banks operating in far-flung and highly risky product lines and markets and should not be regulated as such.

No one has stated concern of an imminent crisis in the GSE system. There is no need to rush to judgment. Hasty action could have catastrophic consequences for housing. NAHB urges a careful and thoughtful approach on GSE regulation and believes such a course will produce tremendous rewards to those with most at stake in the process America's homeowners and renters.

Guiding Principles for GSE Oversight

NAHB endorses continued federal government support of America's housing finance system through GSEs, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. NAHB believes that government oversight of these GSEs should be guided by the following principles:

1. The GSE status of these institutions must be maintained. Efforts to privatize, withdraw any of the federal privileges and legal exemptions, or otherwise diminish the ability of the GSEs to provide housing financing at the lowest possible cost should be opposed.

2. The GSEs should fulfill their public mission by conducting activities authorized by their charters in a safe and sound manner and by promoting access to mortgage credit to address the needs of affordable housing throughout the nation.

3. The regulatory framework of the GSEs should be strong and credible, possess adequate authority and resources and reflect the differences inherent in the charters and operating structures of the GSES. Further, the regulatory framework should foster competition among the GSEs to develop and implement innovative, low-cost funding and other programs to meet the nation's housing credit needs.

4. The mission oversight of Fannie Mae and Freddie Mac (including approval of new programs and enforcement of affordable housing goals) should be conducted by the Department of Housing and Urban Development (HUD), an entity with a thorough understanding of and extensive involvement in housing-related issues.

5. The safety and soundness oversight of Fannie Mae and Freddie Mac should be conducted by an independent regulatory agency through rigorous examinations, enforcement of regulations (including capital standards) and transparency, without unnecessarily impairing the ability of these GSEs to accomplish their mission.

6. The recently implemented risk-based capital standards for Fannie Mae and Freddie Mac should be allowed to remain in place for a period of time sufficient to evaluate the effectiveness of the new standards.

7. There should be no alteration in the Federal Housing Finance Board's (FHFB) responsibilities for regulation of the mission and safety and soundness of the Federal Home Loan Bank System.

Administration's Proposal

In outlining the Administration's proposal during testimony before this Committee on September 10, Treasury Secretary John Snow stated that "we have two core objectives that should guide us: a sound and resilient financial system, and increased homeownership opportunities for less advantaged Americans." These objectives are consistent with NAHB's guiding principles, but we are concerned that the administration's proposal may not accomplish these objectives and could undermine the housing finance system.

The Bush Administration proposes to create a new federal agency within the Treasury Department to regulate and supervise the financial activities of the housing GSEs. The new agency would have general regulatory, supervisory and enforcement powers for GSE oversight, including the authority to establish, enforce and revise capital standards. Oversight of existing GSE activities and approval of new activities would be shifted from HUD to the new Treasury agency. HUD would be left with minimal regulatory authority, limited to oversight of the annual affordable housing goals and a consultative role in program oversight.

Importantly, the Administration does not recommend any changes in the GSES' agency status. This is consistent with NAHB's first principle of GSE regulation. Further, we believe that the regulatory framework outlined by Secretary Snow should be limited to only Fannie Mae and Freddie Mac. Secretary Snow indicated in his testimony that the Administration also would like to bring the Federal Home Loan Banks under this regulatory structure. NAHB would oppose such a move. The structure of the Federal Home Loan Bank System is unique and substantially different from that of Fannie Mae and Freddie Mac. The Federal Home Loan Banks should continue to have their own independent regulator, currently housed in the Federal Housing Finance Board.

Mission Regulation

It is imperative that HUD retains current status as mission regulator for Fannie Mae and Freddie Mac. NAHB has grave concerns with the Administration's proposal to transfer program authority from HUD to the new Treasury office. Stripping HUD of any mission oversight functions constitutes a devastating attack on the mission of HUD by removing the agency's ability to improve housing opportunities for America's working families. Such a move would gut HUD's role as our nation's primary housing advocate and threatens to jeopardize the success of the housing finance system and undermine the vibrant housing market that sustained the economy in recent years.

There are three main aspects to GSE mission oversight: general charter compliance; program approval and oversight; and, housing goals enforcement, monitoring and enforcement. These functions form the core of mission regulation and cannot be separated as the Administration recommends.

Program Oversight

The objective and focus of program oversight is not safety and soundness, it is mission compliance. The legislative history of program oversight provisions makes this clear.

The 1968 Fannie Mae Charter Act, which reconstituted Fannie Mae as a government-sponsored private corporation, granted HUD general regulatory power to ensure Fannie Mae's compliance with its housing mission as specified in the charter. In 1970, HUD was vested with prior approval of all new Fannie Mae programs through the Emergency Home Finance Act, which also created Freddie Mac. HUD was granted regulatory oversight of Freddie Mac in 1989 through the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which transferred this authority to HUD from the Federal Home Loan Bank Board. Finally, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the GSE Act) reaffirmed HUD as the program regulator of Fannie Mae and Freddie Mac and gave HUD the authority to establish, monitor and enforce affordable housing goals.

The legislative history reflects the recognition by Congress that program oversight is a function of mission regulation that must be conducted by HUD, the only cabinet agency with a thorough understanding of and extensive involvement in housing-related issues. Indeed, during consideration of the 1992 GSE Act, Senate Banking Committee Chairman Riegle stated that “in order to properly coordinate national housing policy, ... regulations relating to the housing missions of Fannie Mae and Freddie Mac should be issued only with the review of the HUD Secretary.”

Under current law, Fannie Mae and Freddie Mac must submit a new program approval request to HUD if the initiative is "significantly different" from a program previously approved; is an activity in which the GSE had not engaged prior to passage of the 1992 GSE Act; or, represents an expansion in terms of dollar volume, number of mortgages or securities involved above limits expressly contained in any prior program approval. Further, if HUD believes an activity should be subject to prior approval, HUD may also request additional information or require a GSE to submit a program request. (Prior to one year after the effective date of the risk-based capital regulations, the GSES were required to simultaneously submit new program requests to the Director of OFHEO. With the implementation of the RBC capital rule in September 2002, OFHEO now has a consulting role, at HUD's discretion, in the evaluation of new programs.) HUD is required to approve any new program request unless it is not authorized by the GSEs' Charter Acts or is not in the public interest.

The existing program approval requirements and process have served the housing market well, by ensuring effective regulatory oversight and encouraging product innovation to fulfill the GSEs' housing mission. This is particularly true in the affordable housing area where both GSEs have introduced products and services to expand homeownership opportunities for low-and moderate- (low/mod) income borrowers, renters and residents of areas underserved by the broader housing finance system. Technological innovations by the GSEs, such as their automated underwriting systems

(AUS), also have contributed to their efforts to expand homeownership opportunities. In the affordable multifamily market, both GSEs have established forward commitment programs that support much-needed production of new units. Further, each has developed partnerships and alliances at the national and local levels to expand affordable housing opportunities.

The present program approval structure strikes an appropriate balance between mission and safety and soundness oversight. Safety and soundness are not criteria for new program approval. Indeed, the Treasury Department reached the same conclusion in its 1990 study on the GSES. Treasury stated,

"the regulatory authority which monitors a GSE's fulfillment of its Congressional mandate should be different from the entity implementing financial safety and soundness standards. Separating these two regulatory functions will remove risks to the taxpayers by removing a perceived conflict of interest [emphasis added]. The Treasury recommends that the current program regulator continue to be responsible for ensuring that the GSE meets its Congressional mandate by effectively serving its intended beneficiaries." Report of the Secretary of the Treasury on Government-Sponsored Enterprises, May 31, 1990.

It is interesting that the Treasury and HUD now view program approval as a function of safety and soundness oversight to be overseen by the Treasury. NAHB believes Treasury is the wrong place to put program approval. Treasury lacks experience in and knowledge of housing. Treasury presently has oversight for two important housing tax programs, low-income housing tax credits and mortgage revenue bonds. Operation of these programs is left to the states and HUD to set program specifics. Outside of these tax programs, Treasury has little experience in evaluating the effectiveness and appropriateness of housing policies.

Applying safety and soundness criteria, in conjunction with Treasury's longstanding bias against programs that facilitate the flow of capital to housing, would severely retard the development of programs needed by Fannie Mae and Freddie Mac to fulfill their housing mission. It will stifle innovation necessary to provide liquidity to the housing credit markets, particularly in areas that otherwise would not be adequately served. Such activities, by definition, involve higher risk and would be greatly constrained if program approval were solely a component and function of safety and soundness regulation.

The purpose of safety and soundness regulation is to ensure that Fannie Mae and Freddie Mac are adequately capitalized for the mission-related programs they are operating, and that appropriate governance structures and procedures are in place to operate those programs in a safe and sound manner. Safety and soundness regulation should not be a vehicle for disapproving programs so the enterprises undertake little or no risk. We don't need GSEs for such a purpose and they could not fulfill their mission if they were regulated in such a manner. Safety and soundness regulation should focus on ensuring that there is adequate capital and strong effective risk management.

The ability of Fannie Mae and Freddie Mac to spur innovative solutions and to develop new products that increase homeownership and rental housing opportunities will only continue if the mission of these corporations is regulated by HUD.

Housing Goals

The Administration is proposing to strengthen HUD's housing goals authority over Fannie Mae and Freddie Mac. As HUD Secretary Martinez outlined in his September 10 testimony, this will include the creation of a new GSE office within HUD, independently funded by the GSES, to establish, maintain and enforce housing goals. HUD would be granted new administrative authority to enforce housing goals, enhanced civil penalties for failure to meet the goals, and expanded authority to set housing goals and sub-goals beyond the three currently established.

NAHB supports HUD as the regulator for the GSEs' housing goals. We agree with Secretary Martinez that “HUD is the appropriate agency to develop and enforce housing goals. Institutionally, [HUD's] mission is devoted to furthering the goal of affordable housing and homeownership and HUD has the most expertise in this area." Indeed, NAHB believes that housing goals authority is one of HUD's key functions as mission regulator for Fannie Mae and Freddie Mac.

NAHB has always been a strong supporter of the affordable housing goals for Fannie Mae and Freddie Mac since HUD was granted this authority by the 1992 GSE Act. The housing goals establish percent of business purchase goals for three categories: low- and moderate-income, underserved areas and special affordable. The first set of goals was established by regulation in 1995, and was updated in 2000 to cover the years 2001-2003. Current goals levels, as a percent of annual purchases, are: 50% for lowmod; 31% for underserved areas; and, 20% for special affordable

The 2000 rule also provided for bonus points for the 2001-2003 period for units financed for GSE mortgage purchases in small (5-50 unit) multifamily properties and for units in 2- to 4-unit owner-occupied units. In addition, there is a temporary adjustment factor for Freddie Mac multifamily purchases that counts each unit in a property with more than 50 units as 1.35 units.

Both GSEs have consistently exceeded all of the housing goals since the initial goals were established in 1995. The goals have encouraged Fannie Mae and Freddie Mac to reach deeper into the affordable housing market with tangible benefits. The GSEs financing of housing for low-and-moderate-income families has increased from under 30 percent of their purchases in 1992 (prior to passage of the GSE Act) to over 51 percent in 2002.

NAHB supported HUD's increase in the goals for the 2001 - 2003 period, from the original goals put in place in 1995. NAHB feels that more needs to be done to encourage the GSEs to increase their activities in some market segments, such as rural areas and multifamily production.