PROPOSALS FOR IMPROVING

THE REGULATION OF THE HOUSING GOVERNMENT SPONSORED ENTERPRISES

WEDNESDAY, FEBRUARY 25, 2004

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 2:34 p.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 hearing will come to order.

This afternoon, the Committee holds its fifth hearing on needed improvements to the regulation of Government Sponsored Enterprises. The Committee will hear from Mr. Franklin D. Raines, Chairman and Chief Executive Officer, Fannie Mae; Mr. Richard F. Syron, Chairman and Chief Executive Officer, Freddie Mac; and Mr. Norman B. Rice, President and Chief Executive Officer of the Federal Home Loan Bank of Seattle.

It is my intention that today's hearing will be the final session in our series of hearings. After today's hearing, we will have heard from a wide variety of witnesses, and we will have an extensive record to review in our deliberations. Several Members of this Committee introduced their own proposals to reform GSE regulation, and I want to commend Senators Hagel, Dole, Sununu, and Corzine for their hard work in this regard and their ideas and their approach, and also for their participation in the hearing process. They have been very involved.

It is time for the process to move forward. The Committee will be working over the next several weeks to assemble a legislative package. I know that all of the Members of this Committee share a goal of putting in place a strong, credible regulator that will ultimately benefit the GSE's, protect taxpayers, and preserve the prominent role of housing in our economy, which we all support. I want to thank all the witnesses for appearing here today, and we look forward to your testimony and also the question period. Senator Johnson, do you have an opening statement?

STATEMENT OF SENATOR TIM JOHNSON

Senator JOHNSON. Yes, a brief statement. Thank you, Mr. Chairman, for calling today's hearing, another in a series to determine the best way to improve the regulatory framework for the housing

GSE's. I look forward to hearing this distinguished panel. Following Chairman Greenspan's testimony yesterday, I think it is timely and important that we carefully consider the testimony of today's witnesses on the important mission our housing GSE's carry out every day to help advance the dream of homeownership for millions of low- and middle-income American families.

I simply do not agree with Chairman Greenspan's view that housing GSE's should be privatized. I am also growing increasingly concerned that officials of the Bush Administration, most recently Gregory Mankiw, Chairman of the Council of Economic Advisers, have called into question the real and perceived benefits Fannie and Freddie receive because of their Congressional charter. These benefits the Administration continues to attack come with critically important public policy responsibilities and mandates from Congress, including requiring Fannie and Freddie to meet affordable housing goals and targeted minority homeownership goals.

Congress provided these tools to the GSE's to help low- and middle-income Americans realize the dream of homeownership, and they are also restricted from participating in the marketplace for higher-end homes. There are important policy reasons that we need to address in considering regulatory reform, including whether to include the Federal Home Loan Bank in a new regulatory entity, appropriate minimum capital standards, receivership, and program approval authority.

I intend to work with my colleagues to reach a consensus on these and other issues, and I continue to believe that changes are needed to ensure the integrity of the system. However, I have to caution that continued statements by the Administration questioning the need for a Federal-private partnership through the Government Sponsored Enterprises makes reaching agreement on reforming the regulatory structure of these entities all the more difficult. The goalposts keep shifting, and I find this troubling.

In my home State of South Dakota, many community financial institutions rely heavily on products offered by Fannie Mae, Freddie Mac, and the Federal Home Loan Bank of Des Moines to help finance quality, affordable housing in small rural communities. Without the important private-public partnership demonstrated by our housing GSE's, I have to wonder how many of my low- and middle-income constituents in rural South Dakota would be significantly hindered in becoming homeowners.

The Administration, in the name of economic efficiency, has tried to convince us that exporting jobs is good, and now we are urged to leave our housing needs to the marketplace and hope for the best. As we move forward on regulatory reform of the housing GSE's, we have got to keep in mind the fundamental role that these institutions play and ensure that whatever changes we make to the regulatory structure, whether in the areas of minimum capital, receivership, or other issues, we do not inadvertently harm the housing mission of the GSE's.

As the creator of these important institutions, we in Congress have a special obligation to ensure that the GSE's are meeting their unique role while at the same time ensuring that the regulatory structure for the GSE's is strong, independent, and credible.

Mr. Chairman, while finding a consensus on these issues may be difficult, I am committed to working with you and my colleagues on this Committee to find solutions that balance the ability of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to meet their critical missions with the need for world-class regulation of the GSE's.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you.

Mr. Chairman, I add my welcome to our distinguished panel. Chairman Raines, Chairman Syron, President Rice, thank you for appearing.

As we know, the secondary market plays a critical role in housing finance. Congress should not diminish this role. However, as Government Sponsored Enterprises like Fannie Mae and Freddie Mac dominate this landscape, Congress has a greater responsibility for strict oversight and comprehensive supervision. The stakes are profound, particularly when questions are raised about the implicit U.S. Government guarantee and the GSE's' growing relevance to our financial system.

Have these institutions become too big to fail, as some would argue. Will a financial crisis ensue if they are left inadequately supervised, as I believe Chairman Greenspan asked yesterday in his testimony.

Clearly, the existing regulatory framework requires strengthening to ensure that prevailing risks are mitigated. This is in the interest of the housing industry, the private capital markets, investors, and the American taxpayer. Few would argue the importance of housing to the national economy and the increasing role of the GSE's.

There are currently over $7.2 trillion in mortgage loans in the United States; 45 percent of all those loans are owned or guaranteed by Fannie Mae and Freddie Mac. This Committee should bear in mind that other companies also engage in the primary and secondary markets as well. These private companies face extensive regulatory oversight from multiple supervisors, including Federal and State banking agencies and the Securities and Exchange Commission. This comprehensive oversight can require, if certain conditions exist, prior product approval, limitations on growth, minimum capital standards, and even receivership.

Clearly, a gap exists in the regulatory framework of financial institutions and the Government Sponsored Enterprises. In introducing the Federal Enterprise Regulatory Reform Act, S. 1508, the intent sought by Senators Sununu, Dole, and I is to create a fundamentally strong regulatory framework, an agency with the capacity to establish capital guidelines, and, when necessary, have the discretion and authority to limit its activities.

These are integral regulatory rules that have been successfully applied by the U.S. Federal banking agencies. They are principles founded on the premise of curtailing risk when conditions are necessary. I am confident these measures will serve to enhance the confidence in the mortgage industry as well.

I might add, Mr. Chairman, also the intent of our bill was not to undo GSE's, nor to put GSE's out of business. That may come in a different era at a different time, but that has not been the intent of our legislation.

I again thank you, Mr. Chairman, for your leadership on this issue and look forward to our distinguished witnesses. And I might add I will probably not be able to engage the entire time since I am due to chair a hearing here shortly. But I wanted to be here to at least give the witnesses an opportunity to make their statements so I could benefit from what they have to say, and I will stay longer if I can. But, again, thank you for coming, gentlemen. Chairman SHELBY. Thank you, Senator Hagel.

Senator Crapo.

STATEMENT OF SENATOR MIKE CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman, and also to Chairman Raines, Chairman Syron, and President Rice, we appreciate your coming before us today and look forward to your discussion with us. These are very critical issues.

As this Committee considers creating a new independent regulator for Fannie, Freddie, and the Federal Home Loan Banks, it is important that we recognize that although these GSE's have much in common, these entities are structurally different. And as we approach this issue, the first question that we must address is whether all three should be included under the same regulator, where the regulator will be located, and the level of independence of that regulator. And if they are all included, I am interested in learning today how you believe this regulator should be structured so that it can maximize the value and benefit of each GSE.

Would you support creating divisions within the regulatory structure? Should there be an advisory body in addition to or as a part of this regulator? If so, who should be included, and what value would this advisory body provide?

Additionally, there has been a lot of discussion about capital standards, and I have asked questions on it in, I believe, every hearing that we have held. Can each of you explain your capital standards and how they work and how each of your capital requirements compares to the commercial banks or the circumstances that you might face under such an independent regulator as we are talking about?

There are questions as to whether capital standards should be addressed statutorily, as a floor of some sort with broad discretion in the regulator, or whether the legislation that is established should instead not worry about setting any particular levels, but setting the standards by which capital should be evaluated by the regulator.

In yesterday's testimony, Chairman Greenspan said, "World-class regulation, by itself, may not be sufficient and, indeed, as suggested by Treasury Secretary Snow, may even worsen the situation if market participants infer from such regulation that the Government is all the more likely to back GSE debt.” I wonder what your responses are to the issues raised by Chairman Greenspan with regard to this implied guarantee that the marketplace seems to place on GSE debt.

I do have to take issue to some extent with those who would say that the Administration is critical of Government's role in and support of making sure we have strong, affordable housing in the United States. I certainly do not believe that any of the efforts that are undertaken by any of those who have introduced legislation or by those who have supported the idea of an independent regulator is intended to diminish the value of our Government's commitment to developing the best approach to affordable housing that this Nation can put together. The question instead is: How do we protect the U.S. taxpayer? How do we make certain that the housing industry and the mortgage industry are operating as efficiently and as safely as possible so that we do not face some of the very terrible circumstances that we have faced in other arenas? And how do we make certain ultimately that we achieve our objective of solid, affordable housing available to the maximum extent possible in our society?

I look forward to working with you on these issues and welcome your expertise and advice today. I should also say, Mr. Chairman, that like Mr. Hagel, I have not only another hearing but also I think half of my constituents from the State of Idaho are in Washington, DC, today.

[Laughter.]

And so I may have to slip out. But I can assure you, I will listen to as much as I can, and I will read every word of your testimony and listen to the points that you have made.

Thank you very much.

Chairman SHELBY. Senator Stabenow, do you have an opening statement?

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman. I do have a few comments. I would say to Senator Crapo, though, that I think the other half of the people here in town are from Michigan today, so I apologize in advance. Many of us are trying to be in many places at once today. But welcome to those who are here. We appreciate very much your leadership and your testimony today, and I think this is such an important topic, and I hope we will be focused on what is in the best interest of the American people and the important role that GSE's have played in helping to create a housing market that is affordable and available to people and to help keep the economy moving forward by the fact that we have had the housing market continue to be strong even in the face of other very challenging times in the economy. And I know that each of you have played a role in that.

Yesterday, we were able to hear from Federal Reserve Chairman Greenspan, and I must say that the views he offered I did not agree with, and some of the comments. And I hope that there is, in fact, not going to be support for privatizing GSE's. I do not believe that is in the best interest of the families that I represent in Michigan or people across the country.

I think the relationship between GSE's is unique. There is no doubt about it. But there is immense value to the public in the relationship that we have together. In return for a limited amount