In a 2002 study, MORTECH, a company specializing in research on the mortgage industry and its use of technology, found that the use of automated underwriting systems (AUS) was nearly universal. That represents a complete transformation of the industry over the last ten years. Virtually all underwriting was manual in 1993. By 2002, 91.3 percent of lenders had implemented automated underwriting. An estimated 75 percent of loan applications were underwritten using automated underwriting in 2002.

Technology has enabled lenders to handle volumes that have more than tripled in the last ten years. During the 1993 refinance boom, the mortgage industry originated $1.0 trillion in mortgage loans, of which 52 percent was comprised of refinance transactions. This year, we are projecting that the mortgage industry will originate over $3.3 trillion, with over 67 percent being refinance transactions. Without today's technology, the 1993 mortgage market was both paper and people intensive. In 1993, refinancings were treated no differently from regular purchase mortgages. A homeowner seeking to refinance had to fill out a complete application, wait two weeks or longer for approval, order a full house inspection and wait an average of 45 days to close. The inefficient process added dollars and time to the homeowners' cost.

Today is quite different. The introduction of technology has dramatically improved lender efficiencies. With automated underwriting, a lender can provide a borrower with an approval in minutes. In fact, more than 75 percent of applicants are now approved in two to three minutes. And more importantly, lenders who have integrated technology into their business processes witnessed tremendous cost savings. Automated underwriting systems have cut origination costs for mortgage banks, commercial banks, and thrifts. And borrowers have reaped the rewards, in lower mortgage costs.

Automated Underwriting Has Lowered
Borrower Costs

Borrower Origination Costs Since 1993

1993 1994 1995 1996 1997 1998 1999 2000 2001

Source: MORTECH Origination Costs on a $100,000 Loan

2002/03

2002

Technology also impacted our ability to do business at lower costs. Fannie Mae had difficulty handling the volumes in 1993. In the peak month of the 1993 refinance boom, we had 631 people processing 320,000 loans. We hired a large number of temporary employees to handle the huge volume of paper. This year, at the peak of the refinance wave, 250 Fannie Mae employees processed one million loans a month

Providing Leadership in the Market

The 1992 Act focused Fannie Mae on our mission and gave us the flexibility to innovate to meet that mission. As a result, we now lead the market in funding mortgages for low-income and minority home buyers.

There have been many studies that have attempted to measure Fannie Mae's impact in the market. Last week, you heard that some of these studies showed that Fannie Mae lags the primary market in funding mortgage loans for low-income and minority homebuyers. Actually, the most recent data show that Fannie Mae leads the market, by measurements HUD uses and by more common measurements.

Fannie Mae is the nation's largest private investor in affordable housing and minority lending. Since 1994, Fannie Mae has financed homes for more than 12 million low- and moderate-income families and more than 4.8 million minority families. Further, the fact is that - when measured against the market in which we operate - Fannie Mae's performance on affordable housing lending has consistently surpassed the primary market's performance.

Two weeks ago, Secretary Martinez's testimony repeated analysis from the President's budget that
Fannie Mae's affordable housing performance in our single-family business lagged the primary market

as measured by Home Mortgage Disclosure Act (HMDA) data. The Secretary's testimony cited data from 1999 that HUD believes showed that we lagged the market that year.

Over the years, Fannie Mae has disagreed with HUD's methodology for defining market leadership primarily because the Department has used a definition of the primary market that includes a large part of the subprime market, where Fannie Mae has traditionally not operated. If the subprime market is not included, a HMDA-based market leadership analysis shows that we have consistently led or matched the conventional market in the past.

In 2001, 43.1 percent of Fannie Mae's single-family business served low- and moderate-income borrowers compared to 42.0 percent for the conventional, non-subprime market. A total of 23.0 percent of Fannie Mae's business served minority homebuyers compared to 21.3 percent for the conventional conforming market. We led the conventional conforming market in lending to African Americans, 5.2 percent to 4.4 percent, and matched the market in lending to Hispanics at 9.0 percent. These comparisons are based on owner-occupied, home purchase mortgages in MSAS - the appropriate subset for comparisons between HMDA and Fannie Mae data.

In recent years, Fannie Mae has sought to extend financing to those with imperfect credit, but those advances are not captured in the analysis cited by the Secretary, which focused on data from 1997 through 1999. As a result, since 2001 Fannie Mae has led the market even using the broader definition of the comparison market employed by HUD. Using HUD's definition of the primary market, the 2001 data reveals that Fannie Mae led the market in purchasing loans to low- and moderate-income households (43.1 percent to 42.7 percent), minority borrowers (21.9 percent to 20.8 percent), and African-American borrowers (5.2 percent to 5.0 percent). This represents our own best efforts to replicate HUD's methodology, as HUD has not yet published any analysis using 2001 data.

Fannie Mae's affordable lending performance in 2002 was also excellent, with the percentages of our single-family business serving low- and moderate-income and minority borrowers increasing over the exceptional 2001 levels. For owner-occupied, home purchase lending in metropolitan areas Fannie Mae achieved a 45.7 percent level in low-mod lending (representing a total investment of $69.3 billion for these borrowers), a 26.2 percent level in minority lending ($46.1 billion), a 5.4 percent level in lending to African Americans ($8.3 billion), and 11.0 percent level in lending to Hispanics ($18.3 billion). The 2002 HMDA data for the market were released in August, but cannot be fully analyzed until HUD provides its list of subprime lenders reporting to HMDA – which we expect to receive in October.

Finally, HUD data is focused entirely on single-family homes. None of this analysis includes any of the impacts from our investments in Low Income Housing Tax Credits, multifamily affordable rental housing, Mortgage Revenue Bonds or the other community development investments we make through our American Community Fund.

Market leadership is about qualitative as well as quantitative contributions. Fannie Mae has been an innovative leader in the affordable housing field. The company was at the forefront of the mortgage industry expansion into low-downpayment lending, initiating the purchase of the Fannie 97 mortgage in 1994 as the first widely available and standardized 3 percent down mortgage product and offering loans with as little as a $500 contribution from the borrower today.

We've also harnessed technology to break down the lending barriers minorities often face, mainly by making our automated underwriting system even more flexible so lenders could provide Fannie Mae financing to families with atypical financial profiles. For example, we provided more feedback in the

underwriting findings so that lenders could help consumers understand what went into the decision so they could try to fix any problems and get a "yes" decision from that lender.

Our investments in technology have expanded markets for our lender partners, and by reducing the cost of originations, enhanced affordability for the homebuyer. More recently, Fannie Mae has launched new efforts to serve borrowers with blemished credit histories. Our Expanded Approval and Timely Payment Rewards product lines are examples of how we help conventional mortgage lenders broaden their markets to serve borrowers previously left only to subprime lenders.

We've also used our role in the secondary market to change practices in the primary market to reduce the prevalence of predatory lending. We are working in local communities throughout the nation to help develop solutions to the problem of predatory lending. For example, in Essex County, NJ, Fannie Mae worked with New Jersey Citizen Action, the U.S. Department of Housing & Urban Development, Essex County, and interested lender partners to develop a workout solution was specifically crafted to help more than 100 families primarily in Essex County who were victims of a property flipping scheme that occurred from 1999 to 2001.

We work to support and increase public advocacy to protect mortgage consumer rights. We believe that all home-buying consumers should be treated equally and should have access to the lowest cost mortgage for which they qualify. We also want home-buying consumers to know the true cost of the mortgages they are being offered -- including all fees and charges.

We have established industry-leading anti-predatory lending policy guidelines to combat abusive lending practices in the marketplace. By setting tough standards and at the same time making conventional mortgage products more widely available, we are working to see that good practices chase bad practices out of the mortgage market.

III: SOUND BUSINESS

Best in Class Disclosure

Fannie Mae has worked with Congress and the last two Administrations to create best-in-class disclosure and corporate governance practices for the company.

In 2000, in consultation with the Treasury Department and members of this committee, Fannie Mae crafted a set of proposals designed to place it at the leading edge of safety and soundness practices. These voluntary initiatives include commitments to issue subordinated debt, obtain an annual "risk to the government” rating, enhance our liquidity planning, disclose more information about interest rate risk and credit risk sensitivity, and implement and disclose the results of an interim risk-based capital standard. In several cases, we created financial structures and disclosures that have little precedent among financial institutions. Taken together, these initiatives give investors and policymakers more information about Fannie Mae's risk exposure -- and confidence that Fannie Mae can manage that exposure -- than they can get from any other financial institution. We continue to meet every one of the voluntary initiatives.

These disclosures, combined with the regulatory mechanisms Congress enacted in 1992, place Fannie Mae at the vanguard of risk management and disclosure practices worldwide, with cutting-edge regulatory discipline bolstered by cutting-edge market discipline.

In the post-Enron environment, policymakers expressed some concern that some of our disclosures were voluntary rather than mandatory. Some were concerned that our financial statements were not on the SEC's EDGAR website. We responded by consulting with the Treasury Department and members of this committee about their concerns, and then committing to voluntarily register our common stock with the SEC under the 1934 Securities and Exchange Act. In March, we completed that registration, and we are now permanently subject to all SEC disclosure rules and fully subject to all provisions of the Sarbanes-Oxley Act of 2002 just like any other SEC registrant. We cannot ever back out of this registration.

And we took further disclosure steps earlier this year. While the SEC has detailed guidelines for disclosures for many types of securities and issuers, the SEC currently does not have such guidelines for issuers of asset-backed or mortgage backed securities. Instead it reviews the disclosures of each privatelabel issuer. In a comparable process, a joint Treasury-SEC-OFHEO task force undertook a similar review of our MBS disclosures. When the task force recommended that we add six new pool level disclosures to our MBS issuances, we agreed. As of April, those disclosures are in place. As a result of this process, there are no significant difference between our MBS disclosures and those of private-label issuers.

Fannie Mae has relied on multilayered, redundant risk management practices for the past decade. We now have added multilayered, redundant disclosure and transparency practices, with both a greater quantity and a greater quality of information and disclosure. We now put out more -- and more timely -information to the public, investors and policymakers than any other financial institution in the world. If policymakers or investors have a question or concern about how Fannie Mae is doing, there are several ways to find out. They can look at the results of our supervision exams, which are public, unlike those of other financial institutions. They can look at our capital levels, our stress test results, our external rating reports, our regular reports on how the economy is affecting our business, or changes in the value of our subordinated debt. No financial company in the world will give policymakers and investors more information about its financial condition than Fannie Mae does.

Our voluntary initiatives ensure that Fannie Mae will remain one of the safest, soundest financial institutions in the world. Our subordinated debt rating and our risk-to-the-government rating are among the strongest in the industry. We have more than adequate liquidity to survive for three months assuming no access to the capital markets. We could endure the worst economic shocks in history shocks that few other financial institutions could survive -- with significant capital left over.

As several financial regulators have noted, there is a world of difference between disclosure and transparency. It is easy to post reams of information on a web site or to include mountains of extraneous material in a financial report. It is a difficult, ongoing process to ensure that not only does the company disclose information, but that we do so in a way that investors, policymakers, and other stakeholders can truly understand the nature of our business. We believe we have achieved a market-leading level of transparency, and we have some external support for this belief.