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The Federal Home Loan Bank Act requires each Bank to establish and fund an Affordable Housing Program. Under the AHP, each Bank must annually contribute the greater of 10 percent of its net earnings for the previous year, or such prorated sums as may be required to ensure that the aggregate contribution of the Banks is at least $100 million. Actual contributions to the program were $199 million for 2002, and the contributions have exceeded $100 million each year since 1994.

AHP subsidies must be used to find the purchase, construction, or rehabilitation

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Owner-occupied housing for very low-income, or low-or moderate-income (no
greater than 80 percent of area median income) households; or
Rental housing in which at least 20 percent of the units will be occupied by and
affordable for very low-income (no greater than 50 percent of area median
income) households.

In 2002, the Finance Board adopted a regulation enabling Banks to allocate annually the greater of $4.5 million or 35 percent of each Bank's AHP contribution to homeownership set-asides. Part of this increased funding authority helps Banks combine AHP subsidies with HUD initiatives benefiting minority, immigrant, and other first-time homebuyer families.

Since the inception of the AHP in 1990, the Federal Home Loan Banks have contributed $1.7 billion to the program, funding 236,596 rental units and 122,126 owneroccupied units. In 2002, the Banks committed $286 million to AHP projects.

The Finance Board appropriately devolved operation of the AHP program to the individual Banks in the late 1990s, a valuable development because the Banks are best equipped to assess local affordable housing needs and build partnerships with local community groups and housing agencies.

Correspondingly, the Finance Board's oversight responsibility has grown with respect to the AHP to ensure proper and effective program operation. As such, we are following up the horizontal review with a new practice of examining each Bank's AHP program once a year. These exams are performed by examiners and analysts whose specialized training has specifically equipped them for this task.

We are also preparing regulatory language intended to enhance the effectiveness of the AHP by permitting Banks more latitude in establishing the criteria to score applications. The goal is for Banks to be more responsive to local housing conditions. We also plan to streamline the application process to permit projects to proceed more quickly and with lower administrative costs for the Banks.

AHP is truly one of the Federal Home Loan Banks' great success stories, and with rigorous oversight at the Federal Housing Finance Board, I am confident it will be even more successful in the




The 1998 GAO report also faulted the Federal Housing Finance Board for failing to maintain an arm's length relationship from the Federal Home Loan Banks, and my Finance Board colleagues and I have undertaken a range of steps to rectify this inappropriate approach toward regulation,

Two unanimous votes by the Finance Board - one a year ago, one just this month - demonstrate the new, more professional relationship between the regulator, the Finance Board, and the regulated entities, the Federal Home Loan Banks.

The Finance Board's current practices now recognize that its proper role is not to operate the Federal Home Loan Banks, not to cheerlead for them, but rather to function as a true arm's length regulator.

In September of 2002, the Finance Board adopted standards of conduct that delineated the formal relationship it now maintains with respect to the Federal Home Loan Banks. The standards also reaffirmed rules prohibiting Federal Housing Finance Board directors or employees from accepting meals, travel, or gifts from Federal Home Loan Banks.

By adopting these standards the Finance Board drew what I call “the bright red line of separation” between the regulator and regulated entities, a separation Congress sought to establish with passage of the Gramm-Leach-Bliley Act. The relationship means the Finance Board will act, at times, in the face of disagreement with the Federal Home Loan Banks.

An example of this independence is the other, more recent unanimous vote I mentioned. On September 10, the Finance Board adopted a proposed rule to require each Federal Home Loan Bank to register a class of its securities with the Securities and Exchange Commission under the Securities Exchange Act of 1934. While not all Banks embrace voluntary registration with the SEC, the Finance Board determined enhanced Bank disclosure – with appropriate safeguards to ensure continued effective operations of the Banks – is in the best interest of, in this case, investors in the Bank System and, more broadly, the public who stand behind these GSES.


In July of 2002, the Administration called on all government sponsored enterprises to comply with the corporate disclosure requirements of the Securities Exchange Act of 1934, as interpreted and enforced by the SEC.

Fannie Mae and Freddie Mac, the other two housing-related GSEs, answered this call. Fannie Mae has already filed its first disclosures under the new SEC regime.

As Chairman of the Federal Housing Finance Board, I, too, am determined to hold the Federal Home Loan Banks to the highest standard of disclosure. Accordingly, I formed a working group from the Finance Board and the Federal Home Loan Banks to review the implications of acceding to the Administration's request that all GSEs register.

Early this year, I concluded that voluntary registration with the SEC was indeed the best approach to providing enhanced public disclosure of the governance and finances of the Federal Home Loan Banks. I reached this conclusion based on two premises.

First, the Banks' long-term access to global capital markets will be enhanced by providing investors in consolidated obligations with maximum reliable transparency into the finances and governance of each of the 12 Banks. Markets function best, especially in times of stress, when needed information is readily available and reliable.

Second, as public trusts, these 12 GSEs have a duty to contribute both to the smooth functioning of capital and mortgage finance markets and to public confidence that the benefits of GSE status are used wisely.

At my urging, Federal Home Loan Banks and the staff of the SEC have held numerous meetings to address the process for voluntary registration, including methods for resolving several key disclosure and accounting questions.

The Board of Directors of the Federal Home Loan Bank of Cincinnati actively embraced the disclosure initiative as in the best interest of its members, voting in February to pursue voluntary registration. Last month, the Cincinnati board resolved to "actively engage, effective immediately, in the process of voluntary registration with the SEC of its member-held stock."

This summer, too, the boards of the Federal Home Loan Bank of San Francisco and the Federal Home Loan Bank of Atlanta resolved that, if SEC registration was the determined course of action, it is their request that the Finance Board adopt a regulation requiring it

In response to those requests, on September 10 the Finance Board unanimously adopted a proposed regulation requiring each Bank to register a class of securities with the SEC under section 12(g) of the Securities Exchange Act of 1934.

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.


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 statutonly 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 Pederal 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


“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


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.

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