And like all of my colleagues, I share those concerns about safety and soundness.

Mr. Raines, in particular, one of the challenges of being from Oklahoma and having a state with a tremendous amount of cultural diversity, people from every continent, by historic and ethnic origin, as well as 39 recognized Native American tribes, is that we have particular challenges when it comes to housing issues. And your folks have been very aggressive, very successful in my tenure in Congress in doing things to help facilitate efforts to address those kind of issues.

Could you for a moment speak to the issue that probably I think gets to the core of what a lot of us are concerned about, and that is the questions as addressed earlier about how the proposed legislation would affect your ability to create those new opportunities? Thinking about my Native Americans in Oklahoma, how would this legislation, this proposal as you understand it, impact those efforts? Mr. RAINES. Well, Congressman, depending on how the committee writes the bill, it can either accelerate our ability to innovate or it can basically turn us into another stultified bureaucracy.

And I say that advisedly. We have 54 partnership offices around the country that we established for the sole purpose of working closely with local communities to try to bend our national programs to fit local circumstances.

And we have been remarkably successful in doing this and able to innovate, whether it is on Indian tribes and now that we are one of the only people who will buy mortgages on Indian reservations that are governed solely by the Indian judicial system, or whether it is in New Orleans where we are one of the first people to try to help them to move housing from being very small, shotgun class, into housing that moderate income and working people could own, all over the country.

But we have been able to innovate because we as a private company could say "yes" within the time frame that people needed.

But if, on the other hand, every time we had a new idea, a new activity, a new product, we had to go and get prior approval, that would not only slow the process down, I think it would discourage us from even trying because by the time we got it done, all of our partners would have been frustrated by our lack of ability to respond.

So a lot hinges on how it is written. And I think if it is written as I am thinking Congress intended in 1992, to encourage innovation, under a broad set of programs that had been approved, then I think we can continue to make an enormous amount of progress. On the other hand, if we go backward and change the standard and make it so that if every time we change a process or an activity then that has to be approved, then I think it will bring innovation within the housing finance industry to a screeching halt.

Mr. LUCAS OF OKLAHOMA. Well, I appreciate that. And certainly of my 39 tribes, 16 of which are in my congressional district, every one has a different tribal charter, a different governing system, a different perspective. Most have uniquely different courts, tribal courts to work within. I appreciate that.

I think, Mr. Chairman, I would like to yield back the rest of my time at this time.

The CHAIRMAN. Gentleman yields back.
The gentleman from California, Mr. Sherman?

Mr. SHERMAN. Thank you, Mr. Chairman.

I think we all agree we need the strongest possible regulator of the financial soundness of the housing GSEs. And I think that we all agree that Treasury would be the entity that the markets would respect the most. That is why I am glad we are having a hearing and hopefully a márkup of H.R. 2575, which is the subject of this hearing.

I am concerned, and I will ask the panel to bear with me on this, but this is a special concern, I think, for many of you, but especially from anyone from California, that H.R. 2575 currently still contains section 110, which would lower the conforming loan limit on single family units from $332,000 to $275,000. And that would be an anathema to those of us from high cost areas, including Los Angeles.

Now, I am told that it is the plan of the authors to delete that provision and I hope very much that that occurs. However, if it does not occur, then I think it would be germane for me to offer an amendment to raise the conforming limit in those states that contain a standard statistical metropolitan area in which housing prices on median exceed $322,000, or whatever the conforming loan limit is.

I am going to be leading up to a question here. But I will be interested to focus on not who should be the financial soundness regulator, but which entity should give new program approval to the housing GSES.

I fear that if we take that away from HUD, it would be like taking the "H" from HUD and we would have to rename it UD, because housing would no longer be its province.

I understand that new programs may raise safety and soundness issues. So if HUD approved the new program, Treasury could then step in and say well, that is a riskier program, here are the reserves that you need. That is the proper purpose of a safety and soundness regulator.

But if the mission of developing new types of mortgages that will help those, say with tarnished credit histories, get financing, if that is moved over to an organization whose mission and expertise has nothing to do with getting people, particularly first-time home buyers into housing, I think that would be a problem. So I hope that we can keep the "H" in HUD.

Now, currently HUD does have as its primary responsibility, Mr. Raines and others for a oversight mission and it is their responsibility, as I have said, of approving new programs.

You have indicated that you support the Administration proposal to bifurcate these mission oversight duties, which would, as I have stated, result in HUD retaining its goal of providing affordable housing and Treasury would be the primary regulator of financial soundness.

Perhaps, Mr. Raines, you could explain why would it make sense to split these two functions? And do you think that HUD has more expertise in your mission goals of providing housing to, and particularly home ownership to those who currently don't own their homes?

Mr. RAINES. Well, I certainly believe that HUD does have that expertise. And we have been a partner with HUD over many years in working together to try to expand the availability of affordable housing. So clearly HUD has the housing expertise within the Federal Government, no question about that.

And that is why we are very focused on the issue, from our standpoint, of what the standard is on deciding as opposed to the geography of who decides. For us, if the wrong standard is there, we wouldn't want it in HUD. If the right standard is there, then we are open to where it can be. And ultimately, obviously, this committee is going to have to make up its own mind about that location.

But we don't see any magic in it being in one place or the other. There is nothing that is going to make it better by moving it to Treasury ipso facto. The question is what the standard is and how will that authority be used and will it be used to encourage innovation or will it be used instead for other purposes?

Mr. SHERMAN. So HUD has as its mission a dedication to providing affordable housing and home ownership to those who otherwise wouldn't have it. It has the expertise to evaluate your new programs to see whether they achieve that goal. And yet you are an agnostic on whether the agency with the mission and the expertise would have that as its function. I, however, am a true believer that we should keep the "H" in HUD.

And I yield back the balance.

The CHAIRMAN. The gentleman yields back.

The chair recognizes the gentleman from Louisiana, the chairman of the Capital Markets Subcommittee.

Mr. BAKER. Thank you, Mr. Chairman.

Mr. Gould, in your testimony you have a statement that says, "Freddie Mac would strongly support the creation of a new regulatory office within the Department of the Treasury if Congress were to determine that this would enhance the safety and soundness oversight."

Beginning with that, I assume that absent the issue of capital and new product approval, using the Treasury testimony as your point of reference, do you generally support the proposal as outlined in the hearing before the committee by Treasury? Or are there issues of concern beyond capital and new product approval that you would like to bring to our attention for the committee's consideration?

Mr. GOULD. Well, again, there has been great deal of conversation on the earlier panel of independence. I think if one used the model of OTS or OCC, we would find that certainly to be acceptable given the independent decision-making. It wasn't totally clear to me from Secretary Snow's testimony whether that model was being totally followed. But that is what we would think is the proper way to do it.

And we stick with HUD on the mission because they have had experience, they do have perspective. That is their job. The Treasury has had no background in that. And it certainly is necessary to make sure that it is not restrictive, as opposed to allowing innovation.

But nonetheless, there is an agency that is experienced. And I think it is fair to say that Freddie Mac's experience working with HUD in that regard has been quite satisfactory.

Mr. BAKER. Thank you.

Mr. Raines, you have a similar comment in your testimony about the advisability of an independent regulator being constructed. Are their other issues on your list beyond the capital question and the new product approval or perhaps the independence issue that you would want to bring as concerns with the Treasury recommendation?

Mr. RAINES. Yes. The other item that we have emphasized is that our experience with our Presidential directors has been a good one. And it would be our preference to keep them as members of our board. And so I think that is a difference with the Secretary's proposal.

But fundamentally, with regard to no change in our status, in our charter, in our mission, we are in agreement with the Secretary.

With regard to capital in terms of no statutory change in minimum capital but more flexibility for the regulator with regard to risk-based capital, we are in agreement with the Secretary.

And as we just discussed, where it comes to innovation in housing, the key has to be to make sure that innovation in housing can occur. And if a standard can be established on that, then I think that probably we could get broad agreement in terms of location. Mr. BAKER. Well, my reason for the question is we have a platform from which we can begin to construct an effort, and identifying those areas where we have outstanding differences are, I think important because by and large there is broader agreement than one might first perceive on the necessity to move forward with a new regulatory structure.

Some members today have questioned the advisability of any change in current regulatory form. And I wanted to have both your perspectives that you do believe it advisable, assuming that Congress conducts business properly from your perspective, absent those identified issues on which there is some concern on your part. With respect to the Secretary's position on minimum capital, I asked an initial question during the hearing to which Mr. Ney asked a follow-up question.

There was another person just before the hearing concluded. I would like to read my question and the Secretary's response.

"Just for point of clarification, Mr. Secretary, on the capital issue, I understand the position currently is that we do not seek nor do we expect to change any capital standard immediately on establishing whatever this regulatory body would look like."

But coupled with that is the statement, "We do not, however, wish to limit our authority to change capital standards as we see fit both with regard to minimum or risk-based, based on staff analysis of risk assessment of the institution's leverage, or whatever standards you may choose to use. You do not want to have a regulatory system that constrains your ability to act in the public interest.

Secretary Snow: "That is right. That ought to be the decision of the regulator."

Now subsequent to that, there was a request by somebody to clarify further, and there was another statement issued relative to the capital standard issue.

"The Administration is not proposing legislation itself change any capital standard"-that is a point I agree with.

"We also are not suggesting that the statutory minimum capital of 2.5 percent be changed"-I agree with that.

"We are recommending that the new agency have full, more flexible authority over setting risk-based capital standards"-I agree with that.

So I guess our only point is, if we are not going to change minimum, do we construct a new regulator like every other financial regulator of every other financial institution who has that tool in his resume, recognizing that we are not going to change the minimum capital standards, but if risk profiles change and there is a need to change it, why should we have to come back to the Congress in order to adopt a minimum capital modification?

And I am out of time, and he is ready to push a button, so let me throw one more thing.

If we were to

The CHAIRMAN. Was that a rhetorical question?

Mr. BAKER. I am just still kind of continuing the same question, because I figured you might cut me off if I stop and said this is question two.

So continuing in defining that question: If we were to take the advice of Mr. Royce and others and roll the Home Loan Bank System into a new single regulator, what would be the Federal Home Loan Bank's view of adopting your capital standard, which some bright legislators a few years back came up with this class A, B stock, where if you are class A you have to have 5 percent, class B, 4 percent, if you are blended somewhere between that.

Would you, based on your operational experience and your ability to make credit available to your customers and your ability to move in the markets, have you found that capital standard to be an inhibition to your success-either one of the Home Loan Bank folks— and would you recommend to us that if we were all together, everybody would have the same capital standard?

Mr. SCHULTZ. Speaking for myself, we have not found operating under the capital standard in the Federal Home Loan Bank Act to be a problem. I think as capital plans diverge as a result of the changes after Gramm-Leach-Bliley we may see competitive differences emerge among the banks. But the capital standards remain the same for all the banks and they have not been a problem. Mr. BAKER. Mr. Hehman, do you want to respond? Mr. HEHMAN. I would agree with that.

We have implemented our capital plan, Congressman. It is working. It is working quite well. And we think it is an appropriate level of capitalization for our balance sheet.

Mr. BAKER. Mr. Raines, do you want to respond?

Mr. RAINES. I wanted to respond to the first part of the compound question

Mr. BAKER. Briefly.

Mr. RAINES. which went to the Treasury's position on capital.