[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

                              ----------                              
                                                                   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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