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Testimony of George D. Gould
House Financial Services Committee Hearing
September 25, 2003
Page 9 of 9

The facts speak for themselves: Freddie Mac and Fannie Mae have consistently met the permanent affordable housing goals. Additional enforcement authority would add little to the legislative and regulatory incentives that Congress and HUD have put in place. Therefore, we respectfully suggest that no additional authority is needed.


Freddie Mac has long supported strong regulatory oversight. It is critical to the achievement of our mission. As we have stated on previous occasions before the Congress, our core principles for the creation of a new regulatory structure are credibility, commitment to the GSE housing mission and a high degree of bi-partisan support.

As I have outlined today, Freddie Mac is prepared to support many of the specific provisions put forth by the Administration and the Congress. We believe that a strong, credible regulator is essential to maintaining the confidence of the Congress and the public that we can meet our vital mission while remaining at the forefront of capital and risk management.

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Thank you for the opportunity to appear today. I look forward to working with Chairman Oxley, Congressman Frank and the members of this Committee to secure the future of our housing finance system and, with it, the dreams of millions of families.

Statement of

David Hehman

President and CEO Federal Home Loan Bank of Cincinnati

Before the

House Financial Services Committee

September 25, 2003

Mr. Chairman, Ranking Member Frank, and Members of the Committee, I appreciate the opportunity to speak to you today about the Federal Home Loan Banks (FHLBanks) and legislative proposals to reform regulation of the housing government sponsored enterprises. My name is David Hehman and I am President and CEO of the Federal Home Loan Bank of Cincinnati (Cincinnati FHLBank).

I would like to provide an overview of the FHLBanks, address the impact of recent legislation and conclude with the topic of regulatory reform.

FHLBank Overview

The FHLBanks were created in 1932 to support America's housing finance system. It was largely the FHLBanks' ability to raise long term debt in the capital markets and pass that funding along to their member financial institutions that encouraged the development of the 30 year fixed-rate mortgage that is the predominant financing tool in the United States mortgage finance system today.

The FHLBanks continue to play a vital role in the nation's housing finance and community lending system. Member institutions, primarily community banks and thrifts, use the FHLBanks' advance programs to meet the mortgage and community lending needs of their local markets, and use our Affordable Housing Programs to help house thousands of low-income families in those communities.

The FHLBank System (System) is comprised of 12 regional FHLBanks, their 8,080 member financial institutions and the Office of Finance that issues debt on behalf of the 12 regional FHLBanks. The regional FHLBanks are overseen by an independent regulator, the Federal Housing Finance Board (Finance Board).

The System is a unique GSE. While the System shares a congressional charter and housing mission with Fannie Mae and Freddie Mac, the FHLBanks are fundamentally different in both structure and perspective. The 12 regional FHLBanks and their members form a cooperative that is driven by customer credit demand, not profit maximization. And while the 12 FHLBanks are independently owned and operated, they share joint and several liability for the System's debt. This leads to very conservatively run operations that have been effectively supervised under the current independent regulatory regime designed by Congress.


Congress has historically taken an active role in defining the mission and structure of the System. Two critical pieces of legislation shaped today's FHLBanks. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) expanded membership to include commercial banks and credit unions with a demonstrated commitment to housing finance. FIRREA also created the System's Resolution Funding Corporation assessment and mandated the Affordable Housing Program through which each FHLBank sets aside 10 percent of net earnings annually for the creation of affordable housing throughout the nation. That commitment has resulted in $1.7 billion of private capital flowing into the housing market to create 380,000 units of affordable housing.

Title six of the Gramm-Leach-Bliley Act of 1999, sponsored by Congressmen Baker and Kanjorski, established universal voluntary membership; provided for a permanent capital structure; expanded the types of collateral that community institutions can pledge to secure advances, and increased the independent corporate governance of each FHLBank.

Six FHLBanks, including Cincinnati, have implemented newly required capital stock plans. This monumental task has occurred well within the legislative time frame, and is due in no small part to the strength of the System's independent regulator and the commitment of the boards of directors at each FHLBank. The new capital structures have left the System with $38 billion of capital with an aggregate capital-to-assets ratio of 4.7 percent as of June 30, 2003.

Financial Profile

These two pieces of legislation combined with the performance of the FHLBanks in the marketplace and customer demand for FHLBank products, resulted in considerable growth over the last decade. As of June 30, 2003, the FHLBanks had combined total assets of $809 billion up from $721 billion a year ago, and up from $166 billion a decade ago. Likewise, FHLBank membership saw a dramatic increase from 3,900 members at June 30, 1993 to just over 8,000 at June 30, 2003.

A financial snapshot of the Cincinnati FHLBank is also instructive to understanding how and why the cooperative structure is successful. The Cincinnati FHLBank is comprised of 750 members serving Ohio, Kentucky and Tennessee. As of June 30, 2003, Cincinnati reported $47 billion in advances, $7 billion in acquired mortgage assets (AMA) and $144 million in Affordable Housing Program grants invested into the creation of 25,000 units of housing. These are not just numbers. These are telecommunications jobs in Urbana, Ohio; the 1000th Habitat House in Kentucky dedicated last weekend; a small home-improvement loan program in Memphis that combats predatory lending; and 25 community based financial institutions that were able to sell mortgages in the secondary market for the first time.

My job as president of the Cincinnati FHLBank and the job of my Board are to ensure the success of this cooperative partnership. That is how we fulfill our housing finance mission. Our role of linking Main Street to Wall Street demands the flexibility to access the capital markets that we now enjoy. The Cincinnati FHLBank stands ready to fund the housing, economic development and liquidity needs of our members on a continuous basis. Cincinnati FHLBank advances are a critical component of the asset/liability management of our community based institutions as evidenced by the fact that approximately three of every four members have borrowings outstanding at any given time. This flow of funds from Wall Street to Main Street is clearly demonstrated by the financing activity of our FHLBank this past month. The Cincinnati FHLBank participated in 71 separate issues of fixed rate debt ranging in maturity from one to 15 years. The average size of the bonds issued was $34 million, a very small number by bond market standards. The funding raised was used to directly support member advance demand and mortgage note sales as well as provide the Cincinnati FHLBank with its pool of liquidity.

Independent Regulator

My Board and I believe that we can best support and build upon our successful record with a strong, independent regulator, engaged corporate govemance, and effective risk

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