GSE programs fit into a coherent set of programs at HUD to create the largest affordable housing stock available for America, and that huge disparities in home ownership faced by African-Americans and Hispanics can be closed.

We would be concerned if the programs of the housing GSEs are evaluated out of context, out of the context of a comprehensive housing program, and that faulty conclusions could be reached from the effectiveness or appropriateness of the programs of the housing GSES, and that inappropriate safety and soundness standards might then cloud the mission of the housing GSES.

Still, we believe that important improvements could be made in program oversight. Organizations like the National Urban League, and you heard from The Enterprise Foundation just a second ago, and other community-based and nongovernment organizations have worked to address the housing needs of underserved communities. Beyond comments to proposed rules, we hope that Congress will create a new way of rule-setting to ensure a transparent mechanism, to ensure HUD incorporates the views of such organizations in setting rules and regulations toward goal-setting for the housing GSES and in program oversight.

To us, the key is not just mission, but whether the program proposals from the housing GSES would actually lead to the housing targets established by HUD. And as I just explained, we think this is the responsibility of HUD, not just of the housing GSES, that is, reaching affordable housing targets.

We think that this would incorporate the lessons learned by these organizations Enterprise, the National Urban League, and others on the front lines of address the housing problem and into assessing the likely effectiveness of the proposed program enclosing the home ownership gaps experienced by underserved markets. Thank you.

[The prepared statement of William E. Spriggs can be found on page 236 in the appendix.]

Mr. BAKER. Thank you, Doctor.

Mr. Courson?

STATEMENT OF JOHN COURSON, PRESIDENT AND CEO, PACIFIC MORTGAGE COMPANY, ON BEHALF OF THE MORTGAGE BANKERS' ASSOCIATION OF AMERICA

Mr. COURSON. Thank you, Mr. Baker, Ranking Member Frank, distinguished committee members, thank you inviting the Mortgage Bankers to speak at this important hearing.

MBA members originate loans in the primary market that Fannie Mae and Freddie Mac purchase. MBA, therefore, has a keen interest in maintaining the safety and soundness of our country's real estate finance system.

Fannie Mae and Freddie Mac play two important roles in the American finance system. First, they provide market liquidity, and second, they buy affordable housing loans from lenders so that lower-income Americans, and those living in underserved areas, can get access to housing credit.

Obviously, it is imperative to have effective oversight of the GSES. The Mortgage Bankers endorse the principles for GSE regulation played out by Secretary Snow and Secretary Martinez before

the committee earlier this month. And further, the Mortgage Bankers support certain core principles for effective regulation of Fannie Mae and Freddie Mac.

First, effective safety and soundness oversight is vital. The Treasury Department's 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. The Mortgage Bankers urge this committee to look at the Office of Thrift Supervision 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 a fundamental tool in this regard. A statute should not unduly tie a regulator's hand.

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 banking enforcement tools have proven their effectiveness over the years, and support including such tools for a GSE regulator.

Within these four core principles, one issue stands out to MBA as fundamentally important for the mortgage industry-the safety and soundness of GSE programs and activities.

The activities of Fannie Mae and Freddie Mac have ramifications throughout the American mortgage market, and indeed throughout the domestic and international economies.

For these reasons, all their activities must be safe and sound, not just some. We believe that the approval of new programs and activities is fundamentally linked to financial safety and soundness.

The safety and soundness regulator is in the best position to evaluate the appropriateness of new or proposed GSE programs. 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, or 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 micro-manage the GSE, and that it not unduly constrain the GSEs' ability to innovate in a timely manner to meet the marketplace needs.

Fannie Mae and Freddie Mac have Government sponsorship so they can assist Americans with their housing needs. Effective safety and soundness oversight ensures that the GSEs are able to meet these housing needs.

MBA strongly supports the affordable housing goals for Fannie Mae and Freddie Mac, and endorses HUD's role in setting and en

forcing those goals. The Mortgage Bankers strongly urge Congress to reform the oversight of Fannie Mae and Freddie Mac in this manner, so that they can continue in their role of supporting housing, especially affordable housing.

Congressman Baker, thank you, and I am happy to answer any questions.

[The prepared statement of John Courson can be found on page 139 in the appendix.]

Mr. BAKER. Thank you, sir. And welcome back to our former colleague, Mr. Bartlett.

STATEMENT OF STEVE BARTLETT, PRESIDENT AND CEO, THE FINANCIAL SERVICES ROUNDTABLE

Mr. BARTLETT. Chairman Baker, Ranking Member Frank, and Congressman Scott, this is about as close to a special order as I have done in any time in the last 12 years.

I notice Congressman Scott is looking at the clock. If you have a flight or something, and you want to take my time to ask a question, I will gladly yield. If that is the issue, that would be fine.

Well, I will stay within my five minutes. My name is Steve Bartlett, I am President of the Financial Services Roundtable and our newly formed Housing Policy Council.

Collectively, Mr. Chairman, and members of the committee, our member-companies represent the strongest commitment to housing in America today, originating some 70 percent of the residential mortgages in the United States.

Our members strongly support the goal of home-ownership for all Americans, and we help to meet it every day. We understand the functions and operations of both the primary and secondary mortgage markets.

Toward that end, our council has adopted five principles that we believe should guide this committee. Those principles are consistent with the proposal that Secretaries Snow and Martinez offered to the committee.

They include: One, the regulatory agency should be independent and housed within Treasury, much as the OCC and OTS are structured an operate within Treasury.

Second, the agency should be funded by nonappropriated funds. Third, all supervision and regulation should be in one agency,

not divided.

Fourth, the agency should have an abundance of staff qualified to understand, analyze and supervise the quality and the quantity of assets and liabilities of Fannie and Freddie.

And fifth, its securities disclosure should be the same as applicable to all other publicly traded companies.

Now, last week, Mr. Chairman, the council met and considered and added a sixth principle. The new bureau within the Treasury should also have regulatory and supervisory responsibility over the Federal Home Loan Banks.

Thus, the council strongly supports the Administration's proposal that an independent regulator within Treasury, free from the appropriations process, the safety and soundness regulation including the authority to review and approve new GSE activities.

The regulator should establish capital standards and have enforcement capabilities, and those should be a strong as that of banking regulators.

Speaking of banking regulators, I want to cite as an example the OCC. The OCC has offered a clear road map to follow. It has the authority to supervise all aspects of a national bank's operations, including review of new activities.

There is no need to re-invent the wheel or create new procedures. Now, the council, and I personally I must say, intend in no way to criticize, and it hasn't happened here today, the dedicated personnel at OFHEO or the Federal Housing Finance Board.

I find them to be professional, ethical, dedicated, knowledgeable individuals. They have not had the statutory authority to do their jobs. The Housing Policy Council and the Roundtable believes that under these new proposals they will have an opportunity to do a world-class job.

So in conclusion, the members of the Housing Policy Council believe in our system of housing finance, and we want to strengthen it. We recognize that the housing GSEs have an important role to play, but there is no question that the system of housing finance would benefit from a strong, independent regulator.

Inn conclusion, one statistic which I looked up this morning, the OCC regulates national banks with approximately $3.9 trillion of assets. OFHEO regulates GSES with approximately $3.3 trillion in assets, owned and guaranteed, almost the same.

The OCC does its job with 2,800 employees, and full statutory independent authority. OFHEO has been asked to regulate almost the same size of assets with 115 employees, and no independent statutory authority.

Therein lies the challenge of this committee, Mr. Chairman, to provide statutory authority for a strong and independent regulator for this critical segment of the nation's financial marketplace and the home-ownership opportunities for all Americans.

The time to act is now, this session. Thank you.

[The prepared statement of Hon. Steve Bartlett can be found on page 123 in the appendix.]

Mr. BAKER. Thank you, Mr. Bartlett.

Mr. Taylor, it is my understanding that Rahway Savings Institution, as a regulated entity under the Office of Risk Supervision, has to comply today with what is known as community re-investment standards.

Mr. TAYLOR. That is correct.

Mr. BAKER. At issue is whether another entity other than HUD can adequately supervise a social mission compliance in an effective manner. What is your experience with OTS in your responsibilities as an institution in meeting your CRA criteria?

What is the supervision like, and what are the consequences of your failure to meet those standards?

Mr. TAYLOR. If I could just make one correction. We are not OTSsupervised; we are a state chartered bank. So we are supervised by the Department of Banking of the State of New Jersey, as well as the FDIC, as a Federal regulator.

And with regard to that and its relationship to an independent regulator under the Treasury for these GSES, it has been very simple for us to be able to met our CRA requirements.

We do utilize, I must say also, the GSES in question to help us attain those goals, in terms of utilizing their services and their programs, which is one of the main reasons why they are so beneficial to us and to the industry.

With regard to a regulator having oversight and having those kind of mission-directed responsibilities, we believe that if an independent agency under Treasury, a truly independent agency, is given the mission statement and the mission of housing as its key measure for these GSES, that there should be no reason why the housing needs are not fully met.

Mr. BAKER. Do you share the view of other witnesses that Fannie and Freddie perhaps could do a better job in meeting the needs of low-income minorities and inner-city individuals than they do today?

Mr. TAYLOR. Tough question to answer. I think they have tried, and I commend them for what they have done. I think they have made some great strides.

They do come out with some innovative programs. Our members have taken advantage of them, ACB has entered into relationships with both Fannie Mae and Freddie Mac that deliver mortgages to them, both of which are conventional mortgages as well as CRArelated mortgages.

So I know the endeavor and the attempt on their part has been sincere, as it has been for the industry at large.

Mr. BAKER. Thank you. Mr. Bartlett, a capital-related question. As you know, I have raised the issue with Mr. Raines and others today about the adequacy of maintaining authority for the new regulator to appropriately review risk and adjust minimum capital.

As the rules now stand, the risk-based capital standard only recently promulgated is not yet in effect in the sense that the minimum capital required by statute of 2.5 percent is the actual currently required amount by a GSE.

In order for a regulator, currently OFHEO, to act under the statute, you must be critically undercapitalized, that is a level of 1.25 percent.

By allowing a regulator in the future, not today, no one is suggesting the immediate or imminent adjustment to either risk based or minimum capital standards-what would be your view, from your organization's perspective, given your broad scope of mortgage finance activities, as to the effect of allowing the regulator to have that authority? Would that enhance confidence? Would it have any effect on the ability to make credit available? What is the consequences of following the path that I have suggested?

Mr. BARTLETT. Chairman Baker, that path should be followed, as Secretary Snow proposed in his testimony. He was quite clear. I read: "The regulator should also have authority with regard to capital for the GSEs."

So it is essential that this regulator be given authority over capital. This is the only regulator in the United States of America that does not have authority over-financial regulator-over capital and that should be an essential part.