[Congressional Record Volume 146, Number 63 (Friday, May 19, 2000)]
[Extensions of Remarks]
[Pages E769-E771]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E769]]



                            CAPITAL MARKETS

                                 ______
                                 

                            HON. MAX SANDLIN

                                of texas

                    in the house of representatives

                         Thursday, May 18, 2000

  Mr. SANDLIN. Mr. Speaker, Frank Raines, Chairman and CEO of Fannie 
Mae, testified this week before the House Banking and Financial 
Services Subcommittee on Capital Markets. His testimony was interesting 
and informative, and I appreciated hearing from him. So that those who 
will not receive a copy of his testimony may understand more about what 
Fannie Mae does, and what Mr. Raines' views are, I include for the 
Congressional Record a copy of his speech before The National Press 
Club on May 12.

Remarks Prepared for Delivery by Franklin D. Raines, Chairman and Chief 
                     Executive Officer, Fannie Mae

       Thank you for joining us today.
       These are ``interesting'' times for the housing industry, 
     and we wanted to bring you up to date since Jim Johnson gave 
     his farewell address as Chairman of Fannie Mae from this 
     podium in November of 1998. A year and a half may not seem 
     like a long time, but it has been an unusually turbulent 
     period, and much is at stake.
       As some of you may recall, Jim titled his speech, ``Why 
     Homeownership Matters--Lessons Learned from a Decade in 
     Housing Finance.'' He painted a very positive picture. He 
     said the American Dream of homeownership was more alive, 
     achievable and inclusive than ever. He said the growth in 
     homeownership is making everything better, from the wealth of 
     average families, to the health of older communities, to the 
     strength of the nation's economy. The housing finance system, 
     he declared, was the most efficient and effective ever 
     devised.
       Jim was absolutely right. And things have gotten even 
     better. The national homeownership rate has just topped 67 
     percent, a new record. Even though mortgage rates have gone 
     up, the housing market remains robust. Housing starts are 
     strong. Home sales are vigorous. Home values are 
     appreciating. Households are growing. Homes are getting 
     larger. Home equity is rising. Default and foreclosure rates 
     are at historic lows.
       And the process of buying a home has never been better. 
     Automated underwriting and other advances have made it 
     faster, easier, less frustrating and less costly to finance a 
     home, and reduced the bias in lending decisions. E-commerce 
     and financial deregulation are giving consumers more power 
     and more choices at lower costs. The mortgage industry has 
     been breaking through the old red lines and bringing 
     affordable housing finance to families that used to be 
     overlooked, neglected or rejected.
       Behind all of this, the secondary mortgage market--
     including Fannie Mae--is attracting billions of dollars of 
     private capital from all over the world, providing lenders 
     with a steady flow of funds in all communities at the lowest 
     rates in the market and with zero risk to the government.
       With the system we have today, and with the economic winds 
     at our backs, the national homeownership rate could rise as 
     high as 70 percent in this decade, with ten million new 
     homeowners and growth especially among minorities, new 
     Americans and other historically underrepresented consumers.
       Yogi Berra warned that, ``A guy ought to be very careful in 
     making predictions, especially about the future.'' But I 
     think we're on pretty solid
       But I stand before you at a moment when questions have been 
     raised about the utility of the U.S. secondary mortgage 
     market that is so integral to the system's functioning as a 
     whole. Some of these inquiries are well meaning. But it is no 
     secret that some of the questions are generated by financial 
     competitors that would earn more if Fannie Mae and Freddie 
     Mac were not lowering costs for consumers.
       The U.S. housing finance system is strong, but it is not 
     indestructible. Changing it significantly could have real 
     consequences for real families. The burden of proof for 
     anyone that wants to change the system is a simple but 
     stringent test--does it help or hurt home buyers?
       Today, let me reinforce why our system works so well and 
     what we are up against.
       To illustrate what is so good about our system, let's 
     compare it to the other major industrialized countries. Most 
     of the G-7 countries have a well-developed mortgage system 
     organized around depository institutions. But the mortgages 
     they offer are less consumer-friendly. In America we take the 
     30-year, fixed-rate mortgage for granted. Last year, 66 
     percent of the mortgages issued in the U.S. were 30-year, 
     fixed-rate conventional mortgages.
       Outside the U.S., the long-term fixed-rate mortgage is a 
     rarity. In Canada, they have rollover mortgages, where the 
     rate is fixed during the first one to five years, with a 
     prepayment penalty equal to three months of interest. The 
     fixed-rate term in Spain is usually one year. In France, 80 
     percent of all mortgages have variable rates. In Germany, you 
     can get a fixed-rate for five to fifteen years, but you can't 
     refinance during this period without paying a huge penalty.
       The low down payment features of U.S. conventional 
     mortgages are also unique. We now take for granted down 
     payments as low as 5 and 3 percent. That's not the case in, 
     say, Germany, France, the United Kingdom or Japan. In 
     Germany, the down payment is typically 30 to 40 percent, and 
     in Japan, you've had to put down effectively 50 to 60 
     percent.
       Why are American conventional mortgages more consumer-
     friendly? Mainly because we have a secondary mortgage market. 
     In other countries, the banks largely make the loans from 
     their deposits and hold the mortgages as an investment. Our 
     system primarily worked that way until the 1970s and 1980s. 
     Today in America, banks, thrifts, mortgage bankers and credit 
     unions make the loans, but they can depend on the secondary 
     market to supply the long-term funding.
       What Congress did in establishing a secondary market in the 
     thirties and privatizing this market in the sixties made this 
     change possible, and it has turned out to be absolutely 
     brilliant. When it chartered Fannie Mae and then Freddie Mac 
     as private companies, it created a system that harnesses 
     private enterprise and private capital to deliver the public 
     benefit of homeownership. And it maximizes this public 
     benefit while minimizing the public risk, without a nickel of 
     public funds.
       Let's do a quick risk-benefit analysis, starting with the 
     risk side of the equation.
       There is a simple reason fixed-rate mortgages with low down 
     payments are rare outside the U.S. Since they don't have a 
     secondary market to buy the mortgage, the lender has to hold 
     the loan and take on all the risk. That is, the lender has to 
     assume the credit risk--the risk that the borrower could 
     default--and the interest-rate risk--the risk that interest 
     rates will change and cause the lender to pay out more to 
     depositors than he is receiving on loans. So the lender 
     protects himself by requiring the consumer to pay more up 
     front and more each month if interest rates rise.
       In America, the secondary market purchases the mortgage, 
     taking most of
       This process is called ``risk transformation.'' Here's how 
     it works. Fannie Mae and our lender partners create mortgages 
     that consumers want, like our 3 percent down Fannie 97. And 
     we finance them with capital we raise by creating debt 
     instruments that investors want, like our Benchmark 
     securities. We share the credit risk on the Fannie 97 with 
     mortgage insurance companies, and we hedge the interest rate 
     risk by selling callable debt securities to Wall Street. We 
     also work with Wall Street to develop even more refined 
     strategies for hedging our interest-rate risk and credit 
     risk. Last year, we spent about half of our gross revenues 
     paying others to assume risk we didn't want.
       Managing risk, in fact, is all we do. We manage risk on one 
     asset--U.S. home mortgages--perhaps the safest asset in the 
     world. All told, 96 percent of all mortgages in America are 
     paid in a timely fashion, which goes to show just how much 
     Americans cherish homeownership. And to help us analyze our 
     risk precisely, we have amassed performance data on 29 
     million loans dating back over 20 years.
       All of this helps to explain why our credit loss rate 
     during the nineties averaged only 5 basis points--five cents 
     on every hundred dollars--even during the recessions in 
     California and New England. Just to compare, the bank credit 
     loss rate on their more diverse set of assets was an average 
     of 86 basis points, or 86 cents on every hundred dollars. 
     Today, our loss rate is lower than ever, at just 1 basis 
     point last year.
       A strong secondary market makes the entire financial system 
     safer and more stable. The government holds Fannie Mae and 
     Freddie Mac to the highest financial safety and soundness 
     standards in the financial services industry. We have to hold 
     enough capital to survive a stress test--essentially, ten 
     years of devastating mortgage defaults and extreme interest 
     rate movements. Other financial institutions would not last 
     long under the scenario spelled out in our capital 
     requirements. Thrifts, for example, would become insolvent 
     after five to seven years. At the end of the ten years, 
     Fannie Mae and Freddie Mac would be the only major holder

[[Page E770]]

     of mortgage assets still standing. A strong secondary market 
     puts mortgages in the safest hands.
       Now let's look at the public benefit.
       First, the secondary market means consumers never have to 
     hear their lender say, ``sorry--we're out of money to lend.'' 
     People think this can't happen, that it's something out of 
     the Depression era. But without Fannie Mae and Freddie Mac, 
     this could have happened at least twice in the last 20 years. 
     When the S&L system crashed during the eighties, the thrifts 
     in California and Texas would have had no money to lend if we 
     had not stepped in to back their loans. Then, in 1998 when a 
     credit crisis shook the capital markets, conventional 
     mortgage rates would have jumped as jumbo rates did if Fannie 
     Mae and Freddie Mac hadn't been able to raise billions of 
     dollars in capital, and keep it flowing to lenders. Home 
     buyers never felt the credit crunch. In both cases, hundreds 
     of thousands of families would have been denied a mortgage.
       The secondary market also drives down mortgage costs. Last 
     week, a mortgage backed by Fannie Mae would be $19,000 
     cheaper, over the term, than a jumbo mortgage that's just a 
     dollar beyond our loan limit. Our savings over the jumbo 
     market jumped beyond $26,000 during the credit crisis of 
     1998. Today, a Fannie Mae loan is about $200,000 cheaper than 
     a subprime mortgage, and even about $18,000 cheaper than an 
     equivalent FHA or VA loan backed by the government. During 
     the nineties, Fannie Mae alone saved consumers at least $20 
     billion through lower mortgage rates.
       The secondary market also expands homeownership. Under the 
     1992 revisions to our charter, Congress requires Fannie Mae 
     and Freddie Mac to meet affordable housing goals, to devote a 
     set percentage of our business to underserved families and 
     communities. As many of you know, Fannie Mae
       Since 1993, these initiatives have boosted our lending to 
     African Americans by 31 percent, and to all minorities by 16 
     percent. Last year, Fannie Mae alone provided nearly $46 
     billion in housing finance for over 400,000 minority 
     families. That's what having a strong secondary market can 
     do.
       The success of our housing finance system is not lost on 
     the other major industrialized countries. I just returned on 
     Tuesday from meetings in London and Frankfurt with our debt 
     investors--the people who buy our Benchmark securities that 
     allow us to finance mortgages here. One of the many ironies 
     of being Chairman of Fannie Mae is that there are countries 
     in which investors will help finance American homeownership 
     while their own homeownership rate is lower.
       Naturally, many countries are curious about our system. 
     Fannie Mae has responded to many requests to serve as 
     advisors overseas, not because we will ever buy loans abroad, 
     but because of our expertise in the unique U.S. secondary 
     market, a market that is viewed in other countries as some 
     kind of miracle.
       So over the past few years, a team from Fannie Mae has been 
     invited to 29 different countries from Europe, to Africa, to 
     Latin America, to Asia to help them figure out how to build a 
     better system like ours. These countries have asked us how to 
     deepen their capital markets, manage risk better and expand 
     affordable lending and fair lending. We just had a team in 
     South Africa to help a start-up secondary market conduit 
     develop mortgage risk modeling, which they want to use to 
     fight redlining.
       What you see in America is a dynamic web of entities--both 
     public and private sector--delivering homeownership to 
     citizens of all backgrounds, incomes and circumstances. We 
     have small, medium and large mortgage originators and 
     lenders, serving consumers from store fronts to web sites. We 
     have home builders, Realtors, mortgage brokers, mortgage 
     insurers and appraisers and mortgage.coms. We have consumer 
     advocates, citizen activists and nonprofit housing 
     organizations. The system receives wide support from local, 
     county, state and federal agencies and elected leaders, 
     public policies and public benefits. And behind all of it, we 
     have a vibrant secondary market drawing capital from all over 
     the world to finance this homebuilding, lending and 
     purchasing.
       The interaction of these entities is constantly driving the 
     housing system to improve itself, to reward low cost and high 
     quality, to police the bad actors and chuck out the bad 
     apples, to search for new markets and untapped home buyers, 
     and break down the barriers. Looking back over my years in 
     the industry gives me confidence that the U.S. housing 
     system, with a little nudging here and there, will continue 
     to do the right thing for consumers. Good money will drive 
     out the bad. A better mousetrap is always in development. 
     Underserved families will be served. Our system is constantly 
     evolving and innovating to make owning a home more possible 
     for more people.
       Given how great our system is, it makes you wonder: Why are 
     some voices suggesting there is something wrong with our 
     housing finance system, something fundamental that needs to 
     be fixed?
       Certainly, the system benefits from constructive scrutiny. 
     It is entirely appropriate for the Congress to hold oversight 
     hearings on the safety and soundness of the secondary 
     mortgage market. I look forward to testifying before Mr. 
     Baker's subcommittee next week. It is also appropriate for 
     our regulators--HUD and OFHEO--to monitor us closely. And it 
     is appropriate for other agencies to ask questions within 
     their purview as well. We welcome official scrutiny.
       But something less constructive is also going on here in 
     Washington. Recently, a senior Senator asked me why Fannie 
     Mae was suddenly in the news so much. I explained to him that 
     some very large financial institutions have decided they are 
     not content with the way the system works for them. They see 
     how Fannie Mae and Freddie Mac drive down mortgage costs for 
     consumers and serve all mortgage lenders. They see how we 
     give small- and medium-sized mortgage lenders a chance to 
     compete with the large institutions. So this small group of 
     large institutions would like to eliminate the benefits that 
     Fannie Mae and Freddie Mac provide, from low-cost financing 
     to automated underwriting systems.
       They have brought the fight to Washington under the name FM 
     Watch. They began by defining themselves as a watchdog group, 
     and their rhetoric was mild. But over the course of the past 
     year, they have been unable to gain any traction. They have 
     been unable to answer the question of how the consumer would 
     benefit from any of their proposals regarding Fannie Mae and 
     Freddie Mac. And our nickname for this group, the ``Coalition 
     for Higher Mortgage Costs,'' has stuck like a tattoo.
       So this group has switched from watchdog to attack dog. Its 
     strategy is now to create an instant crisis, to convince 
     policymakers that Fannie Mae and Freddie Mac are a financial 
     risk to the taxpayer, an S&L crisis waiting to happen. This 
     is the equivalent of the owner of one movie theater going to 
     a rival theater and shouting ``fire!'' A mortgage insurance 
     industry that nearly collapsed in the 1980s and a banking 
     industry that collapsed in the early 1990s now seek to tag 
     the secondary mortgage industry with the word ``risky.''
       By trying to create a crisis, FM Watch has gone beyond a 
     watchdog role into an approach which, carried to its logical 
     conclusion, would actually harm the housing finance system, 
     all in an effort to create short-term advantages for its 
     members.
       Never mind that its claims collapse under scrutiny. Fannie 
     Mae and Freddie Mac are far from the S&L problems and banking 
     problems that bankrupted their deposit insurance funds and 
     required federal direct and indirect bailouts. To the 
     contrary, if the failed S&Ls and banks had stuck to safe 
     mortgage investments like we do instead of all their 
     speculative non-mortgage investments, they might not have 
     failed.
       Our safety and soundness allowed us to be the ``white 
     hats'' in the S&L and banking crises as we rode in with 
     additional capital to keep the housing system going. The 
     risk-based capital standard that Congress gave us since the 
     S&L and banking crises has made us even more safe and sound. 
     What FM Watch does not mention is that if the economic stress 
     test in our capital standard ever came to pass, the 
     government would have to bail out their members long before 
     Fannie Mae was in any danger.
       But you can learn a lot from debating with an entity like 
     FM Watch. They use so many facts that you just can't find 
     anywhere else. It reminds me of a story Adlai Stevenson once 
     told. He reminded his audience of the old lawyer addressing 
     the jury, who closed his summation by saying: ``And these, 
     ladies and gentlemen, are the conclusions on which I base my 
     facts.'' FM Watch is looking for any conclusion that will 
     help to damage Fannie Mae and Freddie Mac. The facts will be 
     altered to fit.
       If this Coalition for Higher Mortgage Costs were 
     successful, it would destabilize the secondary mortgage 
     market and the related capital markets. This destabilization 
     would undermine the entire housing industry and its progress, 
     raise costs for consumers and stifle the advance of 
     homeownership--harming underserved families first. Because 
     such an outcome is unacceptable, I don't think this will 
     happen. The American people and their elected representatives 
     are smart. They will soon recognize another lobbyist-driven 
     Potemkin-crisis public relations campaign for what it is. 
     Then they and the capital markets will stop listening.
       Certainly our housing system is not perfect. Minority 
     homeownership rates are too low. There is still inequality in 
     affordable mortgage credit. Too many families that can afford 
     the least are being charged the most for mortgage
       One issue deserving of further study is the question of why 
     disparities in loan approvals between white and minority 
     borrowers continue to persist. Many have suspected overt 
     racial discrimination. But those disparities can be found 
     even in automated underwriting systems using racially neutral 
     underwriting criteria.
       We take this issue very seriously because in our 
     experience, automated underwriting has in fact expanded 
     lending to minority families. To try to understand the 
     problem better, we have studied results from our system, 
     Desktop Underwriter. We found that

[[Page E771]]

     differences in credit histories account for about 50 percent 
     of the difference in loan approvals. And when you also factor 
     in the applicant's loan-to-value ratio and reserves, these 
     three factors together account for over 90 percent of the 
     difference in the approval ratings. The results of this study 
     point to the need for public policies addressing consumer 
     credit education and minority savings and wealth development.
       The housing finance system needs more answers to questions 
     such as this. To further explore these issues, next month 
     Fannie Mae is hosting a conference titled ``The Role of 
     Automated Underwriting in Expanding Minority Homeownership.'' 
     We're bringing together a range of advocates, academics, 
     regulators and lenders to engage in a meaningful dialogue 
     concerning automated underwriting systems and their role in 
     expanding homeownership and promoting fair lending. I am 
     personally committed to working every day to make sure that 
     these systems are the best they can possibly be.
       All in all, the housing finance system--through 
     inspiration, perspiration and a little luck--has grown into 
     the most successful system in the world. It is worth 
     protecting and defending. We must never allow the system to 
     be damaged by those who would place their narrow financial 
     interests ahead of those of the industry as a whole and--most 
     importantly--ahead of the consumers we serve.
       This being a national election year, it is a good time to 
     discuss and debate our national priorities, and certainly 
     homeownership is high among them. Few ideals unite us more 
     than owning a home to raise your family, invest your income, 
     become part of a community and have something to show for it. 
     There are many ways to go about improving the housing finance 
     system to make it better, more affordable and more inclusive. 
     As we pursue these efforts, we need to keep our eyes on the 
     prize and ask the most important question, ``does this 
     proposal help or hurt home buyers?''
       Thank you.

       

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