HUD's most recent regulatory revision of the affordable housing goals, in 2000, resulted in Fannie Mae and Freddie Mac increasing their mortgage financing for low-income and underserved people and communities by nearly half-a-billion dollars between 2001 and 2011. That increase will enable the companies to serve 7 million families beyond the 21 million they already had committed to assist during that period. HUD also established bonus points in 2000 to increase Fannie Mae and Freddie Mac financing for small multifamily properties and owner-occupied two-to-four unit properties that also contain rental units.

More can be done under the current regulatory authority. In fact, the current affordable housing goals are up for a regulatory revision this year. We are not aware whether HUD plans to update the goals. We are not aware of any effort by the Department to seek the advice and assistance of housing organizations in any goal revision. If HUD intends to review the goals, we urge it to work with a wide range of housing organizations, including Fannie Mae and Freddie Mac, as it always has in the past, before moving forward.

We would support strengthening aspects of the affordable housing goal regulations to require, encourage and enable Fannie Mae and Freddie Mac to serve lower income borrowers and underserved areas. For example, we would support tightening the definition of "low-income" for the purposes of the "underserved areas" goal. The current regulation generally defines "underserved areas" as census tracts having a median income at or below 120 percent of metro median income and a minority population of 30 percent or greater, or a median income at or below 90 percent of metro median income. In rural areas, 95 percent substitutes for 90 percent (among other differences). The 90 percent and 95 percent targets should be changed to 80 percent, to align the definition of "low income" with the other parts of the goals regulation and other HUD programs and to get more resources where they are more needed.

In addition, we would support providing additional incentives to encourage greater Fannie Mae and Freddie Mac activity in other underserved segments of the market. These areas could include manufactured housing loans; single family loans to underserved minorities; single and multifamily rehabilitation loans; single and multifamily loans in Native America areas; single and multifamily loans in Empowerment Zones and Renewal Communities; loans to low-income rural borrowers; and loans to properties with expiring Section 8 contracts.

We also would strongly support measures to enhance Fannie Mae and Freddie's Mac's ability to pioneer innovative programs and initiatives such as financial guarantees, risk-sharing and targeted loan programs with mission-oriented partners, such as state housing finance agencies and community development financial institutions.

Enterprise's experience with Fannie Mae is illustrative. For example, Fannie Mae and Enterprise created a lending program, Enterprise Mortgage Investments (EMI), that provides low-cost capital and credit enhancement for rental housing for low-income working families. EMI's portfolio today includes nearly $300 million in financing,

GOVERNANCE

When Congress passed the Gramm-Leach-Bliley Act of 1999, it gave the board of directors at each Federal Home Loan Bank the clear responsibility for making business decisions concerning that Bank. Any business decisions previously made by the Federal Housing Finance Board were devolved to the Banks.

This new, post-Gramm-Leach-Bliley relationship makes it even more critical that the Federal Home Loan Banks meet the highest standards of corporate governance, and that the Federal Housing Finance Board pursue rigorous safety and soundness supervision of board governance at these Banks.

Therefore, the Finance Board recently completed a thorough assessment of corporate governance at each of the Banks. This effort included the first-ever horizontal review - that is, a systemwide supervisory review of a single issue at each of the 12 Banks - which addressed the Banks' effectiveness relative to eight indicators of effective board governance.

The Finance Board's final report on this review includes a variety of general recommendations for improving corporate governance. The agency also provided specific, confidential feedback to each of the 12 Banks.

The Board's next step is to solicit from the Banks, their member institutions, experts, and interested members of the public any ideas for reform in this important area. Input generated may be used in the design of proposals aimed at making the Federal Home Loan Banks role models in corporate governance.

Earlier this year, the Finance Board also undertook a second systemwide horizontal review, that of the Federal Home Loan Banks' implementation of the statutorily mandated Affordable Housing Program (AHP). The AHP is a highly successful program that warrants a separate discussion.

THE AFFORDABLE HOUSING PROGRAM (AHP)

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 fund the purchase, construction, or rehabilitation

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.

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.