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cover management and operations risk. The firms must meet both the RBC and minimum capital standards to be classified as adequately capitalized. Failure to meet the capital standards would trigger enforcement actions ranging from limits on growth and activities to conservatorship.

Fannie Mae and Freddie Mac have consistently met their capital standards and thus have been classified as adequately capitalized. Prior to the implementation of the RBC standard, the firms were required to meet the minimum leverage ratio. The RBC standard became enforceable on September 13, 2002 after nearly 10 years of development. The RBC test is the first regulatory capital standard to be based on a stress test and has been hailed as the most dynamic and stringent capital standard for any financial institution.

Given the importance of capital to the financial condition of the GSEs, we agree with Sec. Snow that there is a need for stability in capital standards and that capital standards should not be subject to frequent change. NAHB applauds Sec. Snow's decision not to recommend any changes in the GSEs' RBC regulation at this time, given that the standard took ten years to develop and has been in effect for only one year. We are pleased that the Treasury is giving the RBC standard a chance to work. NAHB recommends against any changes in the GSEs' minimum capital standard as well.

Longer-term, NAHB agrees that the safety and soundness regulator should have the flexibility to adjust capital standards as necessary. However, NAHB cautions against any significant changes in the GSEs RBC standard or any significant increase in the GSEs minimum capital standard. Overcapitalization of the GSEs, beyond the level of risk, is not economically efficient and could have unintended consequences for the housing markets, by reducing the level of capital for housing and increasing mortgage rates.

NAHB would also oppose the imposition of bank-like capital standards for the GSEs as some have proposed. Congress rejected this notion and intentionally drafted a separate capital regime for Fannie Mae and Freddie Mac under the 1992 GSE Act. The present capital framework takes into account the unique nature of the GSEs business, that there are only two firms (as compared to thousands of banks) and they engage in a monoline business, focused on low-risk residential mortgages (unlike banks which engage in a wide range of activities). During the lengthy development process of the current RBC standard, OFHEO took great pains to ensure that the standard appropriately ties capital to risk. Bank regulators have recognized that bank capital standards do not tie capital to risk and are now engaged in a process to revise bank capital standards through the Basel II Accord.


NAHB appreciates the opportunity to share our views on the regulatory framework for the nation's housing government-sponsored enterprises. The critical supports provided by the housing GSEs, Fannie Mae, Freddie Mac and the Federal Home Loan Bank System, were an essential component to the recent success of the housing market in sustaining the nation's economy. NAHB appreciates the Committee's efforts to

assess and seek improvements to the regulatory framework of the housing GSEs. We look forward to working with the Committee as you progress towards fashioning a narrow regulatory solution to the oversight of these important housing institutions.

Statement of John A. Courson

President & CEO
Pacific Mortgage Company

Folsom, California

on behalf of the

Mortgage Bankers Association of America

before the

U.S. House of Representatives

Financial Services Committee

Hearing on

Secondary Mortgage Market Enterprises Regulatory Improvement Act

the Administration's Proposals on GSE Regulation

September 25, 2003

Chairman Oxley, Ranking Member Frank, distinguished Committee members, good

morning. I am John Courson, President and CEO of Central Pacific Mortgage

Company, and Chairman of the Mortgage Bankers Association of America (MBA or the

Mortgage Bankers). MBA is the national association representing the real estate

finance industry. We have approximately 2,600 members that are engaged in every

aspect of real estate finance. MBA members originate loans in the primary mortgage

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


Thank you for inviting the Mortgage Bankers to speak at this very important hearing concerning the regulation of the Government-Sponsored Enterprises (GSES), the

biggest participants in our country's secondary mortgage market. Fannie Mae and

Freddie Mac play two important roles in the American home finance system. First, they

provide market liquidity, which is critical to enabling mortgage loans to be originated,

and which allows the American housing market to grow as our country's population and

housing needs grow. 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. These two roles - supporting the mortgage market and supporting

affordable housing - play an important part in this country's housing finance system. The American housing finance system is the envy of the world.

Today, just over 68 percent of all Americans own their own homes, the highest rate in

history. More minorities own homes now than ever. Purchasing a home is the largest

investment that most Americans will ever make and it likely will become their largest

asset. Close to 75 percent of all American homeowners borrow money to purchase

their homes. Members of the Mortgage Bankers originate about 70% of residential

loans in this country.

Homeownership benefits our citizens and our economy. The real estate sector employs

1.37 million individuals, a record level in U.S. history. The mortgage banking and

brokerage industry has added almost 150,000 jobs since January 2001, bringing our

total share to over 400,000 employees. Home sales stimulate additional, downstream

economic activity. Home sales will add an estimated $25 billion in housing-related

expenditures to the economy in 2003. States and localities benefit from

homeownership also-property taxes contributed approximately $285 billion to state

and local budgets in 2002.

To maintain the vitality and stability of our housing finance system and of our financial

markets in general, it is imperative to have effective oversight of the GSEs. Recently,

we have seen examples in other industries of what can happen without effective

oversight, and the Mortgage Bankers applaud this Committee's efforts to prevent future

problems from arising in our housing finance system.

The Mortgage Bankers endorse the principles for GSE regulation laid out by the

Secretary of the Treasury John Snow and the Secretary of Housing and Urban

Development (HUD) Mel Martinez before this Committee earlier this month. Further,

the Mortgage Bankers support certain core principles for effective regulation of Fannie

Mae and Freddie Mac.

First, effective safety and soundness oversight, the reason all of us are here today, is

necessary. The Treasury Department 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. That funding should not be

subject to either annual or permanent Congressional appropriations, so the regulators

will be equipped to fulfill their missions, even in cases like the current one, where a

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