earlier this month that we have built enough 
liquidity into our portfolio to allow us to continue to operate 
smoothly and meet our obligations even if we had no access to 
the agency bond market for 3 months. This is a statement very 
few financial institutions could make.
    We also said that we would disclose each quarter the 
percentage of our on-balance sheet assets we hold as liquid 
assets, again, going beyond the terms of the voluntary 
    And yesterday we announced that we had made the initial 
disclosures of our interest rate risk and credit risk 
sensitivities, as well as disclosures from our interim risk-
based capital stress test.
    For our interest rate disclosure, we followed the 
directives of the new Basel Accord and released the two 
measures of interest rate risk we used to manage our business 
internally: net interest income at risk, and our effective 
duration gap. We are going beyond our commitment by releasing 
our duration gap on a monthly basis.
    We also made our first quarterly disclosure of the impact 
on our credit losses of an immediate 5 percent drop in home 
values. We are showing our credit loss sensitivities both with 
and without the effect of credit enhancements to highlight the 
role that loss-sharing arrangements play in our credit risk 
    And finally, we carried out our first interim risk-based 
capital stress test. We passed this test with a capital cushion 
of between 10 and 30 percent of our total capital as of 
December 31st, 2000.
    Combined with our charter revisions in 1992, the six 
voluntary measures we have just implemented place Fannie Mae at 
the vanguard of risk management and disclosure practices 
worldwide with cutting edge regulatory discipline bolstered by 
cutting edge market discipline.
    If there is any question or concern about how Fannie Mae is 
doing, there are now several ways to find out. You can look at 
the results of our supervision exams. You can look at our 
capital levels, our regular stress test results, our external 
rating reports, our monthly and quarterly reports on how the 
economy is affecting our business, or changes in the value of 
our subordinated debt.
    No financial company in the world will tell you more about 
its financial condition than Fannie Mae does.
    Our new disclosures reinforce the fact that Fannie Mae is 
one of the safest, soundest financial institutions in the 
world. Our subordinated debt and risk-to-the-Government ratings 
are among the strongest in the industry.
    We have more than adequate liquidity to survive for 3 
months without access to the credit markets, and we could 
endure the worst economic shocks in history, shocks few other 
financial institutions could survive, with significant capital 
left over.
    Mr. Chairman, Congressman Kanjorski, thanks to your 
leadership and partnership, our safety and soundness regime is 
now consistent with the best thinking in the world, and it goes 
well beyond any federally-chartered bank or financial 
institution today.
    Together, we have produced an even safer, sounder Fannie 
Mae, a stronger U.S. housing finance system, and a better 
chance for more Americans to own a home. And we have done more 
than that. Together, we have created in Fannie Mae nothing less 
than a model for financial institutions in America and around 
the world.
    Mr. Chairman, we applaud you for your leadership and look 
forward to continuing to work with you.
    [The prepared statement of J. Timothy Howard can be found 
on page 151 in the appendix.]
    Chairman Baker. Thank you very much, Mr. Howard. Thank both 
of you gentlemen.
    My first question relates to the comment about the stand-
alone measure of the S&P rating, Mr. Howard. In your testimony, 
the rating agencies rated your subordinated debt separate and 
apart from Fannie's relationship with the Federal Government.
    I visited with a representative of S&P not long ago trying 
to understand the mechanisms by which ratings were established. 
And there's a fine line that I think has been drawn, but that I 
need to clarify from your perspective.
    As I understand it, they set aside the value of a 
governmental intervention by exercising the line at the 
Treasury. But at the same time, they did calculate the value of 
the ratings.
    The fact that the market perceives that you have an 
implicit guarantee, therefore, even in illiquid markets, you 
have the ability to market your securities and debt instruments 
in a manner which others may not, so that there is a buy-side 
bias, as I would describe it, in the market toward the rate, 
although it does take into consideration prohibiting the 
exercise of a line of credit. Do you see that differently? 
That's the way it was explained to me.
    Mr. Howard. Let me go into my understanding of both the 
rating Standard & Poor's did of our subordinated debt as well 
as the risk-to-the-Government rating, because they are rating 
somewhat different things, but from a common perspective.
    In each case, Standard & Poor's assumes that our 
fundamental operating practices, whatever causes them to be 
what they are, whether it's a view by investors that the 
Government would in some form support our senior debt or not, 
they take no position on that. They simply say that whatever 
your current operating practices are--``your'' being Fannie 
Mae's--we assume those will continue in times of duress.
    For our subordinated debt----
    Chairman Baker. Excuse me. I'm sorry. But on that point, 
whatever your existing business practices are will continue 
during times of duress?
    Mr. Howard. Yes.
    Chairman Baker. That is, despite the fact that the 
securities may say not guaranteed by the full faith and credit 
of the United States, you could buy it with that assumption 
anyway? That that's sort of the market practice today.
    Mr. Howard. The investors with whom I speak, and Mr. Baker, 
Chairman Frank Raines and I returned from Europe a month ago, 
doing our annual visit with European investors. For 17 years, 
Fannie Mae has been doing a visit with European investors in 
the spring and a visit with Asian investors in the fall.
    We talk to investors continually. The investors, including 
the most sophisticated, fully understand that our debt is not 
guaranteed by the U.S. Government. There is no ambiguity in 
their minds on that point.
    What Standard & Poor's does in rating our subordinated 
debt, they have said explicitly they do not assume that in the 
unlikely event that Fannie Mae were to encounter financial 
difficulty, that the U.S. Government would guarantee or support 
that debt. That's an explicit statement they make.
    So the subordinated debt rating is a very pure credit 
quality rating of our obligations, assuming no Federal support. 
And that distinguishes it from the senior debt.
    The risk-to-the-Government rating, in my understanding from 
talking to Standard & Poor's, attempts to view the U.S. 
Government as a potential creditor of Fannie Mae, and in effect 
ranks the probability of the Federal Government ever being put 
in a position where it has to make a decision whether to 
support or not support the senior debt.
    And in both cases, whether it's viewing the exposure that a 
subordinated debtholder has to Fannie Mae's credit condition, 
or viewing the Government's role as an entity that has 
chartered Fannie Mae and may at some point face a decision 
about whether or not to support senior debtholders, in each 
case we have been accorded a AA-minus rating, which is 
extraordinarily high. And that represents, in my view, the 
fundamentally sound risk management practices that we have put 
in place.
    Chairman Baker. Let me follow up with the second part, Mr. 
Brendsel, of the stated agreement of October. And first let me 
congratulate both Fannie and Freddie for your success in the 
implementation of the proposal to date. I want to acknowledge 
that and that you have in my judgment made a good faith effort 
to comply with the tenor and tone of the agreement.
    However, that meeting of that morning, I announced the 
intent to introduce legislation this year with regard to a 
regulatory structure. I don't want to open a discussion as to 
the details of the regulatory structure.
    All I want is to confirm, since this is the first 
opportunity you've had to visit in this forum since last 
October, that you, both from a corporate perspective, view the 
creation of a strong regulatory structure not only as 
protection for the taxpayer, but an asset in the markets, 
because it gives them confidence and you do have oversight that 
is appropriate and sufficient.
    Mr. Brendsel.
    Mr. Brendsel. Absolutely.
    Chairman Baker. Mr. Howard.
    Mr. Howard. Yes. We believe that the existence of a strong 
regulatory structure is very much in our interests, the 
interests of our investors, policymakers, and anyone who has a 
strong interest in the continued smooth workings of the U.S. 
housing finance system.
    Chairman Baker. Let me do this quickly. I really wish I had 
a whole lot more time. But since we have a fair number of 
Members, I'll try to stick to 5 minutes. I would just like to 
have a little more in-depth analysis if I might, Mr. Howard, or 
from both operations with regard to the spreads on the sale of 
subordinated debt. It appears that the spreads have widened 
instead of narrowed from the first offering at 22 basis points. 
I've seen different reports where it's vacillated. But it seems 
of late to have been significantly higher than it was at the 
outset, and I wish to understand better whether that's a 
liquidity issue in the market or other reasons. And I'll just 
get that in writing at a later time.
    Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    As I understand it, in developing the voluntary 
commitments, you studied worldwide the best practices of 
regulators for safety and soundness of financial institutions, 
particularly those of your own regulator, OFHEO. How do your 
commitments stand up in comparison with other financial 
regulators, both inside and outside of the country?
    Mr. Brendsel. Well, Mr. Kanjorski, as I commented in my 
oral statement, our disclosures really stand up extremely well. 
In fact I would call them world class in terms of the kind of 
information they provide to investors.
    Justice Brandeis once said ``sunshine is the best 
disinfectant.'' And that's really what has occurred here. We 
are providing the kind of information to the marketplace, to 
investors that really exposes us to the sunshine, to the 
scrutiny of our investors, and whether it is our practice to 
issue additional subordinated debt, disclosure of our 
independent rating, disclosure of our interest rate risk or 
credit risk, they put us at the head of the pack.
    And it really is reflecting the recommendations made by the 
Basel Committee on Banking Supervision as well as the Shipley 
Commission as well as recommendations by the Fed and Treasury 
for commercial banks in this country.
    Mr. Howard. The recommendations of both the Basel Committee 
as well as the Shipley Commission were targeted primarily on 
disclosure practices of institutions as a supplement to 
    Although in the case of Basel, Basel did support quite 
strongly the use of specific stress tests and internal models 
in gauging the true risk of complex financial institutions. And 
in that regard, the legislation in 1992 was quite far-sighted 
in enshrining in statute the need to do just such a test, using 
the actual data from businesses practices in determining the 
amount of capital that the entity should hold in light of the 
specific risks that it takes and the way in which it manages 
    So in that regard, I believe OFHEO's regulatory structure 
is indeed at the cutting edge of regulatory practice.
    Mr. Kanjorski. Some have suggested that the recent GAO 
report on OFHEO regulatory authority concludes the agency lacks 
sufficient enforcement power to ensure that Fannie Mae and 
Freddie Mac do not pose a threat to the economic stability of 
our country.
    The report, however, also notes that it appears each 
regulator has the statutory tools available to address 
significant safety and soundness concerns. These views seem to 
be in conflict. I was just wondering if you would give us your 
perspective on these two conflicting views.
    Mr. Brendsel. My reading of the GAO report--and indeed, 
it's my reading--is that it concludes that OFHEO does have 
adequate regulatory authority that they need for regulating the 
two institutions, albeit in some cases it is slightly different 
than the authorities that banking regulators have.
    But that is also appropriate, given that we are different 
kinds of institutions. We're only two. We're only focused on 
one line of business--residential mortgage loans. We're not 
engaged in a myriad of activities like banks are. And indeed, 
our regulator only has two institutions to focus on rather than 
the thousands of banking institutions.
    So overall, my conclusion on reading the report is although 
different in some cases, they conclude that the authorities are 
adequate and appropriate.
    Mr. Howard. Congressman Kanjorski, I would echo that. I 
would also add that the principal conclusion of the GAO report, 
and I'll quote this, is that ``based on each regulator's powers 
and authorities, it appears that each regulator has statutory 
tools available to address significant safety and soundness 
    The GAO report did highlight areas where the powers were 
different. But as Mr. Brendsel said, that seems to reflect 
largely the different circumstances of banks and other 
financial institutions versus Fannie Mae and Freddie Mac.
    Mr. Kanjorski. I guess it is not proper to ask the hen 
whether we should empower the fox, but do you feel that 
Congress should give greater powers to your regulators? Is this 
something we should presently investigate or potentially 
    Mr. Brendsel. I think that overall, I would say first and 
foremost, we support a strong and credible effective regulator. 
Whatever the structure, whatever the particular authorities 
that are necessary to carry out that objective that you give to 
the regulator, we certainly want the regulator to be 
professional, knowledgeable, have the appropriate authorities. 
And ultimately, it's a decision for Congress to make.
    And from my standpoint today, at least from what I 
understand their authorities to be in my reading of the GAO 
report, I would not recommend to Members of Congress that any 
changes be made.
    But first and foremost, we want a regulator that has 
credibility and the confidence of you and of investors 
    Mr. Howard. Our view is quite similar.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Ney.
    Mr. Ney. Thank you, Mr. Chairman. I have a question for 
both witnesses.
    Freddie Mac and Fannie Mae operate with less equity capital 
per dollar of debt than banks risk. Given your size, what would 
you want to comment on the suggestions made that there's 
undercapitalization and perhaps the capital adequacy needs to 
be increased? Do you want to comment on that?
    Mr. Howard. I'd be happy to. One of the principles of the 
Basel Commission is that capital needs to be appropriate for 
the risk undertaken. In Fannie Mae's case, and also in Freddie 
Mac's case, we are doing business in a single asset class. U.S. 
residential mortgages.
    We do two things with that asset class. We guarantee the 
credit and we take the interest rate risk for the mortgages 
that we hold in portfolio. On the credit risk side, the 
fundamental credit quality of residential mortgages is 
extremely high compared with other asset classes--consumer 
loans, loans to small businesses, loans to international 
    There's a wealth of data on that. And under the principle 
that capital needs to relate to risk, if an entity is limited 
to a single business which has a low embedded default rate, 
less capital on an absolute basis can still mean a much 
stronger institution if the entity holding that small amount of 
capital is limited to mortgages.
    Fannie Mae's risk-based capital test is designed to measure 
exactly that, and it goes beyond that. Because by explicitly 
relating capital to risk, it gives us the financial incentive 
to hedge our risks and limit our risks in a fashion that we can 
keep our required risk-based capital under our statutory 
    One of the fundamental flaws recognized by international 
regulators of the current ratio-based system that covers most 
institutions including commercial banks is it requires a large 
amount of capital as a buffer against what could go wrong, 
equivalent to what you could as capital against the 100-year 
flood. The only problem with that is entities that have to hold 
that capital then have to go out and attempt to earn a return 
on that excess capital, which gives them the incentive to take 
more risk.
    So the incentives under the additional capital system are 
in my view precisely the wrong ones. A company that takes 
modest risk and hedges it well can actually be considerably 
safer, sounder and stronger than the one that has a higher 
nominal amount of capital, but is taking more risks, because it 
has a broader range of businesses and doesn't hedge as well.
    Mr. Ney. Mr. Brendsel.
    Mr. Brendsel. I'm not certain I can add to Mr. Howard's 
dissertation, an excellent dissertation on risk-based capital, 
other than to say ditto.
    If we can survive, which is basically what is contemplated 
in the 1992 legislation and essentially how Freddie Mac 
operates today, if we can survive an economic calamity that is 
basically equivalent to the Great Depression, that clearly 
indicates we are extraordinarily strong and well capitalized, 
even though you can't measure it by the typical kinds of 
accounting ratios that many use. But that's not the appropriate 
measure of capital adequacy and capital strength, as Mr. Howard 
has pointed out.
    Mr. Ney. Everybody talks about the crisis in affordable 
housing. How do you feel that the six voluntary commitments 
that have been made and are being undertaken in fact would help 
with the mission of home ownership?
    Mr. Brendsel. I think they're extremely positive, because 
they will serve to maintain the confidence of investors in the 
world's capital markets, the confidence of the public 
policymakers, and indeed, the confidence of our customers, the 
Nation's mortgage lenders, that we are there and will be able 
to meet our obligations as well as provide the kind of 
liquidity and stability to the mortgage market.
    Ultimately that means there will be more mortgage money 
available at lower rates, which is in essence the core of what 
we're doing in terms of providing money to finance affordable 
housing as well as housing for middle income Americans.
    Mr. Howard. There is a very fundamental connection between 
our safety and soundness and our ability to carry out our 
    As Fannie Mae continues to do its part to meet the large 
number of unmet housing needs that still exist, we will by 
definition get a larger profile. Our mortgage portfolio will 
continue to grow. We will issue more debt. Our credit needs 
will continue to grow.
    A growing Fannie Mae is evidence that we are being more 
effective carrying out our mission of making housing credit 
more available and more affordable.
    As we grow, this concern that exists legitimately among 
policymakers over whether or not size equates to risk goes 
fundamentally to the heart of these voluntary disclosures and a 
strong regulatory system.
    We feel that if we can be as transparent as any financial 
entity in the world, we can continue to be innovative, be 
aggressive in achieving our mission and reaching the pockets of 
unserved areas and not have concerns be raised about whether or 
not this should cause Congress to worry about our fundamental 
safety and soundness and risk to the taxpayer.
    Chairman Baker. Thank you, Mr. Ney.
    Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Howard, can you--as you know, predatory lending is a 
scourge in the minority community. Can you tell us about the 
specific steps your company is taking to combat predatory 
    Mr. Howard. Yes. I would be happy to do that. Several 
months ago we announced a series of guidelines to which we 
requested that our lenders adhere in showing us credit-impaired 
loans that might conceivably be eligible for purchase by us.
    The areas that we specifically looked at included a number 
of--the interest rate that could be charged on those loans, 
whether or not there were prepayment penalties that were 
unreasonably imposed on the loan, and the existence of prepaid 
credit life policies that might result in an erosion of equity 
in the property, making it harder for the borrower to stay in 
the home.
    We came out with a series of guidelines that were quite 
explicit. We shared those with our lending partners, came to an 
agreement that these were the right set to use, and have 
implemented them. And we found that many originators have in 
fact confirmed their origination practices to those standards.
    So we think that even though our presence in the market as 
far as guaranteeing or purchasing of those loans has not 
increased as much as ultimately we believe it could, we think 
we've already had an impact on lending practices which is 
highly positive.
    Mr. Meeks. Mr. Brendsel, Freddie Mac has bought billions of 
dollars of subprime mortgages. In the same vein, how can you 
ensure that these mortgages are not predatory?
    Mr. Brendsel. First of all, we only deal with the good 
guys. And there are some, as you've already pointed out, 
Congressman, that are not the good guys. They're engaged in 
abusive practice and so forth.
    So what do we do? We have a combination of certainly 
guidelines and requirements for any mortgage loan that we will 
purchase that includes no high cost loans, no single-premium 
credit life, no prepayment penalty in excess of 5 years, 
required monthly reporting by all of our services, prompt 
reporting of prompt payments. And so we begin with that.
    Second, we have an audit program that on a regular basis 
audits the customers that we do business with around adherence 
to our policies and guidelines.
    And finally, we engage in a fairly significant education 
campaign overall, not only with lenders, but also increasingly 
with consumers in communities.
    We've been involved in something called the ``Don't Borrow 
Trouble'' education campaign that we've now taken to 12 cities 
that really is a public education campaign around, again, 
alerting consumers to what to look out for when they go to get 
a mortgage loan or any loan.
    Mr. Meeks. And finally, let me just ask both of you I 
guess, there's a new problem, or maybe it's an old problem, 
that I have found in my district. While understanding that we 
need the subprime market, I'm becoming concerned that we've 
been finding individuals who had Class A credit, but they are 
led into the subprime market.
    And as a result of being classified improperly, they are 
being robbed in essence of their individual buying power, 
buying power that they would have, if not the money for the 
mortgage, because of the incorrect classification.
    And then I've heard this phrase, ``mission creep,'' that is 
leading you into the subprime market. Can you tell me how do 
you respond to that? Mission creep and the misclassification of 
    Mr. Brendsel. If ``mission creep'' means trying to clean up 
practices in the subprime market, trying to find ways to 
qualify more borrowers for low cost loans that can be purchased 
by Freddie Mac, we plead guilty, absolutely. But in fact, we're 
not going beyond our charter there. That's foursquare in 
keeping with the purpose and mission for which Freddie Mac is 
    Indeed, yesterday there was an article in The American 
Banker that talked about some subprime lenders who were 
complaining that we were engaging in some business, trying to 
buy some business and purchase subprime loans, and it's going 
to drive down their profit margins, drive down what I would say 
is their excessive fees and returns that they are getting 
    So, great article, great compliment, I think, to what 
Freddie Mac is doing. I submitted it for the record actually. 
Beyond that, though, I think what we've also discovered is that 
there frankly are just many families that are in the subprime 
market that really can qualify for a prime loan if only they 
are reached by the right lender.
    That's why we want to partner and team up with the right 
lender with our tools, many of our automated underwriting 
tools, so that they can qualify those families for a prime loan 
at the lowest possible rate.
    [The article referred to can be found on page 144 in the 
    Chairman Baker. Your time has expired, Mr. Meeks.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. I want to compliment 
both gentlemen for their efforts to comply or conform to the 
voluntary agreement. You're satisfied, so I'm satisfied.
    I also say if you told me a year ago that I'd be reading 
The American Banker, I'd say ``fat chance.''
    Mr. Shays. But I want to continue what Mr. Meeks went on, 
and I want to know, what is the lowest acceptable score that 
you would have?
    Mr. Howard. We have no automatic cutoff. We have programs 
that will evaluate all borrower characteristics, credit score, 
the property the person is borrowing.
    Mr. Shays. So you have no score?
    Mr. Howard. We have no bright line below which one cannot 
get a loan.
    Mr. Brendsel. We do not either.
    Mr. Shays. And how are you pricing these borrowers' risks? 
How do you determine that?
    Mr. Howard. We look at the characteristics, and based on a 
review of the characteristics compared with how loans with 
similar characteristics have behaved in the past, we pick 
prices that we believe adequately compensate us for bearing 
that risk.
    Remember, we have two objectives whenever we're 
underwriting a loan. We want to make sure that the consumer 
gets the lowest rate possible, but we also have to grade it and 
price it so that we meet our safety and soundness objectives on 
the other side. It's a constant balancing act.
    Mr. Shays. Mr. Brendsel.
    Mr. Brendsel. Same answer.
    Mr. Shays. Same answer as his? Thank you. How are you 
disclosing your activities to your shareholders? Should we have 
been surprised this was happening?
    Mr. Howard. What's the ``this''? I'm sorry.
    Mr. Shays. How would you disclose your activities to your 
shareholders? You know, you're getting into a new market it 
seems to me.
    Mr. Howard. We have been very open with our investors as 
well as the Congress about our intent to be active in this 
    I'll echo what Mr. Brendsel said in that this is in no way 
mission creep. Mission creep has a connotation of doing 
something you shouldn't be doing. And making loans to people 
with less-than-perfect credit is not only totally within our 
charter, it's something that we should do and it's something 
that's right to do.
    And as we can take more advantage of the benefits of 
automated underwriting that allow us to more effectively grade 
credit risk, we can and will be moving further into this area.
    I will say that last year we have done an amount of this 
business that's significant to the market.
    Mr. Shays. I don't mean to be rude and interrupt, but I 
only have 5 minutes.
    How do you respond to the allegations that the GSEs are 
using their ability to allocate business to the detriment of 
the institutions that are outspoken critics of them, such as 
moving up to the list of approved bidders for Fannie?
    I'm going to give you a chance to--this is today's edition 
of The American Banker. So don't give me as long an answer as 
they have here.
    Mr. Howard. It actually deserves a longer answer. I will 
give you a short answer. The allegations are completely 
    Mr. Shays. Let me just ask you, though. They're baseless 
that you haven't done it, but how can you be assured that 
others in your organization haven't made that--if someone said 
my staff did something, I could say ``they're baseless,'' but I 
would check it out. I would know they were baseless. You 
    Mr. Howard. Congressman, I have checked it out. The only 
specific cite made in the article alleging threats was that we 
removed Wells Fargo Bank from a list of approved or eligible 
bidders for our debt. We did not do that. We have no such list.
    Wells Fargo, as any other bank, can bring us debt 
transactions anytime it wants to.
    Mr. Shays. Fair enough.
    Mr. Brendsel.
    Mr. Brendsel. As I was reported in The American Banker, I 
made a statement, wrote a letter indicating that Freddie Mac 
has not, does not, will not engage in bullying or abusive 
tactics. We have a clear corporate ethic against that kind of 
thing. Second----
    Mr. Shays. If any of your employees were implying that 
might be the case, what would be your response to those 
    Mr. Brendsel. Depending upon the seriousness, clearly I 
would do a review of that particular statement and obviously it 
could result in an employee being fired.
    Mr. Shays. You would consider that a very inappropriate 
    Mr. Brendsel. Absolutely.
    Mr. Howard. As would I.
    Mr. Shays. Thank you very much.
    Chairman Baker. Thank you, Mr. Shays.
    Ms. Jones.
    Ms. Jones. I'll pass. I'll pick up later on.
    Chairman Baker. Mr. Ford.
    Mr. Ford. Thank you, Mr. Chairman. Thank you both Fannie 
Mae and Freddie Mac for being here. I want to follow up my 
colleague, Mr. Shays, with a line of questioning he was sort of 
following through.
    I guess in the article from yesterday's American Banker 
reads that ``The idea that Fannie and Freddie would dip their 
toes''--it's sounding something like ``The Sopranos'', I might 
add--but, ``would dip their toes further into subprime lending 
has lenders concerned that their margins will shrink and their 
profits erode. They also figure they will lose business as 
prime lenders snap up their loans by offering better rates.''
    I applaud you, both of you, for working to make housing 
more affordable. It would seem to me, Mr. Chairman, that on 
this subcommittee we would be applauding that and encouraging 
that as well.
    Would you mind--I know that you've had questions asked by 
my colleague, Mr. Meeks and certainly by others on the 
subcommittee--would you mind elaborating just briefly if you 
could on some of your other efforts in the subprime market? I 
know you started, Mr. Brendsel of Freddie Mac. I can't 
pronounce your last name correctly.
    Mr. Brendsel. Brendsel.
    Mr. Ford. Mr. Brendsel. I'm sorry. Mr. Brendsel, if you 
could elaborate for 30 seconds and perhaps, Mr. Howard, you 
could as well, just summarize very quickly some of your 
activities in the subprime market.
    And why have you made these people so mad at you is what I 
want to know. Is it you're providing more housing for people? 
Is that essentially what it is?
    Mr. Brendsel. Yes. Basically, it's all about competition if 
you want to look at it that way. It is providing additional 
consumer choice through other lenders.
    After all, one of the reasons why someone finds themself in 
a situation of having to take out a subprime loan is that 
that's the only source of credit that they may be aware of.
    And indeed, by working with a number of lenders, small as 
well as large, providing them with the kinds of tools so that 
they can originate those loans, it means that, you know, that 
family can get a better mortgage loan.
    Well, the subprime lender that was charging very high fees 
and very high costs is going to be unhappy, and that's what you 
see reflected in the article of yesterday.
    Mr. Ford. Mr. Howard.
    Mr. Howard. We are very much aware that there are many, 
many borrowers who are not getting the best mortgage for which 
they are qualified.
    We have developed products, including our expanded approval 
and timely payment reward mortgages that are designed to 
address that. But we're also working very intensely with our 
lender partners on figuring out how to get those products in 
front of you.
    We are surprised, frankly, that even with the products, 
we're not getting the demand that we would hope we could. So we 
think we have to come up with new ways for making those 
products available and accessible to people who could benefit 
from them.
    And we are going to work very hard and very diligently 
until we figure out how to do that. We think we have a service 
to offer this underserved area, and we intend to do that.
    And I think that's one reason why subprime lenders are 
currently kicking up some dust around this.
    Mr. Ford. Is it true that over the life of an average 
subprime loan that a consumer will pay nearly $209,000 more 
than a conventional loan?
    Mr. Howard. It's certainly possible given the rates that 
I've heard are being charged in that market.
    Mr. Ford. I know we are discussing a potential tax cut 
here, which I support, I might add, here in Congress, but I 
cannot think of a better tax cut for working people than 
helping them to save that amount of money over the life of a 
    To put some of these voluntary initiatives in perspective, 
both of you, could you please comment as briefly--my time is 
running out--on how safeguards like these compare to the norms 
of industry? Have other companies, particularly those that are 
part of FM Watch, taken similar steps or they simply mirror 
what you all are doing?
    Mr. Brendsel. I can't say how particular companies that are 
members of FM Watch match up against these particular 
disclosure commitments.
    However, in general, I can say that based on my knowledge 
of what financial institutions disclose, our commitments, our 
disclosures put us clearly up ahead of the pack.
    Indeed, last year, we retained PriceWaterhouseCoopers to 
review our disclosure practices before we made these additional 
commitments. At that time, they said our disclosures to 
investors placed us among the best of the best in terms of 
banking and financial institutions.
    These additional commitments take us beyond the best.
    Mr. Ford. Mr. Howard.
    Mr. Howard. Our commitment is to remain at the forefront of 
disclosure practices. We think we have now moved beyond that to 
being best practice. If and as disclosure practices improve, we 
will revisit what we're doing, and our commitment is to stay 
    Mr. Ford. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Ford.
    Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. I'd like to yield 15 
    Mr. Shays. Just very quickly. My concern and my questions 
are, it's not a level playing field. We give you a charter 
because of that. We cannot go into our business if we put 
everyone out of business. And the question is, what's 
appropriate for you to be in? And I'm not asking for a response 
now, but I'm eager to have a second round of questions just to 
pursue what is your legitimate business.
    Thank you.
    Mr. Bachus. Thank you. Gentlemen, you all make projections 
on your debt in future years, and I've noticed that Treasury, 
they make projections on what their debt is. And I'm told that 
the debt of Fannie Mae and Freddie Mac will exceed that of the 
U.S. Treasury by 2005.
    Is that accurate? Are you aware of that?
    Mr. Brendsel. I can't say whether or not those particular 
projections are accurate. I can say that those types of 
comparisons that you read are kind of comparing apples to 
oranges, or I'd put it this way.
    Declining U.S. Treasury securities outstanding is clearly 
good news for the U.S. taxpayer.
    Increasing Freddie Mac securities outstanding really 
reflects good news for America's home buyers. And after all, it 
is securities that are backed by mortgages on people's homes.
    So our growth is in line with the growth of the U.S. 
mortgage market. Indeed, for example, over the last 5 years, 
residential mortgage debt outstanding has grown roughly 8 
percent a year. We've grown roughly 9 percent a year. But that 
reflects the strength of the economy, increasing home ownership 
rates, the exploding home ownership rates that have occurred 
over the last several years.
    And so, clearly, that is good news for America's home 
buyers as reflected in the strength of Freddie Mac, not any 
risk to the U.S. Treasury or taxpayer.
    Mr. Howard. I'd make a couple of points to that. First of 
all, this is what we would call a high quality problem, having 
Treasury debt disappear by the year 2010. When Treasury debt 
totally disappears, my teenaged daughter will have more debt 
outstanding than the U.S. Treasury.
    Fannie Mae currently has about $640 billion in debt 
outstanding, all of which is funneling capital into housing. A 
very important point in comparing Fannie Mae debt with Treasury 
debt is the fact that, because we deal exclusively in the 
secondary market, we do not create debt except insofar as we 
cause more mortgages to be made.
    Whenever Fannie Mae buys a mortgage in the secondary market 
by issuing debt, the proceeds of that debt are given to the 
seller who then pays off their debt. So what's happening in the 
aggregate is debt is shifting from that of the seller of the 
mortgage to Fannie Mae.
    We talked earlier that Fannie Mae debt has a stand-alone 
rating of AA-minus. It's very high quality debt. So this is a 
good problem to have in my view.
    Mr. Bachus. Thank you. Mr. Howard, Moody's, in rating your 
subdebt, stated ``It is Fannie Mae's intent to create a class 
of securities that would reflect the market's views on the 
firm's credit profile via the price at which it trades.'' Would 
you explain?
    Mr. Howard. Yes. What we're hoping to do is create a class 
of security where investors know they have an economic interest 
in the risk management practices of Fannie Mae.
    And that's because we built into the subordinated debt a 
feature that would cause the holders of that subordinated debt 
to have their interest payments deferred for up to 5 years if 
our capital falls below a threshold amount. And that threshold 
amount is 125 percent of our so-called critical capital level.
    With that financial incentive, we believe subordinated 
debtholders will pay attention to our disclosures, monitor our 
credit quality, and the reflection of their view will be in the 
price at which that subordinated debt trades relative to our 
senior debt.
    Mr. Bachus. You just mentioned that you would defer 
interest payments. A lot of times on subordinated debt, that 
debt converts to equity. Is that right?
    Mr. Howard. Subordinated debt can be structured that way. 
We have deliberately chosen not to do that, because we want to 
ensure that a holder of subordinated debt has the same interest 
as the U.S. taxpayer.
    The subordinated debt that converts to equity gives the 
holder an interest in the company doing whatever it can to make 
that subordinated debt principal pay off, even if the risk the 
company takes are very high, the equity holders, if a company 
is in trouble, basically want the company to go for broke, 
shoot for the moon, on the hope they'll get paid off. 
Debtholders want exactly the opposite.
    So subordinated debtholders in that circumstance, if the 
debt is not converted to equity, have exactly the same interest 
as the Congress and the U.S. taxpayer, and that's what we 
wanted to create.
    Mr. Bachus. But of course, it might not bring you up to the 
minimum capital standards, which you are intending to do by 
deferring those interest payments.
    Mr. Howard. No. But remember, the suspension of interest is 
only triggered if we fall below those critical capital 
thresholds which, given our risk management incentives and 
practices, is a highly unlikely event. And again, that's 
reflected in our stand-alone credit rating.
    Mr. Bachus. Who is going to verify the commitments you've 
make whether they're being acted upon?
    Mr. Brendsel. Certainly it starts internally with our own 
board of directors and our internal audit function. Externally, 
of course, it will be verified by our regulators through their 
examination function at OFHEO.
    Mr. Bachus. So you do see part of their role is to verify 
that the commitments you made to this subcommittee are 
    Mr. Brendsel. Yes.
    Chairman Baker. You've expired your time, Mr. Bachus. We'll 
come back to you.
    Ms. Jones.
    Ms. Jones. Thank you, Mr. Chairman. I want to commend you 
for holding these hearings once again. It's kind of like deja 
vu, though. Remember last year when you were holding these 
hearings, Mr. Brendsel, Mr. Howard, and all the articles that 
came out about Fannie Mae and Freddie Mac on the issues of 
mission creep?
    I want to quote specifically from an article in The 
Washington Post that said, ``Today a hearing before 
Representative Richard Baker, Chairman of the House Financial 
Services Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises, was not scheduled to question 
the company's lending guidelines, rather aimed at assessing 
their progress toward a number of goals laid out last year.'' 
And on and on and on.
    That was the intent of this hearing, was it not, gentlemen? 
Is that why you came prepared to testify today, Mr. Brendsel?
    Mr. Brendsel. Yes.
    Ms. Jones. Mr. Howard?
    Mr. Howard. Yes it is.
    Ms. Jones. And I really didn't intend to question the issue 
of mission creep, but seeing how everybody else decided they'd 
go down the line on mission creep, I thought I'd go that route 
    It's true that the mission of both of your Government 
sponsored enterprises allows you to go into the secondary 
market? I'm kind of cross-examining like a prosecutor. Forgive 
me. Give me short answers. Correct?
    Mr. Howard. Yes.
    Ms. Jones. And in that effort, Mr. Howard, you've been with 
Fannie Mae maybe--in this position for the past 10 years. Is 
that correct?
    Mr. Howard. Eleven, yes.
    Ms. Jones. Eleven. Excuse me. And in those 11 years as the 
CFO of Fannie Mae, can you talk about why you chose to go down 
the route that you've gone to look at your charter and make 
some specific changes and what you thought you were permitted 
to do under the law?
    Mr. Howard. We last took a look at our charter in 1992 in 
conjunction with Congress. At that time, Congress made some 
changes, including giving us specific housing goals that we 
have met every year since they've been in effect. It created a 
new regulatory capital standard, which we're now discussing.
    Subsequent to the 1992 law, we have made no request for 
further charter expansion. We believe our charter as adopted by 
Congress in 1992 is exactly the right charter for us to have to 
carry out the mission that Congress has given us.
    We have been operating within that charter, which is why on 
the topic of mission creep, I have yet to hear a credible 
description of what it is we are doing that exceeds the charter 
that this Congress passed in 1992.
    Ms. Jones. Mr. Brendsel, would you like to answer that 
question as well?
    Mr. Brendsel. Having been in Freddie Mac since 1982, now 18 
years, I have a long history in the evolution of Freddie Mac.
    First I'd say our charter is very clear as to our purpose, 
our authorities, what we can do and what we cannot do. And over 
time, while the regulatory structure has been changed and 
enhanced certainly for Freddie Mac, we have not sought really 
to change our charter in terms of our authorities with one 
exception that I can remember, and that is in fact we proposed, 
attempted to get a change to the charter requirement that we 
have private mortgage insurance on every low downpayment 
mortgage that we purchase.
    We proposed making it more flexible so there would be 
alternative forms of credit enhancement that we could use on 
low downpayment mortgages. We saw that the evolution of the 
capital markets meant that there were many other alternatives 
other than private mortgage insurance to give us that 
    That particular proposal failed, but I still think it's a 
good idea.
    Ms. Jones. Do you know who Beneva Scholte is?
    Mr. Howard. I've heard the name.
    Ms. Jones. She's the contact person for the FM Watch report 
that outlines how GSE mission creep threatens American 
consumers, the report that came out about a week ago, just in 
time for our wonderful hearing. Have you ever been in contact 
with her?
    Mr. Howard. I have not been personally.
    Ms. Jones. Let me finally say that you've had an 
opportunity since last year to comply with these six voluntary 
agreements to put your ships in better shape than they already 
were in, correct?
    Mr. Brendsel. Correct.
    Ms. Jones. You don't have any issue about entering into 
voluntary compliance, do you?
    Mr. Brendsel. No.
    Ms. Jones. Did you welcome the opportunity to continue to 
make these two companies the leading companies here in the 
United States in pushing or providing for affordable housing in 
the United States?
    Mr. Brendsel. Absolutely. I couldn't have said it better 
    Ms. Jones. Thank you very much, Mr. Chairman. I yield the 
balance of my time.
    Chairman Baker. Thank you.
    Mr. Weldon.
    Mr. Weldon. Thank you, Mr. Chairman.
    Mr. Brendsel, you stated regardless of disruptions in the 
capital markets that that may make it impossible to borrow, 
Freddie Mac has the means to meet our financial obligations for 
at least 3 months.
    Mr. Brendsel. That's true.
    Mr. Weldon. I think, Mr. Howard, you said the same thing?
    Mr. Howard. Yes.
    Mr. Weldon. Could you give me a little more detail on how 
you'd go about doing that?
    Mr. Howard. I think we would both do it in a similar way. 
First of all, we maintain a fairly sizable liquidity portfolio. 
As of the end of last year, it was 8 percent of total assets.
    That liquidity can be run off. They're high quality 
securities that can be sold to allow us to pay down debt if we 
don't have access to capital markets.
    Mr. Weldon. What kind of securities are they?
    Mr. Howard. Many of them, we made short-term loans to 
banks, in the Fed funds market. We have AAA-rated securities 
that can be sold readily for prices very close to what we paid 
for them.
    We also have over $300 billion in high quality Fannie Mae 
mortgage-backed securities that can be pledged as security for 
repurchase agreements that can then be used for borrowing. This 
is very standard practice in the financial services industry. 
And the use of those securities as collateral for repurchase 
agreements would give us many months of access to borrowing 
without having to issue debt.
    Mr. Weldon. Mr. Brendsel.
    Mr. Brendsel. My answer would be very similar. Clearly, we 
start out with a schedule of what are all the outstanding 
commitments and obligations that the company will have coming 
due over the next 3 months, so we can have a clear idea on 
    And then second, we make certain we have the kind of 
liquidity that Mr. Howard was referring to, whether it was in 
the form of very high grade, high quality corporate securities 
and banking securities or our own mortgage-backed securities.
    Mr. Weldon. Correct me if I'm wrong. It's very easy for you 
to raise capital by just issuing debt, and that in itself gives 
you a lot of liquidity in terms of giving you the ability to 
expand your business. Would you say that that enhances safety 
and soundness for your institutions?
    Mr. Howard. Not just for our institution, but for the 
financial system as a whole. So in times such as the fall of 
1998 when credit was not readily available, we were able to 
issue Fannie Mae debt that investors valued and would invest 
in, take those proceeds and channel them into the housing 
    So we can serve as a stabilizing force for the entire 
    Mr. Weldon. Do you want to add to that at all?
    Mr. Brendsel. This may be just a point of clarification. 
This liquidity and contingency commitment would assume that we 
would not be able to issue any debt at all for that 3-month 
    Mr. Weldon. Right. I realize that. You have been conducting 
the internal risk-based capital test, the so-called ``stress 
test.'' In the agreement you committed to disclosing the 
parameters of your testing models and the outcomes of the 
testing. What level of detail are you going to be providing on 
that? Or have you made that decision yet or not?
    Mr. Howard. Yes. In implementing the interim risk-based 
capital test associated with the voluntary agreements, we have 
moved from using a model based on Fannie Mae's own 
specification that we have been running since 1993 to one that 
uses as its basis the notice of proposed rulemaking that OFHEO 
put out in 1999.
    So we use that as the basis plus amendments OFHEO has made 
subsequent to that.
    In addition, we added elements in our comment letter of 
March 10th of 2000, which is publicly available, and made some 
additional adjustments to approximate as closely as we could 
what we think a final official standard might look like. And 
those changes are available on our website as part of our 
disclosure package.
    So by going to OFHEO's website, looking at our comment 
letter on our website, an observer can look at all of the 
elements that we used in running our risk-based capital test on 
an interim basis that we just announced.
    Mr. Weldon. The same for you as well?
    Mr. Brendsel. Similar. We've attempted to coordinate 
wherever possible types of disclosures with Fannie Mae to 
assure that investors wouldn't be confused.
    Mr. Weldon. Have two standards.
    Mr. Brendsel. Yes, two standards and so forth. And I 
wouldn't say that in all cases we have adopted the identical 
    But I'd like to add one additional point about Freddie Mac. 
We really began managing the company under a kind of a stress 
test approach to assess capital adequacy and to maintain 
assurances that we were appropriately capitalized beginning in 
the late 1980s.
    Indeed, we were an advocate of the legislation that was 
crafted in 1992 establishing this very dynamic and forward-
looking, at the time an avant garde risk-based capital 
approach, and we've been managing according to that at Freddie 
Mac ever since.
    Indeed, we were disclosing a lot about how we assessed 
capital even before we made this final commitment. And now of 
course, we're going to provide additional information including 
general information around the kind of parameters in this 
stress test that we use for this disclosure.
    Mr. Weldon. Thank you, Mr. Chairman. I think my time has 
    Chairman Baker. Thank you very much, Mr. Weldon.
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I want to yield my 
first 2 minutes to my good friend and colleague, Congressman 
    Mr. Israel. Thank you. I thank the gentleman for yielding.
    There seems to be near-unanimous praise on both sides of 
the aisle for the voluntary initiatives that you are conforming 
to, and you've already stated that those voluntary initiatives 
help you meet your core competency, which is to provide 
affordable housing.
    I'm just wondering whether you can estimate the approximate 
cost of conformance with the voluntary issues in terms of 
personnel or hard dollars. Mr. Howard?
    Mr. Howard. Most of the voluntary commitments codify or 
make public practices that we have already undertaken. Those 
practices do have costs, because we need to have high quality 
staff to do risk assessment. We need to do lots of modeling to 
help us get a sense for how best to measure and manage our 
    The one specific cost that's easy to track is the 
additional cost we pay to issue subordinated debt. Because if 
we didn't have a subordinated debt, we would issue senior debt 
at a lower cost.
    So for the first issue we did, $1.5 billion, we paid 22 
basis points more. That's a pure additional cost.
    We have committed to build our subordinated debt up to 
roughly 1.5 percent of total assets, which over the next 3 
years will be between $12 and $15 billion of subordinated debt. 
And if we pay 22 basis points on all of that, that will be a 
real incremental cost over and above the others that I've 
    Mr. Israel. Mr. Brendsel, if you answer briefly please.
    Mr. Brendsel. Yes. The additional incremental cost on 
subordinated debt would be similar. I think our first issue, we 
had 22 basis points, which would amount to, on a $2 billion 
issue, that we did about $4.4 million annually in additional 
    If, however, these commitments, including the subordinated 
debt, provide greater assurance and confidence to the investors 
in the stability of the company, really the confidence of 
Congress and the public, that will be more than offset in terms 
of overall cost on our senior debt.
    Mr. Israel. I thank the gentleman for yielding.
    Mr. Hinojosa. Thank you. I was looking at the closing 
statement that Mr. Brendsel used, and he said that he looks 
forward to working together with us to secure the future of our 
housing finance system and with it the dreams of millions of 
    So that brings me to one of the points that I made earlier 
in my opening remarks, and that was my concern about the wide 
gap that exists between the standard families owning a home, 
Anglo-Saxon families, I think that there's a lag of 26 percent 
behind Anglo-Saxon home ownership.
    So can you tell me what your company is doing to close this 
wide gap?
    Mr. Brendsel. Yes. I can tell you what our company is 
trying to do with all its energy and all the commitment of the 
4,000 employees at Freddie Mac and their creativity.
    First of all, I'd emphasize that we are committed to 
closing that gap, finding every avenue that we can within our 
    Certainly, it includes developing new flexible mortgage 
products that make it easier for a low-income or minority 
family to afford their first home. It includes partnering with 
organizations that know the Hispanic community well, like the 
National Council of La Raza and the National Association of 
Hispanic Real Estate Professionals.
    Indeed, we recently entered into an agreement, a 
partnership really, with those two organizations, $2 million to 
develop web-based technology to increase home ownership 
counseling for Hispanic families.
    In addition, we're constantly trying to improve our 
underwriting systems, use technology to drive down origination 
costs, increasing the ability of a low-income family or a 
minority family to get a mortgage loan. And, of course, we are 
constantly exploring new ways to attract capital from 
throughout the world at a lower cost, making it again more 
possible to afford a home.
    I think it's a journey. It's a journey that we've been on 
for decades now. Clearly, there's a long way to go. Yes, the 
average home ownership rate nationally approaches 70 percent, 
67 percent. But as you have clearly indicated, the home 
ownership rate for Hispanics as well as African American 
families in this Nation falls well below and indicates that 
there is still a lot more work to be done.
    Mr. Hinojosa. Mr. Howard, your group has done a great deal 
of effort in San Antonio to Brownsville, to McAllen, to Laredo 
and that area, because I've seen some of the programs that were 
introduced in these last 4 years as we were moving many 
families from welfare to jobs, and in some cases not letting 
them stay more than 2 years in Section 8 housing.
    Do you have a way of monitoring and assessing the success 
or failure of your new programs as they relate to get Hispanics 
to own their own homes?
    Mr. Howard. Yes we do. Last year, Fannie Mae announced our 
$2 trillion American Dream commitment. That was the successor 
to our $1 trillion initiative that we announced back in 1994.
    In both cases, we established a very rigorous pattern of 
announcing specific goals and then tracking and reporting on 
how we were doing against those goals.
    One of the subgoals of the American Dream commitment is a 
specific minority lending initiative where we are setting 
targets to help close the home ownership gap between 
minorities, including Hispanics, and majority Americans.
    But I've noticed in recent publications by FM Watch and 
others, they're claiming that we have solved the home ownership 
problem and that we should stop. That totally ignores the very 
wide gap between minority home ownership and majority home 
ownership that we are committed to working on to close.
    And through the American Dream commitment and specific 
target initiatives that we are working on with interest groups 
as well as lenders and others, we will follow up on those 
initiatives, track and report on them, and hopefully be a 
positive force in achieving a good outcome.
    Mr. Hinojosa. Would you repeat the name of the organization 
that felt that you should stop?
    Mr. Howard. FM Watch.
    Chairman Baker. You'll be hearing more from those folks, 
Mr. Hinojosa, I'm sure.
    Chairman Baker. The gentleman's time has expired. I'll 
start back on a second round. There being no further Republican 
    Just one comment again on the specifics of the arrangement 
of last fall. The requirement to issue subordinated debt equal 
to 4 percent as subtracted from the core capital, whatever that 
difference turns out to be, an annual rating which now has 
turned into a surveillance rating, new liquidity standard for a 
3-month operating window, an interest rate risk disclosure and 
credit risk disclosure that is new and heretofore not engaged 
in, and each of you commented that you feel that that package 
represents a substantive structural change in the level of 
transparency and disclosure to the markets. Is that correct?
    Mr. Howard. Yes it is, sir.
    Chairman Baker. And to your knowledge, has it had an 
adverse impact on your operations since you complied with these 
    Mr. Howard. None whatsoever.
    Mr. Brendsel. No.
    Chairman Baker. Well, I just want to make the point, and 
this is coming from a little different perspective, that it is 
possible to manage the affairs of Government sponsored 
enterprises without necessarily legislation, but with 
regulatory changes that do not result in adverse circumstances, 
like throwing hundreds of thousands of people out of home 
ownership. I feel that's a pretty substantive point to make.
    Second, that with regard to the discussion of the regulator 
piece that is yet to come, these are elements that a--I don't 
want to say a well-run shop, because you all are 
extraordinarily well run--would want to have in the 
marketplace, coupled with a competent regulator so there's no 
question about the stability of your debt issuances.
    And the reason for bringing that up is I am concerned about 
the consolidation of the counterparties because of mergers and 
acquisitions internationally and domestically and your ability 
to hedge risk appropriately.
    I am concerned about the difficulty we may engage in if we 
have a short-term 1998 liquidity problems and whether or not--
I'm not suggesting we haven't gone far enough, but what I'm 
asking you is, what is your level of confidence, knowing now 
that these new standards are operative, that the markets are 
now expecting this, and you can't back off of it. It's a 
requirement that you must go forward with. Am I reading 
anything into the spreads on the subdebt as being any indicator 
of any concern, particularly with the consolidation of 
counterparties' potential liquidity problems in the broader 
market, not within your shop?
    How good do you feel about the deal we put together here 
and its effect on being able to insulate taxpayers from any 
adverse circumstances that could develop? Keep in mind we're 
talking the 1980s and Louisiana/Texas oil and gas patch 
circumstances that are in pretty dire consequences.
    Mr. Brendsel. Mr. Chairman, I think I would answer the 
question this way. We started from a point at the time that we 
announced the commitments that we were already extraordinarily 
well capitalized for the risks we take and face, because we're 
only in the home ownership business and rental housing.
    And we only added to that by the additional commitments. 
Obviously, spreads on securities fluctuate from day to day for 
a variety of reasons, many of which have nothing to do with any 
one institution. So I don't know what you're reading into a 
spread moving from 22 basis points to 28 basis points, but in 
the scheme of things, that is just a random fluctuation.
    I used to be the chief financial officer at Freddie Mac 
years ago and I've lost my edge a little bit, so I'll let Mr. 
Howard comment as well.
    Mr. Howard. I put the movement in our subordinated debt in 
this perspective. As Mr. Brendsel mentioned, each of us priced 
subordinated debt around 22 basis points off our senior debt.
    In our case, we traded as tight as about 18 and as wide as 
28. That's a minus 4 plus 6 move. That is a range that is well 
within what other issuers of subordinated debt have experienced 
over the same time period. These are the high quality 
commercial banks that have subordinated debt outstanding that 
is quoted publicly in the market.
    I would also say that over the last year, our 10-year 
senior debt spreads to Treasuries have moved within a swing of 
about 45 basis points, reflecting a host of factors, none of 
them specifically being credit quality-related.
    Chairman Baker. Well, the overall interest market since the 
date of introduction of the legislation year til now has been 
nothing but a continuous, steady downhill trend, and we're 
enjoying a very low interest market at the moment, which 
certainly has to have a much larger effect on the cost of 
selling than anything else I can imagine. I'm again exceeding 
my time.
    Mr. Kanjorski.
    Mr. Kanjorski. Mr. Chairman, I think I have asked all my 
questions and heard all the answers. I suggest this has been a 
very successful hearing.
    Chairman Baker. Does any other Member wish to be heard?
    Ms. Jones. Just very briefly. Some would say that the 
current interest market has been influenced by conversations by 
our chief officer of Government and other elected officials or 
appointed officials in his Administration. Some would say that, 
wouldn't they, Mr. Brendsel, Mr. Howard?
    I'm not asking you to say it, because you can't say it, but 
I can say it. That some of the articles would say that the 
interest or the economy is in the position that it was--I think 
it was the New York Times in fact that said that some in our 
Administration have talked the economy down. You read that, 
didn't you, Mr. Brendsel? You don't have to admit to it. But I 
know you read it. Well, let me go on.
    Ms. Jones. Standard & Poor's and Moody's, those are the 
organizations that evaluated your economic status and debt 
ratio, right? Correct?
    Mr. Howard. Yes, that's correct.
    Mr. Brendsel. That is correct.
    Ms. Jones. And in fact, they're kind of like Alan 
Greenspan. When he speaks, people listen. When Standard & 
Poor's and Moody's give you a rating, people listen to that, 
    Mr. Howard. Yes they do.
    Ms. Jones. And in fact, in order to judge your soundness, 
and what's the other word I want?
    Mr. Howard. Safety.
    Ms. Jones. And safety. Thank you very much. You went to 
these institutions to have them evaluate you and even passed 
what was part of the voluntary agreement.
    Mr. Howard. Correct.
    Ms. Jones. And so if I were sitting in your shoes, I would 
feel pretty darn good about the--I wish my son would get A and 
double AA and what are those other ratings?
    Ms. Jones. But he says, Mom, give him time. But you're at 
that status right now. Is that correct?
    Mr. Howard. Yes we are.
    Ms. Jones. I wondered if you might briefly elaborate for 
me. One of my colleagues said something about when you can 
raise capital by issuing debt. I can't think of his name. He's 
seated four down on the side. He said that the way you can 
raise capital for your company is by issuing debt. Is that 
    Mr. Howard. He may have said that.
    Ms. Jones. Anyway, he raised the question. My question is--
and I'm not a business expert or anything--but most 
corporations raise capital by issuing debt. You're not doing 
anything unlike other corporations. Is that a fair statement?
    Mr. Howard. I don't believe we are.
    Ms. Jones. OK. And wouldn't it be fair to say that because 
of the lack of affordable housing in the United States and 
because there are so many people in need of housing, there's 
room at the table for many, many financial institutions who 
want to engage in mortgage lending in communities, regardless 
of their color, economic interest, to get involved?
    Mr. Howard. Very much so.
    Ms. Jones. And that even though this is a competitive 
market, Fannie Mae does not have to engage in threatening 
tactics in order to be successful?
    Mr. Howard. We do not and have not.
    Ms. Jones. What about you, Freddie Mac? Do you have to 
engage in threatening tactics in order to be successful?
    Mr. Brendsel. No. We never have and we never will.
    Ms. Jones. I'll yield, Mr. Chairman.
    Chairman Baker. Thank you.
    Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. I just want to say that 
both your organizations have been very helpful to me. Both 
organizations are very responsive.
    But I found the hair on my back rising when you talked 
about going to any market where you see an opportunity, where 
there's an overpricing and so on. It almost sounded a little 
sanctimonious to me, with all due respect.
    You all are given opportunities to compete that your 
competition in a sense doesn't have. Is that correct?
    Mr. Howard. This is a longer discussion, but I think that's 
a complicated subject.
    Mr. Shays. It is a complicated subject. And that's almost 
an arrogant answer. I realize it's a complicated subject. But 
the bottom line is, you are given certain opportunities that 
your competition doesn't have.
    Mr. Howard. We are given different opportunities from those 
which our competition's been given.
    Mr. Shays. Your cost of capital is less, correct?
    Mr. Howard. In the long-term end of the market, yes. In the 
short term, it is higher than our competition.
    Mr. Shays. You don't have to file certain reports, correct?
    Mr. Howard. That's correct.
    Mr. Shays. You don't have to pay State and local taxes?
    Mr. Howard. Through Congressional design.
    Mr. Shays. I know that. I'm not saying that you have these 
powers illegally. You have them. We've given them to you. And 
doesn't that apply to you as well? It applies to both 
    Mr. Brendsel. That's correct.
    Mr. Shays. So you don't have to pay State and local taxes. 
You can get capital, at least in the long-term, cheaper. There 
are certain advantages you have.
    And so what obligations do I have up here to make sure that 
you don't use those advantages to basically put everyone out of 
    Mr. Howard. We have a charter that precisely limits us to 
channeling whatever those advantages may be into housing.
    Mr. Shays. So the charter basically sometimes is going to 
tell you that you can't go into a marketplace even if you 
happen to think that the market is overpriced and you have 
    Mr. Howard. Yes, that's correct.
    Mr. Brendsel. I think I would agree with many of the points 
that you were making, Congressman. We compete with certain 
tools, advantages, that come as a result of our charter. And 
indeed, with those tools come special or different 
responsibilities. We're limited obviously to only the 
residential mortgage market.
    Indeed, we're also limited. We can't originate a mortgage 
loan. In addition, of course, we can't buy mortgage loans on 
expensive housing, so-called jumbo loans.
    Our charter is very clear. We can't go off into doing 
credit cards. We can't go off into any number of different 
other things.
    Mr. Shays. The bottom line, the purpose for which you exist 
is to enable Americans to buy more homes. That's the basic 
purpose for why you exist. And you've done a pretty good job of 
that. Am I wrong? Isn't that the basic purpose? If we want more 
residential housing, we want more homeowner properties.
    Mr. Howard. But beyond that, it's targeted residential 
investment. That's why we have housing goals that guide us as 
to where we should focus whatever benefits Congress gave us. 
There are limits that come with the benefits.
    Mr. Shays. So you could make a determination in your 
charter allowed it that there's great opportunities in the 
jumbo loan market?
    Mr. Howard. No. That's expressly----
    Mr. Shays. Maybe you didn't hear my question. If your 
charter allowed it?
    Mr. Howard. Yes.
    Mr. Shays. And we tell you you can't go into that 
marketplace. Why do you think we do that?
    Mr. Howard. To focus our efforts where Congress deemed they 
were most necessary.
    Mr. Shays. So you have a problem with this subcommittee 
overseeing your activities?
    Mr. Howard. No.
    Mr. Shays. Do you have a problem with our investigating the 
possibility of providing more regulations?
    Mr. Howard. No.
    Mr. Shays. That's good.
    Mr. Howard. Terrific.
    Mr. Shays. We'll be watching.
    Mr. Howard. We look forward to it.
    Mr. Brendsel. Congressman, could I make an additional 
comment? And indeed, with regard to the last point, we in fact 
welcome the oversight.
    Actually I think it makes us a better organization, a 
better company, and it's really better for the Nation as a 
    Finally, the other point I wanted to make is the issue of 
benefits or advantages relative to others. Mr. Howard said it's 
a complex issue. It's more complicated than simple, I think, as 
has been reflected here today in our conversation.
    Freddie Mac recently requested that James Miller, former 
Director of OMB in the Reagan Administration, and James Pearce 
with Welch Consulting, do a study to look at our companies' 
advantages, the benefits we receive, and then the benefits to 
consumers. That was a report they issued on January 9th.
    Two points I would leave you with. One is it clearly shows 
that the benefits realized by the Nation, consumers and 
homebuyers, the value of those greatly exceeds the advantages 
realized by Freddie Mac and Fannie Mae.
    The second point they make is, in fact, there are many 
other institutions in the marketplace in residential mortgage 
markets elsewhere that possess their own set of federally 
bestowed advantages, specifically banking institutions that 
have federally-insured deposits and that are members or are 
able to borrow from the Federal Home Loan Bank system, which 
are themselves Government-chartered corporations.
    And so, their final conclusion was, in fact, that we were a 
more efficient way for the Government to support and encourage 
the flow of mortgage credit to this Nation's mortgage markets.
    Mr. Chairman, I'd like to submit that report for the 
    [The report referred to can be found on page 103 in the 
    Chairman Baker. Without objection.
    Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Chairman Baker.
    I would ask Mr. Howard a question. Can you please tell me 
what the predatory lending is and how it differs from subprime 
    Mr. Howard. Predatory lending in my view--and I'm not the 
world class expert on this--does not have a precise definition. 
In general, they are lending practices that are not in the best 
interests of the consumers, and typically the consumer is not 
made fully aware of prior to committing to a loan.
    We have categorized predatory lending practices into 
certain groups. And at that point, the basis for the guidelines 
that we put out to our lenders.
    But precisely because there is not a specific definition of 
predatory lending, we entered into discussions with numerous 
parties to try and come up with a right balance, because the 
flip side of too restrictive guidelines is that people who have 
only one place to get credit find they can't get credit 
anywhere, which is an outcome we don't want. So we're 
attempting to find that fine line between making sure that 
people have loans they can afford, even if they have to pay a 
higher rate because of their past credit, and abusive practices 
that end up causing them to lose their home.
    Mr. Hinojosa. I think Freddie Mac--I'd like to ask you what 
is your company doing to respond to the problems that Mr. 
Howard just outlined?
    Mr. Brendsel. In predatory lending?
    Mr. Hinojosa. Predatory lending, yes.
    Mr. Brendsel. We refuse to purchase certain kinds of loans 
that are generally regarded as being associated with predatory 
lending practices, excessive interest rates on those loans, 
single-premium credit life insurance, prepayment penalties that 
extend for an excessive period of time.
    We also refuse to deal with certain lenders that we have 
determined are associated with predatory practices. So it's a 
combination of having policies against purchasing certain kinds 
of loans and also policies against dealing with lenders that 
are associated with abusive practices.
    Mr. Hinojosa. Thank you for that explanation. I wish to 
yield the balance of my time to Congresswoman Jones.
    Ms. Jones. Thank you, my colleague. Let me begin with the 
question on restrictions and go through maybe a few 
restrictions that Fannie Mae has as a result of being a 
Government sponsored enterprise.
    You're restricted to a single line of business, residential 
mortgages. Is that correct, Mr. Howard?
    Mr. Howard. Yes it is.
    Ms. Jones. You are confined to mortgages under the loan 
limit, currently $275,000 for a single family loan. Is that 
    Mr. Howard. Yes it is.
    Ms. Jones. You're required to operate in all markets at all 
times. Is that correct?
    Mr. Howard: Yes.
    Ms. Jones. Must meet percent of business goals for 
affordable housing, correct?
    Mr. Howard. Correct.
    Ms. Jones. And meet a rigorous risk-based capital test in 
addition to six voluntary agreements or policies you just 
recently accorded yourself to. Is that correct?
    Mr. Howard. Yes. Although currently we're meeting the 
interim test because the regulatory test has not been 
officially promulgated.
    Ms. Jones. Now let me go to the charter purposes. One, to 
provide stability in the secondary market for residential 
mortgages. Is that correct?
    Mr. Howard. It is.
    Ms. Jones. To respond appropriate to the private capital 
market, correct?
    Mr. Howard. Yes.
    Ms. Jones. To provide ongoing assistance to the secondary 
market for residential mortgages, including activities relating 
to mortgages on housing for low- and moderate-income families, 
and following a reasonable economic return that may be less 
than the return on other activities by increasing the liquidity 
of the mortgage investments and improving the distribution of 
investment capital available for residential mortgage 
financing, correct?
    Mr. Howard. That sounds right.
    Ms. Jones. And finally, to promote access to mortgage 
credit throughout the Nation, including central cities, rural 
areas, and underserved areas by increasing, quote, ``the 
liquidity'', unquote, of mortgage investments and improving the 
distribution of investment capital available for residential 
mortgage financing charter purposes, correct?
    Mr. Howard. Yes.
    Ms. Jones. And it is not your intention in any of the 
activities that you engage in, Mr. Howard, Mr. Brendsel, to act 
outside of those chartered purposes.
    Mr. Howard. It is not.
    Ms. Jones. Is that a fair statement?
    Mr. Brendsel. That's correct.
    Ms. Jones. Thank you. I yield the balance of my time, Mr. 
    Chairman Baker. Thank you, Ms. Jones.
    Ms. Jones. Mr. Hinojosa's time actually.
    Chairman Baker. Thank you, Mr. Hinojosa-Jones.
    Chairman Baker. Mr. Shays.
    Mr. Shays. Mr. Chairman, I didn't really need a full 5 
minutes just to say that I really appreciate both witnesses 
appearing before us.
    You know, I'm new to this subcommittee. I find this a very 
interesting subcommittee to serve on. I appreciate your 
chairmanship of this subcommittee.
    But I have a lot of constituents who both work with you and 
appreciate your partnership and also compete with you. I have a 
lot of consumers who have benefited deeply by what your 
organizations do, but I'm absolutely convinced that the playing 
field isn't level. And because it's not level, we have that 
oversight responsibility.
    I look forward to learning more about what you all do and 
how you try to conform to your charter and so on. Thank you. I 
thank you, Mr. Chairman.
    Mr. Howard. We look forward to working with you on that.
    Chairman Baker. Thank you, Mr. Shays.
    There being no further comment from Members, I just wish to 
wrap our hearing up today.
    Someone asked earlier in the course of the hearing who 
would be the overseer to assure third parties that the terms of 
the voluntary agreement are successfully implemented over time.
    Since we joined hands at the start, I guess it would be 
appropriate for us not to release hands until we get a 
regulatory structure that we can pass this responsibility off 
    So I will announce, with the agreement of Mr. Kanjorski, 
who had to leave a little bit earlier, that we will continue in 
this fashion on some semi-annual or annual basis to receive 
reports from the enterprises using today's report as the 
benchmark against which future measurements can be made.
    Second, and it's has been referred to widely, but we will 
have legislation to introduce in the near term on the suggested 
regulatory structure, which I have not yet, but do intend to 
visit with both of the GSE management teams before the bill is 
finally brought.
    I also shared that with Mr. Kanjorski and assured him that 
we would get him a copy of the bill before it would be finally 
    We will also soon receive the report from the CBO relative 
to the now long-awaited subsidy evaluation which could be the 
subject of an additional topic.
    Suffice it to say we are going to move very slowly, but I 
want the Members of the subcommittee and the representatives of 
the GSEs to understand that we're going to have a very 
thoughtful through-the-summer type of discussion, no rush to 
judgment. But I do believe that the steps we take in here build 
a platform of a cooperative agreement that can be carried 
forward, and that we won't find it necessary to result in some 
of the exchanges which occurred in last year's debate and that 
we can jointly perform the service of making good public policy 
while not adversely affecting home ownership, and I think at 
the same time enhance the marketability of the two enterprises' 
products by creating a regulator that does have credibility.
    To that end, gentlemen, I look forward to working with you 
and Members of this subcommittee.
    Mr. Brendsel. And we welcome the opportunity to work with 
you, Mr. Chairman.
    Mr. Howard. As do we.
    Chairman Baker. Thank you very much. The hearing is ended.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             March 27, 2001