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this additional bonus point system permits Freddie Mac to receive additional credit for each qualifying multifamily mortgage for properties with more than 50 units. Although HUD had originally established the TAF as 1.2 (i.e., 20 percent added weighting per eligible unit, Freddie Mac was able to obtain a legislative amendment which increased the TAF to 1.35 units of credit (or 35 percent additional weighting per unit). According to data provided by Freddie Mac, the TAF added almost 3 percentage points to Freddie Mac's low and moderate income housing goal performance, over 1 percent to its geographically targeted goal performance, and 1.4 percent to its special affordable goal performance. The TAF is due to expire this year and should not be extended.

Additionally, we are extremely disappointed that HUD has continued to resist disclosing the results of a major fair lending review the department has undertaken and completed of the GSEs automated underwriting systems (AUS). The vast majority of mortgages made by lenders today are run through these systems, which rely on credit scoring and other statistical measures to rate creditworthiness. In effect, these systems determine who qualifies for prime mortgages and at what price. Borrowers that do not meet GSE standards, therefore, often are relegated to the more expensive subprime market. Credit scoring models almost always have disparate impacts for minorities, but they have not been subject to a full-scale regulatory review to determine whether they are discriminatory. The purpose of the HUD fair lending review of the AUS is to determine an answer to this essential question. Chairman Baker and others in Congress have written to HUD asking for the results of this inquiry, but to my knowledge they have yet to be forthcoming with the requested information.

The 2000 HUD rule establishing the existing goals levels also recognized that the GSES, "have a public responsibility to help eliminate predatory mortgage practices which are inimical to the home financing and homeownership objectives that the GSEs were established to serve.” (Federal Register, October 31, 2000, 65044) The rule affirmed corporate policies adopted by the GSEs at the time indicating that they would not purchase predatory mortgages by disallowing them from receiving goals credit for predatory loan purchases. HUD should be building on these prior actions by continuing to challenge the GSEs to expand upon these prohibited features and act more aggressively to challenge predatory practices in the subprime market. Unfortunately, HUD has not taken these critical steps.


In addition to a number of the suggestions recommended by Secretary Martinez, we believe that GSE performance toward meeting their goals could be improved through expanded public disclosure of these GSEs mortgage activities and through better reporting to Congress by HUD. Specifically, we recommend the following actions be taken:

1 Improving the GSE Public Use Data Base.

The 1992 GSE Act required HUD to establish a public use data base and provide expanded public disclosure of GSE mortgage activity. Unfortunately, this data base does not provide sufficiently useful information for enabling housing consumers and local

community groups to determine for themselves how active the GSEs are in their own localities. While some data is provided on GSE activity at the census tract level is not as detailed as data provided by mortgage lenders under the Home Mortgage Disclosure Act (HMDA). In particular, local GSE data does not specify at the census level mortgage type as well as other important loan characteristics (e.g., whether the purchase was a home purchase Joan or a refinancing, whether it was a prime or subprime loan, loan to value ratios, loan amount). Expanded reporting of these data elements would greatly improve the utility of this data base and assist with a more complete analysis of GSE activities in communities throughout the nation.

I Better reporting to Congress on GSE affordable housing activities and

departmental plans for establishing new goals.

The GSE Act requires each GSE to report annually on its affordable housing performance, but does not require their regulator to report in a comparable way. While HUD publishes reports on GSE activities, annual reporting detailing the goal levels the GSEs' achieved and the activities undertaken to reach these levels would help to circulate this information more widely. These reports should distinguish between home purchase and refinancing purchases, purchase levels by different household income levels, and detail the extent to which the levels were achieved through the purchase of subprime mortgages. The department should also be required to report to Congress to explain delays in undertaking new rulemaking to set new housing goals in situations where the original term for these goals has expired or due to expire.

In closing, let me reiterate that we believe it is in everyone's interest to have strong regulatory oversight of the GSEs. In so doing, we urge the committee to proceed with caution and resist the urge to make needless changes that detract from the GSEs' ability to perform their public mission.

Mr. Chairman, this concludes my written testimony. Thank you again for the opportunity to testify today and I will be glad to answer any questions that you and other committee members have for me.







September 25, 2003

Thank you, Chairman Oxley, Ranking Member Frank and members of the Committee. Good moming. It is a pleasure to be here today. My name is George Gould.

I have served on Freddie Mac's board since 1990 and am currently the Presiding Director and Chairman of the Governance and Finance Committees. I am also vice chairman of Klingenstein, Fields & Company, a firm that manages individual assets and estates. Prior to.joining this firm, I served as Undersecretary for Finance at the Department of Treasury from 1985 to 1988. At the request of President Reagan, I chaired the Working Group on Financial Markets to examine the effect of the October 19, 1987 stock market crash.

I welcome the opportunity to be here today to discuss key aspects of a strengthened regulatory structure for Freddie Mac and Fannie Mae. Freddie Mac plays a central role in financing homeownership and rental housing for the nation's families. Our job is to attract global capital to finance America's housing. Given the importance of housing to our economy, and the importance of housing finance to global capital markets, it is critically important that our regulatory structure provide world-class supervision. Hence, I applaud Chairman Oxley, Congressman Frank and the Administration for their thoughtful deliberations on these questions of global importance.

Freddie Mac supports much of the Administration's proposal on regulatory reform. Before expressing our views on key aspects of the proposal, I would like to say a few words about the resolution of Freddie Mac's accounting issues and our continued safety and soundness.

Resolution of Accounting Issues

On January 22, 2003, Freddie Mac announced, in conjunction with our new independent auditor, PricewaterhouseCoopers, the need to restate earnings for 2000, 2001 and 2002. In our June 25, 2003 press release we described the major factors leading to the need to restate earnings, a copy of which is provided for the record. In stark contrast to other recent corporate restatements, we expect Freddie Mac's restatement to show a large cumulative increase in earings for the prior years. We also expect it to result in a large increase in our regulatory capital surplus.


While the restatement will represent an important milestone, we remain determined to bring our financials completely up to date as quickly as possible. Once we resume timely reporting of our financials next year, we will proceed with our commitment to complete the process of voluntarily registering our common stock with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 so that we become a reporting company under that Act. We are irrevocably committed to the voluntary agreement we announced last summer to submit to the periodic financial disclosure reporting requirements that apply to registrants. Freddie Mac reaffirmed this commitment in a letter to Treasury Secretary John Snow on July 14, 2003.

Testimony of George D. Gould
House Financial Services Committee Hearing
September 25, 2003
Page 2 of 9

Because we have not yet completed the restatement, I am not in a position to comment further on Freddie Mac's accounting issues today. However, once the restatement is complete, I would be more than happy to answer whatever questions you may have.

Finally, I would like to say a few words about Freddie Mac's safety and soundness. Some have used the opportunity presented by Freddie Mac's accounting problems to suggest that the company is somehow too large, too complex and too risky. Nothing could be further from the truth. Freddie Mac's exposure to both credit risk and interestrate risk remains extremely low, despite a weak economy and a turbulent market environment. While there is absolutely no excuse for the issues that led to the need to restate earnings, Freddie Mac's business fundamentals remain rock solid. We will get through this difficult period, and emerge a much better company. We are working diligently to ensure that Freddie Mac's accounting expertise and disclosure practices measure up in every way to our time-tested risk management capabilities.

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Now, let me retum to the focus of this hearing: proposed legislation to strengthen the regulation of the housing government sponsored enterprises, or GSEs.

Regulatory Oversight Structure

Freddie Mac has long supported strong regulatory oversight. In October 2000, Freddie Mac and Fannie Mae joined with Chairman Baker, Representative Kanjorski and other members of the Committee to announce a set of public commitments to ensure that the two GSEs remain at the leading edge of financial risk management and risk disclosure. These commitments, which I will describe in greater detail below, continue to represent a high standard that few other financial institutions can meet.

In March 2001, we appeared before Chairman Baker's subcommittee and announced we had implemented five of the six commitments, with the sixth being implemented the following month. Several months later, in June 2001, we stated that a strong regulator is essential to maintaining the confidence of the Congress and the public that we can meet our mission. We outlined key principles for effective regulatory oversight and pledged to work with the Congress in that regard. Those principles are as follows:

First, the regulator must be highly credible. We continue to firmly believe that the GSE regulator must have supervisory expertise, be adequately funded and be independent in its judgments. Credibility is absolutely fundamental to the continued confidence of the Congress, the public and the markets.

Second, the regulator must support housing. Not only is housing an important public policy objective, it has been an economic powerhouse for the past several years. The necessity of expanding affordable housing opportunities is more urgent than ever. Over the next 10 years, America's families will need an additional $8 trillion to fund their mortgages. By innovating new mortgage products and new mortgage investment vehicles, Freddie Mac will open doors for

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