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homeownership also-property taxes contributed approximately $285 billion to state

and local budgets in 2002.

To maintain the vitality and stability of our housing finance system and of our financial

markets in general, it is imperative to have effective oversight of the GSEs. Recently,

we have seen examples in other industries of what can happen without effective

oversight, and the Mortgage Bankers applaud this Committee's efforts to prevent future

problems from arising in our housing finance system.

The Mortgage Bankers endorse the principles for GSE regulation laid out by the

Secretary of the Treasury John Snow and the Secretary of Housing and Urban

Development (HUD) Mel Martinez before this Committee earlier this month. Further,

the Mortgage Bankers support certain core principles for effective regulation of Fannie

Mae and Freddie Mac.

First, effective safety and soundness oversight, the reason all of us are here today, is

necessary. The Treasury Department successfully regulates both national banks and

federal thrifts, and has successfully demonstrated its ability to fulfill the role of a

financial safety and soundness regulator. The Mortgage Bankers support establishing

Treasury as the safety and soundness regulator for Fannie Mae and Freddie Mac.

Second, the GSE regulators, both within Treasury and HUD, need to have adequate

funding if they are to live up to their important duties. That funding should not be

subject to either annual or permanent Congressional appropriations, so the regulators

will be equipped to fulfill their missions, even in cases like the current one, where a

major problem arises very suddenly. Such a funding arrangement has worked well for

OTS. Changing the current annual appropriation to a permanent appropriation will not

strengthen the regulators, that is, it will not meet Congress's current goal

strengthening GSE regulation. The Mortgage Bankers urge this Committee to look to

the OTS funding arrangement in drafting legislation.

Third, the safety and soundness regulator needs flexibility in setting capital standards.

MBA does not mean to imply that today's capital requirements are inappropriate or

inadequate in any way. Rather, MBA believes that the regulator needs the tools to

respond to changing marketplace conditions - capital standards are the fundamental

tool in this regard. A statute should not unduly tie a regulator's hands.

Fourth, a regulator needs adequate enforcement authority to correct any problems that

may arise, and, more importantly, to deter problems in the first place. The Mortgage

Bankers believe that the enforcement tools that the banking agencies share have

proven their effectiveness over the years, and supports including such tools for the GSE


Within these four core principles, one issue stands out to MBA as the most

fundamentally important for the mortgage industry – the safety and soundness of GSE

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programs and activities. The programs in which GSEs engage, that is, what the GSES

do every day, is the basic determinant of their safety and soundness. When they

implement a new program, when they purchase mortgage-backed securities, when they

try a new way to hedge their interest rate risk, when they find a new source of debt,

when they do the things day in and day out as a normal part of their business

operations, they put their safety and soundness at issue.

Fannie Mae and Freddie Mac are so large that when they undertake some activity, it

has ramifications throughout the American mortgage market and, indeed, throughout

domestic and international economies. The GSEs' risks are more than a mere question

of housing, their risks are of central concern to financial regulators around the world.

Because the GSEs' actions sway our economy, it is imperative that their activities be

conducted safely and soundly. We certainly do not believe that any GSE would

intentionally risk harming their financial standing or the state of the economy. Yet, the

fact is that the GSEs are so large that they do affect our economy. For these reasons, their activities must be safe and sound - all of their activities, not just some. Congress

cannot give the GSEs or their safety and soundness regulator an exemption from their

obligation to ensure that new programs are consistent with prudent financial

management and sound business operations. We believe that the approval of new

programs and activities is intrinsically linked to financial safety and soundness.

The safety and soundness regulator, for these reasons, is in the best position to

evaluate the appropriateness of new or proposed GSE programs. The regulatory

approval system should be robust, and should have a clear definition of what requires prior regulatory review. Congress should draw a clear line between the primary and

secondary mortgage markets -- in no event should the GSEs be permitted to encroach

upon the mortgage origination process. In no event should the GSEs be permitted to

use their government-sponsored benefits to distort the competitive landscape of the

primary mortgage market.

The Mortgage Bankers also believe that it is important that the regulator not

micromanage the GSEs, and that it not unduly constrain the GSEs' ability to respond in

a timely manner to marketplace needs. Regulatory approval for new programs must

come in a timely manner, and should be based on a clear and well-defined criteria.

Fannie Mae and Freddie Mac enjoy the benefits of government sponsorship so they

can assist Americans with their housing needs. MBA very strongly supports the

affordable housing goals for Fannie Mae and Freddie Mac because the goals require

the GSEs to focus their activities on lower income Americans and those living in

underserved areas. MBA endorses HUD's role in setting and enforcing those goals

because HUD has extensive experience in this area. The goals are set based on

extensive and complex research and analysis. The Mortgage Bankers support giving

HUD flexible authority to set and enforce appropriate affordable housing goals for

Fannie Mae and Freddie Mac.

The Mortgage Bankers strongly urge Congress to reform the oversight of Fannie Mae

and Freddie Mac in this manner so that they can continue their role in supporting

housing, especially affordable housing, in this country.

Thank you for asking the Mortgage Bankers to testify today on these important issues.

We would be happy to supply you with any additional information you wish. I am happy

to answer any questions the distinguished members of this Committee may have.

Statement of The Honorable Armando Falcon, Jr.
Director, Office of Federal Housing Enterprise Oversight
Before the Committee on Financial Services

U.S. House of Representatives

September 25, 2003

Chairman Oxley, Ranking Member Frank, and Members of the Committee.

Thank you for inviting me to appear before you today. I am pleased to provide my

views on improvements that can and should be made to the regulatory oversight of

Fannie Mae and Freddie Mac. My views are my own and are not necessarily those of

the President or the Secretary of Housing and Urban Development.

I would like to begin by stating upfront that I support legislation to strengthen the

supervision of Fannie Mae and Freddie Mac. Upon taking office as Director of Office of

Federal Housing Enterprise Oversight (OFHEO) in October of 1999, I quickly realized

that the Agency's long-term success was jeopardized by inadequate resources, a

constraining funding mechanism, and a lack of powers equal to those of other

regulators. Over the past four years, I have been a consistent advocate of legislation

designed to address those shortcomings, and so I was encouraged by the

Administration's comprehensive proposal and your efforts, Mr. Chairman, to move

forward. While I am in general agreement with the well-considered proposal that

Secretaries Snow and Martinez have presented to the Committee, but I do have a few

concerns that I hope can be properly addressed.

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