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Proposals to Restructure the Regulatory Framework for the Housing-Related Government Sponsored Enterprises
September 25, 2003
The 211,000 members of the National Association of Home Builders (NAHB) appreciates the opportunity to present their views to the House of Representatives' Financial Services Committee on the regulatory framework for the housing-related government-sponsored enterprises (GSEs), including safety and soundness oversight, new program approval and the establishment and enforcement of affordable housing goals. The GSES – Fannie Mae, Freddie Mac and the Federal Home Loan Bank System
are critical components of the nation's housing finance system and are largely responsible for the efficiency and resiliency of that system, as reflected in the tremendous advances recorded in the availability and affordability of mortgage products for home buyers and providers of rental housing. The housing finance system has also allowed the housing sector to sustain economic performance as other sectors have faltered.
NAHB believes it is important that the regulatory framework for the GSEs is credible and effective to ensure these organizations fulfill their mission in a safe and sound manner. However, any changes in the current system must be carefully considered to avoid disruptions to the efficient operation of the mortgage markets and the impediments to the development of effective programs to address the nation's housing needs.
As discussed in detail below, the Department of Housing and Urban Development (HUD) is the appropriate agency to regulate the mission of Fannie Mae and Freddie Mac, including approving new programs and establishing affordable housing goals. We do not feel that the Department of Treasury, which is well suited to oversee the safety and soundness of Fannie Mae and Freddie Mac's financial operations, has sufficient expertise and involvement in housing issues to also serve as the program regulator. NAHB is opposed to changes to the current regulatory arrangement for the Federal Home Loan Bank System.
Housing and the Economy
The housing market has been an engine of growth in recent years, sustaining the economy during a difficult stretch. That performance continues this year, with new home sales heading toward a record performance of more than a million closings. Singlefamily home construction has been robust and should total about 1.4 million units in 2003. Multifamily activity has been more subdued, but should still post a respectable showing, pushing total housing starts above 1.7 million units for the second consecutive year.
While low interest rates and favorable demographics have spurred demand, these results would not have been possible without the support of the finance system for housing. The bedrock of that system is a liquid and vibrant secondary market that is the product of the activities of Fannie Mae and Freddie Mac. These enterprises have not only contributed to the affordability of housing credit but also have taken the lead in expanding the menu of affordable housing programs and products. The Federal Home
Loan Banks also continue to play an important role both by providing liquidity to housing lenders and by developing innovative programs to address housing needs.
GSEs and Housing Finance
The housing-related GSEs are American success stories. As mentioned above, they have brought enormous benefits to home buyers, renters and the housing finance system. These include:
Reduction of mortgage interest rates -- Home buyers with conforming loans --
Reliable and stable flow of mortgage credit -- The linkage that the GSEs provide to the national and international capital markets sustains the flow of capital to housing, even under changing economic conditions. While the economy has undergone major shocks over the past decade, home buyers have experienced no interruption in the availability of mortgage credit.
Elimination of regional disparities in interest rates -- The GSEs provide a nationwide market for mortgage funds, a key factor in the elimination of regional disparities in the availability and cost of mortgage credit, which occurred regularly before Fannie Mae and Freddie Mac came on the scene. Today, interest rates in conforming mortgage markets around the country vary by no more than 10 basis points.
Cushion against local economic downturns -- When regional economies begin to slow, some participants in the mortgage industry have restricted credit or abandoned markets in search of opportunities elsewhere. This is not the practice of the GSEs. They maintain a presence in all markets under all economic conditions, cushioning the impact of local or regional declines in economic activity.
Market standardization and innovation -- The GSEs have brought both standardization and innovation to the mortgage markets, involving a variety of mortgage instruments and securities structures. Standardization is key to obtaining and retaining investor confidence and supports the innovation that has addressed a broad range of borrower and investor preferences. In the primary market, the GSEs have supported the development of hybrid mortgages that combine the benefits of adjustable and fixed-rate mortgages. The GSEs also have established reduced downpayment programs to help cash-strapped first-time home buyers. Recently, both Fannie Mae and Freddie Mac have introduced mortgage products to assist borrowers with tarnished credit histories. In addition, Fannie Mae and Freddie Mac are at the forefront of technological innovations to
streamline the mortgage process in order to reduce the time and cost involved in obtaining a mortgage.
Expansion of homeownership and rental housing opportunities -- The housing
Current GSE Regulatory Framework
The 1992 GSE Act established a dual regulatory oversight structure for Fannie Mae and Freddie Mac. HUD is the programmatic (or mission) regulator and the Office of Federal Housing Enterprise Oversight (OFHEO) is the safety and soundness regulator.
The 1992 GSE Act also requires Fannie Mae and Freddie Mac to obtain prior approval by HUD of any new mortgage programs. The Act defines new programs as any programs that are significantly different from programs previously approved or engaged in prior to 1992. HUD also is required to review new programs to ensure that they are consistent with the GSEs' charters and are in the public interest. In addition, Fannie Mae and Freddie Mac are required by law to meet annual housing goals established by HUD.
Finally, The 1992 GSE Act established OFHEO as an independent office within HUD to oversee the safety and soundness of Fannie Mae and Freddie Mac. OFHEO's primary responsibilities are to establish and enforce capital standards for Fannie Mae and Freddie Mac and to conduct annual on-site examinations of the firms to ensure that they are operating in a safe and sound manner. Fannie Mae and Freddie Mac are required to meet two capital standards, a minimum leverage ratio and a risk-based capital (RBC) standard.
Context for GSE Oversight Evaluation
NAHB believes that debate and discussion on the future of GSE regulation should be grounded in the fact that the housing-related GSEs were created to provide liquidity and stability to the housing market. NAHB believes it would be a tremendous mistake to turn discussion on GSE regulation into a referendum of our highly successful housing finance system. It would be ironic for debate and action on regulatory changes to undermine the success that has been achieved in these areas.
The key to the GSEs' success is their steadfast focus on their mission. They are in one business, housing finance - a relatively low-risk endeavor. This narrow focus should be
in the discussion of any future regulatory framework. The GSEs are not
banks operating in far-flung and highly risky product lines and markets and should not be regulated as such.
No one has stated concern of an imminent crisis in the GSE system. There is no need to rush to judgment. Hasty action could have catastrophic consequences for housing. NAHB urges a careful and thoughtful approach on GSE regulation and believes such a course will produce tremendous rewards to those with most at stake in the process – America's homeowners and renters.
Guiding Principles for GSE Oversight
NAHB endorses continued federal government support of America's housing finance system through GSEs, including Fannie Mae, Freddie Mac and the Federal Home Loan Banks. NAHB believes that government oversight of these GSEs should be guided by the following principles:
1. The GSE status of these institutions must be maintained. Efforts to privatize,
withdraw any of the federal privileges and legal exemptions, or otherwise diminish the ability of the GSEs to provide housing financing at the lowest possible cost should be opposed.
2. The GSEs should fulfill their public mission by conducting activities authorized
by their charters in a safe and sound manner and by promoting access to mortgage credit to address the needs of affordable housing throughout the nation.
3. The regulatory framework of the GSEs should be strong and credible, possess
adequate authority and resources and reflect the differences inherent in the charters and operating structures of the GSEs. Further, the regulatory framework should foster competition among the GSEs to develop and implement innovative, low-cost funding and other programs to meet the nation's housing credit needs.
4. The mission oversight of Fannie Mae and Freddie Mac (including approval of
new programs and enforcement of affordable housing goals) should be conducted by the Department of Housing and Urban Development (HUD), an entity with a thorough understanding of and extensive involvement in housing-related issues.
5. The safety and soundness oversight of Fannie Mae and Freddie Mac should be
conducted by an independent regulatory agency through rigorous examinations, enforcement of regulations (including capital standards) and transparency, without unnecessarily impairing the ability of these GSEs to accomplish their mission.
6. The recently implemented risk-based capital standards for Fannie Mae and
Freddie Mac should be allowed to remain in place for a period of time sufficient to evaluate the effectiveness of the new standards.