PROPOSALS FOR IMPROVING

THE REGULATION OF HOUSING GOVERNMENT SPONSORED ENTERPRISES

TUESDAY, FEBRUARY 24, 2004

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:01 a.m., in room SD-538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY Chairman SHELBY. The Committee will come to order.

Today, the Committee continues its consideration of needed reforms to the regulatory regime for the housing GSE's. This is the fourth hearing on this matter. The time and the resources that the Committee have dedicated to this matter underscore its importance.

Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System provide liquidity to a vital sector of our national economythe housing markets. Because of their crucial roles in our economy, the financial condition, and safe and sound operations of these institutions must be diligently monitored.

Given their size, and their sophisticated risk management strategies, this monitoring is no simple task. It is one of my top priorities to report legislation from this Committee that will create a new housing GSE regulator that will have the stature, sophistication, and necessary regulatory tools to ensure that these institutions continue to carry out their public policy mission in a safe and sound manner.

Today, the Committee will hear from Alan Greenspan, the Chairman of the Board of Governors of the Federal Reserve System. Chairman Greenspan will share his insights with this Committee on the role that the housing GSE's play in the housing sector, the impact of their operations on our financial markets, and the need to establish a strong, credible regulator.

Senator Allard, do you have an opening statement?

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I do have just a very brief state

ment.

First of all, I would like to thank you for your diligence in following this issue. It is very important, I think, and I would also

like to thank Chairman Greenspan for taking time from his busy schedule to show up before this Committee to testify. I have always valued his testimony before this Committee. And as Chairman of the Housing Subcommittee, reforming the GSE's is a topic in which I am keenly interested.

The housing market is no doubt a critical aspect of the U.S. economy. We have seen the housing market sustain itself during this last economic downturn that we had. It was actually a persistent bright spot that we had in our economy when everything else was not doing well. The financing of mortgages I think in recent years has helped to power the economy through the recent recession.

Now, the GSE's have been an active part of helping the American Dream come true for millions of families. The GSE's, though, are large, complex financial institutions that merit the highest levels of scrutiny. I believe alternative regulatory proposals to ensure the protection of the U.S. housing markets are necessary. This regulatory authority needs to rest on a strong, financially sound foundation, and I look forward to discussing the necessary elements a regulator must have to do its job effectively.

Though many items still need to be worked out as part of a new regulatory regime, I believe we are making progress, and I hope that we can all agree that we must have a strong regulator. We owe nothing less to the taxpayers and homeowners of the Nation. I look forward to hearing from Chairman Greenspan and his thoughts on how we can reform and improve the regulatory structure for GSE's.

Chairman SHELBY. Senator Dole.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you, Mr. Chairman. I would like to express my appreciation for your continued leadership on this very important issue.

Last summer, Senators Hagel, Sununu, and I introduced S. 1508, the Federal Enterprise Regulatory Reform Act. I think my colleagues would agree that approximately 95 percent of this bill enjoys broad, bipartisan support. As for that remaining 5 percent, I am confident you will find agreement, Chairman Shelby, as you are working this issue.

The question of the proper powers and resources available to a regulator of the Government Sponsored Enterprises has proven to be a vexing issue. Chairman Shelby, you have been carefully crafting solutions to some of the more controversial proposals contained in the GSE reform package, and this Committee is very close, I believe, to achieving a consensus. After so much work, it is my hope that the consensus will earn all of our support.

I understand, Chairman Greenspan, that you have devoted a considerable amount of your time, in addition to that of your staff, on the risks and benefits of our GSE bill. I appreciate your willingness to weigh in on these important issues.

One issue of particular importance is the need to ensure that the regulator has the ability to control nonmortgage investments of the GSE's. In his testimony 2 weeks ago, the Comptroller General stated, "We again recommend that Congress legislate nonmortgage investment criteria for HUD or any new GSE regulator that may be

established through legislation." The General Accounting Office has warned us that the incentives to use the benefits of Government sponsorship to increase shareholder value could, over time, erode the public mission. I believe every Member of this Committee is committed to ensuring that the mission to create greater opportunities for homeownership, especially for minority populations, is the number one priority for the GSE's. We must make sure that our effort gives this mission the focus and attention it deserves by all GSE's, and that there is no chance of erosion over time. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Thanks, Mr. Chairman.

Chairman Greenspan, welcome. It seems like you were just here. In fact, I think you were. Welcome back.

I read in some of the briefing material for today's hearing an explanation-I think it showed up in the American Banker-about different kinds of capital from minimum to risk-based accords, or a whole lot of others. And so the question that I am going to be asking you, just to telegraph my pitch, is to explain all those capital standards in ways that even former Governors can understand. And if you could do that today, you will get an A-plus from me, and maybe make those relevant to our discussion.

When I was Governor of Delaware, we used to have a slogan in our administration. You have all heard probably somewhere in your life the axiom, somebody who did a job, did not do it necessarily very well, you say, "That is good enough for Government work." I never liked that.

Later on, I used to hear people say often, "If it ain't broke, do not fix it." And that applies, I guess, to things inside as well outside of Government. And I have never been real crazy about that one either.

The slogan that we adopted for 8 years was, "If it is not perfect, make it better." And I think when we look at the way that we regulate our GSE's, it is not perfect. We can make it better. But as we approach the job of doing that, I think it is important for us to keep in mind that today in this country, almost 70 percent of the people live in a home that they own. And it is a remarkable success story.

In my little State, our homeownership rate is actually approaching 75 percent. And as we try to make what is not perfect more perfect, I think it is important that we do so in a way that does not undermine the remarkable success that we have had in fostering homeownership.

Welcome back. We look forward to your testimony.

Chairman SHELBY. Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman.

Just less than 2 weeks ago, Chairman Greenspan, you testified before this Committee about monetary policy, and at the time I criticized you for allowing yourself and the Fed to be drawn into things that have nothing to do with monetary policy. I do not think

that studies on home interest rates and whether GSE's help or hurt homeownership have much to do with monetary policy. However, your monetary policy decisions, comments, and studies can have a great influence on home interest rates and whether or not someone can purchase a home.

I was very surprised to hear about the recent Fed GSE study. I was surprised it stated that Fannie and Freddie are responsible for an average of 7-basis-point decrease on home mortgages.

I have two Kentucky papers in front of me. Both have mortgage surveys. Both of them show a 25- to 50-basis-point difference between 30-year fixed-rate mortgages that GSE's can buy and 30-year jumbo mortgages which GSE's cannot buy. I would like to know your opinion on why there is such a difference between the rates of the jumbo and the fixed-rate loans and if these differences are consistent with the recent Fed study.

I was also struck by a comment in your speech yesterday to the credit unions. You stated, "Recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.”

Of course, if homeowners knew that rates would be lower, they would have used adjustable rate mortgages. But most homeowners do not know what rates are going to be for the next 30 years. That is why they buy fixed-rate mortgages. Not very many homeowners have the resources that the Fed has in being able to predict longterm interest rates. So they buy fixed-rates despite the fact that they are more expensive to hedge against risk.

For the average American, losing your home is not worth the risk of possibly saving some money on a 30-year adjustable mortgage. Rates were low in the last decade, historically low. But most of us here remember the 1970's and early 1980's and how high rates were then. If rates started to rise to Carter-level rates, I am fairly certain that no one would want an adjustable rate mortgage.

You are always warning economic institutions, public and private, that they must hedge against risk. I agree with you and think it is very prudent advice. But I also think the average American should hedge against risk for their most important investmenttheir home.

Once again, thank you for coming today. I look forward to your testimony.

Chairman SHELBY. Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman, for scheduling these_hearings on this very important topic of Government Sponsored Enterprises, and thank you, Chairman Greenspan, for attending.

There are a host of technical issues that we have to consider, things such as the merger of the various regulatory agencies, whether or not there should be a statutory standard for capital, the potential impact on all of these things. But what most concerns me is how we can harness these organizations, both Fannie Mae and

Freddie Mac and the Federal Home Loan Banks, to provide affordable housing opportunities for our citizens. Because as I go about this country, that is one of the great sources of concern and difficulty for families all across this country. Housing prices are soaring. The housing markets are doing extremely well. As a result, rental markets are appreciating dramatically. It is impossible for anyone making a minimum wage job to afford even a decent rental unit in most places, probably every place in the country.

We have to do something. And, to date, we have been unable to harness in a proactive way the Federal policy for a housing trust fund or anything that will stimulate production and try to generate more opportunities. And if not by design, then by default, we have to rely upon some of these private entities.

I frankly think we have to challenge all of these entities to do more, not just rhetorically but practically, to provide opportunity for affordable housing, not simply to provide mortgage support for people who can afford to buy expensive homes or even mid-priced homes, but to look out and make sure that we have a place so that all of our families can find a place. I hope in the context of these discussions that you can give us your advice on that point also. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Crapo.

STATEMENT OF SENATOR MIKE CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman.

Mr. Greenspan, again, we thank you for sharing your wisdom and being with us here today.

I think my focus today is going to be, as I think is indicated by Senator Carper, on the capital standards issue. Obviously, there are a lot of issues that we need to deal with as we address the relationship in the home mortgage industry between Fannie and Freddie, the Federal Home Loan Banks, and the private sector lending institutions.

To me, one of the questions that is clearly in the forefront is the question of capital standards, the questions like: Should the statute, if we pass one, set a floor? Or should the statute establish any type of capital standard as opposed to letting it be set regulatorily by any new regulator that might be established? Questions like: Should the capital requirements be different for different types of institutions depending on the nature of risk which they incur? Should capital standards be imposed that extend beyond the level of risk? And is establishment of a capital standard that exceeds risk economically inefficient?

It is questions like this which I believe we must address as we address the question of establishing a new regulator and setting the parameters and the scope of authority of such a new regulator. I know that you have looked at this very closely, and I look forward to your testimony today. And, Mr. Chairman, I also look forward to working with you as we put this together. Thank you. Chairman SHELBY. Absolutely.

Senator Enzi.