[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
GSE REFORM AND THE FEDERAL
HOME LOAN BANK SYSTEM
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 9, 2005
__________
Printed for the use of the Committee on Financial Services
Serial No. 109-6
U.S. GOVERNMENT PRINTING OFFICE
23-733 WASHINGTON : 2005
_____________________________________________________________________________
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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
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York DENNIS MOORE, Kansas
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
EDWARD R. ROYCE, California RUBEN HINOJOSA, Texas
SUE W. KELLY, New York JOSEPH CROWLEY, New York
ROBERT W. NEY, Ohio STEVE ISRAEL, New York
VITO FOSSELLA, New York, WM. LACY CLAY, Missouri
JUDY BIGGERT, Illinois CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MARK R. KENNEDY, Minnesota JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
J. GRESHAM BARRETT, South Carolina BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida DAVID SCOTT, Georgia
TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York
JIM GERLACH, Pennsylvania MELVIN L. WATT, North Carolina
KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama
JEB HENSARLING, Texas MELISSA L. BEAN, Illinois
RICK RENZI, Arizona DEBBIE WASSERMAN SCHULTZ, Florida
GEOFF DAVIS, Kentucky BARNEY FRANK, Massachusetts
MICHAEL G. FITZPATRICK,
Pennsylvania
MICHAEL G. OXLEY, Ohio
C O N T E N T S
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Page
Hearing held on:
March 9, 2005................................................ 1
Appendix:
March 9, 2005................................................ 45
WITNESSES
Wednesday, March 9, 2005
Conners, Joseph F., Executive Vice President and Chief Financial
Officer, Beneficial Savings Bank............................... 38
Hehman, David H., President and Chief Executive Officer, Federal
Home Loan Bank of Cincinnati................................... 32
Meyer, F. Weller, President and Chief Executive Officer, Acacia
Federal Savings Bank........................................... 34
Miller, Jan, President and Chief Executive Officer, Wainwright
Bank........................................................... 36
Rosenfeld, Hon. Ronald A., Chairman, Federal Housing Finance
Board.......................................................... 8
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 46
Gillmor, Hon. Paul E......................................... 48
Hinojosa, Hon. Ruben......................................... 49
Kanjorski, Hon. Paul E....................................... 50
Royce, Hon. Edward R......................................... 52
Velazquez, Hon. Nydia M...................................... 53
Conners, Joseph F............................................ 54
Hehman, David H.............................................. 67
Meyer, F. Weller............................................. 76
Miller, Jan.................................................. 83
Rosenfeld, Hon. Ronald A..................................... 89
Additional Material Submitted for the Record
Rosenfeld, Hon. Ronald A.:
Written response to questions from Members of Congress....... 94
GSE REFORM AND THE FEDERAL
HOME LOAN BANK SYSTEM
----------
Wednesday, March 9, 2005
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance
and Government Sponsored Enterprises
Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in
Room 2128, Rayburn House Office Building, Hon. Richard Baker
[chairman of the subcommittee] presiding.
Present: Representatives Baker, Gillmor, Castle, Royce,
Kelly, Biggert, Miller of California, Kennedy, Barrett, Feeney,
Davis of Kentucky, Fitzpatrick, Kanjorski, Meeks, Frank, Baca,
Scott, Velazquez, Watt, Davis of Alabama, Wasserman Schultz,
and Maloney.
Chairman Baker. [Presiding.] I would like to call this
meeting of the Committee on Capital Markets to order this
morning.
The subcommittee meets today for the purpose of receipt of
testimony on the current regulatory oversight of the Federal
Home Loan Bank System and the appropriateness of examining and
consideration of modifications in light of pending reform to
government-sponsored enterprise regulations.
The bank system was established in 1932 to help facilitate
liquidity for the extension of credit for the purchase of homes
by individuals. Today, the bank system is composed of 12
separate districts with approximately 8,000 members in the
system and is enjoying a growth in its programmatic and
financial activities as a result of several legislative changes
throughout the years, principally the Modernization Act in
1999.
Of continuing interest to members of the committee is the
relationship between the bank system and the taxpayers and the
balancing of its social charter. The Secretary of the Treasury
under certain limited conditions is authorized to extend up to
$4 billion of credit to the system in the case of financial
reversal.
What is interesting to note, as we have seen the
disclosures relative to Fannie Mae and Freddie Mac, which much
of the national news attention has been given, is that similar
growth patterns exist among all GSEs. Although the bank system
today holds about $115 billion of mortgages, not necessarily
that significant as contrasted with Fannie or Freddie, equaling
about 7 percent of their $1.6 trillion currently held, the rate
of growth has been significant and the amount of debt issuances
is at $774 billion, while Fannie at $976 billion and Freddie at
$757 billion.
So the system itself has great potential for growth, and is
it the question of the committee whether the authorities
granted to the system and the required programmatic activities
are sufficiently being met in light of the significant growth,
and whether in the current debate over GSE reform significant
attention should be given to bank system activities and the
adequacy of the current regulatory structure.
I wish to point out to the bank system's credit, I believe,
that their EDP Program, the Economic Development Program, the
Community Investment Program, CIP Program, and others are
significant assets to local communities, and with the expansion
of the appropriate, to include small business lending and
agricultural, there is the potential for the bank system to
provide meaningful service to communities that frankly is not
available anywhere else, particularly for the small bank, or
the community bank as they are typically called, who tends to
be more of a portfolio lender holding the obligation in their
own institution.
This is a credit window allowing significant cost advantage
for product and significant length of term, which makes it a
very attractive facilitator for the extension of credit to
small growth in rural communities.
For that reason, I am very much of an advocate of the
system but do look forward to hearing from our witnesses today
as to their perspectives on the adequacy of our current
regulatory structure.
With that, I recognize Mr. Kanjorski for an opening
statement.
Mr. Kanjorski. Thank you, Mr. Chairman.
We meet today to discuss the regulation of the Federal Home
Loan Banks. As you know, Mr. Chairman, I share your deep
interest in these important financial institutions. After all,
we worked closely together for several years to include
language to reform the Federal Home Loan Banks during our
deliberations over the 1999 law to modernize the financial
services industry.
Among other things, these reforms strengthened the
corporate governance of the Federal Home Loan Banks, updated
their capital structure and established voluntary membership on
equal terms and conditions for all eligible institutions. They
also expanded access to the system for small community
financial institutions. The changes additionally have helped to
pave the way for enhanced targeted economic development
lending.
Although some of my colleagues may think the issue is a new
one, we have debated how to best regulate the Federal Home Loan
Banks for a number of years. Like the regulation of Fannie Mae
and Freddie Mac, my goal has been to ensure that we have
strong, world-class and independent regulation for the Federal
Home Loan Banks.
The current safety and soundness regulation of the Federal
Home Loan Banks is actually better than that of the other
government-sponsored enterprises. The Federal Housing Finance
Board, unlike the Office of Federal Housing Enterprise
Oversight, is funded outside of the congressional
appropriations process. In addition, a previous survey by the
Government Accounting Office determined that the Finance Board
has powers that are substantially better than OFHEO's
authorities, because these authorities more closely align with
those of the banking regulators.
Because the Finance Board already has many of the powers
that it needs and because the structure of the Federal Home
Loan Banks is significantly different from the other housing
GSEs, my preference continues to be to consider regulatory
changes for these institutions on separate tracks from any
regulatory reform bill for Fannie Mae and Freddie Mac. With its
increased emphasis on safety and soundness supervision in
recent years, the Finance Board has become increasingly more
effective in monitoring the Federal Home Loan Banks.
That said, I recognize that there is a strong push by some
to incorporate the Federal Home Loan Banks into any forthcoming
GSE reform bill. If we therefore do include the system in the
regulatory overhaul, we need to ensure that such legislation
will protect the unique nature of the Federal Home Loan Banks
and not negatively affect the cost of funds. I also want to
ensure that the system can continue to build on its community
and economic development initiatives that we authorized 6 years
ago.
Another important concern for me is the need to ensure that
an independent voice continues to be heard on the boards of the
Federal Home Loan Banks. Public interest directors have an
important role to play in corporate governance. Some of the
reforms that we have enacted in recent years have gone too far
in limiting the compensation that they can receive for their
services.
We need to increase the pay of directors in order to ensure
that we can attract quality directors to serve on boards and
effectively monitor sophisticated financial products and
strategies. We ought to also increase the length of the term of
all directors. Finally, we should ensure that directors are
appointed in a timely manner.
One final issue that I hope we will address today concerns
registration with the Securities and Exchange Commission. Last
year, the Finance Board approved a rule to require the banks to
register their stock with the Commission, even though such
stock is not publicly traded. The banks are now working toward
implementing that plan. I do, however, have concerns about how
such registration will interplay with the joint-and-several
liability of the system. I therefore hope that our witnesses
today will address this issue.
In closing, Mr. Chairman, I commend you for your sustained
leadership in these matters and look forward to hearing from
our witnesses today.
Chairman Baker. Thank the gentleman for his statement.
Mr. Barrett?
Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you, Chairman Baker.
With the improper accounting practices at Fannie Mae and
Freddie Mac, this committee has raised serious concerns about
that adequacy of the current regulatory environment for
housing-related government-sponsored enterprises.
Despite being a new member of this committee, it is
apparent to me that there is a great need to change the GSE's
regulatory structured. Legislative proposals have been
introduced to create an independent regulatory, not only for
Fannie Mae and Freddie Mac, but also for the Federal Home Loan
Banks.
In America, we have a great story to tell. The United
States homeownership rate has reached a record 69.2 percent in
the second quarter of 2004, and the number of homeowners in the
United States reached 73.4 million--the most ever. And for the
first time, the majority of minorities in America own their own
homes, and this is also the experience in my district in
southeastern Pennsylvania.
Due to this success, we must ensure that GSE reform does
not hinder the housing industry. The regulatory must be
independent and have supervision and enforcement powers nearing
those of federal banking regulators. The regulator also has to
recognize that the Federal Home Loan Bank System has a
different mission, structure and capital backing than Fannie
Mae and Freddie Mac. Nonetheless, I believe that the benefits
of a combined regulator would outweigh the costs.
Ultimately, we must be certain that we are protecting the
home buyer. These home buyers are the families of the 8th
Congressional District of Pennsylvania. I need to know in what
way housing-related GSE reform would affect their everyday
lives before we proceed.
I yield back my time, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Frank?
Mr. Frank. Thank you, Mr. Chairman.
I agree with much of what the gentleman from Pennsylvania,
the ranking minority member of the subcommittee, had to say. If
it were up to me, we would not be putting the Federal Home Loan
Banks in with Fannie Mae and Freddie Mac. I accept the argument
that I heard from many that market perception really forces us
to do this. Namely, if we were not to include the Federal Home
Loan Banks here, the market would misread this in some ways and
there could be problems.
I am drawing up a list, Mr. Chairman. This is an area, the
question of receivership for Fannie Mae and Freddie Mac, how we
treat stock options. I have a long list of things that we are
being urged to do primarily because if we do not do them, the
market will misread what we are doing.
When I hear people preach to me the unerring intelligence
of the market in general, I think about the number of occasions
when this committee is pressed to do things because the market
will get it wrong if we do not make some cosmetic changes,
including the Federal Home Loan Banks in the same regulator
with the GSEs is fairly cosmetic. They are different
institutions, they will be regulated in different ways, but we
will put them in the same overall box in the organization
chart. That will apparently be of some comfort to investors,
far be it for me to deny these people comfort. I just hope they
will not take this as one more sign of their acuity.
On the Federal Home Loan Banks, it is important that we not
disrupt the system that seems to me to be working well, in
particular. I was here when under the leadership of Henry
Gonzalez, whose picture was there, we created, over bitter
partisan opposition at the time, the Affordable Housing
Program. It was a very close vote on the floor of the House of
Representatives. Today, it is one of the few areas where we
continue to make money available for the construction of
subsidized housing. It has worked superbly.
I am pleased to note that one of the later witnesses will
be from Boston, Mr. Miller, from the Wainwright bank. The
Wainwright bank has been a great example of a socially
responsible institution, and we have benefited from the
Affordable Housing Program.
Housing has been very important in this country,
economically and socially. The existence of 30-year fixed
mortgages as a main option for a lot of people we must not
jeopardize that.
I would mention one specific point that I would hope we
will deal with, and it deals with the Affordable Housing
Program. The Affordable Housing Program dispenses funds as a
percentage of where the activity has occurred, and it dispenses
those funds--well it dispenses the funds according to the banks
that are members of the particular regional bank.
When we passed that in the eighties, mergers were not
nearly the rage that they are today. The result is that today
we have a lot more activity being conducted in one area but
being credited because of a merger to another area, and that
creates a disparity.
The notion of the Affordable Housing Program was that money
would be spent on affordable housing to some extent in the
areas where the banks earned it. In Boston, now, we have had a
couple of mergers, the Sovereign Bank-Compass Bank one in
particular where an out-of-state bank, headquartered I believe
in the Pittsburgh district, now does a lot of business in
Boston.
I am very grateful, both to the home loan bank system, the
Pittsburgh and Boston banks and to Sovereign bank for some ad
hoc arrangements that dealt with that, but I would hope we
would find some systemic way that this does not have to reach
the issue of multiple bank membership. What I would like to see
is that for the Affordable Housing Program purposes we get a
form of accounting so that the original purpose is not defeated
by mergers and that economic activity in a particular area will
generate money for affordable housing in that area.
But, overall, I do not think that radical surgery of any
sort is needed here, and I accept the fact that we will be
doing an overall bill, and I hope that we will come out with
something that looks, frankly, very much like what we now have
with regard to the home loan banks.
Chairman Baker. I thank the gentleman and make the
observation that if that affordable housing standard were made
applicable to Fannie's $900 billion investment portfolio, that
could yield some real benefits.
Mr. Frank. If the gentleman would yield, as he knows, he is
talking about something we have already been advocating. And in
fact thanks to the Senator from Rhode Island, Mr. Reed, it was
in the Senate bill, which would have passed if the
administration did not pull the plug on it. And it is in every
proposal that we have made, so we very much agree.
And I would also point out to the gentleman that what we
are doing, if he would just yield me 30 more seconds, the
Affordable Housing Program is a percentage of the profits,
which means--and I want to apply that to Fannie Mae and Freddie
Mac. I want a percentage of what they do to go to affordable
housing, which of course means that if you succeed in shrinking
them, you will succeed in shrinking the amount that goes into
affordable housing.
Chairman Baker. I thank the gentleman for his observations
and agree. I think we actually could do both. I think we can
increase the amount available to affordable housing, shrink
their portfolio and everybody wins.
Mr. Frank. Well, I would just to the gentleman, if he would
yield further since we are apparently debating the substance,
you get a percentage, and the smaller their overall activity,
the smaller the percentage, either of the affordable housing
goals or of the profits that go along with the Affordable
Housing Program.
Chairman Baker. Oh, I agree. I am just saying they do
nothing now. We could certainly improve off nothing.
Ms. Kelly?
Mrs. Kelly. Thank you, Mr. Chairman.
Believing in the ownership society, I fully support what
the Federal Home Loan Banks have been doing in providing access
to home ownership in various ways. I am concerned that with the
bill that we are to do that we not create a dislocation in the
housing market in any way. I think that is what my colleague
was referring to.
That said, I applaud what home loan banks have been doing,
and I certainly look forward to the testimony of the witnesses
today.
I applaud you, Mr. Chairman, for holding this hearing so
that we can actually hear from the people who are helping
Americans own homes.
I yield back.
Chairman Baker. Thank the gentlelady.
Ms. Wasserman Schultz?
Ms. Wasserman Schultz. Thank you, Chairman Baker, Ranking
Member Kanjorski and members of both panels.
For the sake of time, I would like to limit my opening
statement because I am eager to hear from the panelists, but I
do want to express the concern that I know that many members
have, that the public interest directors for the Federal Home
Loan Banks have not been appointed.
And what this decision has done is it has increased the
risk for the corporate governance structure for the Federal
Home Loan bank of Atlanta, specifically which serves the
institutions that I represent in Florida.
The three appointed directors of the bank, whose terms have
expired, were among the board's most experienced directors who
possess special industry knowledge and expertise that added
value to the governing ability of the bank's board.
Their vacancies leave $130 billion financial institution's
board operating without a newly elected chairman, and that
deeply concerns me.
Thank you. I yield back the balance of my time.
Chairman Baker. I thank the gentlelady.
Mr. Castle, did you have a statement? Mr. Castle? Did you
have a statement?
Mr. Davis?
Mr. Davis of Kentucky. Thank you, Mr. Chairman. Housing
issues are deeply personal to me. When I was a young child, our
congressman cut through federal bureaucratic red tape to help
my mom get our first house, and it changed our lives. I am
looking forward to this dialogue on goals and transition in the
Federal Home Loan Banks, like our own excellent Cincinnati
branch, and hope that it can continue to adapt to the markets
and also provide a platform to help people transition into
ownership.
Thank you for being here. I yield back my time.
Chairman Baker. Thank the gentleman.
Mr. Watt?
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman. I thank you for holding
this hearing on GSE reform and the federal home loan bank
System, and I would like to commend you again for your
continued leadership on GSE oversight and reform.
For some time, I have been a strong advocate of regulatory
reform for all three housing GSEs: For Fannie Mae, Freddie Mac
and the Federal Home Loan Bank System. In the last Congress, I
proposed legislation to create a single regulator for all three
entities, and in my view, this is the right policy because all
three present similar risks to the financial system.
Since unveiling my legislation in June of 2003, there have
been numerous headlines about problems at all three housing
GSEs. The accounting troubles at Fannie Mae and Freddie Mac
seem to have overshadowed the issue in the Federal Home Loan
Bank System, but in the past 2 years seven of the 12 Federal
Home Loan Banks have been downgraded or put on negative watch
by Standard & Poors. The S&P took these steps because of the
increased interest rate risk and/or the decreased profitability
at the seven banks.
The interest rate risk in the Federal Home Loan Bank System
has increased markedly as the individual banks have stepped up
their purchases of mortgage assets. If managed improperly, this
risk could put the entire safety and soundness of the system in
jeopardy.
I was pleased to read Chairman Rosenfeld's prepared
testimony in which he asserts that interest rate risk oversight
is the Finance Board's top priority. I encourage the Finance
Board to be vigilant in this undertaking.
In addition to our important oversight role in this
committee, I hope that we will move swiftly to create a new
regulatory structure for Fannie Mae and Freddie Mac and the
Federal Home Loan Banks. There is a very simple solution:
Congress must create a new regulator with powers at least equal
to those of other financial regulators, such as the OCC or the
Federal Reserve.
I hope this committee will heed the advice coming from
Chairman Greenspan, coming from the entire Board of Governors,
coming from the Federal Reserve staff, the U.S. Treasury
Department, the OECD, coming from the IMF and from countless
others who have urged Congress to act.
And, Mr. Chairman, thank you again for your leadership. I
yield back.
Chairman Baker. I thank the gentleman for his statement and
look forward to working with him on legislation yet to be
considered.
Mr. Feeney? There is no statement?
Is there any other member desiring to make an opening
statement?
If not, at this time, I would turn to our first witness,
the chairman of the Federal Housing Finance Board, the
Honorable Ronald A. Rosenfeld.
Welcome, sir, and you will need to pull that microphone
down almost right in front of you. It is not very sensitive.
STATEMENT OF HON. RONALD A. ROSENFELD, CHAIRMAN, FEDERAL
HOUSING FINANCE BOARD
Mr. Rosenfeld. Thank you, Chairman Baker, Ranking Member
Kanjorski and members of the subcommittee. Today represents my
first appearance before this subcommittee. I am honored to
appear before you and to thank you for the opportunity to
discuss the Federal Home Loan Bank System and reform of the
government-sponsored enterprises.
The opportunity to serve at the Finance Board is a great
privilege. It has also been my privilege to work in the public
sector at both the state and federal levels and most recently
as president of Ginnie Mae. I have also spent a good part of my
career in the real estate development and investment banking
businesses.
As chairman of the Finance Board, I testify today as a
regulator who is committed to ensuring that the banks operate
in a financially safe and sound manner, and carry out their
housing finance mission.
Mr. Chairman, I would like to begin by providing this
subcommittee with an update on the banks' registration with the
SEC. The banks are required to file registration statements by
no later than June 30, 2005 and to have their registrations
effective by no later than August 29, 2005. The Finance Board
staff has been working with the banks to ensure that
registration is accomplished in a smooth and efficient manner.
Over the past year, the Finance Board issued three advisory
bulletins to the banks to help guide them through the
registration process. To date, 11 of the banks have filed draft
Form 10s with the SEC, and 10 of those banks have received
comment letters from the SEC.
On the supervisory front, last year, the Finance Board
entered into two supervisory written agreements: One with the
Federal Home Loan bank of Chicago and the other with the
Federal Home Loan bank of Seattle. Under the written agreement,
the Finance Board required the Seattle bank to hire independent
third parties to conduct reviews of the board and management
oversight and the bank's risk management processes. Those
reviews are under way.
In considering its strategic alternative, the bank's board
of directors and senior management have decided to focus on the
company's traditional mission assets, called advances. This
will likely include the development of an exit strategy for the
Mortgage Purchase Program, which will enable the banks to lower
its overall risk profile and reduce its operating cost
structure.
Previously, in June of 2004, the Finance Board entered into
a written agreement with the Federal Home Loan bank of Chicago.
Last month, the Finance Board accepted the bank's 3-year
business and capital plan.
At the Finance Board, we are continuing to assess the
performance and condition of these banks, and I can assure you
that we will take whatever additional measures, if any, are
needed to maintain the safety and soundness of each of the
Federal Home Loan Banks and the system as a whole.
Now, let me summarize briefly four key supervisory
initiatives and priorities for 2005 and offer a brief comment
on GSE reform. First, as noted, interest rate risk monitoring
is at the top of our supervisory agenda. Interest rate risk is
an inherent and significant risk facing the banks due to the
nature of their business.
Second, this year we initiated a program to visit each bank
on a quarterly basis, between our annual on-site examinations.
The visits give us an opportunity to follow up on examination
issues and other developments.
Third, we have directed our examiners to place increased
emphasis on two essential elements of sound banking: Corporate
governance and risk management. In addition, our examiners will
continue to give close scrutiny to the accounting practices.
And fourth, we intend to provide additional guidance with
respect to the Affordable Housing Program.
Finally, regarding the reform of the housing GSEs, there
can be little debate over the need to have the very best
supervision and regulation. On that, I suspect we can all
agree. So, the issue comes down to whether there will be real
GSE reform.
Real GSE reform consists of equipping the regulator with
the powers that are most critical to providing effective and
thorough oversight. In my view, a regulator must have a
complete arsenal of enforcement powers, including, but not
limited to, freedom from the appropriations process, the
authority to approve new business activities and receivership
authority. As for the structure of the regulator, the
administration has spoken in its 2006 budget, and there seems
to be a clear consensus in favor of supporting the notion of
one regulator.
Chairman Baker, Ranking Member Kanjorski, and members of
the subcommittee, thank you for this opportunity, and I am
pleased to answer your questions.
[The prepared statement of Hon. Ronald A. Rosenfeld can be
found on page 89 in the appendix.]
Chairman Baker. Thank you very much, Mr. Chairman. I want
to start with just a general observation and maybe a comment
from you.
Your authorities at the Finance Board in relation to those
of the current Fannie and Freddie regulator, OFHEO, you can
remove a bank officer or a director, place a bank into
receivership, the ability unilaterally to address capital
levels, even perhaps limit portfolio growth in a particular
product or activity. Do you view those tools as essential to a
regulator overseeing GSE activity?
Mr. Rosenfeld. Chairman Baker, I believe that those tools
are absolutely essential to effective regulation, and I would
add that one of the reasons that I believe we at the Housing
Finance Board have been and will continue to be a very
effective regulator is the fact that we do have that complete
arsenal of tools at our disposal.
Chairman Baker. So you would then, I presume, make the
observation that if a single regulator is to be created, the
regulator created for this new purpose should at least have the
authorities currently in the Federal Housing Finance Board and
not the diminished powers granted currently to OFHEO.
Mr. Rosenfeld. I certainly agree with you. Quite frankly, I
am not sure whether in the list of powers that you articulated
that you mentioned being free from the appropriation process.
If you had not, that also is a very critical aspect. But I
would concur with your statement.
Chairman Baker. With that addendum, certainly, I agree.
There is one other point, which I think has not been
discussed at great length. In questioning to Mr. Greenspan
several weeks ago, I was concerned about the rate of growth at
Fannie and Freddie, and we segued into the question of
securitization. In your testimony, you made note of the fact
the bank system does not securitize.
It was in the early to mid-1990s Mr. Brendsel, then CEO of
Freddie Mac, at that table, when asked by me about the
advisability of then the growing MBS portfolio, as to the
advisability in engaging in that practice, and at that time his
view was, ``That is enabling us to move certain business risks
off our books to the market, and we look at it as a security
device, enabling us to generate even more liquidity.''
At the same time, he said in that day, ``We would not
conceive of repurchasing our own MBS back onto the books for
the sake of enhanced profitability.'' And of course that view
appears to have changed significantly over time.
If the bank system were to securitize and to issue MBS but
be prohibited from repurchasing its own MBS, as a regulator, do
you see that as an ill-advised path or have you given any
consideration at this point?
Mr. Rosenfeld. I think that that is certainly one option,
and I think in order to answer the question let's stipulate
that a decision as to the ability to securitize has been made.
I am not addressing the advisability of that, but we will
stipulate that that is the case.
I think if that is the case, we essentially have three
options. One option is basically the Ginnie Mae model where
Ginnie Mae provides a guarantee, collects a fee and goes home.
That is all it does. The next model would be something which I
think perhaps might be described as a variation of Alan
Greenspan's comments where the GSEs could purchase securities,
their own included, but have a limitation on how much of those
securities they can buy. And I suppose a third model would be
essentially what we have now, at least in the case of Fannie
and Freddie, where they purchase their own securities without a
limit.
Those are very important decisions, and, quite frankly, I
think that the decision of which one of those three models is
most appropriate is best left to the Congress.
Chairman Baker. And one other observation in my discussion
with Mr. Frank about the limitation on portfolio growth, if we
were to assess some arbitrary percentage against the earnings
of that portfolio at the other two GSEs, similar to the
Affordable Housing Program, my concern would be without a cap
that would only fuel more growth as the entity attempts to
offset the loss of that percentage with additional revenue to
inure to the benefit of shareholders and a perverse incentive
to see that portfolio's growth rate even escalate unless there
is some sort of cap.
Chairman Greenspan did indicate in his comments that the
current $1.6 trillion worth of portfolio holdings for both
Fannie and Freddie do not have any nexus to facilitating home
ownership. That being the case, if we do adopt some cap in
light of their rate of growth, would you as a regulator feel
that that cap is also appropriate for the bank system or would
you feel as a regulator that that cap would also be appropriate
for the bank system going forward?
Mr. Rosenfeld. Well, certainly, that cap was not
necessarily appropriate for--and I do not know what it would
be, but it is not necessarily appropriate for the home loan
banks. The notion of a cap, as such, to the extent that the
Congress deems it appropriate, I think if it is applicable to
Fannie and Freddie, would have a logical nexus to the home loan
banks.
I think in regard to your observation, and in response to
Congressman Frank's thoughts, I think that imposing additional
tax might encourage an expanded portfolio. I think that is
possible, but I think you have to keep in mind some fundamental
differences between Fannie and Freddie and the home loan banks,
one of which is that Fannie and Freddie are publicly held
companies. Earnings per share are a very significant part of
their interest. While there is an interest on the part of the
home loan banks to earn profits, they simply do not have in the
system the kinds of motivations in terms of earnings that exist
with a publicly held company.
Chairman Baker. Thank you. I certainly have come to
recently appreciate how earnings per share affect a lot of
things over at Fannie.
Mr. Kanjorski?
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Rosenfeld, just to keep the record straight, your
opinion as to the safety and soundness of the system at this
point in time, is there any reason for the Congress to be
overly nervous about any of the Federal Home Loan Banks?
Mr. Rosenfeld. No, sir.
Mr. Kanjorski. And would you say that as a result, even
through some tough times in terms of a recession, they have
come through rather well, but they have had to have corrective
mechanisms put into place under the direction of the bank?
Mr. Rosenfeld. Congressman, I believe that the safety and
soundness of the home loan banks are well assured. I think the
activities are in good hands, and I will tell you that as
chairman of the Housing Finance Board, we are cognitive of our
primary responsibility, which in fact is safety and soundness,
and we intend to do what needs to be done.
Mr. Kanjorski. Well, I think there is a discussion,
certainly, with myself and some of my other colleagues in terms
of whether or not there should be one single regulator for
Fannie Mae and Freddie Mac and the Federal Home Loan Banks. You
have an opinion we should have a single regulator or are you
somewhat similar to my thinking that the Federal Home Loan
Banks are rather unique institutions doing rather unique things
vis-a-vis Freddie Mac and Fannie Mae and therefore special
understanding of the banks and their relationship to their
stockholders, other banks, national banks, et cetera, demands a
little bit more hands-on understanding of that difference?
Mr. Rosenfeld. I think, Congressman, there are a number of
issues that would end that question that I think I need to
address. Number one, whatever is done from this day forth I
think it is important that we recognize and the Congress
recognizes the difference between Fannie and Freddie and the
home loan bank system. As I said earlier, Fannie and Freddie
are publicly held corporations, whereas the home loan bank
system is a cooperative. There are a whole series of
significant aspects that differentiate the two. Those
differences must be respected.
Today, the Federal Housing Finance Board is I think an
extremely capable regulator for two reasons: Number one, we
have very good people, and, number two, we have powers that
Chairman Baker articulated. So between the people and the
powers we, I think, are in an excellent position.
If in fact it was determined by the Congress to go through
with one regulator, assuming that the powers remain, we would
not at all be impaired. But I would point out to you that--and
there might be a certain amount of marginal benefit that we
might pick up by some consolidation under one regulator. But
even if we do not go to one regulator, I would assure you that
as to the Federal Home Loan Banks they will continue to be very
well regulated.
I am not adverse to the one regulator. I think, as I said
earlier, it is up to the Congress, and regardless of which way
it goes, we will do what we need to do in a very appropriate
way at the Housing Finance Board.
Mr. Kanjorski. While we are on that subject, I know you are
just newly on board, but we have had some discussions ourselves
on economic development and the use of the Federal Home Loan
Banks as a tool toward probably bringing more money into the
area and having it operate through a better filter system,
local banks that utilize the lending services of the Federal
Home Loan Bank System.
Have you had the occasion to examine some of the tools that
are down at the Finance Board to see whether or not we need a
greater expandability to encourage more activity in the area of
economic development and community development?
Mr. Rosenfeld. I think, Congressman, we have the tools. The
problem in that situation, which I share your views in this
very important matter, the problems are really, I think,
twofold. One is we have to, in effect, educate the bankers in
the home loan bank system as to the desirability of making
loans in those areas. The other, which perhaps is even more
important, is we have to create a demand amongst borrowers for
those kinds of loans.
And I think at the end of the day the real challenge is to
bring both sides together. We want to have bankers who are more
receptive to making those kinds of loans, and we want to have
more people asking for those kinds of loans. And I think at
that point we will have some real success. But unless we do
both, I think it will be very difficult to really make a
meaningful contribution to what I know we want to contribute
to.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Barrett?
Mr. Barrett. Thank you, Mr. Chairman.
Chairman Rosenfeld, thank you for being here today. It was
great to talk to you the other day. Appreciate you taking some
time with me.
As you know, Chairman Oxley and Chairman Baker have been
leaders on the issue of corporate governance, and because of
that, a lot of committee members have questions regarding the
current vacancies on appointed director positions at the
Federal Home Loan Banks, and I am going to roll about four
questions into one, so if you could help me out here.
Currently, what is the status of the appointed director
positions on the Federal Home Loan Banks boards? What options
are being considered? What is the current plan and the course
of action to fill these vacancies? And if you can give me some
type of time frame, too, Mr. Chairman, I would greatly
appreciate that.
Mr. Rosenfeld. Congressman, people who I refer to as public
interest directors are very important to the home loan bank
system. Quite frankly, the historic way of selecting directors
is probably inappropriate in the world that we live in today
with the growth of the banks and the sophistication of the
banks. I think historically selection for public interest
directors tended to be in the nature of a thank you, an
honorarium, a reward, something of that nature. In today's
world, that is simply inappropriate. These are very large, very
complex institutions.
And the challenge we have is to create a process that
brings directors, public interest directors to the table who
have the requisite knowledge and qualifications that are
appropriate for the positions that they are filling. That is
not easy to do for a variety of reasons, one of which is you
have to define, based on every particular bank, what are there
particular needs. They may have some very, very capable people
and what you need in Cincinnati you do not necessarily need in
Topeka. So one problem is, what do they need based on their
particular situation?
Another problem is currently there is a cap, a relatively
modest cap for service on these boards, and I think that, quite
frankly, although it is currently our statutory obligation to
do so in terms of appointing directors, the Congress has looked
at this and is considering at least in the Hagel bill that I
have seen a couple of changes which I think are good. Number
one, the selection of public interest directors would be made
by the banks. Number two, the salary cap would be off. Number
three, the terms would be extended from 3 to 4 years, all of
which I think are good.
Now, I would point out we are not waiting--we cannot wait
until Congress acts, but we are looking at how we can go about
really creating a board that is appropriate for what is needed
in the system today.
And let me also add, the term, ``public interest
directors,'' is I think in some respects used in the wrong way.
Now, in the statute it is mentioned the public interest
directors, which have something of a descriptive nature to them
in terms of their background and qualifications. What I really
think we are talking about here is outside directors. Within a
subset of outside directors are public interest directors.
But I think virtually all students of corporate governance
would agree that a totally inside board is not effective. We
would hardly concur with that. I think most students of
corporate governance would agree that the regulator should not
appoint the regulated, but that is where we are.
As I said a moment ago, we are working on it. It is not
easy in terms of time to get it done. I really cannot give you
a definitive date, but I would certainly hope that it does not
go on many more months.
Mr. Barrett. So short of legislation, I mean, there is no
definitive plan, as we stand right now?
Mr. Rosenfeld. We have not evolved to the point where
saying that if you do not pass legislation we will do A, B, C,
D. We have not gotten there yet.
Mr. Barrett. Okay. But you think you are getting closer?
Mr. Rosenfeld. We are working on it.
Mr. Barrett. Okay. One last follow-up. And I understand
where you are coming from that public interest directors, I
mean, it is a different environment, it is a different world,
but if we get the right person for the right job, you still
believe that there is a place for public interest directors,
Mr. Chairman?
Mr. Rosenfeld. As a subset of outside directors. I think
they are part of being an outside director. So the answer to
your question is, yes.
Mr. Barrett. Thank you, Mr. Chairman.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Ms. Wasserman Schultz?
Ms. Wasserman Schultz. Thank you, Mr. Chairman.
Mr. Rosenfeld, just to follow up on the question that the
gentleman was just asking you, you originally extended the
terms of the public interest directors by 6 months and then
that was pulled back. Can you elaborate on why you initially
felt that that was why and then subsequently that was not the
direction that you went in?
Mr. Rosenfeld. Yes, Congresswoman Wasserman Schultz. We had
originally sought to hold over existing directors whose terms
were expiring. We did that because we felt, as I think many of
you feel, that a full complement of directors is desirable. In
particular, I believe that of those directors whose terms were
expiring, something like nine of them were either chairman or
vice chairman of their boards, which are obviously positions of
significance. We felt that if we were able to hold them over
pending a clarification of what is really needed, that would be
desirable.
It was subsequently determined by the Justice Department,
conveyed to White House counsel, that what we did was not
within our legal authority, and having learned that, we
rescinded the extension, and that is exactly what happened.
Ms. Wasserman Schultz. In the past when those openings
occurred, how had that been handled? When an opening occurs,
was there an automatic reappointment or was there a----
Mr. Rosenfeld. Congresswoman, I honestly do not know, not
having been there. I know that in the short time I had been
there, when I acted, there was an awful lot of letters that
came in terms of people supporting one candidate or another,
but I really do not know whether people were normally
reappointed or not. I simply do not know.
Ms. Wasserman Schultz. How could it possibly be better
public policy to leave those positions vacant for as long as
they have been than to at least extend the terms of the----
Mr. Rosenfeld. But we could not extend the terms. The
Justice Department came down and said we do not have the
authority to extend the terms. I think what we did was
preferable to reappointing somebody for what is a 3-year term
and basically continue a process that we think is inappropriate
for the governance of these banks.
Ms. Wasserman Schultz. But, essentially, now what the
situation is, is that you have a very large ship without a
captain.
Mr. Rosenfeld. Well, you have a great many captains, a
great many directors who remain in office, and I think that in
most all the banks, the ones I have spoken to, and I think I
have spoken to most, yes, it is true that many of the banks
lost very talented directors, but many, many talented directors
remain. So this is not a rudderless ship, let me assure you.
First of all, all the member directors are still there, and
I believe probably around two-thirds of the appointed directors
are still there. So it is not without leadership.
Ms. Wasserman Schultz. But it appears obvious, though, that
politics has been injected into the way that this is being
handled this time as opposed to the previous instances where
there were vacancies, and what I would like--if you do not know
the answer to the question which I asked you, which was how has
it been handled before, if you could have someone find out for
me, because I am quite certain that the length of time that
they have been left open has not been similar in the recent
past. So if you could find out and have someone let me know, I
would appreciate it.
Mr. Rosenfeld. We will do so. Thank you.
Ms. Wasserman Schultz. Thank you.
Chairman Baker. The gentlelady's time has expired.
Mr. Fitzpatrick?
Mr. Fitzpatrick. Thank you, Chairman Baker. I just have one
question.
Chairman Rosenfeld, by the way, thank you for your
testimony. I found this very useful and very helpful.
It was reported, I guess as a result of your filings for
2003, that the federal home loan bank had outstanding debt
obligation of about $774 billion. Can you let us know, let the
committee know how much of that debt was held by the United
States versus foreign nations and also how much was held
governmentally versus by private investors?
Mr. Rosenfeld. Congressman, I do not know the answer to
that question. We will have to get back to you.
Mr. Fitzpatrick. Appreciate that. Thank you.
Chairman Baker. Thank the gentleman.
Mr. Watt?
Mr. Watt. Thank you, Mr. Chairman, and thank you, Mr.
Rosenfeld for being here.
Let me just ask a couple of questions about your testimony.
Last year, year before last, a number of federal home loan bank
officials started approaching me about their interest in more
aggressively doing things that were similar to what Freddie and
Fannie were doing. And when I investigated further and talked
further there seemed to be a substantial division between the
member banks about whether that was a good idea. And what
initially had appeared to be a federal home loan bank position
turned out to be the position of one or two of the member
banks, not the whole system.
I take it from your testimony on page two that some of the
bank went more aggressively in the direction of doing the same
kinds of things that Freddie and Fannie were doing. Is that
what the Mortgage Purchase Program was, a reflection of that,
or am I missing something here?
Mr. Rosenfeld. In a very general sense, I would answer yes,
but it is only partially similar to what Fannie Mae has done.
Mr. Watt. I know I am----
Mr. Rosenfeld. They are different in some very significant
ways.
Mr. Watt.----oversimplifying this to some extent, but does
the comment, the last sentence at the bottom of page two of
your testimony, ``This will likely include the development of
an exit strategy for the Mortgage Purchase Program,'' is that a
reflection that a decision basically has been made to go back
to a more traditional approach and portfolio of activities by
the home loan banks than the attitude that seemed to be
floating around 2 or 3 years ago?
Mr. Rosenfeld. Congressman Watt, that is an excellent
question, and the answer is that that is a decision by the
board of the Seattle Bank. That is not a decision of the
Federal Housing Finance Board; we have not made that decision.
And, quite frankly, I think that the decision that what the
other 11 banks do in the system are going to be up to the
directors of those institutions. That is clearly a significant
decision for Seattle, but it applies only to Seattle.
Mr. Watt. And to what extent are the other banks kind of
out there doing those kinds of things similar to a Mortgage
Purchase Program?
Mr. Rosenfeld. Well, the biggest participant in that
general type of activity is the Home Loan Bank of Chicago,
which is substantially more involved in it than Seattle was. I
think it is three or four times larger in terms of the size of
the program.
A number of the other banks are involved in that program on
something of a lesser basis than Seattle, and there are a
couple of banks who are not involved in it at all.
Mr. Watt. And has Chicago had more success with it than
Seattle? I mean, have they exposed themselves to the same kind
of problems?
Mr. Rosenfeld. Well, in the context of both being under a
written regulatory agreement, they have both had problems, but
I think that it is fair to say in deference to Chicago that the
extent of the economic reality of their participation has been
more successful than Seattle has been.
Mr. Watt. They made better business decisions----
Mr. Rosenfeld. To date. To date.
Mr. Watt.----and management decisions than Seattle.
Mr. Rosenfeld. To date. But, again, I would emphasize that
both are under regulatory agreements.
Mr. Watt. Okay.
Mr. Rosenfeld. Which is not where you want to be if you are
in the banking business.
Mr. Watt. All right. What is the Finance Board's attitude
toward--or maybe--I am new to this subcommittee, so I am kind
of feeling my way.
Mr. Rosenfeld. I am new to the Finance Board.
Mr. Watt. Well, then we may be like the blind leading the
blind, as they say.
Chairman Baker. That will be the gentleman's last question,
because his time is getting----
Mr. Watt. I am just trying to figure out whether the
Finance Board has a general attitude about whether it is
desirable to be in Mortgage Purchase Programs, such as Chicago
and Seattle have been involved in, or is there a position that
the Finance Board has taken?
Mr. Rosenfeld. Our position, Congressman Watt, is that we
are safety and soundness regulators. That is our number one
priority. We also want to ensure that the banks operate within
their mission of providing housing finance and community
investment needs. We have not made nor perhaps will not make a
definitive judgment as to the mortgage programs.
I think that we look at them from the perspective of safety
and soundness, and to the extent that their activities
jeopardize safety and soundness, we will act accordingly. And
that is really the framework in which we look at these things.
We do not look in a theological or philosophical sense.
Mr. Watt. Thank you, Mr. Chairman.
Chairman Baker. Gentleman's time has expired.
Mr. Davis?
Mr. Davis of Kentucky. Thank you, Mr. Chairman.
As the federal home loan bank is adapting to changes in the
marketplace as the economy continues to transform, I was
wondering if you are looking at new products or processes to
address risk and also give your clients and your members more
options.
To that end, I was wondering if you might comment on the
discussion about the ability to securitize mortgages, which has
been proposed as a way to reduce interest risks at the banks?
And in your opinion, do you believe that the banks should be
allowed to issue or guarantee mortgage-backed securities in a
capital market that are conforming mortgages owned by the banks
or their members?
Mr. Rosenfeld. I think, Congressman, it is important that
in answering that question we define what securitization means,
and let me define what I believe it means, at least in the
context of my answer. I believe it means the issuing of
mortgage-backed securities by a federal home loan bank which
carries the joint and several liability of the Federal Home
Loan Bank System. Such a development would represent a
significant departure from the current structure and practices
of the home loan bank. That departure is so significant, in our
judgment, that it should only be undertaken at the direction of
the Congress.
I am sorry, was there another----
Mr. Davis of Kentucky. No. So from that perspective, you
are against that.
Mr. Rosenfeld. No, I am not against it. What I said is that
the decision to securitize, in the context I defined it, should
be left to the Congress. That is a very different activity than
historically has been performed by the home loan banks.
Mr. Davis of Kentucky. Would your personal view be to keep
it in the more traditional vein where it has been as opposed to
where Fannie Mae has gone?
Mr. Rosenfeld. Congressman, I really do defer to the
Congress. I do not have a strong personal opinion.
Mr. Davis of Kentucky. Okay. Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Rosenfeld, it is my understanding that the current
Affordable Housing Program the board oversee subsidizes the
cost of housing for low-income, owner-occupied and rental
housing. With regards to rental housing specifically,
Affordable Housing Program subsidies support housing in which
at least 20 percent of units will be affordable for very low-
income households at or below 50 percent of the area median
income.
Given that there is a shortage of affordable rental
housing, some communities, like those in my district, are
exploring opportunities to set aside a small chunk, 30 or 40
percent of units, for low-income families in order to meet the
demand for housing.
What are your thoughts on the banks reaching more families
by increasing the Affordable Housing Program to 30 or 40
percent of units and serving poorer families by lowering the
area median income maximum to 40 or 30 percent?
Mr. Rosenfeld. Congresswoman, I am afraid I must answer you
in a generality, because I simply do not have the knowledge or
facts to answer you specifically as to the questions you are
asking me. As a general proposition, we would certainly like to
see the Affordable Housing Program expanded to help those
people who need it.
Given the reality that when you give more to one group you
take from another because the total is fixed, I think part of
our challenge, and for that matter part of your challenge, is
to make those very tough calls as to what we do. I will try to
get back to you on the specifics and perhaps lay out some of
the issues involved in what you are suggesting, but,
unfortunately, I just cannot respond to you today.
Ms. Velazquez. Well, I would appreciate if you sent to us a
written response. But at some point or another, we need to look
at the crisis that we are facing in this country, especially in
urban centers, including rural America regarding affordable
housing.
Mr. Rosenfeld. I agree.
Ms. Velazquez. Chairman, the issue of limiting Federal Home
Loan Banks' members' use of advances has come up in the recent
debate about whether to include the banks in GSE reform. It is
my understanding to advances to members is a significant part
of the banks' business. Can you comment on the potential
effects of limiting the use of advances by federal home loan
bank members?
Mr. Rosenfeld. I am not aware of any discussion about
limiting advances by the home loan banks, unless I----
Ms. Velazquez. This is an issue that has been raised by
some of your lenders, including the ones from New York.
Mr. Rosenfeld. Congresswoman, I have not heard about
limiting advances.
Ms. Velazquez. Okay. Thank you very much.
Chairman Baker. I thank the gentlelady.
Mr. Feeney?
Mr. Feeney. Thank you, Mr. Chairman, and thank you, Mr.
Rosenfeld.
You talked a lot about supervision and oversight and
regulation. I am interested in the capital structure of the
home loan banks and your oversight of it. Gramm-Leach-Bliley
mandated that the capital structure be changed for these banks.
What is the status of the banks' implementation of these new
capital plans, and what is the average percentage leverage of
capital in the relative amount of 6-month and 5-year maturity
stock in the system, to your knowledge?
Mr. Rosenfeld. To my knowledge, 10 of the 12 banks have
completed their capital plans under Gramm-Leach-Bliley. I am
sorry, I did not hear the rest of your----
Mr. Feeney. What is the average percentage of leverage
capital in the amount of 6-month and 5-year maturity stock in
the system, if you know?
Mr. Rosenfeld. Well, the minimum leverage capital is, I
believe, 4 percent. Some banks have higher. I cannot tell you
the average. I certainly will get back to you on that.
Mr. Feeney. Okay. I think that would be helpful. And which
two banks have not yet fully implemented the capital plan?
Mr. Rosenfeld. I am going to have to get back to you on
that, sir.
Mr. Feeney. Okay. In 2003, the Federal Home Loan Banks had
about $775 billion worth of outstanding debt. Do you know how
much is held by U.S. as opposed to foreign investors of that
debt?
Mr. Rosenfeld. That question was asked a few moments ago. I
did not know it then, and I still do not know.
Mr. Feeney. All right. Okay. Sorry, I was out of the room
for a minute.
Mr. Rosenfeld. I understand.
Mr. Feeney. But I am interested in the capital structure,
and if you can answer those questions for us, I would be
grateful.
Mr. Rosenfeld. We will, sir. Thank you.
Mr. Feeney. With that, I will yield back the balance of my
time.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Meeks?
Mr. Meeks. Thank you, Mr. Chairman.
Mr. Chairman, I am going to try to get some clarification.
I know as of last June the FHFB decided to require the FHLBs to
register a class of equity securities under the 1934 act. And I
have no problem with greater protection of our financial
system, but I am not clear on what the benefits are. The FHLBs
issued debt securities, and they are not owned by the public
but by their members, and so I was wondering if you could
explain to me more clearly the benefit of having them register
and whether or not the member banks are not receiving enough
information on their own FHLBs that they own?
Mr. Rosenfeld. Congressman, I think that there are a couple
of benefits to registration with the SEC, although I certainly
will acknowledge that I was not there when the debate took
place. But the home loan bank system is a very significant
issues of debt, and I believe that the public is better served
by complete openness and candor in terms of the status of
organizations that issue debt, publicly held debt. And I think
in today's world greater disclosure, given a choice, is clearly
the way to go.
Another factor, another benefit that I think is prevalent--
or present, I should say, is the fact that the disciplines
involved in registering with the SEC tend to provide for better
management of an organization. I have spent most of my life,
quite frankly, in the private sector, partially in a family
owned business, partially with a public company. I will tell
you that being part of a public company is much more onerous,
it is much more difficult and challenging and aggravating in
terms of the registration requirements. But it also makes you a
better company because it forces you to do things that you
might not do if you were not required to do it.
Mr. Meeks. I am trying to also conceptualize in my head and
ensure that the separate legal and operational characteristics
of the Federal Home Loan Banks are maintained and not lost in
an agency that would also regulate the other two much larger
GSEs. I think that is important.
Now, the question then comes in, the day-to-day decisions,
the everyday supervisory decisions between the deputy director
as opposed to the director will do. Would the director be
established as more of an agency administrator who will review
the actions of the deputy director who may then focus in more
on and interpret some of the regulatory decisions that are
affecting the GSEs? How do you see that? How do you see that we
can make sure we maintain the differences between the Federal
Home Loan Banks and Fannie and Freddie Mac?
Mr. Rosenfeld. Well, I think everybody who is knowledgeable
acknowledges the fact that Fannie and Freddie and the home loan
banks are very different.
Mr. Meeks. I see.
Mr. Rosenfeld. I have no idea how this is going to turn out
and what the ultimate structure is going to be or who is going
to be in what position, but I have to believe that anybody who
would come into a position of responsibility in the oversight
of the home loan banks would very quickly learn that the system
is not broke and if it ain't broke, do not fix it, because it
does not need to be fixed. And I simply cannot imagine that
people would come in and try to materially change what is
fundamentally a very, very well run, well disciplined safety
and soundness regulator. So, quite frankly, I am really not
terribly concerned about that.
Mr. Meeks. Thank you.
Yield back, Mr. Chairman.
Chairman Baker. Mr. Royce?
Mr. Royce. Thank you. Thank you, Mr. Chairman.
And, Chairman Rosenfeld, I would like to preface my
questions by giving the following safe harbor, and that is I do
not believe the Federal Home Loan Bank System is on the brink
of failure, but as this committee considers legislation, we
need to prepare for all scenarios.
And so my first question, I want to get your thoughts about
receivership in the Federal Home Loan Bank System. Currently,
the 12 banks are jointly and severally liable for the senior
debt obligations of each banks. Those bonds carry triple A
ratings. This means that if one bank were to default on its
bond payments, the bond holder would be made whole by the other
11 banks, correct?
Mr. Rosenfeld. Correct.
Mr. Royce. However, the individual banks also enter into
derivatives contracts with counterparties to hedge interest
rate risk. Not all individual banks have triple A counterparty
ratings. In the event of a failure at one of the banks, how
would counterparty contracts be handled? Does joint and several
liability apply to derivatives contracts in these cases?
Mr. Rosenfeld. It is my understanding that they do not.
Mr. Royce. They do not. Well, the Federal Home Loan Bank
System is in a very unique situation, because we have got 12
member banks with close to $1 trillion in assets. You are
convinced that the argument of joint and several liability does
not make one bank liable for the actions of the other 11 banks
in some instances but it does in others. But better regulation
and SEC registration help to protect the system. Do you believe
that the 12 banks should be required to share more detailed
information with one another as an additional protection to the
system, given the joint and several liability argument?
Mr. Rosenfeld. Congressman, I believe that the 12 banks
should be given the option of sharing more information with
each other. I am hesitant to use the word, ``require,'' because
you can perhaps get into areas that it may be inappropriate to
share. And I think, quite frankly, we are headed in that
direction. I know our general counsel has been meeting with the
general counsel of the various home loan banks exploring
mechanisms for the sharing of information. I think that the
fundamental track that your question is on I think is a very
important one.
Mr. Royce. Don't you think it would guarantee some measure
of additional protection if that information were shared?
Mr. Rosenfeld. I agree with you that if more information
was shared, that would provide some greater degree of
protection.
Mr. Royce. And as you say, internally they are working on a
methodology to encourage sharing, although not mandated; is
that----
Mr. Rosenfeld. That is correct.
Mr. Royce.----your understanding?
Mr. Rosenfeld. That is correct.
Mr. Royce. If it were mandated, do you think there would be
even further protection to the overall system?
Mr. Rosenfeld. I think it depends on what is mandated. I
think that if you--I suppose you could go so far as to require
things that would actually jeopardize the system, but that is
why I think a voluntary approach is--and the human pressures
that come from that kind of environment I think would probably
do the trick.
Mr. Royce. Chairman Rosenfeld, thank you very much.
Chairman Baker. Thank the gentleman.
Mr. Davis?
Mr. Davis of Alabama. Thank you, Mr. Chairman.
Chairman Rosenfeld, good afternoon to you. Let me pick up,
if I can, on the questions that Mr. Watt was raising to you
earlier. One of the things that was interesting to me as I
listened to your colloquy with him you were talking about the
evaluation the Finance Board will make as to whether home loan
banks should move into the secondary market. You talked about
the fact that you all have not reached a decision or a
consensus yet as a board on whether or not that is an advisable
course for home loan banks.
I want to ask you about that, but what was interesting
about that colloquy to me is that it raises an interesting
contrast I want to get your reaction to. As you know, we are,
as a Congress, and this committee in particular, very much
considering the new regulatory structure, not just for the home
loan banks, potentially, but for the other GSEs. Fannie and
Freddie, and one of the points of contention has been whether
or not new programs or new activities, even, should be given a
high level of scrutiny and be subjected to advanced approval by
a regulator.
Now, if I am understanding your testimony correctly, the
Finance Board does not require advanced approval of whether or
not a bank goes into the secondary market. If a bank makes a
decision to do that, it can do that; is that correct?
Mr. Rosenfeld. If you mean we have to approve the selling
of assets in the normal course of the business, the answer is
no.
Mr. Davis of Alabama. And, again, I understand that whether
or not it is a good practice for home loan banks to move into a
secondary market, I understand that is under evaluation, but
what is interesting to me is that under a regulatory structure
that you just said has worked very well, and I agree with you,
it has worked very well, the Finance Board does not require
that kind of advanced approval of home loan banks, but yet
there are some members of the committee who do believe that
there ought to be a high level of review for new programs or
activities on the part of Fannie or Freddie. Does that strike
you as a contradiction?
Mr. Rosenfeld. No, not really. I think that, again, Fannie
and Freddie is really not on my plate.
Mr. Davis of Alabama. But you do take my point that
obviously new programs and new activities requiring a level of
advanced scrutiny of that seems fairly intrusive, and it raises
the question to me is shouldn't we learn something from the
home loan banks? Obviously, the home loan bank does not appear
to be nearly as intrusive in terms of what it inspects
regarding its member banks, and it seems to work very well,
doesn't it?
Mr. Rosenfeld. I think we are intrusive where intrusion
makes sense.
Mr. Davis of Alabama. But you have not found an intrusion
makes sense in the context of advanced regiments by secondary
mortgage. So, again, I am not trying to debate you on the
subject, I am just trying to get a general reaction. That, to
someone who is a layman--I have included myself in that
category--seems like something of a contradiction. If it has
worked well for the Federal Home Loan Banks to allow the home
loan banks to make as basic a decision as whether to go into
the secondary market, maybe that tells us something about
whether or not it is exactly necessary or healthy.
Mr. Rosenfeld. Congressman, let me be very clear, and
perhaps I misstated a moment ago: In terms of selling loans in
the secondary market, that would require our approval. I was
addressing the issue of just generally buying and selling
assets, which they do every day. But in terms of selling
mortgages in the secondary market would require our approval.
Mr. Davis of Alabama. Okay. But what about the specific
chorus of whether or not home loan banks ought to be engaging
in that practice, as a general rule, what Mr. Watt was asking
you about earlier? Is there a consensus on the Finance Board
that it is a good or bad practice for member banks to be
entering the secondary market?
Mr. Rosenfeld. I think you have to look at the particular
situation. Let me leave aside the issue of securitization,
which is a whole other category, as I tried to define it
earlier. But the mere act of selling mortgages into a secondary
market may or may not be appropriate. It depends upon the
circumstances of that bank and what----
Mr. Davis of Alabama. And that is a decision the bank would
make.
Mr. Rosenfeld. Subject to our approval.
Mr. Davis of Alabama. Okay. Subject to your approval.
Mr. Rosenfeld. Right. I am sorry, going back to Fannie and
Freddie.
Mr. Davis of Alabama. Well, I was just trying to make a
basic comparison, one of the major points of controversy around
Fannie and Freddie is whether or not when they engaged in new
activity or new programs there ought be a level of advanced
scrutiny by the regulator, whoever the regulator turns out to
be. And what I am simply trying to do is to ask you whether or
not there is a difference or whether there is an appropriate
difference between your regulatory authority and the level of
regulatory authority that is being proposed for Fannie and
Freddie?
Mr. Rosenfeld. Well, I think that Fannie and Freddie exist
pursuant to essentially a contract and a charter, and I think
that they have been given certain benefits in exchange for
certain restraints, limits as to what they could do, and I
think it is appropriate that whatever they are undertaking be
viewed in the context of the contract that they entered into.
I think in the case of the home loan banks I think there is
an element of that, but I think we are in a somewhat different
situation.
Mr. Davis of Alabama. I think my time has expired, Mr.
Chairman.
Chairman Baker. The gentleman's time has expired.
Mr. Scott?
Mr. Scott. Yes. Thank you, Chairman Baker.
Chairman Rosenfeld, let me ask you a few questions about
safety and soundness, which, as I understand it, is one of your
primary responsibilities that you are charged with ensuring
that each of the 12 Federal Home Loan Banks operate in a safe
and sound manner.
What is the status of the comprehensive accounting review
of the banks, and are there any preliminary findings that you
could share with this committee?
Mr. Rosenfeld. First of all, Congressman, let me tell you
that, in effect, there are two important activities going on,
one of which, of course, as I mentioned on a number of
occasions, the SEC registration. That is moving along in a very
quick fashion, and we intend for the banks to complete their
work as scheduled.
We have also said in the past, and we will reiterate, that
we want the accounting of these home loan banks to be
absolutely appropriate, given the various FASB rules and
regulations. And we said that we would do whatever needs to be
done to ensure that would occur.
We, to date, quite frankly, have not begun a specific
activity in terms of a special accounting review. If in fact we
determine as time goes by that the need for that sort of thing
is in fact appropriate, I assure you we will do it. And if that
becomes in conflict with the SEC registration somehow, we will
deal with that when the time occurs.
I would point out to you, however, as we sit here, I am not
aware of anything that exists in any of the banks that would
suggest that there is an issue that needs to be corrected.
Mr. Scott. When the SEC registration process of the home
loan banks stops, has there been any problems?
Mr. Rosenfeld. Well, I think there are always problems when
people are asked to do something comprehensive and new. So I
would describe it as more nits and gnats as opposed to major
substantive problems.
Mr. Scott. Should, in your opinion, a single financial
institution, any single financial institution be permitted to
have a relationship with more than one federal home loan bank?
Mr. Rosenfeld. Well, that question is I think most
frequently put in the context of, what do you think about
multidistrict membership. It is the opinion of our counsel, our
general counsel, that we at the Finance Board do not have the
authority to authorize multidistrict membership. I suppose one
could shop around and get another opinion someplace, but at to
end of the day, that, to me, much like securitization, is an
issue that goes to the very core of the creation of the home
loan bank system and quite frankly should be determined by the
Congress.
Mr. Scott. Now, should home loan banks be allowed to issue
or guarantee mortgage-backed securities by conforming mortgages
owned by the Federal Home Loan Banks or their members?
Mr. Rosenfeld. I did not get the last part.
Mr. Scott. Should home loan banks be allowed to issue or
guarantee mortgage-backed securities by conforming mortgages
owned by the Federal Home Loan Banks or any of their
institutional members?
Mr. Rosenfeld. I assume, Congressman, you are asking me the
question about securitization, unless I am wrong. I mentioned
earlier that I think securitization, which would mean the
issuance of mortgage-backed securities that are backed by the
joint and several liability of the home loan bank system, I
think the decision to do that ought to be left to the Congress.
Mr. Scott. Thank you.
Chairman Baker. Thank you, Mr. Scott.
Mr. Miller?
Mr. Miller of California. Thank you, Mr. Chairman.
Currently, the federal home loan bank has a single
regulator for both mission oversight and safety and soundness,
different than Freddie and Fannie. Freddie, they have one for
safety and soundness and the other one for a different mission.
What can we learn from FHLBs compared to Freddie and Fannie as
it applies to looking to preserve the housing mission while
ensuring safety and soundness at the same time?
Mr. Rosenfeld. I am sorry, could you----
Mr. Miller of California. Well, your structure has a single
oversight, whereas Freddie and Fannie have a double. Can you
compare the two, and what should we look to to preserving the
mission of Freddie and Fannie as it applies to housing?
Mr. Rosenfeld. Well, I think that we at the Finance Board
have virtually all the requisite powers we need in terms of
being a safety and soundness regulator to assure that the banks
are operated in a safe and sound way and fulfill their mission.
I think, and, again, I am by no means a student of the
OFHEO rules and regulations, but it is fairly apparent that
they did not have the same tools that we had. I think the best
way to assure that Fannie and Freddie meet their housing
mission is to make sure that they are operated in a safe and
sound fashion, which means the regulator has to have the right
tools. I think if they operate in a safe and sound fashion, I
see no reason to believe that their commitment or their mission
would not be achieved.
Mr. Miller of California. can you give me the pros and cons
to each approach, all that you see out there, separating
regulators versus separating single regulators--the single
versus the separate, having two versus one?
Mr. Rosenfeld. Yes. I think that the reasons for doing it,
as a practical matter, may be--if that is the route to get
appropriate governance over Fannie and Freddie, then that is
probably a route you ought to go. That just may be the way to
do it. A couple of the advantages of doing that is I think that
there would be some enhanced expertise, particularly in the
area of which management by having a larger organization. I
think there may be some economies of scale in terms of the
administration and so on.
I think that in terms of perception, and I am not sure how
significant it is, but I think there is an argument that
perceptions amongst the investment community would be that both
carry the same kind of a quality in terms of their securities
as opposed to one being perhaps a stepsister. So those I think
are all benefits.
The negatives, quite frankly, are not negatives, in my
opinion, providing that whoever is in charge recognizes that
Fannie and Freddie and the home loan banks are really quite
different and not only recognize it but respects the difference
and governs in a manner that is respectful of those conditions.
As I said earlier, there is no question in my mind the Finance
Board regulatory structure today is first rate, and if we went
to one regulatory, it would continue to be first rate,
providing it would be left alone and its talents and skills
were respected.
Mr. Miller of California. We are looking at breaking up
where HUD has currently had oversight to have two separate
ones: One for fiscal oversight and one for programmatic. The
problem I am having is when you shift programmatic away from
HUD, who I believe has expertise, that I am concerned could
create a problem because when you are dealing with
programmatic, as you know, many of the programs out there
change products from day to day to try to meet the demands of
the industry. What do you think about that?
I mean, I think HUD has expertise and they have proven that
historically to continue to have oversight of the programmatic
side and possibly coming in on the fiscal side with----
Mr. Rosenfeld. I think, Congressman, you have to recognize
that HUD as a place does not have expertise. HUD as a place
that has people who are experts has expertise.
Mr. Miller of California. Correct.
Mr. Rosenfeld. And I think if you take----
Mr. Miller of California. But you could say Congress does
not have expertise, it is the individuals within Congress who
have the expertise.
Mr. Rosenfeld. If you take the people who are at HUD or
take others who are very knowledgeable and put them in another
building, that expertise would be there too.
Mr. Miller of California. But what do you accomplish? All
you are doing is creating a name change. That is my concern. If
we are going to take the same people that have the ability to
continue programmatic oversight, as they have in the past, and
you shift people to a different room, yes, I would agree with
you, but is that what we are doing? I mean, that is my concern,
that we might be shifting authority away from HUD and yet not
moving the people who have the oversight capability to move
with that.
Mr. Rosenfeld. Congressman, I----
Mr. Miller of California. That is a difficult question.
Mr. Rosenfeld. With all due respect, that part of what is
proposed I have simply not considered. It is an interesting
question. I do not know the answer.
Mr. Miller of California. Okay. I think my time has
expired.
Thank you, Mr. Chairman.
Chairman Baker. I thank the gentleman.
Mr. Rosenfeld, I just wanted to come back, given the
diversity of questions you have responded to this morning, and
make some general observations. The Federal Housing Finance
Board operates as a unitary regulatory in the sense of safety
and soundness and mission compliance. In response to the
question the gentleman from Alabama, Mr. Davis, relative to
product approval, with regard to MPP and MPF, you had to get
prior approval as opposed to HUD who has to stop the practice
of Fannie and Freddie once having entered into the market.
In my knowledge of the matter, it has never been brought to
my attention where HUD has ever turned down a product of Fannie
or Freddie. I would consider that to be fairly significant
evidence that nobody gets it right 100 percent of the time. My
wife has pointed that out to me.
The point being that you have broad unilateral authority to
act. There is a clear receivership provision. You have the
unilateral right to adjust capital, as you deem appropriate in
the public interest. You can limit their portfolio growth. All
of these matters considered and aggregated has not in any way
adversely affected the bank system's ability to enter the
capital markets and acquire capital needed for its business
purposes. Is that correct?
Mr. Rosenfeld. That is true.
Chairman Baker. And in fact when we look at your
operations, you are subject to a 20 percent net operating
profit by district to meet your REFCOR obligations, a 10
percent net profit for affordable housing, so, essentially,
one-third of your net operating profits is allocated by
government requirements to specific purposes. That does not
seem to be an inhibition to the successful operation of the
bank system.
The point is that those who have been opponents of reform
for Fannie and Freddie have missed the lessons the bank system
has clearly demonstrated, that all of these regulatory
constraints have resulted in a better system which performs at
a higher level of social mission compliance than Fannie or
Freddie. In fact, most commercial banks have more loans in
their portfolio to low-and moderate-income individuals than
Fannie and Freddie have in their portfolio. And few commercial
banks can match up with the bank system's record of performance
in that arena.
Now, not to sound like I am in the first row of church at
the bank system, I have got one problem and I do not know that
there is a good answer to it. One of the distorting effects, I
think, in the market from a bank system perspective is the
consolidated debt obligation and Banker X's ability to borrow,
in essence, on Bank Y's credit. I am not suggesting today, make
clear, that we revocate the consolidated debt obligation
structure, but I do believe there should be market discipline,
in addition to the regulator's function, in evaluation district
banks' creditworthiness in some capacity, whether it is some
subordinated issue, whether there is a requirement--some
vehicle where we require a district to issue debt on its own
bottom for the market to respond to the managerial and
supervisory issues within that district.
Has there been any discussion or is that even an area which
the board has entered into or has concerns about?
Mr. Rosenfeld. We have concerns, Chairman Baker, that all
of the banks operate to the very highest credit quality
standards that is possible. We have not explored the notion, to
my knowledge, of changing the idea of consolidated obligations,
but I think that consolidated obligations from everybody's
perspective is better served if each one of the components in
the consolidation are triple A. So I think we are working----
Chairman Baker. Well, let me help in a little way. Here is
my point, and I appreciate your method of governance, I
appreciate your team oversight, but you are not dictating as a
finance board what products a bank might engage in, for example
the MPP Program. What you do, as I understand it, is once the
product is developed, you assess the risk-taking nature of that
product and determine if it is too risky, if it is sufficiently
hedged, if the capital is adequate, but you do not tell a bank,
``You can do A or you cannot do B.''
Mr. Rosenfeld. We do, Congressman. In a sense, a program
like that--it happened before I ever was there--but it has to
be approved by the Finance Board.
Chairman Baker. Right, but----
Mr. Rosenfeld. And once it is approved, then we monitor it
and make sure that it does not get out of line in terms of what
is appropriate for safety and soundness.
Chairman Baker. Right, but as I am understanding the
supervisory role it is to look at the practice and determine if
it is sufficiently walled off from a risk-taking perspective,
not to represent a clear and present danger to the financial
solvency of the institution. But you do not write district
banks' business plans; they write their business plans and come
to you and say, ``Here is what we want to do. Is this okay?''
And from a safety and soundness perspective you say, ``We like
it, but we are going to keep an eye on you.'' I got that part.
But each bank can get out there on the risk profile in
different ways based on their own creativity and innovation of
their staff. I am suggesting that strong regulation is not only
warranted but necessary, but I would really like just an added
dose of market discipline in there somewhere. And the bank
system, as you have noted, a little unique in that regard as a
member-owned structure, other than the issuance of debt into
the market, we do not have the kind of discipline that a Fannie
or Freddie would have in the day-to-day trading of a recognized
liquid stock, and that is really what I am getting at.
Mr. Rosenfeld. I understand and I agree, and I would point
out, Chairman Baker, that we love all of our bank presidents
but we also watch them.
Chairman Baker. I like the old trust but verify myself. I
want to thank you.
Mr. Baca, did you----
Mr. Baca. Sure, I would like to ask a question.
Thank you very much, Mr. Chairman.
Recently, the Federal Housing Financial Board approved a
rule that would require the Federal Home Loan Banks to register
stock with SEC to allow for increase in disclosures. Would you
predict that as a result of that that SEC would ever take a
rule like that it has taken with Fannie Mae in investigating
the financials of the Federal Home Loan Banks?
Mr. Rosenfeld. I could never predict what another
organization would do, but my guess is if they thought that
there was a need for it, they would do it.
Mr. Baca. The only thing is that I want due process to be
done on both as well.
The other question, at least one home loan bank, the
Seattle Bank, has decided to exit mortgage purchases business
asserting that it is too risky. Do you think that the Federal
Home Loan Banks should be in this business?
Mr. Rosenfeld. I think that we all acknowledge that the
mortgage programs or managing interest rate risk, which is
another way of describing the mortgage programs, is
intrinsically a high-risk business. It is just the nature of
what it is. I think that having said that, that does not mean
that the activity is intrinsically bad. We are looking very
carefully at the appropriateness of the activity as well as the
extent of the activity. And like so many other things in life,
the answer may be in moderation.
I cannot say to you the program is totally good in an
unbounded way nor can I tell you that it is totally bad, and we
are looking as to what might be the appropriate way to deal
with that program. We are very concerned about it. I know the
banks are concerned about it. And it is very high on our
priority list of coming to some resolution as to just what
happens with that program.
Mr. Baca. Bottom line is should they be in this business or
not?
Mr. Rosenfeld. Cannot tell you at the moment. The best way
I can describe it to you is, at some level the risk does not
jeopardize safety and soundness. At the other extreme, I can
assure you that if it got big enough, safety and soundness
could be jeopardized, and that would be intolerable from our
standpoint.
Mr. Baca. Okay. Thank you very much.
Chairman Baker. The gentleman yields back?
Mr. Baca. I yield back.
Chairman Baker. Mr. Frank.
Mr. Frank. Thank you, Mr. Chairman. I have a question, but
first I did want to comment, Mr. Chairman, that I think frankly
you set out kind of a straw man when you said people who are
opposed to reform of Fannie and Freddie, which I think you mean
people who do not like your bill, do not understand that
affordable housing can be helped. Quite the contrary is the
case, and really let's get the record clear here.
This administration, which has been very critical of Fannie
and Freddie, let an entire calendar year go by in which they
had the authority to increase the affordable housing goals and
did not exercise it, because they inherited 2 years of
increased goals from the previous administration and in the
third year they could have, in the second year of their
administration, increased the goals. We asked Mr. Weichert
about it and by the time he got around to it it was too late,
and when we asked why they had not done it, they said they
forgot.
I welcome the new interest in affordable housing in Fannie
and Freddie, but I have to say that it does seem to me in some
cases to be more a stick that people want to beat them with
than something they want to accomplish.
And with regard to an affordable housing program, I am glad
to see the enormous support for the Affordable Housing Program.
I was here in 1987 when it was a two-vote victory on the floor
of the House in a very partisan vote, which created the
Affordable Housing Program, and I am glad that people have now
accepted the fact on both sides of the aisle that it should be
there.
But I also want to point out when we were doing legislation
on Fannie Mae and Freddie Mac last year, it was those of us who
you have characterized as being opposed to reform who came up
with the idea and pushed it legislatively to make the
Affordable Housing Program something they would have to do.
Certainly, that is the way it went in the Senate. There was an
amendment by Senator Jack Reed, and we were strongly supportive
of it.
So quite the contrary is the case, and in fact many of us
believe that some of the proposals that are affecting Fannie
and Freddie would have too much of an adverse effect on them.
We can differ about those, but any suggestion that people who
are on the other side of you have not been trying to increase
affordable housing I think is exactly the opposite of the case.
And on the affordable housing, and that is the thing that
greatly interests me, and we have talked about this before and
I mentioned it earlier and I had to go off to another meeting,
but I did want to touch on what I think was your willingness to
work with us.
We can find a way without getting to the controversial
issue of multiple memberships by one institution and several
regional banks to try and deal with the problem created by
mergers whereby economic activity that is generated by member
banks in a particular area could get credited for purposes of
the Affordable Housing Program to another region. And to the
extent that we can work out some kind of proportionality, I
just want to affirm that that is something that we think we can
do without interfering with the overall function.
Chairman Baker. Congressman, immediately after I got back
to my office after visiting with you, I said to the gentleman
actually behind me that I was visiting with you and you came up
with an issue here that I thought was extraordinarily
meritorious, and I assure you we are working that issue right
now. We share your concerns.
Mr. Frank. As I said, I want to pay tribute to the banks,
the Pittsburgh and Boston Banks and the Sovereign Bank for
trying to--essentially, what happened is Sovereign buys up a
very active thrift operation in Massachusetts, and I think they
worked out a deal where the Boston Bank will be able, in
effect, to lend out the money with the agreement of the
Pittsburgh Bank. And if we make that available to everybody, I
think that would be very helpful.
Chairman Baker. Incidentally, there is no prohibition
against different home loan banks working out such an
agreement. What we are trying to do is create some
opportunities to facilitate those kinds of----
Mr. Frank. Okay. Let me just offer this, and I would hope
this would be something we could do. If it turns out by the
time we get to legislating on this that something we could do
could facilitate that, not necessarily in a mandatory way but
sometimes there is an unintended consequence of some other
provision, I will count on you to let us know so that we can
leave you in a legal situation where you can fully take the
action. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. If the gentleman would just further yield,
I just want to make sure that there is not an appearance of a
split or a chasm here between the gentleman's views and that of
my own with regard to affordable housing. I have publicly
stated that the gentleman's views on affordable housing goals
are desirable and should be included in any legislative
approach that this committee should consider.
Just in past years, not speaking directly to the gentleman,
I could not get past the safety and soundness issue which I
thought were so important to get to affordable housing. I think
now in the window in which we are finding ourselves that safety
and soundness and affordable housing can be mutually addressed
and I think achieve the goals the gentleman----
Mr. Frank. Well, Mr. Chairman, I am delighted you have made
that passage, and I welcome you.
Chairman Baker. Well, I would point out that I was somewhat
involved in the Federal Home Loan Bank System's Design and
Modernization Act of 1999 and have always been an advocate, but
it is difficult to advocate when the money is not there to meet
the goal. And my concern has been that the charter privileges
granted to the large enterprises were being utilized to supply
significant rate of return to shareholders and not meet their
social obligation. And that historically has been there. So I
just want to make sure everybody out there knows you and I are
together.
Is there any other member wishing to make a statement. If
not----
Mr. Frank. I am sure, Mr. Chairman, that will comfort them
as they leave.
Chairman Baker. Yes. I can see the calm sweeping across the
face of the earth.
Mr. Chairman, I want to express my appreciation for your
appearance here today, your strong leadership and direction,
and we look forward to working with you in the future.
Mr. Rosenfeld. Thank you, sir.
Chairman Baker. Thank you.
And if I may ask the members of our second panel to come
forward as they can.
I want to welcome each of you to our hearing this morning,
and just as to the general practice of the committee, your
formal statement will be made part of the record. You will be
recognized in order to present a summary of your views, and we
request that you try to constrain yourselves to within a 5-
minute presentation.
And for the purposes of making our initial introduction, I
would like to recognize Mr. Davis who has a word to say.
Mr. Davis?
Mr. Davis of Kentucky. Thank you, Chairman Baker. This
morning I would like to welcome to the subcommittee a
constituent of mine residing in Kentucky's fourth district, Dr.
David Hehman, who is president and CEO of the Federal Home Loan
Bank of Cincinnati, a regional wholesale bank serving 750
member financial institutions in Ohio, Kentucky and Tennessee.
Dr. Hehman oversees the operations of the $83 billion
federal home loan bank, including its multimillion dollar
Affordable Housing Program that has created over 31,200 units
of affordable housing in the region. He was named president and
CEO in 2003 following a 25-year career at the bank in
Cincinnati, during which he held positions including chief
financial officer and executive vice president.
In addition to these duties at the bank in Cincinnati, Dr.
Hehman serves on the Finance Committee and Public Policy and
Outreach Committee of the Federal Home Loan Bank President's
Conference and also represents the Federal Home Loan Bank of
Cincinnati on the board, the Council of Federal Home Loan Banks
and Pentegra's Retirement Fund.
I am also pleased to report that outside his duties with
the bank, Dr. Hehman serves on the board of directors of
Brighton Properties, Incorporated, a non-profit affordable
housing and social services agency in my district in northern
Kentucky, and he is a regionally recognized advocate working to
increase opportunities for home ownership.
Thank you for being here this morning, Dr. Hehman. We look
forward to hearing your testimony, and I yield back to you,
Chairman Baker.
Chairman Baker. I thank the gentleman for his comments, and
at this time Mr. Frank also wishes to be recognized to make a
brief opening statement.
Mr. Frank. Thank you for your graciousness, Mr. Chairman.
I am delighted Mr. Jan Miller, who is the president and CEO
of Wainwright Bank in Boston is here. The Wainwright Bank has
been an extraordinarily creative, socially responsible bank,
and I particularly wanted to note that, because among the
projects in which they have worked on affordable housing was
one in which my mother was very active. It is a very creative
program providing aid to homeless women, a group very much
neglected. So I am very appreciative of Wainwright for showing
how profitability and social responsibility combine, and I
thank Mr. Miller for being here.
And I also thank him for his testimony because I often sit
and listen or read people's testimony and at the end of that
have no idea what they think about the relevant issues, and I
have learned a lot about their views on life but none of which
help me. On pages four and five, he has a series of bullets,
very specifically, talking about what as both from the bank and
a member of the board of directors, the Boston Bank, very
specific policy recommendations, positively and negatively. I
appreciate those. I find myself very persuaded by them.
But I thank him both for the nature of the testimony and
for coming, and I appreciate, Mr. Chairman, your letting us do
this.
Chairman Baker. Certainly.
I would now turn to Mr. David Hehman, president and CEO of
Federal Home Loan Bank of Cincinnati. Welcome, sir.
Mr. Hehman. Thank you, Mr. Chairman, and thank you to
Congressman----
Chairman Baker. You will have to hit the button and then
pull it close too.
Mr. Hehman. Can you hear me?
Chairman Baker. There we are.
STATEMENT OF DAVID H. HEHMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, FEDERAL HOME LOAN BANK OF CINCINNATI
Mr. Hehman. Sorry. Thank you, Mr. Chairman. I would also
like to thank Congressman Davis for those kind words.
Mr. Chairman, Ranking Member Kanjorski and members of the
committee, I do appreciate the opportunity to speak to you
today on behalf of the Council of Federal Home Loan Banks.
Mr. Chairman, I would like to commend you for your
commitment and hard work to create a truly world class
regulator for the GSEs.
And, Congressman Kanjorski, we commend you on your strong
support of the system over the years and your support and your
efforts toward strong corporate governance within the system.
As you have heard today, the home loan bank system is quite
unique, comprised of 12 regional banks with over 8,000 member
institutions. And while the system shares a congressional
charter and housing mission with Fannie Mae and Freddie Mac,
the banks are fundamentally different.
Our structure is one of 12 regional banks and their members
that form a cooperative that is driven by member credit demand
without the earnings pressure of a publicly traded stock
corporation. And while the 12 banks are independently owned and
operated, as you know, they share joint and several liability
for the system's debt.
I think the mission perspective in the system is also
broader than that of the other housing GSEs. The home loan
banks are major providers of advanced funding for housing and
community development. The value of these advanced systems goes
from their daily availability as well as the actual provision
of long-term funding at capital market rates.
Recent research sponsored by the council into the impact of
federal home bank advancements on mortgage lending has clearly
shown that members of the system hold a significantly higher
share of their assets in housing and community development
loans compared to non-members. These findings actually confirm
those in a July 2002 study sponsored by the Federal Reserve
Bank of Cleveland, Ohio.
These studies show a strong correlation between the use of
advances and members' willingness and ability to hold mortgage-
related assets. Quite simply, the studies confirm the system is
doing exactly what the work that Congress had intended.
Two critical pieces of legislation have shaped the home
loan banks today. First, of course, is FIRREA of 1989, which
expanded membership to include commercial banks and credit
unions, established the resolution funding assessment on bank
earnings as well as mandated the Affordable Housing Program. As
a result of the AHP program, the home loan banks since 1990
have awarded over $2 billion to create more than 400,000 units
of affordable housing throughout the United States.
Title VI of the Gramm-Leach-Bliley Act, sponsored by
Congressmen Baker and Kanjorski, provided a permanent capital
structure, expanded the types of collateral community
institutions can pledge and also increased the independent
corporate governance of each bank.
The task of creating permanent capital is nearing
completion, as 10 of the 12 banks are now finished with their
capital plan. These new structures have left the system with
some $42 billion worth of capital and an aggregate capital
asset ration of 4.5 percent.
You have also heard that the Federal Housing Finance Board
has recently adopted a final rule regarding each federal home
loan bank and the requirement to register a class of equity
securities with the SEC. Under this disclosure, the Federal
Home Loan Banks will file their financial statements with the
SEC. While the system already has in place a comprehensive
reporting system, furnishing SEC reports will further the
process of providing transparent statements by which the public
can judge the activities of the system.
Last year, recognizing there were serious legislative
efforts to reform regulation of the GSEs, the Council of
Federal Home Loan Banks adopted guiding principles for such
legislation. With respect to the Federal Home Loan Banks, we
believe these same principles should apply to regulatory reform
under consideration by the current Congress.
First, we believe it is critical that the legislation
preserve the Federal Home Loan Banks' mission of providing
cost-effective funding to members for use in housing finance
and community development. And that legislation should continue
to encourage regional affordable housing programs.
Second, it is critical that the legislation provide for a
strong independent regulator. In addition, this new regulator
must be given all the tools and authority necessary to ensure
that Federal Home Loan Banks' advanced mortgage programs
operate in a safe and sound manner that is consistent with our
mission.
Third, it is critical that the legislation preserve the
role and function of the Office of Finance, as they are the
office that obviously is involved with the issuance of our
debt. Legislation must ensure that neither the U.S. Treasury
nor the independent regulatory unit has the ability to impede
or limit the Federal Home Loan Banks' access to capital markets
without cause.
Fourth, it is critical that the new regulatory structure
recognize the unique regional characteristics of the system,
including corporate governance at the local level.
Mr. Chairman, the Council of Federal Home Loan Banks
supports legislative efforts to achieve a world-class
regulatory for the GSEs. From the point of view of the Federal
Home Loan Banks, we believe it is important to resolve this
matter promptly.
Thank you for the opportunity to address the committee, and
I would be happy to answer questions at the appropriate time.
[The prepared statement of David H. Hehman can be found on
page 67 in the appendix.]
Chairman Baker. Thank you very much.
Our next witness is Mr. F. Weller Meyer, president and CEO
of Acacia Federal Savings Bank. Welcome.
STATEMENT OF F. WELLER MEYER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, ACACIA FEDERAL SAVINGS BANK
Mr. Meyer. Good morning, Chairman Baker, Ranking Member
Kanjorski and members of the subcommittee. My name is Weller
Meyer, and I am the president and CEO of Acacia Federal Savings
Bank.
Acacia is a $995 million community bank in Falls Church,
Virginia. Acacia's primary business is originating mortgages
for families. We are a member of the Federal Home Loan Bank of
Atlanta and currently have $244.1 million of advances
outstanding. That is 26.7 percent of our liability. We rely on
the Federal Home Loan Bank System day in and day out to help us
do our mortgage lending business.
Community banks have an acknowledged history of superior
performance in lending to low-income and minority borrowers and
first-time home buyers. The Federal Home Loan Banks support
this business with advances and with programs, including the
Affordable Housing Program. These activities would not be
possible without access to advances.
From a member and user perspective, it is important to
retain the highly successful cooperative organization of the
system and the ability of the Federal Home Loan Banks to fund
the mortgage originations and community development activities
of its member institutions.
Like many other banks, Acacia's investment in federal home
loan bank stock is the single largest investment we have. The
safe and sound operation of the banks and the safety of my
investment are critical. Although Acacia is a member of the
Federal Home Loan Bank of Atlanta, the organizational structure
and the joint and several liability of the banks mean that I am
interested in all the activities of all the federal home loan
banks.
The Federal Home Loan Bank System needs a strong,
independent regulator that has the authority to supervise the
individual banks using the current statutory framework of
powers. Any new regulator of the Federal Home Loan Banks must
have the authority to maintain the banks' access to the capital
markets and their current well-defined mission to support the
mortgage finance, affordable housing and community development
activities of member banks.
In the past 10 years, acquired member asset programs have
been developed by several banks to provide the members and the
banks that participate an alternative risk management and
mortgage funding strategy. The members are able to sell loans
to the Federal Home Loan Bank under terms established in the
program.
As the programs evolve, some market participants have
discussed permitting securitization of the loans as part of the
program. I strongly believe that this is a topic that must be
studied before any action is taken, and that securitization be
considered only in the context of a public review process
conducted by the designated federal regulator.
The independence of the future regulator is an important
element. A structure that provides autonomy will insulate the
regulator from concerns about unintended political influence.
Fees that the regulator assesses the Federal Home Loan Banks
must be used only to examine and supervise the banks.
The Finance Board has powers and authorities similar to
those of the banking regulators in the areas of capital
activities and supervision, and they should be preserved.
The Federal Home Loan Banks' stocks and debt instruments
should be subject to transparent disclosures that are
appropriate for the unique GSE. In June 2004, the Finance Board
issued a final rule requiring that each federal home loan bank
register a class of securities with the SEC under the
Securities Exchange Act of 1934. The disclosure scheme that has
been established for public companies contains a number of
requirements that make it difficult for a cooperative system to
comply.
I support the inclusion of certain specific securities law
exemptions in any legislation. Such exemptions will make it
easier for the Federal Home Loan Banks to register and to
comply with the disclosure requirements but will also make it
easier for interested parties to understand the disclosures and
the business of the Federal Home Loan Banks.
In particular, I support a specific provision that would
exempt the Federal Home Loan Banks in the system from certain
requirements of SEC's Regulation FD. I believe that the
composition of the boards of each of the Federal Home Loan
Banks is a critical element in ensuring that the governance of
the Federal Home Loan Banks is undertaken in an appropriate
manner.
Financial business and operating expertise must be
demonstrated by the board of each federal home loan bank. I
support careful consideration of changes to the statute,
regulations and practice that will ensure that each federal
home loan bank will have a board that is composed of members
with a stake in the system, who understand the commitment and
importance of serving on the Federal Home Loan Bank Board.
I wish to again express my appreciation, Chairman Baker,
for this opportunity to testify on this important issue. The
future of the Federal Home Loan Bank System is important to the
day-to-day operations of many community banks, including
Acacia, and the communities they serve.
I look forward to working with you and the members of this
subcommittee as the legislative process unfolds.
[The prepared statement of F. Weller Meyer can be found on
page 76 in the appendix.]
Chairman Baker. Thank you very much, sir.
Our next witness is Mr. Jan Miller, president and CEO of
Wainwright Bank.
Welcome, sir.
STATEMENT OF JAN MILLER, PRESIDENT AND CHIEF EXECUTIVE OFFICER,
WAINWRIGHT BANK
Mr. J. Miller. Thank you, Mr. Chairman. I would also like
to thank Congressman Frank for his kind words. The project that
he described is one of the most enjoyable that we have done.
As I said, my name is Jan Miller, and I am president and
CEO of Wainwright Bank and Trust Company in Boston, and I also
serve as an elected director on the Board of the Federal Home
Loan Bank of Boston.
Wainwright is a $750 million socially responsible
commercial community bank with 9 branches throughout the Boston
metropolitan area. The bank's progressive agenda includes a
commitment to affordable housing, community development, social
justice, environmental issues, women's rights and the gay and
lesbian community.
It is our commitment to affordable housing and community
development that is the cornerstone of our organization. We
have provided more than $400 million in financing for these
projects over the past decade.
Currently, approximately 40 percent of our commercial loan
portfolio is dedicated to community development and non-profit
lending, including homeless shelters, special needs housing,
food banks, AIDS housing and services, breast cancer research,
land preservation, community health centers and other service
organizations.
I ran for a seat on the Boston Bank's board, because the
Federal Home Loan Banks are a critical partner for community
banks like Wainwright. We rely on the Federal Home Loan Bank of
Boston as a vital source of liquidity and asset liability
management. But equally important, the Boston Bank has been
enormously helpful in our efforts to address the needs of
affordable housing in the extremely dense, high-cost
metropolitan Boston area. Each federal home loan bank commits
10 percent of its net profits to the Affordable Housing
Program, which awards grants and subsidized below market rate
loans to fund affordable housing developments for the very low,
low and moderate income individual and families.
Wainwright has been fortunate enough to win funding for 24
of these such projects. We simply could not have funded these
developments, which resulted in 775 units of much needed
housing, without the nearly $6 million in AHP grants and $12
million in subsidized advances.
Whether it is transforming an empty school into affordable
assisted living for the elderly or creating first-time home
ownership opportunities for hard-working families or providing
quality housing for special needs populations, the homeless and
the disabled, the Affordable Housing Program has been an
important vehicle to help Wainwright fulfill its mission and
strengthen our community.
The Federal Home Loan Banks are as relevant today as they
were when Congress created the bank system back in 1932. But if
the members of the subcommittee believe it is important for
this nation to have diverse, locally based financial
institutions serving our communities and not just a handful of
very large banks, then it is vital that we keep the Federal
Home Loan Bank System strong and vibrant.
Moreover, if you believe, as I do, that private financial
institutions have a key role in addressing the need for
affordable housing across the nation, the Federal Home Loan
Banks are critical.
Congress is wise to establish the bank system as a
regional-based cooperative. The Federal Home Loan Banks are
well-positioned to meet the unique needs of multifaceted
communities across our nation. The housing and community
development finance needs could be quite different in New
England than those you might find in Chairman Baker's district
in Louisiana or in Pennsylvania or in other areas of the
country.
The local federal home loan bank knows the laws and local
regulations and also the people in the public sector and who to
turn to for assistance when the project needs help. They are
attune to any changes or any new requirements. The people at
the Federal Home Loan Bank of Boston are committed to
affordable housing and become our partner in the projects that
we finance.
The Affordable Housing Advisory Council brings members of
the housing community together frequently to discuss issues,
the bank's programs and the needs within the region. It is my
belief that the bank system would not be nearly as effective if
it were a one-size-fits all operation.
The directors of the Boston Bank have considered at some
length the potential for reforming the regulatory structure for
the Federal Home Loan Banks, along with Fannie Mae and Freddie
Mac. As a director and a shareholder, I support having a strong
and respected regulator for the Federal Home Loan Banks. The
Boston Bank, as a member of the Council of Federal Home Loan
Banks, supports the guiding principles of legislative reform,
as Mr. Hehman has described in his testimony.
More specifically, the Board of Directors of the Boston
Bank believe that any GSE reform legislation should have the
following elements: The new regulator must be independent
outside of the Department of Treasury and dedicate a separate
division to oversee the Federal Home Loan Banks; independent
directors must continue to be appointed to the boards to
maintain representation of the public interest.
Finally, the Boston Bank would strongly oppose the
following in any GSE reform legislation: Efforts aimed at
minimizing the bank's current GSE status, any efforts to foster
consolidation, the imposition of additional financial burdens
on the banks. As cooperatives, we already operate on very thin
margins.
We believe the Federal Housing Finance Board has sufficient
authority to oversee the safety and soundness of the system's
Mortgage Purchase Programs and thus would oppose any limits
placed on these programs by legislation, limits placed on large
members' access to the banks or any restrictions on board
governance granted in Gramm-Leach-Bliley.
Mr. Chairman, I appreciate the opportunity to testify this
morning. On behalf of Wainwright Bank and the Federal Home Loan
Bank of Boston, I look forward to working with you and your
colleagues to craft a sound and thoughtful regulatory structure
for the Federal Home Loan Banks.
[The prepared statement of Jan Miller can be found on page
83 in the appendix.]
Chairman Baker. I thank the gentleman.
Our next witness is Mr. Joseph F. Conners, the executive
vice president and chief financial officer of Beneficial
Savings Bank.
Welcome.
STATEMENT OF JOSEPH F. CONNERS, EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, BENEFICIAL SAVINGS BANK
Mr. Conners. Thank you, Mr. Chairman, and thanks for the
opportunity to come before the subcommittee today to talk about
the vital role that the federal home loan bank plays in helping
Beneficial and other community banks meet the housing and
community credit needs of local communities.
I am Joe Conners. I am at Beneficial Savings Bank. We are a
Philadelphia bank with about $2 billion in assets and 36 branch
offices spread throughout the city and its suburbs. Within
those suburbs we do have offices located in the districts of
two subcommittee members, Representatives Fitzpatrick and
Gerlach.
I want to just talk a little bit about the bank itself and
history of the bank, because I think there is a reasonable
parallel to some of the important issues that are affecting the
home loan bank right now.
Beneficial was founded over 150 years ago to serve the
underserved. It was founded as a mutual or cooperative company.
It remains a mutual cooperative company today, and it was also
founded to serve the needs of a local area or a regional
market, much like the 12 different Federal Home Loan Banks do
in their regions.
Essentially, the history is that in the 1850s waves of
immigrants came from Europe due to the potato famine in Ireland
as well as unrest and revolution in other parts of central
Europe. Philadelphia being the major port city was a recipient
of a lot of these immigrants as they came seeking a better
life.
They worked hard, they earned money, and they needed a
place to save their money. The banks, the commercial banks at
that time were not designed for working men and women. They
were really there to serve the wealthy business people that
were their primary backers. As the earnings of these wealthy
people accumulated, they needed a place to stash their savings,
and they went to the church.
The local parish priests became their bankers and took
their savings, put them in drawers in the basement of the
church, and as they savings began to accumulate there were some
concerns about security. These concerns were shared by the
bishop of Philadelphia at the time, a fellow named John Newman
and through his inspiration a group of businessmen got together
and formed Beneficial Mutual Savings Bank in 1853.
Bishop Newman, just so you know, subsequently was canonized
by the Catholic church as a saint, so we do like to say we are
the only bank in the country, maybe in the world, that actually
was founded by saint.
[Laughter.]
Now, as I said, the bank was founded as a mutual company,
it remains that way today, which basically means that we pay no
dividends, we have no shareholders to please, there is no
public stock outstanding. That means the bank can really focus
its energies on its community and its customers. And we think
that is very similar to the mission and to the actual
operations of the Federal Home Loan Banks.
Today, the Federal Home Loan Bank of Pittsburgh, of which
Beneficial is a member, along with about 341 other member
owners, helps us to meet the credit needs of the community. As
is the case with a vast majority of federal home loan bank
members, Beneficial is not large enough. To access the broadest
range of capital markets activities and options to raise money
to fund our operations.
The Home Loan Bank of Pittsburgh enables Beneficial to
essentially tap global capital markets without having the in-
house expertise and resources that a major money center bank
would need to have. It allows Beneficial to borrow from the
home loan bank at reasonably attractive rates. It is a
cooperative, so it adds only a small markup which we can then
pass along to our customers in the form of reasonably
attractive rates for their housing needs and other credit
needs.
The knowledge that we can borrow at any time from the home
loan bank, and that our mortgage loans and other eligible
collateral will support the bank's funding, allows us to be
more active lenders than we otherwise would be. The liquidity
that is provided by the federal home loan bank is very
important in allowing us to be able to fund our customers'
needs on a daily basis.
For example, with the economy expanding, as it has been and
continue strong demand for new housing, Beneficial has
recently, in the last year or 2, begun using federal home loan
bank advances to support construction of new housing in the
area, as well as rehabilitation and renovation of existing
units in urban neighborhoods and in suburban communities.
Our customers are developers, they are looking for money
short term that floats, that they can pay back whenever they
want and that they can draw down whenever they want. The way we
can structure these borrowings with the Federal Home Loan Banks
allows us to meet those needs in almost perfectly correlated
transactions, so we take on no additional interest rate risk.
We provide resources to the communities that help to build
housing units, that help to provide construction jobs and, of
course, to make a spread for the bank, which, as I said, as a
mutual, simply goes into the reserves of the bank.
We think it is important that the work that the
subcommittee is doing as soon as possible can help to restore
consumer and investor confidence in the Federal Home Loan Bank
System and particularly in Fannie Mae and Freddie Mac. I think
that it is very important, because I think that all of these
GSEs that support housing are critically important. The
homeownership rates in the country have gone up sharply since
the founding of the home loan bank back in 1932. I am sure
there are a number of reasons for that. However, the federal
home loan bank is certainly one of them.
With regard to the legislation that is being considered, we
think it is important that this home loan bank is ensured a
robust future, that the safety and soundness regulator of the
home loan bank is indeed a world-class regulator, that the
regulator should have the ability and the flexibility to allow
the banks to develop new products over time, that any
legislation, and I think this is critical, does not impede the
ability of the home loan bank to access capital markets, which
they do hundreds of times throughout the day to meet the needs
of their community bank customers, that the unique nature of
the system, that is 12 independently operated cooperatives, be
preserved, and that Congress should ensure that the SEC
recognizes that the system does have unique features that
really do not apply to other firms, companies and even Fannie
Mae and Freddie Mac that the SEC will regulate.
Thanks very much for the opportunity to be here, and I
would be glad to answer any questions.
[The prepared statement of Joseph F. Conners can be found
on page 54 in the appendix.]
Chairman Baker. Thank each of you very much. Unless some
member objects, I am going to suggest we proceed rather
informally. I have got just some principles I would like lay
out for you to respond to and then a series of a few questions.
I recognize the unique nature of the bank system's
structure and of its function and that community need, to a
great extent, drives the product the bank will ultimately
deliver. And despite characterizations to the contrary, the
housing mission of all GSEs is the reason for their existence.
I do not really know of anyone on the committee who would
suggest that we should not meet the needs of low-income, first-
time homebuyers, minorities. That is how we do it. That is how
we achieve those goals. And to assess the enterprises, as in
your case, 10 percent of net profit, in order to achieve that
goal is a fairly heavy burden. We do not see anything similar
on the Fannie-Freddie side of that sort.
And balancing the mission with safety and soundness, that
in the effort to provide the revenue you need to accomplish
your mission, that untoward risk is not taken on in an ill-
advised manner. Therefore, a strong regulator with unilateral
authority to act, which I believe the bank system has in the
Finance Board structure.
Having said that, those observations do raise a few
questions about where we are and where we should go. For
example, I did not hear and have not read is there a view of
the panel as to whether it is ill-advised or of no consequence
to have a single regulator with mission and safety and
soundness combined, as does the bank system?
Some will argue on the committee that we must have a
separate box somewhere in which mission, product approval
activities are reviewed and gauged and kept segregated from the
safety and soundness shop. I think, making full disclosure,
that it makes a lot of sense to have both in the same facility,
as does the current bank model. Do you all have any view on the
regulatory structure going forward or no comment? I will take
that.
Mr. Conners. I will comment. I do not see the need or even
the facility of having two separate regulators. I think I would
agree with your comments.
Chairman Baker. Good. Thank you. Anybody else want to get
in trouble?
If not, let me jump to sort of the second observation, and
Mr. Meyer, you came as close to touching on this with your
comments in expressing the view and belief that at each
district level there should be sufficient expertise on the
board and in the management to appropriately gauge that bank's
risk profile and to ensure that nothing goes awry that can be
prevented.
That gets right up to that consolidated debt question of
mine. If I were in the Dallas Bank and let's assume it was the
Washington, D.C. Bank, no reference to Baltimore, Philadelphia,
anybody, just making this up, and they got engaged in certain
activities that I would never think of in the Dallas Bank was
appropriate but yet I am on the hook for that should it go
backwards, is that an operational concern of a use of the bank
system, and would it be advisable for us to look at some way to
on an annual basis have each district issue some sort of
security to have a level of market discipline?
Mr. Meyer. Mr. Chairman, I believe that the direction that
you are headed with appointment of a strong, independent
regulator is the first step in the process. I think that the
system, as it has existed to date, has worked very well. I
agree that there is a legitimate concern as to joint and
several liability between the banks. I am not sure that I have
an answer as to how appropriately that would be handled going
forward.
Certainly, from the selling point of having a strong
regulator who has safety and soundness oversight and control, I
think that is the beginning point. There may be some
refinements that would enhance that, but I think it is a
legitimate concern.
Chairman Baker. Good. I just think having someone in the
market evaluate a bank's performance is a helpful tool for the
regulator, because as we have found out, sometimes the
regulator finds it first, sometimes the market finds it first.
But when you have got both of them, you have got a chance of
finding it.
Anybody else have a comment on that market discipline
question?
The other issue that was raised, frankly, by Chairman
Greenspan's comments of a couple of weeks ago where he did not
find it in itself inappropriate for the banks to engage in
securitization, I think it is a good way to move interest rate
exposure off your books and into the market as long as you are
not subsequently out there buying back your own stuff. That
causes me significant concern.
Do any of you have a view as to the appropriateness or
desirability for the system to be authorized to enter into the
world of securitization.?
Mr. Hehman. I think as a bank president, I want every tool
possible to manage the interest rate risk on my balance sheet.
I think Chairman Rosenfeld very clearly pointed out
securitization means lots of things to lots of people, and he
went from the Ginnie Mae model across the spectrum.
Having said that, I know the Council of Federal Home Loan
Banks has not taken a position on this. I can tell you that the
board of directors of my bank believes that a legislative fix
for securitization is not the answer, but it should be
something that the regulator, a strong regulator should be able
to evaluate in their safety and soundness role as a proper
financial management tool for the Federal Home Loan Banks. So I
think it is something they ought to at least consider, give
strong consideration to.
Chairman Baker. Well, from a safety and soundness point,
moving interest rate risk exposure off from a housing
perspective, if it is to generate revenue for housing mission
compliance, that is okay.
Mr. Hehman. I understand.
Chairman Baker. Leveraging your ability to borrow at low
rates in the market for other purposes is where I think the
concerns would lie.
I also want to explore, Mr. Miller, your comment about the
concern about enhanced costs potential with any legislation
that might move forward to the bank system.
Mr. Frank and I have had discussions about affordable
housing goals. Is it your view the 10 percent now required is
the ceiling beyond which we should not go because it may have
adverse operational consequences or was that an inappropriate
conclusion?
Mr. J. Miller. The comment more was to additional costs
that might be laid on the banks that would reduce their
earnings and reduce the ability to--you know, the 10 percent of
the earnings, reduce the amount of money that is available for
affordable housing.
Chairman Baker. Because I do not have any inside knowledge
here, but I know that the level of assessment of net operating
profit is something that probably will be discussed, and I just
wanted to get a clear focus on whether that level of assessment
was in today's world an appropriate assessment or was there
room to move. And I know if REFCOR went away, that would be an
easy thing to answer. But I do not think we are going there.
Unless any of you gentlemen would have further comment, let
me just say in my own arena with the Economic Development
Program, the EDP program, I have found this to be
extraordinarily valuable but extraordinarily misunderstood or
not very well known about by member banks, and I am for that
purpose convening a little get together in Louisiana soon to
have the Dallas Bank come over and talk about it in broad
terms.
I do not know how we translate it to the member banks out
there in the real world what this program offers and what it
means in the way of small business development, but it is a
great program and however we can be of help on our side of the
fence in making more people aware, I certainly want to offer
that.
And then thank each of you for your participation here this
morning. It has been most helpful to us. And I can assure you
your remarks will be forwarded to every member and will be
reviewed in the course of our work going forward.
Our meeting stands adjourned. Thank you.
[Whereupon, at 12:24 p.m., the subcommittee was adjourned.]
A P P E N D I X
March 9, 2005
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