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Financial Services Committee
Improvements to GSE Regulation
September 25, 2003
Today, the Financial Services Committee will hear from the regulators, the regulated, and outside parties interested in the oversight of the housing Government Sponsored Enterprises. Two weeks ago, Secretaries Snow and Martinez came to the Committee with the Administration's proposal to improve regulatory oversight of the GSEs. They proposed developing a "world-class” regulator with the tools to rigorously supervise the activities of these highly complex financial institutions.
The Secretaries called for the regulator to be housed in the Department of Treasury as an individual office, similar to that of the Office of the Comptroller of the Currency. Additionally, the proposal called for the Department of Housing and Urban Development to retain its role as regulator of the GSE's mission and to ensure that the agencies meet their affordable housing goals. HUD's expertise in this area is critical, and under the Administration's proposal, the Department would receive additional powers to enforce compliance with the housing goals.
There is broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is under-funded, under-staffed, and unable to fully oversee the operations of these sophisticated enterprises. This was reflected in the surprise management reorganization by Freddie Mac, and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator. A strengthened regulator will send the signal to the markets that these entities have solid management, and are engaging in safe and sound activities. Confidence will be restored in the GSEs, and they will be able to get back to their important work of expanding homeownership opportunities without the distractions that have been plaguing them over the past several months.
Fannie Mae and Freddie Mac have done a good job of promoting home ownership and providing liquidity to the secondary mortgage market. These GSEs have quickly grown into large financial institutions that have a major impact on the housing market and the domestic economy. We must ensure that they have competent and thorough oversight,
while making certain that any action we take does not have a negative impact on access to housing.
I am encouraged by the letters and statements of support the Committee received following the last hearing on GSE regulatory reform. I hope today serves as an opportunity for Members to learn more about the need for changes to the GSE regulatory structure and how that can be accomplished.
I'd like to thank our Capital Markets Subcommittee Chairman Richard Baker for his years of work to strengthen the regulatory structure of the GSEs. His expertise on this issue serves our Committee well. His numerous hearings, studies and bills, provide our Committee with an informed background on which to move forward.
I welcome the witnesses and I look forward to their testimony.
House Financial Services Committee
September 25, 2003
Mr. Chairman, I want to commend you for your leadership role in addressing this vital issue to taxpayers and homeowners alike. This is not an issue that has convenient answers, but it is essential for this committee to provide leadership on this important matter.
Over the years, the committee has made various inquiries in this effort, from probing the enterprises to determine the adequacy of their efforts in meeting important housing goals, to the expressed concerns relative to regulatory oversight. But the questions have not been limited to just the obvious issues. Over the years questions concerning mortgage backed securities, leverage ratios, durations gap, bank investment concentration of GSE securities, and other unique issues have come before the committee. I am quite ready, in fact anxious, to turn the examination of these questions over to a fully funded, properly constructed, independent regulatory office to professionally respond to such questions. It is frankly not a business that members of Congress should routinely find themselves engaged. I am sure that many of my colleagues enthusiastically agree.
I also look forward to eliminating the political risk to the enterprises of threatening changes to their charter, almost as much as I look forward to absolute assurance that the taxpayers will never be called to pick up the tab for the failure of the system. Others may suggest a radical new capital regimen, comparable constraints on new products, or attacks on the basic structure of the charters - I will not go there. Responsible regulatory oversight is the goal and the closure that results from this effort will be beneficial to all concerned.
I do think it appropriate to make a clarifying statement concerning my opinion of the work of Mr. Falcon and the regulatory agency currently charged with the duty of regulatory oversight. I have certainly expressed frustration at times with the pace with which action has been taken by the agency. And on some occasions, I have disagreed with the recommended actions. But there is one clear observation I wish to make on behalf of all those who have given their best effort over the years, and that is you have made considerable effort with the limited resources and the constrained authority which you have been given, to discharge your responsibilities.
In fact, Mr. Falcon, your testimony today is one of the best statements by anyone as to the direction this Congress should take in providing adequacy of oversight. Your statement is concrete evidence of your leadership and your ability to give professional council. I highly commend you.
As to the current task, I am very pleased to have received excellent recommendations for the modification of HR 2575 from the Secretaries of the Treasury and HUD. All of the recommendations are suggestions with which I have previously agreed and do now fully support. In fact, there are few modifications required to HR 2575 to make the provisions wholly consistent with the Treasury testimony. As the Secretary has stated, Fannie and Freddie are world-class financial organizations that require a world-class regulator. Independently funded, with all appropriate authority, with the ability to make professional decisions absent political interference. That has been, and still remains my legislative goal. It is also evident that the protracted discussion of these concerns has had no adverse effect on home ownership opportunities. For those who continue to object to any structural change in regulatory oversight, just take a deep breath. We have enjoyed, and continue to enjoy the lowest mortgage interest rates in history. I suggest the Alan Greenspan effect is far more powerful than any action this committee might consider. In fact, this effort is only to insure secondary mortgage market stability, not to place constraints that will in any way adversely affect any individual's ability to own their own home.
Further, it is certainly appropriate to afford opportunity to all stakeholders in this process to give their perspective on this important decision. But it should be clear to all concerned, that if we are to construct an independent regulatory structure, the Congress should make the final policy decisions, in a manner which is independent from any single business perspective. The enterprises are creations of the Congress, created to meet the needs of all who seek the opportunity of home ownership. We must balance that responsibility with limiting risk to the taxpayer. That is and will remain a policy decision that only the Congress should make. Regardless of the final determinations of the committee as to the construction of HR 2575, I will respect the consensus opinion reached, and fully support the Chairman's effort to achieve this essential reform. But it is now time for decisions: no more inquiries, no more hearings, we have asked all the questions, and frankly heard all the various answers. It now is simply the time for decisions. I look forward to the completion of this work and consideration by the full House before the year is completed.
STATEMENT OF THE HONORABLE WM. LACY CLAY
Sponsored Enterprises “Regulatory Oversight of the Government Sponsored Enterprises
September 25, 2003
Good morning Chairman Oxley, Ranking Member Frank and Members of the committee and witnesses.
In 1992, after exhaustive study, this Committee made improvements to the charter for Fannie Mae and Freddie Mac. One improvement was intended to help close the housing gap, which still exists between minority and majority homeowners. While the gap remains at over 30 percentage points, I do not fault the GSEs for lack of trying.
They work on a daily basis to create innovative products and programs which meet the needs of those denied the American dream of homeownership. Fannie Mae and Freddie Mac help to bring the dream of homeownership to thousands of my constituents on a regular basis. I have serious concerns that as we ratify the problems at one GSE that Congress does not give in to the business opponents of these GSEs who profit from predatory and subprime lending at the expense of affordable housing. The minority homeownership achievements of these GSEs are on the right track.
I support the creation of a new bureau within Treasury with the resources necessary to oversee the safety and soundness of Fannie Mae and Freddie Mac. Establishing a world class regulator for the GSEs would be a landmark achievement for the Bush Administration and the 108th Congress. It would also be in the best interests of Fannie Mae and Freddie Mac investors, the housing finance sector and the housing mission that we are serving.
Fannie Mae and Freddie Mac play a critical role in a well functioning secondary market and I would be very concerned with any changes to their charter that would compromise their ability to deliver on their mission. I favor legislation that will strengthen the "safety and soundness” regulator for these GSEs without diminishing their mission emphasis or inhibiting their ability to expand homeownership.
I am in favor of a strong regulator for the companies and would support changes needed for stronger regulation, however, I will not support any wholesale change to their business model given the benefits they have yielded in promoting homeownership and affordable housing.