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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 noi sure how well it would work. Fannie Mae stepped up when others would not to commit $25 million in investment through Enterpnse 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 bousing 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.
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, totaling more than 10,000 affordable apartments. Enterprise and Fannie Mae also launched a venture in the early 1990s, Comerstone Housing Corporation, which acquired government-owned foreclosed properties from the Resolution Trust Corporation and preserved their affordability. Cornerstone helped save more than 5,000 apartments for low-income people in mixed-income communities.
Fannie Mae and Freddie Mac have developed similar initiatives with many other organizations that broke new ground in affordable housing. These innovations have often pointed the way for the mainstream market to follow-benefiting those institutions' bottom lines and millions of low-income people. The ability to “test market" new privatepublic partnerships at scale is a unique value only Fannie Mae and Freddie Mac can provide in affordable housing.
Interestingly, Fannie Mae and Freddie Mac receive no affordable housing goals credit for their investment and direct lending activities, which are often the ways in which they have supplied the most innovative and important forms of capital to a variety of partners that reach extremely low-income people. Certainly, there should be an effort to encourage Fannie and Freddie Mac to make more of this capital available and to reward them for doing so in a financially prudent way.
Finally, we would support constructive efforts to enable Fannie Mae and Freddie Mac to play a more active role in the subprime mortgage market. The companies' resources, capacity and clout could position them to increase alternatives to predatory lenders, which are still stripping wealth and assets from too many low-income families. We commend HUD for imposing tough standards to help ensure Fannie Mae and Freddie Mac do not receive affordable housing goal credit for purchasing certain high cost loans. And we commend the companies for the strong steps they have taken on their own to help fight the predators. Working with HUD, mortgage lenders and housing advocates, we believe the companies could find additional ways to serve subprime borrowers and create a strong, fair secondary market for subprime loans.
The last time Congress revised Fannie Mae and Freddie Mac's statutory framework, it expressly provided the companies the freedom and flexibility to respond to fast moving market conditions and help meet our nation's affordable housing needs. The companies have consistently met their affordable housing responsibilities, even as HUD steadily and substantially increased them over the past decade. It is our experience that Fannie Mae and Freddie Mac's current statutory and regulatory framework has enhanced their ability and willingness to forge partnerships with organizations like Enterprise to deliver housing resources to people and places that cannot take full advantage of our nation's generally well functioning housing system. Millions of low-income people have a decent, affordable home as a result. Any changes to federal regulation of the companies should not jeopardize or limit that progress.
Statement of Franklin D. Raines
September 25, 2003
Chairman Oxley, Congressman Frank, and members of the committee, thank you very much for inviting me here today. I am here to testify on legislation that would alter Fannie Mae's regulatory framework. To give some context to these proposals, I would like to begin by describing the fundamental health and dynamism of our mortgage finance system, the efficiencies Fannie Mae has helped to bring to the system, our impact on broadening homeownership, and our leadership in disclosure, risk management and corporate governance.
Let me start by saying, I am appearing today in support of legislation - the right legislation - to strengthen Fannie Mae's regulatory oversight. I am here today to ask Congress to take action to make our housing finance system even stronger by enacting the Administration's proposal to move our financial regulator to a bureau of the US Department of Treasury.
We support the Administration's proposal for three main reasons:
First, we support having a strong, well-funded, highly credible financial regulator, and this move would help ensure that
Second, the proposal supports our charter and mission, including our freedom to continue to innovate with our lender customers and housing partners to expand affordable housing to new people and places.
And third, the proposal supports the advanced capital structure Congress provided in 1992, which ensures that we remain safe and sound through even the worst conditions while allowing us to direct the maximum amount of low-cost financing to homebuyers. The proposal also calls for giving the regulator full and more flexible authority to adjust risk-based capital standards over time, to incorporate evolving best practices. We support giving the regulator this additional flexibility.
Fannie Mae looks forward to working with Congress and the Administration to adopt the proposal into law this year.
I believe that strengthening our financial regulator is the natural next step in a sequence of Congressional actions that have made the GSE construct an enormous success. Over the last 65 years, Congress has created a remarkable and unique public policy model that today marshals private capital – at no cost to the government -- to carry out the public policy goal of making homeownership more affordable. Let me review the history that has brought us to this opportunity today.
I: THE SUCCESS OF THE AMERICAN SYSTEM
When Fannie Mae was first created in 1938, the 30-year fixed rate mortgage was little more than an idea. Most homes were financed nearly entirely with cash. The standard mortgage product available in the market was a 5-year loan with a balloon payment at the end. When the federal government decided to start making 30-year fixed rate loans, no one really knew if the product would work. Today, it is the standard mortgage in the United States.
Again in 1968, innovative policymakers took another bold step, creating the GSE model we know today. Fannie Mae was privatized. It became a private, shareholder-owned company with a public mission to expand homeownership. This was a novel idea at the time. And the GSE model has proven an overwhelming success, marshalling private capital for a public mission.
In 1992, Congress established Fannic Mae's moder regulatory framework. It included specific affordable housing goals, a rigorous capital framework, and a constant, on-site program of supervision. In the decade since that law was enacted, Fannie Mae has played a central role as our mortgage markets have become increasingly efficient and we have done so maintaining strong, safe, and sound financial performance.
Our mortgage finance system is the envy of the world. Nowhere else in the world are lowdownpayment, long-term, fixed rate, prepayable mortgages the market standard. Other nations have noticed our success and are eager to imitate it. Many have figured out how to use government guarantees and government funds to expand homeownership, but none have yet accomplished the success of the GSE model, galvanizing private companies to attract low cost funding to the mortgage market, without spending a dime of the taxpayers' money.
According to the Federal Housing Finance Board, last year in the United States, 83 percent of residential mortgages had fixed rates, with the predominant product being a thirty-year fixed-rate mortgage. By contrast, in Canada borrowers can get a fixed rate for only the first one to five years, and face a prepayment penalty equal to 3 months interest. And in Spain only about 10 percent of the market is fixed rate. In Germany, the typical downpayment is 35 to 40 percent, and in Japan homebuyers have to put down 50 to 60 percent.
In the UK, Chancellor of the Exchequer Gordon Brown is convinced that variable rate mortgages have contributed to housing booms and busts, by exposing homeowners to interest rate swings that create sudden leaps in monthly mortgage payments. He has a team working on creating a market for long-term fixed rate mortgages, and has made the introduction of a fixed rate mortgage product a pre-condition of the UK's adoption of the euro. Brown believes that this will help to reduce the boom and bust cycle in the property market in the UK.
Why are low down payment fixed rate prepayable mortgages so common here and a rarity elsewhere? The difference is Congress' long-standing commitment to homeownership and its decision to foster a sophisticated secondary mortgage market that continues to meet the needs of both homebuyers and investors.
The GSE model has succeeded where other nations have failed because it taps deep pools of capital around the world and disperses mortgage risk across the capital markets. Fannie Mac offers lenders the ability to shed the credit and interest rate risk inherent in a long-term fixed rate mortgage, and to transform mortgage risk into the various forms that investors want to buy. We do that in two ways, both