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Maintenance of at least 5 percent of on-balance sheet assets in liquid, marketable, non-mortgage securities and compliance with the Basel Committee on Banking Supervision Principles of Sound Liquidity Management, which requires at least three months' worth of liquidity, assuming no access to new issue public debt markets. Because of the critical importance of liquidity to the achievement of our mission - and the importance of non-mortgage assets to this liquidity - the GSES' non-mortgage assets should not be singled out for onerous regulatory treatment.

• Public disclosure of interest-rate risk sensitivity results on a monthly basis. The test assumes both a 50 basis-point shift in interest rates and a 25 basis-point shift in the slope of the Treasury yield curve - representing an abrupt change in our exposure to interest-rate risk.

Public disclosure of credit risk sensitivity results on a quarterly basis. The disclosure shows the expected loss in the net fair value of Freddie Mac's assets and liabilities from an immediate nationwide decline in property values of 5 percent.

• Public disclosure of an annual independent rating from a nationally recognized statistical rating organization.

In July 2002, the GSEs made an additional commitment to voluntarily register their common stock with the Securities and Exchange Commission under the Securities Exchange Act of 1934 so that both companies will become reporting companies under that law. Freddie Mac is fully committed to completing this process as soon as our financial statements are brought up to date.

Freddie Mac would support giving the regulator authority to ensure we carry out these important public commitments. Taken together, they significantly enhance the degree of market discipline under which the GSEs operate. Robust and frequent credit and interestrate risk disclosures, combined with the release of annual independent ratings and the issuance of subordinated debt, constitute an important "early warning system" for investors.

Mission Regulation

I would now like to say a few words about mission oversight. Freddie Mac's mission is to ensure a stable supply of low cost mortgages for America's families - whenever and wherever they need them. This mission defines Freddie Mac and what we are trying to accomplish. Our business model flows directly from our congressional charter, which requires us to focus exclusively on financing residential mortgages.

We believe that the HUD Secretary should retain all existing GSE mission-related authority consistent with HUD's mission to expand homeownership and increase access

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to affordable housing. Specifically, HUD should retain authority to ensure that the purposes of the GSES' charters are accomplished and continue to have regulatory, reporting and enforcement responsibility for the affordable housing goals, just as under current law. Additionally, HUD should retain existing fair housing authority.

We also believe that, in keeping with its housing mission, HUD should retain its authority to approve any new programs of Freddie Mac and Fannie Mae under the same approval standards as in current law. Our ability to lower housing costs for homeowners and renters is directly linked to our expertise in managing mortgage credit risk and our distinguished record of bringing innovative products and services to market. As our mission regulator, HUD is the appropriate place for approving new programs. HUD alone has the expertise to determine whether new mortgage programs are in keeping with our charter and statutory purposes.

Meeting the annual affordable housing goals is a key aspect of our meeting our mission. Established in 1993 and increased in 1995 and 2000, the three affordable housing goals specify that significant shares of Freddie Mac's business finance homes for low- and moderate-income families and families living in underserved areas. In 2000, HUD specified that 50 percent of Freddie Mac's mortgage purchases must qualify for the lowand moderate-income goal,' 31 percent must be of mortgages to borrowers in underserved areas, and 20 percent must be of mortgages to low- or very-low income borrowers or those living in low-income areas." Freddie Mac has successfully met all the permanent housing goals.

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The existing statutory and regulatory structure provides great discretion to our mission regulator to determine the goals - and creates strong incentives for us to achieve them. The HUD Secretary currently has the regulatory authority to establish and adjust the housing goals. In the event a GSE fails to meet one or more of the goals - or there is a substantial probability that a GSE will fail one or more of the goals - the Secretary is authorized to require the submission of a housing plan. Further, the Secretary may initiate a cease-and-desist proceeding and impose civil money penalties for failing to fulfill the housing plan. These are strong incentives for the GSEs to strive to meet the goals year after year - to say nothing of the reputational "penalty" for failing to meet a goal.

7 Low- and moderate-income families have incomes at or below 100 percent of the area median income. & Underserved areas are defined as (1) for OMB-defined metropolitan areas, census tracts having a median income at or below 120 percent of the median income of the metropolitan areas and a minority population of 30 percent or greater; or a median income at or below 90 percent of median income of the metropolitan area; and (2) for nonmetropolitan areas, counties having a median income at or below 120 percent of the state nonmetropolitan median income and minority population of 30 percent or greater; or a median income at or below 95 percent of the greater of the state nonmetropolitan median income or the nationwide nonmetropolitan median income.

9 Low-income areas refer to census tracts in which the median income is at or below 80 percent of the area median income. Low-income families have incomes at or below 80 percent of area median income, while very-low-income families have incomes at or below 60 percent of the area median income.

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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.

Conclusion

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.

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

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