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At the same time, NAHB believes that any proposed changes to the housing goals should undergo careful examination. Fannie Mae and Freddie Mac were created to serve a broad range of housing needs and we would not want overly stringent or complex goals to impede that mission. Continual increases in the percentage targets will have diminishing returns and run the risk of adversely impacting other housing programs, such as FHA's single family program.

Safety and Soundness Regulator

NAHB supports strong and credible safety and soundness oversight for Fannie Mae and Freddie Mac. As discussed above, NAHB believes that the focus of safety and soundness regulation is to ensure that the GSEs are adequately capitalized and have appropriate risk management practices to fulfill their housing mission in a safe and sound manner. The safety and soundness of Fannie Mae and Freddie Mac should be ensured through rigorous examination, enforcement of capital standards and transparency, without unnecessarily impairing the ability of the GSEs to perform their housing mission. It is imperative that the safety and soundness functions be separate from mission regulation, specifically program oversight and housing goals.

Safety and soundness oversight of Fannie Mae and Freddie Mac presently resides with OFHEO, an independent office within HUD. The events of the last few months with respect to Freddie Mac's accounting practices raises serious questions about OFHEO's ability to perform these regulatory functions. Thus, NAHB would support the transfer of safety and soundness oversight of Fannie Mae and Freddie Mac from OFHEO to an office within the Treasury Department. We recognize that Treasury is the premier financial institution regulator because of its expertise and experience with financial issues. However, the authority of the office must be limited to safety and soundness functions only, mission oversight must continue to reside with HUD.


Further, NAHB believes that the safety and soundness regulator must be completely independent and statutorily protected from the Treasury's political influences, the same as regulatory agencies within Treasury. To this end, NAHB is concerned about any proposal that would require that all new regulations and Congressional testimonies prepared by the new office to be cleared through the Treasury Department. We strongly urge Congress to construct legislation that appropriately protects the independence between any new Treasury regulator over Fannie Mae and Freddie Mac and the Treasury's politically appointed policy makers.



NAHB has consistently supported the establishment and enforcement of capital standards for Fannie Mae and Freddie Mac. Pursuant to the 1992 GȘE Act, Fannie Mae and Freddie Mac are required to meet two capital standards, a minimum leverage ratio and a risk-based capital (RBC) standard. The minimum leverage ratio is 2.5 percent of assets plus 0.45 percent of adjusted off-balance sheet obligations. By law, the RBC standard, is based on a stress test which calculates the amount of capital that Fannie Mae and Freddie Mac must hold to maintain positive capital over a 10-year period of adverse credit and interest rate conditions, plus an additional 30 percent of this capital level to

cover management and operations risk. The firms must meet both the RBC and minimum capital standards to be classified as adequately capitalized. Failure to meet the capital standards would trigger enforcement actions ranging from limits on growth and activities to conservatorship.

Fannie Mae and Freddie Mac have consistently met their capital standards and thus have been classified as adequately capitalized. Prior to the implementation of the RBC standard, the firms were required to meet the minimum leverage ratio. The RBC standard became enforceable on September 13, 2002 after nearly 10 years of development. The RBC test is the first regulatory capital standard to be based on a stress test and has been hailed as the most dynamic and stringent capital standard for any financial institution.

Given the importance of capital to the financial condition of the GSEs, we agree with Sec. Snow that there is a need for stability in capital standards and that capital standards should not be subject to frequent change. NAHB applauds Sec. Snow's decision not to recommend any changes in the GSEs' RBC regulation at this time, given that the standard took ten years to develop and has been in effect for only one year. We are pleased that the Treasury is giving the RBC standard a chance to work. NAHB recommends against any changes in the GSEs' minimum capital standard as well.

Longer-term, NAHB agrees that the safety and soundness regulator should have the flexibility to adjust capital standards as necessary. However, NAHB cautions against any significant changes in the GSEs RBC standard or any significant increase in the GSEs minimum capital standard. Overcapitalization of the GSEs, beyond the level of risk, is not economically efficient and could have unintended consequences for the housing markets, by reducing the level of capital for housing and increasing mortgage rates.

NAHB would also oppose the imposition of bank-like capital standards for the GSEs as some have proposed. Congress rejected this notion and intentionally drafted a separate capital regime for Fannie Mae and Freddie Mac under the 1992 GSE Act. The present capital framework takes into account the unique nature of the GSEs business, that there are only two firms (as compared to thousands of banks) and they engage in a monoline business, focused on low-risk residential mortgages (unlike banks which engage in a wide range of activities). During the lengthy development process of the current RBC standard, OFHEO took great pains to ensure that the standard appropriately ties capital to risk. Bank regulators have recognized that bank capital standards do not tie capital to risk and are now engaged in a process to revise bank capital standards through the Basel II Accord.



NAHB appreciates the opportunity to share our views on the regulatory framework for the nation's housing government-sponsored enterprises. The critical supports provided by the housing GSEs, Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, were an essential component to the recent success of the housing market in sustaining the nation's economy. NAHB appreciates the Committee's efforts to assess and seek improvements to the regulatory framework of the housing GSEs. We look forward to working with the Committee as you progress towards fashioning a narrow regulatory solution to the oversight of these important housing institutions.

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Statement of John A. Courson

President & CEO
Pacific Mortgage Company

Folsom, California

on behalf of the

Mortgage Bankers Association of America

before the

U.S. House of Representatives

Financial Services Committee

Hearing on

Secondary Mortgage Market Enterprises Regulatory Improvement Act

the Administration's Proposals on GSE Regulation

September 25, 2003

Chairman Oxley, Ranking Member Frank, distinguished Committee members, good

morning. I am John Courson, President and CEO of Central Pacific Mortgage

Company, and Chairman of the Mortgage Bankers Association of America (MBA or the

Mortgage Bankers). MBA is the national association representing the real estate

finance industry. We have approximately 2,600 members that are engaged in every

aspect of real estate finance. MBA members originate loans in the primary mortgage

market that Fannie Mae and Freddie Mac purchase. MBA, therefore, has a keen

interest in maintaining the safety and soundness of our country's real estate finance


Thank you for inviting the Mortgage Bankers to speak at this very important hearing

concerning the regulation of the Government-Sponsored Enterprises (GSES), the

biggest participants in our country's secondary mortgage market. Fannie Mae and

Freddie Mac play two important roles in the American home finance system. First, they provide market liquidity, which is critical to enabling mortgage loans to be originated,

and which allows the American housing market to grow as our country's population and

housing needs grow. Second, they buy affordable housing loans from lenders so that

lower-income Americans and those living in underserved areas can get access to

housing credit. These two roles – supporting the mortgage market and supporting

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affordable housing - play an important part in this country's housing finance system.

The American housing finance system is the envy of the world.

Today, just over 68 percent of all Americans own their own homes, the highest rate in

history. More minorities own homes now than ever. Purchasing a home is the largest

investment that most Americans will ever make and it likely will become their largest

asset. Close to 75 percent of all American homeowners borrow money to purchase

their homes. Members of the Mortgage Bankers originate about 70% of residential

loans in this country.

Homeownership benefits our citizens and our economy. The real estate sector employs

1.37 million individuals, a record level in U.S. history. The mortgage banking and

brokerage industry has added almost 150,000 jobs since January 2001, bringing our

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total share to over 400,000 employees. Home sales stimulate additional, downstream

economic activity. Home sales will add an estimated $25 billion in housing-related

expenditures to the economy in 2003. States and localities benefit from

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