[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                     THE ADMINISTRATIVE PERSPECTIVE

                        ON GSE REGULATORY REFORM

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 13, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-15














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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  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           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 13, 2005...............................................     1
Appendix:
    April 13, 2005...............................................    49

                               WITNESSES
                       Wednesday, April 13, 2005

Jackson, Hon. Alphonso, Secretary, United States Department of 
  Housing and Urban Department...................................     8
Snow, Hon. John W., Secretary, United States Department of 
  Treasury.......................................................    10

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    50
    Kanjorski, Hon. Paul E.......................................    52
    Royce, Hon. Edward R.........................................    53
    Jackson, Hon. Alphonso.......................................    54
    Snow, Hon. John W............................................    58


















                     THE ADMINISTRATIVE PERSPECTIVE

                        ON GSE REGULATORY REFORM

                              ----------                              


                       Wednesday, April 13, 2005

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to call, at 10:07 a.m., in Room 
2128, Rayburn House Office Building, Hon. Michael Oxley 
[chairman of the committee] presiding.
    Present: Representatives Oxley, Leach, Baker, Bachus, 
Castle, Royce, Ney, Kelly, Paul, Ryun, Miller of California, 
Tiberi, Kennedy, Hensarling, Garrett, Barrett, Harris, 
Neugebauer, Price, Davis of Kentucky, McHenry, Frank, 
Kanjorski, Maloney, Watt, Carson, Sherman, Meeks, Lee, Moore of 
Kansas, Capuano, Clay, Baca, Lynch, Scott, Green, Cleaver, 
Wasserman Schultz.
    The Chairman. [Presiding.] The committee will come to 
order.
    Pursuant to Rule 3(f)(2) of the rules of the Committee on 
Financial Services for the 109th Congress, the Chair announces 
he will limit recognition for opening statements to the Chair 
and Ranking Minority Member of the full committee, the Chair 
and Ranking Minority Member of the Subcommittee on Capital 
Markets, Insurance and Government-Sponsored Enterprise, or 
their respective designees, to a period not to exceed 16 
minutes, evenly divided, between the majority and minority.
    The prepared statements of all members will be included in 
the record.
    The chair recognizes himself for an opening statement.
    I want to welcome Secretary Snow and Secretary Jackson back 
to the committee this morning. I am looking forward to your 
views on H.R. 1461, the Federal Housing Finance Reform Act of 
2005, and the administration's perspectives on GSE reform in 
general.
    We have been working on this issue for a long time. Since 
the 106th Congress, this committee has held 22 hearings and has 
heard from 101 witnesses on GSE-related matters.
    Chairman Baker should be commended for his hard work in 
monitoring the GSEs over the years, and I am proud to be a co-
sponsor to the legislation he introduced to create a new GSE 
regulatory agency.
    This legislation will foster confidence by granting the 
agency the necessary powers to ensure the safe and sound 
operations of these complex enterprises.
    I would encourage my colleagues to join in support of this 
legislation.
    At this time, in 2003, we were all led to believe that the 
GSEs were running smoothly with only a routine accounting 
restatement in progress at Freddie Mac. What we have learned 
since then is that these enterprises were involved in revenue 
smoothing, the misapplication of accounting standards and 
irresponsible corporate governance.
    The Federal Home Loan Bank system has also had its share of 
problems over the years with accounting problems and inadequate 
management. The governance situation in Seattle seems to be 
particularly troubling.
    It is time for a new oversight structure for the GSEs that 
will give the regulator the tools it needs to prevent these 
problems from developing and permit swift action when problems 
do arise.
    We have learned in our hearings that the current regulator, 
OFHEO, lacks the critical tools needed to supervise these 
enterprises. It is our duty to structure a strong regulator to 
ensure that the housing market, the taxpayers and the financial 
system as a whole remain safe. H.R. 1461 strikes the right 
balance of strong regulation that is not overly burdensome.
    Authority over minimum capital, program approval and 
receivership are all concepts that this committee has discussed 
over the years.
    This regulator is independent from the political process. 
That means there is no influence on safety and soundness or on 
mission compliance.
    Some argue that HUD has the expertise in housing mission. 
However, I would contend that it is not HUD that has the 
expertise but rather it is the people at HUD who have that 
expertise. These people can move to the new regulator and make 
decisions that are independent and in the best interest of the 
U.S. housing market.
    H.R. 1461 also grants the regulator the authority to adjust 
the portfolios of the enterprises. This is an important power, 
and it will ensure that the enterprises do not hold portfolios 
that are unsafe and unsound or in violation of their mission.
    In a similar manner, banks are forced to keep their 
portfolios in check through capital levels mandated by the 
Basel Accords. This structure encourages the holding of a 
diverse portfolio of assets, since the holding of too much of a 
particular asset, or a risky asset, results in a higher capital 
charge.
    We have heard from some that Congress should be cautious in 
its efforts to create a new regulator and that we need to be 
mindful not to harm the housing market. In truth, the housing 
markets are being threatened now by the various accounting and 
regulatory problems at the GSEs and by the lack of a regulatory 
agency with a real and real authority.
    A regulator with enhanced powers will assure that our 
housing financing system recovers and becomes stronger and more 
resilient in the future. The goal of this bill is to create a 
credible GSE regulator--nothing more, nothing less.
    I also want to remind members of the committee that both 
Secretary Jackson and Secretary Snow have been generous with 
their time. Last week Secretary Jackson appeared before us, and 
next week Secretary Snow will be back to discuss international 
financial issues.
    I would urge members to keep their statements and questions 
focused on GSE-related issues this morning so that we can have 
a productive session.
    Thank you both for appearing today, and I look forward to 
your testimony.
    Now I recognize the gentleman from Massachusetts, the 
Ranking Member, Mr. Frank.
    Mr. Frank. There are three sets of concerns that have been 
brought out with regard to the government-sponsored 
enterprises, and I will talk particularly Fannie Mae and 
Freddie Mac.
    I think we are all fairly clear that the reason the Federal 
Home Loan Banks are going to be included in this legislation is 
that it would look funny if they were not. That is, absent the 
concern over Fannie and Freddie, we would almost certainly not 
be dealing with the Federal Home Loan Banks, but people are 
afraid that the markets would react negatively if we did this 
new scheme and they were not included, so they will be 
included.
    I trust they will be included in ways that will recognize 
the very quite distinct differences between Fannie Mae and 
Freddie Mac.
    Now, with regard to Fannie Mae and Freddie Mac, it seems to 
me there were sets of concerns. I want to begin with what I 
think is some context that has gotten too little attention.
    We have a serious housing problem in this country. We have 
a particular problem in many parts of the country. But housing 
affordability is one of the gravest social problems we have.
    And while general prosperity, which we all welcome, helps 
alleviate some social problems, reduces unemployment, can 
increase real wages, in some ways it makes the housing 
situation in some parts of the country worse.
    The prosperity of the 1990s, because of market 
imperfections, meant that in some parts of the country the 
demand for housing increased far beyond what the supply of 
housing could meet. And so in many parts of the country, the 
1990s made things worse.
    We have decided--over my objection, but I see no near-term 
reversal of that--substantially to reduce the direct federal 
role in housing affordability production. We are basically out 
of the production business at HUD. We have rental assistance 
programs, but we are not constructing much housing.
    In addition, we have hundreds of thousands of units of 
housing that has been built over the years with federal 
assistance, under the 221(d)(3) and 236 program, the rural 
housing programs, which is at risk because of market forces and 
the expiration of legal restrictions of going out of the 
affordable housing inventory.
    So if we were to project current housing policies forward--
I will be opposed to that, but I cannot guarantee obviously it 
does not happen--we will have 5 years from now many fewer 
affordable units than we now have federally provided for.
    There are a couple of offsets to that. One, has been the 
most successful thing we have done in a long time. It was 
originally very partisan when it was done, but it is now 
universally accepted. The former chairman of this committee, 
Henry B. Gonzalez, was the leader in it. We mandated an 
affordable housing program to the Federal Home Loan Banks with 
a percentage of their profits that has become a major source of 
housing affordability production.
    And now we come to Fannie Mae and Freddie Mac. And the 
context is that Fannie Mae and Freddie Mac are important 
sources of affordable housing, and in my judgment should become 
even more important sources of affordable housing, and that is 
one of the things I hope we will do in this bill.
    There are three sets of concerns. One has to do with the 
financial safety and soundness of these two large institutions. 
And here I think there is general consensus that we should 
increase the ability of regulators to take action necessary to 
protect safety and soundness.
    I would say that I think the situation is not nearly as 
critical as people have thought. We have found with both Fannie 
Mae and Freddie Mac inappropriate behavior, bad accounting--I 
think influenced probably by the compensation schemes of the 
top officials--and we have been able to step in through the 
regulator and correct those.
    What is interesting to me is that in both cases, 
multibillion dollar mistakes happened. The leadership 
committed--the mistakes were not made; people made the 
mistakes. Mistakes do not happen by themselves.
    No one should be allowed to use the passive voice when 
talking about screw-ups. We ought to identify who did it. The 
leadership of Fannie Mae and Freddie Mac did it. And they 
have--all those I believe have left. I am sorry that their 
compensation lingers on, and I would like in the bill to make 
sure that we can more adequately cut off compensation for 
people who misbehave.
    But in neither case has the safety and soundness of Fannie 
Mae or Freddie Mac or the housing market or the United States 
been implicated. In other words, there was more solidity there 
than people think.
    But in any case, I agree that we should take action to 
strengthen the safety and soundness regulation.
    But there are two other agendas at stake here. One is the 
notion that it is inappropriate for the federal government to 
interfere with the allocate of functions of the capital market. 
I believe this partly motivates Mr. Greenspan.
    There is obviously a very respectable, intellectual 
tradition that says: The market knows all, the market is smart 
and government is dumb--to quote a former majority leader from 
Texas, a current former majority leader from Texas--and he said 
the markets are smart and the government is dumb.
    And the view is that Fannie Mae and Freddie Mac, with a 
particular set of legislative and executive arrangements, 
biases capital allocation towards housing. And there are people 
who want to stop that. I very much disagree with that.
    There are also competitors. There are organizations of 
people who compete or resent the fact that Fannie Mae and 
Freddie Mac can borrow money more cheaply than others, because 
of a perception in the market that we are going to bail them 
out. I am not going to bail them out, and if they want to lend 
money to Fannie and Freddie cheaper, that is their judgment. Do 
not come to me if it does not work out.
    But there are competitors who want to reduce that 
advantage, who want to restrict what Fannie Mae and Freddie Mac 
can do.
    I find the latter two inappropriate. I will cooperate in 
trying to enhance safety and soundness. But I will resist 
efforts to impose an ideological agenda to get them out of the 
housing business, as people try to get the government out of 
the housing business in general. I will oppose efforts to 
hinder their ability to do things that competitors do not want 
them to do.
    And I would make the final point with this--with your 
indulgence, Mr. Chairman, and I appreciate it: I agree with 
those who say that Fannie and Freddie are not spending enough 
of their resources on affordable housing in particular.
    They get an advantage from the market. So there is a 
general agreement on that. But there are two approaches to 
it.There is the administration prediction, and the 
administration predilection is: ``Fannie and Freddie get 
certain advantage because of this market perception, and they 
can borrow money more cheaply, and they do not do enough for 
affordable housing, let's reduce their overall activity, let's 
cut down what they do.''
    Others of us believe--and I think this is overwhelmingly 
the case on our side, and it is certainly the case with 
virtually every organization in America that is concerned about 
housing production and affordable housing--instead, let's leave 
them at the current level, unless safety and soundness dictate 
otherwise, and have them do more about affordable housing.
    So our effort is going to be, one, to enhance safety and 
soundness; and two--unlike, frankly, the administration 
position--to advocate a greater allocation of resources toward 
affordable housing.
    That is the approach that we will be taking, and I think 
those are the issues that we will be dealing with in the 
legislative situation.
    The Chairman. The gentleman's time has expired.
    The gentleman from Louisiana, Mr. Baker, chairman of the 
subcommittee.
    Mr. Baker. I thank you, Mr. Chairman.
    And I want to start by acknowledging your hard work and, 
frankly, tolerance on this issue over the years. I am most 
appreciative of your leadership in this area.
    I also wish to make clear that the bill now pending is not 
a bill drafted in a void by any individual, but a collaborative 
effort led by the Chairman, in consultation with Secretary 
Snow, Secretary Jackson, Chairman Greenspan, Director Falcon--
all those who have had some significant interest in this matter 
for many years and who bring to this perspective the insights 
that are extremely important in having a bill which is 
constructed appropriately and is balanced.
    Just without reviewing history, why do we need this bill? 
There are some who would suggest that circumstances are not 
sufficient to cause great change in the current oversight of 
these enterprises.
    If any other public operating company issued an 
announcement that we will have a multibillion dollar 
restatement over multiple years, that we cannot perform our 
duty to report our financials in a timely manner to the market 
and cannot yet give a date by which that financial information 
will be provided, the market reaction to that news for that 
public operating company would be immediate and extremely 
adverse.
    The reason why we have not seen such reaction in this case 
is clearly because of the market perception of the federal 
backstop. It skews market discipline, it prevents management 
from reacting in a manner which is appropriate in all other 
circumstances, and therefore the need to change the regulatory 
regime is absolutely essential and immediate.
    I am grateful that we have not had more significant adverse 
consequences, that interest rates have not gone through the 
ceiling, that homeownership has not been precluded for millions 
of the Americans who chose to pursue that vision, and that we 
are able in a relatively calm and dispassionate environment to 
discuss the needs for regulatory reform.
    I think it is also important to recognize what the bill 
does not do. It does not, for example, repeal the line of 
credit, it does not set arbitrary limits on investment 
portfolio, it does not make immediate or requisite adjustments 
to capital.
    It does create a world-class regulator, with the ability to 
act not only in the interest of taxpayers but in the interest 
of homeownership.
    There is the authority to adjust capital, to assess risk, 
to approve programs and to act in the interest of 
homeownership.
    It is much like having a fire extinguisher in a commercial 
building. You may never have a fire. But if a fire breaks out, 
you would be well served to have the fire extinguisher on the 
wall.
    This bill is the fire extinguisher. We hope none of these 
powers are ever essential or necessary.
    And let me speak to one point about limitations on growth 
of the GSEs.
    Prior to the innovation of the investment portfolio and 
mortgage-backed securities, and even in the early days, one 
CEO--former now--sitting at that very table said, ``Oh, we 
would never repurchase our own MBS, because we are moving 
interest rate risk and prepayment risk off our books and into 
the market.''
    Now we see in substantial number these enterprises 
repurchasing their own mortgage-backed securities without 
concurrently increasing their capital to offset or hedge 
against that risk.
    Prior to the creation of MBS, these enterprises, 
principally and only, securitized home mortgages--a very 
profitable line of business. The G-fees are significant, the 
margins are great.
    Without the investment portfolio, these enterprises can 
grow, and substantially grow, and remain highly profitable 
without the adverse risk that the investment portfolio brings 
to the issue.
    However, we only vest the authority in the regulator to 
make judgments, going forward, after appropriate study, if the 
investment portfolio should be constrained in any manner.
    I want to make clear that this bill is not about 
artificial, arbitrary statutory regulation. It is about 
creating a regulator with sufficient tools to respond to any 
adverse conditions--not only in the interest of taxpayers, but 
in the promotion of homeownership for every American who hopes 
one day to live in the luxury of their own home.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from Pennsylvania, Mr. Kanjorski?
    Mr. Kanjorski. Mr. Chairman, we need to have a strong, 
independent and a world-class GSE regulator. Such a regulatory 
system will promote confidence in the GSEs, protect the 
continued viability of our capital markets, ensure taxpayers 
against systemic risk and expand housing opportunities for all 
Americans.
    To ensure that we have appropriate GSE regulation, I 
believe that any future legislative reform efforts should also 
adhere to several key principles.
    For example, the regulator must have a funding stream 
separate and apart from the annual corporations process. In 
order to be credible and effective, the regulator must 
additionally have genuine independence from the political 
system. Such independence must consist of complete autonomy 
from the enterprises, include sufficient protection from 
outside special interests and provide substantial insulation 
from political interference.
    A strong regulator must further have robust supervisory and 
enforcement powers. In this regard, many have suggested that we 
should model GSE safety and soundness regulation on that of 
other financial institutions. I agree with this sensible 
concept.
    In fact, the general goal of our reform debates heretofore 
has been to make GSE supervision more bank-like. However, some 
recent reform proposals, such as those aimed at imposing 
arbitrary portfolio limits and requiring a burdensome approval 
process before the GSEs can go to market with new innovations, 
would appear to be more than bank-like. These proposals, 
therefore, cause me considerable concern.
    Moreover, we must ensure that we continue to remember why 
we created these public-private entities as we work to develop 
regulatory reform legislation. We created GSEs to make credit 
available to finance home purchases because the private market 
was not effectively meeting credit needs. The GSEs' charters 
limit business activities to their public missions. And they 
receive benefits from the government that help them carry out 
those public missions.
    Beyond ensuring that GSEs can continue to fulfill their 
missions, we must maintain a public interest in the boards of 
these public-private entities. In that vein, I have been very 
concerned that the administration has failed to appoint 
independent directors at Fannie Mae, Freddie Mac and the 
Federal Home Loan Banks as it is required to do under the law.
    Public participation on these boards helps to focus the 
GSEs on their missions.
    Additionally, I am very concerned that the removal of the 
presidential appointment authority in any legislation, as some 
have regrettably suggested, would result in a greater 
probability of privatization in the future.
    Privatization of the housing GSEs is a very bad idea for 
financial institutions of this size and of such importance to 
our economy.
    In sum, Mr. Chairman, in developing any enhanced GSE 
regulatory system, we should perform deliberate surgery. We 
should abstain from considering radical proposals that would 
fundamentally change the ways in which the GSEs operate or 
undermine their charters.
    Finally, as we implement strong independent and world-class 
GSE regulation, we must also ensure that the GSEs continue to 
achieve their statutory objectives and carry out their public 
missions.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 52 in the appendix.]
    The Chairman. I thank the gentleman.
    We now turn to our distinguished panel. Our first witness 
is Secretary Jackson.
    Secretary, welcome back. It is good to have you back. You 
seem very comfortable before the committee after all this 
experience that you have had.
    [Laughter.]
    We welcome you, and you may proceed.

 STATEMENT OF HON. ALPHONSO JACKSON, SECRETARY, UNITED STATES 
          DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

    Secretary Jackson. Thank you very much, Chairman Oxley and 
Ranking Member Frank and members of the committee.
    I welcome the opportunity to join Secretary Snow in 
discussing the administration's views on how best to improve 
and reform regulatory oversight of the housing government-
sponsored enterprises.
    The President has set an ambitious goal: to build an 
ownership society where everyone has a chance to own a home, a 
retirement account, a health care plan, and to gain permanent 
stake in the American dream.
    Ownership brings stability to our neighborhoods and 
security to our families. To build on an ownership society, the 
President is committed to helping even more Americans buy 
homes.
    This commitment is embodied in the President's challenge to 
the housing industry to join with us to create 5.5 million new 
minority homeowners by the end of this decade. It is embodied 
in the Blueprint for the American Dream Partnership, through 
which HUD has brought together the private sector, not-for-
profit and government agencies to meet the President's 
challenge.
    Secretary Snow will outline the core principles that the 
administration believes should underline any GSE regulatory 
reform. He and I are in full agreement: Congress and the 
administration has an opportunity and an obligation to 
strengthen the regulatory structures of the GSEs.
    A strong regulator is in everyone's best interest: the 
administration, the Congress, the housing industry, Wall 
Street, investors worldwide and the American homebuyer.
    The administration has two goals in this process: First, we 
must ensure that the GSEs continue to fully carry out the 
mission granted to them by Congress of promoting affordable 
housing and homeownership; second, we must ensure that the GSEs 
are subject to rigid oversight so that they serve the public 
purpose.
    To ensure that the GSEs have appropriate finance oversight 
and are held accountable, the administration supports 
strengthening the power of the GSE regulator. Doing so would 
make the regulator more comparable in terms to statute, power, 
authority and resources to other financial regulators charged 
with safety and soundness oversight.
    Seventeen months ago, in the wake of Freddie Mac's 2000 
accounting scandal, 2003 accounting scandal, Secretary Snow and 
then-Secretary Martinez came before the committee to make a 
case for reform. As Secretary Snow will describe in his 
testimony, other troubling problems that impact the safety and 
soundness of the GSEs have come to light.
    In addition, in July 2004, HUD reported that Fannie and 
Freddie continued to substantially lag the conventional markets 
in serving first-time homebuyers, especially minority first-
time homebuyers.
    In October of 2004, HUD determined that Freddie Mac 
overstated its 2002 performance under the low-and moderate-
income and underserved-area housing goals by doubling the 
account by 45,000.
    Recently HUD determined that some of Fannie Mae's 
international activities may not be consistent with the 
chartered purpose. Therefore, HUD has advised Fannie that it 
must obtain prior written approval from HUD before it engages 
in any international activity.
    Last week, HUD ordered Fannie to cease and desist serving 
sale programs for third-party lenders. Again, this activity is 
inconsistent with the charter purpose.
    The best way to prevent similar or worse abuse in the 
future is through the oversight of a strong regulator empowered 
to hold Fannie Mae and Freddie Mac accountable to the highest 
standards their size and statute demands.
    The administration strongly supports retaining the core 
element of oversight of Fannie and Freddie, setting enforcement 
and affordable housing goals at HUD.
    Congress established the housing goals to ensure that the 
GSEs fulfill their mandate to provide leadership to the 
mortgage market. To transfer this role from HUD could delay 
years of implementing of the new regulatory plan.
    We also consider it important that the fair housing 
requirement and enforcement pertaining to the housing GSEs 
remain at HUD, given HUD's expertise in housing discrimination. 
HUD should have full enforcement power for those authorities in 
the same way it enforces the Fair Housing Act.
    Secretary Snow will testify of the additional powers for 
the new regulator, and I would add one more: allowing the 
regulator to establish conforming limits on a local basis each 
year using the best available data to more appropriate serve 
low-and moderate-income families.
    Let me stress that we believe that such encompassing of 
changes to the regulatory structure will boost the confidence 
of the GSE stakeholders. Investors will be better protected 
under the regulatory system that empowers the regulator to do 
the job we expect them to. And the American public will 
ultimately benefit.
    As the same time, we will strengthen the GSEs' ability to 
serve low-and moderate-income families pursuing homeownership.
    I join Secretary in saying that I look forward to working 
with the committee.
    And my full statement will be submitted to you, Mr. 
Chairman and the Ranking Member.
    [The prepared statement of Hon. Alphonso Jackson can be 
found on page 54 in the appendix.]
    The Chairman. Without objection.
    Thank you, Secretary Jackson.
    Secretary Snow, it is good to have you back before the 
committee and look forward to your appearance next week as 
well.

   STATEMENT OF HON. JOHN W. SNOW, SECRETARY, UNITED STATES 
                     DEPARTMENT OF TREASURY

    Secretary Snow. Thank you very much, Mr. Chairman. It is a 
great pleasure to be here.
    Chairman Baker, former Chairman Leach, Mr. Frank, Mr. 
Kanjorski, members of the committee, I appreciate the 
invitation you have given me. And as with Secretary Jackson, I 
look forward to working with you to make legislation to 
strengthen the regulation of the GSEs a reality.
    I am heartened by the comments. I am heartened by private 
conversations.
    Mr. Chairman, thanks to you, Chairman Baker and others on 
the committee, we have made a lot of progress over the last 2 
years.
    The administration's position on this is clear. I think it 
is unequivocal.
    Secretary Jackson has stated the commitment of the 
administration to housing, to advance the housing objective. 
Underlying the housing objectives is a strong and secure 
mortgage market.
    The GSEs play a very important role in providing liquidity 
to the mortgage market through their operations in the 
secondary market. The strong regulator plays an essential role 
in assuring the soundness and safety of that market, and thus 
continuing to make sure that liquidity is available to advance 
the important goal of homeownership.
    The need for the strong regulator is clear. These are large 
and important financial institutions that affect not only the 
housing markets and the mortgage markets, they also affect, 
because of their size, the financial risks to the country as a 
whole.
    The strong regulator we envision would focus primarily on 
soundness and safety of the housing markets, but it would also 
take into account the broader issue of systemic risks to the 
financial system.
    That regulator ought to be world-class. It ought to have 
the authorities and powers and responsibilities that other 
world-class financial market regulators have--like the Federal 
Reserve Board, like the OCC--the sorts of authorities laid out 
in the Basel Accords.
    I think your legislation advances that objective in a very 
positive way, and we commend you for that.
    The new regulator ought to have powers at a minimum over 
risk-based capital and minimum capital, the ability to set 
those standards, not through statute but through administrative 
discretion, taking into account the changing marketplace 
conditions that the entities find themselves in.
    It ought to have independent funding, as Congressman 
Kanjorski said.
    It ought to have, also, broad supervisory powers to review 
the activities of the entities.
    Importantly, it ought to be able, if the entities find 
themselves in deficiency, in default, to trigger a receivership 
process.
    And also it needs to have the ability, consistent with 
making sure liquidity is available to carry on the primary 
mission, to limit the GSEs' retained mortgage investments. That 
is a very important power as it goes directly to this issue of 
systemic risks.
    As I say, I think your efforts are to be deeply commended. 
We have made tremendous progress here.
    And we want to continue, ``we,'' the administration, 
Secretary Jackson and I want to continue to work with you and 
the committee, Mr. Chairman, to try and make a reality of new 
legislation to establish that strong regulator with all the 
powers necessary to have a world-class regulator supervising 
the activities of these very important entities.
    Thank you very much.
    [The prepared statement of Hon. John W. Snow can be found 
on page 58 in the appendix.]
    The Chairman. Thank you, Mr. Secretary.
    Thanks, both of you, for your excellent presentations.
    Let me begin, Secretary Snow, with an issue. First of all, 
it seems to me that over the last year, a lot of the issues 
that were very contentious and very difficult have tended to 
become less so for a lot of reasons that I will not get into. 
The receivership issue, for example, stands out.
    There is one issue that is a relatively new issue to the 
debate, at least in terms of how high it has been perceived, 
and that is the portfolio limits issue. Some cite it as 
systemic risk--Chairman Greenspan and others--because so many 
financial institutions hold GSE debt and the obvious potential 
problem that exists.
    Could you lay out for us the GSE-related risks that concern 
you the most as Secretary of the Treasury? And are the risks 
related to investments and securities held by the GSEs and 
their portfolios? And lastly, do the GSEs hold inherently risky 
investments in and of themselves?
    Secretary Snow. Thank you very much, Mr. Chairman. That is 
a question that gets at the heart of this important issue.
    The problem of systemic risk grows not out of the holdings 
themselves, or the nature of those holdings. Mortgages are a 
pretty secure holding. MBSs themselves are a pretty safe and 
secure holding.
    The systemic risk issue arises because of the vast size of 
these holdings that have grown just enormously over the past 
decade and a half or so. And the size of these holdings is what 
concerns me--I think it concerns Chairman Greenspan--but not 
the holdings themselves.
    These holdings of the paper of the GSEs are heavily 
concentrated in financial institutions, in pension plans, in 
insurance companies, in community banks, and in the financial 
system generally. A very heavy percentage of all the GSE paper 
is held in those institutions.
    But derivatives, the hedging mechanisms that are used to 
deal with the risks that the GSEs properly are trying to spread 
and hedge against, are concentrated in five or six very large 
financial institutions.
    What concerns the Treasury Department and the Federal 
Reserve Board is the concentration of these risks in our 
financial institutions which, in the event of a default or even 
the threat of a default, could have far reaching, contagious 
effects across the financial system, creating this thing we 
call systemic risk.
    Our proposal would limit the GSEs to holdings of MBSs or 
mortgages or other investments to the extent required to carry 
out their primary function. We understand they need liquidity. 
We understand there may be a case for holding some amount of 
this paper and making these investments.
    The precise amount I think is best left to the regulator to 
determine against a standard which would say they should not 
hold anymore than they need to hold to carry out their primary 
function to make the secondary market.
    The Chairman. Well, that raises the issue that I wanted 
to--and I am glad you set that up, because the issue is: How do 
we deal with that systemic risk in terms of portfolio? Some 
have, as you know, talked about a prescriptive, in the 
legislation, that is, that would shrink the portfolios by a 
particular dollar amount each year.
    And it strikes me that, given the fact that markets change, 
interest rates change and the like, that to enact something 
like that in a prescriptive nature invites some real problems, 
that in fact if we are going to create a world-class regulator, 
then we ought to have some faith in that world-class regulator, 
given the authority by Congress to make those kinds of 
decisions going forward.
    What is your opinion on that?
    Secretary Snow. Mr. Chairman, I would agree with those 
thoughts.
    Regulatory agencies are set up to have expertise to deal 
with day-in, day-out changing circumstances and conditions. It 
is hard to legislate once and for all. And this is a case that, 
it seems to me, cries out for the application of that sort of 
regulatory expertise and discretion.
    I do not know whether the liquidity requirements of the 
GSEs call for portfolio reductions of X, Y or Z. But a good 
regulator, given a good staff and the resources to get into 
those issues, could make that determination.
    I would urge you, though, to direct the regulator--and this 
is such an important issue--to direct the regulator in a policy 
sense that they should not permit the GSEs to hold more of 
these assets than is necessary to carry out their primary 
function.
    They do need liquidity. The regulator is in the best 
position, I would think, to determine the role of MBSs, 
mortgages and other paper in fulfilling that requirement for 
liquidity to carry out their primary function.
    So I am much more comfortable leaving it to the regulator, 
with strong policy guidance from the Congress.
    The Chairman. Thank you.
    My time has expired.
    The gentleman from Massachusetts?
    Mr. Frank. I said earlier that I think it is important to 
sort out some strains. And I will tell you that I am concerned.
    Until well into the administration, this administration 
ignored the affordable housing mission. When this 
administration took power 2001, they inherited affordable 
housing goals for the government-sponsored enterprises which 
covered 2001 and 2002. They had been promulgated to people in 
the administration.
    The administration had the authority then to promulgate 
goals that would have taken effect in 2003 and 2004, new goals. 
They forgot.
    We finally inquired whether they planned to do anything 
about goals, and HUD said they did. But by the time they said 
they did, the time had expired. And when I asked them why--I 
think I may have asked you, Mr. Secretary--but somebody said to 
me, well, it was an oversight.
    So HUD deliberately or negligently failed to do anything to 
increase the goals.
    The concern for the goals, which I share--indeed, not 
share, which I had before they did--did not come until there 
was an assault on Fannie and Freddie. There were other issues.
    One of the most important things you are going to have to 
do if you want to expand homeownership beyond the current 
income level is fully to take advantage of manufactured 
housing. Manufactured housing is an indispensable asset as part 
of the effort to expand it.
    Fannie Mae decided to pull back from manufactured housing 
because it was being pressed by regulators, by financial 
credit-raters to do that.
    Several of us, on both sides of the aisle, rural and urban, 
wrote to Fannie Mae and said, ``Please do not do this. We need 
you to get back into manufactured housing.'' We tried to work 
with HUD on that.
    We wrote to Secretary Martinez, then the Secretary of HUD, 
and asked him for a meeting. The answer was that he was too 
busy to meet with us.
    HUD, to my knowledge, still has not done anything about 
helping us get them into manufactured housing.
    We found Fannie and Freddie not taking advantage of some of 
the rural housing programs. And, again, it has been a 
congressional initiative to do that.
    So let me say I welcome this interest in affordable 
housing. I wish it had come earlier.
    And now let me ask some specific questions.
    Mr. Secretary, to Secretary Jackson, are you aware of what 
HUD is doing with regard to manufactured housing with Fannie 
and Freddie, because we have found that to be a gap. We tried 
to get HUD interested, and we were brushed off.
    Is HUD working on trying to do anything? Do you agree with 
us, that they ought to be engaged with manufactured housing?
    Some people say, ``Well, it is too risky.'' But we have 
been pressing them to do more. Is HUD doing anything in that 
regard?
    Secretary Jackson. First of all, let me say this, that your 
analysis, from the inception. is very well correct. And let me 
address first the affordable housing goals and then the 
manufactured housing.
    Yes, it is clear that in 2001, 2002, we did not come up 
with the affordable housing goals. Some were still in play. And 
the reason was that in many cases, as you know, Mr. Ranking 
Member, even when we came up with them, we were constantly in 
dispute.
    What I did----
    Mr. Frank. In dispute with whom?
    Secretary Jackson. With Fannie Mae as to whether they 
were--may I finish, please?
    One of the things that occurred in the 2003 when we started 
the goals is, I made a conscious decision that we were no 
longer going to debate with Fannie and Freddie or members of 
this body about whether the goals were acquirable or obtainable 
or not. We said that ``these are the goals and you are going to 
have to meet them.''
    Mr. Frank. Mr. Secretary, I asked about manufactured 
housing. The fact is----
    Secretary Jackson. And I am ready to answer that question--
--
    Mr. Frank. I wish you would. You raise the thing on the 
goals, let me go back.
    2002 went by, you had the ability to raise the goals, you 
said--nobody here in 2002 was telling you not to do it. We 
raised it with you, and the answer we got was, well, it just 
was not on the agenda.
    So it is clear----
    Secretary Jackson. That is not the answer.
    Mr. Frank. HUD had the ability in--well, I will go back and 
get you the transcript, when we asked why. HUD could have done 
it, and nobody would have tried to stop you from doing it.
    We had some suggestions about how to do it, but not about 
increasing the goals.
    But let me ask you about manufactured housing: What has HUD 
been doing----
    Secretary Jackson. Well, we have no authority to tell them 
what to do about manufactured housing. We have talked to them, 
we will continue to talk to them.
    Mr. Frank. I didn't say authority. I do not have any 
authority, either, Mr. Secretary, but, you know, there is jaw-
boning, there is pressure. People speak, and we try to, as I 
said, to get them into manufactured housing. Could you tell me 
what HUD has been doing to persuade them?
    Secretary Jackson. We have tried to get them--and I think 
you have said something that is very important. You work with 
them too. It has been very difficult to get Fannie Mae and 
Freddie Mac to work with us until now.
    Mr. Frank. It has been easier to get them to work with us 
on affordable housing than it is get you to work with us.
    Secretary Jackson. That is not true.
    Mr. Frank. Well, it certainly is to me.
    Secretary Jackson. You know why?
    Mr. Frank. Let me ask you about affordable housing. We have 
in our version of the legislation--those of us on the 
Democratic side in the Senate and the House, and it is not in 
the bill--a requirement that they put a certain percentage of 
their profits into an affordable housing program modeled after, 
in general, the Federal Home Loan Bank program.
    Could I ask both of you what you think of that, that 
proposal that we take a percentage of their profits, that we 
mandate that a percentage of their profits go into an 
affordable housing program, direct production subsidy, similar 
to what the Federal Home Loan Banks have done?
    Secretary Jackson. But you know, Mr. Ranking Member----
    Mr. Frank. What do you think of that proposal----
    Secretary Jackson. May I finish? Mr. Ranking Member, why 
should they do it? Their charter mandates that they must do it. 
Why should they set aside something that the charter mandates 
that they do?
    Mr. Frank. So, you will not answer the question, I guess. 
Are you in favor of----
    Secretary Jackson. The charter does not mandate with the 
Federal Home Loan Banks should do. They have decided to do 
that. But charter is mandated----
    Mr. Frank. Excuse me, the Federal Home Loans Banks were 
mandated to do it by an act of Congress. And the charter does 
require them to do something that does not, as explicitly as we 
think it should, require them to put the profits--not just in 
the loans.
    We are talking about going beyond the charter. The charter 
says that as they lend the money, as they do the secondary 
market stuff, that they should do affordable. We want to go 
beyond that get them more directly into, as the Federal Home 
Loan Banks are, into more direct stuff.
    So are you in favor of that provision?
    Secretary Jackson. My position is, I have as long as they 
want to do more, that is fine.
    Mr. Frank. Are you in favor of us mandating it? That is 
English. I am sorry for my diction, but you can understand 
that.
    Secretary Jackson. But you are the Chairman, I am not--I 
mean, you are the Ranking Member. This is the finance----
    Mr. Frank. Yes, I am the Ranking Member asking the--excuse 
me, Mr. Secretary, but you have come before us to make 
recommendations about legislation. I asked you about a specific 
piece, and you act as if somehow I am invading your privacy.
    The point is this: We have legislation. I do not want to 
wait for Frannie or Freddie to decide to do it.
    This is the point: I think we are doing more to get them 
into affordable housing than you have done.
    Are you in favor of an amendment to this bill that would 
mandate that 5 percent of their profits go into subsidized 
affordable housing?
    Secretary Jackson. That is your decision to make.
    The Chairman. The gentleman's time has----
    Mr. Frank. Why are you here?
    Secretary Jackson. I am here to tell you what our viewpoint 
is.
    Mr. Frank. Well, then tell me your viewpoint on that.
    Secretary Jackson. That is my viewpoint.
    Mr. Frank. I know it is my decision. What is your viewpoint 
on our decision?
    The Chairman. The gentleman's time has expired.
    Secretary Jackson. If you choose to do that, that is fine.
    The Chairman. The gentleman from Louisiana?
    Mr. Baker. I thank the Chairman.
    Good morning, Secretary Jackson. Welcome.
    I would just like to comment that from my perspective, the 
department has been very forthcoming and aggressive in seeking 
out ways to get Fannie and Freddie to the table.
    I have repeatedly pointed out that when we look at the 
function these enterprises engage in, you would assume that 
they would have a degree of mortgages in their portfolios that 
have high loan-to-value correlation.
    I have made the brash assumption that poor people do not 
have money. So that if they are to buy $100,000 home that 
requires a $5,000 down payment and $3,000 in attorney's fees, 
that $8,000 cannot be easily accumulated and therefore they 
cannot purchase homes.
    There are programs that allow 100 percent of the purchase 
price to be financed. And so you would look at the portfolio 
thinking you would find an aberrant amount of loan-to-values in 
their portfolio in excess of 95 percent to 100 percent, meaning 
they are loaning $98,000 out of $100,000 or $100,000.
    When you go back and examine the portfolio, you find that 
in each enterprise's case, it is less than one-half of 1 
percent held in portfolio fits that characterization.
    So where are they making loans? They are making them in the 
fat and middle part of the market where the homeowner has 30 or 
40 percent down payment, and the typical home-loan value is 
well in excess of $250,000, with mom and pop both working, with 
two kids, a dog, a Chevrolet pickup truck and a bass boat. 
These are not the folks that the charter says they should be 
focusing on to help fulfill the dream of homeownership.
    I have long been troubled by it. I have long known they 
underperform the market. Commercial banks hold on average 13 
percent of those loans in their own portfolio. And Fannie and 
Freddie are stumbling over getting beyond 3 or 4 percent.
    So there is much work to be done, and I commend you for 
your efforts.
    Secretary Snow, I just want to hit a couple of points very 
quickly as they, I believe, were raised in the course of Senate 
considerations that did not get the attention I think they 
needed to receive.
    One, with regard to the debate over limitations on 
investment portfolio versus the activity known as 
securitization: For many years there was in the life of both 
enterprises no mortgage-backed securities. It is a relatively 
recently developed financial entity.
    You could constrain the mortgage-backed security 
acquisition, an issuance process, and the investment portfolio, 
and is it not true that the enterprises could continue to grow 
quite successfully with handsome margins by only engaging in 
the activity known as securitization?
    Secretary Snow. I think there is a big market, and they 
have shown they have a comparative advantage in that market.
    Of course, if we move down the road we are suggesting, they 
would have an incentive to focus more of their efforts on 
making that secondary market and providing those guarantees.
    Mr. Baker. Sure. And to a great extent, the portfolio in 
the past has been the basis on which they have returned double 
digit rates of return, enabling shareholders' profit, and 
perhaps some might suggest, executives to earn rather large 
compensation--no comment expected.
    Secondly, with regard to concentration of holdings: Under 
the rules requiring the aggregation of tier-one capital for 
institutions insured by the FDIC, there are three things 
permissible for a bank to hold, meeting the tier-one capital 
requirement: U.S. treasuries, cash and GSE securities.
    It is now my understanding that an excess of 4,000 banking 
institutions meet their tier-one capital requirements to the 
extent of 100 percent is now constituted by GSE securities.
    By contrast, if a bank is to make any other investment, 
there is an investment cap of 10 percent of assets on that 
particular investment.
    With regard to loan obligations, there is a loan limit to 
one borrower rule of 20 percent of assets.
    So, then, all other cases, except for the GSE securities, 
there are statutory and regulatory limits on how far one may go 
as a CEO of a banking enterprise in investing in a single 
course of business activity.
    Do you think it advisable for us to examine the 
concentration question and authorize the regulator to take 
appropriate action to limit this concentration?
    Secretary Snow. I think it is a subject that deserves 
consideration. And I would urge you to continue to look at it.
    I think having the strong regulator in place with the power 
to limit those portfolios is probably even more important in 
dealing with this issue of systemic risk.
    But, clearly, the numbers you have laid out for us suggest 
how broad the systemic risk is and why we need that strong 
regulator.
    Mr. Baker. Just in closing, I want to commend both of you 
for your leadership in this tough area. It has been a battle 
over many years, and under your leadership, something finally 
might happen.
    Thank you.
    Secretary Jackson. Let me say this to you, Mr. Chairman, I 
think to add to what Secretary Snow said is, that if we look at 
today's GSE portfolio, it could easily be reduced by 
prepayments on a number of the mortgages, and that would reduce 
it in itself.
    Also I think that the Secretary alluded to something that 
was important.
    In 1990, the securitized market for the GSEs was $740 
million. If you look at it today, it is $3.8 trillion. That is 
a huge difference.
    And I think that, clearly, what the Secretary is saying, 
that if we have world-class regulator, they can look at many 
ways and will not hurt the market at all with the abilities of 
the GSEs to continue to fund low-and moderate-income loans, and 
even the top end of the loans, it will not affect them. They 
will not be able to hold as many mortgage-backed securities as 
they do.
    The Chairman. The gentleman's time has expired.
    The gentleman from Pennsylvania?
    Mr. Kanjorski. First of all, Mr. Secretary, I think you 
have come a long way, from what I recall a year or so ago, and 
I want to congratulate you on that.
    Secretary Jackson. Thank you.
    Mr. Kanjorski. I think that shows good flexibility. And we 
are now working towards something we may be able to get our 
hands around.
    I have a couple of questions.
    But one is--and maybe I am wrong and you can fill me in, 
Mr. Secretary--I understand that normally the regulator of 
banks has the flexibility to require greater capital if they 
anticipate or see risk on whatever formula that they lay out. 
And, clearly, the proposed legislation would contain that type 
of authority in this new regulator.
    Would you tell me, though, is there a limitation or a 
strength or authority for the regulator to dictate the 
investments of any private banking institution?
    Secretary Snow. The OCC and the Federal Reserve Board have 
broad regulatory supervision, including lines of business and, 
as you say, broad authority over capital, minimum and----
    Mr. Kanjorski. Well, I understand the capital side. I am 
talking about the portfolio side.
    Secretary Snow. No. But let me say that the reason that 
sort of authority is really important here, is critical here, 
is to deal with the incentives that exist for the GSEs to 
continue to take on more and more debt, because they have a 
borrowing advantage which allows them to make an above-normal 
rate of return on any interest-based asset they buy.
    And that is an incentive for continuing expansion of their 
loan portfolios, which is leading to this situation where 
systemic risks are created.
    Normal bank regulators do not have----
    Mr. Kanjorski. Mr. Secretary, but if a system risk appears 
to be possible, the regulator will have the authority to 
increase the need for capital, and that we have all agreed on.
    But you are capping both sides. You are giving the power to 
increase capital to avoid systemic risk, but you also, for the 
first time, want to get very involved, by the regulator, in the 
portfolio, and that seems a very strange inconsistency if we 
are going to look at these institutions as similar to other 
financial institutions, other than the fact that they have a 
special charter.
    Secretary Snow. Congressman, we would limit it only to the 
extent they hold more of these investments than is necessary to 
carry on----
    Mr. Kanjorski. The regulator is going to determine what is 
necessary.
    Secretary Snow. The regulator would--per my exchange with 
the Chairman--have the power to determine what is necessary.
    Mr. Kanjorski. And we all wish we get a very good and fair 
regulator, but we are--sometimes some administrations tend to 
appoint individuals that are necessarily enamored with the 
institutions they are appointed to serve in. I think there is 
something happening in the Senate on that issue today.
    And that raises the question: How do we know what this 
regulator's propensity will be?
    Once appointed, he will have a term and have this 
extraordinary power to decide that he does not like this idea 
of a portfolio of Freddie or Fannie, and by fiat, without a 
standard--does not have to show systemic risk, does not have to 
show anything--he can just limit that investment concept that 
these institutions have determined on their own, for good 
purposes, and in a sound way, and fulfilling their mission will 
have to bend their corporate decision-making authority to this 
regulator who may have no justification in the world other than 
the fact that he decides that is good practice.
    Secretary Snow. Congressman, I would set a standard. My 
recommendation is, you do set a standard. You tell the 
regulator that they can hold such paper--MBSs, mortgages, other 
paper, outside of treasuries--but only to the extent they need 
to, to have the liquidity to carry on their mission. Seemingly, 
that is consistent----
    Mr. Kanjorski. If we should do that, we should be worried 
probably even more so about the derivatives. That seems to be a 
major problem as to just how good the derivatives are, how 
effective are the counterparties, how over-invested are the 
counterparties.
    Are you suggesting, then, that this committee and the 
Congress legislate regulatory authority over hedge funds and 
other derivative purchasers?
    Secretary Snow. No, I am not at all, Congressman.
    Remember why we have the extensive derivatives. We have the 
extensive derivatives because of these vast and growing 
portfolios of investments which are subject to both prepayment 
and interest risks. And the GSEs appropriately say, ``We have 
better hedge this,'' and this is sophisticated hedging that 
ends up being held by the counterparties that are five or six 
very large financial institutions that hold virtually all of 
these derivatives.
    The Chairman. The gentleman's time has expired.
    The gentleman from Iowa, Mr. Leach?
    Mr. Leach. Thank you, Mr. Chairman.
    First, I think it very important to underscore that great 
credit goes to Mr. Baker and to you for bringing forth an 
approach the thrust of which I strongly agree with.
    But I would go a little bit further, Mr. Secretary.
    You have underscored systemic risk. I think there is 
enormous free market risk that is under the table and never 
raised. These institutions that come under the rubric of GSEs 
have advantages in the market, and they stilt the market in 
very profound ways.
    It is not simply coming from the perspective of advantages 
on cost of money and the cost of funds.
    They also have regulatory advantages that are profound. A 
small institution that competes against the GSEs for the 
holding of a mortgage has to carry more capital than they do. 
And one of the most interesting aspects of the American 
mortgage system is that it is quite possible, contrary to all 
regulatory history at this moment in time, that the larger an 
institution, the greater capital it needs, not the less capital 
it needs.
    The risk gets greater when size gets to be of a different 
dimension. And we have had a system where bigness has meant 
less regulatory intrusion rather than more. At a minimum we 
need comparability; quite possibly you need more regulation 
with ``the big''.
    There is also this issue of once you get great powers, you 
tend to want to spread your wings. And one of the things that I 
would like to add to this bill, and I will attempt to do so, is 
that I believe that the same regulatory authority ought to 
apply to all GSEs. And that includes the Farm Credit System, it 
includes Farmer Mac.
    There is no more egregious example of stretching government 
powers than Farmer Mac.
    There is no more interesting model of inappropriate 
spreading of power than the Farm Credit System which tries to 
get out of serving farmers and into serving the market economy 
itself, using the advantages of GSE powers.
    I think this committee does a great disservice not to put 
all GSEs under comparable regulation that is being set forth 
today.
    Finally, I would stress again, when you give someone power 
at a governmentally mandated level and they grow, the oversight 
should not only be about prudence, it ought to have something 
to do with competition. It might be sensible for this new 
regulator that is set up should not have an FTC kind of 
component.
    I raise these thoughts for your consideration and would ask 
for your comment.
    Secretary Snow. Congressman Leach, you raise some very good 
issues there, issues that it seems to me we ought to think 
about. I do not know that we have moved far enough down the 
road in thinking on those that we at least, from the Treasury 
side--maybe Secretary Jackson has thought about them more--
would be in a position to come down hard and fast one way or 
another.
    But there is a commonality to government-sponsored 
entities. And they do have certain advantages.
    Whether the Farm Credit Bureaus and the other, the GSEs, 
fit this pattern in the same way, I just do not know.
    What I do know about this situation, though, is that the 
marketplace treats the paper of these entities far different 
than the paper of other financial institutions because of that 
implied guarantee, because of the sense that the market gives 
that these entitites are too large to fail.
    Mr. Leach. I appreciate that. My time is about over.
    I just want to make one final point: The word ``Farm Credit 
System'' has the word ``farm'' in it. But if you took the word 
``farm'' out and just called it ``credit system,'' and you look 
at what the entity is attempting to do, which is to serve all 
the functions of all banks, it is more pervasive and powerful 
than either the two housing GSEs and affects Treasury 
concentration of interest far greater than the two housing 
GSEs.
    And from the Banking Committee's perspective, I would 
stress that this issue of the Farm Credit System, as a banking 
institution with GSE powers, that wants to operate as a bank, 
not simply serving the farm economy, is very, very concerning 
and is potentially far more explosive than the two-housing GSE 
circumstance.
    If we do not deal with it today, it becomes more explosive 
tomorrow.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The gentleman from New York, Mr. Meeks?
    Mr. Meeks. Let me first go to Mr. Snow.
    One of the things that has bothered me all throughout this 
incidence with Fannie Mae and Freddie Mac, et cetera, is that--
and as Mr. Falcon had stated in his testimony, that they were 
able to recognize problems with major--where major accounting 
firms had certified financial statements. And some of the 
issues went back 20 years or so.
    My question is: What do you see in this new legislation 
that would allow a regulator to recognize problems within a 
more reasonable time frame, say within a year at least? Is 
there anything that you see in this--the regulator, in this 
bill, have that problem?
    Secretary Snow. Congressman Meeks, I think the new 
regulator will have more robust authorities, better funding, 
funding not dependent on the appropriations process, and freer 
of all political constraints, as we envision it, and with more 
resources, the ability to attract more resources.
    I would put it outside the civil service system. I would 
give them the ability to hire the people who have these skills 
and understanding the mathematical models that underlie the 
derivatives, that understand the complicated accounting that 
goes with derivatives.
    It is essential that they get access to those sorts of 
people with that sort of expertise.
    I think the legislation creates that environment where this 
would be a much more robust and muscular agency, capable of 
doing a lot more, capable of attracting just top-flight people, 
and top-flight people will get on top of these things better.
    Mr. Meeks. That being said, you know, next week, I guess as 
the Chairman has indicated, we are going to have a hearing on 
Sarbanes-Oxley, and that, I guess, legislation will be focused 
on auditing firms and their qualifications and 
responsibilities.
    It seems as if the role of the auditor, not only in regards 
to GSEs but in corporate America, is generally falling short of 
being the watchdog it was meant to be.
    Do you think that the role of the auditor needs to be 
addressed in this legislation also? For instance, should we 
force GSEs to rotate auditors every few years?
    Secretary Snow. Congressman, I think strengthening the 
general oversight, corporate governance, as has been done 
through Sarbanes-Oxley, clearly should apply to the GSEs in 
totality, including registration under the Securities Acts, 
which some have agreed to do but have not yet done.
    So, yes, I think part of this that we recommend is required 
registration under the 1934 Act.
    Mr. Meeks. And one for Secretary Jackson: Since the 
Treasury does not have a history of understanding the needs of 
the housing market, what responsibilities do you believe that 
your agency should have in relations to the GSEs, such as its 
missions and goal?
    Secretary Jackson. Well, I still believe, as I said in my 
opening statement, that we should have the fair housing 
component because we have the necessary staff to address that.
    And secondly, I think, clearly, the housing goals--because 
the goals are to meet low-and moderate-income standards, and I 
think that we are in a better position to do that. We are doing 
it now.
    And in fact, as I stated to you all before, the acting 
chairman and the present chairman and CEO of Freddie Mac, we 
have worked with him and we have come up with goals we think 
that are obtainable, and they are working toward those goals.
    But I would think we would still--those goals should stay 
necessarily with HUD.
    Mr. Meeks. What about program approval?
    Secretary Jackson. Well, I think program approval really 
could be with the regulator or with HUD.
    I mean, the problem is, a new program--I think that the new 
regulator clearly will have on their mind safety and soundness 
in new programs to make sure that the GSEs conform to the 
charter.
    Mr. Meeks. But would not it--I mean, the experience with 
reference to the program, it belongs to you. Treasury has not--
--
    Secretary Jackson. Well, today it is with HUD.
    Mr. Meeks. And would not you believe that your expertise--I 
mean, you do not think that you should have some role as far as 
approval of programs.
    Secretary Jackson. I think so, advisory role or some role 
if it goes to the new regulator, clearly, because we could get 
with them and give them experience that we have had in this 
process for the last 20 years or so.
    Mr. Meeks. Last, Mr. Jackson, let me ask: Am I correct in 
understanding that HUD has the authority to prevent breaches of 
the charter of GSEs now?
    Secretary Jackson. Well, we have general regulatory 
authority.
    You know, we have been trying, Congressman, to decide what 
that general regulatory authority is. We have made efforts to 
stop new program authorities, we have made efforts to make sure 
that they conform to the program limits.
    But in many cases we have not been very successful 
because--and I am going to be very candid--because we were 
consistently being contested by the GSEs as to what we had the 
power to do.
    And I can tell you, over the last 3 years that has not been 
the case. We have, as my mother would say, we have put our foot 
down and told them it is not really relevant what they think; 
it is the decisions that we make since we have the general 
regulatory authority.
    The Chairman. The gentleman's time has expired.
    The gentleman from California, Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman. Thank you very much for 
holding this hearing.
    And I would also like to thank Secretary Snow and Secretary 
Jackson for their very able service to our country.
    And I really want to commend you, Mr. Chairman, and 
Chairman Baker, for your efforts in crafting legislation to 
reform oversight of the three housing GSEs.
    I continue to support the creation of a single new 
regulator with the authority to set minimum and risk-based 
capital standards, to place a troubled entity into 
receivership, to review product approval and mission, and to be 
independently funded outside of the appropriations process.
    And I am very pleased to see that this H.R. 1461, the 
Federal Housing Finance Reform Act, contains all of these 
critical components.
    Now, since the introduction of H.R. 1461, Chairman 
Greenspan and Secretary Snow have both testified that any new 
legislation should place limits on the portfolio holdings of 
Fannie Mae and Freddie Mac.
    And in Chairman Greenspan's remarks, he said that the 
Federal Reserve is concerned that the large concentration of 
mortgage assets in the two enterprises puts the safety and 
soundness of the entire financial system in jeopardy.
    In fact, in all my years here in Congress, this is the 
strongest and most stern warning I can recall coming from a 
chairman of the Federal Reserve. And the words from Chairman 
Greenspan were, ``To fend off possible future systemic 
difficulties which we assess as likely"--as likely--"if GSE 
expansion continues unabated, preventative actions are required 
sooner rather than later.''
    In light of the Federal Reserve's warnings, Mr. Chairman, I 
would respectfully request that this committee hold a hearing 
on the risks associated with Fannie and Freddie holding large 
quantities of mortgage assets on their balance sheets before we 
mark up legislation.
    And such a hearing would allow this committee to understand 
more fully the concerns expressed by the Federal Reserve 
chairman and by Secretary Snow.
    Mr. Secretary, my question to you is: In your testimony to 
the Senate Banking Committee last week, you suggested that 
Congress give the new regulator the authority to limit 
portfolio growth. However, you did not recommend a statutory 
cap, as proposed by Chairman Greenspan.
    And I remember reading a comprehensive equity research 
report in 2002 which forecast that together Fannie and Freddie 
would own $12 trillion of mortgages on their balance sheet by 
the year 2020, and that this would amount to 53 percent of the 
total mortgage debt in 2020.
    In 2002, Fannie and Freddie owned about 20 percent of 
mortgage debt outstanding.
    I presume that you and Chairman Greenspan have seen similar 
forecasts.
    If Fannie and Freddie one day own 50 percent, or even 40 
percent, of all mortgage debt outstanding, would that concern 
you?
    And if so, would your proposed solution to give the 
regulator the authority to limit portfolio holdings, as opposed 
to a statutory solution as proposed by Chairman Greenspan, be 
enough to ease systemic fear at Treasury?
    The last question I wanted to ask you was: I understand 
that the OCC usually gets public comment before letting 
national banks into a new line of business. In your view, has 
this process harmed innovation by the national banks?
    Secretary Snow?
    Secretary Snow. Thank you, Congressman Royce.
    No, that review process has not harmed innovation. We have 
seen lots of innovation in national banks that are subject to 
the OCC regulation.
    On the subject of the systemic risks, the concern is with 
the present, but it is also very much, as you point out, with 
the future. And the rule that I would urge you to think about 
hard is one that says: GSEs can hold such amounts of this 
paper----
    Mr. Royce. As is necessary for liquidity? Or how would you 
define----
    Secretary Snow. As is necessary for liquidity.
    Mr. Royce. How would you define liquidity under that?
    Secretary Snow. Well, I would define it the way regulators 
normally define it. There are exigencies that come up. There 
may be needs for them to step in and make the market.
    And maybe--and this is a hard case to make--maybe there is 
some case for their holding some MBSs and some mortgages for 
unique circumstances. But it is hard to see that it would be 
very much, because treasuries provide the closest thing to 
liquidity, the best form of liquidity and the safest form of 
liquidity.
    So I would think this rule would, in the hands of a good 
regulator, lead over time to a gradual reduction in the 
holdings of mortgage-based paper, and they could fulfill their 
liquidity needs through treasuries and such amount of mortgage-
based paper that the regulators says they really need.
    But I would not have the regulator make an affirmative 
finding that they need to hold it.
    Mr. Royce. Thank you very much. My time has expired. Thank 
you, Mr. Secretary.
    The Chairman. The gentleman's time has expired.
    The gentleman from Georgia, Mr. Scott?
    Mr. Scott. Thank you very much, Mr. Chairman.
    Secretary Snow, I take it from your testimony that the 
administration does support legislation that creates an 
independent regulator for housing GSEs outside of the Treasury 
Department. Correct?
    Secretary Snow. Yes, Congressman Scott. We think the 
important issue here is not where the regulator is housed, but 
that the Congress establish that strong regulator with the 
powers I laid out.
    Our point is that if you decide to put it into Treasury--
and I take it there is not overwhelming sentiment to do that--
but if you did put it in Treasury, then we suggested some 
conditions that we thought ought to be met.
    Mr. Scott. Well, do you believe, then, that if the Treasury 
Department had full policy control of the GSEs that the markets 
would perceive that control as full backing of the GSEs by the 
government?
    Secretary Snow. Congressman, there is a risk of putting the 
GSE regulator inside Treasury that the market would presume the 
relationship of the government to these entities is 
strengthened and enhanced. That is the very perception that we 
would want to disabuse the markets of.
    And that is why I am saying, if you put it in Treasury, 
then Treasury would need to be able to have certain oversight 
powers, in order to disabuse the market of that perception, 
that the relationship between the Treasury and the entities has 
been strengthened.
    Mr. Scott. Let me ask you this also as a follow up on that 
point: Last week we had the Commerce Secretary and Mr. Jackson 
in, and I raised some points then that I just want to get your 
opinion on.
    That was proposed that about 18 programs be shifted over to 
Commerce Department from housing, and in effect reduction of 
about 35 percent of the budget of HUD goes over to Commerce, 
just the idea, the plan, about $4 billion could be transferred 
there.
    Today we are talking of further erosion of HUD.
    Do you feel that the American people would perceive this as 
a dismantling of HUD?
    For you, Secretary Snow, I would like your opinion on that.
    Secretary Snow. Well, Secretary Jackson is probably in a 
much better position to address that than I am.
    Mr. Scott. I had asked that Secretary Jackson before, in 
view of the fact that Treasury now is getting involved in this, 
particularly from the oversight and the regulation of the prior 
responsibility of HUD, via GSEs, Treasury now is beginning to 
be a part of that.
    Just your opinion, do you feel that we are dismantling HUD?
    Secretary Snow. No. What I think we are doing, as I 
understand this--and I am not as close to this as Secretary 
Jackson or Secretary Gutierrez is--what I think is being done 
here is an effort to concentrate these programs, streamline 
them, and provide for the delivery of the underlying services 
more effectively.
    Mr. Scott. Let me go to you, Secretary Jackson: Do you 
believe that H.R. 1461 will provide enough input from HUD 
regarding the housing goals of the GSEs?
    Secretary Jackson. No, because if we look at the present 
bill, the housing goal and the fair housing component is 
encompassed within this present bill. And as I stated in my 
opening statement, I believe that clearly we are the best 
persons to handle it.
    But let me say this to you, Congressman, which I think is 
very important: Even today in OFHEO, even though it sets in 
HUD, we really have no control over OFHEO. OFHEO is basically 
an independent body.
    And I agree that if we are going to regulate the GSEs, it 
has to be an independent body with the appropriate powers to 
do.
    But then to answer the latter part of your question: No, we 
still believe that those two components are best served at HUD.
    Mr. Scott. Okay, I want to take advantage of my time. I 
have a number of questions.
    Do you believe, then, Mr. Jackson, that HUD should maintain 
oversight of the housing mission?
    Secretary Jackson. I really do. I think that HUD, because 
it has the appropriate staff, understands what the mission of 
the GSEs are, and we are quite capable and prepared to address 
those missions.
    Mr. Scott. Now, the flip side of that: Do you believe that 
Treasury currently has the expertise to oversee the GSEs' 
housing mission?
    Secretary Jackson. Well, we are not talking about Treasury 
getting the program; we are talking an independent agency. And 
I am not sure whether any independent body at this point in 
time, until we can see the configuration, has that power. I 
cannot say no and I cannot yes.
    The Chairman. The gentleman's time is expired.
    The gentlelady from New York, Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman.
    Secretary Snow, I would like to get your thoughts on BSA 
compliance.
    As you know, currently the GSEs are exempt from BSA 
compliance. In the first beneficial case, others--the filing of 
SARs may have allowed fraud against the taxpayers to be 
detected sooner.
    In addition, sound public policy ought to demand, I think, 
that all financial institutions be subject to this key 
component of our fight against money laundering and terror-
finance.
    Casinos, the post office, small community institutions are 
subject to the law. Yet institutions with hundreds of billions 
in financial assets, like Fannie Mae, are exempt.
    So I would like your thoughts on this issue.
    And, secondly, concerning the BSA, can you comment on the 
recent action taken by the OCC against Arab Bank. Might this 
yet be another instance of where the regulator is consistently 
giving a clean bill of health to a bank, found out, then, only 
in retrospect, that there were problems they had not 
identified.
    I want to know what we can do to meet our objectives of a 
solid BSA compliance regime that prevents money laundering, 
provides good intelligence, protects banks and their customers 
from the harmful uncertainty that they are currently 
experiencing.
    As we examine the Arab Bank issue, I am afraid that we are 
going to find the kind of missteps and gaps between the 
relevant entities, like OCC and FinCen, that contribute so much 
to the current jumbled regulatory environment.
    I am going to be having a hearing next week, and I hope 
that Treasury will be there, and Treasury will be there to 
present their views on this. And I want to know if I can count 
on Treasury to be there at the hearing to discuss the Arab Bank 
issue.
    But I also would like you to go back and talk to me about 
the BSA and whether or not we should apply it to Fannie and 
Freddie.
    Secretary Snow. Congresswoman Kelly, the BSA Act lies at 
the forefront of our efforts on terrorist finance, as you know. 
And while it is not perfect, I think we are making good inroads 
with it and clearly having effects.
    We yield to no one in our commitment to enforcing it and 
enforcing it effectively and having the resources to make sure 
we do that.
    Whether or not Fannie and Freddie should be directly 
subject to it is something let get back to you on, think about.
    And be delighted to participate in your hearing.
    On the Arab Bank, certainly OCC found some very 
questionable behaviors there and entered into some orders 
against the bank. But that matter is still under investigation, 
so I better not go any further in responding to it, except to 
say that we are monitoring it, we are vigilant with respect to 
it.
    And we have had follow-on meetings with the Jordanians to 
try and make sure that they understand BSA, how it applies, and 
the need for the scrutiny that BSA calls for and due diligence 
in the conduct of the affairs of their financial institutions.
    Mrs. Kelly. Well, thank you, Mr. Secretary. And I 
appreciate the fact that you said that you would be delighted 
to come to the hearing. I look forward to having you there. I 
think it is very important Treasury be there and present what 
is going on.
    Secretary Snow. I understand you are having discussions 
with our staff now, and if we can work it out, I certainly 
would look forward to it.
    Mrs. Kelly. Thank you.
    I yield back.
    The Chairman. Ms. Kelly yields back.
    The gentleman from Texas, Mr. Green?
    Mr. Green. Thank you, Mr. Chairman and Mr. Ranking Member.
    Mr. Secretaries, I am very much concerned about the power 
to regulate possibly becoming the power to eliminate. And I am 
concerned because much consternation has developed as a result 
of what appears to be consolidation that can possibly lead to 
the elimination of some programs.
    We have programs that have been traditionally a part of HUD 
that are finding their way to another department--at least one 
now, two, maybe others.
    And I do believe that the consternation is becoming greater 
as we perform additional investigations. We see that the 
Brownfields Grants are being moved and defunded, the 
Empowerment Zones, Rural Housing and Economic Development, 
Section 108 CDBG loans, capacity-building grants, EDI set-
asides.
    My concern is whether or not we are seeing the alpha of 
HUD's omega. Are we witnessing the genesis of revelations yet 
to come that will reveal that we had this opportunity to save a 
program that has been of great benefit to the American people, 
but somehow we missed the opportunity and at some point later 
we will be sitting here deciding whether there should be a HUD 
at all.
    Mr. Secretary?
    Secretary Jackson. Thank you very much, Mr. Congressman.
    To me those are two clearly separate issues.
    The shifting of the block grant to Commerce is quite 
different than the proposal before us that has been presented 
by Chairman Baker in the sense that I have said that we still 
believe that the fair housing goals for the GSEs, the new fair 
housing goals, and the housing review of the appropriate 
housing goals should stay with HUD.
    But as a whole, moving OFHEO to an independent regulator 
does not at all disturb me, because, clearly, OFHEO does not 
have all of the necessary powers that is inclusive in this bill 
to make sure that the GSEs are regulated. And that is all we 
are saying.
    We want the GSEs to be as strong as possible. And I think 
Secretary Snow has said it. But at the same time, as I said 
when I was before the Senate committee, this belief that they 
have the tacit backing of the federal government has given it a 
great deal of leeway.
    And let me give you an example of what I mean.
    If you deal with most commercial bankers, the most that 
they can leverage their money is 11 to 1. The GSEs have been 50 
to 1. That is the advantage.
    And I am saying to you that if it is going to be brought in 
compliance, we must have a strong regulator, and that 
regulator's name might not be OFHEO. It might be something 
else.
    But the point is, I think, really, it needs to be 
regulated.
    And that is not to destroy them; that is to keep them 
strong.
    Mr. Green. I yield back the balance of my time. Thank you.
    The Chairman. The gentleman leads back.
    The gentleman from California, Mr. Miller?
    Mr. Miller of California. Thank you, Mr. Chairman.
    Welcome, Secretaries.
    My question is for Mr. Jackson: Freddie and Fannie are 
chartered to operate in every district across this country, and 
they have a difficult time operating in my area. If you look at 
Hawaii, Alaska, Guam, Virgin Islands, conforming in that area 
is about $539,475. Yet in Hawaii, Honolulu, the medium home 
price is $460,000.
    In Orange County, California, the medium home price is 
$627,500. In L.A. County it is $470,990. Even L.A. County is 
$10,000 higher than Hawaii. And the current limits are 
$359,650.
    How can you ensure the high-cost areas of the country are 
served by conforming loan-limit market?
    Secretary Jackson. I would think that, clearly, we cannot 
have a set conforming loan limit, the same as I have said we 
cannot have a nationwide fair market housing rent. It is 
impossible, because, clearly, the obstacles that you face in 
California are certainly different than what we face in Texas.
    So, therefore, I would say the regulator must have the 
flexibility to work with the specific areas to make sure we 
address those needs. And in your case, it is very, very 
critical that the regulator has that flexibility.
    So I would say absolutely not the same thing as I would say 
with capital. I think the regulator should be flexible.
    And the question was asked, Mr. Chairman, ``Well, how do we 
know the regulator will be prone to do that?"
    Well, I would hope that any regulator that we put there 
would have the expertise and the fairness to look at it, the 
same as the Chairman of the Federal Reserve or the OCC. And 
when we chartered those, we did not know who the persons were 
going to be at that point in time. But they have worked out 
very well.
    And that is the confidence and faith I have in this 
country, that when we look at the new regulator, their job is 
to regulate based on what is best for this country, not what is 
best for an individual.
    Mr. Miller of California. If they are given the discretion 
to adjust limits, what would you envision a process to be?
    Secretary Jackson. I really cannot tell you today.
    Mr. Miller of California. Would you, then, suggest that we 
include high-cost areas in statute? Would that be more 
appropriate? Or would you allow the leeway for them to go to 
high-cost areas and raise it?
    Secretary Jackson. I would say statute-wise, because when 
we are talking about California or New Hampshire or Maine or 
Vermont or Massachusetts, the high-cost might be $550,000 
today, but next year it might be $575,000, and the year after 
that it might be $600,000.
    Mr. Miller of California. But you do believe it has to be 
addressed.
    Secretary Jackson. It has to be addressed, because 
otherwise, we would be doing your constituents a disservice, we 
would be doing the Ranking Member's constituents a disservice. 
I mean, because, clearly, we have a unique situation in both 
places.
    Mr. Miller of California. Would you say that applying to 
FHA currently is $312,895, which nobody in our area can qualify 
for FHA, where that is needed in many cases, and yet applying 
to them also?
    Secretary Jackson. Yes, it clearly is. And we just did it a 
couple of months--well, about 4 or 5 months--in Nevada, because 
we clearly knew we were out of sync.
    Mr. Miller of California. Temporarily I would like to yield 
to Ms. Kelly. She had a question at the last moment.
    Mr. Frank. Well, would the gentlemen yield to me, briefly?
    Mr. Miller of California. After Ms. Kelly, I would love to.
    Mrs. Kelly. Thank you very much, Mr. Miller.
    I just wanted to ask the Secretary: I understand that 
Treasury today has taken a very important step in designating a 
financier of the al-Zarqawi network in Iraq, an individual 
named al-Hiyari. I want to know if you could elaborate a little 
bit on that. I think that people here are interested in it.
    Secretary Snow. Thank you very much, Ms. Kelly.
    Yes, today we have--at about 10:30, while this hearing was 
under way--designated a Zarqawi financier, Mr. al-Hiyari, who 
has been providing support for the Zarqawi network. We did this 
pursuant to the executive order, 13224, which is aimed at 
freezing the assets, designating and freezing the assets, of 
terrorists and their financiers.
    This is one more important step in our efforts. It is the 
third in a series of strikes by the government to undercut the 
foundations of the Zarqawi network.
    This fellow, al-Hiyari, to Mr. Zarqawi two decades almost, 
back to late 1980s, when they met in Afghanistan.
    This is another important step on the part of the United 
States government in taking actions to deal with terrorist 
finance.
    I thank you for the chance to mention that.
    Mrs. Kelly. I congratulate you on taking that step.
    Mr. Miller of California. You are taking my time.
    Mr. Frank, I yield.
    Mr. Frank. Thank you.
    I just wanted to thank the Secretary, first, for the 
graciousness of including my district, and you are right.
    And also just to express my appreciation with answers to 
the gentleman from California on both FHA and Fannie Mae and 
Freddie Mac.
    I think you are right that we can be flexible out there, so 
there ought to approach, and I thank you for that. And I thank 
the gentleman from California----
    Mr. Miller of California. Thank you, Mr. Secretary.
    Mr. Sherman. Mr. Chairman, if I could just say amen.
    The Chairman. The gentleman's time has expired.
    Mr. Frank. I am not sure under the Constitution you can, 
but you go ahead anyway.
    [Laughter.]
    The Chairman. The gentleman's time is expired.
    The gentleman from Massachusetts, Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Gentlemen, I generally do not have a whole lot of specific 
concerns with the bill. I am not terribly thrilled with 
changing some of the proposals that would allow the regulator 
to set policy goals. That bothers me a lot. I think policy 
should be with policy-makers and regulation should be with 
regulators. But that is a specific item that hopefully we can 
work out over time.
    And honestly, I do not disagree with any of the regulator 
items that you have raised. I mean, I like strong regulation. I 
used to think that was Democratic philosophy; I guess now it is 
a Republican one as well, and that is a good thing.
    I have no problem with strengthening the regulators. I 
actually always thought that the regulators that were there had 
the power to do something and chose not to do it for several 
years. That is not a problem with the legislation; that is a 
problem with the individuals who are the regulators.
    And I am particularly of that opinion in the last couple of 
years when the regulators finally did step up and do their job.
    But all that being said, on some levels I do not really 
care where regulators are, I do not really care what you call 
them, I do not care where the chairs on the ship as long as 
they are there.
    But I am concerned about housing markets. And my question 
to you is relative not for the regulation aspect of it but more 
to the scope of allowed activity for the GSEs.
    And, again, not because I am interested in specific scope 
of activities, that is of no concern to me. The only concern I 
have is: What is the impact on mortgage rates.
    And I am specifically starting with mortgage rates for the 
average applicant--and we are now, give or take, I do not know, 
in the 6, 6.5 percent range, if I remember correctly.
    If this legislation were in place and activated in a manner 
that would satisfy you two gentlemen, have you looked at what 
the mortgage rates would be today?
    Secretary Jackson. Congressman, I really do not think that 
it is going to adverse or negatively affect the market.
    I think a few minutes ago I said to you that if we decide--
if the regulator decided to limit the mortgage-backed security 
that the GSEs owned, that would not have a significant effect.
    When people prepay their loans, their mortgages, it would 
just go away, and they could continue to make loans that should 
be made to low-and moderate-income people at the same level.
    We looked at it----
    Mr. Capuano. So you are satisfied that--in general, I am 
not going to hold you to decimal points--that people today 
would be able to walk into their local bank, apply for mortgage 
and get it on the same rates as we have today.
    Secretary Jackson. Because I believe--and I said this 
before your committee before; I think the Ranking Member 
asked--I think that Fannie Mae and Freddie Mac will be very 
competitive.
    Mr. Capuano. Mr. Snow, do you agree with that general 
assessment?
    Secretary Snow. Congressman, I absolutely do. Because 
remember, we are saying that all the liquidity they need to 
carry on their primary mission should be available to them. And 
that is a directive I would urge you to give the directorate of 
this agency, that they be allowed to have all the liquidity 
they need to carry their----
    Mr. Capuano. And I presume that is just not rates but also 
terms as well, because that is just as equally----
    Secretary Snow. This legislation should not adversely 
affect the terms or rates on which mortgages are available.
    Mr. Capuano. Fair enough.
    I would also ask, again, a similar question along the same 
lines. The availability of those loans, as well, to the people 
who are qualifying for those loans. It will not do me any good, 
if the rates stay the same, if my constituents are no longer 
qualified to apply because I do not have sufficient income or 
whatever the changes might be.
    So to me it is rates, it is terms, it is qualifications, 
and I just want to make sure we are clear.
    Secretary Jackson. And we agree with you.
    Mr. Capuano. Thank you.
    I guess the last part of it is, again, I understand fully 
well--I think that the Ranking Member made some good points as 
far as I would love to see Fannie and Freddie and anybody else 
step up to the plate in affordable housing because I think--it 
is not the only thing I focus on. That is why I focused on 
rates for people who do not quality for affordable housing.
    I think it is a whole ladder of housing. But affordable 
housing is part of that ladder.
    And the availability of capital to support affordable 
housing--we can argue about the policies and who should give 
them and everything else--but the capital available, I also 
want to make sure that you feel that this legislation would not 
adversely impact the amount of capital that is on the table 
that is available for those items.
    Secretary Jackson. Congressman Capuano, no, it would not.
    And let me say this to you: Not only do you feel that way 
about affordable housing, President Bush has emphasized to the 
GSEs the importance that they lead the market in carrying out 
their mission. And my responsibility is to make sure that they 
do, and we are doing everything within our power.
    And I must say this, on behalf of the acting chairman at 
Fannie Mae and the Chairman and CEO at Freddie Mac: Over the 
last 12 to 14 months, they have been working very well with us 
to try to address and meet those goals. I think that it is 
finally settled, or they finally realize, that not only is the 
President and the administration serious about this, but 
Congress is serious about it also.
    The Chairman. The gentleman's time has expired.
    Mr. Capuano. Mr. Chairman, I would just like to get Mr. 
Snow's answer to it as far as----
    Secretary Snow. I agree with Secretary Jackson.
    Mr. Capuano. Thank you.
    The Chairman. The gentleman from Texas, Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman. First, I want to 
commend you and Chairman Baker for bringing this very important 
piece of legislation before us today.
    Secretary Jackson, it is good to see you again once again. 
The last time I looked, I think we are enjoying the highest 
rate of homeownership in the entire history of the United 
States of America. So contrary to some opinions, you must be 
doing something right.
    Secretary Jackson. Well, we are enjoying it because the 
President has put in motion the necessary tools for us to 
increase homeownership. We have Congresswoman Katherine Harris, 
who was very, very helpful to us in the American Dream Down 
Payment Act, which helps 40,000 families a year become new 
homeowners, because we can help them with the closing costs and 
down payment.
    And we have a number of other avenues that the President 
has put in place to make sure that low-and moderate-income 
people and middle-income people understand the responsibility 
of being homeowners, and it is working.
    Mr. Hensarling. Thank you, thank you.
    The question I have has to do with what some call ``mission 
creep.'' And one of my colleagues brought up whether or not 
there is a meeting of the minds on regulation between both 
sides of the aisle.
    The concern that I have is that obviously Congress has 
granted the GSEs some very special benefits, but ostensibly the 
quid pro quo is that they use these benefits purely to engage 
in what is their charter-approved activities.
    So in your testimony you speak, I believe previous 
international consulting work that was done by Fannie, third 
party real estate-owned management and services activities. I 
think previously they have engaged in airplane lease 
activities, activities related to loan originations, for 
example, automated underwriting systems.
    We know they are engaged in retail brand-building, because 
you cannot watch the television without seeing one of their 
excellently produced television spots.
    But it would seem to me that all of this would detract from 
what their charter says they are supposed to be doing with 
these government-granted benefits. And I am also concerned 
about the unfair competition, because I believe that indeed the 
consumer's best friend is a competitive marketplace, and if 
they are going to leverage these benefits into non-charter 
activities, it is not a level playing field.
    So my first question is: Is this an ongoing problem with 
the GSEs in seeing new activities that are not specific to 
their charter?
    Secretary Jackson. It has been in the past, but let me say 
this to you: We have taken a firm stand, as I said a few 
minutes ago to another congressperson, that when we see these 
kinds of activities taking place, we are stopping them very 
quickly.
    We believe the same as you do, that they should address 
their mission, and their mission is to provide low-and 
moderate-income secondary mortgage liquidity to the market. And 
that is what we think they should be doing. And when we find 
them doing things that they should not we are going to stop 
them.
    But at the same time, I want to reiterate again, because I 
think that the last 12, 14 months the kind of cooperation that 
we have gotten out of the GSEs is much better, and our 
relationship is much more amiable than it had been before.
    Mr. Hensarling. Well, we have a couple of pieces of 
legislation out there now dealing with new product approval. 
And certainly in the House version of the bill, some might 
argue that there is not as bright a line test between the 
primary and the secondary market, as some might argue would be 
in the Senate language.
    So in your opinion, given that you have had to exercise 
some discretion over new product approval, is the line 
sufficiently bright in the House language for the new regulator 
to get the job done?
    Secretary Jackson. From reading the language that Chairman 
Baker has done, to me it is clear that they delineate between 
the primary and secondary market.
    Now, I have to tell you, the GSEs have--we have had serious 
debate about some of the programs, because they will not call 
them products, ``new programs,'' and they said they are not in 
the primary market. We believe that they were.
    And we are saying now that, clearly, when you look at the 
bill, it says ``activities,'' ``all activities,'' which in this 
case, they will not be able to use the logical argument, 
``Well, this is a program, not a product. This is not a new 
product.''
    So I think, clearly, it will be delineated in the new bill.
    From my understanding, their responsibility is the 
secondary market.
    Mr. Hensarling. In the seconds I may have left, if I could 
switch to Secretary Snow and talk about systemic risk.
    With respect to GSEs' portfolio holdings, I would assume 
they would argue that somehow they are adequately hedging the 
various risks that are involved, the default prepayment 
interest rate. But your concern is, is that most of these 
derivatives are held by perhaps by five or six firms. Can you 
elaborate on the systemic risk that this presents?
    Secretary Snow. Yes, yes, Congressman.
    The systemic risk comes from the fact that so much of the 
GSE paper is out there in the marketplace, held by all sorts of 
financial institutions--insurance companies, pension plans, 
community banks, thrifts, commercial banks.
    And on the derivative side, since they have these large 
portfolios that are subject to down payment and interest risks, 
they have to hedge it. They should hedge it.
    The counterparties to those hedges are concentrated in five 
or six very large financial institutions, and the aggregate 
amount of this hedging is gigantic. The concern is, if 
something unravels, it could cause systemic risk to the whole 
financial system.
    The regulator needs to have the authority to look at 
systemic risks, not just housing soundness and safety but 
systemic risks generally. I think the legislation does that, 
and I think it is awfully important that it stay in the 
legislation.
    The Chairman. The gentleman's time is expired.
    The gentleman from Missouri, Mr. Clay?
    Mr. Clay. Thank you, Mr. Chairman.
    I thank both of the witnesses for being here.
    First, for Secretary Snow: Chairman Greenspan has recently 
argued that the portfolios of the GSEs are too big. He has 
suggested that they may have to be reduced to maybe $100 
billion. Mr. Greenspan has defended higher mortgage interest 
rates as a positive development and that capital would be made 
available to consumers who otherwise cannot get mortgage loans.
    The St. Louis Post Dispatch writes that this is like saying 
the inner-city poor should be thankful for the high interest 
rates because nobody else is providing the service.
    Do you feel the same way, Mr. Secretary?
    Secretary Snow. Congressman, on that issue of the limits 
and how best to approach the limits, I agree that the holdings 
of the mortgage assets should be constrained, should be 
limited, and I think what the Chairman said is that one option 
was to do it through legislation. I do not think he said that 
was the better option.
    We think it needs to be constrained, and I would suggest 
that the appropriate way to do it, as I have suggested, is by 
giving the regulator broad authority against a directive that 
they not hold more than is required.
    Mr. Clay. Well, do you favor a 90 percent reduction in the 
portfolios of the GSEs?
    Secretary Snow. No, I would not put that in legislation, 
but I would allow the regulator, this expert regulator that 
would be created by the statute, to render whatever judgment 
regulator, after due process, felt was appropriate.
    Mr. Clay. Mr. Secretary, do you believe that the inner-city 
poor should be thankful for having to pay higher interest 
rates? Secretary Snow?
    Secretary Snow. I do not think anybody should be thankful 
for having to pay more than a competitive rate for anything.
    Secretary Jackson. That is right.
    Mr. Clay. Okay, just to make you aware. Secretary, thank 
you for your response.
    Secretary Jackson, the St. Louis Post Dispatch also stated 
that the question should not be whether mortgage lending is 
occurring in underserved communities but whether minority 
consumers are being ripped off through unjustifiable, high 
interest rates and fees.
    They also quoted a study by the National Community 
Reinvestment Coalition that says about 29 percent of African 
Americans who bought or refinanced homes last year were stuck 
with high-cost loans compared with about 10 percent of whites.
    Will the change to the GSEs help alleviate this condition? 
And are these disparities in interest rates considered in this 
proposal being advanced in the handling of the GSEs? And will 
the situation worsen? What do you think?
    Secretary Jackson. I cannot tell you about the language in 
the present bill. I can tell you what we are doing at HUD to 
address predatory lending, which is exactly what you are 
speaking in terms of.
    Mr. Clay. Sure.
    Secretary Jackson. We do not condone it. We have been 
absolutely--we have just tremendously been dealing with this 
issue almost since day one, when we got here.
    I just do not believe that in the refinancing process that 
the education of many of the persons who are doing the 
refinancing, or buying their first home, has been very, very 
good. That is why that when we came in here, came to office, 
there was $8 million being spent on counseling; today we are 
spending $45 million to work with people so, Congressman Clay, 
we will not have that situation.
    That is appalling. I read the study, and it is not a good 
study. I have talked to the people in Planning, Development and 
Research to come up with a solution how HUD can better curtail 
what has been occurring.
    Secretary Snow. Since I am running out of time here--as we 
emphasize reducing the size of the portfolio held by the GSEs, 
has anyone measured the positive effect that Fannie Mae and 
Freddie Mac have had on increasing minority homeownership 
through their programs and through their influence on the 
entire industry regarding minority homeownership.
    And then what happens now? We are basically changing the 
mission of these GSEs.
    Secretary Jackson. We are not changing the missions.
    Let me say this to you, Congressman. Though, I do not want 
in any way contradict you, but Fannie does not have a sparkling 
record of addressing first-time minority homebuyers. It has a 
dismal record compared to the other industry.
    If you look at the other commercial banks, there are many 
of them that are doing much better addressing minority 
homeownership than Fannie Mae and Freddie Mac.
    Now, we have been working with them and we will continue to 
work with them, but I do not want you to be under any illusion 
that they have been leading the market, they have been even 
coming close to leading the market in the process. They have 
not been. And that is one of the criticisms that we have had 
with Fannie.
    Mr. Clay. Well, don't you think we pretty much brought them 
all along kicking and screaming?
    Secretary Jackson. No, I can tell you some of the 
commercial banks are not kicking and screaming.
    Mr. Clay. The results of this study, Mr. Secretary----
    Secretary Jackson. I am telling you some of the commercial 
banks are not----
    Mr. Clay. Do you want to name some?
    Secretary Jackson. No, I am not going to name any today.
    Mr. Baker. [Presiding.] The gentleman's time has expired.
    Mr. Clay. Thank you, Mr. Secretary.
    Mr. Baker. Thank you, Mr. Clay.
    Mr. Garrett?
    Mr. Garrett. Thank you, Mr. Chairman.
    And thank you, Secretary Snow and Secretary Jackson as 
well.
    I am pleased today that some of my colleagues agree with 
myself and also with Chairman Greenspan, as one of the main 
focuses of our debate here should be to dealing with first and 
foremost the rapid growth of the portfolio of these entities, 
and also as Mr. Hensarling just mentioned, also the issue of 
mission creep as well.
    Chairman Greenspan has previously testified here that the 
limitation or the slowdown in the portfolio size should occur 
over a period of time, and you have already, Secretary Jackson, 
addressed that issue, doing payback and what have you.
    Is this something that we need to look at over a long 
period of time? Or could we simply look at it today to say that 
they have no role for them to have this portfolio of this size 
and that we could simply say that they should stop immediately 
adding to the portfolio and let the rest of it simply pay 
itself off over a short period of time?
    Secretary Snow. Congressman, that is sort of the approach 
implicit, I think, in the legislation.
    Secretary Jackson. Right.
    Secretary Snow. And over some fairly short period of time, 
if they are not adding to the portfolio--which I think would be 
the policy implicit in the statute that you are looking at then 
the portfolio would wind down. And it should wind down to a 
level that is consistent with achieving the statutory purpose, 
giving them the liquidity they need from these instruments to 
serve their underlying statutory purpose----
    Mr. Garrett. And no more, though.
    Secretary Snow. And no more, because I agree with you: The 
real issue here is the rapid growth of the portfolios.
    Mr. Garrett. Right, and Secretary Snow, you had indicated 
that, to put it one way, size does matter as being the main 
problem as far as the interest rate risk as far as portfolio 
size.
    And if you look at some of the numbers at the end of last 
year, you were looking at $757 billion in derivatives, that was 
more than the $732 debt that they held.
    We have to look a ways back to get any financials out of 
them, of course, to see what they say. But if you go back to 
June of last year, they were looking at a trillion dollars in 
derivatives, again in excess of the $940 billion in debt that 
they had at that period of time. So size is certainly an 
element here.
    But I would suggest that in addition to the size aspect, 
even if they were to bring it down to a certain element of size 
to it, is not there an aspect of this that they have been 
engaging in cherry-picking?
    And in the portfolio that they have engaged in, keeping the 
better risk, from their point of view, as far as their 
stockholders are concerned, by keeping those who are not 
prepaying, which for the short-term benefits them and benefits 
the stockholders, because it adds to the bottom line because 
you do not have the prepay, but for the taxpayers, we are put 
on the risk because that there is a greater interest rate risk 
at that point of time.
    And then what happens is--and you can comment on this--is 
that you shift the bad risks over to those securities that are 
over at the other side of the table where they are securitizing 
them, and by doing so, that you are adding a premium to those 
securities, and that that has added to the cost to the 
consumers.
    So in essence, they are cherry-picking, benefiting their 
bottom line, benefiting their stockholders, benefiting their 
profit line, hurting the taxpayer, and also--and this goes to 
the question, that is why I bring it up, it was just said on 
the other side--that if we do not do something, that they will 
continue to add this premium to the other side of the 
securitization.
    Secretary Snow. Congressman, the fundamental problem is 
that the dynamics of the business therein, structured as it is 
with the implied guarantee, creates an incentive for these 
entities to continue to buy paper, market-priced paper, because 
any market-priced paper they buy other than treasuries is a 
good arbitrage.
    Any, that they buy, any interest rate instrument they buy, 
creates an opportunity for above-market rate of return, because 
their borrowing costs are low relative to the returns on that 
paper, except for one instrument: that is treasuries.
    That is why we think that for liquidity needs, their focus 
ought to be on treasuries to deal with the systemic risk.
    Mr. Garrett. I appreciate that.
    And perhaps Secretary Jackson could address the point.
    But what they are doing, though, is by the other side of 
the equation, is that the risk that they are putting into the 
securitization aspect of it are these risks that do have the 
earlier pre-payback basis to them. So those people who are then 
in the market that are buying those securities know that this 
is not as good a risk as the risk that they are holding, and 
therefore there is a premium added to that.
    Secretary Jackson. That is correct.
    Mr. Garrett. And that goes to the question that was raised 
over here: Is not this bad for the consumer, what they are 
doing? No matter what level of securities they are holding in 
their portfolio, if they are allowed to continue to cherry-pick 
that portfolio, this is bad for the consumer.
    Secretary Jackson. Yes, sir.
    Mr. Garrett. The other aspect to this--Mr. Hensarling got 
to the aspect of secondary markets and primary markets, and I 
guess you are addressing this, saying this is going to be 
addressed in the legislation.
    I would just close by saying the administration has 
certainly said that we should be looking towards a more 
competitive and private sector approach to all this, and of 
course you have already said, Secretary Jackson, the private 
sector is doing a better job.
    Can we look to you to come back to us with additional 
avenues that we could go to the private sector to encourage 
them to be able to compete on a fair, level playing field in 
this market?
    Mr. Baker. And that has to be the gentleman's last 
question.
    Secretary Jackson. Yes, I will be happy to do that for you.
    Mr. Baker. I thank the gentleman. His time has expired.
    Mr. Cleaver? No questions?
    Mr. Davis is not here.
    Ms. Harris?
    Ms. Harris. Thank you, Mr. Chairman. Thank you for holding 
this important hearing.
    To our speakers, thank you for being here and for all your 
important answers.
    I would like to address three quick questions to Secretary 
Jackson.
    Fannie and Freddie are playing critical roles as the 
administration strives to increase the rate of homeownership in 
low and moderate households. And I appreciate all of your 
efforts and all the great ideas. You have worked with me and 
our district so closely.
    But achieving this goal is going to require Fannie Mae and 
Freddie Mac to develop programs for these underserved markets. 
And I share concerns with the gentleman from Massachusetts when 
we ask what measures that Congress can undertake to ensure that 
this mission remains their central objective--first quick 
question.
    Secretary Jackson. We have put in place housing goals that 
are measurable, both for the primary and secondary market--and 
I do not mean in the sense that it is primary or secondary. But 
we have three specific goals that deal with the different 
sectors of society, with low-and moderate-income communities, 
low-and moderate-income households, and we measure those goals.
    And I think that sitting through with Fannie and Freddie 
over the last year, we made some adjustments, and we think that 
those goals can be met. And we are meeting with them 
periodically to make sure that those goals are being met.
    Ms. Harris. We are desperate in our region for affordable 
housing when we read that affordable housing is a $290,000 
home. So obviously, our first responders, teachers, everyone 
needs that type of opportunity.
    But as you are increasing these housing goals for both 
Fannie and Freddie, is not it going to force the GSEs to engage 
in a little bit more risky opportunities? And don't you think 
there should be some sensitivities as to how that impacts their 
safety and soundness?
    And don't you think it makes more sense that there would be 
one authority that would be governing or weighing those two 
conflicting issues, one against the other, so there is that 
kind of accountability as we move forward?
    Secretary Jackson. Let me say this to you: I have heard 
before that if we stress that they meet the housing goals 
serving the low and moderate market that it is going to affect 
their abilities.
    Well, I will just pose a question as I posed a year ago: 
What affected their abilities to carry out their 
responsibilities more than those derivatives? That is affected 
their abilities, not serving low-and moderate-income people.
    And if you notice today, Fannie and Freddie are not making 
that argument to you all again. They made it a little over a 
year ago, but that is not an argument they are making. We 
worked through it, and I think they will be able to do it. And 
they can still serve the high-end and the middle market just as 
well.
    Ms. Harris. I am extremely interested in the low and 
moderate, that there are affordable opportunities.
    Concerning the bright line, the mortgage brokers have 
approached me. I really would like to know kind of what you 
believe is the intent of that.
    In my discussions, it is clear that there are distinctions 
between the primary and secondary markets. But they are 
concerned that there will be a negative impact on their ability 
to provide these kind of immediate services for eligibility.
    They believe that those loan creations are going to really 
fall more closely in the hands of the large banks, and right 
now that could extend the time frame up to 90 days in terms of 
loan approval, which would be devastating to our housing 
markets.
    They still believe that they are the most efficient 
delivery of services, and so consequently, I just really do not 
understand that intent. They feel they will be precluded from 
those loan originations, and that efficiency would be 
devastated.
    Secretary Jackson. You know, Congresswoman, I really cannot 
answer that specifically, but it would seem to me that 
competition is absolutely good. And the only thing that I see 
in Chairman Baker's bill is he is saying: We are going to 
delineate what the GSEs' responsibilities are between the 
primary and secondary market.
    I just think that the competition will be there, and they 
will still be able to serve the market. And I could be wrong, 
but I do not think I am.
    Ms. Harris. We will have further discussions with the 
Chairman. I am sure he can help us out with those answers.
    Thank you.
    Secretary Jackson. Thank you.
    Ms. Harris. One quick question for Secretary Snow: The 
demand for the GSE to create in the market more mortgage--they 
always say that the more mortgages, that that will help drive 
down the mortgage costs. And have you taken a look or are there 
any studies that determine what the impact on mortgage rates 
would be if the hard cap were enacted?
    Secretary Snow. If what?
    Ms. Harris. The more mortgages that exist, the more 
competitive, how it drives down the mortgage rates. So if a 
hard cap is enacted, is that going to lessen the amount of 
mortgages?
    Secretary Snow. I think I can say without much fear of 
contradiction here that all the evidence and all the theory 
suggests that limiting their holdings of mortgages, as we 
suggest, or of mortgage assets, as we have suggested, will have 
little or no effect on the mortgage rates. Because, remember, 
our focus is to say they should hold what they need but no more 
to have the liquidity to pursue their primary purpose.
    So we would allow them to hold what they need, as 
determined by the regulator, to have the liquidity to make that 
secondary market. So they would continue to play the large and 
significant role in the secondary market they play today.
    In fact, they might begin to play a larger role, because 
now, rather than making money off the arbitrage in their 
portfolio, taking their low borrowing costs and then buying 
other market-based paper, they would have an incentive to focus 
on their primary mission: making the secondary market.
    Mr. Baker. The gentlelady's time has expired. I thank the 
gentlelady.
    Mr. Paul?
    Mr. Paul. Thank you, Mr. Chairman.
    I have a question for Secretary Snow.
    You know, there is a free market axiom that says that when 
government intervenes in the market, they sometimes solve the 
problem and sometimes they do not. But they inevitably create 
two new problems which requires two more regulations. And I 
happen to believe that.
    And the gentleman on the other side of the aisle earlier 
mentioned that he thought that the Democrats were the good 
regulators, but he was very pleased to know that we have joined 
the crowd and that now we are the regulators.
    And that suggests to me that the problem we face with the 
GSEs is that we believe that it is come about because of lack 
of regulation, and all of a sudden, if we have more 
regulations, we are going to solve our problems. And I think it 
is much deeper than that.
    You mentioned that the--and I think everybody has conceded 
here that the size of the holdings is a significant problem, 
and it introduces the notion of risk. And I would agree with 
that. But nobody seems to be asking the question: Why are they 
so large?
    You know, we are dealing with--this to me is somewhat like 
thinking back in January of 2000, and there were many who 
predicted that there was a Nasdaq bubble. And they said, 
``Well, we have a Nasdaq bubble, and we are going to have a 
collapse, and we need to do something about it, we need to 
regulate it so that we do not have a collapse,'' which the 
bubble was already there.
    And if we have the distortions built into the system, 
regulations may even help precipitate a major crisis or a major 
change if we do not look at it.
    And I would suggest that there are two major reasons why we 
have this huge size of the holdings of the Fannie Mae and 
Freddie Macs, and that is, one, it deals with Federal Reserve 
policy that makes credit easy, interests rates low, it causes 
the speculations the same as it has in stock markets in the 
past.
    And of course, I know you are not in charge of interest 
rates, and we cannot deal with that, but we have a line of 
credit to the Fed and to the treasury, which you mention in 
your written report, that it is not a guarantee, it is only a 
perception. But markets' perceptions are just about everything 
on the short run because they are anticipating what the 
benefits are.
    So I would say that if that is part of it, why do not we 
deal with that and move toward a market, and say, ``Why do not 
we limit that or get rid of it?'' because that helps to build 
these giant holdings.
    And I think that, to me, would be so much more important 
than waiting for the day--interest rates may be controlled by 
the Fed on the short run and in the short term, but ultimately 
the market overtakes.
    And we are dealing with a major problem with the dollar. If 
the dollar goes down, which many people predict it will, 
especially with our current account deficit, we are going to 
see rising interest rates. And if there truly is a bubble--as 
those who have predicted correctly about the bubble in the 
Nasdaq--if it is there, I think we face a lot more serious 
problems than just dealing with a few more new regulations and 
think we are going to solve it.
    If you would comment, please?
    Secretary Snow. Yes, I will be happy to.
    You asked, why the rapid growth? I think that the single 
most important factor in the rapid growth of these portfolios 
is the fact that beginning about 1990 or so, the entities 
decided that there was a very sizable profit to be made from 
simply arbitraging their lower borrowing costs against holding 
other market-priced paper, and, in effect, became in many ways 
like a hedge fund simply arbitraging a cost advantage in one 
market to get higher returns in another.
    And you are absolutely right, Congressman Paul, that the 
problem here is the growth of these portfolios. And our concern 
is, without a strong regulator, there will be ineluctable 
pressures here for that portfolio to grow and grow and grow and 
grow, because the incentives are so large when you can borrow 
at a rate lower than anybody else and then invest in another 
market, in any market-priced paper, and make a large profit.
    That just creates huge incentives to continue to take out 
loans and then turn around and buy the mortgages and the 
mortgage-backed securities.
    Mr. Paul. Does that mean that you would be sympathetic to 
removing that benefit they have, this line of credit to the 
treasury, as Alan Greenspan has suggested?
    Secretary Snow. Congressman, yes. In my testimony, I said 
we would only use that line of credit in furtherance of a 
receivership where it might serve a useful purpose. But other 
than that, absolutely.
    Mr. Paul. Thank you.
    Mr. Baker. Let me make an announcement for the benefit of 
members. Secretary Snow has informed me of a need to depart 
here by 12:30. I do have three members in regular order who 
would be recognized. I know others have an interest in a second 
round, but we are going to proceed in regular order--Mr. Davis, 
you are next--and I will try to enforce the five-minute rule to 
make sure all members get recognized.
    Mr. Davis?
    Mr. Davis of Kentucky. Thank you, Mr. Chairman.
    First of all, I want to commend you and Chairman Oxley and 
the Ranking Member on bringing this bill forward to introduce 
the Federal Housing Finance Agency. I think it is important 
that we restore credibility to our government agencies and 
trust in them.
    My question is for Secretary Jackson, kind of a follow-on 
to Congressman Hensarling's questions earlier, two points 
around that.
    The proposed regulatory authority I think has the much 
needed just common sense guidelines in terms of authority to 
set minimum and risk-based capital levels, approving new 
programs, placing failed GSEs in receivership, which I think is 
an important statutory authority, among other things.
    And one question is, we have talked about primary and 
secondary market operations so that I am curious. The 
administration has been very forthright, very pro-small 
business community development, encouraging homeownership in 
many ways. You and I have had some discussions on this as well.
    Secretary Jackson. That is right.
    Mr. Davis of Kentucky. And I guess my first question would 
be: Do you believe that the new agency should define what are 
primary and what are secondary market operations in order to, 
you know, better understand the types of programs that should 
be permitted and what should not, to avoid the type of snowball 
effect that we had with Fannie Mae?
    Secretary Jackson. Yes, I do. I do believe that that is 
important, and having briefly read over the legislation that is 
put forth by Chairman Baker, I think that makes a good 
delineation of what is primary and what is secondary.
    Mr. Davis of Kentucky. I guess my follow-on to that: Since 
you all have advocated these very open market policies and the 
idea of less regulatory intrusion, do you think that it would 
follow logically that you would want to curtail the 
encroachment of government-sponsored enterprises into the 
private sector to the detriment of businesses from the 
standpoint they do not enjoy some of these special governmental 
privileges?
    Secretary Jackson. I think they should be put in a position 
where they have to compete.
    It is clear to me, Congressman Davis, that if you get an 
allocation from the treasury, and 33 to 35 percent of it goes 
directly to your shareholders, and then the other portion is 
used exactly as Secretary Snow said, to buy down loans at a 
lower price and sell off the others, it does give you an 
advantage, there is just no question about it.
    And I think that if they are forced to compete in the 
market with a strong regulator saying that ``This is the way 
you are going to operate,'' yes, I think the competition will 
still be there. But at the same time, it will not diminish 
their ability to carry out their charter.
    Mr. Davis of Kentucky. I appreciate that.
    The concern I have had is that, particularly knowing Dave 
Hehman, who is the CEO of the Federal Home Loan Bank in our 
region, in the Cincinnati region, the home loan banks run a 
totally different operation.
    Secretary Jackson. Absolutely.
    Mr. Davis of Kentucky. They tremendously serve the market 
sector. In fact, Mr. Hehman is actively involved in urban 
housing initiatives to get working families into housing. It is 
a much more true and friendly face of compassionate 
conservatism, I think, in terms of involvement in the trenches.
    And my bigger concern is making sure that they compete 
openly and fairly and serve a specific market sector, but to 
make sure that the other GSEs toe the line and are good 
stewards of our taxpayer dollars.
    Secretary Jackson. And let me say this: The Federal Home 
Loan Banks have a regulator, and he can make the necessary 
adjustments, and you can see it right now in a number of the 
Federal Home Loan Bank boards, which is quite different than 
the other two GSEs.
    And the other thing, as I said a few minutes ago, with him 
setting aside the affordable housing goals, they have done a 
very excellent job in making sure that they are carrying out 
that, which was not initially part of their mission.
    Mr. Davis of Kentucky. Thank you very much, Mr. Secretary.
    I yield back my time.
    Mr. Baker. I thank the gentleman.
    Mr. Ney?
    Mr. Ney. Thank you, Mr. Chairman.
    Because my time is limited, I just want to get a couple of 
major questions in. So I am not going to cut you off on certain 
things, but I want to just try to get as much in as possible.
    A lot of people are suggesting, or some, that there should 
be a bright line between the primary and secondary mortgage 
markets?
    This is for Secretary Jackson.
    Do you support this? And if so, should Congress or the 
regulator define the bright line?
    Secretary Jackson. Yes, I do support it. And I think that 
clearly it should be defined, in my mind, in the legislation, 
because we have tried in many cases to deal with the situation, 
as you know, between new products and new programs, and that 
has been a very difficult process.
    Mr. Ney. So do you think this should be part of the program 
approval?
    Secretary Jackson. I think in this present legislation, it 
is within the legislation introduced by Chairman Baker.
    Mr. Ney. Something I found surprising with your testimony--
and this has nothing to do with you personally as Secretary 
reversing any position, but it is a position reversal, which I 
am not saying is bad in my mind, from previous, probably a year 
ago--but you mentioned in your testimony that HUD's expertise 
in developing and enforcing the housing goals makes it 
appropriate for the department to retain the authority to set 
the affordable housing goals.
    I think before, it was going to be moved from the 
department--this is prior to your being Secretary--but it was 
going to be moved from the department. What changed everybody's 
mind? I am just curious.
    Secretary Jackson. Well, I think if you look at the last 12 
to 14 months where HUD has really asserted its authority, and 
we have had to work with the GSEs, and they realized for the 
first time that we were serious about meeting our--well, I will 
not say the first time--that we were serious about having them 
meet the housing goals.
    It was clear we have the expertise, and we utilized the 
expertise in the way that it should have been utilized for a 
number of years. And therefore, I still think that we are the 
appropriate place that it should.
    Mr. Ney. If this legislation passes, then, do you view that 
HUD will have to go through a different type of process to 
establish new goals? Or will a lot of it stay as it is? I mean, 
do you have any, not details, say, but any ideas about that?
    Secretary Jackson. The present way that Chairman Baker's 
proposal is put, we are not involved at all. I mean, that would 
be clearly within the independent regulator, and we would, for 
transitional purposes I would think, give them all the 
information that is necessary.
    Mr. Ney. We know safety and soundness is important, and we 
have to have a good regulator so that some of the past problems 
are avoided. One of the questions--how does it go together? In 
other words, you have a mission. How do we make sure we have 
standards and regulations in place, safety standards and 
mission, and how do we do it without risking damage to the 
markets?
    Secretary Jackson. We are doing it now. I mean, we have the 
HUD mission, the fair housing goals, and OFHEO is making sure 
that in essence the safety and soundness is done. I think that 
if you work together, it can be done.
    Others would say, ``Why do not we have it in one specific 
place, housed?'' as the Chairman has said. I am convinced that 
that would work too. It would take some time. And let me say 
this to you: That is my only concern, is if all aspects are in 
one place and we are trying to regulate the GSEs----
    Mr. Ney. I guess if you have separate--my question would 
be, if you have separate regulators, would that cause a 
problem?
    Secretary Jackson. No, it does not, from my perspective.
    Mr. Ney. Okay.
    My yellow light is on, so I wanted to just make a note as I 
close here, and it is on manufactured housing.
    I have been, for 10 years, onto this issue. We have talked 
with you and we have appreciated you talking with us. But in 
manufactured housing, I think there has been a reluctance to 
the bureaucracy, there has been problems, and, you know, there 
is not one fit for people in housing in one particular area. 
There is urban centers, and you know the whole story of 
housing.
    So I do hope down the line we can continue to, you know, 
make things go decently with manufactured housing, walk through 
some of the problems that are out there, and just even when it 
comes to, you know, some of the ways that--there was a 
bureaucracy that was tough to get even some of the units 
approved.
    This has been endemic for quite a few years, and I just 
want to mention it. I think it is a problem, and I know Mr. 
Frank spoke on it earlier, and I just want to continue to 
stress that we need to, you know, work with that issue.
    Thank you, Mr. Chairman.
    Mr. Baker. The gentleman's time has expired.
    Mr. Bachus?
    Mr. Bachus. Thank you.
    This question is for Secretary Snow.
    Secretary Snow, I am sure I am just like anybody else, if I 
go out to get a mortgage, if I buy a new house or refinance, I 
am going to look for the cheapest rate, cheapest interest rate. 
You know, if I can get something for an eighth of a point less 
in someplace else, that is where I am going to go. So if you 
can offer a lower interest rate, you have a tremendous 
advantage in the market.
    Now, having said that, the GSEs charge loan originators, 
mortgage companies, a G-fee, guarantee fee.
    Secretary Snow. Right.
    Mr. Bachus. And that determines to a large extent, I mean, 
to some extent, exactly what interest rate they can charge the 
public or mortgage company.
    Now, I understand that these G-fees are not set on how safe 
or sound a mortgage is, like an 80 percent mortgage or a 90 
percent mortgage; it is based on volume. And what they do is, 
they negotiate in private confidential agreements with mortgage 
originators, and they charge some one fee, they charge others 
other fees. And I understand that that can vary by as much as 
15 percent. Obviously, the more volume you do, the lower fee 
you get.
    And I am not sure I think this is good public policy for a 
government-sponsored entity, because it obviously favors your 
biggest mortgage companies, and it puts your smaller mortgage 
companies or your local mortgage companies at a disadvantage.
    So my questions to you is, I guess number one, what they 
charge companies, since it is a government-sponsored entity, 
should it be made public where the public can scrutinize that? 
Because it can be a tremendous advantage. And it is my 
understanding that some mortgage companies, some of the smaller 
ones, are being charged 15, 20 basis points more. So I would 
just like you to comment on that.
    And Secretary Jackson, if you would also like to comment.
    But we want to promote competition, and we also want to 
promote a level playing field in any government-sponsored 
entity.
    Secretary Snow. Well, this is really a subject that 
Secretary Jackson knows a lot more about than I do.
    I would say two things: It certainly is an issue that I 
think deserves consideration and review and monitoring and so 
on. How best to do that, I would leave to you, Congressman.
    But as you do it, you also want to make sure that we do not 
interfere with whatever appropriate economics are at play that 
create those differentials, because there probably are some 
lower costs associated with large bundling that justify 
somewhat lower rates on just a market cost basis. But clearly 
it should not be beyond that.
    And that certainly seems to me to be something that ought 
to be subject to being monitored and looked at and followed up 
on, but Secretary Jackson----
    Secretary Jackson. Congressman, I would echo exactly what 
Senator Snow said--senator----
    Secretary Snow. You promoted me.
    Secretary Jackson.--Secretary Snow--quite a Freudian slip--
has said.
    I think you will have to address the issue.
    We really cannot address it at HUD because they do not 
report to us. We have no knowledge of how that system works. We 
can tell you how our system works at FHA and Ginnie Mae.
    It is clear, we set a standard, and we abide by those 
standards, and they are public knowledge.
    I think you will have to make the decision as to whether 
they are public knowledge.
    Now, as you know, I think you raised the question because 
there has been great criticism in areas, especially about those 
who are not large institutions dealing with the two. And in 
many cases, it has been said that that is why they have not 
been able to address the low and moderate market because of 
that situation, because the smaller institutions usually are 
the ones who are addressing the marginal people we were talking 
about earlier with the Ranking Member.
    But we have no way of knowing how they set the system.
    Mr. Bachus. Well, you know, that is one thing that I sort 
of disagree with. If you are going to have a government-
sponsored entity that securitizes loans, the public ought to 
know. And they are charging different people different guaranty 
fees, different rates, and when these rates can amount to 15, 
20 basis points, that is a big difference.
    Secretary Jackson. Yes, it is.
    Mr. Bachus. It is a competitive advantage. So they could be 
showing favoritism.
    So, number one, I think as a public policy they ought to 
reveal their guarantee rates; and number two, I think that it 
is a guarantee rate that the mortgage will be paid, that they 
will not lose their money. It ought to be based on credit-
worthiness of the mortgages as opposed to volume.
    And I think there is a strong right to know by the public.
    The second question is this----
    Mr. Baker. The gentleman's time has expired.
    Mr. Bachus. Okay, thank you.
    Mr. Baker. I appreciate the gentleman.
    I want to recognize Mr. Cleaver for his question.
    Mr. Cleaver. This is a question for both of you. It is one 
simple question, although the history of the world will change 
based on what your answer is.
    [Laughter.]
    And it is very important.
    A lot of people are saying, ``Well, you know, we do not 
want to throw out the baby with the bathwater.'' I am not 
there. I think that, you know, what we need to do is probably 
just bathe the baby and not adopt a new baby.
    My concern is that--well, let me ask the question: Are 
either of you experiencing, even slight discomfort, with the 
fact that if all these changes are in fact brought about, that 
we are making major changes to the GSEs and that we are not in 
any way going to damage their ability to continue to bring new 
homeowners across the length and breadth of this country? Do 
you have perfect calmness in your spirit over what we are 
doing?
    Secretary Jackson. I do, because, Congressman, I believe 
that it is in our best interests that we keep the three GSEs 
healthy for this economy. If we do not, then it presents a 
serious problem.
    So I would be remiss and I think the administration would 
be remiss to support anything that would be causing of the 
demise of these GSEs. That is not what we are saying.
    We are saying strengthen them, but at the same time, take 
some of the risk that they have afforded us out of their hands.
    Secretary Snow. Congressman, I would agree with Secretary 
Jackson and say without any hesitancy that the actions that are 
being proposed in the legislation will strengthen the mortgage 
markets, will remove risks that otherwise could be there, and 
therefore lead to, in my view, much healthier markets long term 
for mortgages.
    Mr. Cleaver. We are recording that for history.
    Thank you, Mr. Chairman.
    Mr. Baker. I thank the gentleman.
    I believe that is the last person who is here to be 
recognized for questions.
    I wish to, on behalf of Chairman Oxley, express our deep 
appreciation to Secretary Jackson and Secretary Snow, not only 
for your participation but for your lengthy commitment to get 
resolution on this important public policy matter. We are 
indeed appreciative of your leadership.
    Our meeting stands adjourned.
    Secretary Snow. Thank you very much.
    Secretary Jackson. Thank you very much.
    [Whereupon, at 12:35 p.m., the committee was adjourned.]





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                             April 13, 2005



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