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exist. Strengthening their safety and soundness regulation supports that mission by

ensuring that they are strong enough to provide the financial services that make that

mission a reality.


Mr. Chairman, that concludes my testimony. I look forward to working with the

Committee as this important legislation moves forward. I will be happy to answer

questions that you and the Committee may have.

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SEPTEMBER 25, 2003


1424 16th Street, N.W., Suite 604 • Washington, D.C. 20036 • 2021387-6121 •

Chairman Oxley, Representative Frank, members of the committee, my name is Allen Fishbein and I am the Director of Housing and Credit Policy for the Consumer Federation of America. I am testifying today on behalf of CFA, which is a non-profit association of some 300 consumer organizations, with a combined membership of 50 million that was founded in 1968 to advance the consumer interest through advocacy and education. CFA and many of our members have had long-standing interest and involvement on housing finance matters, including advocating for expanding the role of the GSEs in serving important housing needs. As for my own background, I have been an advocate for many years on GSE issues and have served at HUD as Senior Advisor for GSE Oversight, where my responsibilities included assisting with supervision that led to the establishment of the present affordable housing goals for Fannie Mae and Freddie Mac. Thank you for affording us with the opportunity to present our views on various proposals the committee is considering revising the regulatory structure governing these two government sponsored housing enterprises.

Consumers - whether existing or future homebuyers, renters, or investors - have a great stake in the outcome of these deliberations. Fannie Mae and Freddie Mac, along with the Federal Home Loan Bank System are government sponsored enterprises (GSE) created by Congress to help ensure the smooth flow of housing credit throughout the nation. CFA believes that the GSEs' play an important, indeed essential role, in promoting a sound housing market and by providing expanded homeownership and other housing opportunities. The GSEs’ public charters limit their activities to their housing mission and in return, they are afforded special competitive privileges not enjoyed by fully private financial institutions. The GSEs also have additional statutory mandates that require them to serve special housing finance needs, such as expanding mortgage credit opportunities to low and moderate income households and underserved communities. Changes to the GSEs' regulatory structure, therefore, must be undertaken with great care and precision so as not to work at cross purposes with the GSEs' ability to carry out these important mission activities.

Does the GSEs' regulatory structure require changing?

Fannie Mae and Freddie Mac are the nation's two largest home finance companies. Through their secondary market activities the two GSEs own or guarantee more than $3 trillion in mortgages --almost one-half of all outstanding mortgage debt -- and fund nearly 80 percent of the estimated total of all conforming, non-government insured mortgages made. Further, because of their market dominance, the underwriting standards of the GSEs also have much sway over who is eligible for mortgage credit and on what terms.

The 12 Federal Home Loan Banks (FHLBs) that make up the Federal Home Loan Bank System are a somewhat different form of government sponsored enterprise, but one that is also mandated to serve broad housing finance needs as well as particular affordable housing needs. The system also provides an important source of funding for lenders,

which in turn, use these funds to finance home loans and other residential mortgages. The System has over 8,000 financial institution members at the end of 2002 and assets of over $700 billion. My written testimony today focuses largely on issues of oversight structure pertaining to Fannie Mae and Freddie Mac and not the FHLBanks since this seems to be the most immediate focus of the committee's deliberations. However, we are prepared to supplement this testimony by providing additional views on the merits of combining FHLB oversight what that of Fannie Mae and Freddie Mac.

Freddie Mac's announcement of plans to make a substantial restatement of its earnings for prior years, coupled with more recent revelations about the departure of its three top executives and other reports of irregularities attracted considerable attention this summer and seemed to have unnerved the financial markets. The sheer size of the GSEs and their importance to the housing market mean that investors are sensitive to any hint of trouble. We are aware that members of this committee expressed concerns that these difficulties were not detected earlier by regulators and do not believe the current structure has the capabilities to provide adequate oversight in this area.

Still others had called for a regulatory overhaul even before these recent developments came to light. Unquestionably, the tremendous growth in the size of the GSEs over the past decade has raised the stakes for regulatory oversight. Indeed, Fannie Mae's and Freddie Mac's mortgage investments have increased by over 620 percent and the GSES today are two of the largest private debt issuers in the world (CRS Report to Congress, September 8, 2003, 2). Similarly, the FHLB System's business has sextupled and its membership has more than tripled since 1992, with commercial banks instead of savings institutions now constituting a majority of the system's membership. Government, the GSEs, consumers, residents of underserved communities, lenders, the housing industry and taxpayers all have a strong interest in effective oversight of enterprises financial condition. Thus, it would be hard to argue against the need for Congress to review the adequacy of a regulatory structure that was put into place a decade or more ago.

The existing regulatory structure governing Fannie Mae and Freddie was established in 1992 as part of the Federal Housing Enterprises Safety and Soundness Act (or GSE Act). The GSE Act established OFHEO as an independent agency, within the U.S. Housing and Urban Development (HUD) to oversee the safety and soundness of the two enterprises and to help ensure that they are adequately capitalized. The GSE Act also reaffirmed H as the GSEs' mission regulator, with general regulatory responsibility for ensuring that Fannie Mae and Freddie Mac operate within their public charters and otherwise fulfill their statutory mandates, including authority to review the GSEs new mortgage programs, establish and monitor the GSEs' fulfillment of their annual affordable housing performance goals, and ensure that they abide by fair lending requirements.

Review of Proposed Changes

There appears to be some consensus for taking steps to enhance the safety and soundness oversight of the GSEs. There also is growing recognition that OFHEO does not have all the powers it needs to perform this oversight. Unlike banking regulators, OFHEO does not have authority to assess the financial institutions it supervises for the full cost of oversight. Funds for its budget are provided through congressional appropriations although collected from Fannie Mae and Freddie Mac in the form of semi-annual assessments. This approach limits the agency's funding in comparison to the direct assessment approach used by federal banking regulators. For example, OFHEO's budget for FY 2002 was just over $27 million. Rep. Baker and others have estimated that Office of the Comptroller of the Currency assessment for banks of the size of the GSEs would be around $70 million.

In addition, OFHEO is not equipped with the full range of enforcement tools commonly afforded to financial regulators. It is my understanding, for example, that the agency's "cease and desist" authority is limited to capital related matters and does not encompass other areas of safety and soundness regulation. Enhancing the agency's authority in this area would appear to make sense.

Perhaps the simplest way to correct this problem, in our view, would be to upgrade OFHEO. But we know that some on this committee have concluded that a mere upgrade alone would not be sufficient and that further changes to the regulatory structure are also needed. For example, H.R. 2575 introduced by Capital Markets Subcommittee Chairman Baker would abolish OFHEO as an independent agency within HUD and transfer safety and soundness authority and general regulatory authority HUD now has to a revamped Office of Thrift Supervision, an independent unit within the Treasury Department that also regulates savings institutions. The bill would retain HUD as the supervisor of the affordable housing mandates, expanded enforcement authority for these mandates, and also provides the department with new authority to pre-approve any new activities the GSEs want to undertake. H.R. 2575 would provide both HUD and the new regulator with authority to assess the GSEs directly for the costs of their oversight activities.

H.R. 2803 introduced by Rep. Royce generally follows a similar approach, although the bill also abolishes the Federal Housing Finance Board, which supervises the FHLBanks and designates the new office to handle combined oversight for all three GSES.

Secretary Snow and Secretary Martinez in their testimony before this committee earlier this month outlined their proposal for making even more extensive changes to the existing regulatory restructure. Their plan calls for a major shifting of regulatory functions to a new cabinet department. It would reconstitute the safety and soundness regulator, along with HUD's general mission oversight and what expanded authority to review"new lines of business, new types of investments, and acquisitions” into a single new bureau to be located at the Treasury Department. HUD still would retain authority to oversee the GSEs' affordable housing goals and fair lending enforcement, but not much else. The two Secretaries also proposed that supervision of the FHLBanks would eventually come under the purview of this new bureau as well.

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