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





                        REVIEW OF THE OFFICE OF
                       FEDERAL HOUSING ENTERPRISE
                     OVERSIGHT AND FEDERAL HOUSING
                             FINANCE BOARD

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

                             JOINT HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                AND THE

                            SUBCOMMITTEE ON
                     CAPITAL MARKETS, INSURANCE AND
                   GOVERNMENT SPONSORED ENTEREPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 13, 2004

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-100



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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          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSSELLA, New York              CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey            CHRIS BELL, Texas
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
              Subcommittee on Oversight and Investigations

                     SUE W. KELLY, New York, Chair

RON PAUL, Texas, Vice Chairman       LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
MARK GREEN, Wisconsin                DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas                JIM MATHESON, Utah
SCOTT GARRETT, New Jersey            STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania             ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida           CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
  Subcommittee on Capital Markets, Insurance and Government Sponsored 
                              Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
EDWARD R. ROYCE, California          MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois         HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York               RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio                  KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona             JOSEPH CROWLEY, New York
JIM RYUN, Kansas                     STEVE ISRAEL, New York
VITO FOSSELLA, New York,             MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois               WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin                CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania      JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania        BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio              DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 13, 2004................................................     1
Appendix:
    July 13, 2004................................................    37

                               WITNESSES
                         Tuesday, July 13, 2004

Castaneda, Hon. Alicia R., Chairman, Federal Housing Finance 
  Board..........................................................    11
Falcon, Hon. Armando Jr., Director, Office of Federal Housing 
  Enterprise Oversight...........................................     8

                                APPENDIX

Prepared statements:
    Kelly, Hon. Sue W............................................    38
    Oxley, Hon. Michael G........................................    40
    Gillmor, Hon. Paul E.........................................    42
    Kanjorski, Hon. Paul E.......................................    44
    Castaneda, Hon. Alicia R.....................................    46
    Falcon, Hon. Armando Jr......................................    50

 
                        REVIEW OF THE OFFICE OF
                       FEDERAL HOUSING ENTERPRISE
                     OVERSIGHT AND FEDERAL HOUSING
                             FINANCE BOARD

                              ----------                              


                         Tuesday, July 13, 2004

             U.S. House of Representatives,
       Subcommittee on Oversight and Investigations
     Subcommittee on Capital Markets, Insurance and
                   Government Sponsored Enterprises
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to call, at 2:59 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Sue Kelly 
[chairwoman of the Oversight and Investigations subcommittee] 
presiding.
    Present: Representatives Baker, Royce, Kelly, Paul, Capito, 
Hensarling, Garrett, Murphy, Brown-Waite, Frank, Kanjorski, 
Gutierrez, Inslee, Ford, Hinojosa, Lucas of Kentucky, Clay, 
Scott and Bell.
    Chairwoman Kelly. [Presiding.] This hearing of the 
Subcommittee on Oversight and Investigations will come to 
order. I welcome Chairman Baker, and we are actually holding a 
joint hearing here.
    This afternoon, the Financial Services Committee continues 
its series of oversight hearings on the federal agencies within 
the committee's jurisdiction by conducting a review of the 
Office of Federal Housing Oversight, the OFHEO, and the Federal 
Housing Finance Board, the FHFB.
    OFHEO is an independent agency and the primary regulator 
for Fannie Mae and Freddie Mac, two of the world's largest 
financial institutions. The agency's primary mission is to 
ensure the capital adequacy and financial safety and soundness 
of the government-sponsored enterprises.
    The Federal Housing Finance Board is an independent agency 
that regulates the 12 federal home loans banks and also ensures 
that they operate in a safe and sound manner. Their roles are 
critically important to American taxpayers, homeowners and 
investors. Fannie Mae, Freddie Mac and the federal home loan 
banks provide valuable services to homeowners by increasing 
liquidity in the home mortgage markets. Their significance to 
and impact on our economy cannot be overstated, spanning across 
the entire scope of the financial services sector from the bond 
markets, mutual funds, and pension funds, to relationships with 
financial institutions, insurance companies, individual 
investors, central banks and other institutions in foreign 
countries. We must ensure that they are functioning well and 
serving the needs that Congress intended.
    Over the last few years, the government-sponsored 
enterprises have been the focus of increased attention. This 
committee has a strong interest in overseeing their regulation. 
As we face a growing economy that has been fueled by the 
housing sector, Congress must ensure that these entities have 
effective and efficient oversight. Since the housing sector 
continues to be the engine that drives our economy currently, 
our government must ensure that we do not disrupt the steady 
flow of low-cost funds to homebuyers, while protecting the 
taxpayers.
    Today, the committee welcomes the Director of the Office of 
Federal Housing Enterprise Oversight, Mr. Armando Falcon. We 
are very interested in OFHEO's annual report to Congress, as 
well as the agency's recent 2004 budget request for $59.2 
million. While this figure represents a significant increase 
for the agency, it is important that the OFHEO be well funded 
and well staffed to oversee these extremely complicated 
institutions. The committee supports OFHEO's request and would 
like to hear more about how it plans to use these funds, 
including the creation of a new Office of Compliance and an 
Office of Chief Accountant.
    The committee is also pleased to welcome the Chairman of 
the Federal Housing Finance Board, Mrs. Alicia Castaneda. Today 
marks Chairman Castaneda's first appearance before the 
Financial Services Committee, and we welcome you. We welcome 
your testimony on the state of the Financial Board and the 12 
federal home loan banks. We look forward to hearing your vision 
for the future of your agency.
    While we are pleased with the tremendous strides that OFHEO 
and the Finance Board have taken to strengthen their oversight 
role, the two agencies really remain ill-equipped to handle the 
oversight of the GSEs. In order to protect taxpayers, 
investors, and homebuyers and restore confidence in the GSEs, 
we believe that these entities need a single world-class 
regulator to oversee their operations and financial well-being.
    I am hopeful that Congress and the Administration can reach 
a consensus for reform that strengthens the oversight of the 
GSEs and continues to encourage homeownership. In the meantime, 
OFHEO and the Finance Board have been very active with a number 
of proposals aimed at strengthening the oversight and 
operations of the GSEs. The committee is very interested in 
learning more about these reforms today, in addition to the 
nature and status of the accounting restatements and other 
supervisory actions. Specifically, OFHEO and the Finance Board 
have been very active in the area of corporate governance. 
OFHEO recently circulated a rule that would, among other 
things, separate the CEO and chairman functions and require 
periodic audit partner and audit firm rotation.
    Since its work on Sarbanes-Oxley, this committee has taken 
a great interest in pursuing the highest levels of integrity in 
corporate governance, and we would like to hear your views on 
these issues. As you know, the General Accounting Office has 
found that mandatory audit firm rotation for publicly traded 
companies may be inefficient and potentially is disruptive. 
Given the consolidation in the accounting industry and the 
highly complex nature of the GSEs, the committee would like to 
hear more about this proposal and what precedent it sets for 
publicly traded companies.
    Similarly, the Finance Board just voted unanimously to 
require the 12 home loan banks to register with the SEC. While 
the increased disclosure is generally preferable, we would like 
to know more about the significance of this requirement, since 
the stock of the home loan banks is not publicly traded like 
the other GSE stocks. In the absence of reform legislation, the 
committee is also interested in how the regulators intend to 
handle other issues such as receivership.
    During the debate over regulatory restructuring, there was 
considerable discussion about whether a new regulator should be 
vested with receivership powers similar to those held by other 
financial regulators. The committee would like to know whether 
OFHEO plans to address this issue. The issue of multi-district 
membership is also significant, considering the recent 
acquisitions that several large federal home loan bank members, 
which have spurred petitions to the Finance Board to allow 
members of the system to maintain membership in more than one 
federal home loan bank. Since the issue has an impact on the 
way affordable housing contributions are measured among the 
federal home loan banks, it is important that we know how the 
Finance Board plans to address the multi-district membership.
    Finally, the Department of Housing and Urban Development 
has recently proposed increasing the housing goals of Fannie 
Mae and Freddie Mac. The proposal requires the firms to 
increase the percentage of mortgage loans they finance for low-
and moderate-income borrowers, from 50 percent to 57 percent by 
the year 2008. While this is neither the role of OFHEO nor the 
focus of today's hearing, the committee does have an interest 
in determining the impact that this proposal could have on the 
safety and soundness of these entities. I hope you can address 
this issue today.
    I would like to thank my colleague and co-chair of today's 
hearing, Representative Richard Baker. Chairman Baker's work on 
these issues has been crucial to the reform efforts and has 
greatly benefited the American people. The subcommittees thank 
the witnesses for their testimony. The American people will 
undoubtedly benefit from your views and this important 
oversight.
    Without objection, all members's opening statements will be 
made part of the record. We turn now to Mr. Gutierrez.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 38 in the appendix.]
    Mr. Gutierrez. Good afternoon, and thank you, Chairwoman 
Kelly, for this hearing, the latest in a series of oversight 
hearings on financial services regulators. On this particular 
occasion, we are pleased to be joined by Chairman Baker and 
Ranking Member Kanjorski of the Capital Markets Subcommittee, 
where the witnesses before us usually testify. So let me start 
by extending a warm welcome to Director Armando Falcon and 
Chairwoman Alicia Castaneda. They actually wrote this out 
phonetically for me.
    [Laughter.]
    Chairwoman Kelly. Maybe they think you have become too 
anglicized.
    Mr. Gutierrez. Maybe so. It is the first time I have needed 
it. They know I am bad with names.
    Later this week, the Oversight Subcommittee will be having 
a hearing regarding the need for diversity at executive levels 
in the financial services industry. I wish that today's panel 
were a more typical sight in this hearing room. I hope and 
trust that one day that will be the case across America.
    Many of my colleagues have expressed a great deal of 
concern about the appropriate level of authority that should be 
exercised over GSEs by Fannie Mae and Freddie Mac and the 
Federal Home Loan Bank. Most of the legislative focus has been 
on Fannie and Freddie and OFHEO. However, I want to focus for a 
moment on the Federal Housing Finance Board, which just 
recently entered into a written agreement with the Federal Home 
Loan Bank of Chicago in my hometown. For those of you less 
familiar with the federal home loan bank system, each of the 12 
home loan banks serves the member institutions in its 
districts. The Chicago bank services financial institutions in 
Illinois and Wisconsin, but that is not all. The Chicago bank 
pioneered a program known as mortgage partnership finance, or 
MPF, which provides financial institutions with a source of 
liquidity and risk management, and an alternative to the 
secondary market.
    The Chicago bank started the MPF program in 1997 and now 
administers the back-office functions for eight other home loan 
banks participating in the program. The three remaining banks 
have started similar versions. The Chicago bank is necessarily 
engaged in a more sophisticated and complex transaction than 
some of the other regional banks, due to its commitment to 
success. The MPF program has been good for Chicago and good for 
the federal home loan bank system. I think the program will 
continue to benefit banks and consumers for many years to come.
    Last month, the Chicago bank entered into a written 
agreement with its regulator. This agreement requires that the 
Chicago bank present the Finance Board with a detailed business 
and capital plan and how they are going to manage that 
business, taking into consideration not merely regulatory 
minimums in the setting of capital standards, but factors such 
as interest rate movement. As many of you are aware, I am 
deeply concerned about the potential effects that the rising of 
interest rates will have, but my focus has generally been on 
the consumers who are struggling to pay their mortgage or 
credit card bills at the current rates, and will have a much 
harder time as rates increase.
    While these consumers have little flexibility and often no 
alternatives, it is certainly reasonable to expect institutions 
to have plans in place to hedge against inflation-rate 
fluctuations. What this written agreement between the Finance 
Board and the Chicago bank illustrates is the power that the 
regulator has in the federal home loan bank system. In this 
case, it was a reasonable and appropriate exercise of that 
power. However, the Finance Board's predecessor was not always 
so judicious. As we know, the federal home loan bank system and 
its regulator, the Finance Board, has huge power over them. In 
fact, back when there was a Federal Home Loan Bank of Los 
Angeles, at one point the Federal Home Loan Bank Commissioner 
decided that there should not be one, and it merged the bank 
with another.
    You know, the Finance Board could do that today if they 
wanted to. They could merge or move the banks. When the Los 
Angeles bank sued, they lost because the court found that even 
if the orders to liquidate the bank, transfer its assets and 
readjust the bank district had been motivated by malice of the 
Federal Home Loan Bank Commissioner, if the auditors were 
otherwise justified by legal purpose, they were not otherwise 
illegal or subject to attack on their validity. That is pretty 
broad-based power.
    That is power. The Finance Board clearly has it and seems 
to be using it appropriately at the moment, keeping in mind its 
obligation to serve the public good. I only wish that some 
agencies like the OCC would have similar power, and did not 
seem so afraid to use their power and fulfill their duty to the 
public when it requires them to act against the desires of 
their regulated institutions.
    I want to thank you, Chairwoman Kelly and Mr. Baker and Mr. 
Kanjorski, for calling this hearing. I look forward to the 
testimony of our witnesses at this hearing.
    Chairwoman Kelly. Thank you very much, Mr. Gutierrez.
    Mr. Baker?
    Mr. Baker. Thank you, Chairwoman Kelly. I certainly 
appreciate your courtesy and cooperation in conducting this 
hearing. It is highly appropriate from an Oversight and from a 
Capital Markets perspective that the two committees focus on 
this particular responsibility. I appreciate the opportunity to 
work with you and Mr. Gutierrez.
    As to Mr. Kanjorski's and my responsibility, there is no 
question that the committee has spent considerable time and 
effort in first attempting to understand functions of GSEs, and 
secondly examining the regulatory adequacy of the current 
structure.
    To both the Director and the Chairwoman today, I extend my 
appreciation for all your efforts over the past months, 
particularly Mr. Falcon, over many years of difficulty. I 
appreciate your commitment to bring about accountability. I 
will be very brief in my opening statement, as I have a fair 
number of questions I would like to move to, and certainly 
would want to hear the testimony of both our witnesses and move 
the hearing along.
    With that, I would yield back the balance of my time.
    Chairwoman Kelly. Thank you very much.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Madam Chairman.
    We meet today to examine the recent actions and pending 
proposals at the Office of Federal Housing Enterprise Oversight 
and the Federal Housing Finance Board. These two regulatory 
bodies help to ensure that Fannie Mae, Freddie Mac and the 
federal home loan banks continue to fulfill their public 
mission of advancing homeownership.
    Our nation's system of housing finance is not only 
extremely successful, but it is also the envy of the world. 
More than 68 percent of Americans presently own the homes in 
which they live. Government-sponsored enterprises have 
contributed greatly to this accomplishment.
    This success, however, should not stop us from asking 
whether and how we can do a better job with respect to 
regulating the housing government-sponsored enterprises and 
conducting congressional oversight regarding these matters. We 
should always examine ways by which we can improve regulatory 
efficiency and lower mortgage rates.
    As you know, Madam Chairman, I am also one of the few 
remaining members of this committee who participated in the 
entire congressional battle to resolve the savings and loan 
crisis. I am therefore acutely aware of the need to protect 
taxpayers from risk. It is in the public's interest that we 
ensure that the housing government-sponsored enterprises 
continue to operate safely and soundly. We must further ensure 
that these public-private entities achieve their public 
responsibilities for advancing homeownership opportunities.
    As we proceed today, I hope that our distinguished 
witnesses will share their views on corporate governance. I 
know that the Federal Housing Finance Board has carefully 
studied these issues in recent years and has worked to improve 
the performance and accountability of federal home loan bank 
executives and board directors.
    Nevertheless, I have heard concerns about the need to 
improve the expertise on the boards, such as requiring at least 
one director to have experience with derivatives. I have also 
previously proposed extending the terms of directors from 3 
years to 4 years to increase institutional memory at the 
federal home loan banks. I am additionally aware that one 
federal home loan bank may soon have no representative on its 
board with more than 3 years of experience, assuming that none 
of its current directors are reappointed later this year.
    In recent months, the Office of Federal Housing Enterprise 
Oversight has also released its proposed minimum standards for 
corporate governance. These standards have sparked considerable 
debate, particularly regarding the decisions to separate the 
CEO and chairman functions and to mandate the rotation of 
external auditors. In addition, I am very concerned about the 
failure of the Bush Administration to appoint directors to 
serve on Fannie Mae's and Freddie Mac's boards. As a result of 
this decision, each board has five fewer individuals to serve 
than they usually had.
    The failure to appoint presidential representatives on 
these boards has increased the burden that each of the 
remaining directors must carry. Moreover, it is important to 
note that three of the five presidential appointees on each of 
these boards had to represent particular concerns or have 
specific backgrounds, such as experience in the housing 
industry. Unfortunately and counter to congressional intent, 
neither Fannie Mae nor Freddie Mac is now benefiting from 
receiving these diverse viewpoints.
    In closing, Madam Chairman, as I said at our very first 
hearing on GSE regulations in March 2000, we need to have 
strong, independent regulators that have the resources they 
need to get the job done. I continue to support strong GSE 
regulation. A strong regulator, in my view, will protect the 
continued viability of our capital markets, ensure against 
systemic risk, and expand housing opportunities for all 
Americans. I therefore look forward today to hearing from the 
leaders of the two regulatory entities overseeing the safety 
and soundness of the housing government-sponsored enterprises, 
and yield back the remainder of my time.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 44 in the appendix.]
    Chairwoman Kelly. Thank you very much, Mr. Kanjorski.
    Mr. Garrett, do you have an opening statement?
    Mr. Garrett. Just to thank you for holding the hearings. I 
will defer my opening statement because there are three areas 
that I will be interested to see whether they are touched upon 
with regard to the comments we receive today. First of all, I 
am just coming from another meeting with regard to the money we 
are spending, and that is budgetary issues and the amount of 
money being requested. Secondly is GSEs involvement in foreign 
nations; and finally, with regard to the status of special 
examinations ongoing at Fannie Mae.
    So I will be interested to hear your testimony on that, and 
probably will have follow-up questions at the conclusion. 
Again, thank you to the Chairs for holding the hearing.
    Chairwoman Kelly. Thank you.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Chairwoman Kelly.
    I want to thank you for calling this hearing. It gives us 
an opportunity to hear form both witnesses. I look forward to 
your remarks. Thank you.
    With that, I yield back the balance of my time.
    Chairwoman Kelly. Thank you.
    Mr. Scott?
    Mr. Scott. Yes, just a couple of opening remarks, Ms. 
Chairlady.
    Chairwoman Kelly. That is okay. We know what you mean.
    [Laughter.]
    Mr. Scott. Certainly in view of the fact that OFHEO is the 
primary regulator of Fannie Mae and Freddie Mac, and that your 
mission is to ensure the capital adequacy and financial safety 
and soundness of these two entities, last year Freddie Mac had 
one of the largest corporate financial restatements of earnings 
and saw the ouster of its top executives. The Office of Federal 
Housing Enterprise Oversight followed with an examination of 
Freddie Mac's accounting and management practices and a 
forensic audit is currently being conducted at Fannie Mae.
    This committee has heard testimony that OFHEO was basically 
asleep at the switch and did not catch these accounting schemes 
early enough. There is general agreement that OFHEO needs to be 
strengthened in order to ensure the safety and soundness of 
these GSEs as they expand rapidly and rely on complicated 
accounting methods.
    As we know, legislation has stalled which would consolidate 
the functions of OFHEO and the Federal Housing Finance Board at 
the direction of the Administration. I believe that several of 
the issues that will be discussed today, including 
appropriations to fund the regulators and the authority to 
issue regulations, would be addressed if Congress were able to 
pass GSE legislation. If I understand right, you are asking for 
perhaps 50 percent more in funding, an increase of over $20 
million from what you asked for last year.
    So with that being said, I look forward to hearing the 
panel's testimony on the current safety and soundness of the 
GSE, and their current commitment to affordable housing goals.
    I yield back the balance of my time.
    Chairwoman Kelly. Thank you, Mr. Scott.
    Ms. Capito?
    Mrs. Capito. I have no questions, Madam Chairwoman. I look 
forward to the testimony.
    Chairwoman Kelly. Thank you.
    We now turn to our panel. The subcommittees are pleased to 
have with us the Director of the Office of Federal Housing 
Enterprise Oversight, Mr. Armando Falcon, and the Chairman of 
the Federal Housing Finance Board, Ms. Alicia Castaneda.
    Director Falcon was confirmed as the head of the Office of 
Federal Housing Enterprise Oversight in 1999. As Director, he 
heads the federal agency responsible for ensuring the financial 
health of Fannie Mae and Freddie Mac. Mr. Falcon leads a 
diverse staff of examiners, financial analysts, IT 
professionals, attorneys and external affairs experts. Prior to 
this appointment, Mr. Falcon served for 8 years on the legal 
staff of the House Banking Committee.
    Chairman Castaneda was confirmed by the Senate in December 
2003. Ms. Castaneda brings more than 28 years of commercial 
banking experience to the Federal Housing Finance Board, most 
recently as senior vice president at Bank of America. Chairman 
Castaneda is the first Hispanic to be appointed to the Federal 
Housing Finance Board and is the first woman to serve as a 
director since the Finance Board became full-time in 1990. For 
that, madam, I certainly congratulate you heartily.
    The committee thanks both witnesses for their appearance 
and testimony. Without objection, your written statements will 
be made part of the record. You will each be recognized for a 
5-minute summary of your testimony. If you have done this 
before, you know that the box on the table has green, yellow 
and red lights. The green light means you have a full 5 
minutes. The yellow light means you have 1 minute, and please 
start to summarize. The red light means your time is up.
    Let us go to our first witness, Mr. Falcon.

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

    Mr. Falcon. Madam Chairwoman, Mr. Chairman, and Ranking 
Members Gutierrez and Kanjorski, thank you for the opportunity 
to testify at today's oversight hearing. You mentioned my time 
working here at the committee. It is always a pleasure to be 
back in this hearing room, sometimes more pleasurable than 
others, but I do appreciate the opportunity to be here.
    My testimony will discuss the financial condition of the 
enterprises as reported in OFHEO's 2004 annual report, the 
importance of additional resources to strengthen the regulatory 
supervision and my efforts to reshape OFHEO to meet the demands 
of the future.
    OFHEO is required to report annually on the financial 
safety and soundness of each enterprise, including the results 
and conclusions of the annual examinations of the enterprises. 
OFHEO fulfills this requirement through the annual report to 
Congress submitted each June 15. This year, OFHEO has adopted a 
CAMELS approach in the report on the condition of the 
enterprises. The federal banking regulators employ the CAMELS 
methodology as a summary for an institution's financial 
condition. CAMELS is an acronym for six areas of evaluation: 
capital adequacy, asset quality, management, earnings, 
liquidity and sensitivity. I will briefly review OFHEO's 
assessment in each category.
    First, capital. Capital provides the means by which the 
enterprises withstand adverse economic conditions or 
situations. OFHEO monitors and assesses the capital position of 
Fannie Mae and Freddie Mac on an ongoing basis. Both 
enterprises exceeded their minimum and risk-based capital 
requirements for all quarters in 2003 and were classified as 
adequately capitalized.
    Second, asset quality. OFHEO evaluates the credit risk 
management practices of each enterprise for both single-family 
and multi-family lines of business. As part of that evaluation, 
OFHEO conducts selected sampling and targeted reviews. Those 
reviews evaluate whether the practices of the enterprises meet 
safety and soundness standards and adequately protect the 
enterprise from the risk of loss associated with counter-party 
default. Based upon examination activities to date, it is the 
overall conclusion of OFHEO that Fannie Mae and Freddie Mac 
have strong asset quality and prudent credit risk management 
practices.
    Third is management. OFHEO evaluates management of the 
enterprises in accordance with OFHEO's regulation, guidances 
and prudential standards applied in the course of an 
examination. Regarding Freddie Mac, OFHEO conducted a special 
examination of the events leading to the enterprise's 
restatement and replacement of senior management. Late last 
year, I submitted a report on the special examination of 
Freddie Mac. The report details a pattern of inappropriate 
conduct and improper management of earnings that led to the 
restatement and management restructuring of the company. As a 
result of the findings of the special examination, Freddie Mac 
agreed to implement corrective measures and pay civil money 
penalties of $125 million as part of a consent order with 
OFHEO. During the period of the consent order, the board of 
directors at Freddie Mac has elected a new chairman and has 
hired a number of senior executives as its management team. The 
company is making good progress on its remediation obligations 
and we will provide a full assessment on management in our next 
annual report.
    Regarding Fannie Mae, OFHEO concluded that the overall 
management of operational risk at Fannie Mae comports with 
applicable safety and soundness standards, but that judgment 
may be subject to change as a result of a special examination. 
OFHEO has initiated a special examination of the accounting 
policies and practices at Fannie Mae. The scope of this review 
includes accounting policies and controls at the enterprise, 
including the identification of any control weaknesses or 
unusual transactions. Pending completion of that examination, a 
definitive assessment of Fannie Mae management must be 
deferred.
    Fourth, earnings. OFHEO assesses enterprise earnings by 
analyzing the magnitude, trends, sources and quality of 
earnings, with particular attention to factors that may cause 
earnings to change in the future. Earnings in 2003 were strong 
for both Fannie Mae and Freddie Mac, amounting to $7.9 billion 
and $4.9 billion respectively. Fannie Mae's reported income 
represented a 71 percent increase from 2002, while Freddie 
Mac's was down 52 percent. However, the underlying economics of 
both enterprises was relatively stable.
    Their two principal lines of business, credit guarantee and 
portfolio investment, continue to perform well at each 
enterprise, without deterioration in their risk 
characteristics. Credit losses remain exceptionally low, while 
spreads between interest rates earned on assets and interest 
rates paid on debt remain more than ample. OFHEO has been 
monitoring Freddie Mac's progress in compiling and issuing 
already delayed quarterly financial statements for 2004. We 
will continue to work with the company to resolve problems so 
that investors receive accurate and full disclosure of 
financial information on a timely basis.
    Fifth, liquidity. We found that both companies demonstrated 
reliable access to sufficient sources of funds on cost-
effective terms to remain liquid and meet their obligations 
throughout 2003.
    Sixth is sensitivity. This describes the exposure and 
vulnerability of a company's earnings and capital movement in 
interest rates. I will summarize this point. We basically found 
that both companies have adequately managed their exposure to 
sensitivity risk.
    Let me move to our budget now. OFHEO is seeking a total 
budget of $59 million to more fully staff a reorganized 
supervisory program. This budget supports 237 positions, 
compared to the 178 supported in our 2004 budget. It is an 
increase of 59 new positions, fully 85 percent of which are 
directly allocated to supervision of the two enterprises. These 
new examination and capital analyst positions will enhance and 
strengthen OFHEO's regulatory efforts by adding very necessary 
depth and breadth in our supervisory staff. I want to thank the 
leadership of the Financial Services Committee for their 
support for OFHEO's 2005 budget. Your support has been and 
continues to be critical to our success.
    Also, as you mentioned Madam Chairwoman, we have 
reorganized OFHEO by doing basically three things: creating a 
new Office of Chief Accountant, a new Office of Compliance, and 
we have restructured the examination program to create two 
teams, one assigned to each enterprise led by an examiner-in-
charge. We think these changes will help us best prepare OFHEO 
for any challenges that might arise in the future and make our 
program a more effective and strengthened supervisory program. 
My written testimony has more about the rationale underlying 
those actions.
    Finally, we continue to flesh out our regulatory 
infrastructure project. The main rule we have pending right now 
are amendments to an already existing corporate governance 
rule. Some of the major changes in this rule have been 
mentioned by the committee, namely the separation of the 
chairman and CEO function, requiring auditor firm rotation, 
limiting the term of service on the board, and requiring higher 
standards for board independence. The comment period is closing 
on that rule, and we will take all comments into consideration 
and then promulgate a final rule as soon as possible.
    Thank you, Madam Chairwoman and members of the 
subcommittees for your time. I appreciate it, and I will answer 
any questions at the right time.
    [The prepared statement of Hon. Armando Falcon Jr. can be 
found on page 50 in the appendix.]
    Chairwoman Kelly. Thank you, Mr. Falcon.
    Just to remind both of you, your full written statements 
will be made part of the record and have been read by a number 
of us.
    Now, we turn to you, Ms. Castaneda. Please push the button 
and pull the microphone as close to you as you can so we can 
pick up your voice.

 STATEMENT OF ALICIA CASTANEDA, CHAIRMAN, THE FEDERAL HOUSING 
                         FINANCE BOARD

    Ms. Castaneda. Thank you, Chairwoman Kelly and Ranking 
Member Gutierrez. Thank you as well, Chairman Baker and Ranking 
Member Kanjorski.
    This is my first appearance before Congress since I joined 
the Federal Housing Finance Board and became its Chairman in 
April. I am honored to appear before your two subcommittees to 
discuss the Federal Housing Finance Board and its oversight of 
the federal home loan bank system. I am speaking today as 
Chairman and my remarks do not necessarily represent the view 
of my board colleagues.
    I came to the Finance Board after 28 years in commercial 
banking, experience that is proving very valuable in my new 
role as Chairman of the independent regulatory agency charged 
with oversight of the 12 federal home loan banks and the Office 
of Finance. As you know, the banks are government-sponsored 
enterprises and their members comprise more than 8,000 
commercial banks, savings and loans, insurance companies and 
federally insured credit unions.
    Today I can say with full confidence that the Finance Board 
is fulfilling the duties Congress gave it in the Federal Home 
Loan Bank Act: to ensure that the federal home loan banks 
operate in a financially safe and sound manner, carry out their 
housing finance mission, and remain adequately capitalized and 
able to raise funds in the capital markets.
    Over the past 2 years, the Finance Board has made great 
strides in enhancing our capabilities to carry out these 
duties. The clearest evidence can be seen in the tripling of 
our examination staff. However, bank supervision is more than 
just examinations. We have also hired highly qualified mortgage 
specialists, bank analysts, community development specialists, 
accountants and economists. We are upgrading our technology and 
systems. These all contribute significantly to our oversight 
and supervision of the federal home loan banks.
    While the agency has indeed come a long way, there is still 
more to do. I can assure this committee that, as Chairman, I am 
committed to a course of constant improvement. My intention is 
to continue building our staff, adding necessary resources, and 
fostering a world-class regulatory culture at the Finance 
Board.
    As a regulator, the Finance Board's job is to do what needs 
to be done, when it needs to be done. That has been my approach 
since I joined the Board in January, and it will be as long as 
I remain on the Board, which leads me to several recent 
developments that I think reflect our regulatory approach.
    First, the Finance Board last month voted unanimously to 
require the home loan banks to register with the Securities and 
Exchange Commission under the Securities Exchange Act of 1934. 
The federal home loan banks are among the biggest debt issuers 
in the country, issuing roughly $500 billion in bonds annually 
in recent years. The home loans banks collectively had $765 
billion in debt outstanding as of March 31, 2004.
    Given these facts, the Finance Board called for consistent, 
enhanced and transparent disclosures from the individual banks 
to help achieve market discipline. Because investors in that 
market, as well as the banks' members and the public should and 
will know more about the risks faced by these financial 
institutions.
    Registration will also ensure that home loan bank 
disclosure standards are fully comparable to those of the other 
housing GSEs and large private financial institutions. Based on 
my experience as a banker and fixed-income trader, I believe 
this will help ensure that the banks are not disadvantaged in 
their access to capital markets. For all these reasons, we 
adopted the regulation, and the registration process is now 
under way. Each bank will be required to first file with the 
SEC by no later than June 30, 2005 and to have their 
registrations effective by no later than August 29, 2005.
    A second recent development occurred on the supervisory 
front. On June 30, the Finance Board and the Federal Home Loan 
Bank of Chicago entered into a written agreement to address 
certain shortcomings in the bank's risk management, internal 
audit, capital management, and accounting and financial 
recordkeeping practices.
    These shortcomings were identified in recent Finance Board 
examinations of the bank. After a series of incremental steps 
dating back several years, my colleagues and I on the Finance 
Board determined that a formal written agreement was the 
necessary and appropriate next step to improve the bank's 
management and oversight of these issues.
    Third, and finally, let me describe what the Finance Board 
is doing with respect to the affordable housing program. 
Beginning in 1990, Congress required the federal home loan 
banks to set aside 10 percent of their profits for low-income 
housing. Since its inception, the AHP program has provided some 
$2 billion in grants and subsidies for affordable housing.
    The Finance Board is committed to ensuring that these 
programs operate in a safe and sound manner and help fulfill 
the home loan banks' housing finance mission. We are currently 
conducting a system-wide review of the home loan banks' AHP 
programs to help evaluate what they are doing in this area. We 
are also building a corps of examiners to focus solely on the 
affordable housing program, and have added new community 
development specialists to further assist in examinations.
    Mr. Chairman, Madam Chairman, members of the subcommittees, 
thank you for allowing me this opportunity today to outline our 
activities at the Federal Housing Finance Board. I believe we 
have attained a level of expertise, experience and capabilities 
that makes the Finance Board an accomplished, effective 
financial regulatory agency, one that serves the public in the 
way Congress intended, through rigorous oversight of the 
federal home loan banks and their housing finance and 
affordable housing missions.
    Thank you, and I will delighted to answer any questions.
    [The prepared statement of Hon. Alicia R. Castaneda can be 
found on page 46 in the appendix.]
    Chairwoman Kelly. Thank you very much, Ms. Castaneda.
    Director Falcon, I understand that Fannie and Freddie have 
a policy which is just now being enforced that requires 
deductibles for wind damage insurance coverage to be less than 
2 percent. In New York, comprehensive homeowners coverage has 
not been readily available or affordable, so a special advisory 
panel in New York strongly recommended deductibles as high as 5 
percent to increase the availability of insurance coverage in 
certain areas. These recommendations were approved by the State 
of New York as a result of a series of special reports 
commissioned by the State legislature.
    I want to know if you are aware of the problem and of the 
costly impact it is having on the homeowners in New York, and 
if you will consult with New York's State Insurance 
Commissioner to try to resolve this.
    Mr. Falcon. Madam Chairwoman, I was not aware prior to your 
mentioning this, but I will absolutely go back and take a look 
at it. As we look at the risk to the enterprises of different 
mortgage programs, we look at not just the risk, but the 
ability to manage the risk of the mortgages. They mitigate 
risks through the use of credit enhancements and other 
techniques. Certainly, we will look into the rationale 
underlying this policy judgment and report back to you on 
whether or not there is some way that possibly the risk of 
this, if they are excessive, can be mitigated through certain 
means.
    Chairwoman Kelly. I wish you would, sir, because your 
policy flies in the face of what the State legislature in New 
York passed, so it is important that we make these two laws 
congruent in any way possible. If you would get back to me on 
that, I would greatly appreciate it.
    Chairman Castaneda, the Administration has indicated it 
will not make any presidential appointments to Fannie Mae and 
Freddie Mac's boards of directors. Is it their intent to also 
not appoint directors of the federal home loans banks, the 12 
federal home loan banks? What is going to happen if the Finance 
Board's appointment process, what is going to happen to it 
actually, for this coming round of vacancies?
    Ms. Castaneda. I have not heard anything from the White 
House regarding that issue. By statute, the Finance Board has 
to appoint some of the directors at each one of the banks. But 
to answer your question, I have not heard anything from the 
White House.
    Chairwoman Kelly. I wonder, ma'am, if you would be willing 
to make an inquiry?
    Ms. Castaneda. I certainly will.
    Chairwoman Kelly. So that perhaps you would better answer 
that question. I think that is an important point that we need 
to clarify. You heard Mr. Kanjorski in his opening comments 
mention that also. There is some concern about how this is all 
going to work, and we would be very interested if you could 
help us understand that, please.
    Ms. Castaneda. I will make sure that the Finance Board 
staff will come back with an answer to you.
    Chairwoman Kelly. Thank you.
    I want to ask you both, the Financial Services Committee 
spearheaded corporate governance reforms in the Sarbanes-Oxley 
rules. I would like to ask you about some of the new corporate 
governance proposals your agencies are considering, which our 
committees are still reviewing. How closely have your agencies 
worked with the SEC on these issues, like the accounting 
restatements, the SEC registration, auditor rotation, 
separation of the CEO and the chairman? These are areas where 
we are all interested in hearing what you have to say about 
whether you have been closely working with the SEC on resolving 
issues there.
    I am asking both of you. Take your pick.
    Mr. Falcon. I will go ahead and go first. We do consult 
with the SEC on various issues. We did consult with the SEC on 
our current corporate governance rule. I am not suggesting that 
they endorse it or oppose it, but we did consult with them 
during the drafting process of the amendment that we have 
issued.
    In addition, we work closely with the SEC on a variety of 
other matters. We work closely with them in preparation for 
Fannie Mae's and Freddie Mac's announcement to voluntarily 
register with the SEC. I think we consult as necessary, and 
certainly the SEC, I feel from their standpoint, recognizes our 
responsibility at OFHEO to do our job as a matter of safety and 
soundness, while they do their job as a matter of investor 
protection.
    Chairwoman Kelly. The reason I am asking this is that the 
primary role of your agencies is to protect the taxpayers 
through safety and soundness oversight on the GSEs. The SEC's 
primary responsibility is to protect investors. These are two 
very different goals. Because of that, that is the genesis of 
my question. Basically, we took a very serious look for 
instance at the audit firm rotation during the Sarbanes-Oxley 
debate. Some of these other things I really would like to hear 
more about from you.
    I do not understand how, given the consolidation of the 
accounting industry that we are in, we are looking now at the 
final four firms. I do not see how this is going to get 
structure to avoid conflicts of interest. Deloitte is doing a 
forensic audit of OFHEO. PWC audits Freddie Mac. KPMG audits 
Fannie. Ernst and Young is working with Fannie Mae's law firm 
on the special audit. I am not sure how this is all working. I 
am not sure that this committee is clear on that, and I would 
really appreciate hearing back from you.
    I am out of time. I am going to turn now to Mr. Gutierrez.
    Mr. Gutierrez. Thank you.
    I want to welcome you both here once again, and to say to 
Director Falcon, you are always welcome to come back. I enjoyed 
serving together with you on the Banking Committee. It was the 
Banking Committee before they changed its name mysteriously.
    I have a question for Chairwoman Castaneda. The financial 
services industry has evolved as the barriers to interstate 
banking have been removed. Consolidation in the financial 
services industry continues as large-and mid-size banks from 
different parts of our country merge or acquire one another. 
One of the most recent examples of this trend is the merger of 
Bank One in Chicago with J.P. Morgan Chase in New York. Under 
the current finance board rules, individual bank members of the 
FHLB system are not permitted to belong to more than one FHLB. 
If two members merge or one acquires the other, the surviving 
bank must withdraw from membership in one of the home loan 
banks districts.
    The concern I and other members have is the impact that 
such a rule has on the distribution of affordable housing 
program funds, which are linked to business and profits of each 
of the FHLBs. While a new merged bank continues to do retail 
business in both of the eight FHLB districts, all advances and 
mortgage purchases must be conducted only through one of the 
FHLBs, where it retains its membership. When the Finance Board 
asked for comments on this issue some time ago, the Chicago 
Home Loan Bank proposed a compromise that would apply in the 
limited circumstances in which a bank belonging to one home 
loan bank is acquired or merged with a bank belonging to a 
different one.
    In this case, the surviving bank retains its membership. 
The surviving bank emerged, Bank One, J.P. Morgan, the 
survivors unfortunately for Chicago is J.P. Morgan Chase. It 
gets to retain them. The advantages of this proposal is that it 
helps better ensure that funds supporting affordable housing 
are retained and distributed in the district where they were 
generated. Can I just have your thoughts on this compromise and 
your thoughts in general on this issue?
    Ms. Castaneda. Thank you, Congressman Gutierrez, and thank 
you very much for pronouncing my last name so well. I give you 
a 10.
    [Laughter.]
    Finance Board rules do not prevent a federal home loan bank 
from funding projects from outside their districts. As a matter 
of fact, the Finance Board rules approve and most of the banks 
now do allow funding from out-of-district projects. So when a 
merger occurs, it is very likely that all the funding for a 
particular community be comprised of in-district and out-of-
district funding. That said, I cannot forecast whether the 
total funding of the bank district that loses a member could 
have less funding for particular projects.
    The data that the Finance Board has collected shows that it 
is very common for a federal home loan bank that loses members 
in one year to gain new members in the following year. The 
overall impact of merger and acquisitions on affordable housing 
funding has generally balanced out through the time and across 
the system. In other words, the data shows that there has not 
been any significant impact because of the mergers and 
acquisitions.
    I would be more than happy to have the Finance Board staff 
share some of this data with your staff.
    Mr. Gutierrez. I would appreciate it, because I guess when 
you are the loser, I mean in one of these situations, we have 
New York, we have Chicago and we have the home loan bank. We 
have raised issues outside of your concern when banks do those 
kinds of things. In Chicago, we are wondering where are the 
jobs going to go; where is the corporate giving of the 
institution. It has a harmful impact. We would just like to get 
that information from you to see that we do not lose, 
specifically around housing programs, which we have seen. I 
have friends at Freddie and Fannie that are not too crazy about 
what the federal home loan bank does, but I think more 
competition is good competition. I want to make sure that 
competition does not get somehow sidetracked.
    Thank you very much, Chairwoman Castaneda, and welcome once 
again Director Falcon.
    Mr. Falcon. Thank you, Congressman.
    Ms. Castaneda. Thank you.
    Chairwoman Kelly. Thank you.
    Chairman Baker?
    Mr. Baker. Thank you, Chairwoman Kelly.
    Mr. Falcon, it has been some time since we visited. I 
appreciate your participation here today.
    I have a series of questions that I would just like to give 
to you, and then as time permits have you respond today or as 
you are comfortable in writing at a later time. I understand 
that you are moving forward with finalization of your proposed 
corporate governance reforms. Both GSEs have filed statements 
of some objection to a number of the provisions. Have you set a 
deadline for completion of this corporate governance reform? If 
so, could you at the appropriate time inform the committee as 
to how you intend to achieve that end conclusion?
    Number two, I continue to be very interested in the ongoing 
forensic accounting review now under way at Fannie Mae. It is 
my opinion, based on other revelations in public operating 
companies over the past several years, that if the corporation 
is not cooperative in disclosure that an accounting overview of 
some effectiveness may be questionable in its outcome. 
Therefore, do you believe the enterprise is making information, 
documents, access to personnel available in a timely and 
appropriate manner to meet your concerns and those of the 
auditor?
    Number three, in response to your specific corporate 
governance reform relative to reasonable and appropriate 
executive compensation, Mr. William McDonough, Chairman of the 
Public Corporation Accountability Oversight Board, appeared 
before the committee recently and said something to the effect 
that executive compensation is an area where congressional 
review would be highly appropriate, and if either the 
compensation committees or shareholders cannot bring about 
appropriate reform, that Congress should act.
    To that end, I note in the response, particularly by 
Fannie, to that specific recommendation, and I am relying on an 
American Banker article that states that the term 
``appropriate'' is not defined by your proposal and therefore 
does not allow companies to determine what standards will apply 
when determining compliance. The law prohibits executive 
compensation that is not reasonable and comparable, that is the 
1992 law which Fannie is suggesting as appropriate language. 
``Comparability'' would therefore mean disclosure of executive 
compensation levels. There has been some controversy 
surrounding disclosure of the top 20 executives's compensation 
for either or both enterprises.
    I will follow this discussion with a specific letter asking 
that in order to achieve Fannie's suggested comparability 
standard that you make available to the committee Fannie, 
Freddie, at whatever level, 10 or 20, it does not matter to me, 
and in addition some single line of financial service industry 
comparable. For example, a sophisticated S&L, if there is 
nobody of asset size comparable, but who has a single line of 
business principally. I will follow this hearing up with a 
letter on that matter.
    In the time remaining, I want to plow new ground which we 
have not previously talked about, relative to what are known as 
guarantee fees, fees which the enterprises charge originators 
when purchasing loans. A cursory review of data I have been 
able to obtain, and I certainly do not have access that you 
would have, indicates that the GSEs credit loss ratios have 
declined due to improvements in their underwriting and risk 
management, meaning they are not taking as many poor people as 
they used to take, apparently, while loan loss reserves in the 
same period of review have declined principally attributable to 
reduced losses.
    However, it appears that the guarantee fees that mitigate 
potential losses have remained constant in the historic decline 
of losses, and at the same time declining loan loss reserves. 
Where is the money going? If it is not going to build up loan 
loss reserves, and by way of disclosure it is my understanding, 
let's just pick the year 1995, that the average G rate was 22 
basis points, with a credit loss ratio of 5 basis points. 
Today, it is down to a .6 basis point CLR with a G fee rate of 
20.2. The difference being in 1995 there was a return on equity 
of 21 percent; today in the case of this GSE, it is 50 percent.
    At the same time from 1995 to 2003, loan loss reserves as a 
percentage of assets have declined from .25 basis points down 
to .08. The public policy concern I have is that the money is 
not flowing the loan loss reserve account to insulate against 
the three-fold increase in asset value on Fannie's side, a six-
fold increase on the Freddie side. At the same time, the loss 
ratios have dropped, meaning the risk to the enterprises has 
for some reason been mitigated, but yet the income flow net to 
the corporation would appear on its surface to have been 
increased rather dramatically.
    I do not have access to the cash-flow numbers to indicate 
to me what this means to the corporation in terms of gross or 
net returns on equity, but I would very much appreciate some 
detailed analysis of this area of business and again a report 
back to the committee, not in any urgency, but the first of the 
year, after the first of the year. My time has expired. I will 
wrap both of those requests into a single letter. If you have a 
chance to just touch on the corporate governance reform issues 
and the compliance with forensic accounting requests, and with 
the Chairwoman's diligence, maybe with those two you can jump 
in. Thank you.
    I appreciate the Chairlady's tolerance.
    Chairwoman Kelly. Thank you, Mr. Baker.
    Mr. Frank?
    Mr. Frank. Thank you, Madam Chair.
    We are probably guilty. Part of my frustration in dealing 
with these issues is that we have before us two entities which 
are very important with regard to affordable housing, a crisis 
in this country. But our own committee structure fails to fully 
take account of that. We had a very important hearing today on 
homelessness and housing for the Housing Subcommittee. Now we 
have two other subcommittees, and the Housing Subcommittee is 
not part of it. I regret that. The media that cover these 
institutions, particularly the GSEs, tend to be more in the 
financial area than the housing area, and I really hope we can 
increase attention to that.
    To Chairwoman Castaneda, let me say that Mr. Gutierrez's 
question is my question. I understand your argument that it 
sort of balances out, but I do not want to rely on that. The 
affordable housing program of the federal home loan bank is one 
of the best things we have. Director Falcon in fact was here 
under the leadership of Chairman Gonzalez when we enacted that. 
It was hard-fought and it is an excellent program. But it 
follows the CRA principle, which is money raised by the banks 
in an area which then contributes to FHLB profits are to be 
spent in the area. That is very important. I was here when we 
did that under Mr. Gonzalez's leadership.
    At that point, bank mergers were not a big deal, 
particularly with thrifts. Now, mergers are a big deal. Back 
then, we were called the Committee on Banking. If we ever 
change the name again, I think we are going to change the name 
to the Committee on the Bank, because there will probably only 
be one.
    [Laughter.]
    But what this has meant is that there is a consolidation, 
and we are losing the principle that money generated in one 
place should be in another. I know there are people who are 
worried about domination by some large entities. I do not see 
any problem. I want to continue to pursue this with you. I am 
just saying that particularly where there has been a merger, an 
entity that was bought up, that had been a member of a federal 
home loan bank, that that portion of what it earned should be 
credited to its regional bank and not elsewhere. I intend to 
keep pursuing that.
    The second point I want to make to both of you, and it 
touches both, but more to Director Falcon, is one of the 
tensions we have had. There are tensions involved in the way we 
do things. We were talking just as an example, but touching on 
some of what you do, in predatory lending, there is a tension 
between doing away with predatory lending and redlining. We did 
not used to have predatory lending. We had redlining. You go 
too far in one direction here you can lose things.
    Here, the tension is between safety and soundness on the 
one hand, financial stability, and on the other hand getting 
into housing. I must say to Director Falcon, as he knows, one 
of the concerns some of us have with some of the legislative 
proposals that come from the Administration is the fear that, 
and I think the Administration has been somewhat inconsistent. 
On the one hand, they talk about the need to do more affordable 
housing, where I am supportive; but on the other, to put so 
much emphasis administratively and elsewhere on safety and 
soundness, that we would lose that.
    I have one specific example relevant to both of you. It is 
relevant to Fannie and somewhat to Freddie. It is relevant to 
the New York Federal Home Loan Bank, and that is the issue of 
manufactured housing. Without manufactured housing, you will 
not get significant homeownership among moderate-income people. 
It is a very important resource. It has been historically 
underutilized. It has been ridiculed. We are coming to an 
understanding of the importance of manufactured housing.
    It is not either/or. I am very proud of my relationship 
with the homebuilders. We need both. But clearly, manufactured 
housing is improving in quality, and we have not in a 
regulatory way quite caught up with that, I mean in terms of 
property laws, et cetera. But here is the problem: Your New 
York regional bank was downgraded by one of the rating agencies 
because of its manufactured housing. Director Falcon, you have 
raised questions about manufactured housing. I understand that 
manufactured housing has a problematic past, but the quality of 
the housing has significantly increased; our understanding of 
it has increased.
    What I would urge both of you is, I need you both to 
reassure me, that we are going forward and are going to find a 
way to encourage the entities under your various supervisions 
to go forward in manufactured housing. What I am afraid of is 
that a focus only on the problems with the past financial 
inventory is going to drive them out of it. I must say I think 
that that has been one of my concerns about OFHEO. I need 
people to reassure me, for me to feel comfortable about this, 
that we are going to recognize it.
    Let's put it this way. There has got to be a way to deal 
with whatever problem that used to be there with manufactured 
housing, and that we will not let the hangover from some of the 
bad practices be a deterrent to them going aggressively forward 
in the future. I think that is a very important test, frankly, 
for both regulators, of your ability to preserve financial 
soundness without impinging on the affordable housing issue, 
which we all say we are for.
    Let me start with Director Falcon.
    Mr. Falcon. Thank you, Congressman.
    Like you, I believe very much in the mission of the two 
companies that we regulate. I believe in their housing mission, 
including this area with manufactured housing. Our concern 
about it was related to the accounting for these assets, not so 
much just these, but impairments in general. They apply 
primarily to the portfolio of manufactured housing loans. What 
we have sought to do is put in place the proper accounting for 
those assets if and when they did deteriorate. In the case of 
these, they did.
    I will pledge to you that we do seek to strike the balance 
between safety and soundness, cognizant of the mission of these 
two companies. I believe the mission of my agency is in some 
regards also a housing mission, not just a safety and soundness 
mission. So we are very aware of that. I think all the 
employees of the agency feel that way.
    Mr. Frank. If I might just make a specific suggestion, 
which is, if you feel the need for some reason to talk about 
the manufactured housing, nothing stops you from saying, and we 
say this in the context of believing that going forward they 
should remain an important part of the portfolio and encourage 
them to do that. When all people hear are the negatives, it 
drives away the enterprises; it drives away lenders; it 
accumulates.
    Mr. Falcon. That is right. It is just a matter of going 
forward and making sure there are adequate risk management 
practices in place, so that if this type of asset does 
experience higher than normal defaults or losses, that there 
are adequate enhancements in place so that the losses are not 
excessive.
    Mr. Frank. Can I say this, I also believe, and my own view 
with regard to the GSEs, particularly Fannie and Freddie, they 
are given certain government advantages. I do not think every 
individual product line has to be profitable. We want a 
cumulative profit, so I hope we would also say, look, if there 
is a danger of things not going too well in the one area in the 
affordable housing area, that can be made up for elsewhere. 
This is not a case where every individual line has to show this 
kind of profit.
    Mr. Falcon. In the case of Fannie and Freddie, that 
provision is specific in their charters, that for affordable 
housing-type of mortgages, they could expect a lower rate of 
return than they would on other types of assets. So that is 
specifically contemplated in their charters.
    Mr. Frank. Okay. I just hope that when we do the 
supervision, we keep reminding people of that, because that 
tends to get lost.
    Chairman Castaneda?
    Ms. Castaneda. Thank you, Congressman Frank. It is good to 
see you again.
    I also have to say, like Director Falcon, our mission is 
not only to ensure that the banks operate in a safe and sound 
manner, but to promote housing finance. I can tell you at the 
Finance Board, we very much encourage the banks to promote 
manufactured loans. We do it three ways. Federal home loans 
banks can accept manufactured loans as collateral for their 
advances. Two, the federal home loan banks can buy manufactured 
loans. And number three, they can also buy mortgage-backed 
securities guaranteed by manufactured loans. So we do promote 
the manufactured loans business.
    Mr. Frank. Thank you.
    Chairwoman Kelly. Thank you very much, Mr. Frank.
    Mr. Paul?
    Mr. Paul. Thank you, Madam Chairman.
    I appreciate the opportunity for these hearings and your 
emphasis on this very important matter. I also want to point 
out that Chairman Baker, I think has been talking about this, 
maybe for years or a decade. So he was on to something, and I 
think his warnings were very important and are very important. 
It also points out that Congress moves awfully slow.
    So if we were developing a problem, and I truly believe we 
have been developing a problem that is now much worse, I would 
say that if we have been concerned, especially Chairman Baker, 
for 10 years, I imagine during that period of time it has 
gotten much, much worse.
    I see it as a financial time bomb, to tell you the truth. 
The only discouraging thing about our discussions that we have 
here in the committee is for the most part we talk about the 
technical solutions, the job you have as regulators, and 
believing that it is a technical problem. I think it is much, 
much more fundamental. We rarely deal with the fundamentals. I 
would like to emphasize a little bit about the fundamentals.
    As a matter of fact, I would not want your jobs for 
anything. If we are facing a problem, which many people in this 
country think we are, your responsibility is to provide safety 
and soundness, I mean, I see it as practically an impossible 
task if this things starts to unwind, and I believe it is going 
to unwind. It involves trillions of dollars and derivatives. It 
is just a huge monstrosity.
    And yet, it seems like we are not even working in that 
direction. We did early on talk a little bit about how the $2 
billion line of credit distorts the interest rates and you get 
a benefit, and it is estimated by CBO that that is probably a 
$15 billion a year benefit. Even that in itself is minor, 
because the other part that we do not talk about is the 
willingness of the Federal Reserve in these past several years 
to buy GSE debt. Oh, they do not hold it. They are there. That 
is a message to the world and to the country that the Federal 
Reserve, although they talk about cleaning up the mess, they 
themselves contribute to the bubble mentality that, you know, 
if Congress does not bail us out quickly enough, the Federal 
Reserve is there because they have done it in the past. They 
certainly did it at the time of Y2K.
    Also, the Federal Reserve has expressed concern about what 
is happening. They talk about their daylight overdrafts that 
you have. They have proposed that we get rid of that. That is 
important, but that too is minor and I think technical. But 
overall, I think the housing bubble comes from easy credit, 
which is totally out of your control. That is what we live 
with. Artificially low interest rates at 1 percent create the 
bubble mentality, whether it is in the stock market or the 
housing market. This is where the real fault is. I do not know 
how we will ever address that as regulators.
    Then we sort of add onto it through these special deals, 
which nobody can be opposed to because it is helping the poor 
people. So we ask you to make 10 percent of your loans to 
people that are the least creditworthy, who are the most likely 
to default if there is a correction, putting more pressure on 
your job as well as on the taxpayer. So the whole thing is, as 
far as I can see, total distortion of the marketplace. I am a 
believer in the market, and that we should try to get back to 
that.
    So my question basically is, how do you see the 
fundamentals compared to the technical approach to this? And do 
you think there is a possibility of a puncture of a bubble? To 
me, the most vulnerable thing that we are facing is when the 
foreign governments and foreign entities stop buying our debt, 
and you have no control of that, and we do not have control of 
it. They bought $10 billion last week of GSEs, and the dollar 
is going down. When it goes down precipitously, and they quit 
buying or they dump dollars, what in the world are we going to 
do to contain the collapsing bubble?
    Mr. Falcon. Congressman, we track home price appreciation 
quarterly through our house price index, which we do release to 
the public. Our economists do track it and are aware of the 
historical trends and causes of price bubbles. My economists 
who have looked at this with lots of experience, believe that 
we do not currently have a price bubble in home prices. If 
anything, if there was a change in interest rates in an adverse 
way, it might lead to some regional depreciations. As far as an 
overall price bubble, they do not see it. Because of our strong 
housing finance system, which is I think the envy of the world, 
there are many other countries that are trying to replicate 
what we have done here in the United States.
    There is strong support for homeownership and the ability 
of individuals to obtain credit. Whether or not it is too easy 
or not, I do not have an opinion on that. But we do see that in 
the current environment, with the ability of individuals to 
purchase homes, which does not in turn support home prices, 
that we are not in a situation where there could be a large 
deflation in home values or a price bubble, as you pointed out. 
That is our experience at this point in time. We continue to 
monitor it going forward as we put out more house price 
indices.
    Ms. Castaneda. I think you have a very good point, 
Congressman. That is true not only for GSE debt, but for a lot 
of the debt issued in the United States. We do depend a lot on 
foreigners to buy a lot of these instruments. My job as a 
regulator is to make sure that the federal home loan banks will 
continue to operate in a safe and sound manner. Your remark, 
then, how do we do that? Well, that is my job. As long as I am 
the Chairman of the Housing Finance Board, that is what I am 
going to do. If I can ensure that the Finance Board ensures 
then that the banks are operating in a safe and sound manner, 
we will not give any reasons for these foreign investors to 
stop buying the federal home loan bank debt.
    Mr. Paul. Thank you.
    Chairwoman Kelly. Thank you, Mr. Paul.
    Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Madam Chairman.
    Madam Chairwoman, the past practices of the appointments of 
boards of directors of the federal home loans banks has been by 
your board. It has generally had a bipartisan structure to it. 
Recently in this Administration, almost overwhelmingly all the 
vacancies have been appointed to one party, your party. It is 
something that troubled me. I understand politics, but I 
understood that the congressional authority for the appointment 
of the members of the board of the various banks was vested in 
the Finance Board. You said, well, I will have to talk to the 
White House. Did I misunderstand the structure of the law that 
the Congress appointed? I thought that authority rested with 
the Finance Board.
    Ms. Castaneda. That is correct, Congressman.
    Mr. Kanjorski. Do you abdicate your role as the Finance 
Board and pass that on to the White House, contrary to 
congressional intent?
    Ms. Castaneda. No. By statute, the Finance Board elects the 
public interest directors. It is the Finance Board 
responsibility to elect these directors. I can also tell you 
that this will be an issue that I am going to working with my 
other colleagues in the next few weeks.
    Mr. Kanjorski. But in response to one of the member's 
questions, you said you are going to be talking to the White 
House about this, indicating that the names of the appointees 
come from the White House, and that the clearance is through 
the White House. Did I understand you to say that?
    Ms. Castaneda. No, I did not say that today. Again, we have 
by statute to appoint the public interest directors. This is an 
issue that I am going to be addressing with the other board 
members.
    Mr. Kanjorski. Do you think there is any reason to have 
public interest directors on the federal home loan bank system?
    Ms. Castaneda. I think the public has to be represented at 
the board of directors of the federal home loan banks.
    Mr. Kanjorski. Do you think those appointments should be 
partisan or nonpartisan?
    Ms. Castaneda. I think those appointments should be based 
on the qualifications and the skills of the individuals.
    Mr. Kanjorski. Is it peculiar in your mind that maybe out 
of 60 or 70 appointments, that 97 percent come from one party 
and only about 3 percent from the other party? Is that just by 
chance, do you think? Or do you think that is by political 
decision?
    Ms. Castaneda. Congressman, I was not aware of the specific 
numbers that you are talking about.
    Mr. Kanjorski. In the last 3 years, I am aware of only one 
director of my party that was reappointed to a board. It is not 
so much I am worried about Republican or Democrat, although 
that tends to indicate that we are losing the intent of 
Congress to have real independent directors. We are having 
political directors, and I think that is the worst of all 
worlds, but you do believe we should maintain that policy of 
having independent outside directors on that board.
    Would you state an opinion that Fannie Mae and Freddie Mac, 
whether they derive some benefit from being government-
sponsored enterprises where it may be of value to have outside 
independent directors appointed by the President or some other 
appointing authority, as opposed to all internally elected?
    Ms. Castaneda. Again, I can see some advantages why perhaps 
the regulators should not be appointing members to the boards 
of the institutions it regulates. On the other hand, I do 
believe it is very important in the case of the federal home 
loan banks to have board members that represent the public 
interest.
    Mr. Kanjorski. And you would agree that the public interest 
in the United States is pretty much represented by two 
political parties, so that it would not be unusual to have, 
say, three Republicans when the majority of the country or the 
Congress is in that party, and maybe two Democrats when they 
are in the minority, and then vice-versa when the pendulum 
changes, that we try and balance it that way.
    How would you go about defending the policy of this 
Administration to be so partisan in the appointments?
    Ms. Castaneda. I believe the board of directors should be 
elected based on their qualifications.
    Mr. Kanjorski. We are talking about the appointments now.
    Ms. Castaneda. The appointments, regardless of whether they 
are appointed by----
    Mr. Kanjorski. Do you think on the basis of, say the last 3 
and a half years under this Administration is peculiar and not 
followed by prior Administrations that tried to balance the 
appointments, that the Congress should take some action and 
require that there be a balance of appointments, so many 
Republicans and so many Democrats, depending on the makeup or 
persuasion of the White House?
    Ms. Castaneda. Well, obviously Congressman, if the Congress 
decided and this is the right thing to do, Congress could do 
it. As far as the numbers, and you are referring to the last 3 
years, I am not aware of that, sir. I was not at the Finance 
Board.
    Mr. Kanjorski. One of the greatest criticisms, I have a 
tendency to meet with a lot of directors from across the 
country of the 12 banks when they are in Washington, and one of 
the crying needs, they say, is institutional memory and 
experience. Some of them, and in my opening statement I 
indicated there is one federal home loan bank that will not 
have anyone with more than 3 years experience sitting on its 
board of directors. Is that healthy or unhealthy?
    Ms. Castaneda. I think that is one of the issue, and my 
understanding it is included in the House relief bill, the 
number of years that each board of director will serve on the 
board, as well as the compensation. I can tell you that last 
year the Finance Board did a system-wide review on corporate 
governance, and a lot of these issues were raised. I do believe 
that in both issues, the compensation and increasing the number 
of years----
    Mr. Kanjorski. Do you think perhaps the Congress should 
commission a study or establish a commission to start looking 
at the corporate governance of your organization and the 
various federal home loan banks to see whether or not we should 
update some of the problems that we have out there?
    Ms. Castaneda. Obviously, Congressman, if that is something 
that you do feel like that is the right thing to do.
    Mr. Kanjorski. Well, as a matter of good corporate 
governance, would you say we are adhering in these GSEs to the 
same stringent conditions we are imposing on other 
institutions, private institutions, like separating the 
chairman and the CEO in the mutual fund? It would seem to me 
here is a direct group of institutions that have a quasi-public 
involvement and the Congress is not exercising its influence.
    Chairwoman Kelly. Actually, you have gone longer than 
anyone else has spoken. If you want to answer that question, 
ma'am?
    Did you ask that question to your satisfaction? We will let 
her answer and then that is it.
    Mr. Kanjorski. On that individual question. I was going to 
get the Director on something.
    Chairwoman Kelly. If you want to wait, if we have the time, 
we will try to go back on a second round.
    Thank you very much, Mr. Kanjorski.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Falcon, recently there was a press article about one of 
the GSEs. I believe it was Fannie Mae, engaging in a joint 
venture to try to set up a secondary mortgage market in Egypt, 
I believe. I was curious if you had seen the press clip or are 
you familiar with the matter, and whether or not the article 
was accurate? If so, is that something that you view as an 
activity that is within the scope of their charter? Is this a 
matter of concern or not of concern to your office?
    Mr. Falcon. I think it would be a very serious concern if a 
company was contemplating investing the mortgages in any other 
country. However, as far as this international activity is 
essential to their core mission, which is the provision of 
liquidity to the U.S. mortgage market, the answer is no. Does 
that mean is it not permissible under the terms of their 
charters? I think that is a question that HUD will have to 
answer. I cannot. It is HUD's prerogative to opine on whether 
or not is it appropriate under the terms of the charter.
    Mr. Hensarling. Speaking of HUD, there has been a proposal 
to raise the low-and moderate-income affordable housing goal 
targets for Fannie and Freddie. I think it ratchets up from 50 
percent to 57 percent in 2008. I would be curious about your 
opinion as to the impact on the primary mortgage market and the 
secondary mortgage market. Essentially, what are going to be 
the costs and the benefits to the system should this all go 
through?
    Mr. Falcon. The increases in the affordable housing goals, 
our review of this is limited to questions of safety and 
soundness. On that point, we would look at the activities that 
both companies would engage in as they tried to meet new goals. 
Now, these goals are certainly very ambitious, and whether or 
not the companies can meet these new goals will remain to be 
seen, if they do in fact get implemented as final goals for the 
two companies over the next 4 years. We will look at the 
companies closely to make sure that they do not engage in 
excessive risk in order to meet the goals.
    As far as the merits of the goals, that is for HUD to 
decide when they decide what to go final with. My own opinion 
is basically I do support the affordable housing mission of 
these two enterprises very much so. While these are ambitious 
goals, I do not think it would be a stretch for the companies 
to embrace these goals, but not engage in excessively risky 
activities or limit their activity in non-affordable housing 
areas just in order to meet these goals.
    There are provisions in statute that if it turns out that 
it is not feasible to meet these goals, that the secretary can 
find so and then they are excused from meeting the goals, or 
they can work out a plan down the road on how they can work 
towards meeting them. So I view these as goals and not 
mandates. They are certainly ambitious, but they are worth 
trying to achieve.
    Mr. Hensarling. Let's move the conversation to corporate 
governance for a moment. OFHEO has proposed a number of 
corporate governance changes for the GSEs. Fannie already is a 
publicly traded entity, so they are having to comply with 
Sarbanes-Oxley. I believe that Freddie has asserted that it 
will register with the SEC soon, so assumingly they will be 
under Sarbanes-Oxley as well. So can you explain in greater 
detail the need to go beyond the corporate governance 
provisions in Sarbanes-Oxley?
    Mr. Falcon. What we have done is we have taken our 
experience derived from the Freddie Mac accounting problems and 
the management issues which we found gave rise to those 
accounting and earnings management problems. We have released a 
very detailed report on what happened, and what we thought the 
remedies were to try to minimize the likelihood of that 
happening in the future. The corporate governance rule simply 
embodies what, based on that experience, we think is the best 
practice for these two companies. If it goes beyond Sarbanes-
Oxley in some regard, then so be it.
    My responsibility is to ensure the safety and soundness of 
these two companies. Sarbanes-Oxley was designed corporate-wide 
to try to raise the standards in corporate governance. I have 
to determine what is necessary for me to ensure that these two 
companies can remain safe and sound.
    I am not suggesting that what we have in our corporate 
governance rule should be applied corporate-wide. I am simply 
saying that based on our experience, with these two companies 
at this point in time, that this is the best approach to safety 
and soundness, and that is why we have proposed this.
    I am not saying that we have closed the door on the outcome 
on these issues, because we are in the rulemaking process, but 
we will take all comments into account in determining what the 
best policy is.
    Mr. Hensarling. Thank you. I appear to be out of time.
    Chairwoman Kelly. Thank you, Mr. Hensarling.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you.
    I want to address my question to Director Falcon. I am very 
pleased that you have been reorganizing OFHEO so as to be able 
to carry out your mission. I want to ask you some questions 
about that reorganization, because in looking at your statement 
I see that you say that you have reorganized into two fully 
staffed units. How many examiners and accountants make up each 
of those two units?
    Mr. Falcon. When they are fully staffed, they will probably 
approach about 40 or 45 per unit.
    Mr. Hinojosa. Okay. Then you go on to say that in that 
reorganization you plan to possibly rotate that group of staff 
members. What does that mean? How many years, 2, 5, 10 ?
    Mr. Falcon. We have not worked out the details on that yet. 
We are still implementing this transition to this new format. 
But it may be as short as 3 years. It may be as long as 5 years 
perhaps.
    Mr. Hinojosa. How will you ensure that there is continuity 
and institutional memory of what you have learned about Fannie 
Mae and Freddie Mac?
    Mr. Falcon. Let's take for example the area of credit risk. 
We will have a team of people examining the credit risk of each 
company. The team may be anywhere from five to ten examiners by 
the time we are done. We would not just lift them all and 
switch them at the same time. What we would do is maybe move 
one or two into the other company's credit risk area, and move 
the others over, so that you always have a core group that 
maintains the institutional memory. This allows us to ensure 
that the examiners can continue to increase their skills and 
knowledge by looking at the other company, and not necessarily 
stay within that area, but possibly move to interest rate risk, 
operational risk or some other aspect of the examination 
program.
    I think this is the best way of making sure that our 
examiners continue to grow as examiners, and at the same time 
limit any possibility that there could be personal 
relationships that develop between examiners and anyone that 
they deal with continually at the companies.
    Mr. Hinojosa. I commend you for that. I commend you because 
there needs to be continuity. There needs to be that 
understanding of each of the organizations. We are interested 
in increasing homeownership. We are not interested in being so 
conservative that we are not willing to take some risk, because 
Fannie Mae and Freddie Mac are businesses. Rather, these GSEs 
are businesses and they have to have risk. We have risk in all 
other areas where we lend money to our businesses, small, 
medium or large. If we are going to increase homeownership, we 
are just going to have to find a way in which to do it 
efficiently, adequately and in a way that we are indeed 
encouraging homeownership, especially from working families 
that have been paying rent for years and years and years, and 
built up no equity whatsoever.
    So I am pleased to hear that that is your mindset, and know 
that I do not want to be negative, as I heard from one of the 
members of the other side of the aisle, because in business you 
have to take risks. You just have to be well-organized.
    For Chairwoman Castaneda, talking about your finance board 
and building a corps of examiners, do we give you enough money 
in the budget that you have to work with to be able to have 
staff, and to be able to train these members, directors of your 
board to adequately oversee and get the job done that they have 
to carry out?
    Ms. Castaneda. Thank you for the question, Congressman. The 
Finance Board is different than OFHEO. We do control our own 
budget. We do not depend on taxpayers' money. What we do is we 
assess all the federal home loan banks, the 12 federal home 
loan banks, for our expenses.
    As far as whether we have enough budget, enough money, yes 
we do. One of the things we have been doing in the past few 
years is increasing not only our staff, but also our 
infrastructure. I can tell you that right now we have 70 very 
highly qualified, skilled individuals, hard at work in the 
supervision and the examination of the 12 federal home loan 
banks and the office of finance.
    Mr. Hinojosa. Thank you for that explanation. I am pleased 
that we do not have to give you money to run that board. If 
that is the case, then I would like to echo some of the 
comments that were made by Mr. Kanjorski. That is that there 
needs to be representation of the public in ways that you would 
have people who are of both parties or more parties, simply 
because I was concerned to hear that over 95 percent or 97 
percent are of one party. That lack of inclusivity is a 
weakness of representation of the public.
    I believe that your responsibility of making affordable 
housing programs successful needs the input of women, of 
minorities, Democrats and Republicans. We certainly have a long 
way to go to be able to get minorities into the 60 percent and 
70 percent of homeownership. I think that you have the 
responsibility as Chairwoman of that board to move in that 
direction and get courageous and make the changes necessary so 
that it is reflecting the makeup of our country.
    Chairwoman Kelly. Thank you very much.
    Mr. Hinojosa. I commend all of you for the work you are 
doing.
    Chairwoman Kelly. Thank you very much.
    Ms. Capito?
    Mrs. Capito. Thank you, Madam Chairwoman.
    I would like to ask Chairwoman Castaneda a question. I want 
to go back to the issue of the multi-district membership. I 
represent the state of West Virginia. We are covered by the 
Federal Home Loan Bank of Pittsburgh, and 35 percent of our 
market share financial institutions fall within the other 
jurisdictions of other federal home loan banks, the largest one 
being BB&T Bank, which is chartered in North Carolina.
    It has come to my attention that while this bank has been 
able to have access to the affordable housing program, there 
has been no access to the first-time homebuyers downpayment 
assistance program or the economic development growth 
enhancement program. We are concerned about the availability of 
those funds and the ability for that large institution in our 
State to be able to work with the federal home loan bank.
    You mentioned in your previous statement that they are 
allowed to offer all products in all services areas of the 
banks they are chartered in. Is that correct?
    Ms. Castaneda. What I said is that Finance Board rules do 
not prevent the federal home loan bank from funding projects 
outside the districts.
    Mrs. Capito. Do you have any plans to look at this issue in 
any more depth? Because in a State like West Virginia, you 
said, well, it is all going to even out. Well, I do not think 
that the consolidations are going to occur. They are not going 
to be consolidating in West Virginia, unfortunately. They are 
going to be consolidating in New York and other places. How is 
that going to balance out?
    Ms. Castaneda. Again, I would also be delighted to share 
the data that I was preparing earlier. As far as we can tell, 
the mergers and acquisitions impact on affordable housing 
funding has not been very significant.
    Mrs. Capito. Let me ask just another follow-up then. For 
instance, let's take BB&T for an example, if BB&T as an 
institution gets the same amount of money under the affordable 
housing program, do they then decide which areas of their 
service area it goes to? Or does the federal home loan bank 
have some jurisdiction over whether some of that funding gets 
to West Virginia or not?
    Ms. Castaneda. They can request that the federal home loan 
bank, in this case of Pittsburgh, to forward the funds to a 
place outside the Pittsburgh district.
    Mrs. Capito. Okay. Has there been any investigation into 
letting larger and consolidated entities have membership in 
different banks, instead of just single membership?
    Ms. Castaneda. The multi-district issue has not been before 
the board since I cam in January, so I have not had the 
opportunity to study the issue very closely. My understanding 
is the issue is really whether the Finance Board has the 
authority to change multi-district rules, at least without 
there being any specific concern regarding the safety and 
soundness of the federal home loan bank system of any 
particular bank, or for that matter the housing finance 
mission.
    Again, multi-district rules are determined by statute. 
Congress could certainly make any changes it believed 
appropriate. What I can tell you also is that the Finance Board 
staff will be available to assist you on this issue either for 
reviewing the multi-district issue or coming up with any 
different plans. We are available.
    Mrs. Capito. Thank you. I look forward to your sharing the 
data with my office so we can work together on this issue. 
Thank you.
    Ms. Castaneda. I will make sure that that happens.
    Mrs. Capito. Thank you.
    Chairwoman Kelly. Thank you very much.
    Mr. Scott?
    Mr. Scott. Yes, thank you, Madam Chairwoman.
    Mr. Falcon, first let me ask you about funding. You are 
currently asking for $20 million and increasing your funding 
for staffing purposes. Your budget goes through what looks to 
me like a tangled web. You have to get the appropriations 
process through Congress, but your funds are derived from 
having semiannual assessments placed upon Fannie Mae and 
Freddie Mac, two entities that you regulate. All of this is 
going on at the same time that the Administration is working 
feverishly to remove you completely from the appropriations 
process.
    I would like to have your comments on how it is to operate 
within such a tangled web of your finances, and detail for us 
if you will how you can meet these needs while you continually 
have to rely on this rather haphazard means of financing?
    Mr. Falcon. Thank you, Congressman. That is a very good 
question, because this I think goes to the heart of the ability 
of the agency to fulfill its mission over the long term. I 
think the fact that the agency, unlike every other safety and 
soundness regulator, has to go through the appropriations 
process has hindered the agency in the past from fully 
fulfilling its mission. It hinders long-term planning. It 
hinders the ability to respond quickly to certain budgetary 
needs. As we saw with the need to quickly staff-up to deal with 
the Freddie Mac problem, we did not have adequate funds to do 
so, so we had to get additional appropriations for that. The 
same thing arose with Fannie Mae where we needed a separate 
appropriation for that activity.
    It hinders our ability to staff-up, because we cannot plan 
on hiring anyone this year until we are certain that we will 
have the funds next year in order to continue hiring those 
individuals, even if we find the funds in the current year. In 
addition, when there is a continuing resolution, especially a 
long-term one as there was in the 2004 fiscal year, even though 
we are planning for growth, hiring and doing additional testing 
and reviews of the two companies, a CR keeps us operating at 
last year's level, which prevents us from taking on the 
additional responsibilities and activities that we would like 
to. In the case of 2004, that went on for a 4-month period.
    I very much hope that we are not forced into that situation 
again this year. I think it would very dramatically affect some 
of the ongoing activities that OFHEO has, including the Fannie 
Mae review, as well as our effort to staff-up on a timely basis 
in key areas like examinations and capital analysis.
    Mr. Scott. Thank you. Let me talk for a moment also about 
the Fannie Mae review. I happen to believe that Fannie Mae and 
Freddie Mac are performing an extraordinarily important mission 
in providing access to housing for lower-and middle-income 
Americans. Earlier this year, you instituted an examination of 
accounting policies and programs of Fannie Mae to see if you 
could identify any control weaknesses or unusual transactions, 
to take a look at internal controls, to look at the role of 
management, and the board of directors and its implementation 
of its relevant policies and procedures.
    Could you share with this committee your findings thus far?
    Mr. Falcon. Congressman, like you I support very much the 
mission of Fannie Mae and Freddie Mac. However, that very 
important public mission does not give them license to violate 
accounting rules or engage in this conduct. If we find any type 
of violation of accounting rules or misconduct, we will take 
appropriate action to correct and prevent that misconduct from 
happening going forward. I am not in a position, however, to 
give you any updates other than in one area where we were 
prepared to take action as soon as we came to a conclusion 
about it. It was the area of impairments and how they account 
for impairments.
    This primarily affected their manufactured housing 
portfolio and their portfolio of aircraft leases. It will 
result going forward in the write-down of those assets of 
approximately $300 million or so, but we have not determined 
the final numbers yet.
    If you would allow me, I would like to withhold any comment 
on other findings until I am in a better position to be able to 
do so.
    Mr. Scott. I will certainly do that, but please make note 
that I am very interested in moving forthrightly to remove any 
cloud on Fannie Mae's or Freddie Mac's operations in view of a 
public who is in great need of the implementation of their 
mission. I only hope that you and others and your board of 
examinations would take that in mind so that we realize that 
the longer we dally with this, there is a great need that is 
not being fulfilled as much as it should. I would be very 
interested if, off the record or at anytime while in private, 
that I might be able to receive some information that could 
allay some of our concerns, I would be glad to receive those.
    Chairwoman Kelly. Thank you very much, Mr. Scott. I am 
sorry, your time is up, sir.
    Mr. Scott. Okay.
    Chairwoman Kelly. If we get into a second round, you are 
welcome to stay and do that.
    Mr. Murphy?
    Mr. Murphy. I thank you, Madam Chairwoman.
    Chairman Castaneda, I have a question I want to ask you. It 
is really related to high-profile scandals that have 
highlighted our need for government reform. Congress has taken 
some meaningful steps, most notably the Sarbanes-Oxley 
legislation, to ensure that sort of accountability in America's 
boardrooms and corporations.
    When we look specifically at the federal home loan banks, 
we see a lot of extensive board turnover, where I think there 
is a real need to build continuity in these boards. To address 
this issue, there are a number of legislative initiatives that 
have been proposed to improve this governance of the federal 
home loan bank system. One of these includes extending the 
members's terms from 3 years to 4 years, and lifting a 
statutory limit on compensation. Can you tell me your thoughts, 
if you support these provisions? If so, why and what do you 
believe they would do?
    Ms. Castaneda. Thank you for the question, Congressman.
    As I have mentioned before, that was one of the issues that 
was raise during the system-wide corporate governance review 
that the Finance Board did last year. I am very much aware that 
it is included in the House bill, and I do believe that 
extending the term of service from 3 to 4 years would allow the 
board member to be able to a much better job.
    The federal home loans banks are very unique institutions. 
I do believe it takes time for any member, even if you have a 
lot of banking and financial background, to get enough 
information and knowledge to serve. So I do believe then that a 
4-year term is much more reasonable.
    Mr. Murphy. So you are saying that is based upon the time 
it takes to ramp-up to that level of knowledge. Do you think 
that also puts people in a position of helping them make wise 
judgments in the long term as well, rather than trying to rush, 
if they are dealing with that 3-year term here, to try and do 
things? I am thinking of this in light of some comments made 
before that perhaps some of these appointments may be 
politically based, but I am wondering if when people have long-
term positions, does that work positively or negatively towards 
some of those accusations about political actions?
    Ms. Castaneda. I think the more time you have with the 
board, the more familiar you will be with all the issues, the 
better you will be able to understand what you are trying to 
accomplish. In that sense, yes I do believe that then extending 
the term of service, it makes sense.
    Mr. Murphy. I just wanted that comment.
    Thank you very much, Madam Chairwoman.
    Chairwoman Kelly. Thank you, Mr. Murphy.
    Mr. Bell?
    Mr. Bell. Thank you very much, Madam Chair, and my thanks 
to both of you for your testimony here today.
    Ms. Castaneda, a recent issue, as you are well aware, is 
simultaneous membership of one financial institution in 
multiple FHLB districts. As has already been pointed out today, 
today's economy trends toward mergers and consolidation, 
particularly in the financial sector.
    I am wondering how much has this environment contributed to 
the push for multi-district memberships, and how will multi-
district membership affect access to low-cost mortgages and 
housing? And if you have any information that is particular to 
Texas, I would very much appreciate your sharing that, too.
    Ms. Castaneda. Again, Congressman, the multi-district issue 
has not been before the board since I came in January, so I 
have not had the opportunity to study the issue very closely. 
What I would like to tell you again, like I have expressed it 
to some of the other members here this afternoon, is that the 
Finance Board will be available to assist you in any way 
regarding this issue. We have also collected some data 
regarding the affect of mergers and acquisitions, and the 
affordable housing program funding which I will be delighted to 
have the Finance Board staff to get in touch with your staff 
and share that information.
    Mr. Bell. Thank you.
    Earlier, one of my colleagues painted a rather nightmarish 
and doomsday scenario for what could happen in this area, and 
one of the reasons offered for that doomsday scenario was 
programs that have been offered for the least creditworthy 
individuals who were most likely to default. That statement 
contrasts with some of the information I have been provided in 
my district regarding the success of some of those programs 
designed for the last creditworthy individuals or other low-
income individuals. Since you all really did not have an 
opportunity to comment on the entire doomsday scenario which 
was offered, I would like to give you that opportunity now and 
see if you share any of those opinions or what your response 
would be.
    Mr. Falcon?
    Mr. Falcon. Relative to home price appreciation?
    Mr. Bell. That, and any of the other comments that were 
made as to the looming disaster in this area. Do you agree with 
that?
    Mr. Falcon. We have studied the issues related to a system 
at risk, and we discussed earlier issues related to home price 
appreciation. I would never come here and say to you that there 
will never be a failure of either of these companies. You never 
know if an event could happen or if you must miss something. 
But what you have to do is to try to make sure that you have 
put adequate resources, adequate staffing, adequate expertise 
and adequate authorities in the hands of the right leaders to 
make sure that we are doing everything possible to make sure 
that doomsday scenarios do not in fact happen.
    I think with the growth of OFHEO's budget, with the 
additional staffing, with the way we are restructuring our 
regulatory program, I think we have taken great strides in 
trying to strengthen the oversight of these two companies to 
very much reduce the likelihood that there will be any kind of 
systemic event arising from these two companies.
    A healthy Fannie Mae and Freddie Mac in fact can have 
stabilizing effects on our economy. So we need to make sure 
that there are not problems with these two companies that could 
possibly have a destabilizing affect externally. That is why I 
continue to press for the need for adequate resources and for 
every authority necessary at OFHEO, similar to what every other 
safety and soundness program has to ensure that we do have all 
the tools and resources necessary to make sure that we can 
reduce the likelihood, and come as close as possible to 
eliminating the likelihood, that there could be a systemic 
crisis in the housing sector of the economy or otherwise.
    Mr. Bell. Ms. Castaneda?
    Ms. Castaneda. Congressman, I do not have enough 
information for me to make a comment. I would like to come back 
to you on that issue, if I may.
    Mr. Bell. Ms. Castaneda, opponents of FHLB's SEC disclosure 
rule have been vocal in decrying its authority to enact those 
changes. I was wondering if you could comment specifically on 
the Finance Board's jurisdiction in this matter?
    Ms. Castaneda. You are right, Congressman. I have heard a 
lot of comments after our board resolution. The finance board 
looked at all of the issues raised by the banks and the other 
commenters. We made a decision that the best thing to do was to 
ask the banks to register with the SEC. Congress has given the 
mandate to the Finance Board to ensure that the banks operate 
in a safe and sound manner. The Finance Board ensures then the 
banks can raise money in the capital markets. Registering with 
SEC will reassure investors that there are no differences 
between the standard disclosures followed by the other two GSEs 
that could hamper the ability of the federal home loan banks to 
raise funds in the capital markets.
    Additional disclosure would also enhance safety and 
soundness. It would provide more information to the analysts, 
to the member banks, and that would add market discipline to 
the banks and to the system.
    Mr. Bell. Thank you, Madam Chair.
    Chairwoman Kelly. Thank you, Mr. Bell.
    Mr. Royce?
    Mr. Royce. Thank you, Madam Chair.
    Over the past year or so, this committee has spent a great 
deal of its time looking at the 14 housing government-sponsored 
enterprises. Last year, I authored legislation to create one 
regulator for Fannie Mae and Freddie Mac and the federal home 
loan banks. I felt such legislation was needed because the GSEs 
are too large and too important to our nation's housing and 
financial markets not to have world-class regulation.
    Now, in the interim, I believe Congress needs to recognize 
that both the Finance Board and OFHEO are not operating under 
the most optimal statutory constraints, and only congressional 
action can make the necessary fixes. The bottom line is that 
until Congress acts, we are the ones that would and frankly 
should be held responsible, should be held accountable if a 
crisis were to occur in one of the GSEs. Let me be clear in 
saying that I do not know of any looming financial crisis, but 
the fact of the matter is that this committee should take 
prudent steps to ensure that such an event could not occur.
    I would like to see this committee take the bill reported 
out of the Senate Banking Committee and mark it up over here. I 
am sure there would be amendments, and the American people 
would then have a record as to who supports what and why. So I 
respectfully suggest that the committee take up the bill passed 
in the Senate Banking Committee this past spring, because I 
think Congress needs to act.
    In the meantime, the regulatory agencies must continue to 
perform their duties and for some time I have been very 
concerned about the federal home loan bank system's entry into 
the retained mortgage business. The MPF and MPP programs I 
think expose the federal home loan bank system to interest rate 
risk which can be very, very complex to manage. So I was very 
pleased to see the Finance Board recently demand that the 
Chicago bank have robust risk management systems and procedures 
in place. I just wanted to tell you, Chairwoman Castaneda, that 
I think that is a job well done.
    I want to ask you a follow-up question to that, and that 
is, is the Finance Board going to be demanding the same level 
of risk management at the other 11 home loan banks?
    Ms. Castaneda. Thank you, Congressman, an excellent 
question. I can assure you that at the Finance Board we are 
very vigilant in the oversight of all the federal home loan 
banks. We will take any necessary steps as we just did with the 
Chicago bank if we think it is necessary to do it.
    Mr. Royce. Let me ask you this. What is the comfort level 
at the Finance Board with the internal risk-based capital test 
at each of the 12 federal home loan banks?
    Ms. Castaneda. Capital requirements is one of the most 
important issues for the Finance Board. It is at the top of our 
supervisory agenda. As you know, after the GLB Act, all of the 
banks have to have a new capital structure. Most of the banks 
have implemented that new capital structure. As I said before, 
it is at the top of our supervisory agenda. We are monitoring 
not only the level, but also the composition of the capital of 
each one of the federal home loan banks.
    Mr. Royce. Let me ask you about how the bank systems are 
approaching this. Are the banks measuring their exposure to 
mortgage assets in a consistent way across the system? Is there 
a consistency in this? Are there different approaches being 
applied in these different federal home loan banks?
    Ms. Castaneda. Obviously, each federal home loan bank is 
different. They have their own structures as far as, you were 
talking about the mortgage loans.
    Mr. Royce. Right.
    Ms. Castaneda. For some of the banks, the mortgage loan 
portfolio is a much larger portion of their asset base, as in 
the case of Chicago, for example. But as far as how do we 
measure the interest rates at each one of the federal home loan 
banks, our supervisory effort is the same for each bank.
    Mr. Royce. Thank you, Chairwoman.
    Thank you for this hearing.
    Chairwoman Kelly. Thank you, Mr. Royce.
    Mr. Falcon, I wanted to just go back for a minute. Chairman 
Baker asked you for a response, to report back to the 
committee. I just simply need to do a bit of business here, 
with unanimous consent so moved.
    Chairman Baker, if you would like to have a second round 
here, please feel free.
    Mr. Baker. Just a brief follow-up. I would ask a couple of 
questions of the Director that he did not have an opportunity 
to answer in the earlier round. First was with regard to the 
ongoing forensic accounting audit of Fannie Mae, and as to your 
opinion whether the agency is providing access to documents, 
personnel or other matters as may be deemed appropriate to the 
accounting firm or to your own inspectors as appropriate, given 
the circumstance they find themselves in. Are they being 
cooperative in your view?
    Mr. Falcon. I think the cooperation has been spotty, but 
there are many demands we have placed on them for documents and 
to employees for scheduled interviews. Given that we find that 
cooperation has been less than adequate, whether it is 
deadlines being met or data submissions not being complete, we 
have taken steps to address those problems and will continue to 
be as forceful as necessary to make sure we do get full 
cooperation.
    Mr. Baker. Let me ask further that as significant events 
occur which you feel are not helpful to the audits and 
conclusion, if you would take this as a formal request to let 
us know. We certainly want to be helpful to you in encouraging 
a cooperative environment to get to an appropriate assessment 
of financial condition.
    Secondly, given the stated objection of both GSEs to your 
corporate governance reforms, do you have a date certain, or 
how do you intend to proceed as to the implementation of your 
recommendations?
    Mr. Falcon. Right now, we are analyzing the comments we 
have received, and we will decide whether or not to make 
changes to the proposed rule in light of comments that we 
received, and then draft the final rule which will then be 
submitted to OMB. If they determine it is a major rule that 
needs to be cleared by OMB, then we will have to wait for their 
review of it.
    Mr. Baker. As to your part, as to your date of submission 
to OMB, is that a year-end goal?
    Mr. Falcon. Absolutely. I am hopeful we can get our part of 
it done within 1 or 2 months.
    Mr. Baker. Terrific.
    I have one other element that we have not previously talked 
about, or at least not recently. Some on the committee have 
expressed support for the enterprises's efforts with regard to 
facilitating access to credit for first-time, low-income 
minority women. In looking at the portfolio of housing assets 
held, what percent, if you know, exceed 95 percent LTV? My 
expectation would be that first-time, low-income homebuyers are 
not likely to have $3,000 cash for a 97 percent loan for 
downpayment, plus another $2,500 or $2,800 in closing costs or 
$5,000 or $6,000 available in cash to make that acquisition, 
which means to me that most first-time homebuyers are going to 
be that 97, 98, 100 percent LTV first-time home acquisition.
    My suspicion, having looked at these numbers some time ago, 
is that the bulk of assets held by the enterprises are a 
typical $250,000 home, two wage-earners, 25 or 30 percent down, 
people who have gone to their second, maybe third homes. That 
is where the bulk of the enterprises's assets are invested, as 
opposed to that description of that low-income first-time 
homebuyer. Is that characterization still close to accurate, or 
can you respond to it there? Do you need to take time to look 
at it?
    Mr. Falcon. I think I will need some time to look at it, 
rather than give you some numbers off the top of my head which 
might not be accurate. I would prefer to defer, if I can.
    Mr. Baker. Let me refer you to Freddie Mac's annual 
financial report to shareholders about 3 years ago, in which 
they broke it out by percentage of housing investment held. I 
specifically asked the Freddie person at that time, who 
appeared before the committee, why there was such a small 
amount held in 95 percent excess of LTV. The explanation at 
that point, some years ago, was that the portfolio has not 
seasoned. I asked if it needed Tabasco or pork fat, or what we 
needed to get it over the top. I never got a response. I just 
thought it might be appropriate for you to return to that. Many 
members of the committee assume that the principal line of 
business for these enterprises is to help low-income 
individuals. My suspicion is that it is not the case.
    I thank you very much for your leadership and hard work in 
this area. I yield back, Madam Chair.
    Chairwoman Kelly. Thank you very much.
    I want to thank this panel very much for their patience 
with this hearing this afternoon. The Chair notes that some 
members may have additional questions for this panel, which 
they may wish to submit in writing. So without objection, the 
hearing record will remain open for 30 days for the members to 
submit written questions to these witnesses and place their 
responses in the record.
    I really thank you for your patience. With that, this 
hearing is adjourned.
    [Whereupon, at 5:07 p.m., the subcommittees adjourned.]


                            A P P E N D I X



                             July 13, 2004


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