Castaneda, Hon. Alicia R., Chairman, Federal Housing Finance Board Falcon, Hon. Armando Jr., Director, Office of Federal Housing Enterprise REVIEW OF THE OFFICE OF Tuesday, July 13, 2004 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND GOVERNMENT SPONSORED ENTERPRISES COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittees met, pursuant to call, at 2:59 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly [chairwoman of the Oversight and Investigations subcommittee] presiding. Present: Representatives Baker, Royce, Kelly, Paul, Capito, Hensarling, Garrett, Murphy, Brown-Waite, Frank, Kanjorski, Gutierrez, Inslee, Ford, Hinojosa, Lucas of Kentucky, Clay, Scott and Bell. Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order. I welcome Chairman Baker, and we are actually holding a joint hearing here. This afternoon, the Financial Services Committee continues its series of oversight hearings on the federal agencies within the committee's jurisdiction by conducting a review of the Office of Federal Housing Oversight, the OFHEO, and the Federal Housing Finance Board, the FHFB. OFHEO is an independent agency and the primary regulator for Fannie Mae and Freddie Mac, two of the world's largest financial institutions. The agency's primary mission is to ensure the capital adequacy and financial safety and soundness of the governmentsponsored enterprises. The Federal Housing Finance Board is an independent agency that regulates the 12 federal home loans banks and also ensures that they operate in a safe and sound manner. Their roles are critically important to American taxpayers, homeowners and investors. Fannie Mae, Freddie Mac and the federal home loan banks provide valuable services to homeowners by increasing liquidity in the home mortgage markets. Their significance to and impact on our economy cannot be overstated, spanning across the entire scope of the financial services sector from the bond markets, mutual funds, and pension funds, to relationships with financial institutions, insurance companies, individual investors, central banks and other institutions in foreign countries. We must ensure that they are functioning well and serving the needs that Congress intended. Over the last few years, the government-sponsored enterprises have been the focus of increased attention. This committee has a strong interest in overseeing their regulation. As we face a growing economy that has been fueled by the housing sector, Congress must ensure that these entities have effective and efficient oversight. Since the housing sector continues to be the engine that drives our economy currently, our government must ensure that we do not disrupt the steady flow of low-cost funds to homebuyers, while protecting the taxpayers. Today, the committee welcomes the Director of the Office of Federal Housing Enterprise Oversight, Mr. Armando Falcon. We are very interested in OFHEO's annual report to Congress, as well as the agency's recent 2004 budget request for $59.2 million. While this figure represents a significant increase for the agency, it is important that the OFHEO be well funded and well staffed to oversee these extremely complicated institutions. The committee supports OFHEO's request and would like to hear more about how it plans to use these funds, including the creation of a new Office of Compliance and an Office of Chief Accountant. The committee is also pleased to welcome the Chairman of the Federal Housing Finance Board, Mrs. Alicia Castaneda. Today marks Chairman Castaneda's first appearance before the Financial Services Committee, and we welcome you. We welcome your testimony on the state of the Financial Board and the 12 federal home loan banks. We look forward to hearing your vision for the future of your agency. While we are pleased with the tremendous strides that OFHEO and the Finance Board have taken to strengthen their oversight role, the two agencies really remain ill-equipped to handle the oversight of the GSEs. In order to protect taxpayers, investors, and homebuyers and restore confidence in the GSES, we believe that these entities need a single world-class regulator to oversee their operations and financial well-being. I am hopeful that Congress and the Administration can reach a consensus for reform that strengthens the oversight of the GSES and continues to encourage homeownership. In the meantime, OFHEO and the Finance Board have been very active with a number of proposals aimed at strengthening the oversight and operations of the GSEs. The committee is very interested in learning more about these reforms today, in addition to the nature and status of the accounting restatements and other supervisory actions. Specifically, OFHEO and the Finance Board have been very active in the area of corporate governance. OFHEO recently circulated a rule that would, among other things, separate the CEO and chairman functions and require periodic audit partner and audit firm rotation. Since its work on Sarbanes-Oxley, this committee has taken a great interest in pursuing the highest levels of integrity in corporate governance, and we would like to hear your views on these issues. As you know, the General Accounting Office has found that mandatory audit firm rotation for publicly traded companies may be inefficient and potentially is disruptive. Given the consolidation in the accounting industry and the highly complex nature of the GSES, the committee would like to hear more about this proposal and what precedent it sets for publicly traded companies. Similarly, the Finance Board just voted unanimously to require the 12 home loan banks to register with the SEC. While the increased disclosure is generally preferable, we would like to know more about the significance of this requirement, since the stock of the home loan banks is not publicly traded like the other GSE stocks. In the absence of reform legislation, the committee is also interested in how the regulators intend to handle other issues such as receivership. During the debate over regulatory restructuring, there was considerable discussion about whether a new regulator should be vested with receivership powers similar to those held by other financial regulators. The committee would like to know whether OFHEO plans to address this issue. The issue of multi-district membership is also significant, considering the recent acquisitions that several large federal home loan bank members, which have spurred petitions to the Finance Board to allow members of the system to maintain membership in more than one federal home loan bank. Since the issue has an impact on the way affordable housing contributions are measured among the federal home loan banks, it is important that we know how the Finance Board plans to address the multi-district membership. Finally, the Department of Housing and Urban Development has recently proposed increasing the housing goals of Fannie Mae and Freddie Mac. The proposal requires the firms to increase the percentage of mortgage loans they finance for low-and moderate-income borrowers, from 50 percent to 57 percent by the year 2008. While this is neither the role of OFHEÒ nor the focus of today's hearing, the committee does have an interest in determining the impact that this proposal could have on the safety and soundness of these entities. I hope you can address this issue today. I would like to thank my colleague and co-chair of today's hearing, Representative Richard Baker. Chairman Baker's work on these issues has been crucial to the reform efforts and has greatly benefited the American people. The subcommittees thank the witnesses for their testimony. The American people will undoubtedly benefit from your views and this important oversight. Without objection, all members's opening statements will be made part of the record. We turn now to Mr. Gutierrez. [The prepared statement of Hon. Sue W. Kelly can be found on page 38 in the appendix.] Mr. GUTIERREZ. Good afternoon, and thank you, Chairwoman Kelly, for this hearing, the latest in a series of oversight hearings on financial services regulators. On this particular occasion, we are pleased to be joined by Chairman Baker and Ranking Member Kanjorski of the Capital Markets Subcommittee, where the witnesses before us usually testify. So let me start by extending a warm welcome to Director Armando Falcon and Chairwoman Alicia Castaneda. They actually wrote this out phonetically for me. [Laughter.] Chairwoman KELLY. Maybe they think you have become too anglicized. |