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Testimony of George D. Gould
House Financial Services Committee Hearing
September 25, 2003
Page 8 of 9

to affordable housing. Specifically, HUD should retain authority to ensure that the purposes of the GSEs' charters are accomplished and continue to have regulatory, reporting and enforcement responsibility for the affordable housing goals, just as under current law. Additionally, HUD should retain existing fair housing authority.

We also believe that, in keeping with its housing mission, HUD should retain its authority to approve any new programs of Freddie Mac and Fannie Mae under the same approval standards as in current law. Our ability to lower housing costs for homeowners and renters is directly linked to our expertise in managing mortgage credit risk and our distinguished record of bringing innovative products and services to market. As our mission regulator, HUD is the appropriate place for approving new programs. HUD alone has the expertise to determine whether new morgage programs are in keeping with our charter and statutory purposes.

Meeting the annual affordable housing goals is a key aspect of our meeting our mission. Established in 1993 and increased in 1995 and 2000, the three affordable housing goals specify that significant shares of Freddie Mac's business finance homes for low- and moderate-income families and families living in underserved areas. In 2000, HUD specified that 50 percent of Freddie Mac's mortgage purchases must qualify for the lowand moderate-income goal,' 31 percent must be of mortgages to borrowers in underserved areas, and 20 percent must be of mortgages to low- or very-low income borrowers or those living in low-income areas. Freddie Mac has successfully met all the permanent housing goals.




The existing statutory and regulatory structure provides great discretion to our mission regulator to determine the goals - and creates strong incentives for us to achieve them. The HUD Secretary currently has the regulatory authority to establish and adjust the housing goals. In the event a GSE fails to meet one or more of the goals - or there is a substantial probability that a GSE will fail one or more of the goals - the Secretary is authorized to require the submission of a housing plan. Further, the Secretary may initiate a cease-and-desist proceeding and impose civil money penalties for failing to fulfill the housing plan. These are strong incentives for the GSEs to strive to meet the goals year after year – to say nothing of the reputational "penalty” for failing to meet a goal.

Low- and moderate-income families have incomes at or below 100 percent of the area median income. Underserved areas are defined as (1) for OMB-defined metropolitan areas, census tracts having a median income at or below 120 percent of the median income of the metropolitan areas and a minority population of 30 percent or greater; or a median income at or below 90 percent of median income of the metropolitan area; and (2) for nonmetropolitan areas, counties having a median income at or below 120 percent of the state nonmetropolitan median income and minority population of 30 percent or greater; or a median income at or below 95 percent of the greater of the state nonmetropolitan median income or the nationwide nonmetropolitan median income. 'Low-income areas refer to census tracts in which the median income is at or below 80 percent of the area median income. Low-income families have incomes at or below 80 percent of area median income, while very-low-income families have incomes at or below 60 percent of the area median income.

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

The facts speak for themselves: Freddie Mac and Fannie Mae have consistently met the permanent affordable housing goals. Additional enforcement authority would add little to the legislative and regulatory incentives that Congress and HUD have put in place. Therefore, we respectfully suggest that no additional authority is needed.


Freddie Mac has long supported strong regulatory oversight. It is critical to the achievement of our mission. As we have stated on previous occasions before the Congress, our core principles for the creation of a new regulatory structure are credibility, commitment to the GSE housing mission and a high degree of bi-partisan support.

As I have outlined today, Freddie Mac is prepared to support many of the specific provisions put forth by the Administration and the Congress. We believe that a strong, credible regulator is essential to maintaining the confidence of the Congress and the public that we can meet our vital mission while remaining at the forefront of capital and risk management.

Thank you for the opportunity to appear today. I look forward to working with Chairman Oxley, Congressman Frank and the members of this Committee to secure the future of our housing finance system and, with it, the dreams of millions of families.

Statement of

David Hehman

President and CEO Federal Home Loan Bank of Cincinnati

Before the

House Financial Services Committee

September 25, 2003

Mr. Chairman, Ranking Member Frank, and Members of the Committee, I appreciate the opportunity to speak to you today about the Federal Home Loan Banks (FHLBanks) and legislative proposals to reform regulation of the housing government sponsored enterprises. My name is David Hehman and I am President and CEO of the Federal Home Loan Bank of Cincinnati (Cincinnati FHLBank).

I would like to provide an overview of the FHLBanks, address the impact of recent legislation and conclude with the topic of regulatory reform.

FHLBank Overview

The FHLBanks were created in 1932 to support America's housing finance system. It was largely the FHLBanks' ability to raise long term debt in the capital markets and pass that funding along to their member financial institutions that encouraged the development of the 30 year fixed-rate mortgage that is the predominant financing tool in the United States mortgage finance system today.

The FHLBanks continue to play a vital role in the nation's housing finance and community lending system. Member institutions, primarily community banks and thrifts, use the FHLBanks' advance programs to meet the mortgage and community lending needs of their local markets, and use our Affordable Housing Programs to help house thousands of low-income families in those communities.

The FHLBank System (System) is comprised of 12 regional FHLBanks, their 8,080 member financial institutions and the Office of Finance that issues debt on behalf of the 12 regional FHLBanks. The regional FHLBanks are overseen by an independent regulator, the Federal Housing Finance Board (Finance Board).

The System is a unique GSE. While the System shares a congressional charter and housing mission with Fannie Mae and Freddie Mac, the FHLBanks are fundamentally different in both structure and perspective. The 12 regional FHLBanks and their members form a cooperative that is driven by customer credit demand, not profit maximization. And while the 12

FHLBanks are independently owned and operated, they share joint and several liability for the System's debt. This leads to very conservatively run operations that have been effectively supervised under the current independent regulatory regime designed by Congress.


Congress has historically taken an active role in defining the mission and structure of the System. Two critical pieces of legislation shaped today's FHLBanks. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) expanded membership to include commercial banks and credit unions with a demonstrated commitment to housing finance. FIRREA also created the System's Resolution Funding Corporation assessment and mandated the Affordable Housing Program through which each FHLBank sets aside 10 percent of net eamings annually for the creation of affordable housing throughout the nation. That commitment has resulted in $1.7 billion of private capital flowing into the housing market to create 380,000 units of affordable housing.

Title six of the Gramm-Leach-Bliley Act of 1999, sponsored by Congressmen Baker and Kanjorski, established universal voluntary membership; provided for a permanent capital structure; expanded the types of collateral that community institutions can pledge to secure advances, and increased the independent corporate govemance of each FHLBank.

Six FHLBanks, including Cincinnati, have implemented newly required capital stock plans. This monumental task has occurred well within the legislative time frame, and is due in no small part to the strength of the System's independent regulator and the commitment of the boards of directors at each FHLBank. The new capital structures have left the System with $38 billion of capital with an aggregate capital-10-assets ratio of 4.7 percent as of June 30, 2003.

Financial Profile

These two pieces of legislation combined with the performance of the FHLB anks in the marketplace and customer demand for FHLBank products, resulted in considerable growth over the last decade. As of June 30, 2003, the FHLBanks had combined total assets of $809 billion up

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