[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]




 
                        H.R. 2575--THE SECONDARY
                      MORTGAGE MARKET ENTERPRISES
                       REGULATORY IMPROVEMENT ACT

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 25, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-54



92-628              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 25, 2003...........................................     1
Appendix:
    September 25, 2003...........................................   105

                               WITNESSES
                      Thursday, September 25, 2003

Bartlett, Hon. Steve, President and CEO, The Financial Services 
  Roundtable.....................................................    93
Conine, C. Kent, Conine Residential Group, Inc., on behalf of the 
  National Association of Home Builders..........................    83
Courson, John, President and CEO, Pacific Mortgage Company, on 
  behalf of the Mortgage Bankers Association of America..........    91
Falcon, Hon. Armando Jr., Director, Federal Housing Enterprise 
  Oversight......................................................    12
Fishbein, Allen, Director of Housing and Credit Policy, Consumer 
  Federation of America..........................................    85
Gould, George D., Director, Freddie Mac..........................    42
Hehman, David H., President and CEO, Federal Home Loan Bank of 
  Cincinnati.....................................................    48
Korsmo, Hon. John T., Chairman, Federal Housing Finance Board....    16
Montague, Terri Y., President and Chief Operating Officer, The 
  Enterprise Foundation..........................................    87
Raines, Franklin D., Chairman and Chief Executive Officer, Fannie 
  Mae............................................................    44
Schultz, Dean, President and CEO, Federal Home Loan Bank of San 
  Francisco......................................................    47
Spriggs, William E., Executive Director, National Urban League, 
  Institute for Opportunity and Equality.........................    89
Taylor, D. Russell, President and CEO, Rahway Savings Association 
  on behalf of America's Community Bankers.......................    81

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................   106
    Baker, Hon. Richard H........................................   108
    Clay, Hon. Wm. Lacy..........................................   110
    Crowley, Hon. Joseph.........................................   112
    Gillmor, Hon. Paul E.........................................   114
    Gonzalez, Hon. Charles A.....................................   116
    Kanjorski, Hon. Paul E.......................................   117
    LaTourette, Hon. Steven C....................................   119
    Maloney, Hon. Carolyn B......................................   120
    Miller, Hon. Gary G..........................................   121
    Royce, Hon. Edward R.........................................   122
    Bartlett, Hon. Steve.........................................   123
    Conine, C. Kent..............................................   127
    Courson, John................................................   139
    Falcon, Hon. Armando Jr......................................   145
    Fishbein, Allen..............................................   153
    Gould, George D..............................................   163
    Hehman, David H..............................................   173
    Korsmo, Hon. John T..........................................   182
    Montague, Terri Y............................................   191
    Raines, Franklin D...........................................   197
    Schultz, Dean................................................   229
    Spriggs, William E...........................................   236
    Taylor, D. Russell...........................................   240

              Additional Material Submitted for the Record

Baker, Hon. Richard H.:
    Financial Services Forum, prepared statement.................   246
Frank, Hon. Barney:
    Federal Home Loan Bank of Boston letter, September 24, 2003..   256
Ney, Hon. Robert W.:
    National Association of Realtors, prepared statement.........   257
Courson, John:
    Written response to questions from Hon. Ginny Brown-Waite....   261
Falcon, Hon. Armando Jr.:
    Written response to questions from Hon. Ginny Brown-Waite....   262
Gould, George D.:
    Written response to questions from Hon. Ginny Brown-Waite....   266
    Written response to questions from Hon. Barney Frank.........   268
Raines, Franklin D.:
    Written response to questions from Hon. Ginny Brown-Waite....   270
    Written response to questions from Hon. Barney Frank.........   275


                        H.R. 2575--THE SECONDARY
                      MORTGAGE MARKET ENTERPRISES
                       REGULATORY IMPROVEMENT ACT

                              ----------                              


                      Thursday, September 25, 2003

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:10 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Bachus, 
Castle, Royce, Lucas of Oklahoma, Ney, Kelly, Paul, Gillmor, 
Ryun, Ose, Green, Shays, Shadegg, Hart, Tiberi, Kennedy, 
Feeney, Hensarling, Garrett, Murphy, Brown-Waite, Barrett, 
Harris, Renzi, Frank, Kanjorski, Waters, Maloney, Carson, 
Sherman, Meeks, Lee, Inslee, Moore, Gonzalez, Lucas of 
Kentucky, Clay, Israel, Baca, Matheson, Miller of North 
Carolina, Scott, and Davis.
    The Chairman. [Presiding.] The committee will come to 
order. Today the Financial Services Committee will hear from 
the regulators, the regulated, and outside parties interested 
in the oversight of the housing government-sponsored 
enterprises.
    Two weeks ago, Secretaries Snow and Martinez came to the 
committee with the Administration's proposal to improve 
regulatory oversight for the GSEs. They proposed developing a 
world-class regulator with the tools to rigorously supervise 
the activities of these highly complex financial institutions. 
The Secretaries called for the regulator to be housed in the 
Department of the Treasury as an individual office, similar to 
that of the Office of the Comptroller of the Currency.
    Additionally the proposal called for the Department of 
Housing and Urban Development to retain its role as regulator 
of the GSEs' mission and to ensure that the agencies meet their 
affordable housing goals.
    HUD's expertise in this area is critical. Under the 
Administration's proposal the Department would receive 
additional powers to enforce compliance with the housing goals.
    There is a broad agreement that the current regulatory 
structure for the GSEs is not operating as effectively as it 
should. The Office of Federal Housing Enterprise Oversight is 
underfunded, understaffed and unable to fully oversee the 
operations of these sophisticated enterprises.
    This was reflected in the surprise management 
reorganization by Freddie Mac and by Wall Street reports 
stating that GSE oversight is viewed with skepticism because 
OFHEO is largely seen as a weak regulator.
    A strengthened regulator will send a signal to the markets 
that these entities have solid management and are engaging in 
safe and sound activities. Confidence will be restored in the 
GSEs and they will be able to get back to their important work 
of expanding home ownership opportunities without the 
distractions that have been plaguing them over the past several 
months.
    Fannie Mae and Freddie Mac have done a good job of 
promoting home ownership and providing liquidity to the 
secondary mortgage market. These GSEs have quickly grown into 
large financial institutions that have a major impact on the 
housing market and the domestic economy. We must ensure that 
they have competent and thorough oversight, while making 
certain that any action we take does not have a negative impact 
on access to housing.
    I am encouraged by the letters and statements of support 
the committee received following the last hearing on GSE 
regulatory reform and I hope today serves as an opportunity for 
members to learn more about the need for changes to the GSE 
regulatory structure and how that can be accomplished.
    I would like to thank our Capital Markets Subcommittee 
Chairman Richard Baker for his years of work to strengthen the 
regulatory structure of the GSEs. His expertise on this issue 
serves our committee well. His numerous hearings, studies and 
bills provide our committee with an informed background on 
which to move forward.
    I welcome the witnesses and I look forward to their 
testimony.
    And I now recognize the gentleman from Massachusetts, the 
ranking member, Mr. Frank.
    [The prepared statement of Hon. Michael G. Oxley can be 
found on page 106 in the appendix.]
    Mr. Frank. I think this is a very important hearing. And I 
appreciate the Chairman's willingness to have it under the 
auspices of the full committee.
    I joined this committee in 1981 because I am interested in 
housing. And I guess I wouldn't want to boast about my 
accomplishments, because the situation regarding housing, 
particularly people who are of moderate and low income, has 
gotten worse during my tenure. I won't accept the blame, but I 
clearly haven't done a great deal of good.
    And it makes it all the more important that we use every 
tool that we do have to try improve the housing stock. And 
Fannie Mae and Freddie Mac are two of the very important tools 
that we have.
    And there are people I know who are critical of the 
arrangements that we have. I, frankly, welcome the fact that we 
have in Fannie Mae and Freddie Mac a means of bringing down 
housing costs that doesn't put a hit on the federal budget.
    Essentially, there are people in the country who are 
prepared to lend money to Fannie Mae and Freddie Mac at less 
interest rates than they might get elsewhere. I thank those 
people for doing that. I must tell them that I hope they are 
not doing that on the assumption that if things go bad, I or my 
colleagues will bail them out. We will not.
    On the other hand, I think it is clear that Fannie Mae and 
Freddie Mac are sufficiently secure so they are in no great 
danger. And I was glad to have Secretary Snow say when he 
testified that this is not something we are doing in response 
to a crisis. For once, Congress is getting out ahead of a 
problem. This is not the situation where, like the editorial 
writers, we come down from the hills after the battle is over 
and shoot the wounded. In this case, we are taking some 
anticipatory steps.
    I don't think we face a crisis; I don't think that we have 
an impending disaster. We have a chance to improve regulation 
of two entities that I think are on the whole working well.
    I have a particular concern. I know the ranking member of 
the Capital Markets Subcommittee has another concern about the 
independence and how well it will be able to function, and I 
share his views and will be working with him on that.
    My primary interest--and I know I share this with others on 
this committee who care a lot about housing--is to make sure 
that nothing is done in this reorganization that weakens the 
ability, indeed the obligation of Fannie Mae and Freddie Mac to 
help us with our housing problem.
    Now, housing is an interesting part of our economy. The 
argument that prosperity in general deals favorably with a lot 
of social problems has a lot of truth to it. By the end of the 
1990s, the wages of low-income people had gone up. A number of 
things that we want to see happen happened from prosperity in 
general, but not in housing.
    Paradoxically, because of the nature of the supply-demand 
relationship with housing, because of the kinks in the pipeline 
that negatively affect the supply of housing, the very 
prosperity of the 1990s that was so welcome for most of us 
exacerbated the housing problem for many people, in particular 
geographic areas and for people in particular economic 
situations.
    So it is all the more important that we muster the maximum 
resources to protect those people and to maximize the leverage.
    So when you move the regulation to Treasury, if that is 
done, and you leave housing with HUD, I am skeptical that, 
absent anything else, that is going to sufficiently protect 
housing.
    Now, of course there are differences, I would agree. In the 
current Administration it might make not much difference 
whether it is in HUD or Treasury or if it were at the Nuclear 
Regulatory Commission, for all the attention we have gotten to 
housing from HUD. But we are not legislating only for the next 
year and a half, we are legislating for the future.
    So I intend to be pressing to make sure that if a transfer 
goes through--and there are other questions to be addressed, 
and the ranking member on Capital Markets will be addressing 
some of them--that the housing function is not only protected, 
but strengthened. I want to increase the leverage we have.
    Fannie Mae and Freddie Mac do very good work, and they are 
not endangering the fiscal health of this country. But they do 
derive benefits from the current set of legal arrangements.
    I am fully supportive of maintaining that set of legal 
arrangements as long as in return we get not just help for the 
housing market in general, which is important, and lowering 
housing costs in general, as they do, is a good thing, but also 
a particular use of the great resources that they have and the 
profits that they make to help us with affordable housing which 
the market in and of itself will not do.
    So that is what we, many of us on our side, will be trying 
to do as we proceed, to make sure that whatever the final 
arrangements are, the housing function is not only protected, 
but enhanced, and that both the ability and the obligation of 
these two entities to help us with affordable housing is 
strengthened.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from Louisiana, Mr. Baker.
    Mr. Baker. Thank you, Mr. Chairman. I want to again commend 
you for your continuing leadership role in addressing this 
issue, which is really very vital not only to taxpayers, but 
homeowners alike, and prospective homeowners.
    This is not an issue which has really convenient answers, 
but it is essential for this committee, and I appreciate the 
full committee providing the leadership to get us to 
resolution.
    Over the years the committee has made various inquiries in 
this effort, from probing the enterprises to determine the 
adequacy of their efforts in meeting important housing goals, 
as the ranking member has indicated his interest, to express 
concerns relative to their overall regulatory oversight.
    The questions have not been limited just to a couple of 
obvious issues. Over the years, questions concerning mortgage-
backed securities, leverage ratios, duration gap, bank 
investment concentration of GSE securities and a lot of other 
unique issues have been before the committee.
    I am, frankly, quite ready, in fact anxious to turn over 
the examination of many of these questions to a fully funded, 
properly constructed, independent regulator, full of 
professionals able to give analytical examination and 
appropriate answers to these myriad questions.
    It is, frankly, not business that members of Congress 
should routinely find themselves engaged, and I am sure many of 
my colleagues will enthusiastically agree with that 
perspective.
    I also look forward to eliminating, frankly, the political 
risk that now exists with regard to threatening changes to the 
GSE charter, almost as much as I look forward to making 
absolutely sure that the taxpayers will never be called on to 
pick up the tab for the failure of the system.
    Others may suggest radical new capital regimes, perhaps 
unreasonable constraints on new product approval, or attacks on 
the basic structure of the charter. I do not intend and will 
not go there.
    Responsible regulatory oversight is the goal, and the 
closure that results from this effort will be beneficial, in my 
judgment, to all concerned.
    I do think it appropriate to make a clarifying statement 
today concerning my opinion of the work of Mr. Falcon and his 
regulatory agency.
    I have certainly expressed frustration at times with the 
pace with which action has been taken, and on some occasions I 
have had disagreements with recommended actions.
    But there is one clear observation I want to put on the 
record, on behalf of all those employees who have given their 
best effort over the years, and that is, you have made 
considerable effort, with limited resources and your 
constrained authority which you have been given to discharge 
your responsibilities in a professional manner.
    In fact, Mr. Falcon, your testimony today is one of the 
best statements by anyone as to the direction that this 
Congress should take in providing adequacy of regulatory 
oversight. It is evidence of your leadership and your 
willingness to take a difficult stand and give professional 
counsel to the best of your ability. I commend you.
    As to the current task, I am very pleased to have received 
excellent recommendations for the modification of H.R. 2575 
from the Secretary of the Treasury. All of those 
recommendations are suggestions which we have previously 
considered, have previously agreed, and do now fully support.
    In fact, there are few modifications required to H.R. 2575 
to make the provisions wholly consistent with Treasury 
recommendations.
    As the Secretary has stated, Fannie and Freddie are world 
class financial organizations, and they require a world class 
regulatory structure, which is independently funded, with all 
appropriate authority, and the ability to make professional 
decisions absent political interference.
    That has been, and remains, my legislative goal. It is also 
evident that protracted discussion of these concerns really has 
had no adverse effect on home ownership opportunities.
    For those who continue to object to any structural change 
in regulatory oversight, I suggest just taking a deep breath. 
What we have enjoyed and continue to enjoy, the lowest mortgage 
interest rates in our country's history. I suggest that Alan 
Greenspan and his effect is more powerful than any action this 
Congress or this committee might consider.
    In fact, this effort is only to ensure that the secondary 
mortgage market has stability, not to place constraints that 
will in any way adversely affect any individual's ability to 
achieve the dream of home ownership.
    Further, it is certainly appropriate to afford opportunity 
to all stakeholders in this process to give their perspective 
on this important decision, but it should be clear to all 
concerned that if we are to construct an independent regulatory 
structure, the Congress should make the final policy decision 
in a manner which is independent from any single business 
perspective.
    The enterprises, after all, are creations of the Congress, 
created to meet the needs of all who seek the opportunity of 
home ownership. We must balance that requirement with the 
responsibility of limiting risk to the taxpayer. That is, and 
should remain, the policy decision that only the Congress 
should make.
    Regardless of the final determinations, Mr. Chairman, of 
the committee with regard to the construction of H.R. 2575, I 
will respect the consensus opinion reached on the myriad of 
issues and fully support the Chairman's effort to achieve this 
reform.
    But is it now time for decisions. We don't need more 
inquiries, any more hearings. We have asked all the questions, 
and frankly heard all the various answers. It is now simply 
time for decisions.
    I look forward to the completion of this work, and, Mr. 
Chairman, with your continuing strong leadership, consideration 
by the full House of this measure before the year is concluded.
    I thank the chair.
    The Chairman. The gentleman's time is expired.
    The gentleman from Pennsylvania, Mr. Kanjorski?
    Mr. Kanjorski. Mr. Chairman, we will hear today from 
numerous witnesses about their views on the need to alter the 
current regulatory system for government-sponsored enterprises. 
I believe it is once again very important to highlight some of 
my current thoughts on these matters.
    As my colleagues already know, I support strong and 
independent GSE regulation. A strong regulator, in my view, 
will protect the continued viability of our capital markets and 
promote confidence in Fannie Mae and Freddie Mac. It will also 
ensure taxpayers against systemic risk and expand housing 
opportunities for all Americans.
    We must, however, tread carefully in developing any 
legislation to modify the GSE regulatory system. The housing 
marketplace is one of the most vibrant sectors in our 
struggling economy and we must ensure that our actions in 
Washington will not lead to unintended consequences in places 
like Scranton, Baton Rouge, Findlay or Fall River.
    In our last hearing on GSE issues, senior officials within 
the Bush Administration indicated that there was no crisis that 
demanded immediate attention of the Congress. Consequently, 
instead of rushing to judgment, we ought to move judiciously 
and objectively in these matters to make sure that we properly 
construct an appropriate regulatory system.
    In other words, the obligation to create an effective 
regulatory system should guide the timing of our deliberations 
instead of meeting some arbitrary deadline for taking action.
    In developing any enhanced GSE regulatory system, I further 
believe that we should perform deliberate surgery. We should 
therefore abstain from considering radical proposals that would 
fundamentally change the ways in which the GSEs operate and the 
charters of the GSEs.
    We must also ensure that the GSEs continue to achieve their 
statutory obligation of advancing affordable housing 
opportunities for low-and middle-income families.
    As you know, Mr. Chairman, at the start of our two most 
recent hearings on GSEs, I have outlined five principles to 
guide our consideration of GSE regulatory reform legislation. 
Today I feel it is very important to expand my previous 
comments on one of these principles, regulatory autonomy.
    In recent weeks, I have participated in numerous meetings 
with many experts on GSE matters.
    The majority of these individuals have counseled me that in 
order to maintain credibility and be effective, a strong GSE 
regulator must have genuine independence from the political 
system.
    In their prepared statements, many of today's witnesses 
also recognize the importance of and need for regulatory 
autonomy. Accordingly, they will call upon us to adopt a system 
in which the GSE regulatory reform bill can proceed in a proper 
and orderly manner.
    Additionally, several others who will not testify at this 
hearing have noted the importance of statutorily protecting any 
new GSE regulator from improper political influence.
    For example, the Independent Community Bankers Association 
has strongly urged us to construct legislation containing 
appropriate firewalls and independence between any new safety 
and soundness regulator for Fannie Mae and Freddie Mac and the 
Treasury Department's politically appointed policymakers. We 
should heed their sensible advice.
    The National Association of Realtors has also recommended 
that any GSE regulator within the Treasury Department should 
have necessary and sufficient firewalls to ensure its political 
and operating independence, comparable to those that presently 
exist for the Office of the Comptroller of the Currency and the 
Office of Thrift Supervision.
    I wholeheartedly agree. The OCC and the OTS models provide 
us with an effective framework for constructing a new GSE 
safety and soundness regulator.
    Specifically, this new agency should have the authority to 
submit testimony, recommendations and reports to the Congress 
without the prior review or approval of the Treasury Secretary.
    It should further have the ability to issue rules and 
regulations without the review and approval of the Secretary.
    Additionally, it should have the power to initiate and 
complete supervisory and enforcement actions without 
intervention by the Secretary. It should also have independent 
litigation authority.
    Finally, we should prohibit the Secretary from merging the 
responsibilities of this office with any other regulator.
    In closing, Mr. Chairman, I commend you for your leadership 
in these matters. I look forward to continuing to work with you 
to develop a balanced and bipartisan plan of action for 
reforming GSE safety and soundness regulation, ensuring the 
independence of the new regulator and preserving the affordable 
housing mission of Fannie Mae and Freddie Mac.
    I yield back.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 117 in the appendix.]
    The Chairman. The gentleman yields back.
    The gentleman from California, Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman, and thank you for 
holding this hearing. And I want to commend you, I want to 
commend Chairman Baker certainly, as well, for your leadership.
    And I look forward to hearing the testimony of our 
witnesses today. Especially I look forward to welcoming a 
fellow Californian, Mr. Dean Schultz, who is with us, and he is 
the President of the Home Loan Bank of San Francisco.
    This committee, in my view, must include the Federal Home 
Loan Bank system in any legislation that would create a new 
regulatory body for housing government-sponsored enterprises.
    I think that today I would like to once again raise my own 
concerns with the Office of Federal Housing Enterprise 
Oversight and with the Federal Housing Finance Board.
    The arguments to include the Federal Home Loan Banks in a 
better, stronger regulatory framework are consistent with the 
same arguments to include Fannie Mae and Freddie Mac. The 
Federal Home Loan Banks have debt outstanding and a derivatives 
portfolio comparable in size to both that of Fannie Mae and 
Freddie Mac.
    Additionally, the Federal Home Loan Banks are changing the 
risk profile of the system through their rapidly growing 
mortgage assets.
    The Finance Board has neither the depth nor the experience 
to oversee this risk. All three GSEs need to hedge their 
portfolios against movement of interest rates. And for this 
reason, Chairman Greenspan and Secretary Snow both make a 
compelling public-policy case to create one regulator for all 
three GSEs.
    I believe that there is a political consensus building to 
act on the Federal Home Loan Banks. However, at the end of the 
day, if this committee must choose between sound public policy 
on one hand and a unanimous political consensus on the other, 
the committee here should pick good public policy.
    In my view, the benefits of better regulation would accrue 
not only to the taxpayer and to the financial system at large, 
but it is also going to accrue to Fannie Mae and Freddie Mac 
and to the Federal Home Loan Banks. And the reason that is the 
case is because, not only is there going to be better 
regulation, but there is going to be a lower cost of capital 
for those institutions.
    The regulator must see the whole scope of risks in GSE 
housing finance to perform its duties well, including, if we go 
forward and we include the Federal Home Loan Banks, this is 
going to allow Congress to construct the proper foundation for 
this oversight.
    So I look forward to working with my colleagues from both 
sides of the aisle to create legislation that includes all 
three GSEs. And that legislation should adhere to a few basic 
principles.
    The regulator should be independent, like the OCC and the 
OTS. The regulator should be independently funded, outside of 
the congressional appropriations process. The regulator should 
recognize distinctions in the business models between Fannie 
Mae and Freddie Mac and the Federal Home Loan Banks. And with 
the exception of affordable housing goals, with that exception, 
mission regulation should move to the new regulator.
    And I thank you again for your leadership, Mr. Chairman.
    [The prepared statement of Hon. Edward R. Royce can be 
found on page 122 in the appendix.]
    The Chairman. Gentleman yields back.
    Are there further opening statements?
    Gentlelady from California?
    Ms. Waters. Thank you very much, Mr. Chairman. I am pleased 
that we are here today. And I do think this is a very important 
meeting.
    The last time I heard testimony from Fannie Mae and Freddie 
Mac was May 16, 2000. As you know, I was a member of this 
distinguished committee when we enhanced the structure of these 
GSEs in 1992 to assure safety and soundness in particularly 
their housing mission.
    However, I have sat through nearly a dozen hearings where, 
frankly, we were trying to fix something that wasn't broke. 
Housing is the economic engine of our economy, and in no 
community does this engine need to work more than in mine. With 
last week's hurricane and the drain on the economy from the war 
in Iraq, we should do no harm to these GSEs. We should be 
enhancing regulation, not making fundamental change.
    Mr. Chairman, we do not have a crisis at Freddie Mac, and 
in particular at Fannie Mae, under the outstanding leadership 
of Mr. Frank Raines. Everything in the 1992 act has worked just 
fine. In fact, the GSEs have exceeded their housing goals.
    What we need to do today is to focus on the regulator, and 
this must be done in a manner so as not to impede their 
affordable housing mission, a mission that has seen innovation 
flourish from desktop underwriting to 100 percent loans.
    We must be mindful that capital allows these GSEs to 
perform their mission. Nothing in the concerns at Freddie Mae 
had to do with their capital.
    In this regard, I am pleased that Secretary Snow has 
communicated that Treasury has no intent to change the GSE's 
minimum capital or risk-based capital. Their risk-based capital 
requirements are subject to a decade-long, and I quote, 
``nuclear winter or deeply adverse credit and interest rate 
environment.''
    These GSEs have more than adequate capital for the business 
they are in: providing affordable housing. As I mentioned, we 
should not be making radical or fundamental change.
    I also have several concerns, which I raised at last week's 
hearing, and I need to further set the record straight.
    First, these GSEs lead, not lag the primary market in 
funding mortgage loans for low-income and minority home buyers. 
The goals we put in place in 1992 work.
    In 2002 alone, Fannie Mae provided $279 billion in credit 
serving low-and moderate-income households.
    Fannie Mae's $136.2 billion investment in mortgages to 
minority families exceed that of any private financial services 
institution--and may I say particularly Wells Fargo and their 
other competitors, who thrive in subprime and predatory 
lending--and even greatly exceeded the FHA's $46.4 billion in 
minority loan originations.
    Moreover, since the inception of goals from 1993 to 2002, 
loans to African-Americans increased 219 percent and loans to 
Hispanics increased 244 percent, while loans to non-minorities 
increased 62 percent.
    Additionally, in 2001, 43.1 percent of Fannie Mae's single-
family business served low-and moderate-income borrowers 
compared to 42 percent for the conventional conforming market 
as described by the HMDA data. A total of 23 percent of Fannie 
Mae's business served minority home buyers, compared to 21.3 
percent for the conventional conforming market.
    Mr. Chairman and members, the GSEs are working. That is why 
I oppose the transfer of program approval to Treasury and 
expansions into new activities by either Treasury or HUD. I am 
opposed to a new bureaucracy at HUD to track sub-goals. We 
should focus on those banks, many of them competitors of these 
GSEs, who avoid CRA and practice predatory lending.
    In addition, less than 17 percent of OPO's budget was used 
for examinations. Reallocations of funds, not a new and 
expensive bureaucracy, is what is needed.
    I also oppose the tinkering with the GSEs' status and 
indicia of GSEs' status. Leave the Presidential appointment of 
directors alone. Don't rattle the domestic and international 
markets with this tinkering.
    Mr. Chairman, let me just close by saying, it is almost 
unfair to the regulatory agency at this point to simply 
criticize them for not exercising the kind of oversight that is 
now being concluded that they should be exercising without a 
real examination of their resources and their power and all 
that should go along with any regulatory agency.
    If there is anything to fix or improve, it is the 
regulatory agency.
    And again, I suppose I take a position that is somewhat 
different from some of my colleagues. I am absolutely, 
unequivocally opposed to the transfer to Treasury and the 
expansion into new activities by either Treasury or HUD.
    I yield back the balance of my time.
    The Chairman. Gentlelady yields back.
    Are there further opening statements?
    The gentleman from Ohio, Mr. Ney?
    Mr. Ney. Thank you, Mr. Chairman. I think we all can say 
that we appreciate your holding this hearing. It is important 
we proceed cautiously, but expeditiously and carefully on the 
issues of providing a new regulator for GSEs, and you have done 
that.
    I want to thank our many witnesses who will be here today, 
the current panel and also upcoming panel. David Hehman, who is 
President and CEO of the Cincinnati Federal Home Loan Bank will 
be here today.
    As I mentioned, the hearing we held a couple weeks ago, as 
Chairman of the Housing Opportunities Subcommittee, I have a 
keen interest in the strength of our nation's housing market.
    GSE regulation is an incredibly important issue for all 
Americans. One of the only things that held this economy 
together as we all know in the last two years was housing and 
automobiles. Right now, it is housing as an important part of 
the recovery.
    The United States mortgage and credit markets are the envy 
of the world. The mortgage market has singlehandedly kept the 
economy afloat during the recent difficult economic times, and 
housing has proven to be the greatest single generator of 
wealth in our nation.
    As our last hearing demonstrated, a consensus has begun to 
emerge that it is time to create a new safety and soundness 
regulator for Fannie Mae and Freddie Mac at the Treasury 
Department. With the important role the GSEs play in the 
capital markets and the possible risks they could pose to the 
financial system, reconstituting their safety and soundness 
regulator at Treasury is a prudent step at this time.
    Such a move would send an important signal that we 
understand the importance of the GSEs and the secondary 
mortgage markets in maintaining a stable economy and providing 
affordable housing for all Americans.
    While there is a consensus regarding the safety and 
soundness regulator, I am anxious to hear from our many 
witnesses today on what they believe should be done with the 
HUD's oversight responsibility for the housing missions and 
enterprises, including approval authority for any new program 
and enforcement compliance with affordable housing goals.
    These issues have received a significant amount of 
attention since the hearing a few weeks ago, and I look forward 
to asking some specific questions about them.
    I would also like to make one personal observation on the 
regulation of GSEs. I believe it is important in any 
legislation we may consider to allow the housing GSEs to have 
sufficient flexibility to adapt to a changing mortgage market.
    The liquidity that Fannie and Freddie provide to the market 
should not be compromised by unnecessary government regulation.
    As I said before, I believe there are several important 
components that have been integral to providing enhanced 
regulation for GSEs while not impeding their ability to support 
affordable housing in America.
    For example, I think it is imperative for HUD to continue 
to have an important role as it relates to the mission, charter 
and affordable housing goals of Fannie Mae and Freddie Mac. I 
have no doubt that the Treasury Department is unparalleled in 
its ability to manage safety and soundness for these 
corporations. However, Congress has charged HUD with the job of 
supervising affordable and minority housing in our country.
    I am interested to hear what our witnesses think should be 
done regarding the capital requirements for Freddie Mac and 
Fannie Mae, if anything at all. Personally, I believe that the 
requirements Congress had mandated for GSEs have done a good 
job of setting a strong safety and soundness standard.
    Likewise, I believe that while we must give the regulators 
the authority they need to keep the risk-based capital 
regulation relevant to the changing marketplace, we have to 
also allow the newly required risk-based capital requirements 
to take hold before we begin questioning it.
    I know that there are critics of OFHEO risk-based capital 
regulation. However, it has been in place for less than a year, 
and we should allow a decent amount of time to evaluate its 
effects before we begin to dismantle it.
    Finally, I want to make it clear that I believe the 
Department of Housing and Urban Development must maintain its 
role in leadership in promoting housing. This agency has an 
important role in ensuring our nation is focused on providing 
decent and affordable housing for all Americans. We have to 
respect that mission.
    I also want to say hello and welcome to Mr. Falcon today 
for the job he has been undertaking here.
    Again, Mr. Chairman, I thank you for holding this hearing 
and our witnesses for taking the time to be here. I look 
forward to the hearing. Thank you.
    The Chairman. The gentleman yields back.
    Are there further opening statements?
    The gentleman from California, Mr. Baca seeks recognition?
    Mr. Baca. Thank you very much, Mr. Chairman.
    First of all, I would like to commend you for having this 
important hearing this morning.
    Mr. Chairman, as we move forward on deliberation actions on 
the issues of GSE regulations I want to underscore what I heard 
many of my colleagues say that at the last hearing that is that 
we would oppose any changes in mission, charter or status of 
governmental-sponsored enterprises.
    As our ranking member said at the last hearing, there is no 
crisis regarding the GSEs. We have two companies that are 
remarkably effective in the mission of providing affordable 
mortgage financing, to move more low-income families into home 
owning.
    Fannie Mae plays an essential role in helping to finance 
affordable housing throughout the United States. One reason 
Fannie Mae has been successful is because the current status 
encourages them to be innovative, I state, be innovative, to 
introduce new products and to partner with other institutions 
to be proactive in reaching out to low-income families, I 
state, low-income families unembedded with corporate culture.
    When you change this mission, the status or charter, you 
risk losing the focus, intensity and drive that bring on the 
challenge of providing, and I state, on providing the challenge 
of home ownership opportunities to low-income families.
    Regarding the GSEs, safety and soundness is important, but 
whatever this committee does, we should not interfere with GSEs 
ability to innovate, to meet the needs of low-income families 
in underserved areas, and I state, underserved areas throughout 
the United States, such as my area, where the majority of the 
growth is in the Inland Empire.
    GSE must have the flexibility and the products to develop 
and fulfill the responsibility of their congressional charter 
and housing mission.
    Thank you again, Mr. Chairman, for having this hearing. I 
look forward to hearing the witnesses.
    The Chairman. The gentleman yields back.
    Are there further opening statements?
    Having none, we now turn to our first distinguished panel, 
the Honorable Armando Falcon, Jr., Director of Federal Housing 
Enterprise Oversight; the Honorable John T. Korsmo, Chairman, 
Federal Housing Finance Board.
    Gentlemen, welcome to the committee.
    And, Mr. Falcon, we will begin with you.

 STATEMENT OF ARMANDO FALCON JR., DIRECTOR, OFFICE OF FEDERAL 
                  HOUSING ENTERPRISE OVERSIGHT

    Mr. Falcon. Thank you, Mr. Chairman.
    Chairman Oxley, Ranking Member Frank and members of the 
committee, thank you for inviting me to appear before you 
today. I am pleased to provide my views on improvements that 
can and should be made to the regulatory oversight of Fannie 
Mae and Freddie Mac.
    My views are my own and are not necessarily those of the 
President or the Secretary of Housing and Urban Development.
    I would like to begin by stating up front that I support 
legislation to strengthen the supervision of Fannie Mae and 
Freddie Mac. Upon taking office as Director of OFHEO in October 
of 1999, I quickly realized that the agency's long-term success 
was jeopardized by inadequate resources, a constraining funding 
mechanism and the lack of powers equal to those of other 
regulators.
    Over the past four years, I have been a consistent advocate 
of legislation designed to address those shortcomings. And so I 
was encouraged by the Administration's comprehensive proposal 
and your efforts, Mr. Chairman, to move forward.
    While I am in general agreement with the well-considered 
proposal that Secretaries Snow and Martinez have presented to 
the committee, I do have a few concerns that I hope can be 
properly addressed.
    I would like to outline my views in the context of five 
guiding principles. They are, one, the regulator should remain 
independent; two, the regulator should be permanently funded 
outside the appropriations process; three, the regulator should 
have powers equal to those of other safety and soundness 
regulators; four, the regulator should have full discretion in 
setting capital standards; and, five, legislation should build 
on progress made.
    Adherence to each of these principles would strengthen 
supervision and the safe and sound operation of the 
enterprises. Our ultimate goal and benchmark should be to 
establish a regulator that is on an equal plane with the Office 
of the Comptroller of the Currency and the Office of Thrift 
Supervision, both of which operate as independent safety and 
soundness regulators within the Treasury Department.
    I would like to elaborate on the five principles.
    First, the regulator should remain independent. The concept 
of an independent regulator to oversee Fannie Mae and Freddie 
Mac was established in the legislative history of the 1992 act 
that created OFHEO.
    The need for regulatory independence was born out of the 
Congress' experience with the savings and loan crisis.
    I had the privilege, Mr. Chairman, of serving as counsel to 
this committee for eight years, this committee's predecessor, 
during that difficult period.
    One of the clear lessons learned was that all safety and 
soundness regulators should be objective, nonpartisan and 
protected from political interference.
    This is especially critical at times when regulators must 
make difficult and sometimes politically unpopular decisions.
    In addition, independent regulation protects Congress' 
ability to receive the regulators' best judgment on regulatory 
matters unfiltered and without delay.
    With billions of dollars of potential taxpayer liability at 
stake, it is in everyone's interest that this important 
safeguard not be weakened.
    Like OFHEO, the Office of Thrift Supervision is another 
useful example of how a new independent regulator should be 
established as part of a departmental organization.
    In 1989, Congress transferred responsibility for thrift 
regulation from the Federal Home Loan Bank Board to the newly 
created Office of Thrift Supervision within the Treasury 
Department. The Office of Thrift Supervision was established as 
a fully independent regulator. It has the same powers and 
unfettered ability to use those powers as the OCC.
    So I believe Congress should ensure that the new regulator 
has full independence.
    Second, the regulator should be permanently funded outside 
the appropriations process. Currently, OFHEO is funded annually 
through the federal budget and appropriations process, even 
though the agency does not utilize any taxpayer funds. OFHEO is 
funded through assessments on the enterprises, but those 
assessments cannot occur until approved by an appropriations 
bill and at a level set by the bill.
    OFHEO is the only safety and soundness regulator funded in 
this limited manner. At a minimum, this serious anomaly should 
be fixed.
    Permanent funding will enable the regulator to fulfill its 
budgetary needs on a more reasonable basis, without the timing 
constraints associated with the annual appropriations process.
    There should be clear authority for the agency to levy 
special assessments or establish a reserve fund as needed to 
meet emergencies. Currently, any additional funds required to 
meet urgent, unexpected needs can be attained only after a 
supplemental appropriation is enacted. This can delay action by 
the agency to resolve problems early, before they threaten the 
safety and soundness of an enterprise.
    At this point let me state, Mr. Chairman, that I appreciate 
that the Administration has sent up a supplemental budget 
request for the agency of $7.5 million, and I ask for the 
committee's support in getting that supplemental appropriation 
enacted.
    Third, the regulator should have powers equal to those of 
other regulators. While OFHEO's regulatory powers are fairly 
comparable to those of other financial safety and soundness 
regulators, certain authorities need to be provided and others 
clarified.
    For example, a safety and soundness regulator should have 
receivership authority, independent litigation authority, 
enhanced hiring authority and the full range of enforcement 
powers provided to financial regulators.
    Also, the law should be revised to provide clearly that the 
regulator is empowered to address misconduct by institution-
affiliated parties and to exercise general supervisory powers.
    I would be happy to provide the committee with a more 
comprehensive package if you so desire.
    Fourth, the regulator should have full discretion in 
setting capital standards. Capital is one of the fundamental 
bulwarks of effective safety and soundness regulation.
    The regulator should have broad discretion to exercise his 
or her best judgment, using all available information through 
the examinations process and otherwise to determine if capital 
adjustments are necessary. Other safety and soundness 
regulators have this discretion.
    Going forward, the agency needs to have the authority to 
modify both minimum and risk-based capital standards. This 
authority would help meet the changing mix of the enterprises 
business, the market environment in which they operate and the 
changing nature of risk measurements themselves.
    As Secretary Snow said in his testimony before this 
committee, broad authority over capital standards and the 
ability to change them as appropriate are of vital importance 
to a credible, world class regulator. I agree.
    Fifth, legislation should build on the progress we have 
made over the last 10 years. Regulating Fannie Mae and Freddie 
Mac requires a specialized skill set. The capacity to model the 
cash flows of all the mortgages, debt and other financial 
instruments of the enterprises, a necessity for the stress 
test, is unique among financial institution regulators.
    Expertise in how these two secondary mortgage market 
companies manage mortgage risk, including the broad use of 
sophisticated derivative and callable debt, is vital for 
effective regulation.
    In addition, an understanding of how the enterprises are 
affected by the markets in which they operate is extremely 
important.
    Over the past 10 years, OFHEO has developed the specialized 
expertise, from our examiners and financial analysts to our 
researchers and capital analysts, that is necessary to 
supervise these two unique companies.
    The cost in terms of lost regulatory capacity spent while 
trying to rebuild that infrastructure would be substantial.
    That is why I recommend that if a new regulator is 
established in the Treasury Department, OFHEO's personnel, 
regulations and administrative infrastructure should be 
transferred intact to the new agency. It would be highly 
counterproductive to do otherwise.
    There are a couple of other matters I would like to briefly 
discuss.
    First, I agree with Secretary Snow that the Presidentially 
appointed board positions should be discontinued. This is not a 
reflection of current or former Presidentially appointed 
directors. Rather, I think corporate governance would be 
enhanced if the shareholders were allowed to select all members 
of the board.
    Also, I support granting authority to the safety and 
soundness regulator to determine whether activities of an 
enterprise are consistent with its charter. This would mean 
that a single regulator would have the ability to review all of 
the enterprises' activities, new and existing.
    This would consolidate the supervision of the enterprises 
in a manner consistent with the authorities of other regulators 
once again.
    I appreciate the concern expressed about the primacy of the 
enterprises' housing mission, if and when charter compliance 
responsibility is shifted. The goal, in fact, of enforcing 
charter compliance is to ensure that the enterprises remain 
properly focused on their housing mission and not stray into 
extraneous ventures.
    Consistent with that goal, I think mechanisms could be 
instituted to ensure that the new regulator actively solicits 
and considers all views, including housing advocates, when 
exercising this authority.
    The importance of their housing mission is actually why the 
enterprises exist. Strengthening their safety and soundness 
regulations supports that mission by ensuring that they are 
strong enough to provide the financial services that make that 
mission a reality.
    Mr. Chairman, that concludes my testimony. I look forward 
to working with the committee as this important legislation 
moves forward. I look forward to answering any questions that 
you may have.
    [The prepared statement of Hon. Armando Falcon Jr. can be 
found on page 145 in the appendix.]
    The Chairman. Thank you, Mr. Falcon,
    Mr. Korsmo?

STATEMENT OF JOHN T. KORSMO, CHAIRMAN, FEDERAL HOUSING FINANCE 
                             BOARD

    Mr. Korsmo. Thank you, Mr. Chairman.
    Chairman Oxley, Ranking Member Frank and distinguished 
members of the committee, thank you for inviting me to be part 
of this discussion today.
    I have submitted more extensive written testimony to the 
committee and ask that it be included in the record.
    The Chairman. Without objection, all of the statements will 
be made part of the record, including the members'.
    Mr. Korsmo. Thank you, Mr. Chairman,.
    Over the past year and a half, my colleagues and I at the 
Federal Housing Finance Board have undertaken a disciplined, 
continuing and I believe successful effort to improve the 
Finance Board's supervision and regulation of the Federal Home 
Loan Banks.
    A 1998 GAO study found that nine years after its creation, 
the Federal Housing Finance Board remained inadequately focused 
on safety and soundness and too closely involved in operating 
the Federal Home Loan Banks.
    When I became chairman in December 2001, my colleagues and 
I determined these problems persisted and required correction 
for the Finance Board to effectively oversee the banks for 
safety and soundness and achievement of their housing finance 
mission.
    I think one quick example demonstrates my point. At the 
time of my appointment, the Finance Board had only eight bank 
examiners on staff to supervise a dozen financial institutions 
with at the time more than $700 billion in assets, more than 
$30 billion in capital and some $650 billion in outstanding 
debt.
    At the same time, the agency also had eight people in its 
Office of Public Affairs.
    The relative allocation of resources simply did not meet 
the agency's statutory mandates.
    Addressing these problems began with the recruitment of new 
leadership for the agency's Office of Supervision. After a 
national search, a new Director and a new Deputy Director of 
Supervision were hired who between them have 40 years of 
Federal Bank regulatory experience.
    My Finance Board colleagues and I increased the resources 
available for supervision, expanding the examination staff to 
17 full-time examiners today. Our goal is to have 24 in place 
by the end of this calendar year and 30 by October 2004.
    We are now conducting more thorough examination, focusing 
on the bank's risk assessment processes, internal control 
systems and systems of corporate governance, and we are 
communicating the results of those examinations more 
effectively to the banks.
    Our examinations now recognize that banking, including AAA-
rated GSE banking, is a business of managing risks. And the 
responsibility of bank supervisors is to ensure the 
institutions they regulate understand those risks and monitor 
and control them through prudent risk-management practices and 
effective board governance.
    Board governance was recently the subject of the first of a 
series of system-wide supervisory reviews. This increased 
emphasis on bank board governance emerges from the Gramm-Leach-
Bliley mandate that the Finance Board's appropriate role is not 
to operate the Federal Home Loan Banks, not to cheerlead for 
them, but rather to function as a true, arms-length regulator.
    These staffing and policy improvements, as well as an 
ongoing initiative to enhance the bank's quarterly and annual 
financial disclosures and a renewed emphasis on building the 
retained earnings of the banks, have been guided by core 
principles of effective supervision.
    Fortunately, the prerogatives and authority afforded the 
Finance Board by the Federal Home Loan Bank Act have permitted 
us to put these principles into practice.
    They include, first, a GSE safety and soundness and mission 
regulator should have adequate resources, beginning with 
financial resources, to carry out its responsibilities.
    Second, a GSE regulator should have the flexibility to 
allocate resources appropriately and efficiently to ensure the 
regulated entities operate in a financially safe and sound 
manner.
    Third, a regulator must be able to attract experienced and 
knowledgeable staff, with specialized knowledge of the 
enterprises they supervise who are capable of keeping pace with 
changes in the mortgage, finance and capital markets.
    Fourth, a regulator's authority to carry out its 
responsibilities should be clearly articulated in law and 
regulation. And, finally, a GSE regulator should be clearly 
independent of both undue political influence and the entities 
it regulates.
    Finance Board adherence to these principles has produced 
stronger, more comprehensive oversight of the Federal Home Loan 
Banks. I believe the fast progress my Finance Board colleagues 
and I have made in increasing the capacity and sophistication 
of the agency's supervision staff demonstrates the 
effectiveness of the Finance Board's regulatory model.
    Before I close, let me briefly comment on questions raised 
recently concerning cost of funds. I feel obliged to put this 
concern in some context.
    Despite different charters, different ownership and capital 
structures, different business models and different regulators, 
all three housing GSEs raise funds in the agency debt market 
and benefit from the shared advantage of what the market 
perceives is an implied taxpayer guarantee.
    The pricing of agency debt reflects a variety of factors 
that may affect the relative desirability of particular issuers 
at any given moment.
    One factor that will never vary, however, is the Federal 
Housing Finance Board's commitment to the strongest possible 
safety and soundness supervision of the 12 Federal Home Loan 
Banks. On that commitment, the capital markets and this 
committee can rely.
    Mr. Chairman, distinguished members of the committee, thank 
you for allowing me to discuss with you today the Federal 
Housing Finance Board and its efforts to strengthen oversight 
of the Federal Home Loan Banks. I believe the success of these 
efforts demonstrates that the Finance Board is achieving the 
goal of providing effective, efficient and independent 
regulation of the banks.
    I hope our experience can be of value to you as you 
consider H.R. 2575. I am pleased to respond to any questions.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. John T. Korsmo can be found 
on page 182 in the appendix.]
    The Chairman. Thank you, Mr. Korsmo, for your appearance 
today.
    And let me begin some questions.
    The Administration has argued that the Treasury Department 
should have the final say on regulations issued in testimony 
presented by the new regulator. And some claim that this will 
subject the regulator to the political process and possibly 
suppress statements or regulations that could be embarrassing 
to the Treasury.
    On the other hand, others argue that without input from 
Treasury, the new regulator will not be able to utilize the 
depth and breadth of the Department's expertise.
    I would like to hear both of you as regulators, your take 
on both sides of that issue.
    Mr. Falcon?
    Mr. Falcon. Thank you, Mr. Chairman.
    I do believe it is important that the agency, with all the 
expertise that it has, the examination program and all of our 
analysts, be able to promulgate regulations based on what we 
believe is the best public policy for the agency.
    I am not saying necessarily that there would be political 
interference guaranteed with every regulation that we try to 
promulgate, but just the additional delay and the possibility 
for the political interference, I think, makes it better public 
policy that we be allowed to promulgate the regulations without 
the reviewing approval of the Department.
    We do that currently. Our regulations do go through OMB 
review. There is an opportunity of OMB review for any 
department, including the Treasury Department, to have some 
input into the regulations that we do promulgate, and I think 
that provides an adequate means for other input.
    The Chairman. Mr. Korsmo?
    Mr. Korsmo. Mr. Chairman, obviously my experience is a 
little different and limited to what experience I have had at 
the Finance Board. Our statute makes clear that the Finance 
Board acts as a body, and so as chairman I have to be very 
careful to make clear that my comments are only my own.
    But I do have to feel that the independence our statute 
affords us in making comments is significant. Obviously, our 
regulatory process anticipates public comment when we make new 
regulations. The departments of the Administration have not 
been shy, as neither have others in commenting on our 
activities, but I think there is a significant strength to any 
regulator in the independence that we appreciate at the Finance 
Board.
    The Chairman. Let me ask both of you, is there a difference 
between what you mentioned, Mr. Falcon, in terms of 
promulgating regulations, and the Treasury having to sign off, 
for example, on testimony given here on Capitol Hill?
    Mr. Falcon. Let me use today's testimony as an example, Mr. 
Chairman. I disagree with the Secretary of the Treasury's 
testimony that he gave you recently.
    Whether or not I would be able to say that in the choice of 
words that I wanted to use might not be guaranteed if I had to 
get my testimony cleared by the Treasury Department. But I am 
able to come here today and give you my best judgment about 
what should be done and the status of anything with regards to 
companies that we regulate. That wouldn't be absolutely 
guaranteed if it had to be reviewed and approved by the 
Secretary of the Treasury.
    The Chairman. Mr. Korsmo?
    Mr. Korsmo. Again, Mr. Chairman, my experience is limited 
to that at the Finance Board, and I would say again that 
independence is a paramount feature of our experience, and I 
think the latitude, the flexibility it affords can't be 
overstated.
    The Chairman. Mr. Falcon, as you know, Freddie Mac 
announced this morning that they will be unable to meet the 
deadline on their restatement. Could you share with us the 
OFHEO's involvement with the restatement process and what 
impact do you expect that this delay will have on Freddie's 
ability to comply with this voluntary agreement to register 
with the SEC?
    Mr. Falcon. Yes, Mr. Chairman. We have been very involved 
in the restatement process ever since it began when they hired 
the new accountant. That is when Arthur Andersen was relieved 
of their duties by the company.
    The recent development is that there has been a very 
recently uncovered glitch with one of the computer systems that 
produces data pursuant to FAS 140. The company has been keeping 
us informed. We are watching it very closely. It is going to 
result, though, in a delay until November of this year.
    With regards to the registration with the SEC, that will 
not begin to happen until the company is able to produce timely 
quarterly financial statements. The restatement, when it comes 
out in November, will be for quarters leading up to the end of 
2002. They still have work to do to produce financial 
statements for quarters for 2003. We hope that will be done by 
the end of this calendar year.
    Then it will take maybe a quarter or two, into 2004, before 
the quarterly statements for each quarter can be produced in a 
timely manner. It is slowly getting all on track. But until 
they are able to produce a quarter's financial statements in a 
timely manner, they will not be able to register with the SEC. 
So it probably looks like maybe summer or fall of 2004 before 
that can actually take place, Mr. Chairman.
    The Chairman. The chair's time has expired. The gentleman 
from Pennsylvania?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I appreciate both of your initial testimony. I think you 
were frank, and I want to be very clear, particularly you, Mr. 
Falcon, and Mr. Korsmo, any vetting of testimony by an 
independent regulator by Treasury would have an effect on what 
you would initially suggest that you would want to say in 
testimony or potentially could be subject to correction.
    And as I take your testimony, you are indicating you think 
that would be counterproductive. Is that correct?
    Mr. Falcon. Yes, sir.
    Mr. Korsmo. Yes, sir.
    Mr. Kanjorski. And when we use terms, the Secretary used 
them, ``strong,'' ``independent,'' ``world class,'' clearly 
vetting testimony would interfere with the adjective 
``independent.'' Is that correct? I mean, can you be 
independent and have your testimony affected or vetted by a 
department such as Treasury?
    Mr. Falcon. I think ``independence,'' by definition, means 
you have the individual ability to take action and make 
statements without the necessity for review and approval by 
another individual or entity. And for the new regulator to be 
established as a world class regulator that would mean it will 
need all of those powers and independence that are comparable 
to the other financial safety and soundness regulators. This is 
just a vitally important part of it.
    Mr. Kanjorski. Is there anything that you see peculiar with 
the entities that you regulate that are significantly different 
than the banks or the thrifts that are regulated by the two 
other independent regulators that we have evidence of how they 
operate? Is there something unique with Freddie and Fannie that 
you really need the special resources of Treasury before you 
are capable of making judgments as a regulator?
    Mr. Falcon. I think the agency has more expertise than 
exist in any other agency or department in the Federal 
Government with respect to the knowledge of these two companies 
and how they operate, the risks they face and how they manage 
those risks.
    I think having the independence in exercising our best 
judgment with all of that expertise is very important.
    Now, the independence plays another vitally important role 
because another unique aspect of what we do is we regulate only 
two companies, and they are two companies that are of course 
very politically active and very politically savvy. So it is 
important that the regulator be able to take its actions based 
on what it sees as using its best judgment without the 
potential for the companies to exercise their political acumen 
in a way that could undermine safety and soundness regulation.
    Mr. Kanjorski. Mr. Korsmo, do you have the same situation, 
some uniqueness or a lack of uniqueness on what you regulate 
that you need the support and depthful knowledge of Treasury 
before you are capable of performing your functions as a 
regulator?
    Mr. Korsmo. Well, Congressman, as with the instance with 
Mr. Falcon's response, I think the expertise that resides at 
the Finance Board is unparalleled. I think the increased 
capacity and sophistication that we have brought over the last 
two years to our Office of Supervision leaves no doubt that we 
are more capable than any other institution in taking a look at 
and providing oversight to the Federal Home Loan Banks.
    Mr. Kanjorski. Is there any reason, and either of you, that 
over this last several years that you have a need for support 
in creating policy decisions at your respective agencies that 
again you need a grandfather symbol out there or position of 
Treasury to help you out with these very difficult policy 
considerations you are called upon to make?
    Mr. Falcon. I think we have in house all of the expertise 
necessary to make judgments on regulations we might promulgate. 
It is very helpful to have comments through the notice and 
comment process, and we appreciate that and take them under 
consideration. But the expertise necessary to take supervisory 
actions and promulgate regulations, I think does reside within 
the agency.
    The Chairman. Gentleman's time has expired.
    The Chair would indicate to the members that there is a 
vote on the floor, but it would be the Chair's intention to 
keep going. And Ms. Kelly is dutifully going over to vote and 
to come back and Chair while the Chair has a chance to vote. So 
we will continue to go through the questioning.
    And the Chair now recognizes the gentleman from Louisiana, 
Mr. Baker.
    Mr. Baker. Thank the Chairman.
    Mr. Falcon, in your itemization of those issues that are 
important to the new regulatory capacity, number four is full 
discretion of the regulator in setting capital standards. There 
has been some controversy surrounding the provisions in H.R. 
2575, specifically section 114, which gives the regulator 
discretionary authority with regard to minimum capital 
standards.
    The Secretary of the Treasury indicted in his testimony 
that he did not foresee the necessity for nor immediate action 
to increase either the risk-based, nor the minimum capital 
standards.
    Is that a view with which you would concur, based on your 
information today?
    Mr. Falcon. Yes. We have no plans currently and see no need 
currently to raise the capital standards.
    Mr. Baker. And that is a view with which I concur. But that 
is a distinctly different matter from whether the regulator 
should have the authority to adjust capital standards based on 
your review of risk and capital adequacy.
    Have you had an opportunity or are you familiar with 2575 
and that provision of 114 which gives the discretion to the new 
regulatory structure to adjust capital? Have you see that 
provision?
    Mr. Falcon. Yes, I have.
    Mr. Baker. In your view, does that provision require an 
upward adjustment of the minimum capital standard?
    Mr. Falcon. As I read it, I think it simply gives the 
agency the discretion to set capital as it thinks is 
appropriate.
    Mr. Baker. And I concur with that view. I just wanted to 
have your perspective as the regulator with regard to the 
effect of that provision. And I have no intent to pursue a 
provision which would arbitrarily require the upward adjustment 
of capital, but do fully intend to give the regulatory 
structure the authority to adjust minimum and risk-based 
capital as the regulator may deem appropriate, exercising your 
independent authority.
    Secondly, I corresponded with you some time ago relative to 
the severance packages of former officials of Freddie Mac, only 
with regard to the question of the appropriateness of having 
those compensation packages finalized prior to a final 
determination of fact and a finding of accountability with 
regard to the conduct of those officials, making no comment as 
to what should or should not be done, only as to the agency's 
ability to intercede in the finalization of those compensation 
packages.
    I have subsequently received correspondence from one of the 
employee's counsel indicating that the agency did not have the 
authority over the enterprise to either approve or disapprove 
those severance packages.
    As I understand it, you have now corresponded with the 
board of Freddie Mac and indicated that you would like to see 
those employees terminated for cause, which the consequence of 
it would be to effectively terminate those packages.
    Is that a correct summation of where we are?
    Mr. Falcon. Yes.
    Mr. Baker. Is there, therefore, no actual authority for 
your agency today to review compensation packages or severance 
packages prior to their finalization with an employee?
    Mr. Falcon. Well, I think we do have the authority to take 
appropriate action and determine what is the appropriate 
severance package or compensation for the individuals. I 
thought it was important as a matter of good corporate 
governance to set a clear principle that if you engage in 
wrongdoing you will be terminated and won't be allowed to 
resign and keep a large, substantial amount of money.
    With respect to the letter you may have received from one 
individual's counsel, I understand they are representing their 
client's interests, but I am trying to protect the public's 
interest. I believe I have the authority and we will take 
action as we see is necessary.
    Mr. Baker. I only wanted to clarify for the record going 
forward, is there any need in your view while this committee is 
constructing the regulatory authority to make clear that the 
regulator that will be created has clear statutory authority 
and further a responsibility to review these matters.
    And I say it in light of not only the Freddie Mac issue, 
but the unfortunate developments with the New York Exchange in 
the broad context of corporate governance. Particularly where 
it is an enterprise created by the Congress, we have a full 
responsibility, I believe, to assure the taxpayer that we are 
looking at the appropriateness of and have reviewed via the 
regulator the compensation arrangements.
    Am I understanding that you do not believe we need to take 
any further action in regard to that matter to have this 
assurance?
    Mr. Falcon. We do have the authority. However, if you think 
it advisable, it might be appropriate to remove any doubt, so 
you don't have to receive letters such as you did. You may want 
to say something specific in the statute.
    Mr. Baker. Let me suggest, if I may, and I would be happy 
to receive any recommendations you choose to forward, but 
specifically with regard to that item, should you have language 
you would suggest that we might consider I would be 
appreciative to receive it.
    And, Mr. Korsmo, I am sorry to move so quickly, but the 
time on the vote on the floor is moving quickly and I will need 
to step out.
    Not to do this quite so inappropriately, but is there a 
position, affirmatively or negatively, with regard to the bank 
system's participation in the new regulatory structure? I know 
there is division among individual bank districts as to the 
advisability. Has the board or have you reached some 
determination as to what this committee should do?
    Mr. Korsmo. The board has not taken a formal position. I 
think it is safe to say, however, after consultation with my 
colleagues that we are unanimous in our feeling that given the 
progress we have made, and particularly the very different 
charters that exist between Fannie Mae and Freddie Mac and the 
Federal Home Loan Banks, the different ownership structures, 
the different business models, that we believe the progress we 
have made demonstrates that the Finance Board's independence 
should be preserved.
    Mr. Baker. So that is an independently arrived at ``not 
sure, but probably not''?
    Mr. Korsmo. Correct.
    Mr. Baker. I understand.
    Mr. Falcon, there is one other question that has also been 
raised in press reports relative to new product approval 
processes. To my knowledge, in the history of HUD, who has to 
act after the product is in the marketplace, there has not 
been, to my knowledge, a product offering which has been 
revoked by HUD in its capacity as a new products regulator.
    In your testimony, I believe I understood you to say that 
new product authority ought to be more appropriately housed in 
the regulatory structure that also reviews safety and 
soundness. Just to confirm, that is your recommendation to the 
committee?
    Mr. Falcon. I think it would be appropriate to consolidate 
charter compliance authority with the safety and soundness 
regulator. All other safety and soundness regulators have the 
authority to interpret the charters of the entities that they 
regulate.
    Now, as I see it, it is a matter of, as I put it, charter 
compliance. It is not a matter of, for us, new product approval 
authority. Charter compliance would go to every activity of the 
company.
    Because OFHEO as a safety and soundness regulator has 
examiners in the companies every day, because we learn of new 
activities in order to incorporate them into our stress test, 
we could exercise that charter compliance authority without the 
necessity for any formal new product approval process. But I 
think it would be appropriate to consolidate and follow the 
model of the OCC and the OTS.
    Mr. Baker. I really regret my time has expired. After all 
these years, I have got to run. Thank you.
    Mrs. Kelly. I guess it is my turn to ask a few questions.
    So, two weeks ago, the Administration proposal called for 
the increased powers, and we have heard a lot of testimony from 
the Administration about the need for a powerful regulator over 
at Treasury.
    And at our hearing Secretary Martinez testified before the 
committee, and I am quoting him, ``As the President's budget 
noted in February, numerous HUD studies and independent 
analyses have shown that the GSEs have historically lagged the 
primary market instead of leading it with respect to funding 
mortgage loans for low-income and minority home buyers.''
    This question, Mr. Falcon, is for you, because as a 
regulator for Fannie Mae and Freddie Mac, do you believe that 
they could increase their efforts to fund loans for low-income 
and minority home buyers if HUD was given greater authority to 
set the goals and the powers to enforce them?
    Mr. Falcon. Let me say, Congresswoman, that I am fully 
supportive of the enterprise's affordable housing goals and 
their housing mission. I don't have the ability to comment as 
to whether those goals could be higher or not. I will leave 
that to HUD.
    However, I do think, if you support goals, probably you 
would also support some teeth behind those goals. So I think 
the committee should consider whether or not some enforcement 
powers for HUD are appropriate to make sure that, if there was 
any need for some type of action to make sure the goals are 
met, that the authority is there.
    Mrs. Kelly. So tell me how we would do that.
    Mr. Falcon. If you use something comparable to a safety and 
soundness regulator's authority, you might require some type of 
corrective action plan where they would outline exactly how 
they would go about meeting the goals and addressing the 
shortcomings if the goals weren't met.
    Mrs. Kelly. And where would that corrective action be, at 
Treasury or----
    Mr. Falcon. With the housing goals being at HUD, I think it 
would be at HUD.
    Mrs. Kelly. Do you think that this would harm the safety 
and soundness of Fannie Mae and Freddie Mac?
    Mr. Falcon. We do communicate with HUD frequently about the 
housing goals when they go through the process of promulgating 
new goals, and we do offer them input as to whether or not we 
think there would be any safety and soundness concerns raised 
by any increased affordable housing goals. So we do provide 
input to the Department on the safety and soundness 
implications of new goals.
    Mrs. Kelly. I want to go back to the low-income and 
minority home buyers statement by Secretary Martinez. I think 
there is a certain amount of concern on the part of a number of 
members of this committee, including myself, that this mission 
that is a part of what we are trying to do with housing, with 
Freddie Mac and Fannie Mae, I think there is a certain amount 
of concern that there be that mission continued. And I want you 
to address that, if you would.
    Mr. Falcon. Thank you. I absolutely share that view that we 
don't want to do any harm to their ability to fulfill their 
housing mission. I am confident that if the committee decided 
to give the new regulatory agency the authorities that it seeks 
that that wouldn't be inconsistent with their housing mission.
    In fact, a stronger and healthier government-sponsored 
enterprise is more likely to be able to get deeper into 
affordable housing.
    And so I think, rather than it being inconsistent or at 
odds with the housing mission, a strong and fully empowered 
safety and soundness regulator actually helps them further 
their housing goals.
    Mrs. Kelly. I would like both of you to answer what your 
thoughts are on the relationship between balancing strong 
regulation and oversight and encouraging housing goals. Will 
you both answer that?
    Mr. Korsmo. Representative Kelly, obviously the Congress 
has created a quite different model for the Federal Home Loan 
Bank System and how it meets its obligations to promoting 
affordable housing. The banks, of course, set aside 10 percent 
of their net--the greater of 10 percent of their net revenue or 
each bank's pro rata share of $100 million annually for funds 
that go into grants and subsidies for affordable housing 
projects.
    Since 1994, every year that dollar figure has exceeded the 
$100 million minimum. In fact, last year it was in the 
neighborhood of $199 million.
    And I think over the course, since the set-aside program 
was established, the banks have provided something like $1.7 
billion in grants and subsidies for affordable housing 
projects.
    I think that is a reasonable method, frankly, and I can't 
really speak to the housing goals, I am not as familiar with 
how they have been constructed and how they operate. But I 
think the banks should--well, frankly, the banks represent the 
largest single source of affordable housing dollars in the 
country, and I think that all too often that fact isn't 
recognized and the banks should be applauded for the great 
contribution they make to affordable housing.
    Mrs. Kelly. Mr. Falcon, what I am getting at is that there 
are two different entities that are responsible for the tasks, 
and I am trying to figure out how we should appropriately 
coordinate the job that has to be done here to ensure that 
people have the necessary safety and soundness regulations in 
place, but also the mission of HUD is not lost. And if you 
have, either one of you have any suggestion for how you think 
we should do that, I would like to hear that.
    Mr. Falcon. I think what I have suggested in terms of 
consolidating what you call mission, I think more of as charter 
compliance. Someone needs to be responsible for assuring that 
the enterprises always operate within the boundaries of their 
charters.
    Congress gave them a charter with specific 
responsibilities, with specific powers. It is the same for any 
other federally chartered institution. Every other safety and 
soundness regulator has the responsibility of ensuring that the 
entities they regulate operate within the boundaries of the 
power Congress has granted to them.
    And what I am suggesting is more of an issue of charter 
compliance, not prior approval, nothing else.
    If a company wanted to invest in electronic commerce, that 
raises an entirely different issue, I think, than whether or 
not there is an impact on their housing mission. In fact, I 
think the responsibility of charter compliance is to make sure 
that there is no deviation from the housing mission of the 
companies.
    Mrs. Kelly. I want to ask another question. You requested 
$7 million to investigate the management reorganization at 
Freddie Mac. Is this just a question of a lack of funds or are 
there other tools that the OFHEO really needs to fully 
investigate and oversee the GSEs, and what percentage of your 
current budget is actually set aside right now for your 
examination staff?
    Mr. Falcon. On average the percentage of dollars that we 
spend on supervision, examination and supervision, is 
comparable to that of every other regulator.
    We do spend money that is comparable to every other 
regulator when it comes to allocation of dollars to the 
examination program versus the other responsibilities of the 
agency.
    I have heard another comment about a misallocation, that we 
are not spending the right amount of money on exams. I don't 
think that data is accurate. We have looked at this question. 
When we compare the allocation of our agency budget to 
supervision, the examination program, it is comparable to the 
other regulatory agencies.
    So I would want to assure you that we do allocate our 
budget in the proper manner.
    Mrs. Kelly. Thank you very much.
    Mr. Davis?
    Mr. Davis. Thank you, Madam Chairman. One of the few times 
when someone on this row gets to go this early in the 
proceedings.
    Let me try to focus my questions, if I can, on two 
particular areas. The first one relates to the nature of prior 
approval for new activities, which is one of the major parts of 
Mr. Baker's bill, as both of you know.
    Let me ask you--and let me broadly associate myself with 
the comments of the Ranking Member and then Ms. Waters earlier 
to some extent, that in our desire for reform we don't want to 
necessarily over reform; we don't want to necessarily generate 
new problems in the effort to fix problems that we are already 
well aware of.
    Can either of you comment, but particularly, you, Mr. 
Falcon, on whether or not there has been any historical or even 
any anecdotal evidence for that matter that either one of the 
GSEs has ever abused the current scope of activities? Is there 
any historical or anecdotal evidence that under the current 
structure that either Freddie Mac or Fannie have been engaged 
in doing anything that doesn't fit within their charter? How 
are we doing right now under the new activity section?
    Mr. Falcon. I can give you one instance, involving one of 
the companies, several years ago. The companies when they 
purchase high LTV mortgages are required to use one of three 
forms of credit enhancements: one of them is mortgage 
insurance; another is participation insurance; and another I 
believe is repurchase arrangements.
    One of the companies wanted to use a fourth that was 
inconsistent with what the law required, so we stopped the 
company from doing that.
    But on this more general matter, to your question, OFHEO as 
a safety and soundness regulator is in the enterprises day in 
and day out through our examination program.
    Through the examination program and through the need to 
incorporate new activities on a real-time basis into our stress 
test, we learn about new activities in a timely manner. And I 
think if charter compliance was given to the new agency, we 
could exercise that responsibility without the need for any 
formal prior approval, so that there wouldn't be any impact on 
their ability to innovate.
    So it is different from HUD, which doesn't have an 
examination team in the enterprises and doesn't have a risk-
based capital standard. But it is something that the safety and 
soundness regulator could do without the need for a formal 
prior approval mechanism.
    Mr. Davis. Let me raise a question that a number of people 
on this side of the aisle and perhaps on the other side have 
raised, that if we give HUD under this new regime that Mr. 
Baker contemplates, if we give HUD a greater authority to 
oversee or to examine new activities, what is the level of 
transparency behind the decision-making at HUD?
    One of the criticisms is that HUD could potentially, 
depending on a change in regime or a change in the whim of the 
people running the Department, could make the decision that a 
particular kind of program, for whatever reason, was not one 
that HUD wanted to embrace.
    But obviously, given the fact that there are no public 
hearings required around that kind of analysis, given the fact 
that HUD could potentially do what it wanted for whatever 
reason, why would we want to expand their authority to regulate 
new programs unless we at the same time create more 
transparency around the decision-making process.
    Mr. Falcon. I think transparency would be important. I am 
not sure what level of transparency is required right now. But 
the decisions it makes and the basis for those decisions, I am 
not sure that there is a requirement that they be disclosed 
right now.
    But I would encourage transparency. We try to operate as 
fully transparent as possible.
    Mr. Davis. Would you contemplate that there would be any 
circumstance when HUD could reject a new activity, provided the 
activity fit within the charter? The previous example you gave 
me was something that strikes me doesn't fit within the 
charter.
    Let us say that HUD were to make an analysis that an 
activity fits within the GSE charter. Just as a public 
policymaker can you think of any circumstance when they should 
be able to nix an activity at that point or should the charter 
essentially be the standard?
    Mr. Falcon. Well, I think the current standard that HUD 
applies under the statute is not just compliance with the 
charter, but there is also a public interest carve out as well. 
If HUD found that it wasn't in the public interest, even if it 
was permitted by the charter, I think the statute allows them 
to disallow the activity.
    Mr. Davis. So your position would be that if Mr. Baker's 
bill were to be successful and we were to give HUD greater 
authority to regulate new activities, number one there should 
be a high-level of transparency, that would certainly be ideal. 
And number two, that you think that the public interest 
standard should also be incorporated into whatever rationale 
would guide the decision-making process.
    Mr. Falcon. It is another basis by which the regulator 
could disallow a new activity. I am not sure whether or not it 
is advisable to keep it or do away with it, but I am simply 
stating as a matter of fact it is there. It is a question that 
you would need to decide as to whether it is appropriate to 
keep it or not.
    Mr. Davis. Okay. I think that my time has expired, Madam 
Chairman.
    Mrs. Kelly. Thank you, Mr. Davis.
    Mr. Leach?
    Mr. Leach. I want to talk about independence for a second 
from a little different perspective. I am one that strongly 
favors moving regulation to the Treasury. I also believe that 
it should include the Federal Home Loan Banks and that it 
should be independent from the politics of the Executive 
Branch, but it also should be independent from the politics of 
the United States Congress.
    And let me explain what is current law and what is 
following current law and what I believe should be changed. But 
I do not give high hopes that that will occur.
    In current law the regulation of Fannie Mae and Freddie Mac 
are the only institutions in the history of the United States 
of America where Congress says there will be a maximum capital 
ratio. This is a statute written by the regulated and pressed 
through the Congress.
    Now, you indicated in earlier questions, Mr. Falcon, that 
you didn't have any current intent to raise capital standards. 
But do you believe that there should be a maximum capital ratio 
or do you think that that should be an independent judgment of 
the regulator, independent of the executive--that is, of 
Treasury--and of the Congress?
    Mr. Falcon. I absolutely believe that that question should 
be left to the best judgment of the regulators to exercise, 
based on their knowledge of the companies. Yes.
    Mr. Leach. And that we should not have a maximum capital 
ratio statutorily imposed?
    Mr. Falcon. That is right.
    Mr. Leach. Well, I think this is a fundamental issue and 
something that this committee is going to have to think 
through. We want independence from the Treasury; I think we 
should also want independence from legislative directives.
    And I think it should be understood that I mean in a 
bizarre circumstance, but not a trivial one, the International 
Monetary Fund has called for an increase in capital ratios for 
Freddie and Fannie, based on scenarios that are conceivable, 
having conceivable difficulties in the world economy. And I 
hope that Congress does not hamstring any new independent 
regulator.
    Now, Mr. Falcon, and also the distinguished head of the 
Cincinnati bank, do you think the Federal Home Loan Bank System 
ought to be within Treasury? What do you think, Armando?
    Mr. Falcon. I think if Congress decided that it was 
appropriate, we could make it work. However, if you would allow 
me, I would defer to Chairman Korsmo to find out what he 
thinks, maybe in the best interest of his regulated entities.
    Mr. Leach. Well, I appreciate that, but I want to make it 
clear, Mr. Chairman, the issue isn't the best interest of the 
regulated entities, the issue is the public interest.
    Mr. Falcon. Yes, I agree. I misspoke there.
    Mr. Leach. What is your judgment on this, sir?
    Mr. Korsmo?
    Mr. Korsmo. Oh, excuse me. Pardon me, sir.
    I think, frankly, that the job we are doing at the Housing 
Finance Board meets the goals of providing effective and 
efficient and independent regulation.
    I think the progress we have made, particularly in the last 
two years, coupled with the very different charters under which 
the Federal Home Loan Banks and Fannie and Freddie operate, the 
very different ownership structure, the very different capital 
structure, the very different business models, it makes sense 
to preserve some degree of separation to ensure that the level 
of expertise that exists for the oversight of the Federal Home 
Loan Banks is distinct from that of Fannie and Freddie.
    I would leave it to the Congress to make the judgment as to 
how that would be organized, but my belief is that we are 
demonstrating that the Federal Housing Finance Board is an 
appropriate regulator for the Federal Home Loan Banks.
    Mr. Leach. Well, let me just tell you the irony that is 
appearing. I am told Fannie and Freddie desperately do not want 
the Federal Home Loan Bank System under the same regulator, 
because the Federal Home Loan Bank System has a 4 percent 
capital requirement; they have a maximum 2.
    I am also told that the Federal Home Loan Bank System, 
despite having a higher regulatory capital leverage ratio, the 
capital isn't particularly permanent and the regulation is not 
particularly firm.
    We have an episode today in Pittsburgh where we have a bank 
that has been allowed to give dividends, dipping into capital 
not based upon income, which no bank regulator would likely 
have allowed for a commercial bank. And this does not strike 
one as a particularly prudential circumstance. Can you tell us 
a little bit about the Pittsburgh problem?
    Mr. Korsmo. First of all, let me correct. The Pittsburgh 
bank has not dipped into capital; it has dipped into retained 
earnings.
    Obviously, like any safety and soundness bank regulator, I 
have to be very careful about the information that I make 
public that comes from examination and supervisory activity.
    That having been said, I think we appreciate the very real 
concern that you express about the level of retained earnings 
at the Federal Home Loan Banks. In fact, our Office of 
Supervision recently issued an advisory to the banks to review 
their retained earnings policies with a view toward increasing 
retained earnings in the bank system. And I can assure you that 
part of our ongoing examination and supervision function is to 
review not only the retained earnings policy, but also the 
dividend policies of the various boards of the 12 banks.
    Mr. Leach. Well, I appreciate it. But all I can tell you is 
there has been an exponential growth in assets of these banks. 
This exponential growth has some analogies to the savings and 
loan issue of the 1970s.
    Now, on the boards there are some smart people, but I am 
very concerned with the supervision of these banks.
    And I would stress you have joint and several liability. 
And one bank gets in difficulty, all of you are accountable, 
and that implies, one has to be concerned for the capital of 
all the banks. And I just hope as a regulator currently you are 
on top of the capital issue.
    And I also believe the case for putting both of you under 
Treasury is just profound, absolutely profound today. And the 
case for giving independence to an independent regulator is 
extraordinary. And I just have a sense that we have too much 
captive in a regulator, and I say that with great concern.
    And I am very concerned you are going to see things happen 
that are going to stretch your treasuries and stretch the 
treasuries of potentially the public. And so I think this is a 
great opportunity for the committee to make a very responsible 
step, and I hope we do in a comprehensive way.
    Thank you.
    The Chairman. The gentleman's time has expired.
    The gentlelady from California, Ms. Waters?
    Ms. Waters. Thank you very much.
    Mr. Chairman and members, I have been sitting here 
pondering the different requirements for the Federal Home Loan 
Bank and Fannie and Freddie. And I guess I am going to raise 
the question, why shouldn't the Federal Home Loan Banks be 
under the same requirements and restrictions as Fannie and 
Freddie?
    Mr. Korsmo. In what regard, Representative Waters? You 
mean----
    Ms. Waters. Well, maybe we should start--we should back up, 
and let me ask, because I guess I don't really understand, what 
is the fundamental mission of the bank system? Is it 
cooperative lender or secondary market participant?
    Mr. Korsmo. It is to provide liquidity to its member 
institutions, presumably for the purpose of making housing 
finance.
    Ms. Waters. And do you have housing goals?
    Mr. Korsmo. There is a very different--Congress has 
constructed a very different methodology by which the Federal 
Home Loan Banks, as opposed to Fannie Mae and Freddie Mac, meet 
their responsibility to provide--to supplement affordable 
housing. In the case of the Federal Home Loan Banks, the 
greater of 10 percent of their net revenues, or each bank's pro 
rata share of $100 million a year, is set aside to be used for 
grants and subsidies to affordable housing projects.
    What that has meant is every year since 1994, the banks 
have exceeded that $100 million target. In fact, last year it 
was something like $199 million was their 10 percent share. I 
think the year before it was approximately $246 million.
    Since 1990, when the Congress established this process, the 
banks have made available and distributed approximately $1.7 
billion in grants and subsidies to affordable housing and low-
income housing projects.
    I am familiar, of course, with the program that the Federal 
Home Loan Banks have and that we oversee at the Federal Housing 
Finance Board. I am less familiar, of course, with the housing 
goal scenario that is appropriate to Fannie and Freddie. But it 
is certainly an issue that I think Congress should look at, 
whether or not a separate model is still appropriate. But 
again----
    Ms. Waters. What do you think?
    Mr. Korsmo.----in my role as regulator, it is difficult for 
me to make an assessment because I am not that familiar with 
how the housing goals operate.
    Ms. Waters. So you would not have compared the $100 million 
so-called set-aside with the Fannie and Freddie goals?
    Mr. Korsmo. Again, Representative, it is a very different 
model that Congress has established for the banks as opposed to 
Fannie and Freddie. I have not compared them. I think it is 
probably appropriate that somebody take a good look at it.
    Ms. Waters. All right. Thank you very much.
    I yield back the balance of my time.
    The Chairman. The gentlelady yields back.
    The gentleman from California, Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Korsmo, you told Mr. Leach that retained earnings 
weren't part of capital. Well, it is capital.
    Mr. Korsmo. No, no, no. I am sorry. I thought he was making 
reference to dipping into the capital. Obviously----
    Mr. Royce. Right.
    Mr. Korsmo.----retained earnings is part of the minimum 
capital requirement.
    Mr. Royce. Well, I just want to associate myself with the 
points that he made.
    In your testimony, you told us that the Finance Board 
basically has improved over the last couple of years. But this 
morning in The Wall Street Journal and in the Financial Times, 
as you know, and in The New York Times, we have stories about 
some of the issues with the Federal Home Loan Bank of New York. 
And this follows other news about disappointing results that 
Congressman Leach pointed out about the Pittsburgh bank.
    Now, I believe that the New York Bank has taken positive 
steps to manage through its troubles, but I am concerned that 
the Finance Board did not perform well here. I am concerned 
that the Finance Board again failed to protect against systemic 
risk.
    Home Loan Banks do not usually either suspend their 
dividend or dip into retained earnings to pay their dividend. 
And, Mr. Korsmo, you have seen this happen twice in this 
quarter.
    I guess my question is, should Congress be concerned about 
this? And should Congress be concerned that our Treasury 
Secretary Snow and our Federal Chairman Greenspan and our GAO 
have called for combining regulation of all three GSEs at this 
time?
    Mr. Korsmo. Congressman, let me preface my response again 
with the statement I made to, I believe it was Representative 
Leach, that I have to be very careful as a financial regulator, 
and I know you would expect nothing different from the head of 
any bank regulatory agency, to discuss in a public forum 
examination and supervisory actions that we may have taken with 
respect to any individual member.
    I can say in the case of the New York bank that the 
deterioration of the credit quality of certain of their asset-
backed securities is a concern. I will tell you that we have 
monitored the situation very carefully.
    Our examiner in charge is in constant contact with the New 
York Bank. As a regulator, it is our role to ensure that the 
steps taken by the bank are consistent with Finance Board 
regulations and prudent operations, including appropriate 
accounting for any actions taken by the bank.
    Beyond that, it is perhaps not appropriate for me to 
comment.
    I can say that I did talk to our examiner in charge only 
this morning about the articles you cited in The Wall Street 
Journal. I should probably mention that he pointed out to me 
two very significant factual errors in the article, and let me 
quote The Wall Street Journal article.
    It said, quote, the bank said it would suspend its dividend 
payments to the customer banks for the third quarter to 
conserve cash, unquote.
    That is absolutely wrong. The bank has plenty of cash and 
plenty of access to cash. What it did was suspend the dividend 
to protect retained earnings, and I think that was a prudent 
action.
    As I mentioned, the Finance Board's Office of Supervision 
recently issued an advisory to the banks about our concerns 
about the level of retained earnings, not just at the New York 
bank, which frankly has fairly substantial retained earnings, 
but at all the banks. And we are looking at whether or not we 
need to take further regulatory action to deal with the current 
level of retained earnings.
    Mr. Royce. Let me ask you another question. Isn't it fair 
to say that the existing bank regulatory agencies under 
Treasury, the OTS and the OCC, benefit from their affiliation, 
benefit from their association with Treasury? Don't they 
attract numerous well-qualified people to work for them? 
Wouldn't you say that?
    In 1989, Congress replaced the Bank Board, the regulator of 
thrifts at the time, with the OTS under Treasury. That was done 
to enhance regulatory capability and to, frankly, enhance the 
reputation of the regulator.
    Why, when we have this unusual chance to do the same for 
the regulation of these banks, should we not do this?
    Mr. Korsmo. Well I think the two points I have made on that 
issue are significant. One, I think we have made significant 
progress. This is not your father's Finance Board, to coin a 
phrase. And, frankly, I am concerned that some of the 
significant enhancements that are now under way might be lost 
or deferred in a transition process.
    We have made significant institutional changes at the 
Federal Housing Finance Board. We have created a new management 
infrastructure that I think the banks have come to recognize 
the primacy of safety and soundness that this Finance Board has 
placed.
    The team we have built, the enhancements we have made, I 
think are significant.
    I won't tell you that we are where we want to be yet. 
Frankly, we will never be done. But the movement is in the 
right direction and what exists today is a decided improvement 
over what existed two years ago. I would hate to see that 
progress lost.
    Mr. Royce. Let me ask you this question: The GAO has three 
times done an objective analysis where they have come to the 
same conclusion as Treasury, the same conclusion as our Federal 
Reserve Chairman. So assuming that the inclusion of the banks 
could be accomplished to recognize their structure and 
operations, to recognize their difference in mission, such as 
creating a separate division within the new agency for 
supervision of the banks, would you oppose such a creation?
    Mr. Korsmo. As a regulator, I suppose it would probably be 
inappropriate for me to make a judgment one way or another. I 
will leave the decisions in that regard, setting policy, to the 
policymakers.
    Again, my concern is that there be appropriate recognition 
of the very different charters that exist, the very different 
ownership structures that exist between the Federal Home Loan 
Banks and Fannie and Freddie.
    And I would ask also that acknowledgement be made of the 
very real progress that the Finance Board has made. The last 
GAO study that you cited was made I think six months into my 
tenure. We were in the process of making improvements that now 
I think virtually every impartial observer recognizes. And I 
would just caution that the Congress move very carefully in 
dealing with the oversight of these----
    Mr. Royce. I understand that, but to go back to the point 
that Congressman Leach made, you do have the question of what 
happened on your watch at Pittsburgh and what happened with the 
New York Bank. And they are certainly credited with taking the 
right corrective steps now, but the question is, in terms of 
the regulators, I mean, I think our concern is should we expect 
any more negative news stories soon?
    And I think that what brings us here today is whether we 
are willing to take a look at the arguments advanced by the 
Federal Reserve Board Chairman, by our own GAO, by Chairman 
Greenspan and Secretary Snow of the Treasury, to look if we 
can't come up with a better model in which we can better 
anticipate and regulate for the GSEs.
    The Chairman. The gentleman's time has expired.
    Mr. Royce. I thank you, Mr. Chairman.
    The Chairman. The gentleman from Texas, Mr. Gonzalez.
    Mr. Gonzalez. Thank you very much, Mr. Chairman.
    The question will go to Director Falcon. I guess kind of as 
a threshold question, but for whatever reason, we believe this 
action is necessary, and we are moving forward regardless.
    But up to this point, based on the recent situation arising 
out of the practices by Freddie Mac, is there any evidence that 
you are aware of that those actions and practices in any way 
jeopardized the safety and soundness of Freddie Mac?
    Mr. Falcon. No, Congressman, this has not been a safety and 
soundness issue for the company. We have concerns, it is a 
serious matter, about accounting practices and management 
practices as well, but the results here were that earnings were 
not in fact manufactured, but there was an attempt to move 
earnings over a period.
    So it wasn't a matter that caused us concern about the 
financial liability or the safety and soundness of the company.
    Mr. Gonzalez. And there is no evidence out there right now 
that Fannie Mae has engaged in any similar type practice or 
action, is that right?
    Mr. Falcon. That's right.
    Mr. Gonzalez. So regardless of the situation with the two 
big GSEs on safety and soundness, which usually is a predicate 
for anything that we do around here, we still will move forward 
with some new regulatory scheme.
    And I think there are members on this side of the aisle 
that question that, for good reason, because we are not real 
sure. We are like a team of doctors and we decide that the 
patient, regardless of symptoms, is going to require a heart 
transplant. And we are going to do it, because we know if it is 
successful we will come out with a stronger patient.
    The problem with a heart transplant is that the patient can 
die. And that is our concern, is that the patient, in this case 
the two big GSEs that accomplish such great goals in our 
communities, anyway, would be in danger.
    I know you have had a chance to review Secretary Snow's 
testimony. It was not clear to me that what he was describing 
really adheres to your recommendations. On independence, for 
instance, I did not hear that. It was so incredibly general and 
nebulous that I am left with no real idea that Treasury had 
some thought what it would look like, what shape it would take.
    Surely on clearance of testimony, there is disagreement. 
And I will tell you right now that members of this committee 
know that the least responsive witnesses are always from the 
departments. I think they must have classes or something when 
they come in there on how not to answer questions. Really, they 
just need to view all the testimony by Chairman Greenspan, and 
that would be sufficient to get a Ph.D. But nevertheless, that 
is what happens.
    I don't see where we really benefit by that.
    When it comes to appropriations, again, that wasn't part of 
his recommendation.
    Do you understand what the Treasury contemplates? I know 
what some members may have out there for consideration, but at 
this point do you have any firm understanding?
    OFHEO is not going to be subsumed like in OTS or whatever, 
because I didn't hear that coming from Secretary Snow. As a 
matter of fact, I heard pretty much the opposite. That was my 
interpretation of his testimony.
    So based on his testimony and your understanding of it, 
because I know you have been following it, do you have any idea 
of the structure contemplated by Treasury?
    Mr. Falcon. We have the general construct, but much of this 
will decided in the details. I am not familiar with the details 
about how this gets fleshed out and how the construct was 
elaborated on in the testimony actually would take place.
    I think how that is done will depend to a large extent 
whether or not. The principles that I have tried to lay out are 
met and whether or not we are actually moving safety and 
soundness forward or actually taking a step backward.
    So, yes, we absolutely need to look at the details about 
how this is actually done.
    Mr. Gonzalez. Well, we share your concerns and appreciate 
your recommendations and suggestions. And I am hoping that 
legislatively we can build something out there that will assure 
that, that we give people latitude but not the ability to 
refashion the GSEs, to de facto change the charter and 
definitely its mission.
    Again, thank you very much for your all's testimony.
    The Chairman. The gentleman yields back.
    The gentleman from Florida, Mr. Feeney?
    Mr. Feeney. Thank you, Mr. Chairman.
    Mr. Falcon, I was taking a look at some of your comments 
and comparing them to Secretary Snow's recommendations, and on 
at least one issue it seems like you have stepped well out in 
front of anything that the Administration has recommended--that 
would be with respect to setting minimum standards.
    As I understand Secretary Snow's testimony, the 
Administration while, it suggests for some flexibility in the 
future toward capital requirements, it is suggesting there 
should be no statutory change at this point. But on page 5 of 
your testimony, you say that the agency needs to have the 
authority to modify both minimum and risk-based standards. That 
seems to contradict what Secretary Snow suggests we ought to be 
doing.
    And additionally, I have some concerns that if we have an 
agency out there that is able to unilaterally raise minimum 
risk standards, what we are ultimately going to be doing is to 
raise the cost of credit, especially in the affordable housing 
area.
    And I would like you to, number one, tell us why it took 
your agencies the better part of a decade to put together some 
of the standards for both the risk-based and the minimum 
capital standards, but also explain the differences as you see 
them between your position and the Administration's?
    Mr. Falcon. You are right, Congressman, I do disagree with 
the Secretary on that point, if his point was that there should 
be no modification made to minimum capital. And the authority 
that I am seeking is no different from that of the other safety 
and soundness regulators.
    So if there is a concern about constraints on credit, I 
think that concern would be placed with all of the regulatory 
agencies.
    But, in fact, I think we all exercise a very reasonable 
judgment when we use that authority. Setting capital is a very 
important part of how a safety and soundness regulator 
accomplishes its mission, and it has to balance the capital 
requirements against the ability of the companies to operate.
    I think we try to balance those considerations very 
reasonably, and we wouldn't on some unsound basis just decide 
to increase the capital requirements. We don't have any current 
plan to increase the capital requirements right now, but it is 
important for us to have the authority to do so if we thought 
it was appropriate.
    The last thing I want to do is come before this committee 
and explain why the capital was insufficient. So if the 
regulator ever needed to increase capital, I think we should 
have that authority.
    On the risk-based capital standard, it did take more time 
than it should have. When I got to the agency, we all rolled up 
our sleeves and we just got it done. Now it is done and it has 
been functioning for about a year now. It is a state-of-the-
art, vital stress test that makes sure that the companies can 
withstand severe economic shocks.
    I am proud of the work the agency has done, and while it 
took longer than it should have, we did get it done.
    Mr. Feeney. Well, going back to the minimum capital for a 
second, the inference I draw from what you just said is that 
current minimum capital requirements, in your opinion, are not 
insufficient. In other words, that they are sufficient, to take 
out the double negative.
    And yet you are asking Congress to give you the unilateral 
authority to raise those standards, which personally I believe 
would have the impact of at least marginally, and maybe 
substantially driving up the cost of capital, which would 
seriously affect especially the affordable housing market.
    What would be wrong with, when the time comes that you 
believe that minimum capital standards are insufficient, coming 
to Congress and saying that, A, they are insufficient, and, B, 
you would like the power, if Congress doesn't raise the 
standards, you would like at that point to have the power to do 
so? Why should we give it to you now when there is no problem?
    Mr. Falcon. So that I can be sure that a problem never 
develops. I think by the time I came to Congress and asked for 
the authority to raise capital, that is too late.
    It is my job to ensure that we are able to prevent problems 
before they develop and to ensure that the enterprises remain 
safe and sound. And I am asking for the authority that every 
other regulator has.
    We exercise it in our best judgment, and while we have no 
plans currently to raise capital, if we consider that the 
condition of the companies, based on our knowledge of their 
activities through our examination process, ever required us 
proposing an increase in capital, we wouldn't just do it willy-
nilly. We would do it through a notice and comment period and 
through full administrative procedures and follow a process 
whereby we take full comment, including comments from this 
committee, absolutely, as well as general public comments. So 
we would do it with all due process and exercising our best 
judgment.
    Mr. Feeney. I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The gentleman, Mr. Scott, from Georgia?
    Mr. Scott. Yes, thank you very much, Mr. Chairman.
    I want to ask a two-part question. I want to preface it 
with a couple of what I think are facts here.
    I think that given the tremendous growth of the size of 
Fannie Mae and Freddie Mac over the past decade, and their 
importance to the housing market, we all agree that they must 
have strong, independent regulation.
    A couple of weeks ago, this committee heard testimony from 
the Secretaries of Treasury and HUD about the Administration's 
plans to improve the oversight of Fannie Mae and Freddie Mac, 
safety and soundness, as well as their housing mission. And I 
believe that we have got to keep oversight focused foremost on 
what is in the best interests of the consumer and the market.
    And given that, Freddie Mac and Fannie Mae have brought 
stability to the housing market. When they focus on their 
congressional-mandated mission, they provide a very vital tool 
for bringing home ownership to more Americans.
    Right now, we are at a very critical point and juncture. Is 
it best to keep oversight in HUD or do we move it to Treasury?
    I want to ask two questions, or a two-part question to each 
of you. First of all, have you talked with the folks at Fannie 
Mae? Have you gleaned the benefit of getting their inputs, 
since they have the congressional mandate, in terms of what 
would best help them to pursue their mission on this issue?
    Especially in light of the second part of my question, 
which is that affordable housing goals for both Freddie Mac and 
Fannie Mae require that 50 percent of units should be built for 
low-and moderate-income home buyers, and 20 percent for very 
low-income families.
    Yet, from 1998 to 2002, African-American home ownership 
rates only rose from 45.6 percent to 47.3 percent, less than 2 
percent compared with the white average increase from 72 
percent to 74.5 percent, huge gap remains.
    Clearly, the mission of Freddie Mac, and especially Fannie 
Mae, is to close that gap.
    Do you believe that the current housing goals are adequate 
enough to help bring African-American home ownership rates to 
50 percent, just 50 percent, in the near future?
    And the bottom line to this is this: Would moving the 
affordable housing mission to the Treasury Department weaken 
the focus from increasing home ownership and assisting Freddie 
Mac and Fannie Mae in achieving their mission?
    Mr. Falcon. I think under the proposal that is before the 
committee, it doesn't propose moving the affordable housing 
goals to the new safety and soundness regulator. Those would 
remain with HUD.
    As far as, are the goals adequate, I share your concern, 
Congressman, about closing that gap. I am from San Antonio, 
Texas, and I see that whenever I go back home.
    So I think definitely companies should do all they can to 
try to ensure that that gap, using innovative means, is closed. 
We work to make sure that the means they use are safe and 
sound. And we have found that they do meet the safety and 
soundness requirement when they use aggressive means of trying 
to meet higher affordable housing goals.
    As far as whether or not and how much they can go up, I am 
afraid I don't quite have the expertise to answer that 
question. It is better put with the office at HUD.
    Mr. Scott. The other part of my question: Have you had 
conversations with the folks at Fannie Mae, and specifically 
Mr. Raines?
    Mr. Falcon. Yes. We discuss frequently any pending 
regulatory matters. We haven't spoken about the housing goals, 
but we do speak about regulatory matters frequently as needed. 
They are not shy about communicating their views to the agency.
    The Chairman. The gentleman's time expired.
    Mr. Scott. One point. May I have a little follow-up.
    I just wanted to know, if I could, what was the disposition 
in that conversation with Mr. Raines concerning the movement to 
the Treasury Department?
    Mr. Falcon. In our conversation we did not discuss each 
other's views on that point.
    The Chairman. The gentleman's time has expired.
    Gentleman, Mr. Raines will be on the next panel, I would 
say to my friend from Georgia.
    The gentleman from Alabama?
    Mr. Bachus. I thank the chairman.
    And I want to follow up, Director Falcon, with what Mr. 
Scott asked you about, and that is moving authority from HUD to 
the newly approved safety and soundness regulator, Treasury's 
proposal, as it relates to new product approval.
    Now, what is your current roll, OFHEO's current role, as it 
deals with new product approval?
    Mr. Falcon. Our role with the bifurcated system is that we 
are the enforcement arm of the government in respect to Fannie 
Mae and Freddie Mac. Even in the mission area, if HUD thought 
there was a need to promulgate or take some enforcement action 
because of a mission issue, they would come to OFHEO to 
promulgate the cease and desist order.
    Mr. Bachus. But what I am talking about, if they want to 
offer new products, if Fannie or Freddie wants to offer a new 
product and HUD approves that, do you have any role in that? Do 
they consult with you? Do you consult with them?
    Mr. Falcon. Oh, yes, they do consult with us on the safety 
and soundness implications. The risk management of the new 
management, we do consult with them on that.
    Our other role is, because we are the enforcement arm, if 
there is a clear violation of the charter, we will step in and 
make sure that there is no violation.
    Mr. Bachus. But I am just saying, you know, on a run of the 
mill, they ask to do a new product. Do you get that proposal, 
too?
    Mr. Falcon. No, HUD will receive the proposal. We will 
receive information about the activity or product because we 
have to----
    Mr. Bachus. Okay, let us say a new product--do you consult 
when you see that new product proposed? Do you consult with HUD 
on it?
    Mr. Falcon. Yes.
    Mr. Bachus. Have you ever told HUD--have you ever had 
objections to any new products?
    Mr. Falcon. Have we? No.
    Mr. Bachus. No? So you have never objected to any new 
product----
    Mr. Falcon. We don't see every----
    Mr. Bachus. What?
    Mr. Falcon. I think we have seen every one, but I am not 
certain.
    Mr. Bachus. You may not have even seen some of them?
    Mr. Falcon. Right. Well, I think we have seen every one.
    Mr. Bachus. Okay. But you never objected to any of them.
    Mr. Falcon. No. We have raised concerns about----
    Mr. Bachus. Okay, you have raised concerns about certain 
new products.
    Mr. Falcon. Yes.
    Mr. Bachus. As a result of you raising those concerns, was 
it given appropriate weight by HUD?
    Mr. Falcon. I believe so.
    Mr. Bachus. Do you know?
    Mr. Falcon. An example is one of the companies' 
investments, or an extension of the credit really, LendingTree. 
We consulted extensively with HUD on that activity and the 
implications of it.
    Mr. Bachus. Chairman Korsmo, in Treasury Secretary Snow's 
testimony two weeks ago before this panel, he expressed the 
view that leaving the Federal Home Loan Bank out of the new 
regulatory regime that would apply to Fannie and Freddie would 
place the banks, and I quote, ``at a terrible competitive 
disadvantage.''
    Are you aware of his remarks? And do you disagree with the 
Secretary's views?
    Mr. Korsmo. As I mentioned in my opening statement, I think 
there are so many factors at work that go into contributing to 
the pricing for various products that government-sponsored 
enterprises bring to the debt market that it is difficult to 
single out any particular aspect.
    Just as at the Finance Board, we don't go to the Secretary 
for his approval on our testimony, he didn't come to me for 
approval on his.
    But I would suggest that----
    Mr. Bachus. Well, do you believe there is any basis for him 
to make that statement?
    Mr. Korsmo. I think it is limited at best. I think there 
are very few players in the agency market who make their 
decision as to pricing relationships on agency debt based on 
who the supervisor--who the supervising institution is.
    That having been said----
    Mr. Bachus. You mean pricing isn't based on who the 
supervisor is or the level of supervision?
    Mr. Korsmo. I was just going to say, I think that having 
been said, I think it is certainly important, and the market 
probably recognizes the importance of having a strong, 
independent regulator overseeing the function and operations--
--
    Mr. Bachus. So the more----
    Mr. Korsmo.----but I don't think that's the key element.
    Mr. Bachus. So the more resources that the regulatory 
agency has, the better supervision.
    Mr. Korsmo. I think that's a fair statement.
    Mr. Bachus. I think you are asking for additional 
resources, and presently, I think you state in your testimony 
that you have--your present complement is 17 full-time 
examiners?
    The Chairman. The gentleman's time has expired.
    Mr. Bachus. Is that right?
    Mr. Korsmo. Yes, sir.
    The Chairman. The gentleman's time has expired.
    The gentleman from Massachusetts.
    Mr. Frank. Mr. Chairman, we have got a vote. I will pass on 
my questions and go to my other members there and maybe we can 
finish up.
    The Chairman. The chair would indicate--I talked to a 
couple of the members on this side of the aisle--we would like 
to dismiss this panel and then come back with the next panel.
    What I would suggest is that the members recognize the 
gentlelady from New York. If the other members--if we run out 
of time, we recognize those members first when the second panel 
appears, if that is okay.
    The gentlelady from New York.
    Mrs. Maloney. I will be very brief so my other colleagues 
can ask questions.
    But going back to Mr. Bachus's question on competitiveness, 
I would like you to address one issue, the question of cost of 
funds, and are you concerned that if Congress creates a new 
regulator for Fannie and Freddie that is independent and viewed 
in the same league as the OCC and OCS, that it would undermine 
the competitiveness in regards to the cost of funds of the 
Federal Home Loan Bank?
    And would you address, you said that you feel that 
everything is being regulated well, Mr. Korsmo, but the 
possibility that market perceptions may give an advantage to 
the other GSEs if they have a new sort of world-class 
regulator.
    And very briefly, Mr. Falcon, I want to follow up on some 
of the questions of Mr. Baker on capital. In your testimony, 
you endorse allowing a new regulator to have discretion over 
the level of minimum and risk-based capital that the GSEs may 
hold.
    And do you believe this because you think that it is an 
important tool for the regulator or because you believe the 
GSEs are undercapitalized and therefore are a risk in the near 
future?
    Mr. Falcon. I will give a quick answer. I believe it is 
just an important tool.
    Mrs. Maloney. Okay. And, Mr. Korsmo----
    Mr. Korsmo. Quick answer as well. I certainly appreciate 
the concern that some have expressed about the implications for 
Fannie and Freddie having different regulators in the Federal 
Home Loan Banks and the agency market.
    I think any contention that it will have a significant 
impact, particularly given the fact that both entities will be 
regulated by world class regulators, I think is highly 
speculative.
    Mrs. Maloney. Thank you.
    And I want to work with Mr. Royce on this and place in the 
record a synopsis of various GAO reports.
    And I yield to my colleagues, Mr. Meeks and Mr. Sherman.
    Mr. Sherman. I will take the chairman up on his offer to be 
among the first on the next panel.
    The Chairman. I thank the gentleman.
    The gentleman from New York?
    Mr. Meeks. And since I have to go to another hearing, I 
will try to be just real quick. As well as the fact that I am 
just pissed off at OFHEO because if it wasn't for you I don't 
think that we would be here in the first place.
    And Freddie Mac, who on its own, you know, came out front 
and indicated it is wrong, and now the problem that we have and 
that we are faced with is maybe some individuals who wanted to 
do away with GSEs in the first place, you have given them an 
excuse to try to have this forum so that we can talk about it 
and maybe change the direction and the mission of what the GSEs 
had, which they have done a tremendous job.
    There has been nothing that was indicated is wrong, you 
know, with Fannie Mae. Freddie Mac has come up on its own.
    The question that then presents is the competence that your 
agency has with reference to deciding and regulating these 
GSEs.
    And so I wish I could sit here and say that I am not upset 
with you, but I am very upset because what you do is give, you 
know, maybe giving a reason to, as Mr. Gonzalez said, to give 
someone heart surgery when they really don't need it, they need 
something else.
    So the question, I guess, if there is a question that I 
have--and we don't have the time, because I want to know, 
really, what completely went wrong. You may have testified, but 
what really what was wrong and what would be needed by you. You 
know, you said, I think I heard you, you were talking about 
that if he had the same kind of powers or supervisory control 
as some of the big guys that maybe you can change it. But you 
didn't come voluntarily and say that at any point prior to the 
Freddie Mac incident.
    So why and what can you say now so that we don't destroy 
the mission of these GSEs that are creating home ownership? Why 
should I have confidence, why should anyone have confidence in 
you as a regulator at this point?
    Mr. Falcon. Congressman, OFHEO did not improperly apply 
accounting rules; Freddie Mac did. OFHEO did not try to manage 
earnings improperly; Freddie Mac did. So this isn't about the 
agency's engagement in improper conduct, it is about Freddie 
Mac. Let me just correct the record on that.
    We don't review the accounting practices of the two 
companies. That is the role of the independent outside auditor. 
But we are going to begin to look at that going forward.
    Mr. Meeks. And you are saying--and I will stop you, because 
I know we have got to go vote--and you believe that just that 
one, by looking at the accountants--I mean, because we just had 
this huge corporate fraud dealing with accounting scandals, et 
cetera.
    You are saying that then we'll give you the ability to 
catch any problems that may be in accounting--or otherwise. I 
mean, we have got to look for--and any other kind regulatory or 
record-keeping at any GSEs so that the American people can have 
confidence that there is stability and soundness--and safety 
and soundness in the principles, in the practices of the GSEs.
    You are saying that is the sole piece that you need?
    Mr. Falcon. I have been asking for these additional 
authorities for four years now. I have been asking for 
additional resources, involving independent appropriations 
assessment powers.
    This is not a matter of the agency engaging in any 
misconduct.
    And, yes, I think it would be better if the agency had 
additional resources, so that we could hire the types of people 
that we need, given the different activities we are going to be 
doing now. It is not the role of the safety and soundness 
regulator to look at the application of GAAP with the GSEs 
books. That is the role of the auditor.
    And as we have more resources, we are going to hire the 
type of people so that we begin to do that. Hopefully, we will 
try to catch these types of activities. These activities, by 
their nature, are concealed.
    It is not easy for anyone to try to catch them. But with 
the resources, we are going to try.
    The Chairman. The gentleman's time has expired.
    The Chair thanks both of the gentlemen for your testimony, 
and the committee now stands in recess until 1 p.m.
    [Recess.]
    The Chairman. The committee will reconvene. And the Chair 
would like to introduce our second distinguished panel: Mr. 
George D. Gould, the Director of Freddie Mac; Mr. Franklin D. 
Raines, Chairman and Chief Executive Officer of Fannie Mae; Mr. 
Dean Schultz, President and CEO of Federal Home Loan Bank of 
San Francisco; and Mr. David H. Hehman, President and CEO of 
Federal Home Loan Bank of Cincinnati.
    Gentlemen, thank you, particularly for your patience on the 
length of the first panel. The only good news is you are not 
the third panel.
    [Laughter.]
    And so you take them where you can find them.
    And so again welcome.
    And Mr. Gould, we will begin with you.

      STATEMENT OF GEORGE D. GOULD, DIRECTOR, FREDDIE MAC

    Mr. Gould. All right, sir.
    Well, thank you, Chairman Oxley, Ranking Member Frank, and 
members of the committee.
    Good afternoon. My name is George Gould. I have served on 
the Freddie Mac board since 1990 and am currently the Presiding 
Director and Chairman of the Governance and Finance Committee. 
From 1985 through 1988, I served as Under Secretary for Finance 
at the Department of the Treasury.
    I welcome the opportunity to discuss GSE regulatory 
oversight. Freddie Mac plays a central role in financing home 
ownership and rental housing for the nation's families, and 
given the importance of housing to the economy it is critical 
that our regulatory structure provide world class supervision.
    But before expressing our views about regulatory 
restructuring, I would like to say a few words about the 
resolution of Freddie Mac's accounting issues and our continued 
safety and soundness.
    In January 2003 we announced the need to restate earnings 
for 2000, 2001 and 2002. In stark contrast to other recent 
corporate restatements, we expect Freddie Mac's restatements to 
show a large cumulative increase in earnings for the prior 
years.
    Timing is an issue, however, and I am disappointed to 
report to the committee today that our restatement will not be 
completed during the third quarter, as we had previously 
stated.
    We were nearing completion of the restatement and were in 
the process of verifying results when we discovered a systems 
error. We have isolated the underlying problem and will fix it 
as expeditiously as possible.
    As the company stated in our June 25 press release, getting 
our financials right is job number one.
    We are targeting to have this setback addressed during 
October; we plan to restate earnings in November. Whether it 
takes two more days or two more months, Freddie Mac is focused 
on getting our restatement right and regaining the trust of the 
Congress and the public in our financial statements.
    As frustrating as these accounting issues are, let me say a 
few encouraging words about safety and soundness.
    Freddie Mac's franchise is rock solid. Our exposure to both 
credit risk and interest rate risk remains extremely low.
    Just today we announced that our key measure of interest 
rate risk, duration gap, was zero for the month of August in 
spite of it being a turbulent period in the bond markets. This 
is an outstanding example of Freddie Mac's highly disciplined 
approach to risk management.
    Now I would like to comment briefly on the various 
regulatory proposals.
    Over the past few years, Chairman Baker, Congressman 
Kanjorski and the entire committee have worked diligently to 
study ways to enhance our regulatory structure. I want to thank 
you for your hard work and I hope you will find that we have 
much in common.
    To begin with, we support giving our regulator the 
authority to ensure we continue to carry out the public 
commitments we made in conjunction with this committee in 
October of 2000.
    In addition, we support codifying the commitment we made 
last summer to register our common stock with the SEC under the 
Securities Exchange Act of 1934.
    Freddie Mac also would support the creation of a new 
regulatory office within Treasury. To ensure regulatory 
independence, we support applying the same operational controls 
as apply to the relationship between Treasury and the OCC and 
the OTS.
    We also support providing both the regulator and HUD 
authority to assess the GSEs outside of the annual 
appropriation process.
    Capital adequacy is key to our ability to attract low-cost 
funds to finance home ownership in America. Our capital 
standards were developed in keeping with our charter, which 
restricts us to lower risk assets than banks.
    Given our lower risk exposure, we agree with Secretary Snow 
that the GSE minimum capital requirement is adequate and need 
not be changed.
    With regard to risk-based capital, we agree that the 
regulator should have adequate discretion, such as provided to 
federal banking agencies, but discretion should be balanced 
with continuity.
    The risk-based capital standard, which took some 10 years 
to develop with our present regulator, has been in effect less 
than one year, and it should not be changed unnecessarily or 
capriciously. Until an overhaul appears warranted, the 
regulator should continue to apply the existing rule.
    We also support continuity in our mission oversight. We 
believe the HUD Secretary should retain all existing GSE 
mission-related authority. HUD should retain its authority to 
approve new programs under the same standard as in current law. 
HUD alone has the experience and the history to determine 
whether new programs are consistent with our charter and our 
statutory purposes.
    The existing structure also works well with regard to our 
affordable housing goals. As mission regulator, HUD has 
significant discretion to establish and adjust the goals and to 
require the submission of a housing plan if we ever fail to 
meet one of them.
    These are strong incentives for the GSEs to meet the goals 
year after year, to say nothing of the reputational penalties 
of failing to meet a goal.
    Considering that we have consistently met the permanent 
affordable housing goals, additional enforcement authority 
seems unnecessary. Therefore, we would respectfully suggest 
that no additional authority is needed.
    In closing, thank you again for the opportunity to appear 
today. Freddie Mac is safe, sound and strong.
    We are prepared to support many of the provisions put forth 
by this committee and the Administration. A strong, credible 
regulator is essential to maintaining the confidence of the 
Congress and the public.
    We look forward to working with Chairman Oxley, Ranking 
Member Frank, Chairman Baker and Ranking Member Kanjorski and 
other members of this committee as you move forward to enhance 
our regulatory oversight structure.
    I look forward to answering any questions the committee may 
have.
    [The prepared statement of George D. Gould can be found on 
page 163 in the appendix.]
    The Chairman. Thank you, Mr. Gould.
    And, Mr. Raines?

         STATEMENT OF FRANKLIN RAINES, CEO, FANNIE MAE

    Mr. Raines. Thank you, Mr. Chairman, and thank you for this 
opportunity to appear before the committee. And let me as well 
thank the members.
    Mr. Chairman, I have submitted a longer statement for the 
record, and I would ask that that could be included, and I can 
just summarize it.
    The Chairman. Without objection, all the statements will be 
made part of the record.
    Mr. Raines. Thank you.
    I want to thank you for the crucial role that the United 
States Congress has played and is playing today in building and 
sustaining and constantly improving the best housing finance 
system in the world.
    Fannie Mae is proud to be at the core of this remarkable 
system. And I am here today to ask Congress to take action to 
make this remarkable system even better by supporting the 
Administration's proposal to move our financial regulator to 
become a bureau within the U.S. Department of the Treasury.
    The Administration's proposal would help ensure that Fannie 
Mae and Freddie Mac have a strong, well-funded, highly credible 
financial regulator.
    We support the Administration's proposal for three reasons.
    First, we support having a strong, well-funded, highly 
credible financial regulator. Having a strong regulator is in 
the best interest of housing and housing finance, the best 
interest of investors and the markets that supply private 
capital to housing through Fannie Mae, and in the best 
interests of Fannie Mae and our stakeholders.
    Second, the Administration's proposal supports our charter, 
mission and status, including our freedom to continue to 
innovate with our lender customers and housing partners to 
expand affordable housing to new people and places.
    And, third, the Administration's proposal supports the 
advanced capital structure Congress provided in 1992, which 
ensures that we remain safe and sound through even the worse 
economic conditions, while allowing us to direct the maximum 
amount of low-cost financing to home buyers.
    Fannie Mae looks forward to working with Congress and the 
Administration to see the proposal enacted into law this year.
    I believe that strengthening our financial regulator is the 
next natural step in a sequence of congressional actions to 
advance the success of Fannie Mae, a sequence that began 65 
years ago.
    In 1938, with the blessing of Congress, the Federal 
Government created Fannie Mae. The purpose was to ensure a 
nationwide flow of low-cost mortgage capital to all 
communities, at all times, under all economic conditions and to 
make the long-term fixed-rate refinanceable mortgage available 
nationwide.
    At the time, local housing lending was limited primarily to 
local bank deposits and the long-term, fixed-rate mortgage was 
a novel idea.
    Today Fannie Mae is one of only two companies in America to 
guarantee the nationwide flow of low-cost mortgage capital at 
all times, even when other suppliers of mortgage capital cannot 
or choose not to provide such capital.
    And the long-term fixed-rate mortgage is the standard home 
loan in America, the financing choice for 80 percent of 
homeowners and the most consumer friendly loan available.
    With this financing, home buyers can lock in a low mortgage 
rate for the life of the loan. And if rates go down, they can 
refinance their mortgage and lower their monthly payments.
    Three decades after creating Fannie Mae to ensure this 
nationwide flow of consumer friendly mortgages, Congress took a 
bold step to vastly enhance Fannie Mae's worth.
    In 1968, Congress privatized Fannie Mae, creating a 
private, shareholder-owned corporation with a charter and a 
public mission of expanding home ownership by raising private 
capital.
    Privatizing government functions was a novel idea at the 
time, but privatizing Fannie Mae has proven to be a resounding 
success and a model of marshalling private capital to achieve a 
public purpose, in this case the goal of expanding home 
ownership.
    In its 30 years as a government agency, Fannie Mae had 
built $185 million of retained earnings, and in 1968, financed 
$6.8 billion in mortgages.
    But after 35 years as a shareholder-owned company, Fannie 
Mae has amassed over $30 billion of private equity capital to 
finance $2 trillion of mortgages today.
    In the process, Fannie Mae has helped over 50 million 
American families become homeowners, saved homeowners an 
estimated $5 billion in mortgage costs annually, and helped to 
make a low down payment mortgage the industry standard.
    In 1992, following the thrift crisis, Congress revisited 
our charter, reaffirmed its commitment to our mission and 
updated our regulatory structure.
    This framework set specific affordable housing goals, 
created an independent financial regulator with constant on-
site supervision and established a rigorous two-part capital 
framework that a decade later is still more advanced than that 
of other financial institutions.
    Since then, Fannie Mae has met or exceeded every 
requirement of our updated regulatory framework. Every year, we 
have met or exceeded our affordable housing goals, even as they 
have increased. Last year, 62 percent of our total business 
served low-or moderate-income families or underserved 
communities or both.
    In 1994, we launched our trillion-dollar commitment, a 
pledge to provide $1 trillion in financing for 10 million 
underserved families before the decade was over.
    In 2000, after we met this pledge, we launched a redoubled 
new pledge, our American Dream Commitment, to provide $2 
trillion for 18 million underserved families before this decade 
is over.
    We also set a voluntary goal: to lead the market in serving 
minority families. We pledged to provide $420 billion to help 
serve 3 million minority families. And when President Bush 
challenged the private sector to help create 5.5 million new 
minority homeowners by the end of the decade, Fannie Mae 
boosted our pledge to $700 billion as part of a 10-point plan 
to support the Administration's initiative.
    As we expanded home ownership and our service to the 
market, Fannie Mae also met or exceeded the safety and 
soundness requirements of the 1992 act. In 2000, we adopted six 
voluntary initiatives to enhance our liquidity, transparency 
and market discipline.
    In March of this year, we became a permanent SEC registrant 
and are now subject to the same corporate disclosure 
requirements of other SEC registrants.
    Today we meet every requirement of the Sarbanes-Oxley 
legislation. Both Standard & Poor's and the Corporate Library 
have named Fannie Mae among the best companies in the nation 
and the world for corporate governance.
    And since 1992, Fannie Mae has met or exceeded our capital 
requirements in every year. Indeed, we are one of the best 
capitalized financial institutions in the world, when compared 
to the risk of our business.
    Our senior debt of course is rated AAA. Standard & Poor's 
risk-to-the-government rating is AA minus. Moody's rates us A 
minus on a scale where A is the highest rating in their ratings 
of the financial strength of international financial 
institutions.
    These letter ratings rate our stand-alone financial 
strength in the absence of government support. These ratings 
make us one of the highest rated financial companies in the 
world. We are financially strong, because for every $2 in debt 
and liabilities, we have $3 in capital, collateral and mortgage 
insurance to back it.
    Finally, if you look at Fannie Mae's capital under extreme 
conditions, we compare even more favorably with other financial 
institutions of our size.
    Thanks to the periodic improvements Congress has made to 
our regulatory mechanism, Fannie Mae serves to reduce systemic 
risk. If we don't hold mortgages, some other investor, one with 
greater credit losses, a weaker hedging strategy, a lower 
credit rating and perhaps taxpayer-backed deposits at risk will 
have to hold them.
    Now Congress is reviewing our regulatory framework a little 
more than a decade after the 1992 act, and I am heartened to 
see that there is a general consensus that everything Congress 
did to advance our charter, mission and status in 1992 has 
worked very well, and in many ways better than anyone could 
have imagined.
    Indeed, what has emerged is a consensus not to change our 
charter, mission or status, but to ensure that these world 
class companies have a world class financial regulator and to 
do no harm to the best housing finance system in the world.
    The Administration's proposal would modernize our financial 
regulator while protecting the housing finance system. Thus it 
would continue to advance the success of Fannie Mae well into 
the new century.
    We estimate there will be 30 million more people and 13 to 
15 million new households in this country by 2010. Demand for 
housing credit will grow by $6 to $7 trillion by that time. We 
need to have in place a regulatory structure that helps us meet 
that demand.
    Fannie Mae urges Congress to adopt this proposal.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Franklin D. Raines can be found 
on page 197 in the appendix.]
    The Chairman. Thank you, Mr. Raines.
    Mr. Schultz?

STATEMENT OF DEAN SCHULTZ, PRESIDENT AND CEO, FEDERAL HOME LOAN 
                     BANK OF SAN FRANCISCO

    Mr. Schultz. Thank you, Mr. Chairman, members of the 
committee.
    I appreciate very much the opportunity to speak to you 
today on what I consider to be a very important issue.
    I would like to start by making the simple point that I 
truly believe in the function of the GSEs. Using private 
capital, achieving a public purpose through this structure has 
benefited millions of Americans in home ownership.
    I refer you to David Hehman's testimony on the size, 
strength and characteristics of the system and its ever-
increasing role in American housing finance. The contribution 
is simply too large to put at risk.
    I am here to testify before you on a bill to move 
regulation of Fannie Mae and Freddie Mac and the other housing 
GSEs to a new regulator, an independent regulator, organized in 
the Treasury.
    The idea of that legislation is to enhance and improve 
regulation; it is not to change GSE charters, but to enhance 
and improve regulation. I view this as an opportunity for you 
and for us to include the Federal Home Loan Banks.
    If the banks are not included and the bill goes forward, I 
believe the banks are potentially put at risk and will have 
missed an opportunity to enhance our regulatory structure. The 
risk will come about because the market may--not will, but may 
perceive a difference, a lessening of our GSE status, and 
reflect that in our cost of funds.
    That would place our mission accomplishment at risk.
    The ability to raise agency funds is critical to our 
ability to re-lend those funds to our members.
    I know there are arguments--people want to wait until there 
is a better market, a better set of market conditions, or there 
is less contention in the system about moving forward. There 
has always been contention in the system, and legislation has 
passed in the past notwithstanding that contention. And waiting 
for markets to change to an appropriate condition is nothing I 
have ever been successful at, but perhaps you have.
    Thank you very much for your giving me this opportunity to 
make these brief remarks, and I look forward to your questions.
    [The prepared statement of Dean Schultz can be found on 
page 229 in the appendix.
    The Chairman. Thank you, Mr. Schultz.
    Mr. Hehman?

STATEMENT OF DAVID HEHMAN, PRESIDENT AND CEO, FEDERAL HOME LOAN 
                       BANK OF CINCINNATI

    Mr. Hehman. Mr. Chairman, Ranking Member Frank and members 
of the committee, I truly appreciate the opportunity to testify 
before you today.
    My name is David Hehman. I am President and CEO of the 
Federal Home Bank of Cincinnati.
    The Federal Home Bank System consists of 12 regional banks 
and over 8,000 member financial institutions that play a vital 
role in the nation's housing finance and community lending 
system.
    The bank system is a unique GSE. While the system shares a 
congressional charter and housing mission with Fannie Mae and 
Freddie Mac, the Federal Home Banks are fundamentally different 
in both structure and perspective.
    The 12 regional banks and their members form a cooperative 
that is driven by customer credit demand, not profit 
maximization.
    And while the 12 banks are independently owned and 
operated, they share joint and several liability for the 
system's debts. This leads to low-risk, not risk-free 
operations that have been well supervised under the current 
independent regulatory regime designed by the Congress.
    Two critical pieces of legislation shape today's home loan 
banks. The Financial Institutions Reform, Recovery and 
Enforcement Act of 1989, FIRREA, expanded membership to include 
commercial banks and credit unions with a demonstrated 
commitment to housing finance. FIRREA also created the system's 
Res. Corp. payment and mandated the affordable housing program 
through which each bank sets aside 10 percent of net earnings 
annually for the creation of affordable housing throughout the 
nation.
    That commitment has resulted in $1.7 billion of private 
capital flowing into the housing market to create 380,000 units 
of affordable housing.
    Title VI of the Gramm-Leach-Bliley Act of 1999, sponsored 
by Congressmen Baker and Kanjorski, established universal 
voluntary membership, provided for a more permanent capital 
structure, expanded the types of collateral the community 
institution can pledge to secure advances, and increased the 
independent corporate governance of each bank.
    Six banks, including Cincinnati, have implemented newly 
required capital stock plans. This task has occurred well 
within the legislative time frame and is due in no part to the 
strength of the system's independent regulator and the 
commitment of the board of directors of each Federal Home Loan 
Bank.
    A financial snapshot of the Cincinnati bank I hope would be 
instructive to understanding how and why the cooperative 
structure is successful.
    The Cincinnati bank is comprised of 750 members, serving 
Ohio, Kentucky and Tennessee. As of June 30, 2003, Cincinnati 
reported $47 billion in advances outstanding to its members, $7 
billion in acquired mortgage assets, and $144 million in 
affordable housing program grants invested in the creation of 
25,000 units of housing.
    These are not just numbers; these are telecommunications 
jobs in central Ohio, the thousandth Habitat for Humanity house 
in Kentucky, which we dedicated last weekend, a small home 
improvement loan in Memphis that combats predatory lending, and 
25 community-based financial institutions that are now able to 
sell mortgages into the secondary market.
    My job as President of the Cincinnati bank and the job of 
my board are to ensure the success of this cooperative 
partnership. Our role at linking Main Street to Wall Street 
demands the flexibility to access the capital markets we now 
enjoy.
    Bank advances are a critical component of the asset 
liability management of our community-based financial 
institutions, as evidenced by the fact that approximately three 
of every four members have borrowings outstanding at any given 
time.
    The combination of our congressionally determined financial 
requirement, an independent regulator, engaged boards of 
directors and extensive risk management tools have proven to be 
a successful model.
    However, adherence to this model does not mean we are 
adverse to change. The Cincinnati bank wants to do what is best 
for the financial quality of our institution and by extension 
the public it serves.
    At its regularly scheduled meeting last month, the 
Cincinnati board of directors concluded that it was in the best 
interest of shareholders and the public served to retain the 
present independent regulatory structure for the bank. The 
structure and performance of the Finance Board has resulted in 
12 healthy, AAA rated regional Home Loan Banks that currently 
support $500 billion in credit activity serving virtually every 
neighborhood in America.
    At the same time the Cincinnati board affirmed its support 
of our independent regulator, it also directed management to 
begin immediately the process of registering its stock under 
the Securities Exchange Act of 1934. And that process has 
indeed begun.
    The Cincinnati bank strongly believes that registration of 
its stock with the SEC is the best method to provide both bond 
and stock investors the necessary financial information they 
require to assess the condition of the Federal Home Loan Banks.
    My board and I believe that these two decisions are 
consistent and complementary of one another. We are confident 
the financial markets will continue to recognize that the 
Federal Home Loan Bank System consists of financially sound, 
conservatively managed, well-capitalized institutions.
    In conclusion, the Federal Home Loan Banks are strong, 
conservatively run enterprises who have never experienced a 
loss on a loan to their member institutions.
    The bank system's current independent regulator is best 
positioned to provide safety and soundness, as well as mission 
oversight for our cooperative enterprise.
    Mr. Chairman, thank you for the opportunity to address the 
committee on this matter and I would be happy to answer any 
questions when so desired.
    [The prepared statement of David H. Hehman can be found on 
page 173 in the appendix.]
    The Chairman. Thank you, Mr. Hehman, and thanks to all of 
the witnesses.
    Let me begin with Mr. Raines.
    There have been a lot of discussions prior to this hearing 
about new program approval. I wonder if you could take the 
committee through that process for us and explain how that 
works with the regulators working with Fannie?
    Mr. Raines. Well, thank you, Mr. Chairman, for the 
opportunity to do that, because I think there has been some 
confusion about how the process in fact worked.
    This committee--and the chairman of this committee--and 
then the Congress defined very clearly in the 1992 Act what the 
standard was. And that was, we were expected to innovate.
    However, if we had a new program, something that was 
substantially different from what we had done before, we had to 
get prior approval from the Secretary of HUD before we could do 
that.
    But we were told specifically in the legislative history 
that that the approval process did not apply to products, it 
did not apply to new processes, and it didn't apply to new 
products under already approved programs.
    And what has happened since then under multiple Secretaries 
of HUD is that we have in fact had interactions with HUD as to 
new things that we are doing and keeping them informed.
    And on some occasions, they have indicated they thought 
something we might be doing was a program. In other cases we 
brought to them something we thought might be a new program.
    An example would be energy efficient loans. Congress asked 
Fannie Mae to do energy efficient loans back in the early 
1980s. It wasn't until the 1990s that we figured out how to do 
it. And we took that to HUD ourselves and said we think this is 
a new program, even though Congress has specifically authorized 
us to do it, and we believe that it requires your approval.
    The Chairman. Was that in the energy bill in the 1980s?
    Mr. Raines. It was in the energy bill in the 1980s. One of 
the things that the Congress did was look to Fannie Mae to help 
produce energy efficiency in the residential housing sector.
    And so what happens in that process is that when HUD either 
determines on their own that it is a program or we suggest it 
is a program, they then have to make a determination, based on 
the legislative history which is to encourage innovation, to 
see if it meets our charter and if it is in the public 
interest.
    And over that time, HUD has made decisions in a number of 
cases either that something wasn't a program or that if it was 
a program, that they would approve it.
    And so this has actually been a dynamic process. Some had 
defined this as somehow that HUD was not carrying out their 
role.
    If anything, our concern is that the process has been more 
restrictive on innovation than we think it should be or that we 
think Congress thought it should be, and that from time to time 
HUD has used their role to limit the development of new 
products in ways that we think are not helpful to the expansion 
of affordable housing.
    But certainly this has been a dynamic process and not one 
that is by any means an inactive provision of the charter.
    The Chairman. So it has not been a rubber stamp? There have 
been cases where you have actually been turned down for a new 
program approval?
    Mr. Raines. Yes, HUD has in fact indicated that they would 
turn things down. And, quite frankly, if we thought in our 
interactions with them that they thought it was inappropriate, 
we wouldn't go ahead and propose it.
    So you have had the normal back and forth between the 
regulatee and the regulator in the definition of this, and I 
stress, through multiple Administrations and multiple 
Secretaries of HUD.
    The Chairman. Is it true to say that there are some new 
programs potentially that could cause a safety and soundness 
issue?
    Mr. Raines. Well, there certainly could--you can imagine 
our trying to get into some area that could cause a safety and 
soundness issue. And that is one of the things that HUD would 
have to determine at the time.
    The current process by which that is done is that HUD would 
consult with OFHEO and get their advice as to whether it caused 
a safety and soundness issue.
    Although, typically, in most of these, it comes to a 
question of capitalization. OFHEO would typically look at an 
activity and say because of its risk, you have to have more 
capital, as opposed to simply saying there is no way you could 
possibly undertake that activity.
    The Chairman. Well, this committee may be faced with an 
issue as early as next week in terms of the markup and trying 
to determine how we deal with the program approval, at the same 
time deal with the safety and soundness, because, as you know, 
the Treasury proposal is very heavily tilted towards Treasury 
and that whole milieu of issues.
    And at some point we are going to have to wrestle with how 
we balance that between Treasury in the safety and soundness 
issue, which I think that is the gut issue has been decided, I 
think, my sense is, but the other issue in terms of the 
programs is still kind of out there.
    From your perspective, and having experience in that area, 
what would you suggest?
    Mr. Raines. Well, we have had extensive discussions with 
Treasury as to what their rationale is for a change. And I have 
to say that our focus in discussions with them and with others 
has been more on what the decision-making criteria are, as 
opposed to the location.
    It is far more important, we believe, that wherever the 
authority lies, that Congress make it clear that the intention 
is for the company to innovate.
    And within the context of the Treasury discussions, you 
know, they have indicated to us that in fact they believe that 
a prior approval regime isn't necessary at all, that they 
believe that that isn't a requirement. And that has some 
attractive features obviously from the point of view of 
innovation.
    However, we have been also talking to a wide range of our 
friends in the housing industry who have a very substantial 
concern that putting together the approval of our new program 
activities with the safety and soundness regulator might have a 
detrimental impact on housing. And we share a lot of those 
concerns.
    And so I would say to you, Mr. Chairman, that from our 
standpoint, wherever the committee decides to physically locate 
it, the most important issue is that there be a standard that 
encourages innovation and that we not ignore the fact that it 
has been through innovation that we have been able to serve 
more and more people.
    It is not from just doing that same plain vanilla 30-year 
fixed-rate mortgage we started doing in 1938. It is by having 
new programs, with low down payments, and with the ability to 
deal with people with impaired credit and other innovations 
that have really allowed us to expand affordable housing.
    The Chairman. Are you suggesting the innovation standards 
be in the statute?
    Mr. Raines. We believe that the regulator, whoever it is, 
should have a Congressionally determined standard as to on what 
basis could they turn down innovation. We have no question that 
on a safety and soundness basis if it were deemed not to be 
safe and sound, no question that the regulator, whoever it is, 
should be able to turn that down.
    But that has rarely been the issue. The issue has been more 
likely that someone doesn't want innovation because sometimes 
innovation means cutting cost. Sometimes innovation means new 
products coming in, competing with old products. And sometimes 
those who support the old products don't see it as an 
innovation, they see it as an invasion of their turf.
    But just as the antitrust laws aren't there to protect 
competitors; they are there to protect competition. And we 
believe that the new program approval authority should be there 
to protect consumers and not to protect competitors.
    The Chairman. Mr. Gould, do you have any comments in that 
regard, from the Freddie standpoint?
    Mr. Gould. Well, we feel, as I think Mr. Raines has 
suggested, that HUD has had a long experience in determining 
mission and programs, whereas the Treasury has not had that 
background. The Treasury would be very satisfactory to us in 
terms of safety and soundness, that is something that is their 
focus and I am sure that they would do well. But the expertise 
that HUD has developed, the history that HUD has had, makes us 
inclined to have those powers remain with HUD.
    Now, yes, I think it is important what the criteria are. 
That obviously is really a threshold question. Whether one can 
codify those criteria I think is another matter. There has been 
a long evolution of the method of financing in the housing 
market, which has benefited the homeowner and has benefited the 
consumer in that respect. A lot of that has been innovation 
that we would be anxious not to stultify people's imagination 
as to what products or programs could be created as long as 
they are safe and sound.
    I am not convinced that when one writes laws, that one can 
anticipate the future to that degree, and I think there has to 
be discretion left to the regulator.
    The Chairman. Well said.
    The gentleman from Pennsylvania?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Speaking of innovation, I suspect if there hadn't been 
innovation on accounting processes, we wouldn't be here today, 
Mr. Gould.
    Just to take a second of your time, I talked to another 
member of Congress who is holding a hearing on the Freddie Mac 
problem, and it seems that monies were transferred for a very 
short period of time with investment bankers for the purposes 
of not showing the income in a particular time frame, but to 
spread the income over a period of time.
    And in private corporations, I know they do that on a 
regular basis, but whether or not with your special feature, 
having at least in the marketplace the implication of full 
faith and credit of the government, whether we like the idea 
that there is so much attention being paid by the board or the 
corporate family as to what profits look like and for reasons 
that I am trying to determine in my mind, why is the board so 
worried whether or not there are spikes in income.
    And only potentially suggesting--I won't ask you to answer 
it--as we get into corporate governance and since we know 
salaries sometimes are determined on options and benefits, the 
motivation could easily be questioned here as to why Freddie 
Mac got into this difficulty.
    But all that being said, I can't wait until we are able to 
get your responses up here to tell us what really happened.
    Mr. Gould. Well, there are a number of ways to look at it, 
depending on where one is coming from in a sense. I think it is 
worth stepping back and saying what the issue is here. And its 
most fundamental characteristic is the timing of the 
recognition of income.
    What our new auditors have disagreed with, to some extent 
with the old auditors and to some extent with Freddie Mac's own 
policies, was when to recognize income that wasn't created out 
of air, but in fact existed--this is not an Enron, this is not 
a WorldCom. The question was whether that income should have 
been recognized in earlier years or whether it should be spread 
out in many cases over the life of an asset. And that is really 
where the issue has taken place.
    Now, Generally Accepted Accounting Practice is a must. 
There is no doubt that Freddie Mac and any other company should 
adhere to the rules of GAAP. Some of the more recent ones that 
had to do with derivatives, so-called FASB 133, are relatively 
new, there is some difference in interpretation that has gone 
on, and there is not a lot of precedent in history.
    Nonetheless, we must adhere to GAAP. But there was a 
feeling on the part of Freddie Mac's former management that 
GAAP alone did not reflect the underlying economics of Freddie 
Mac's business. Freddie Mac was a much steadier vehicle, and 
sometimes the way things had to be reported, marked to the 
market as influenced by interest rate fluctuations, made it 
appear that there was more volatility than was inherent in 
their basic business.
    And as best I can determine, I think that was a driver here 
in some of the attempts that were made.
    Now not adhering to GAAP simply cannot be allowed to 
happen. But there was I think on the part of former management, 
who did make their mistakes, but who also had a genuine concern 
as to how best to represent the company's underlying earning 
power and nature to the public market.
    Mr. Kanjorski. I am looking forward to those explanations.
    I do want to get to Mr. Raines, though. I looked at your 
testimony, and you don't seem to use the same magic words as 
the Secretary of the Treasury: strong, independent, world 
class.
    Is that for the particular reason that maybe you agree with 
the Treasury and how they use independent is not necessarily 
independent?
    Or maybe I should frame it in a direct question: What would 
you have against your regulator being unfettered and coming to 
Congress and being able to speak without having prior vetting 
by the Secretary of Treasury?
    And, two, why do you consider, with your large 
institutions, it is important that the Secretary of the 
Treasury work on the policy matters for the regulator and why 
we can't have a separate policy decision made by the regulator?
    Mr. Raines. Well, Mr. Kanjorski, as to the language, I 
thought you and the Secretary explored the language quite well 
when he was here with you last time, so I didn't think I could 
add anything to that.
    But to your specific question----
    Mr. Kanjorski. Well, do you want an independent regulator 
that doesn't get vetted and that doesn't have his policy 
reviewed by the Secretary of Treasury or not?
    Mr. Raines. Well, I think there were three issues that you 
discussed with the Secretary, and let me just discuss each of 
those three that go to independence.
    One of them had to do with the finances of the regulator. 
We believe we should have a well-funded regulator; but we don't 
believe that anyone should have unfettered ability to set their 
own budget without anyone looking at it. Within the banking 
context, that is regulated by the fact that banks can change 
regulators and so there is a constraint on how large their 
budget can be.
    We would be the only one who would have a regulator who 
could set an unlimited budget. So we do not favor independence 
if it means that there is no one looking at the budget.
    As it goes to regulation and independence, my understanding 
is that currently our regulator's regulations are reviewed by 
OMB and so that would not be a change on that.
    On the issue that you specifically raised about testimony 
and about policy, that to me is an issue solely between the 
Congress of the United States and the Treasury Department. We 
have no view as to the resolution of that. And I understand the 
views of Congress, that you want an unfettered approach, and I 
understand the views of the Department, but we have no views as 
to how to resolve that third issue.
    But on the first issue, we do have a point of view; on the 
second issue we think it is the status quo; and on the third 
issue, I think it is simply up to whatever the will of the 
committee is as to how you want to resolve that.
    Mr. Kanjorski. Mr. Raines, you are certainly well familiar, 
as a former Director of OMB, do you have review rights over 
OCC? Did you at the time?
    Mr. Raines. You know, I don't remember. I don't remember 
whether--and it may depend on the nature of the regulation, but 
I just don't remember whether OCC had to go through the OMB 
process.
    Mr. Kanjorski. I appreciate that. We will have to examine 
it.
    Can I just ask one more question of our Federal Home Loan?
    Obviously we have a difference of opinion here. The 
question is always arising, Mr, Schlutz, you referred to it in 
your testimony, there may be a difference in the interest rate 
and the market may look at your credit instruments in the 
future with a different eye as opposed to Freddie and Fannie. 
And that obviously worries you. But you said ``it may.'' You 
were very careful not to use ``it will.'' And I appreciate 
that.
    Do you have that same fear, that there may be some 
difference in how the credit markets look at your paper as 
compared to Fannie and Freddie and could it put you at a 
disadvantage, Mr. Hehman, or do you feel that the system will 
work that out without a problem?
    Mr. Hehman. I think the financial markets will work that 
out. I am not as concerned as some other folks who have 
speculated that our funding costs will change.
    I think what is most critical is that we have good, solid 
reporting, and in our case we think that is through the SEC. 
And we think the financial markets will look at the underlying 
risk of the institution, its capital levels, its interest rate 
risk and so forth, not necessarily to whomever the regulator 
may be. So I am not that concerned about it.
    The Chairman. The gentleman's time has expired.
    The gentleman from Oklahoma, Mr. Lucas?
    Mr. Frank Lucas of Oklahoma. Thank you, Mr. Chairman.
    And like all of my colleagues, I share those concerns about 
safety and soundness.
    Mr. Raines, in particular, one of the challenges of being 
from Oklahoma and having a state with a tremendous amount of 
cultural diversity, people from every continent, by historic 
and ethnic origin, as well as 39 recognized Native American 
tribes, is that we have particular challenges when it comes to 
housing issues. And your folks have been very aggressive, very 
successful in my tenure in Congress in doing things to help 
facilitate efforts to address those kind of issues.
    Could you for a moment speak to the issue that probably I 
think gets to the core of what a lot of us are concerned about, 
and that is the questions as addressed earlier about how the 
proposed legislation would affect your ability to create those 
new opportunities? Thinking about my Native Americans in 
Oklahoma, how would this legislation, this proposal as you 
understand it, impact those efforts?
    Mr. Raines. Well, Congressman, depending on how the 
committee writes the bill, it can either accelerate our ability 
to innovate or it can basically turn us into another stultified 
bureaucracy.
    And I say that advisedly. We have 54 partnership offices 
around the country that we established for the sole purpose of 
working closely with local communities to try to bend our 
national programs to fit local circumstances.
    And we have been remarkably successful in doing this and 
able to innovate, whether it is on Indian tribes and now that 
we are one of the only people who will buy mortgages on Indian 
reservations that are governed solely by the Indian judicial 
system, or whether it is in New Orleans where we are one of the 
first people to try to help them to move housing from being 
very small, shotgun class, into housing that moderate income 
and working people could own, all over the country.
    But we have been able to innovate because we as a private 
company could say ``yes'' within the time frame that people 
needed.
    But if, on the other hand, every time we had a new idea, a 
new activity, a new product, we had to go and get prior 
approval, that would not only slow the process down, I think it 
would discourage us from even trying because by the time we got 
it done, all of our partners would have been frustrated by our 
lack of ability to respond.
    So a lot hinges on how it is written. And I think if it is 
written as I am thinking Congress intended in 1992, to 
encourage innovation, under a broad set of programs that had 
been approved, then I think we can continue to make an enormous 
amount of progress.
    On the other hand, if we go backward and change the 
standard and make it so that if every time we change a process 
or an activity then that has to be approved, then I think it 
will bring innovation within the housing finance industry to a 
screeching halt.
    Mr. Lucas of Oklahoma. Well, I appreciate that. And 
certainly of my 39 tribes, 16 of which are in my congressional 
district, every one has a different tribal charter, a different 
governing system, a different perspective. Most have uniquely 
different courts, tribal courts to work within. I appreciate 
that.
    I think, Mr. Chairman, I would like to yield back the rest 
of my time at this time.
    The Chairman. Gentleman yields back.
    The gentleman from California, Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    I think we all agree we need the strongest possible 
regulator of the financial soundness of the housing GSEs. And I 
think that we all agree that Treasury would be the entity that 
the markets would respect the most. That is why I am glad we 
are having a hearing and hopefully a markup of H.R. 2575, which 
is the subject of this hearing.
    I am concerned, and I will ask the panel to bear with me on 
this, but this is a special concern, I think, for many of you, 
but especially from anyone from California, that H.R. 2575 
currently still contains section 110, which would lower the 
conforming loan limit on single family units from $332,000 to 
$275,000. And that would be an anathema to those of us from 
high cost areas, including Los Angeles.
    Now, I am told that it is the plan of the authors to delete 
that provision and I hope very much that that occurs. However, 
if it does not occur, then I think it would be germane for me 
to offer an amendment to raise the conforming limit in those 
states that contain a standard statistical metropolitan area in 
which housing prices on median exceed $322,000, or whatever the 
conforming loan limit is.
    I am going to be leading up to a question here. But I will 
be interested to focus on not who should be the financial 
soundness regulator, but which entity should give new program 
approval to the housing GSEs.
    I fear that if we take that away from HUD, it would be like 
taking the ``H'' from HUD and we would have to rename it UD, 
because housing would no longer be its province.
    I understand that new programs may raise safety and 
soundness issues. So if HUD approved the new program, Treasury 
could then step in and say well, that is a riskier program, 
here are the reserves that you need. That is the proper purpose 
of a safety and soundness regulator.
    But if the mission of developing new types of mortgages 
that will help those, say with tarnished credit histories, get 
financing, if that is moved over to an organization whose 
mission and expertise has nothing to do with getting people, 
particularly first-time home buyers into housing, I think that 
would be a problem. So I hope that we can keep the ``H'' in 
HUD.
    Now, currently HUD does have as its primary responsibility, 
Mr. Raines and others for a oversight mission and it is their 
responsibility, as I have said, of approving new programs.
    You have indicated that you support the Administration 
proposal to bifurcate these mission oversight duties, which 
would, as I have stated, result in HUD retaining its goal of 
providing affordable housing and Treasury would be the primary 
regulator of financial soundness.
    Perhaps, Mr. Raines, you could explain why would it make 
sense to split these two functions? And do you think that HUD 
has more expertise in your mission goals of providing housing 
to, and particularly home ownership to those who currently 
don't own their homes?
    Mr. Raines. Well, I certainly believe that HUD does have 
that expertise. And we have been a partner with HUD over many 
years in working together to try to expand the availability of 
affordable housing. So clearly HUD has the housing expertise 
within the Federal Government, no question about that.
    And that is why we are very focused on the issue, from our 
standpoint, of what the standard is on deciding as opposed to 
the geography of who decides. For us, if the wrong standard is 
there, we wouldn't want it in HUD. If the right standard is 
there, then we are open to where it can be. And ultimately, 
obviously, this committee is going to have to make up its own 
mind about that location.
    But we don't see any magic in it being in one place or the 
other. There is nothing that is going to make it better by 
moving it to Treasury ipso facto. The question is what the 
standard is and how will that authority be used and will it be 
used to encourage innovation or will it be used instead for 
other purposes?
    Mr. Sherman. So HUD has as its mission a dedication to 
providing affordable housing and home ownership to those who 
otherwise wouldn't have it. It has the expertise to evaluate 
your new programs to see whether they achieve that goal. And 
yet you are an agnostic on whether the agency with the mission 
and the expertise would have that as its function. I, however, 
am a true believer that we should keep the ``H'' in HUD.
    And I yield back the balance.
    The Chairman. The gentleman yields back.
    The chair recognizes the gentleman from Louisiana, the 
chairman of the Capital Markets Subcommittee.
    Mr. Baker. Thank you, Mr. Chairman.
    Mr. Gould, in your testimony you have a statement that 
says, ``Freddie Mac would strongly support the creation of a 
new regulatory office within the Department of the Treasury if 
Congress were to determine that this would enhance the safety 
and soundness oversight.''
    Beginning with that, I assume that absent the issue of 
capital and new product approval, using the Treasury testimony 
as your point of reference, do you generally support the 
proposal as outlined in the hearing before the committee by 
Treasury? Or are there issues of concern beyond capital and new 
product approval that you would like to bring to our attention 
for the committee's consideration?
    Mr. Gould. Well, again, there has been great deal of 
conversation on the earlier panel of independence. I think if 
one used the model of OTS or OCC, we would find that certainly 
to be acceptable given the independent decision-making. It 
wasn't totally clear to me from Secretary Snow's testimony 
whether that model was being totally followed. But that is what 
we would think is the proper way to do it.
    And we stick with HUD on the mission because they have had 
experience, they do have perspective. That is their job. The 
Treasury has had no background in that. And it certainly is 
necessary to make sure that it is not restrictive, as opposed 
to allowing innovation.
    But nonetheless, there is an agency that is experienced. 
And I think it is fair to say that Freddie Mac's experience 
working with HUD in that regard has been quite satisfactory.
    Mr. Baker. Thank you.
    Mr. Raines, you have a similar comment in your testimony 
about the advisability of an independent regulator being 
constructed. Are their other issues on your list beyond the 
capital question and the new product approval or perhaps the 
independence issue that you would want to bring as concerns 
with the Treasury recommendation?
    Mr. Raines. Yes. The other item that we have emphasized is 
that our experience with our Presidential directors has been a 
good one. And it would be our preference to keep them as 
members of our board. And so I think that is a difference with 
the Secretary's proposal.
    But fundamentally, with regard to no change in our status, 
in our charter, in our mission, we are in agreement with the 
Secretary.
    With regard to capital in terms of no statutory change in 
minimum capital but more flexibility for the regulator with 
regard to risk-based capital, we are in agreement with the 
Secretary.
    And as we just discussed, where it comes to innovation in 
housing, the key has to be to make sure that innovation in 
housing can occur. And if a standard can be established on 
that, then I think that probably we could get broad agreement 
in terms of location.
    Mr. Baker. Well, my reason for the question is we have a 
platform from which we can begin to construct an effort, and 
identifying those areas where we have outstanding differences 
are, I think important because by and large there is broader 
agreement than one might first perceive on the necessity to 
move forward with a new regulatory structure.
    Some members today have questioned the advisability of any 
change in current regulatory form. And I wanted to have both 
your perspectives that you do believe it advisable, assuming 
that Congress conducts business properly from your perspective, 
absent those identified issues on which there is some concern 
on your part.
    With respect to the Secretary's position on minimum 
capital, I asked an initial question during the hearing to 
which Mr. Ney asked a follow-up question.
    There was another person just before the hearing concluded. 
I would like to read my question and the Secretary's response.
    ``Just for point of clarification, Mr. Secretary, on the 
capital issue, I understand the position currently is that we 
do not seek nor do we expect to change any capital standard 
immediately on establishing whatever this regulatory body would 
look like.''
    But coupled with that is the statement, ``We do not, 
however, wish to limit our authority to change capital 
standards as we see fit both with regard to minimum or risk-
based, based on staff analysis of risk assessment of the 
institution's leverage, or whatever standards you may choose to 
use. You do not want to have a regulatory system that 
constrains your ability to act in the public interest.''
    Secretary Snow: ``That is right. That ought to be the 
decision of the regulator.''
    Now subsequent to that, there was a request by somebody to 
clarify further, and there was another statement issued 
relative to the capital standard issue.
    ``The Administration is not proposing legislation itself 
change any capital standard''--that is a point I agree with.
    ``We also are not suggesting that the statutory minimum 
capital of 2.5 percent be changed''--I agree with that.
    ``We are recommending that the new agency have full, more 
flexible authority over setting risk-based capital 
standards''--I agree with that.
    So I guess our only point is, if we are not going to change 
minimum, do we construct a new regulator like every other 
financial regulator of every other financial institution who 
has that tool in his resume, recognizing that we are not going 
to change the minimum capital standards, but if risk profiles 
change and there is a need to change it, why should we have to 
come back to the Congress in order to adopt a minimum capital 
modification?
    And I am out of time, and he is ready to push a button, so 
let me throw one more thing.
    If we were to----
    The Chairman. Was that a rhetorical question?
    Mr. Baker. I am just still kind of continuing the same 
question, because I figured you might cut me off if I stop and 
said this is question two.
    So continuing in defining that question: If we were to take 
the advice of Mr. Royce and others and roll the Home Loan Bank 
System into a new single regulator, what would be the Federal 
Home Loan Bank's view of adopting your capital standard, which 
some bright legislators a few years back came up with this 
class A, B stock, where if you are class A you have to have 5 
percent, class B, 4 percent, if you are blended somewhere 
between that.
    Would you, based on your operational experience and your 
ability to make credit available to your customers and your 
ability to move in the markets, have you found that capital 
standard to be an inhibition to your success--either one of the 
Home Loan Bank folks--and would you recommend to us that if we 
were all together, everybody would have the same capital 
standard?
    Mr. Schultz. Speaking for myself, we have not found 
operating under the capital standard in the Federal Home Loan 
Bank Act to be a problem. I think as capital plans diverge as a 
result of the changes after Gramm-Leach-Bliley we may see 
competitive differences emerge among the banks. But the capital 
standards remain the same for all the banks and they have not 
been a problem.
    Mr. Baker. Mr. Hehman, do you want to respond?
    Mr. Hehman. I would agree with that.
    We have implemented our capital plan, Congressman. It is 
working. It is working quite well. And we think it is an 
appropriate level of capitalization for our balance sheet.
    Mr. Baker. Mr. Raines, do you want to respond?
    Mr. Raines. I wanted to respond to the first part of the 
compound question----
    Mr. Baker. Briefly.
    Mr. Raines.----which went to the Treasury's position on 
capital.
    And I think having inquired of them very carefully as to 
what their position is, I would like to be sure that we don't 
have a misunderstanding.
    My understanding of the Treasury's position, as they have 
reiterated it, is that they do not support a change in the 
statutory level of minimum capital. They do favor additional 
flexibility for risk-based capital. Therefore, the regulator 
would not be able to change the minimum capital standard, but 
could change the risk-based capital standard.
    And the reason they would change the risk-based capital 
standard is if risk changed. So if an event occurred, then you 
would change the risk-based capital standard. There would be no 
reason to change the minimum capital standard because of a risk 
reason.
    So the only reason I can imagine to change the minimum 
capital standard is that if you want to reduce the level of 
activity that we can carry out. And right now, our minimum 
capital standard is about 400 times our losses. The bank 
minimum capital standard is more like 50 times their losses.
    So I would be concerned about a provision that said that 
they could change the minimum capital standard without 
Congress's approval, because that is a question that goes to 
how much you want us to do. The risk-based capital standard 
goes to how we handle the risk.
    So I believe that we and the Treasury are in absolute 
agreement on that, that in their proposal, there is not a 
proposal to allow the regulator at a later date to change the 
minimum capital standard.
    Mr. Baker. Mr. Chairman?
    The Chairman. The gentleman's time has expired.
    Mr. Baker. Just one further caveat: There is just an honest 
dispute here. I have had lengthy discussions with Treasury over 
many months over capital adequacy. And my view is just 
different from the gentleman's. But I think it is something we 
should appropriately resolve and look forward to doing so.
    Thank you.
    The Chairman. The gentleman from Missouri.
    Mr. Clay. Thank you, Mr. Chairman, and thank the panel for 
their testimony today.
    In 1992, after exhaustive study, this committee made 
improvements to the charter for Fannie Mae and Freddie Mac. One 
improvement was intended to help close the housing gap which 
still exists between minority and majority homeowners.
    While the gap remains at over 30 percentage points, I do 
not fault the GSEs for lack of trying. They work on a daily 
basis to create innovative products and programs which meet the 
needs of those denied the American dream of home ownership. 
Fannie Mae and Freddie Mac help to bring the dream of home 
ownership to thousands of my constituents on a regular basis.
    I have serious concerns that as we rectify the problems at 
one GSE that Congress does not give in to the business 
opponents of these GSEs who profit from predatory and subprime 
lending at the expense of affordable housing.
    The minority home ownership achievements of these GSEs are 
on the right track.
    And, Mr. Chairman, I ask unanimous consent to submit my 
statement in its entirety into the record.
    [The prepared statement of Hon. Wm. Lacy Clay can be found 
on page 110 in the appendix.]
    The Chairman. Without objection.
    Mr. Clay. Thank you.
    And for Mr. Raines. Last week in Secretary Martinez's 
testimony, he pointedly stated that you, Fannie Mae, does not 
lead the market in providing financing for low-income and 
minority home ownership. Could you please explain that to me? I 
am very interested to see if that was accurate.
    Mr. Raines. Well, with all due respect to the Secretary, we 
do disagree with the statement that was made, and in some ways 
I think it was a result of his referring to somewhat outdated 
information.
    Fannie Mae is the largest single provider of financing for 
low-and moderate-income households in the country. Last year we 
provided $279 billion. We provided $136 billion to support 
minority families' ability to own homes.
    To give you some perspective, that is more than the top 
four direct lenders combined, that Fannie Mae has done.
    So no one is even close to the level of what Fannie Mae has 
done. Indeed, we finance far more in the way of first-time home 
buyers and minority home buyers than the FHA, where that is 
their major endeavor.
    So we do lead the market. If you look at 2002 and 2001, we 
led the market with regard to low and moderate income borrowers 
and with regard to minority lending we led the market. And in 
the sub-categories, with regard to African-American lending and 
Hispanic lending, we led the market.
    But we not only led the market, we led the market with the 
lowest-cost product so that people were not just getting a 
loan. They were able to get the lowest-cost loan that was in 
the market.
    So whether it is our housing goals, which we have met every 
year, or whether it is low and moderate income borrowers, or it 
is borrowers in underserved areas, or whether it is minority 
goals, which we set ourselves--HUD does not have the authority 
to set a minority goal, we set that ourselves--in all those 
cases we lead the market, and we are quite proud of it. And it 
hasn't been easy. But it is a fundamental to who we are and 
what we do.
    And the last thing I would say is, there are many ways of 
looking at leading the market. One of them is obviously 
provision of mortgages. But it is also leading the market to 
make sure that people have the information they need so they 
know how to get a loan. It is also leading the market to make 
sure that discriminatory practices are taken out of 
underwriting. And it is also leading the market to be the 
largest investor in low-income housing tax credits, which is 
the single largest vehicle for financing affordable rental 
housing. None of those are captured by the HUD goals.
    So we lead the market by their terms, and we lead the 
market by the terms of the housing industry.
    Mr. Clay. I thank you for that explanation and 
clarification.
    Also, Mr. Raines, I understand that you currently have to 
meet certain housing goals. And my understanding is that you 
have never failed to meet those goals. Is that correct?
    Mr. Raines. That is correct.
    Mr. Clay. Could you tell me then why HUD wants to create 
new categories of sub-goals in this area, or do you know?
    Mr. Raines. I don't understand that, because HUD has 
authority currently to provide incentives for us to pursue 
particular types of loans that they believe are important.
    For example, the last time they changed our goal level--and 
they have been changing our goal level periodically and raising 
it--they showed an interest in expanding our activity with 
small multi-family projects, five to 50 units. And they 
provided an incentive in the goal in order to do that.
    So they have the authority now to have incentives to 
encourage us to do more in areas that they think are important 
for housing purposes.
    Mr. Clay. I thank you for that.
    Thank you.
    The Chairman. The gentleman yields back----
    Mr. Gould. Would I have a chance, Mr. Chairman, just to 
make----
    The Chairman. Of course.
    Mr. Gould. Fannie Mae has done a very fine job on doing 
these goals. But I wouldn't want it to sound as though Freddie 
Mac is not part of this process. We joined with Fannie Mae in 
committing between the two of us, and Fannie is larger than we, 
so they can afford a bit more, a trillion dollars, the 
initiative President Bush announced, by 2010.
    We continue to meet the permanent housing goals of HUD. 
There is more we can do. We are currently, for example, talking 
to the manufactured housing industry in terms of how we could 
innovate and with safety and soundness standards provide a flow 
of funds to that industry where people could perhaps have 
housing at a lower cost.
    There is much to be done in housing in the future to 
fulfill our mission. But we are very much part of that mission 
and doing our percentage share I think, for example, of the 
trillion dollars, our share is roughly $450 billion.
    Mr. Clay. Mr. Gould, I had no intentions of----
    Mr. Gould. No, sir, I know that. But I just thought for the 
record.
    Mr. Clay.----overlooking Freddie Mac, because you all do 
play an essential part in Missouri also.
    Thank you.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Gould. I have never found Fannie Mae bashful about 
these things.
    Mr. Royce. Thank you, Mr. Chairman.
    And just for the record, Mr. Chairman--Mr. Gould, yesterday 
Freddie Mac sent a letter to Chairman Oxley and the committee 
members here outlining your position on this debate. And let me 
just say that I was surprised to see Freddie Mac fighting 
against sound regulatory policy.
    Furthermore, I could not believe that Freddie Mac was 
offering advice about placement of regulation for the Federal 
Home Loan Banks.
    It would be my concern that Freddie Mac wants the banks 
left out so that you will have a cost-of-funding advantage in 
this situation. And I think that Freddie Mac should be a little 
more concerned about trying to produce some financial 
statements with integrity and a little less about trying to 
disadvantage a competitor.
    I would like to ask Mr. Schultz a question, and 
specifically, Mr. Schultz, there is a history of tension, or in 
some cases antagonism, between banks and Treasury. If a new 
agency under Treasury regulates the banks, will this situation 
change or will it continue? And if the latter, would that be a 
positive regulatory change?
    Mr. Schultz. Thank you for your question.
    The aphorism of what you see is a function of where you sit 
is applicable here. We have been listening to--I have been 
listening and learning from discussion about where regulatory 
approval is vested with respect to mission.
    We do not have that issue. The Federal Housing Finance 
Board is our mission regulator and our safety and soundness 
regulator.
    Our understanding, our hope is that if the Federal Home 
Loan Banks are included in this bill--and, again, I would like 
to state that it is not simply the cost-of-funds of question, 
it is the decision to create a world class regulator for the 
GSEs that causes me to say that we should be included as well.
    But if we are included, then I hope that the Congress, this 
committee, will include language that protects the mission of 
the banks and protects the independence of the regulator, 
similar to what our other colleague GSEs would like to see, or 
Freddie Mac, and that that language go a long way toward 
resolving the concerns about whether or not Treasury would be--
a Treasury-independent regulator would be a problem, hostile to 
the mission of the bank system.
    Mr. Royce. Well, let me ask a question then of your 
colleague, Mr. Hehman.
    And that question would be--going to that same premise--if 
we ensure sufficient mission protection--let us say that was 
possible--and we ensure agency independence, and that 
independence is under Treasury, really, in that situation, how 
far apart would the 12 Federal Home Loan Banks be? And in that 
context, would you still object to moving regulatory authority? 
Or do you think that in theory that might be possible to get 
that type of concurrence?
    Mr. Hehman. Clearly, if you had those written into the 
legislation, the 12 banks would come probably closer in our 
view of this.
    Again, our view is that the Finance Board has been an 
adequate regulator, does not need to be a part of the Treasury, 
or our regulator needs to be a part of the Treasury.
    We do have some concerns about that at the Cincinnati bank, 
clearly.
    Obviously, whatever the Congress decides in their wisdom, 
the Home Loan Banks are going to live with that.
    The position that our board took is that the independent 
regulator--and independent is critical--who is also our mission 
regulator, ought to be left alone. That is the view that our 
board of directors took, Congressman.
    Mr. Royce. I appreciate that.
    If we go back to Mr. Schultz--again, Mr. Schultz, if we 
move the functions of the Finance Board to Treasury, how do you 
think that new agency could be structured? Would you give us 
your insights into how you think that would most effectively be 
done?
    Mr. Schultz. Thank you.
    I believe that the differences between the Federal Home 
Loan Banks and Fannie Mae and Freddie Mac have been discussed 
in other people's testimony. But basically we are talking about 
a cooperative with par value stock, and that is the way we get 
private capital to use for public purpose.
    And there are a host of issues that arise that make us 
different from Fannie Mae and Freddie Mac. And for that reason, 
we would suggest that a separate office be created in this 
regulator for the Federal Home Loan Banks, which would assess 
the banks and use those funds to for its operations, and that 
the mission language and independence language be included in 
the statute.
    We do think it is important that the activities of the 
regulator be funded through the banks.
    Mr. Royce. Thank you, Mr. Schultz.
    Mr. Baker. I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back. The gentleman from 
California, Mr. Baca.
    Mr. Baca. Thank you very much, Mr. Chairman.
    First of all, I would like to thank our distinguished 
guests for appearing before us. I particularly want to thank 
Frank Raines and George Gould.
    The work you do in the Latino community is very important. 
Both companies have impressive track records of expanding 
minority home ownership. Hispanic home ownership rates have 
increased from 44.7 in 1998 to almost 50 percent today.
    In the year 2000, Fannie Mae financed over $135 million in 
loans to almost 1 million minority families. In my district, 
Freddie Mac purchased almost $1 million in mortgages that 
financed home ownership for over 800,000 families in the year 
2000.
    My question is for Mr. Frank Raines. Factoring immigration 
and population growth over the next 10 years, isn't there a 
common concern where the mortgage money will come from--or 
where it will come from to meet the demands going forward? That 
is question number one.
    And shouldn't this be carefully factored in any legislation 
that do not encumber a well-working housing finance system?
    Mr. Raines. Congressman, I think that is absolutely right. 
We are going to need to find an additional $6 to $7 trillion of 
financing for home mortgages over the next 10 years--an 
additional $6 to $7 trillion.
    We got the first $6 to $7 trillion over the last 200 years. 
And we are going to need to come up with another $6 to $7 
trillion over the next 10 years.
    So this is a very important debate that this committee is 
having as to the structure of the regulation of these entities 
that are so crucial for reaching around the world to find that 
$6 to $7 trillion.
    One-third of the funding that Fannie Mae brings to its 
portfolio comes from outside the United States.
    So it is very important that we have a structure in place 
that gives confidence to investors that they will continue to 
invest in American homes. Because if they don't, we will end up 
with a capital shortage.
    Already, the U.S. mortgage market is the fastest-growing 
capital market in the world.
    And so it is not as though we just can assume that another 
$6 to $7 trillion would come automatically. It will come 
through a lot of hard work and through well-financed, well-
capitalized intermediaries who will attract that capital into 
our system and then provide it to lenders so that they can lend 
it to individual families.
    Mr. Baca. Good. And isn't it true that home ownership will 
increase amongst the Hispanic community, as we look at right 
now we represent approximately 14 percent of the population, 42 
million people? That includes Puerto Rico. Is it true then that 
the majority of the future home ownerships could come from the 
Hispanic community?
    Mr. Raines. Well, we are going to see tremendous growth in 
the Hispanic community. By 2020, we are going to see the growth 
in the Hispanic community of about 75 percent growth, 28 
percent growth in the African-American community, 80 percent 
growth in the Asian community, at the same time the non-
Hispanic white community's going to grow by 9 percent.
    So quite clearly, the future of home ownership, the future 
of housing in America is going to be around this growing 
population that is going to need not only access to capital in 
theory, but in fact.
    And this has been the area where we have had to work the 
hardest to make sure that the capital system is working for 
these families. And again, if we fail, if we fail to come up 
with $6 to $7 trillion, the people who will be hurt will be 
that part of the population that is growing and that part of 
the population that has not heretofore benefited from home 
ownership.
    Mr. Baca. Thank you, I know that the minority community 
both appreciates Freddie Mae and Freddie Mac and the services 
it is providing in minority communities. So thank you.
    The Chairman. The gentleman yields back.
    The gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman, and I thank the 
gentlemen who are before us. I have significant respect for all 
of them. But I do think that we need to be asking some tough 
questions, and I do want the answers to a few questions.
    Mr. Gould, back in June 25, Freddie Mac indicated its 
earnings could be restated by as much as $4.5 billion and that 
its accounting lapses are more serious and more pervasive than 
previously announced. Today, the company announced the 
restatement would be a minimum of $4.5 billion.
    In the company's statement, I quote, ``the disclosure 
process and disclosure in connection with these transactions 
and policies did not meet standards that would have been 
required of Freddie Mac had it been an SEC registrant.''
    The company further stated, ``Freddie Mac is committed to 
strict compliance with generally accepted accounting principles 
and meeting fully the spirit and intent of all rules and 
regulations surrounding financial reporting.''
    This is my question. Given everything that has happened at 
your company, and the fact that you have acknowledged not 
living up to the disclosure standards required by the SEC of 
all other public traded companies, and also the fact that 
Freddie Mac now claims to be committed to strict compliance 
with all financial reporting requirements, how can you still 
argue that Freddie Mac should be outside the jurisdiction of 
the SEC and the Securities Act of 1933?
    Mr. Gould. Well, as you know we are going to become a 
registrant under the 1934 Act. As you know Freddie Mac is a 
constant financier. Compared to the average American company, 
therefore, the average registrant, we finance many, many, many 
times a year more than they do. And we have looked at the 
absolute requirements of the 1933 Act as a drag on that 
financing, because an additional cost which could get passed 
along in our cost structure to mortgages, to a slowdown, to----
    Mr. Shays. So it would be basically your argument that it 
would provide additional costs and requirements, correct?
    Mr. Gould. Well, yes, but let me try to be more specific 
and give you examples.
    Mr. Shays. You know, I don't want too long an answer.
    Mr. Gould. Okay.
    Mr. Shays. Only because I am given five minutes.
    Mr. Gould. All right, sir.
    Mr. Shays. Thank you. Regarding your reinstatement, my 
understanding is that the minimum $4.5 billion by which you may 
have underreported income is after tax. Is that correct?
    Mr. Gould. That is correct.
    Mr. Shays. So your before tax is going to be--the minimum 
is going to be much higher than $4.5 billion?
    Mr. Gould. That assumes a 35 percent tax rate.
    Mr. Shays. Can you give me an estimate of how much money 
your accounting practices have cost the Federal Government?
    Mr. Gould. Have cost the Federal Government in what sense?
    Mr. Shays. In taxes that haven't been paid that should have 
been.
    Mr. Gould. Oh, gosh, the amount of taxes, if any, 
additional taxes payable would be minuscule compared to that 
amount of money.
    Mr. Shays. Why, you don't pay--I know you don't pay 
Federal, I know you don't pay local and state taxes. But do you 
mean you don't pay Federal taxes?
    Mr. Gould. No, sir. There is a confusion there. Much of 
that money in the restatement is a function of marking 
instruments to market, which is not a taxable event. It is not 
a matter of having sold something and not reported the income 
or profit on the sale. It is a matter, particularly in a time 
of declining interest rates, of marking assets to the market, 
which therefore are worth more and should have been marked to 
the market, but were not at the time. But that is not a taxable 
event.
    Mr. Shays. A June 17th story in the Hill newspaper quotes a 
Freddie Mac lobbyist as saying, ``We feel good about these 
hearings because this is a great story to tell. The restatement 
of earnings is going to be up, not down.''
    Do you agree with this assessment that, in my words, that 
accounting fraud is good news as long as it is up?
    Mr. Gould. No, sir, I do not agree with your statement that 
it is fraud.
    Mr. Shays. You don't think this was fraud?
    Mr. Gould. No, sir, I do not, nor does Mr. Doty, who was 
the investigator that I hired to look into this in the first 
place, as he testified today in the Energy and Commerce 
Committee.
    Mr. Shays. Does the Government think it is fraud?
    Mr. Gould. Sir?
    Mr. Shays. Does the Government think it is fraud?
    Mr. Gould. I do not know who the Government is in that 
respect, sir.
    Mr. Shays. So the fact that you haven't complied with 
general accounting practices and have understated your earnings 
by over $4.5 billion, if someone in the private sector did 
that, wouldn't that be fraud?
    Mr. Gould. Well, I do not have a legal background, and I 
don't want to get past territory with which I feel familiar, 
but my understanding, for what it is worth, in that regard is 
that fraud also implies intent.
    Mr. Shays. When do you intend to come under the 1934 Act?
    Mr. Gould. We have no present intention of doing so.
    Mr. Shays. 1934 Act.
    Mr. Gould. Oh, I am sorry, 1934. I am sorry, I thought you 
said 1933. The 1934 Act is as soon as we can. We cannot do that 
until our financials are current. And that will probably, as 
Director Falcon said this morning on the first panel, that will 
probably take into the middle of next year. As soon as our 
financials are current, we will do so.
    The Chairman. The gentleman's time has expired.
    Gentleman from Massachusetts.
    Mr. Frank. Let me ask Mr. Gould and Mr. Raines on behalf of 
Freddie Mac and Fannie Mae, do you feel that over the past 
years you have been substantially under-regulated?
    Mr. Raines?
    Mr. Raines. No, sir.
    Mr. Frank. Mr. Gould?
    Mr. Gould. No, sir.
    Mr. Frank. And let me ask now the gentleman from the 
Federal Home Loan Bank, do you believe that the Federal Home 
Loan Bank System has been substantially under-regulated?
    Mr. Hehman. No, sir.
    Mr. Frank. Mr. Schultz?
    Mr. Schultz. No, sir.
    Mr. Frank. Okay. Then I am not entirely sure why we are 
here, but we killed the afternoon anyway, so we might as well 
go forward.
    I must say, I am inclined to agree with that. I don't see 
any financial crisis. You can always make things better, but I 
do think we should dispel the notion that we are here because 
there is something rotten that has gone on.
    And I am not one who has been impressed with the history of 
results improved by reorganizing boxes, so I don't know whether 
OFHEO goes to Treasury or not, whether it makes a big deal, I 
am not going to fight it.
    I am concerned about the housing piece.
    And, Mr. Raines, I would differ with one question you were 
asked about whether you should be given--whether HUD should be 
given the ability to do sub-goal. And you said: Well, they 
already have the ability to give you incentives to do that.
    Yes, but maybe they ought to have the right to give you 
orders to do it. I mean, I understand, we all would rather only 
do things that we were incentivized to do, but sometimes maybe 
we should be told to do things to do. And that to me is kind of 
an open question.
    I think the current arrangement is a good one; I think we 
have benefited. I think we have benefited with regard to Fannie 
and Freddie in reducing the cost of housing in general.
    As I have said, apparently there are people in this 
country, investors, who knowing everything they should know, 
are prepared to lend you money at a little less than they would 
charge other people. I am glad they do. I think housing 
benefits. Nobody should be under any illusions that there is 
any guarantee, implicit, explicit, whatever-plicit. It just 
ain't there.
    And I find it ironic, frankly, that some of those who are 
the most interested in trying to--who are worried about this--
the only people who it seems to me to be creating the 
impressions that there is a guarantee are the people who are 
your opponents, who keep saying there is one. If they would 
stop saying there is one, then they wouldn't have to worry 
about people thinking there was one, because it is a self-
fulfilling prophecy.
    But I am interested in doing a better job on the housing 
area.
    Now, let me ask Mr. Schultz and Mr. Hehman, because this is 
something that really originated right here in this room, the 
affordable housing fund that the Federal Home Loan Banks have, 
is that an obstacle, the existence of that, is that an obstacle 
to your being able officially to perform the market functions 
that you perform?
    Mr. Schultz. We don't find the affordable housing program 
to be an obstacle.
    Mr. Frank. Mr. Hehman?
    Mr. Hehman. No, sir, it is an incredibly efficient way to 
disperse that subsidy into the private sector.
    Mr. Frank. Absolutely right. And it is one of the few 
production programs we have right now, other than the low 
income tax credit, it is one of the few direct production 
programs we have, I think many of us are very pleased with it. 
I should say it initiated here, in this room, under the 
chairmanship of the late Mr. Gonzalez of Texas.
    We had a tough fight on the floor of the House. It only 
survived on the floor of the House by two votes, and now 
everybody is all for it. And it is a very impressive kind of 
program, and I salute the Federal Home Loan Banks for the 
flexibility with which they run it.
    And so then the next question is, Mr. Raines, Mr. Gould, 
have you ever thought about something like that? You know, you 
do a good job in reducing the cost and passing along the lower 
cost of funds. Here is a more specific form of subsidy. Have 
either agency thought about that?
    Mr. Raines?
    Mr. Raines. Well, in 1992, the last time this committee 
dealt with our charter, there was a debate as to whether or not 
we should have a grant program such as the Home Loan Banks had 
or whether we should have goals. And the committee, after quite 
a bit of debate, chose goals instead.
    Mr. Frank. Right. I didn't ask that. I asked what does 
Fannie Mae think about that. You would rather have goals than 
grants?
    Mr. Raines. No, I didn't say that. No, I think we would be 
delighted if we got the same treatment the Home Loan Banks 
have, which is that they essentially get them as a credit 
against the taxes that they otherwise would owe.
    Mr. Frank. No, we should look at that.
    I would be careful. If I were you, Mr. Raines, and I am a 
great supporter in general of your mission, but once you start 
saying, ``I would like to be treated like everybody else,'' 
there is a lot of people that would like to be treated like 
you. So I think if I were you, I would do kind of stand-alone 
discussions.
    Mr. Raines. I didn't say that.
    Mr. Frank. Well, I understand that. But I mean, you are 
saying that an affordable housing program, if there was some 
tax credit aspects to it, would be a reasonable thing.
    Mr. Raines. No, I am simply saying, we pay at the full 
Federal rate.
    Mr. Frank. No, I understand that. But you said you thought 
that that wouldn't be a bad program if you had favorable tax 
treatment over it.
    Mr. Raines. I am sorry. I did not hear----
    Mr. Frank. Didn't you say that if you were treated the same 
and the tax--that it was a credit against your taxes, that it 
would be a reasonable thing to do? I thought I heard that.
    Mr. Raines. Yes. You are right. But even without that, 
today, Fannie Mae alone invests about $2 billion a year in low-
income housing.
    Mr. Frank. Okay, but I didn't ask you about that. You know, 
I only talk about what I was asking about, which was that it is 
different, the affordable housing subsidy is a little bit 
different.
    One other question for both of you.
    A little indulgence here.
    And I do think we should be doing more.
    I have been disappointed, maybe I am wrong, and I will ask 
you and I will make it clear that this is not conclusive, but 
the people who work for me have told me that in the rural area, 
the 515 housing program which is the assisted housing that, 
frankly, neither one of you has done as much there as it seems 
to me should be done, like almost nothing. And we are running 
into an increasing problem here in rural subsidized housing, we 
have got rural housing that was built under Federal loans, 
assisted housing, it is going to expire and we are going to 
lose a lot of housing.
    So I would ask, you can respond in writing, because we are 
running out of time, what you are doing with regard to the 515 
rural housing.
    And with that, Mr. Chairman, could I just put into the 
record a letter from Michael Jessee, who is President and Chief 
Executive Officer of the Federal Home Loan Bank of Boston, 
expressing the board of directors of the Boston bank--of the 
Federal Home Loan Bank--opposes at this time inclusion of the 
Federal Home Loan Bank in legislation creating a new regulator 
for Fannie Mae and Freddie Mac, absent credible evidence the 
Federal Home Loan Banks would be otherwise disadvantaged from a 
cost of funds basis.
    And I would like to put that in the record.
    [The following information can be found on page 256 in the 
appendix.]
    The Chairman. Without objection.
    The gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman.
    I realize we have another panel and we are out of session, 
so I will try to be relatively brief, and I may not even have 
any questions.
    And Barney mentioned he is not impressed by reorganizing 
boxes, but we are apparently in the process of reorganizing 
boxes, and that is what it is all about.
    I mentioned to Mr. Baker earlier today the remarkable 
change in some of the testimony we have had from people from 
not just this panel, but all day long, compared to what they 
might have said a year ago.
    But I don't think that is bad. I just ironically noted that 
there has been a changed circumstance here.
    I just would like to say this. These are huge--of all the 
things this committee has jurisdiction over and Congress has 
jurisdiction over, from an economic point of view, with the 
direct jurisdiction that we have over these particular 
entities, this is probably about as big as it comes.
    And I have no way of judging by the size of it how well we 
have really done with helping with minority housing or with 
low-income, middle-income housing, but my sense is that has 
actually gone well. I think you have carried out your mission 
well.
    You couldn't prove it by me. When you start talking about, 
what, $3.3 trillion in debt and some of the assets which you 
have, it is just very hard for the average Member of Congress, 
frankly, to totally comprehend.
    But I think there would be more criticism if you had not 
done well. And I have heard a lot of praise over the years, so 
I think that has gone well.
    On the other hand, I, for one, do feel that we do need 
regulatory change. From what I have read about the Freddie Mac 
investments, while I am not suggesting there is anything 
illegal about that or anything the government should be 
interested beyond that, I do believe we do have the oversight 
interest of making sure that is being handled correctly. The 
security of these entities is of tremendous significance.
    Understanding the role of the Federal Home Loan Banks is 
also very difficult, frankly, for me, and I think for some 
other members here, in terms of where they should be in this 
reorganization of the boxes which may go on.
    And obviously your mission and your goals as opposed to the 
regulation is something else that we all have to pay attention 
to.
    But my only hope is that everybody in this room, because I 
think there is a lot of people out in the audience as well as 
the members up here, will be very focused on what is the right 
way to get those boxes stacked to make absolutely sure that we 
are carrying out the basic missions of housing, which we all 
view to be perhaps the most important issue of what you are 
doing, making absolutely sure that we don't set up something 
that lacks sufficient regulation so that maybe unintentionally 
we could have financial mishaps which could be a tremendous 
problem and which in my judgment would affect our whole economy 
in the United States and frankly the worldwide economy.
    And so I hope when you have your meetings and you come 
before us and you testify, and again, not just the four of you, 
but everybody who is doing this, that everybody has given a lot 
of thought not to just their own interest, but to the overall 
balance of what our responsibility is, I mean ours 
collectively, not just Congress, but all of us in terms of 
helping the housing market in this country.
    Because while you are in the instances of Freddie Mac and 
Fannie Mae private entities, you also have a tremendous public 
purpose in what you do.
    So it is my hope that the people who are really 
knowledgeable can work together and really make a difference 
and end up with something which everyone is going to look back 
on and say, those were positive changes.
    And I yield back.
    The Chairman. The gentleman yields back.
    The gentlemen from Alabama, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Raines, you touched on something earlier that I want to 
talk about for a minute or two. And in the earlier hearing, I 
talked with Mr. Falcon about what I think is a very significant 
problem that may not have received as much attention.
    If we are going to expand HUD's oversight authority to go 
not just from new programs to new activities, I am concerned--
and I suspect from your comments earlier today that you are 
concerned about a very basic problem, and it is this: a lack of 
transparency in how HUD goes about making that evaluation or 
how Treasury would go about it. Whatever the regulator, I think 
the question is, What are the standards for making an 
evaluation of what is permissible new activity and what is not?
    One concern that I would have is that, as we look at the 
vicissitudes of HUD or the changes from Administration to 
Administration, it doesn't seem that we are going to have a lot 
of practical guidance in how HUD is going to look at these 
questions.
    So can you talk for a minute or elaborate on your earlier 
answer about the appropriate standards that should be employed? 
Mr. Falcon, I think, said that he would be comfortable taking 
the broad public policy standard that exists now for evaluating 
the programs and importing that into a new activity standard.
    And so, I suppose we would be left with that fairly 
amorphous public policy standard. We would be left with a--not 
as amorphous, but not a terribly meaningful standard around 
what is within the guideline of the charter.
    I am not really comforted by either one of those. So can 
you talk about that a little bit?
    And, Mr. Gould, you also.
    Mr. Raines. Well, thank you for the opportunity to 
elaborate. I think the standard I have in mind is quite a 
simple one, and that is that a new program is consistent with 
the charter and consistent with the mission. That strikes me as 
being a sufficient standard; the bias should be that it will be 
approved as the current statute says unless it is not 
consistent with the charter and consistent with the mission.
    The concern that I have is--and I have spent time in the 
Government and I have spent time in the private sector--that if 
it depends on a Government agency approving everything and 
making up its own mind about each and every item, it will take 
forever to get approvals done simply by the normal process of 
Government. So the bias should be toward ``it is approved'' 
unless it is found not to be consistent with the charter and 
not consistent with the mission.
    I will give you an example. If we had an innovation that 
was a new program, but it involved Fannie Mae originating 
loans, well, that is against our charter. There is a 
prohibition in our charter for originating loans, and HUD would 
properly turn that down.
    On the other hand, if we came up with a product that was a 
conventional mortgage, but it simply had different underwriting 
standards or it had new features, well, then, that wouldn't 
even rise to a decision because it is not a program, it is not 
something that is large, it is simply a change in a product. 
And even if it were a program, it would be consistent with our 
charter and consistent with our mission. So it is not a very 
elaborate standard that I am talking about.
    What concerns me with a broad public purpose standard is 
that, depending on who is making that judgment, some could come 
to the conclusion that the public purpose is to restrict the 
expansion of housing, because they believe that the American 
people are investing too much money in housing.
    Now, some would say, ``Who would do that?'' And I could go 
and round up most of the economists who have opined on this 
issue. They believe that we have invested too much in housing 
in this country, and they would say it was in the public 
interest to stop it.
    Now, I don't think that is what this committee or this 
Congress would intend, but a broad public purpose or public 
policy standard would allow someone to have that position and 
they could come to that conclusion.
    Now, I do not think that is what Congress intended in 1992, 
and I would hope that we could make it clear that that is not 
what Congress intends today.
    Mr. Davis. Well, let me add one follow-up since my time is 
running a little bit low.
    One of the other things that does not appear to be terribly 
controversial but which still concerns me is this notion of 
bifurcating the safety and soundness analysis from the mission 
analysis.
    In one sense it sounds like an easy enough thing to do, 
but, you know, a number of us here are lawyers and we write 
whole textbooks about the difference between substantive and 
procedural. We write whole textbooks about whether something is 
truly new law or not.
    So given that backdrop, I am not terribly comfortable that 
we would be able to sort out frankly what fits in a safety 
soundness box and what fits in the mission box.
    Closely related to that, I am not clear who would be 
empowered to really break a tie. I am not clear who would be 
empowered to make an analysis. In virtually every 
Administration, with all due respect to HUD, Treasury is going 
to be the weightier department.
    So can either of you, either Mr. Raines or Mr. Gould, 
comment? While, I understand--if I could have just a little bit 
of indulgence, Mr. Chairman--while I understand that both of 
you, I think both of you endorsed the notion of splitting 
safety and soundness from mission, can you talk as a practical 
matter about how we are going to differentiate between the two 
in every instance and who would have the authority to make the 
call if there were ever a tension between safety and soundness 
of mission?
    Mr. Gould. Well, I think the system has basically been 
working now in a bifurcated way. I mean, you have HUD focusing 
on the mission and OFHEO looking at safety and soundness. So I 
perhaps do not see that as the major change that you might, Mr. 
Davis.
    But the Treasury I think is uniquely qualified to determine 
things in a safety and soundness basis, particularly having had 
an operational precedent with OCC and OTS. So that doesn't 
bother me and I have in my testimony recommended it.
    I felt, however, that the Treasury would be starting from 
scratch in terms of determining mission and would have to build 
up to it, whereas that is really part of HUD's mission, if you 
will. Their expertise was worth retaining in that regard and 
although it may not be perfect to have a bifurcation, in fact 
it is taking advantage of both organizations' expertise and 
experience, and it is worth trying and seeing how it goes.
    Now, if they disagree, who is the judge? Perhaps that would 
have to be determined by the Congress.
    The Chairman. The gentleman's time has expired.
    The gentleman from Texas, Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Raines, forgive me, I missed part of your testimony, 
but I would like to make sure I have a very firm understanding 
of one point.
    In your testimony you speak of supporting the 
Administration's proposal, but specifically in transferring the 
new product approval from HUD to Treasury. I understand your 
concerns about innovation and efficiency, but with regards to 
transferring new product approval to Treasury, are you for it 
or against it?
    Mr. Raines. I am in favor of a proposal, as I understand 
the Treasury has proposed it, where there would be an automatic 
approval of new housing innovations by Fannie Mae if that 
authority were moved to the Treasury. That is why I say it is 
so important what the standard is.
    What Treasury has said is that there would be an automatic 
approval, but that if it were determined that there were a 
safety and soundness issue, they would have the right to later 
come in and take action. If that were not the standard, then I 
would not be in favor of the movement.
    But in any event, I believe that there ought to be a very 
clear standard, even if the authority stays at HUD.
    Mr. Hensarling. So would the standard be regulatory or 
statutory?
    Mr. Raines. There ought to be a statutory standard, in my 
view, because I think it is very hard for regulatory agencies 
to create the standards under which they are operating, because 
they are essentially making the political decision.
    So whether it is our regulator or any regulator, I believe 
Congress ought to establish what it is the Congress is asking 
the regulator to do. In this case I urge and I believe it has 
been the history of this committee that it wants the regulator 
to encourage housing innovation. That ought to be the first 
thought, is does this encourage housing finance innovation?
    If Congress doesn't establish that standard, you are 
leaving it then to a regulator to invent their own standard. 
And that standard could be that we believe that there is too 
much investment in housing and therefore we are going to stifle 
innovations.
    So I do not think you want to leave that to be an open 
question. I think Congress ought to tell the regulator in what 
direction you want to go.
    And clearly, I think everyone in the housing finance 
industry believes that we have an impending housing crisis in 
this country and that there is a need to invest more in 
housing, not invest less.
    Mr. Hensarling. A question for the gentleman from the 
Federal Home Loan Banks. Obviously we have a divergence of 
opinion here, but specifically I would be interested to know 
your thoughts on being included in the same regulator as your 
brethren to your right.
    How do you view that with respect to competitiveness? What 
is it about having the same regulator that will make you more 
or less competitive with Fannie and Freddie?
    We could start with you, Mr. Schultz.
    Mr. Schultz. Sir, as I mentioned earlier, the concern that 
leads to our wanting to be included with the same regulator is 
that the market's perceptions are critical in terms of our cost 
of funds and our ongoing ability to access the markets, both 
domestically and abroad. And if there is a perception that, 
well, with the other two housing GSEs, the world class 
regulator is appropriate but the federal home loan banks do not 
need that kind of supervision, people may begin to question is 
it really a GSE? Is it really the same thing as those entities?
    Or if there is a reason to criticize the regulatory 
structure that we are involved in owing to something that 
happens in one of the banks, will there be a permanent increase 
in our cost of funds, which would be reflected through our not 
being able to achieve our mission?
    So those are the concerns about competitiveness. And if you 
ask me to delineate all of the things I can think of, I can't 
go very far beyond that because I can't see the future. But I 
would be concerned with being treated differently if you choose 
to move the other two entities to a different regulator.
    Mr. Hensarling. Well, once again I apologize for plowing 
over old ground, but I missed part of the testimony.
    Mr. Hehman, would you comment please?
    Mr. Hehman. Yes, sir. Our concern about being put together 
with the other two GSEs is very simple, that we are not like 
them. We are a banking system that lends money to community-
based institutions. We are a different animal. We are a 
different GSE.
    So our concern is really to be lumped in with two other 
GSEs who do something, who are very involved in housing, 
clearly, but have a totally different delivery system, in my 
judgment, than the core mission of the Federal Home Loan Banks.
    So our position is that the Home Loan Banks are different 
enough that the current regulatory system has done the job and 
that, in a sense, leave well enough alone.
    Mr. Hensarling. Thank you.
    I see my time has expired.
    The Chairman. Gentleman yields back.
    The gentleman from Georgia, Mr. Scott?
    Mr. Scott. Yes, thank you very much, Mr. Chairman.
    To Mr. Raines and to Mr. Gould, I want to make sure we are 
clear here because I am tending to get kind of a schizophrenic 
response from the two of you in terms of your two feelings 
about the proposed legislation, the President's proposal, 
Administration's proposal.
    On the one hand, I am hearing you say you basically support 
the Administration's proposal. In your interchange with Mr. 
Baker, I think you have tended to say you support basically 
that. But there was--Mr. Baker came back and said there was one 
point of disagreement there that I did not get picked up, but I 
want to.
    This is an extraordinarily important hearing in that the 
people of America, I think, are listening and watching to get a 
clear signal where we go because what you all do is so 
critically important in the mission.
    But on the other hand, I hear you saying that you are very 
fearful of moving from where we are, from HUD, because it may 
lower the priority in terms of the housing goals that we reach. 
And I am very concerned about this. I represent a district in 
Georgia where we have four of the fastest growing counties, 11 
counties around metro Atlanta.
    And just to point out my concern, you were tacking off some 
figures about what you have done, and I commend you for that. 
But if you look at what happened between 2001 and 2002 in terms 
of home ownership rates among white, black, Hispanic, other 
races, central cities and the suburbs, in every single category 
there was a little bit of movement.
    For example, among whites, from 74.3 percent to 74.5; from 
Hispanic, 47.3 percent to 48.2; central cities, 58 to 59, 74.6 
to 74.7.
    The only area which there was a decrease was in the home 
ownership of African Americans, one of the four most critical 
groups to be sustained.
    So I would like to give me a little answer to that as to 
why that decrease? Why the African American community? Is there 
something going on in that community that they are faced with 
that no one else has? I think we want to know that.
    And if you could give us some clarity on how, on one hand, 
you favor what the Administration is doing, but then on the 
other hand you are fearful of what it is doing.
    Mr. Raines. Well, if I might start, Congressman. I think 
you put your finger on the conundrum that we face. We are 
vitally committed to our housing mission. It is what we do. It 
is who we are. And it is our number one priority.
    Our housing mission, however, does require us to raise 
capital around the world. Our investors invest in Fannie Mae 
not because they necessarily share our housing mission, but 
because they think that Fannie Mae will be a good steward of 
the capital.
    And so we need to have a regulatory regime that both helps 
us raise the capital and helps us do our mission. And finding 
that right mix is the conundrum you point to. And what we are 
struggling with here is what is that right mix of things that 
helps us raise the capital and helps us do our mission.
    As I understand the Treasury proposal--and we don't agree 
with every line of the proposal--but as I understand the 
Treasury proposal, it would help us raise the capital and if 
properly prepared would help us do our housing mission.
    If it would not help us do our housing mission, then we 
would oppose the legislation. And that is why, for example, we 
were quite firm on the point, if the proposal is to increase 
our minimum capital standards, we will oppose the proposal. And 
there should be no question I think in anyone's mind about 
that. Why? Because it would undermine our housing mission. It 
would allow us to do less. If you double our minimum capital, 
you cut in half what we can do.
    But this is why I think you are feeling this tension, is 
that we need both. We need the access to the capital markets in 
order to do our mission. And that is why I, in my testimony, 
tried to lay out the history of how the Congress has dealt with 
this. And each time, it has, I believe, reached the right 
balance in those things.
    It has not said that safety and soundness is more important 
than our mission. If that were true, then they should shut us 
down. The most safe and sound course is to have no obligations 
outstanding. But instead, Congress has reached a different 
balance.
    So today, do we have a lot of obligations? Absolutely. But 
for every $2 that we have in debt and obligations, we have got 
$3 in collateral in American homes. And that has been 
successful.
    The Chairman. The gentleman's time has expired.
    The gentleman from North Carolina, Mr. Miller?
    Mr. Brad Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Raines, you just said the word balance. And that is the 
first time I think I have heard this, because I think most of 
the debate has been about either considering safety and 
soundness or considering how to make credit available for home 
ownership, particularly among underserved populations, racial 
and ethnic minorities and just low-wealth families in general.
    But I have seen this as a balance, as trying to strike a 
balance between those competing concerns. And we strike 
balances all the time in every area of the law. Harry Truman 
said he wanted to meet a one-handed economist because he got 
tired of hearing on the one hand, on the other hand from his 
economists. But he really should have talked to a lawyer if he 
wanted to hear about on the one hand, on the other hand.
    Most of the debate, I have thought about which box to put 
this product approval in had to do with whether in striking 
that balance the bias would be on the side of safety and 
soundness or the bias would be in favor of encouraging home 
ownership. Those who oppose putting it in Treasury thought the 
bias would be in favor of safety and soundness. Those who 
wanted it--opposed having it in HUD thought the bias would be 
in favor of encouraging home ownership at the expense of safety 
and soundness.
    I understand that you have said earlier that you do not 
care where it is, which box it is in, but that you think that 
the standard by which it should be subject, new product 
approval should be subjected, should be judged, should not 
consider safety and soundness at all? At the initial stage it 
should not--that product approval should not--it should be 
about whether it is consistent with your charter, and that is 
the extent of the analysis.
    Mr. Raines. And then the safety and soundness regulator 
would determine what the capital would be to ensure safety and 
soundness.
    So there is a separation between consistency with our 
charter and our mission and what the appropriate capital is for 
it.
    The safety and soundness regulator will always establish 
what the capital is, whether it has gone through the approval 
process or not. Anything we come up with, they establish the 
capital requirement.
    Mr. Brad Miller of North Carolina. But my understanding of 
what you said earlier--and I have had the same experience 
everybody else had of being in and out of this hearing, it is a 
great frustration of serving in the House and trying to be a 
conscientious member of a committee--but my understanding is 
that your proposal or what you favor, that would come later.
    Mr. Raines. No, I think in reality what has happened 
currently is it comes almost simultaneously because the two of 
them will consult. That is what happens today. Today, OFHEO has 
the ability to establish whether or not it meets safety and 
soundness standards and what the capital should be and HUD 
decides whether or not it is consistent with our charter and 
our mission.
    So we have that bifurcation today. And I think that part of 
the process works reasonably well.
    I think the greater difficulty is simply what the standard 
is. On what basis should I decide this is okay or not okay? And 
I always thought it was clear. But some of our experience says 
there seems to be some ambiguity about it, and I am asking the 
committee to resolve the ambiguity in favor of housing.
    Mr. Brad Miller of North Carolina. I yield back.
    The Chairman. The gentleman yields back.
    The gentlelady from Indiana?
    Ms. Carson. Thank you very much, Mr. Chairman.
    I am probably the only one on the committee having some 
unreadiness about transferring all this oversight and stuff 
like that because it appears to me that if Treasury can indeed 
establish some safe and soundness in terms of your capital risk 
and your capital investment then it ought to expand that work 
out to the whole United States of America, since we are on the 
brink of economic disaster.
    But I do not understand the part that is proposed in terms 
of the Treasury Department having oversight and decision-making 
in terms of new missions and how this new regulator discerns 
what is a legitimate or a necessary new mission, new goals, new 
modus operandus.
    And I heard all of you wonderful gentleman talk about you 
agree with all of this. But how does the Treasury Department 
discern what is a viable mission, what is a viable new mission 
or a new investment or--am I making my question clear?
    Mr. Gould. Well, in my testimony----
    Ms. Carson. I apologize, I have been----
    Mr. Gould. That is perfectly all right.
    The way Freddie Mac has looked at it is that the mission 
goals and the definition of the mission has been set by HUD for 
many years. We think that is still appropriate for them to do 
so. They have the experience and the background to do so.
    At the same time, it helps us do our mission and serve 
affordable housing to have the lowest cost of funding that we 
can achieve. And that is best achieved by having the market 
perceive us to have a very credible regulator. Credible in the 
sense of saying that we are safe and sound. And there is no 
better entity in that regard than the U.S. Treasury.
    So this bifurcation, we feel, serves both our purposes: a 
safety and soundness regulator with credibility and an 
experienced organization in terms of what our mission should 
be.
    Now, I do agree very much with Mr. Raines that we must be 
very careful of dampening innovation, particularly because the 
point that Mr. Scott made, Mr. Davis made and others, is as we 
go forward here, a clear part of our mission is going to be to 
try to serve the underserved parts of America.
    And that means in order to remain safe and sound in doing 
so that we are going to need some innovation. We are going to 
need some financial vehicles that can provide funds flow to 
those areas and still not engender something that would disturb 
the markets in being unsafe.
    So there is work to be done here. But neither one of these 
decisions are going to be made in the abstract. The Treasury 
should not just sit there and make safety and soundness 
decisions without consultation with the person in charge, HUD 
in our view, of our mission. That is not the way things should 
work and not the way things really do work.
    So there is going to be a constant interchange or so-called 
working together here in order to accomplish what we have to 
do, which is to get the percentage of housing for minority 
groups in this country higher so that it is matching the white 
population. And that is going to take some innovation and that 
is going to take some work and that is going to take some 
commitment.
    And I know Fannie Mae has spoken out about this and we have 
too. This is something we are both dedicated to and we are 
trying to find the best way to do it.
    Ms. Carson. If I may ask one more quick question, Mr. 
Chairman? And maybe this is not the right group to pose the 
question to.
    In Indianapolis, where I am from, we have the highest rates 
of home foreclosures in the country. A lot of that has been 
naivete on the part of the consumer and all that and we 
recognize all of that and that needs to be fixed, that is 
broken.
    But more importantly, our economy, our jobs are 
dissipating. We just last week got word that our biggest 
foundry is closing, 1,000 employees. United was there, they 
left, 2,000 people. For the most part, those people are 
homeowners.
    Now, do you get the blame for all of these foreclosures 
that come up when you have been out in the market with these 
innovative programs?
    And I might hasten to add that at the foundry especially 80 
percent of those are people of color. They are going to lose 
their homes.
    Do you have in this risk, capital risk management apparatus 
some forecast that say, ``Hey, you better not loan that guy 
that money because he is going to lose his job next year''?
    Now, that sounds like a dumb question and perhaps this 
isn't the panel that should address that.
    Mr. Raines. No, it is not at all an inappropriate question 
because it is the heart of what we do. We always are trying to 
find how can we help more and more people and do that within 
safe and sound principles.
    And our experience has been quite good actually. Our 
experience has been quite good. Indeed, even for people who get 
into trouble and get behind in their mortgages, we have found 
that we have been able to keep half of them in their homes and 
not go to foreclosure by working with them as they work through 
periods of unemployment or sickness or divorce or other issues. 
So it is exactly the right question.
    And avoiding foreclosure is as important as making the 
original loan. It doesn't do anyone any good to put someone 
into a home and then as soon as they get into a little bit of 
trouble, foreclose on it. And it doesn't do any good to have a 
bunch of foreclosed houses sitting abandoned in a community. 
That is why Fannie Mae fixes up houses before we
    sell them back so that people are getting a house that is 
in good shape. And we do that very quickly.
    But it is absolutely a critical part of what we and our 
lenders do, is to ensure that people who get into homes can 
stay there and to take whatever steps we need.
    But I can tell you, we have been expanding into low down 
payment lending and to credit-impaired lending and the results 
have been very good. And what that says to me is giving more 
people a chance has been good business.
    The Chairman. The gentlelady's time has expired.
    Ms. Carson. I think you have done a good job.
    Thank you very much, Mr. Chairman.
    The Chairman. Let me thank all of you, particularly our 
traveling folks from San Francisco and Cincinnati. We worked 
you pretty hard today, but I think the committee learned an 
awful lot. And that is obviously the purpose of these hearings. 
We thank you very much.
    And the second panel is dismissed. And the third panel, the 
lucky third panel can now come forward.
    Produce our third panel, beginning with Mr. D. Russell 
Taylor, President and CEO of Rahway Savings Association on 
behalf of America's Community Bankers. Mr. C. Kent Conine, 
Conine Residential Group, Inc., on behalf of the National 
Association of Home Builders. Mr. Allen Fishbein, Director of 
Housing and Credit Policy, Consumer Federation of America. Ms. 
Terri Montague, President and Chief Operating Officer of the 
Enterprise Foundation. Dr. William E. Spriggs, Executive 
Director of the National Urban League, Institute for 
Opportunity and Equality. And Mr. John Courson, President and 
CEO of Pacific Mortgage Company on behalf of the Mortgage 
Bankers Association of America.
    And our last witness of the day, if you can't go to hell, 
be the last witness on the third panel, the gentleman from 
Texas, our former colleague, the Honorable Steve Bartlett, 
President and CEO of the Financial Services Roundtable.
    Mr. Frank. Mr. Chairman, that is what he gets for letting 
his seniority lapse. If he hadn't done that, he would have been 
way up there.
    [Laughter.]
    The Chairman. We thank all of you for your patience in 
waiting through this weighty subject and two panels before you. 
Again, it could be worse. It could be a Friday afternoon.
    So with that, Mr. Taylor, let me recognize you for your 
testimony.

   STATEMENT OF D. RUSSELL TAYLOR, PRESIDENT AND CEO, RAHWAY 
 SAVINGS INSTITUTION, REPRESENTING AMERICA'S COMMUNITY BANKERS

    Mr. Taylor. Absolutely. Thank you, Chairman Oxley, and 
thank you, Ranking Member Frank and members of the committee.
    I am Russ Taylor. I am the President and CEO of the Rahway 
Savings Institution, a small mutual institution located in 
central New Jersey. I am also this year's chairman of America's 
Community Bankers.
    Many of our members are specialists in mortgage lending and 
actively involved in the secondary market. Therefore, we 
appreciate this opportunity to provide our comments to the 
committee on GSE regulatory reform.
    ACB has an intense interest for several reasons.
    First, we strongly support the secondary market role of 
Fannie Mae and Freddie Mac and the important housing mission 
they fulfill.
    Second, we strongly support efforts to improve regulation 
to better ensure safety and soundness and focus on mission.
    And three, our members are business partners with Fannie 
Mae and Freddie Mac and investors in their securities.
    In fact, my own institution has active relationships with 
all of these entities.
    ACB commends Chairman Baker and Representative Royce in 
their efforts. Their years of background work will make it 
easier for Congress to craft sound legislation.
    We strongly support many of the provisions of their bills 
that provide substantial independence for the new agency.
    My written testimony details the key elements of 
independence that are currently provided to other financial 
regulators. This to us is an essential element of GSE 
regulatory reform.
    The new agency must also be able to fund itself without 
going through the annual appropriation process. ACB strongly 
endorses the Administration's position that the new agency have 
the authority to review both current and future programs of 
Fannie Mae and Freddie Mac.
    For over a decade, HUD has not exercised its current 
program approval authority, and as a result Fannie Mae and 
Freddie Mac have engaged in, or at least attempted to engage 
in, activities inconsistent with their secondary market 
responsibilities.
    The Administration, and pending bills, make it clear that 
HUD will still set affordable housing goals for Fannie Mae and 
Freddie Mac. HUD would actually gain authority to set goals and 
to enforce them. That, plus a new independent agency with a 
mandate to enforce the company's housing mission, should 
maintain their support for housing.
    ACB strongly agrees with the Administration position that 
there should be no limit on the new agency's ability to 
increase capital requirements for Fannie Mae and Freddie Mac if 
necessary.
    Let me be clear that we are not proposing the capital 
requirements be increased. But capital is the foundation for 
the safety and soundness of our financial system and must 
remain a flexible tool available to the regulator.
    We recognize that any solution that Congress develops for 
Fannie Mae and Freddie Mac may have a direct impact on the 
Federal Home Loan Bank System. That is a system that we deeply 
care about. In fact, Secretary Snow testified that the Federal 
Home Loan Banks should also be regulated by the new agency.
    ACB has traditionally supported separation between the 
regulation of Fannie Mae and Freddie Mac and that of the bank 
system. The Federal Home Loan Banks are cooperatives, not 
public companies, and pose different regulatory issues.
    However, our members who do support a merged agency are 
concerned that Fannie Mae and Freddie Mac will enjoy a cost-to-
funds advantage if the bank system is not included.
    They also know that Federal Home Loan Banks, Fannie Mae and 
Freddie Mac, are all engaged in extensive interest rate risk 
management. A combined agency would, in their view, be better 
able to supervise these risks. ACB's board is weighing these 
arguments as we speak today.
    I wish to again express ACB's appreciation for your 
invitation to testify on these important issues. We strongly 
support the committee's effort to strengthen the regulation of 
Freddie Mac, Fannie Mae and the Federal Home Loan Banks and 
look forward to working with you as you craft legislation to 
accomplish that goal.
    Thank you.
    [The prepared statement of D. Russell Taylor can be found 
on page 240 in the appendix.]
    The Chairman. Thank you, Mr. Taylor.
    Mr. Conine?

      STATEMENT OF KENT CONINE, CONINE RESIDENTIAL GROUP, 
       REPRESENTING NATIONAL ASSOCIATION OF HOMEBUILDERS

    Mr. Conine. Thank you, Chairman Oxley and members of the 
committee. My name is Kent Conine and I am President of the 
National Association of Home Builders, representing 211,000 
members of our association, which employ over 8 million 
employees. Also President of Conine Residential Group, which is 
based in Dallas, Texas, specializing in both single-family and 
multi-family development and building.
    I am pleased to comment on the recent proposals to 
restructure the regulatory framework for the housing-related 
GSEs.
    On September the 10th, Treasury Secretary Snow and HUD 
Secretary Martinez unveiled before this committee the 
Administration's proposal to restructure the regulatory 
framework for the government-sponsored enterprises.
    This pronouncement focused almost exclusively on improving 
the safety and soundness of the regulation of Fannie Mae and 
Freddie Mac.
    While the nation's home builders support most of what has 
been put forth by the Administration to ensure a strong and 
credible regulatory framework, we have grave concerns about a 
shift from the narrow regulatory focus to a larger referendum 
on the housing finance system in general.
    Housing mission and the GSE's role were largely omitted 
from the discussion during the September 10th hearing. We are 
pleased that this committee, by virtue of conducting today's 
hearing, recognizes that some of the concepts outlines by the 
Administration deserve more rigorous review and discussion.
    Specifically, the Administration's proposal to remove the 
mission oversight or new program approval from HUD and place it 
in Treasury marks a fundamental shift in perspective about the 
role of HUD as well as how the GSEs engage in their day-to-day 
business and undertake new programs.
    We strongly oppose such a change and urge you to retain 
HUD's oversight of new programs as well as the annual 
affordable housing goals and enforcement of our nation's Fair 
Housing Act.
    In focusing on the safety and soundness regulation, we urge 
the committee not to lose sight of the core missions, which is 
consistent with the congressional intent creating the housing 
GSEs; that is to provide liquidity, capital and stability to 
the housing market.
    Program oversight is key to this core mission.
    The Administration's proposal blurs the mission of Fannie 
and Freddie, and thereby rationalizes its proposal by treating 
new program authority as an exclusive function of safety and 
soundness.
    This has never been the case and fundamentally ignores the 
legislative history in the 1990 Treasury studies creating the 
1992 GSE Act.
    The objective and focus of program oversight is not safety 
and soundness, as HUD Secretary Martinez testified, it is 
mission compliance. An example would be furthering the 
Administration's goal of increasing minority home ownership.
    Applying safety and soundness criteria in conjunction with 
Treasury's longstanding bias against programs that facilitate 
the flow of capital to housing would severely retard the 
development of new programs continuously needed by Fannie Mae 
and Freddie Mac to fulfill their housing mission and to adjust 
to market conditions.
    It will stifle innovation necessary to provide liquidity to 
the housing credit markets, particularly in areas that 
otherwise would not be adequately served.
    Such activities by definition involve higher risk and would 
be greatly constrained if program approval is solely a 
component of safety and soundness regulation.
    For example, the highly successful Mortgage Revenue Bond 
program is being held hostage today by Treasury because they 
have failed to adjust the home purchase price limits since 
1993.
    On the issue of capital requirements, NAHB agrees with 
Secretary Snow that there is a need for stability in capital 
standards and that capital standards should not be subject to 
frequent change. NAHB applauds Secretary Snow's decisions not 
to recommend any changes in the GSE's risk-based capital 
regulation at this time, given that the standard took 10 years 
to develop and has been in effect for only about a year.
    We are pleased that Treasury has given risk-based capital 
standard a chance to work.
    Due to the low-risk nature of home mortgages, NAHB 
recommends against any changes in the GSEs minimum capital 
standard requirement as well.
    Finally, the Administration is proposing to strengthen HUD 
housing goals authority over Fannie Mae and Freddie Mac. NAHB 
has a longstanding history of supporting housing goals. We 
supported the increases in the goals implemented by HUD's 2000 
rule.
    This rule also provided for bonus points for the 2001 to 
2003 period for units financed for GSE mortgage-backed 
purchases in small, 50 to 50 unit multi-family properties and 
for units in two to four unit owner-occupied units.
    NAHB feels that more needs to be done to encourage the GSEs 
to increase their activities in some market segments, such as 
rural areas and multi-family production.
    At the same time, NAHB believes that any proposed changes 
to the housing goals should undergo careful examination. Fannie 
Mae and Freddie Mac were created to serve a broad range of 
housing needs, and we would not want to overly stringent the 
goals to impede that particular mission.
    Continual increases in the percentages targets will also 
have diminishing returns and run the risk of adversely 
impacting other housing programs like our FHA single family 
program.
    In conclusion, I appreciate the opportunity today to 
express our position on restructuring the regulatory oversight 
on the housing GSEs, particularly our opposition on moving the 
mission oversight from HUD.
    I hope to work with you in the coming days to have a chance 
to work with you to craft a bill that will accomplish this 
mission.
    Thank you.
    [The prepared statement of C. Kent Conine can be found on 
page 127 in the appendix.]
    The Chairman. Thank you, Mr. Conine.
    Mr. Fishbein?

   STATEMENT OF ALLEN FISHBEIN, DIRECTOR, HOUSING AND CREDIT 
             POLICY, CONSUMER FEDERATION OF AMERICA

    Mr. Fishbein. Thank you, Mr. Chairman, and Mr. Frank and 
members of the committee.
    My name is Allen Fishbein and I am the Director of Housing 
and Credit Policy for the Consumer Federation of America.
    CFA is a nonprofit association of some 300 consumer 
organizations with a combined membership of 50 million that was 
founded in 1968 to advance consumer interests.
    CFA and many of its members have a longstanding interest 
and involvement in housing finance matters, including 
advocating for expanding the role of the GSEs in serving 
important housing needs.
    My own background, which I want to mention, is that I 
served a tour at HUD as Senior Adviser for GSE Oversight. My 
duties included helping to supervise the setting of the present 
affordable housing goals for Fannie Mae and Freddie Mac.
    We thank you for affording us this opportunity.
    CFA believes that the GSEs play an important, indeed 
essential role in promoting a sound housing market and by 
providing expanded home ownership and other housing 
opportunities. Through their statutory mandates, the GSEs are 
required to serve a dedicated percentage of their business to 
address the needs of low-and moderate-income households and 
underserved communities.
    Changes to the GSEs regulatory structure, therefore, must 
be undertaken with great care and precision, so as not to work 
at cross-purposes with the GSEs ability to carry out these 
important mission activities.
    In short, the charge should be do no harm to the GSEs' 
housing mission.
    To summarize the key points from my written testimony, 
number one, we believe that it is in everyone's best interest 
to have a strong oversight regulatory structure. The tremendous 
growth in the size of the GSEs over the past decade has raised 
the stakes for regulatory oversight. Certainly, consumers, 
whether they are existing or future home buyers, renters or 
investors, along with other stakeholders have a strong interest 
in effective oversight of the enterprises.
    Thus it would be hard to argue against the need for 
Congress to review the adequacy of a regulatory structure that 
was put into place a decade or more ago.
    Second, there is recognition that OFHEO does not have all 
the powers it needs to perform this oversight. Listening to the 
testimony today, maybe that is an understatement.
    Unlike banking regulators, OFHEO does not have authority to 
assess the financial institutions it supervises for the full 
cost of oversight, and the funds for its budget are provided 
through a congressional appropriations process which has 
limited the agency's funding in comparison to banking 
regulatory agencies.
    In addition, OFHEO is not equipped with a full range of 
enforcement tools commonly afforded to financial regulators.
    Third, we believe the simplest way to correct this problem 
would be upgrade OFHEO, but we know that some on this committee 
have concluded that a mere upgrade alone would not be 
sufficient and that further changes in the regulatory structure 
are also needed.
    For example, Mr. Baker's bill would abolish OFHEO and 
switch the functions of safety and soundness and some mission 
oversight functions to the Office of Thrift Supervision.
    Also the Administration in their testimony before the 
committee outlined proposals for making even more extensive 
changes to the existing regulatory structure.
    It is our belief, however, that strengthened financial 
oversight could be achieved without making major sweeping 
changes to the existing regulatory structure.
    CFA is supportive of steps to enhance GSE safety and 
soundness oversight. Along these lines, we believe that 
providing GSE regulators with the authority to assess the 
enterprises themselves for the reasonable cost of oversight and 
removing funding for these activities from the annual 
appropriations process would go an extremely long way in 
addressing many of the concerns that have been cited.
    Improving the mechanism used to fund the cost of GSE 
oversight would enable these regulators to increase their 
capacity and bring on additional financial expertise needed to 
perform their important functions.
    However, again, we are not convinced that OFHEO is 
inherently flawed in its capacity to serve as a safety and 
soundness regulator.
    Moving the GSE regulator to Treasury, while it is viewed by 
some as providing certain benefits in stature, could also carry 
with it disadvantages, not the least of which are likely to be 
administrative disruptions, at least in the short term. And 
because Fannie and Freddie are major issuers of debt in the 
capital markets, along with the Treasury Departments questions 
about potential conflicts of interest could conceivably arise 
from the Department's exercise of its new oversight powers over 
the GSE activities.
    We also are troubled by the suggestion that the new 
Treasury bill would not be established as a fully independent 
office, along the lines of OCC and the Office of Thrift 
Supervision.
    However, whether or not a safety and soundness regulator is 
ultimately shifted to Treasury, CFA believes that the charter 
oversight and new program approval should remain at HUD. 
Switching this authority to Treasury we fear would detract from 
maintaining important regulatory focus on the GSE's housing 
mission performance.
    And fifth and finally, we would like to see steps taken to 
strengthen the GSEs' obligation to support its affordable 
housing related activities. We were pleased that Secretary 
Martinez in his testimony before the committee made a number of 
constructive proposals aimed at spurring additional 
improvements in the GSEs' affordable housing performance.
    In particular, we were pleased that the Secretary asked for 
authority for HUD to impose enforceable sub-goals. Sub-goals 
are a logical tool to ensure that the GSEs adequately consider 
the most underserved segments of the mortgage market.
    However, the Secretary's proposal is not sufficient unless 
HUD places greater emphasis than it has on performing these 
important responsibilities. For example, HUD let slip the 
establishment of new goals for 2004 and beyond. The existing 
goals were originally set to end at the end of this year, and 
HUD's failure to take action this year means that the current 
levels will roll over for at least another year.
    In addition, we also believe that much more can be done to 
improve GSE performance in meeting their goals through expanded 
public focus on the GSEs' activities. And in my written 
testimony, I mention two of these areas.
    One would be to improve the GSE public use data base which 
is administered by HUD to permit better local analysis of the 
GSEs' activities, and, two, to have better reporting to 
Congress on the GSEs' affordable housing activities and its 
departmental plans for establishing new goals or explanations 
for why a goal periods would need to be extended.
    The Chairman. Can you sum up, Mr. Fishbein?
    Mr. Fishbein. I am going to close by reiterating that we 
believe it is in everyone's interest to have strong regulatory 
oversight of the GSEs and in doing so we urge the committee to 
proceed with caution and resist the urge to make needless 
changes that detract from the GSEs' ability to perform their 
mission obligations.
    Thank you, Mr. Chairman.
    [The prepared statement of Allen Fishbein can be found on 
page 153 in the appendix.]
    The Chairman. Ms. Montague?

STATEMENT OF TERRI MONTAGUE, PRESIDENT AND CEO, THE ENTERPRISE 
                           FOUNDATION

    Ms. Montague. Thank you, Chairman Oxley and Ranking Member 
Frank and members of the committee, for this opportunity to 
testify. I am Terri Montague, President and Chief Operating 
Officer at the Enterprise Foundation.
    Enterprise provides private capital to support affordable 
housing and economic development in low-income communities. To 
date, we have invested in excess of $4.4 billion to finance 
more than 144,000 affordable homes for low-income people, 
including more than 12,000 in 2002.
    Fannie Mae and Freddie Mac are among Enterprise's most 
important partners. Without them much of our work simply would 
not be possible.
    Congress is considering significant changes to the Federal 
Government's regulations of these GSEs. We encourage Congress 
to deal with these issues as expeditiously as possible to avoid 
any uncertainty in the mortgage markets.
    As many have already testified, we too strongly support 
safety and soundness regulations. And we support strong 
affordable housing requirements.
    We agree with the Administration that there is no reason to 
change the GSEs' mission, charter or status. We also agree with 
the Administration that HUD should remain responsible for 
ensuring the companies' compliance with their congressionally 
mandated affordable housing responsibilities.
    Briefly, we have recommendations regarding three issues, 
the location of prior approval authority, the scope of approval 
authority, and the establishment and enforcement of the GSE 
affordable housing goals.
    On the first point, the location of prior approval 
authority, the Administration has proposed transferring this 
authority from HUD to a new safety and soundness regulator. The 
new agency would consult with HUD on new programs.
    We agree with Chairman Baker and other members of the 
committee that HUD should retain this responsibility. We are 
not aware of any evidence that HUD has failed to exercise 
approval authority appropriately. We see no advantage to 
shifting approval authority to a new safety and soundness 
regulator.
    After all, HUD is the only federal agency with expertise in 
housing finance and a mission to advance affordable housing and 
only HUD has the benefit of more than a decade of experience 
evaluating new GSE housing programs.
    Secondly, the scope of authority issue. Current law 
requires the GSEs to obtain HUD approval for any new program. 
H.R. 2575 would substantially broaden this authority. It would 
require the companies to obtain HUD approval before engaging in 
a wide range of activities, not just new programs.
    Again, HUD has not used its approval authority 
inappropriately. HUD also has the authority under current law, 
which it has previously exercised, to itself initiate a request 
for information from the GSEs regarding what it considers 
possible new programs.
    Requiring the companies to seek federal signoff on new 
activities could curtail their ability to respond effectively 
to changes in the mortgage markets, such as rising interest 
rates. It also almost certainly would impede the GSEs' ability 
and incentive to innovate.
    Low-income consumers and communities which often benefit 
most from GSE innovations could lose out.
    We wonder whether Fannie Mae would have been able to 
pioneer use of the low-income housing tax credit if the company 
had been subject to the approval requirements the bill would 
impose.
    As you may recall, in the credits early days, hardly any 
corporations were willing to commit capital to the program, as 
it was seen as too risky. And few Federal officials understood 
the program in that it was too new.
    Fannie Mae stepped up when others would not and helped 
convince other corporations to invest. Fannie Mae and Freddie 
Mac committed to this fledgling Federal incentive, and in doing 
so, sent a strong signal to the marketplace that the credit was 
a sound investment.
    The housing credit is now perhaps the most important 
Federal incentive for the development of rental housing for 
low-income people. And it is truly impossible to imagine such 
success without Fannie Mae and Freddie Mac's early and 
sustained participation.
    On the third issue: In 1992, the GSE legislation requires 
the GSEs to dedicate substantial portions of their business to 
serving low-income people and communities. The Administration 
has proposed expanding HUD's ability to establish and enforce 
the GSE affordable housing goals.
    We see no reason to change the statutory framework for the 
affordable housing goals at this time. HUD has the authority 
already to increase the percentage of business targets in each 
statutory-goal category.
    HUD also has the authority under current law to incent the 
GSEs to achieve more specific affordable housing objectives. 
HUD has utilized this authority effectively in the past, 
resulting in substantial increases in the GSE's affordable 
housing financing.
    HUD's most recent regulatory revision of the affordable 
housing goals resulting in the GSE's increasing their mortgage 
financing for low-income and underserved people and communities 
by nearly half a billion dollars between 2001 and 2011.
    Let me be very clear: Enterprise has long urged Fannie Mae 
and Freddie Mac to increase their affordable housing activity. 
The companies could and should do more. We welcome the 
opportunity to work with HUD, the GSEs and other housing 
organizations to explore strengthening the goal levels and 
objectives. But we urge Congress and HUD not to proceed with 
any affordable housing goal revisions without seeking the 
advice and assistance of a wide range of housing organizations, 
as it always has in the past.
    I would be pleased to answer any questions that you have.
    [The prepared statement of Terri Y. Montague can be found 
on page 191 in the appendix.]
    The Chairman. Thank you for your testimony.
    Dr. Spriggs?

STATEMENT OF WILLIAM SPRIGGS, EXECUTIVE DIRECTOR, INSTITUTE FOR 
        OPPORTUNITY AND EQUALITY, NATIONAL URBAN LEAGUE

    Mr. Spriggs. Thank you, Congressman, and thank you, 
Congressman Frank, for this opportunity.
    My name is William Spriggs. I am the executive director for 
the National Urban League's Institute for Opportunity and 
Equality. I am joined today Marvin Owens, who is the head of 
our housing department out of our New York headquarters.
    The Congress here has gathered because the size of the 
securities and mortgage-backed security instruments issued by 
GSEs is now almost as large, in fact, a little larger than the 
U.S. Treasury-note market. And so that means that all of us 
should be concerned about the safety and soundness of these 
enterprises, and that they are very important to the security 
of the American economy, if not the world's capital markets.
    However, it is equally important to remember why Congress 
created the GSEs, and that has to do with capital markets.
    In the case of the housing GSEs, the purpose was to create 
an effective market for residential mortgages, and this was in 
response to the lessons taught by history.
    The leverage given to the housing GSEs by Congress was to 
establish increasing access to home mortgages for underserved 
areas, and this mission must remain paramount in assessing 
different measures of safety and soundness.
    For instance, the risk-based capital standards that were 
put in place last year are an example of how it is important to 
try and keep the minimum capital requirements low so that we 
can have a larger pool of funds available for mortgages.
    The primary concern of the League in this issue is the 
maintenance of the housing GSE mission. Our housing office 
partners with both Fannie Mae and Freddie Mac to deliver a set 
of services that we integrate with programs from the banking 
industry, the Department of Housing and Urban Development and 
others to try to increase home ownership in the African-
American community.
    There is no simple answer to the disparity in home 
ownership rates between African-Americans and whites. Access to 
credit is one part of the answer. Credit counseling is another 
part of the answer.
    As an example, our program with Fannie Mae began in 
November 2002 with the signing of a five-year memorandum of 
understanding that launched a demonstration project in six and 
then seven and now eight of our affiliates, including Houston, 
Dallas, Tucson, Rochester, Seattle, Atlanta, and Stamford.
    Working with J.P. Morgan Chase, the project has put more 
than 500 families into homes and got an additional 200 families 
prepared for home ownership, and it has moved over $43 million 
in loans.
    Several of those affiliates are now at various stages in 
creating community housing development organizations, the next 
step in solving housing problems for low-income and African-
American households in their cities.
    So the Fannie Mae relationship is a catalyst that those 
affiliates have leveraged. The League has a similar program 
with Freddie Mac.
    The key lesson learned from the experience of the National 
Urban League's housing department is that increasing home 
ownership requires a comprehensive approach. It was with this 
foresight that the housing GSEs were put within HUD. The 
housing GSEs should be viewed as a tool among others that can 
address the complexity of causes of the disparity in home 
ownership rates in America.
    And it is in that regard that the National Urban League 
would be very concerned if program oversight were moved from 
HUD, even if safety and soundness oversight was moved to 
Treasury as some have proposed.
    Program oversight should ensure that the housing GSEs keep 
to their charter and mission, but should also ensure that the 
housing GSE programs fit into a coherent set of programs at HUD 
to create the largest affordable housing stock available for 
America, and that huge disparities in home ownership faced by 
African-Americans and Hispanics can be closed.
    We would be concerned if the programs of the housing GSEs 
are evaluated out of context, out of the context of a 
comprehensive housing program, and that faulty conclusions 
could be reached from the effectiveness or appropriateness of 
the programs of the housing GSEs, and that inappropriate safety 
and soundness standards might then cloud the mission of the 
housing GSEs.
    Still, we believe that important improvements could be made 
in program oversight. Organizations like the National Urban 
League, and you heard from The Enterprise Foundation just a 
second ago, and other community-based and nongovernment 
organizations have worked to address the housing needs of 
underserved communities.
    Beyond comments to proposed rules, we hope that Congress 
will create a new way of rule-setting to ensure a transparent 
mechanism, to ensure HUD incorporates the views of such 
organizations in setting rules and regulations toward goal-
setting for the housing GSEs and in program oversight.
    To us, the key is not just mission, but whether the program 
proposals from the housing GSEs would actually lead to the 
housing targets established by HUD. And as I just explained, we 
think this is the responsibility of HUD, not just of the 
housing GSEs, that is, reaching affordable housing targets.
    We think that this would incorporate the lessons learned by 
these organizations--Enterprise, the National Urban League, and 
others--on the front lines of address the housing problem and 
into assessing the likely effectiveness of the proposed program 
enclosing the home ownership gaps experienced by underserved 
markets.
    Thank you.
    [The prepared statement of William E. Spriggs can be found 
on page 236 in the appendix.]
    Mr. Baker. Thank you, Doctor.
    Mr. Courson?

STATEMENT OF JOHN COURSON, PRESIDENT AND CEO, PACIFIC MORTGAGE 
  COMPANY, ON BEHALF OF THE MORTGAGE BANKERS' ASSOCIATION OF 
                            AMERICA

    Mr. Courson. Thank you, Mr. Baker, Ranking Member Frank, 
distinguished committee members, thank you inviting the 
Mortgage Bankers to speak at this important hearing.
    MBA members originate loans in the primary market that 
Fannie Mae and Freddie Mac purchase. MBA, therefore, has a keen 
interest in maintaining the safety and soundness of our 
country's real estate finance system.
    Fannie Mae and Freddie Mac play two important roles in the 
American finance system. First, they provide market liquidity, 
and second, they buy affordable housing loans from lenders so 
that lower-income Americans, and those living in underserved 
areas, can get access to housing credit.
    Obviously, it is imperative to have effective oversight of 
the GSEs. The Mortgage Bankers endorse the principles for GSE 
regulation played out by Secretary Snow and Secretary Martinez 
before the committee earlier this month. And further, the 
Mortgage Bankers support certain core principles for effective 
regulation of Fannie Mae and Freddie Mac.
    First, effective safety and soundness oversight is vital. 
The Treasury Department's successfully regulates both national 
banks and federal thrifts and has successfully demonstrated its 
ability to fulfill the role of a financial safety and soundness 
regulator. The Mortgage Bankers support establishing Treasury 
as the safety and soundness regulator for Fannie Mae and 
Freddie Mac.
    Second, the GSE regulators both within Treasury and HUD 
need to have adequate funding if they are to live up to their 
important duties. The Mortgage Bankers urge this committee to 
look at the Office of Thrift Supervision funding arrangement in 
drafting legislation.
    Third, the safety and soundness regulator needs flexibility 
in setting capital standards. MBA does not mean to imply that 
today's capital requirements are inappropriate or inadequate in 
any way. Rather, MBA believes that the regulator needs the 
tools to respond to changing marketplace conditions.
    Capital standards are a fundamental tool in this regard. A 
statute should not unduly tie a regulator's hand.
    Fourth, a regulator needs adequate enforcement authority to 
correct any problems that may arise, and, more importantly, to 
deter problems in the first place.
    The Mortgage Bankers believe that the banking enforcement 
tools have proven their effectiveness over the years, and 
support including such tools for a GSE regulator.
    Within these four core principles, one issue stands out to 
MBA as fundamentally important for the mortgage industry--the 
safety and soundness of GSE programs and activities.
    The activities of Fannie Mae and Freddie Mac have 
ramifications throughout the American mortgage market, and 
indeed throughout the domestic and international economies.
    For these reasons, all their activities must be safe and 
sound, not just some. We believe that the approval of new 
programs and activities is fundamentally linked to financial 
safety and soundness.
    The safety and soundness regulator is in the best position 
to evaluate the appropriateness of new or proposed GSE 
programs. Congress should draw a clear line between the primary 
and secondary mortgage markets.
    In no event should the GSEs be permitted to encroach upon 
the mortgage origination process, or use their Government-
sponsored benefits to distort the competitive landscape of the 
primary mortgage market.
    The Mortgage Bankers also believe that it is important that 
the regulator not micro-manage the GSE, and that it not unduly 
constrain the GSEs' ability to innovate in a timely manner to 
meet the marketplace needs.
    Fannie Mae and Freddie Mac have Government sponsorship so 
they can assist Americans with their housing needs. Effective 
safety and soundness oversight ensures that the GSEs are able 
to meet these housing needs.
    MBA strongly supports the affordable housing goals for 
Fannie Mae and Freddie Mac, and endorses HUD's role in setting 
and enforcing those goals. The Mortgage Bankers strongly urge 
Congress to reform the oversight of Fannie Mae and Freddie Mac 
in this manner, so that they can continue in their role of 
supporting housing, especially affordable housing.
    Congressman Baker, thank you, and I am happy to answer any 
questions.
    [The prepared statement of John Courson can be found on 
page 139 in the appendix.]
    Mr. Baker. Thank you, sir. And welcome back to our former 
colleague, Mr. Bartlett.

 STATEMENT OF STEVE BARTLETT, PRESIDENT AND CEO, THE FINANCIAL 
                      SERVICES ROUNDTABLE

    Mr. Bartlett. Chairman Baker, Ranking Member Frank, and 
Congressman Scott, this is about as close to a special order as 
I have done in any time in the last 12 years.
    I notice Congressman Scott is looking at the clock. If you 
have a flight or something, and you want to take my time to ask 
a question, I will gladly yield. If that is the issue, that 
would be fine.
    Well, I will stay within my five minutes. My name is Steve 
Bartlett, I am President of the Financial Services Roundtable 
and our newly formed Housing Policy Council.
    Collectively, Mr. Chairman, and members of the committee, 
our member-companies represent the strongest commitment to 
housing in America today, originating some 70 percent of the 
residential mortgages in the United States.
    Our members strongly support the goal of home-ownership for 
all Americans, and we help to meet it every day. We understand 
the functions and operations of both the primary and secondary 
mortgage markets.
    Toward that end, our council has adopted five principles 
that we believe should guide this committee. Those principles 
are consistent with the proposal that Secretaries Snow and 
Martinez offered to the committee.
    They include: One, the regulatory agency should be 
independent and housed within Treasury, much as the OCC and OTS 
are structured an operate within Treasury.
    Second, the agency should be funded by nonappropriated 
funds.
    Third, all supervision and regulation should be in one 
agency, not divided.
    Fourth, the agency should have an abundance of staff 
qualified to understand, analyze and supervise the quality and 
the quantity of assets and liabilities of Fannie and Freddie.
    And fifth, its securities disclosure should be the same as 
applicable to all other publicly traded companies.
    Now, last week, Mr. Chairman, the council met and 
considered and added a sixth principle. The new bureau within 
the Treasury should also have regulatory and supervisory 
responsibility over the Federal Home Loan Banks.
    Thus, the council strongly supports the Administration's 
proposal that an independent regulator within Treasury, free 
from the appropriations process, the safety and soundness 
regulation including the authority to review and approve new 
GSE activities.
    The regulator should establish capital standards and have 
enforcement capabilities, and those should be a strong as that 
of banking regulators.
    Speaking of banking regulators, I want to cite as an 
example the OCC. The OCC has offered a clear road map to 
follow. It has the authority to supervise all aspects of a 
national bank's operations, including review of new activities.
    There is no need to re-invent the wheel or create new 
procedures. Now, the council, and I personally I must say, 
intend in no way to criticize, and it hasn't happened here 
today, the dedicated personnel at OFHEO or the Federal Housing 
Finance Board.
    I find them to be professional, ethical, dedicated, 
knowledgeable individuals. They have not had the statutory 
authority to do their jobs. The Housing Policy Council and the 
Roundtable believes that under these new proposals they will 
have an opportunity to do a world-class job.
    So in conclusion, the members of the Housing Policy Council 
believe in our system of housing finance, and we want to 
strengthen it. We recognize that the housing GSEs have an 
important role to play, but there is no question that the 
system of housing finance would benefit from a strong, 
independent regulator.
    Inn conclusion, one statistic which I looked up this 
morning, the OCC regulates national banks with approximately 
$3.9 trillion of assets. OFHEO regulates GSEs with 
approximately $3.3 trillion in assets, owned and guaranteed, 
almost the same.
    The OCC does its job with 2,800 employees, and full 
statutory independent authority. OFHEO has been asked to 
regulate almost the same size of assets with 115 employees, and 
no independent statutory authority.
    Therein lies the challenge of this committee, Mr. Chairman, 
to provide statutory authority for a strong and independent 
regulator for this critical segment of the nation's financial 
marketplace and the home-ownership opportunities for all 
Americans.
    The time to act is now, this session. Thank you.
    [The prepared statement of Hon. Steve Bartlett can be found 
on page 123 in the appendix.]
    Mr. Baker. Thank you, Mr. Bartlett.
    Mr. Taylor, it is my understanding that Rahway Savings 
Institution, as a regulated entity under the Office of Risk 
Supervision, has to comply today with what is known as 
community re-investment standards.
    Mr. Taylor. That is correct.
    Mr. Baker. At issue is whether another entity other than 
HUD can adequately supervise a social mission compliance in an 
effective manner. What is your experience with OTS in your 
responsibilities as an institution in meeting your CRA 
criteria?
    What is the supervision like, and what are the consequences 
of your failure to meet those standards?
    Mr. Taylor. If I could just make one correction. We are not 
OTS-supervised; we are a state chartered bank. So we are 
supervised by the Department of Banking of the State of New 
Jersey, as well as the FDIC, as a Federal regulator.
    And with regard to that and its relationship to an 
independent regulator under the Treasury for these GSEs, it has 
been very simple for us to be able to met our CRA requirements.
    We do utilize, I must say also, the GSEs in question to 
help us attain those goals, in terms of utilizing their 
services and their programs, which is one of the main reasons 
why they are so beneficial to us and to the industry.
    With regard to a regulator having oversight and having 
those kind of mission-directed responsibilities, we believe 
that if an independent agency under Treasury, a truly 
independent agency, is given the mission statement and the 
mission of housing as its key measure for these GSEs, that 
there should be no reason why the housing needs are not fully 
met.
    Mr. Baker. Do you share the view of other witnesses that 
Fannie and Freddie perhaps could do a better job in meeting the 
needs of low-income minorities and inner-city individuals than 
they do today?
    Mr. Taylor. Tough question to answer. I think they have 
tried, and I commend them for what they have done. I think they 
have made some great strides.
    They do come out with some innovative programs. Our members 
have taken advantage of them, ACB has entered into 
relationships with both Fannie Mae and Freddie Mac that deliver 
mortgages to them, both of which are conventional mortgages as 
well as CRA-related mortgages.
    So I know the endeavor and the attempt on their part has 
been sincere, as it has been for the industry at large.
    Mr. Baker. Thank you. Mr. Bartlett, a capital-related 
question. As you know, I have raised the issue with Mr. Raines 
and others today about the adequacy of maintaining authority 
for the new regulator to appropriately review risk and adjust 
minimum capital.
    As the rules now stand, the risk-based capital standard 
only recently promulgated is not yet in effect in the sense 
that the minimum capital required by statute of 2.5 percent is 
the actual currently required amount by a GSE.
    In order for a regulator, currently OFHEO, to act under the 
statute, you must be critically undercapitalized, that is a 
level of 1.25 percent.
    By allowing a regulator in the future, not today, no one is 
suggesting the immediate or imminent adjustment to either risk 
based or minimum capital standards--what would be your view, 
from your organization's perspective, given your broad scope of 
mortgage finance activities, as to the effect of allowing the 
regulator to have that authority? Would that enhance 
confidence? Would it have any effect on the ability to make 
credit available? What is the consequences of following the 
path that I have suggested?
    Mr. Bartlett. Chairman Baker, that path should be followed, 
as Secretary Snow proposed in his testimony. He was quite 
clear. I read: ``The regulator should also have authority with 
regard to capital for the GSEs.''
    So it is essential that this regulator be given authority 
over capital. This is the only regulator in the United States 
of America that does not have authority over--financial 
regulator--over capital and that should be an essential part.
    Now that authority over capital would enhance the safety 
and soundness and also enhance the confidence in the system. 
But I think that's sort of a starting point, and it's a mistake 
that should be corrected.
    Mr. Baker. Thank you.
    Dr. Spriggs, I just have one observation, and I would like 
to hear your comment with regard to it. I have been involved in 
the initiation of a Hope 6 grant in my community. And it is a 
good project but it is potentially flawed unless it involves a 
number of aspects of community investment.
    For example, merely making a line of credit available to an 
individual to acquire a home may not turn out to be a good 
event if at the same time you are not providing services in the 
community, creating jobs in the community and turning a 
blighted area around to become an economic model for all those 
who live there.
    When we talk about providing resources for affordable 
housing, should we be looking beyond just the ability of Fannie 
and Freddie to address the access to capital by low income and 
perhaps look at it as a community renewal effort? I have been 
impressed by the community investment programs, CIP program 
under the Federal Home Loan Bank. And it is a much broader in 
scope program than what is now required of the two other 
housing GSEs. Can you comment on the advisability or the nature 
of that enhancement for the mission compliance for the two 
GSEs?
    Mr. Spriggs. That's exactly my point, I think we have to 
look at it in a comprehensive way. And I would hope that HUD, 
because they run Hope 6, would think of how do you piece 
together the whole pie to make a successful Hope 6 project.
    And it does take many different elements. It takes a very 
strong community-based organization with good technical skills 
to come into the ground and do as you observed, piece together 
some of these other things.
    Some of them are HUD programs, but sometimes it takes an 
organization that deals with other federal agencies and put 
together the whole package from an array of what needs to be in 
place to make a community work.
    Congressman Scott had been concerned that African-American 
home ownership had been dropping. But you know, this is going 
to be a key reaction to the recession and the loss of people's 
job.
    So it isn't, as you were just saying, jobs, the structure 
of the neighborhood are as important, getting credit counseling 
is as important.
    So that's why I think it is important for HUD to think of 
the goals that they set for the programs they approve for 
Fannie Mae and Freddie Mac as within that array. And only, in 
my view, HUD has the ability to think comprehensively about 
what should the program be to meet our housing goals because 
they have the other programs. As you were just mentioning, they 
have the other programs to put into place so we can meet those 
goals.
    And I do not think we should look at Fannie Mae and Freddie 
Mac and point fingers and say you are a silver bullet, you have 
not done it. They are not a silver bullet. They are a necessary 
tool and we need their partnership. But we need to have this 
viewed as you have just mentioned in a comprehensive way.
    Mr. Baker. Thank you, sir.
    Mr. Frank?
    Mr. Frank. I would agree with that. I think basically the 
point that you just made in the conversation here is that we 
want to go beyond lower loans and maybe get into some deeper 
subsidies. But I have a couple of things here.
    First of all, I have to disagree with the gentleman from 
Louisiana that there is some analogy between the low-income 
housing goals of Fannie Mae and Freddie Mac and CRA, Community 
Reinvestment Act. I have defended the Community Reinvestment 
Act, but it is not a very strong mandate. And I think it is 
really qualitatively different from the affordable housing 
goals, which go much more specific. The Community Reinvestment 
Act says you lend in your own area. And it is not just a 
comparable mandate.
    And yes, I would like to see deeper subsidies. I think the 
analogy that I asked about before was the affordable housing 
program of the Federal home loan bank, which was created here 
under the chairmanship of the late Henry Gonzales. And that is 
an element of subsidy.
    But here is my problem, and I ask you to address this. I 
worry about increasing the capital requirements and the 
inconsistency there with the subsidy program. I would like to 
get Fannie and Freddie more deeply into helping low-income 
housing and possibly moving into something that is more 
explicitly a subsidy.
    My concern is that this would not be what would be a 
regulator at Treasury's idea of the best way to promote safety 
and soundness. And in fact, there is a tension between 
increasing the capital requirements and increasing the subsidy. 
I just think you cannot argue it at both ends.
    Members of the panel, Mr. Fishbein, let me start with you, 
if you would comment on that.
    Mr. Fishbein. Well, I agree with you, Mr. Frank. There was 
a lot of talk in the discussion today about bifurcation of 
function. But the reality is that safety and soundness 
regulation and capital requirements interrelate with public 
mission. There is always going to be a give and take and a 
certain tension between these various functions. Hopefully it 
is a creative one.
    Therefore, the regulatory structure that is put into place 
and the way that communications occur and decisions are made 
are an extremely important detail that should be part of any 
restructuring legislation. One of our concerns about placing 
the vast part of both safety and soundness and mission 
oversight at Treasury is that we believe that Treasury's 
emphasis will tend to be on safety and soundness. This will 
make it hard, therefore, for some close calls about mission to 
prevail in that kind of environment.
    So there has to be a balance. And the balance has to 
include equally strong regulatory structures that are in 
position to bring forth the counter balance and expertise in 
analysis to ultimately make sound judgments and make sure that 
one side of regulation does not automatically prevail.
    Mr. Frank. Anyone else wish to address that?
    I believe there has been more alarm raised about potential 
unsafety and unsoundness than, in fact, exists. And it has been 
my experience that when that happens, people start worrying 
that things are not secure. And the first thing that happens is 
the poor people get tossed over the side because, after all, 
they are the least good risk.
    Mr. Bartlett?
    Mr. Bartlett. Ranking Member Frank, this is the same 
tension that occurs with the OTS and OCC. The point is that 
because of that tension, the capital standards should not be 
set by statute. It should be set by a transparent regulatory 
process, which is in place for all other regulators, and should 
be authorized by----
    Mr. Frank. Well, I agree. I think my colleague may be 
asking you whether you think the regulator here, in fact, 
should more resemble the OTS and the OCC than some of the 
proposed statutes do.
    But I would say this, yes, there is that same tension. But 
it is not the mission of either the OTS or the OCC to promote 
low-income housing. And that's the difference.
    I don't want to treat Fannie Mae and Freddie Mac the same 
as I treat a regular bank. If I wanted them to be just like a 
regular bank, then we wouldn't need a Fannie Mae and a Freddie 
Mac. We could have a regular bank.
    The theory is that we have these separate government-
sponsored enterprises that do have some statutory advantages in 
return for which they focus on housing, and, specifically, we 
give them goals. We have the Community Reinvestment Act. Maybe 
if I filed a bill that gave every bank the same kind of low-
income housing goals as Fannie and Freddie and some ability 
to--maybe I could get it passed. I don't think so.
    And they are very different. OCC and OTS have a safety and 
soundness mandate entirely, with a little bit of social 
consciousness with the CRA. But the CRA basically says, ``Do 
not suck too much money out of the community and do not put any 
back in.''
    It should be qualitatively different than the mandates we 
have given to Fannie and Freddie.
    So I guess that may sum up to me why some of us have some 
differences on this. I do not want Fannie and Freddie to be 
just another bank. If they were not going to do more than 
another bank would because they have so many advantages, then 
we do not need them.
    And so therefore, I do think I do not want the same kind of 
focus on safety and soundness that we have in OCC and OTS. I 
want to roll the dice a little bit more in this situation 
towards subsidized housing.
    My time has expired, Mr. Chairman.
    Mr. Baker. Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Listening to that discussion, I tend to agree that this is 
a very delicate area on how we handle mission and how we deal 
with what really independent strong role plus regulation will 
be and to tailor those two situations to these particular 
entities, not counting the fact that we have some earlier 
testimony about throwing in the Federal home loan bank system, 
which creates an entirely different problem we would have to 
address.
    First of all, is anyone on the panel aware of a crisis 
situation where we have to do this in the next two or three 
weeks?
    Do you really believe that some of the issues that have 
been raised here in the discussion with this panel, that this 
can all be accomplished with deliberative speed in a short 
period of time, like two or three weeks?
    Mr. Bartlett. Mr. Kanjorski, our organization and our 
companies have been quite concerned about this from a safety 
and soundness as well as a mission for the last several years. 
We have communicated that concern. But recently, that concern 
seems to have been highlighted by a number of factors.
    So, yes, sir, I believe there is an urgency that is to the 
tune of some $3.3 trillion that is either owned or guaranteed 
by these two agencies that all the testimony that you have 
heard today bring in some question as to whether they are being 
properly regulated. So we think they are not being properly 
regulated. And we believe that with $3.3 trillion, you do not 
want to wait too long. And now is the time to act.
    Mr. Kanjorski. I would not suggest that everyone has 
questioned whether or not we can construct a better regulatory 
authority than what we presently have. I do not know whether we 
want to put a qualitative standard on what has existed. But my 
question is, we have so many fundamental questions, 
particularly missions and what is a strong independent 
regulator.
    It seems to be we are going to have to wrestle a lot of 
things. Somebody suggested we write the mission. I think it was 
Mr. Raines. I venture to say I could anticipate taking weeks 
and weeks and weeks hammering that around and just what that 
description in statute should be of what the mission is so that 
it can be more readily applied.
    My problem is I think we have a lot of haste here. We are 
going to run down and, Steve, having served on this committee 
before, you know what happens in haste. We sometimes do not dot 
all of our i's and cross all of our t's. And we can leave some 
awfully large holes in this mission.
    Example, we are just starting to get down to people using 
the same description of what--you use the term independent and 
strong independent regulator and gave the example of the OCC 
and the OTS.
    The Secretary, last week, said independent, strong, world-
class regulator and gave the example of the IRS. I see a world 
of difference in that. And he may be more correct than we are 
or vice versa. But it seems we have to work.
    If we are not defining our terms in the same way, we are 
going to put out a news release that Congress has passed a 
world-class, strong, independent regulator who cannot come up 
and talk to Congress, who cannot decide policy questions, who 
has limitations on supervision, has limitations on 
prosecutions, et cetera, et cetera, and going right down the 
line.
    Or else, if we all put our minds to it and things do 
crystallize, we can come up with it.
    I am just worried about doing in the limited amount of time 
left in this session. And I, myself, would like to have the 
legislation float for a while, so a lot of people could give us 
critiques of some of the problems that they see every day.
    I left this session three or four times and met with people 
who critiqued me on various things happening here. I find that 
very informative and helpful, because, obviously, I do not 
think any of us on the committee are real experts in this area.
    We are trying to craft language that will reflect expertise 
beyond the committee, actually.
    With that, I appreciate all of the testimony of the panel. 
I look forward to hearing from you. As one member of Congress, 
look, if you see something happening, our names, you just have 
to call the Capitol operator and get a hold of us, give us some 
insight and some input as to, you know, how that big truck 
isn't going to fit in that little garage before we construct 
the garage.
    And other than that, let's hope we can do something really 
contributory here to this system instead of ending up with just 
a whitewash on the garage door because there has been some 
circumstances that have brought this along.
    With that, thank you very much for your testimony.
    Mr. Chairman, I yield back.
    Mr. Baker. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman. I appreciate it so 
much.
    Needless to say, this is an extraordinarily important issue 
to my constituents. I represent four of the fastest growing 
counties in the United States--middle-class, moderate, and 
lower-income. There is no greater need than housing.
    The fundamental question that I have, and I would like to 
get a response first from Mr. Bartlett and Mr. Spriggs, because 
I think between the two of your testimony rests one of the 
fundamental issues that must be resolved. And that is this: 
There are some special reasons that Freddie Mac and Fannie Mae 
were put together. They have a special mission.
    And there is much concern that this shift away from HUD 
over to the Treasury Department is in effect, throwing the baby 
out with the bath. There are concerns, especially from the 
minority community, and of those minority communities, as I 
pointed out, from this home-ownership rates, there is not one 
group within the minority groups that are suffering more than 
the African-Americans.
    It is the only group in this country in which home 
ownership rates have gone down in this past year.
    The others have increased bit by bit, and in African-
American communities, it has gone down.
    The reason I point that out is because there are some 
special peculiarities, sensitivities, that obviously affect the 
African-American community in terms of home ownership than any 
other group.
    We are concerned that in this move that, at least with HUD, 
in terms of its comprehensive dealing with housing, the 
history, all of that there, that something will get lost in the 
move of this oversight to the Treasury Department.
    I have some great appreciation for the safeness and the 
soundness aspect of this measure, and I certainly commend 
Congressman Baker on that pursuit.
    But I think he along with all of us here on this panel must 
be assured that we are not losing any priority, any 
understanding, and in fact will strengthen any effort to move, 
or we don't move it, because I don't think that the American 
people would go along with that. The American people are fair 
people, and understanding people, and keep in mind there is a 
mission here that must not be compromised.
    And I would like to hear from you, Mr. Spriggs, and you, 
Mr. Bartlett, because I think the two of you, again, represent 
a solution to this, coming from two different sides. You are 
supporting this move to the Treasury, and Mr. Spriggs is saying 
there must be caution on it.
    But first, Mr. Spriggs, what safeguards, what assurances 
would you be looking for in this area?
    Mr. Spriggs. Well, again, because I think the reality is 
that the housing problem is complex, and it can't be solved 
only pointing at mortgage bankers or only pointing at Fannie 
Mae. And if a regulator has the responsibility of soundness 
primarily and comes from an institution that looks that way, I 
fear it would be like CRA. And those of us in many 
organizations have big struggles over getting the Community 
Reinvestment Act meaningfully enforced.
    It is very rare to see a bank get a bad grade on their CRA. 
And it is not as if they are doing fantastic things. But it is 
just simply not the primary responsibility in evaluating them, 
to get meaningful about what are their real CRA activities.
    And we are asking Fannie Mae to participate in something 
key and fundamental. As you said, Congressman, Americans are 
fair. And there are certain common values we have. Home-
ownership is just one of those mom-and-apple-pie things. We all 
think that part of the American dream is to be able to own a 
home. And all Americans think that we should figure out how to 
solve home-ownership.
    So that is much more specific than the CRA requirement. And 
I think it affects people differently when they think about 
whether you are meeting that target. If I get on Fannie Mae or 
Freddie Mac for not meeting the home-ownership, I think people 
react differently than if I say a bank didn't do 30 percent of 
loans in some neighborhood, and I am amorphous about whether 
those are business loans or whatever. I mean it just doesn't 
sound--it sounds like I am forcing the bank to do something 
bad.
    Home-ownership is something everybody agrees is something 
we want to take place. So if it is a specific goal, it is a 
goal that needs to be integrated into a whole program; you 
can't just do it with one program. And it needs a whole 
Department, like HUD, to think through what are all the 
components, what is the realistic goal, because HUD has to deal 
with this. They can't give an unrealistic goal. What is the 
realistic goal?
    And then to look at a program and be able to say, ``Well, 
we have these programs. We know what they can do.'' If you are 
coming up with a program that is not going to get to that goal, 
we have all the metrics to compare it and tell you, that is not 
really a meaningful program. It may sound good on paper, but it 
is not a meaningful program.
    So the theory is that we want it with an agency that has 
the expertise, that will set and is used to setting these 
specific and reasonable goals, and is thinking in a 
comprehensive way about how does that goal and how do the 
programs that are in place to meet that goal, how do they all 
fit together.
    And I would be afraid of giving this to someone else who 
didn't have all that in front of them and, I would fear, drop 
the ball and let it escape or approve a program in a way that 
might be not as critical or disapprove of a program because 
they were not getting or were not as concerned about the goal.
    Mr. Scott. Mr. Bartlett?
    Mr. Bartlett. Congressman Scott, thank you for the 
question.
    First, Congressman, setting the GSE affordable housing 
goals under the Secretary's proposal, the two Secretaries, 
would remain at HUD. We believe and they believe that the 
process would be strengthened because there would be a 
transparent regulatory process that would be open for comment 
for all, and that is not the case today.
    Secondly, I do agree that there is a special mission of 
Fannie and Freddie and the GSEs. In fact, and you have no way 
of knowing this, I was one of the principal authors of the 1983 
act that started this, when it was much smaller.
    And we set that mission, in layman's terms, as providing 
liquidity in the residential secondary mortgage market. It has 
succeeded beyond the wildest imagination, because by 1992, that 
was changed and Fannie would contend that it was significantly 
expanded.
    But nevertheless, the regulatory structure was not caught 
up to it. A regulator was created that took--without the 
authority to adopt capital standards that every other regulator 
has always had, and it took eight years for them to issue their 
first regulation because of the statutory hamstring, not bad 
people.
    So it has gotten to a $3.3 trillion overhang over the 
nation's economy. And unless strong, independent regulation is 
provided, the housing goals for Fannie and Freddie will go in 
the tank because the system will ultimately be in jeopardy. The 
system would be in jeopardy.
    And that is why we are here, is to achieve those housing 
goals and make sure that we have strong capital standards to 
achieve them.
    So I think this is a hearing and will be legislation that 
is designed to strengthen the system so that it can continue to 
provide housing and not allow it to be weakened.
    Mr. Fishbein. Mr. Scott, can I answer that question as 
well?
    Mr. Scott. Yes.
    Mr. Fishbein. I certainly agree. It is our position, too, 
that mission responsibility should remain in HUD. But, in 
saying that, I would like to make some additional points.
    First, that HUD is underfunded to do its present mission 
responsibility; that there are no special appropriations to 
perform this regulation; that HUD pays for funding for the 
staff--who are very dedicated, by the way, and very experienced 
from the general HUD operating budget. This sometime means that 
HUD has to make difficult budget choices.
    So providing full funding, whether it be through an 
assessment process or a special appropriation, is absolutely 
critical.
    Second, if the public mission function does get 
transferred, to Treasury, it is necessary to ensure that the 
director of this new office accountable for both functions. 
They should be judged by their ability to conduct safety and 
soundness oversight well, but also by their ability to 
discharge the function as public mission regulator.
    Combining both functions into a single office is very 
difficult which is why we have some concerns about such a move.
    Should the Congress in its wisdom decide to go ahead and do 
that, it is very important these two functions be viewed as 
equally important. Ultimately, the person who heads this office 
should have the responsibility for discharging both duties with 
equal seriousness.
    Mr. Baker. Mr. Scott, in H.R. 2575, we have an independent 
assessment formula not only for safety and soundness within the 
OTS, but we also have a separate assessment in HUD for HUD's 
functions. So that is a very strong new, additional authority 
to ensure that your concerns about mission compliance is in 
hand.
    Mr. Taylor. Could I comment on that last point?
    We have heard today and we have talked a lot today about a 
world-class regulator. And I think we have heard testimony from 
Fannie Mae Chair Raines on this issue, and that is that he has 
investors that are not just in the United States but 
international, and that we are looking to create something to 
bring credibility to the marketplace.
    And I would ask the question, what makes a regulator world-
class if we take away its independence? What if it does not 
have the ability to look at or set capital standards and has no 
oversight on product and services? So at the end of the day, if 
the idea behind this is to have a world-class regulator for the 
GSEs, and then we limit its ability to regulate, what have we 
really done?
    Mr. Baker. You done?
    Okay, thank you, Mr. Scott.
    Just for the record, I want to establish that the current 
bill pending, 2575, was actually introduced on June 24th. Since 
the 106th Congress, I have been a part of or participated in 15 
hearings on the subject of GSE regulation. And with the 
conclusion of this panel, you will be pleased to know you are 
part of 81 witnesses who have come before the Capital Market 
Subcommittee or the full committee on this subject. I would 
hope that in view of that record one would come to the 
conclusion we are not particularly rushing to judgment here.
    But with all that aside, I want to express my appreciation 
to each of you for your perspectives that you have brought to 
the table. I do believe it will be helpful to us in formulating 
whatever the final product will ultimately look like.
    I think the combination, frankly, of safety and soundness 
with mission compliance are not mutually exclusive, that we can 
take actions that are not only good for the enterprises and 
their shareholders, but we can take action that is also 
beneficial to the taxpayer. There is a net win to this process 
and the mere examination of the subject has not caused the 
housing market nor interest rates to go anywhere but down.
    Since 1991, when we first began the discussion of creation 
of OFHEO, and you look at all the hostilities back and forth 
from controversial matters that were introduced or hearings 
that were engaged in, I suggest to you the Alan Greenspan 
effect is much more powerful than all of this combined. And we 
are enjoying record-low interest rates for an extraordinarily 
long period of time. And if we are ever to engage in 
reformation of regulatory function, this window is a rare one 
indeed.
    So not that it is our intent to have any person denied 
access to home ownership, in fact, I think the GSEs can do a 
great deal more in that regard than the do today. And I will 
join with my friends in seeking out statutory provisions to 
ensure that compliance.
    But at the end of the day, this is far too important. They 
have grown so fast for too long that this issue does need a 
world-class regulator with the appropriate skills.
    I also want to introduce into the record a statement by Mr. 
Rick Lazio, former member who now is President of the Financial 
Services Forum who could not be here but wanted to have that in 
the official hearing record.
    [The following information can be found on page 246 in the 
appendix.]
    Unless there are further comments, I thank you for your 
long-suffering patience. Meeting adjourned.
    [Whereupon, at 4:20 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                           September 25, 2003


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