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it, because I don't think that the American people would go along with that. The American people are fair people, and understanding people, and keep in mind there is a mission here that must not be compromised.

And I would like to hear from you, Mr. Spriggs, and you, Mr. Bartlett, because I think the two of you, again, represent a solution to this, coming from two different sides. You are supporting this move to the Treasury, and Mr. Spriggs is saying there must be caution on it.

But first, Mr. Spriggs, what safeguards, what assurances would you be looking for in this area?

Mr. SPRIGGS. Well, again, because I think the reality is that the housing problem is complex, and it can't be solved only pointing at mortgage bankers or only pointing at Fannie Mae. And if a regulator has the responsibility of soundness primarily and comes from an institution that looks that way, I fear it would be like CRA. And those of us in many organizations have big struggles over getting the Community Reinvestment Act meaningfully enforced.

It is very rare to see a bank get a bad grade on their CRA. And it is not as if they are doing fantastic things. But it is just simply not the primary responsibility in evaluating them, to get meaningful about what are their real CRA activities.

And we are asking Fannie Mae to participate in something key and fundamental. As you said, Congressman, Americans are fair. And there are certain common values we have. Home-ownership is just one of those mom-and-apple-pie things. We all think that part of the American dream is to be able to own a home. And all Americans think that we should figure out how to solve home-ownership. So that is much more specific than the CRA requirement. And I think it affects people differently when they think about whether you are meeting that target. If I get on Fannie Mae or Freddie Mac for not meeting the home-ownership, I think people react differently than if I say a bank didn't do 30 percent of loans in some neighborhood, and I am amorphous about whether those are business loans or whatever. I mean it just doesn't sound-it sounds like I am forcing the bank to do something bad.

Home-ownership is something everybody agrees is something we want to take place. So if it is a specific goal, it is a goal that needs to be integrated into a whole program; you can't just do it with one program. And it needs a whole Department, like HUD, to think through what are all the components, what is the realistic goal, because HUD has to deal with this. They can't give an unrealistic goal. What is the realistic goal?

And then to look at a program and be able to say, "Well, we have these programs. We know what they can do." If you are coming up with a program that is not going to get to that goal, we have all the metrics to compare it and tell you, that is not really a meaningful program. It may sound good on paper, but it is not a meaningful program.

So the theory is that we want it with an agency that has the expertise, that will set and is used to setting these specific and reasonable goals, and is thinking in a comprehensive way about how does that goal and how do the programs that are in place to meet that goal, how do they all fit together.

And I would be afraid of giving this to someone else who didn't have all that in front of them and, I would fear, drop the ball and let it escape or approve a program in a way that might be not as critical or disapprove of a program because they were not getting or were not as concerned about the goal.

Mr. SCOTT. Mr. Bartlett?

Mr. BARTLETT. Congressman Scott, thank you for the question. First, Congressman, setting the GSE affordable housing goals under the Secretary's proposal, the two Secretaries, would remain at HUD. We believe and they believe that the process would be strengthened because there would be a transparent regulatory process that would be open for comment for all, and that is not the case today.

Secondly, I do agree that there is a special mission of Fannie and Freddie and the GSEs. In fact, and you have no way of knowing this, I was one of the principal authors of the 1983 act that started this, when it was much smaller.

And we set that mission, in layman's terms, as providing liquidity in the residential secondary mortgage market. It has succeeded beyond the wildest imagination, because by 1992, that was changed and Fannie would contend that it was significantly expanded.

But nevertheless, the regulatory structure was not caught up to it. A regulator was created that took-without the authority to adopt capital standards that every other regulator has always had, and it took eight years for them to issue their first regulation because of the statutory hamstring, not bad people.

So it has gotten to a $3.3 trillion overhang over the nation's economy. And unless strong, independent regulation is provided, the housing goals for Fannie and Freddie will go in the tank because the system will ultimately be in jeopardy. The system would be in jeopardy.

And that is why we are here, is to achieve those housing goals and make sure that we have strong capital standards to achieve them.

So I think this is a hearing and will be legislation that is designed to strengthen the system so that it can continue to provide housing and not allow it to be weakened.

Mr. FISHBEIN. Mr. Scott, can I answer that question as well?
Mr. SCOTT. Yes.

Mr. FISHBEIN. I certainly agree. It is our position, too, that mission responsibility should remain in HUD. But, in saying that, I would like to make some additional points.

First, that HUD is underfunded to do its present mission responsibility; that there are no special appropriations to perform this regulation; that HUD pays for funding for the staff who are very dedicated, by the way, and very experienced from the general HUD operating budget. This sometime means that HUD has to make difficult budget choices.

So providing full funding, whether it be through an assessment process or a special appropriation, is absolutely critical.

Second, if the public mission function does get transferred, to Treasury, it is necessary to ensure that the director of this new office accountable for both functions. They should be judged by their

ability to conduct safety and soundness oversight well, but also by their ability to discharge the function as public mission regulator. Combining both functions into a single office is very difficult which is why we have some concerns about such a move.

Should the Congress in its wisdom decide to go ahead and do that, it is very important these two functions be viewed as equally important. Ultimately, the person who heads this office should have the responsibility for discharging both duties with equal seri

ousness.

Mr. BAKER. Mr. Scott, in H.R. 2575, we have an independent assessment formula not only for safety and soundness within the OTS, but we also have a separate assessment in HUD for HUD's functions. So that is a very strong new, additional authority to ensure that your concerns about mission compliance is in hand.

Mr. TAYLOR. Could I comment on that last point?

We have heard today and we have talked a lot today about a world-class regulator. And I think we have heard testimony from Fannie Mae Chair Raines on this issue, and that is that he has investors that are not just in the United States but international, and that we are looking to create something to bring credibility to the marketplace.

And I would ask the question, what makes a regulator worldclass if we take away its independence? What if it does not have the ability to look at or set capital standards and has no oversight on product and services? So at the end of the day, if the idea behind this is to have a world-class regulator for the GSES, and then we limit its ability to regulate, what have we really done? Mr. BAKER. You done?

Okay, thank you, Mr. Scott.

Just for the record, I want to establish that the current bill pending, 2575, was actually introduced on June 24th. Since the 106th Congress, I have been a part of or participated in 15 hearings on the subject of GSE regulation. And with the conclusion of this panel, you will be pleased to know you are part of 81 witnesses who have come before the Capital Market Subcommittee or the full committee on this subject. I would hope that in view of that record one would come to the conclusion we are not particularly rushing to judgment here.

But with all that aside, I want to express my appreciation to each of you for your perspectives that you have brought to the table. I do believe it will be helpful to us in formulating whatever the final product will ultimately look like.

I think the combination, frankly, of safety and soundness with mission compliance are not mutually exclusive, that we can take actions that are not only good for the enterprises and their shareholders, but we can take action that is also beneficial to the taxpayer. There is a net win to this process and the mere examination of the subject has not caused the housing market nor interest rates to go anywhere but down.

Since 1991, when we first began the discussion of creation of OFHEO, and you look at all the hostilities back and forth from controversial matters that were introduced or hearings that were engaged in, I suggest to you the Alan Greenspan effect is much more powerful than all of this combined. And we are enjoying record-low

interest rates for an extraordinarily long period of time. And if we are ever to engage in reformation of regulatory function, this window is a rare one indeed.

So not that it is our intent to have any person denied access to home ownership, in fact, I think the GSES can do a great deal more in that regard than the do today. And I will join with my friends in seeking out statutory provisions to ensure that compliance.

But at the end of the day, this is far too important. They have grown so fast for too long that this issue does need a world-class regulator with the appropriate skills.

I also want to introduce into the record a statement by Mr. Rick Lazio, former member who now is President of the Financial Services Forum who could not be here but wanted to have that in the official hearing record.

[The following information can be found on page 246 in the appendix.]

Unless there are further comments, I thank you for your longsuffering patience. Meeting adjourned.

[Whereupon, at 4:20 p.m., the subcommittee was adjourned.]

APPENDIX

September 25, 2003

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