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totaling more than 10,000 affordable apartments. Enterprise and Fannie Mae also launched a venture in the early 1990s, Comerstone Housing Corporation, which acquired government-owned foreclosed properties from the Resolution Trust Corporation and preserved their affordability. Cornerstone helped save more than 5,000 apartments for low-income people in mixed-income communities.

Fannie Mae and Freddie Mac have developed similar initiatives with many other organizations that broke new ground in affordable housing. These innovations have often pointed the way for the mainstream market to follow-benefiting those institutions' bottom lines and millions of low-income people. The ability to “test market" new privatepublic partnerships at scale is a unique value only Fannie Mae and Freddie Mac can provide in affordable housing.

Interestingly, Fannie Mae and Freddie Mac receive no affordable housing goals credit for their investment and direct lending activities, which are often the ways in which they have supplied the most innovative and important forms of capital to a variety of partners that reach extremely low-income people. Certainly, there should be an effort to encourage Fannie and Freddie Mac to make more of this capital available and to reward them for doing so in a financially prudent way.

Finally, we would support constructive efforts to enable Fannie Mae and Freddie Mac to play a more active role in the subprime mortgage market. The companies' resources, capacity and clout could position them to increase alternatives to predatory lenders, which are still stripping wealth and assets from too many low-income families. We commend HUD for imposing tough standards to help ensure Fannie Mae and Freddie Mac do not receive affordable housing goal credit for purchasing certain high cost loans. And we commend the companies for the strong steps they have taken on their own to help fight the predators. Working with HUD, mortgage lenders and housing advocates, we believe the companies could find additional ways to serve subprime borrowers and create a strong, fair secondary market for subprime loans.

The last time Congress revised Fannie Mae and Freddie Mac's statutory framework, it expressly provided the companies the freedom and flexibility to respond to fast moving market conditions and help meet our nation's affordable housing needs. The companies have consistently met their affordable housing responsibilities, even as HUD steadily and substantially increased them over the past decade. It is our experience that Fannie Mae and Freddie Mac's current statutory and regulatory framework has enhanced their ability and willingness to forge partnerships with organizations like Enterprise to deliver housing resources to people and places that cannot take full advantage of our nation's generally well functioning housing system. Millions of low-income people have a decent, affordable home as a result. Any changes to federal regulation of the companies should not jeopardize or limit that progress.

Statement of Franklin D. Raines
Chairman and CEO of

Pannie Mae
Before the U.S. House Committee on Financial Services

September 25, 2003

Chairman Oxley, Congressman Frank, and members of the committee, thank you very much for inviting me here today. I am here to testify on legislation that would alter Fannie Mae's regulatory framework. To give some context to these proposals, I would like to begin by describing the fundamental health and dynamism of our mortgage finance system, the efficiencies Fannie Mae has helped to bring to the system, our impact on broadening homeownership, and our leadership in disclosure, risk management and corporate governance.

Let me start by saying, I am appearing today in support of legislation - the right legislation - to strengthen Fannie Mae's regulatory oversight. I am here today to ask Congress to take action to make our housing finance system even stronger by enacting the Administration's proposal to move our financial regulator to a bureau of the US Department of Treasury.

We support the Administration's proposal for three main reasons:

First, we support having a strong, well-funded, highly credible financial regulator, and this move would help ensure that

Second, the proposal supports our charter and mission, including our freedom to continue to innovate with our lender customers and housing partners to expand affordable housing to new people and places.

And third, the proposal supports the advanced capital structure Congress provided in 1992, which ensures that we remain safe and sound through even the worst conditions while allowing us to direct the maximum amount of low-cost financing to homebuyers. The proposal also calls for giving the regulator full and more flexiblc authority to adjust risk-based capital standards over time, to incorporate evolving best practices. We support giving the regulator this additional flexibility.

Fannie Mae looks forward to working with Congress and the Administration to adopt the proposal into law this year.

I believe that strengthening our financial regulator is the natural next step in a sequence of Congressional actions that have made the GSE construct an enormous success. Over the last 65 years, Congress has created a remarkable and unique public policy model that today marshals private capital – at no cost to the government -- to carry out the public policy goal of making homeownership more affordable. Let me review the history that has brought us to this opportunity today.


When Fannie Mae was first created in 1938, the 30-year fixed rate mortgage was little more than an idea. Most homes were financed nearly entirely with cash. The standard mortgage product available in the market was a 5-year loan with a balloon payment at the end. When the federal government decided to start making 30-year fixed rate loans, no one really knew if the product would work. Today, it is the standard mortgage in the United States.

Again in 1968, innovative policymakers took another bold step, creating the GSE model we know today. Fannie Mae was privatized. It became a private, shareholder-owned company with a public mission to expand homeownership. This was a novel idea at the time. And the GSE model has proven an overwhelming success, marshalling private capital for a public mission.

In 1992, Congress established Fannic Mae's modern regulatory framework. It included specific affordable housing goals, a rigorous capital framework, and a constant, on-site program of supervision. In the decade since that law was enacted, Fannie Mae has played a central role as our mortgage markets have become increasingly efficient and we have done so maintaining strong, safe, and sound financial performance.

Our mortgage finance system is the envy of the world. Nowhere else in the world are lowdownpayment, long-term, fixed rate, prepayable mortgages the market standard. Other nations have noticed our success and are eager to imitate it. Many have figured out how to use government guarantees and government funds to expand homeownership, but none have yet accomplished the success of the GSE model, galvanizing private companies to attract low cost funding to the mortgage market, without spending a dime of the taxpayers' money.

According to the Federal Housing Finance Board, last year in the United States, 83 percent of residential mortgages had fixed rates, with the predominant product being a thirty-year fixed-rate mortgage. By contrast, in Canada borrowers can get a fixed rate for only the first one to five years, and face a prepayment penalty equal to 3 months interest. And in Spain only about 10 percent of the market is fixed rate. In Germany, the typical downpayment is 35 to 40 percent, and in Japan homebuyers have to put down 50 to 60 percent.

In the UK, Chancellor of the Exchequer Gordon Brown is convinced that variable rate mortgages have contributed to housing booms and busts, by exposing homeowners to interest rate swings that create sudden leaps in monthly mortgage payments. He has a team working on creating a market for long-term fixed rate mortgages, and has made the introduction of a fixed rate mortgage product a pre-condition of the UK's adoption of the euro. Brown believes that this will help to reduce the boom and bust cycle in the property market in the UK.

Why are low down payment fixed rate prepayable mortgages so common here and a rarity elsewhere? The difference is Congress' long-standing commitment to homeownership and its decision to foster a sophisticated secondary mortgage market that continues to meet the needs of both homebuyers and investors.

The GSE model has succeeded where other nations have failed because it taps deep pools of capital around the world and disperses mortgage risk across the capital markets. Fannie Mac offers lenders the ability to shed the credit and interest rate risk inherent in a long-term fixed rate mortgage, and to transform mortgage risk into the various forms that investors want to buy. We do that in two ways, both

of which have a positive impact on our housing mission by lowering costs to current and potential

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First, we manage credit risk when lenders come to us with a pool of mortgages and we create a
mortgage-backed security (MBS), which the lender can then hold or sell in the market place. Because
we guarantee the timely payment of principal and interest on that MBS, investors who do not want to
take on the credit risk of a mortgage can purchase MBS. Through our credit guaranty business, we have
created and sustained a deep and liquid market for conventional, conforming MBS, which are the
bedrock of today's secondary mortgage market.

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Mortgage-backed securities are sometimes referred to as pass-through certificates, because the security passes through to investors the principal and interest payments each month from the mortgages backing the security. An investor in an MBS owns an interest in a pool of mortgages and receives

the cash flows from this pool. A nationwide network of lenders such as mortgage bankers, savings and loan associations, and commercial banks originates the loans backing the MBS. Securitization by Fannie Mae converts a pool of relatively illiquid mortgage loans into a very liquid security, carrying a guarantee to the investor of timely payment of principal and interest. Fannie Mae's obligation under this guarantee is solely Fannie Mac's and is not backed by the United States government.

The market for these mortgage-backed securities functions with such efficiency that it is able to provide an abundant supply of mortgage credit to American homeowners at low cost, and it is one of the most liquid markets in the world. According to the Bond Market Association, in 2002, Fannie Mae, Freddie Mac, and Ginnie Mae combined MBS issuances totaled $1.46 trillion. On a typical trading day in 2002, more than $154 billion of conforming MBS changed hands. The ultimate beneficiaries of this vast liquidity are homeowners, because they have access to mortgage credit constantly at a lower cost.

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The Portfolio Business

Second, we purchase mortgages directly and hold them in portfolio. In fact, while Fannie Mae did not begin guaranteeing MBS until 1981, the company has purchased mortgages for its portfolio since 1938. Today, Fannic Mae's mortgage portfolio remains a vital tool that enables the company to fulfill its housing mission.

Because many investors are not comfortable with the payment uncertainty of mortgages and MBS, the portfolio business has been, and continues to be, an important tool for achieving Fannie Mae's housing mission. By purchasing mortgages and MBS for our portfolio, Fannie Mae expands the universe of mortgage market investors, bringing more capital into the mortgage market and bringing down mortgage rates. Investors who do not want to manage the unpredictability of mortgages, which can prepay before maturity, can instead invest in Fannie Mae debt securities, whose payments are far more predictable. In this manner, Fannie Mae can attract additional investors in support of housing, providing value to homeowners and investors alike.

When Congress chartered Fannie Mae as a shareholder-owned company in 1968, the company's only line of business -- its only way to provide the residential mortgage market with liquidity -- was to purchase mortgages for its portfolio. By purchasing mortgages for its portfolio, Fannie Mae has been able to move independently to stabilize the mortgage market during a crisis. In so doing, it has provided an important source of stability to the market.

This was clearly evident during the fall of 1998, when markets for many other securities dried up, while the market for conforming mortgages was relatively stable due to the extensive purchase activity by Fannie Mac and Freddie Mac. In a recent study by Andy Naranjo and Alden Toevs of the First Manhattan Consulting Group, the authors found that conforming rates would have been 66 basis points higher during this crisis without the stepped up purchasing activity of Fannie Mac and Freddie Mac.

An additional benefit of the portfolio is that it fosters innovation at Fannie Mae and in the broader mortgage market. New or unusual products are often difficult to securitize, at least initially. The ability to buy loans directly improves the company's flexibility when working with lenders who want to sell new mortgage products into the secondary market. Although these new products cumulatively make up a small portion of the portfolio, the ability to design new products is greatly enhanced when lenders know that Fannie Mae can directly purchase the product in the secondary market.

Through the securitization of mortgages and through the transformation of risk in the portfolio, Fannie Mac attracts investors from around the world into the U.S. mortgage market, and lowers mortgage costs for homeowners. As a result, the average difference in 2002 between the conforming mortgages we can purchase and the jumbo mortgages we cannot purchase was 29 basis points, which translates into $19,300 in savings to consumers over the life of a 30-year fixed-rate loan.

Lowering the cost of a mortgage is critical to the bipartisan public policy goal of making homeownership available to Americans for whom the American Dream has long been out of reach. For every 25 basis point (one-quarter of a percentage point) decrease in mortgage rates, nearly 400,000 additional families can qualify to become first-time homebuyers.


Serving Underserved Communities

Fannie Mae has a special responsibility to focus on some of the nation's toughest housing problems. We do that every day in furtherance of our mission to expand homeownership. In 1994, Fannie Mae launched a Trillion Dollar Commitment dedicated to expanding markets and increasing access to mortgage credit. Upon completion of the Trillion Dollar Commitment in 2000, we announced our $2 trillion American Dream Commitment, a decade-long effort to close homeownership gaps and strengthen communities. Since 1994, Fannie Mac has served more than 12 million low- and moderate-income families and more than 4.8 million minority families.

As the 1992 Act established, HUD has responsibility for our housing mission. HUD has used this responsibility to ensure that we remain focused on our affordable housing mission and to ensure that our business continues to promote housing as a national public policy priority. In addition to operating under HUD's regulation, Fannie Mae also has worked with HUD on a variety of initiatives -including the President's Minority Homcownership Initiative, The Trillion Dollar Commitment, the American Dream Commitment, and important anti-predatory lending initiatives – that have furthered our affordable housing mission. We support a continued role for HUD as our mission regulator.

As the 1992 Act mandated, HUD has established affordable bousing goals for the company, to quantify our mission responsibilities. HUD sets specific share of business goals for purchasing loans to low- and

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