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REVIEW OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT AND FEDERAL HOUSING

FINANCE BOARD

Tuesday, July 13, 2004

U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE AND

GOVERNMENT SPONSORED ENTERPRISES
COMMITTEE ON FINANCIAL SERVICES,

Washington, D.C. The subcommittees met, pursuant to call, at 2:59 p.m., in Room 2128, Rayburn House Office Building, Hon. Sue Kelly (chairwoman of the Oversight and Investigations subcommittee) presiding.

Present: Representatives Baker, Royce, Kelly, Paul, Capito, Hensarling, Garrett, Murphy, Brown-Waite, Frank, Kanjorski, Gutierrez, Inslee, Ford, Hinojosa, Lucas of Kentucky, Clay, Scott and Bell.

Chairwoman KELLY. [Presiding.] This hearing of the Subcommittee on Oversight and Investigations will come to order. I welcome Chairman Baker, and we are actually holding a joint hearing here.

This afternoon, the Financial Services Committee continues its series of oversight hearings on the federal agencies within the committee's jurisdiction by conducting a review of the Office of Federal Housing Oversight, the OFHEO, and the Federal Housing Finance Board, the FHFB.

OFHEO is an independent agency and the primary regulator for Fannie Mae and Freddie Mac, two of the world's largest financial institutions. The agency's primary mission is to ensure the capital adequacy and financial safety and soundness of the governmentsponsored enterprises.

The Federal Housing Finance Board is an independent agency that regulates the 12 federal home loans banks and also ensures that they operate in a safe and sound manner. Their roles are critically important to American taxpayers, homeowners and investors. Fannie Mae, Freddie Mac and the federal home loan banks provide valuable services to homeowners by increasing liquidity in the home mortgage markets. Their significance to and impact on our economy cannot be overstated, spanning across the entire scope of the financial services sector from the bond markets, mutual funds, and pension funds, to relationships with financial institutions, insurance companies, individual investors, central banks and other

in the accounting industry and the highly complex nature of the GSEs, the committee would like to hear more about this proposal and what precedent it sets for publicly traded companies.

Similarly, the Finance Board just voted unanimously to require the 12 home loan banks to register with the SEC. While the increased disclosure is generally preferable, we would like to know more about the significance of this requirement, since the stock of the home loan banks is not publicly traded like the other GSE stocks. In the absence of reform legislation, the committee is also interested in how the regulators intend to handle other issues such as receivership.

During the debate over regulatory restructuring, there was considerable discussion about whether a new regulator should be vested with receivership powers similar to those held by other financial regulators. The committee would like to know whether OFHEO plans to address this issue. The issue of multi-district membership is also significant, considering the recent acquisitions that several large federal home loan bank members, which have spurred petitions to the Finance Board to allow members of the system to maintain membership in more than one federal home loan bank. Since the issue has an impact on the way affordable housing contributions are measured among the federal home loan banks, it is important that we know how the Finance Board plans to address the multi-district membership.

Finally, the Department of Housing and Urban Development has recently proposed increasing the housing goals of Fannie Mae and Freddie Mac. The proposal requires the firms to increase the percentage of mortgage loans they finance for low-and moderate-income borrowers, from 50 percent to 57 percent by the year 2008. While this is neither the role of OFHEÒ nor the focus of today's hearing, the committee does have an interest in determining the impact that this proposal could have on the safety and soundness of these entities. I hope you can address this issue today.

I would like to thank my colleague and co-chair of today's hearing, Representative Richard Baker. Chairman Baker's work on these issues has been crucial to the reform efforts and has greatly benefited the American people. The subcommittees thank the witnesses for their testimony. The American people will undoubtedly benefit from your views and this important oversight.

Without objection, all members's opening statements will be made part of the record. We turn now to Mr. Gutierrez.

[The prepared statement of Hon. Sue W. Kelly can be found on page 38 in the appendix.)

Mr. GUTIERREZ. Good afternoon, and thank you, Chairwoman Kelly, for this hearing, the latest in a series of oversight hearings on financial services regulators. On this particular occasion, we are pleased to be joined by Chairman Baker and Ranking Member Kanjorski of the Capital Markets Subcommittee, where the witnesses before us usually testify. So let me start by extending a warm welcome to Director Armando Falcon and Chairwoman Alicia Castaneda. They actually wrote this out phonetically for me.

(Laughter.) Chairwoman KELLY. Maybe they think you have become too anglicized.

Mr. GUTIERREZ. Maybe so. It is the first time I have needed it. They know I am bad with names.

Later this week, the Oversight Subcommittee will be having a hearing regarding the need for diversity at executive levels in the financial services industry. I wish that today's panel were a more typical sight in this hearing room. I hope and trust that one day that will be the case across America.

Many of my colleagues have expressed a great deal of concern about the appropriate level of authority that should be exercised over GSEs by Fannie Mae and Freddie Mac and the Federal Home Loan Bank. Most of the legislative focus has been on Fannie and Freddie and OFHEO. However, I want to focus for a moment on the Federal Housing Finance Board, which just recently entered into a written agreement with the Federal Home Loan Bank of Chicago in my hometown. For those of you less familiar with the federal home loan bank system, each of the 12 home loan banks serves the member institutions in its districts. The Chicago bank services financial institutions in Illinois and Wisconsin, but that is not all. The Chicago bank pioneered a program known as mortgage partnership finance, or MPF, which provides financial institutions with a source of liquidity and risk management, and an alternative to the secondary market.

The Chicago bank started the MPF program in 1997 and now administers the back-office functions for eight other home loan banks participating in the program. The three remaining banks have started similar versions. The Chicago bank is necessarily engaged in a more sophisticated and complex transaction than some of the other regional banks, due to its commitment to success. The MPF program has been good for Chicago and good for the federal home loan bank system. I think the program will continue to benefit banks and consumers for many years to come.

Last month, the Chicago bank entered into a written agreement with its regulator. This agreement requires that the Chicago bank present the Finance Board with a detailed business and capital plan and how they are going to manage that business, taking into consideration not merely regulatory minimums in the setting of capital standards, but factors such as interest rate movement. As many of you are aware, I am deeply concerned about the potential effects that the rising of interest rates will have, but my focus has generally been on the consumers who are struggling to pay their mortgage or credit card bills at the current rates, and will have a much harder time as rates increase.

While these consumers have little flexibility and often no alternatives, it is certainly reasonable to expect institutions to have plans in place to hedge against inflation-rate fluctuations. What this written agreement between the Finance Board and the Chicago bank illustrates is the power that the regulator has in the federal home loan bank system. In this case, it was a reasonable and appropriate exercise of that power. However, the Finance Board's predecessor was not always so judicious. As we know, the federal home loan bank system and its regulator, the Finance Board, has huge power over them. In fact, back when there was a Federal Home Loan Bank of Los Angeles, at one point the Federal Home

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