The proposed rule provides for a lengthy, 120-day comment period, during which, I hope, the Banks will each meet with the SEC to work out the necessary details to effectuate registration and begin meeting the periodic financial reporting requirements of the '34 Act.

Following the Finance Board's recent vote, two additional Banks - New York and Topeka - also adopted resolutions moving them toward voluntary registration.

The focus of the enhanced disclosure effort from the start has been to ensure that the Federal Home Loan Banks play their part, as government sponsored enterprises, in contributing to the smooth functioning of the capital and mortgage finance markets. In the end, consistent and full disclosures of these institutions' finances and corporate governance also serve the public, who stand behind their charters as government sponsored enterprises.

CONCLUSION

Mr. Chairman, distinguished members of the Committee, thank you for allowing me to discuss with you today the Federal Housing Finance Board and its efforts to strengthen the agency's ability to oversee the Federal Home Loan Banks for safety and soundness and accomplishment of their housing finance mission. Since 2002, the Finance Board has dramatically improved its ability to perform its statutorily mandated responsibilities. The agency's supervision function is stronger, more thorough, and more effective. Taken in conjunction with the initiative to enhance the financial disclosures provided by the Federal Home Loan Banks, I believe the Finance Board is capably representing the interests of the public and taxpayers who stand behind the Federal Home Loan Banks and who benefit from the successful performance of the Federal Home Loan Banks' important role in housing finance.

I hope the experience of the Finance Board during this process will be of value to this Committee as you consider H.R. 2575 and other issues relating to government sponsored enterprises.

I am pleased to respond to any questions.

Testimony of Terri Y. Montague
President and Chief Operating Officer
The Enterprise Foundation

On

"The Secondary Mortgage Market Enterprises Regulatory Improvement Act And the Administration's proposals on GSE regulation"

For the House Committee on Financial Services

September 25, 2003

Introduction

Thank you, Chairman Oxley, Ranking Member Frank and members of the Committee for this opportunity to share with you The Enterprise Foundation's views on government regulation of Fannie Mae and Freddie Mac.

I am Terri Montague, president and chief operating officer of The Enterprise Foundation. Enterprise is a national nonprofit organization that provides private capital to support affordable housing and economic development in low-income communities. Enterprise and its wholly owned subsidiary companies have invested $4.4 billion to finance 144,000 affordable homes for low-income families and individuals, including more than 12,000 in 2002. We are currently investing half-a-billion dollars a year to help connect low-income people and communities to the mainstream economy.

We have no more important partners in our work than Fannie Mae and Freddie Mac. The companies have been indispensable to Enterprise's efforts to expand housing opportunities for low-income homebuyers and renters. In many cases, Fannie Mae and Freddie Mac alone were willing and able to help Enterprise meet the needs of the people and places we serve. Without them, much of our work simply would not be possible.

In the interest of full disclosure, the Committee should know that Enterprise regularly seeks support from many major financial institutions, including Fannie Mae and Freddie Mac. The companies and their corporate foundations, along with other financial institutions, have been major contributors to The Enterprise Foundation.

In addition, we have sought out senior executives from financial institutions to lend their talent, energy and personal contributions to our cause. Franklin Raines, Fannie Mae's chairman and chief executive officer, and Barry Zigas, senior vice president and executive director of Fannie Mae's National Community Lending Center, are Trustees of The Enterprise Foundation. Mr. Zigas has served since his days as executive director of the National Low Income Housing Coalition. Our Board also includes executives from other financial institutions who are committed to affordable housing.

First, Do No Harm

Congress is considering significant changes to the federal government's regulation of Fannie Mae and Freddie Mac. The administration and members of Congress have proposed a new regulator and expanded regulatory authority for Fannie Mae and Freddie Mac's financial safety and soundness, as well as their new activities. In addition, the administration has proposed to increase regulation of Fannie Mae and Freddie Mac's congressionally mandated affordable housing responsibilities.

We encourage Congress to deal with these issues as expeditiously as possible to avoid any uncertainty in the mortgage markets. In acting, Congress should follow the "Hippocratic housing oath:” first, do no harm. It is imperative that any congressional action affecting Fannie Mae and Freddie Mac does not limit the companies' ability and incentive to address the housing needs of low-income people and communities. Any changes to their federal regulation should, in fact, enhance the companies' capacity to innovate in furtherance of their vital public purpose mission. This is our sole priority in Congress' review of Fannie Mae and Freddie Mac's regulation.

Certainly, the safety and soundness of Fannie Mae and Freddie Mac is critical for taxpayers and the economy. Vigorous regulation is essential. There is no reason, however, that strong safety and soundness oversight should chill or constrain Fannie Mae and Freddie Mac's vitally important affordable housing activities—and it must not be encouraged or enabled to do so. In fact, the interests of affordable housing and safety and soundness are very compatible, if carried out the right way. We are encouraged that the administration has not indicated a need to change the new risk-based capital standards for Fannie Mae and Freddie Mac at this time. Enterprise has worked hard to ensure that implementation of those standards does not undermine the companies' affordable housing activities.

We also agree with the administration that there is no reason to change Fannie Mae and Freddie Mac's mission, charter or status. And we agree with the administration that the Department of Housing and Urban Development (HUD) should remain responsible for ensuring Fannie Mae and Freddie Mac's compliance with their affordable housing responsibilities.

Issues of Concern in Pending Proposals

The balance of our testimony addresses three critical issues regarding federal regulation of Fannie Mae and Freddie Mac that the administration and members of Congress have raised recently: 1) the location of the regulator responsible for approving new Fannie Mae and Freddie Mac initiatives; 2) the scope of that approval authority; and 3) the establishment and enforcement of Fannie Mae and Freddie Mac's affordable housing responsibilities.

Location of approval authority. Under current law, HUD is responsible for approving new Fannie Mae and Freddie Mac programs. The administration has proposed transferring this authority to a new agency that also would regulate Fannie Mae and Freddie Mac's financial safety and soundness. The administration has said it would support establishing such an agency as a bureau of the Treasury Department. The new agency would "consult" with HUD on new programs. Subcommittee Chairman Baker's (R-LA) legislation (H.R. 2575) would leave HUD in charge of "prior approval authority."

We agree with Chairman Baker that HUD should retain this responsibility. We are not aware of any evidence that HUD has not exercised prior approval authority appropriately. HUD is the only federal agency with expertise in affordable housing and a mission to advance it. Only HUD has the benefit of more than a decade of experience working with Fannie Mae and Freddie Mac to evaluate new programs. Getting a new agency up a new learning curve for no apparent gain seems an ill-advised use of limited

resources.

Scope of approval authority. Current law requires Fannie Mae and Freddie Mac to obtain HUD's approval for any "new program" before implementing the program. The law generally requires HUD to approve any new program unless HUD finds that the new program does not comply with the appropriate company's charter or is not in the public interest. H.R. 2575 would require Fannie Mae and Freddie Mac to obtain HUD approval before commencing any "new activity," including changes to existing (approved) "programs, activities, business processes and investments" or expansion of (approved) programs.

Again, we wonder what problem this provision purports to fix. As noted above, HUD has exercised its prior approval authority appropriately. In addition, HUD has the authority under current law, which it has exercised, to itself initiate a request for information from Fannie Mae and Freddie Mac regarding what it considers possible new programs.

Requiring Fannie Mae and Freddie Mac to seek federal government sign-off on changes to such a wide range of activities could curtail the companies' ability to respond effectively to changes in the mortgage markets, such as rising interest rates. The expanded approval authority in H.R. 2575 also almost certainly would inhibit the companies' incentive to innovate. Low-income consumers and communities, which often benefit most from Fannie Mae and Freddie Mac's innovative initiatives, could lose out.

We recall that a primary purpose of prior approval authority when it was enacted in 1992 was to encourage and enhance Fannie Mae and Freddie Mac innovation in support of their affordable housing mission. We worry that the prior approval provision in H.R. 2575 would have the opposite effect. We wonder, for example, whether Fannie Mae would have had the same ability and incentive to pioneer with Enterprise the Low Income Housing Tax Credit (LIHTC) if the company had been subject to the approval requirements H.R. 2575 would impose.

Hardly any corporations were willing to commit capital to support affordable housing for low-income people through the LIHTC when the program was new. Virtually no federal officials understood the program. Even many housing groups that had advocated for the credit were not sure how well it would work. Fannie Mae stepped up when others would not to commit $25 million in investment through Enterprise and worked with us convince other corporations to invest. Together, we helped create the corporate market in LIHTC investments. Freddie Mac joined Fannie Mae several years later in helping to expand the market of LIHTC investors by making matching pledges for state and local LIHTC investment.

Fannie Mae and Freddie Mac's commitment to this fledgling federal incentive sent a strong signal to the marketplace that the Credit was a sound investment. Their participation solidified the program at a critical juncture, when its future hung in the balance. The LIHTC is now the most important federal incentive for the development of rental housing for low-income people, accounting for more than 115,000 affordable apartments for working families, seniors, homeless individuals and people with special needs every year. It is impossible to imagine such success without Fannie Mae and Freddie Mac's early and sustained participation.

Establishment and enforcement of affordable housing responsibilities. As the Committee is aware, the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 requires Fannie Mae and Freddie Mac to dedicate substantial portions of their business to serving low-income people and underserved communities. They must meet annual goals, established by HUD, and expressed as a percentage of all the housing units for which the institutions provide financing, in the following categories: loans to low- and moderate-income borrowers (minimum 50 percent of all units financed by each company for 2003); loans in central cities, rural communities and other underserved areas (31 percent); and "special affordable" loans to very low-income borrowers and lowincome borrowers living in low-income areas (20 percent).

The administration has proposed expanding HUD's ability to establish, maintain and enforce Fannie Mae and Freddie Mac's “affordable housing goals.” While we have not seen details of the administration's proposal, the proposal would appear to require significant statutory changes. We see no reason to change the statutory framework for the affordable housing goals at this time. Let us be very clear: Enterprise has long encouraged Fannie Mae and Freddie Mac to increase their affordable housing activities. The companies could and should do more to help meet pressing housing needs. But changing the statute is the wrong approach.

HUD has the authority already to increase the percentage-of-business targets in each statutory goal category. HUD also has the authority under current law to incentivize Fannie Mae and Freddie Mac to achieve more specific affordable housing objectives, such as through bonus points, and, on a more limited basis, through "subgoals" of the "special affordable" housing goal.

HUD has utilized both types of authority effectively in the past, resulting in substantial increases in Fannie Mae and Freddie Mac's affordable housing financing.