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Thursday, September 25, 2003


Washington, D.C. The committee met, pursuant to call, at 10:10 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael Oxley (chairman of the committee) presiding.

Present: Representatives Oxley, Leach, Baker, Bachus, Castle, Royce, Lucas of Oklahoma, Ney, Kelly, Paul, Gillmor, Ryun, Ose, Green, Shays, Shadegg, Hart, Tiberi, Kennedy, Feeney, Hensarling, Garrett, Murphy, Brown-Waite, Barrett, Harris, Renzi, Frank, Kanjorski, Waters, Maloney, Carson, Sherman, Meeks, Lee, Inslee, Moore, Gonzalez, Lucas of Kentucky, Clay, Israel, Baca, Matheson, Miller of North Carolina, Scott, and Davis.

The CHAIRMAN. [Presiding.) The committee will come to order. Today the Financial Services Committee will hear from the regulators, the regulated, and outside parties interested in the oversight of the housing government-sponsored enterprises.

Two weeks ago, Secretaries Snow and Martinez came to the committee with the Administration's proposal to improve regulatory oversight for the GSEs. They proposed developing a world-class regulator with the tools to rigorously supervise the activities of these highly complex financial institutions. The Secretaries called for the regulator to be housed in the Department of the Treasury as an individual office, similar to that of the Office of the Comptroller of the Currency.

Additionally the proposal called for the Department of Housing and Urban Development to retain its role as regulator of the GSEs’ mission and to ensure that the agencies meet their affordable housing goals.

HUD's expertise in this area is critical. Under the Administration's proposal the Department would receive additional powers to enforce compliance with the housing goals.

There is a broad agreement that the current regulatory structure for the GSEs is not operating as effectively as it should. The Office of Federal Housing Enterprise Oversight is underfunded, understaffed and unable to fully oversee the operations of these sophisticated enterprises.

This was reflected in the surprise management reorganization by Freddie Mac and by Wall Street reports stating that GSE oversight is viewed with skepticism because OFHEO is largely seen as a weak regulator.

A strengthened regulator will send a signal to the markets that these entities have solid management and are engaging in safe and sound activities. Confidence will be restored in the GSEs and they will be able to get back to their important work of expanding home ownership opportunities without the distractions that have been plaguing them over the past several months.

Fannie Mae and Freddie Mac have done a good job of promoting home ownership and providing liquidity to the secondary mortgage market. These GSEs have quickly grown into large financial institutions that have a major impact on the housing market and the domestic economy. We must ensure that they have competent and thorough oversight, while making certain that any action we take does not have a negative impact on access to housing.

I am encouraged by the letters and statements of support the committee received following the last hearing on GSE regulatory reform and I hope today serves as an opportunity for members to learn more about the need for changes to the GSE regulatory structure and how that can be accomplished.

I would like to thank our Capital Markets Subcommittee Chairman Richard Baker for his years of work to strengthen the regulatory structure of the GSEs. His expertise on this issue serves our committee well. His numerous hearings, studies and bills provide our committee with an informed background on which to move forward.

I welcome the witnesses and I look forward to their testimony.

And I now recognize the gentleman from Massachusetts, the ranking member, Mr. Frank.

[The prepared statement of Hon. Michael G. Oxley can be found on page 106 in the appendix.]

Mr. FRANK. I think this is a very important hearing. And I appreciate the Chairman's willingness to have it under the auspices of the full committee.

I joined this committee in 1981 because I am interested in housing. And I guess I wouldn't want to boast about my accomplishments, because the situation regarding housing, particularly people who are of moderate and low income, has gotten worse during my tenure. I won't accept the blame, but I clearly haven't done a great deal of good.

And it makes it all the more important that we use every tool that we do have to try improve the housing stock. And Fannie Mae and Freddie Mac are two of the very important tools that we have.

And there are people I know who are critical of the arrangements that we have. I, frankly, welcome the fact that we have in Fannie Mae and Freddie Mac a means of bringing down housing costs that doesn't put a hit on the federal budget.

Essentially, there are people in the country who are prepared to lend money to Fannie Mae and Freddie Mac at less interest rates than they might get elsewhere. I thank those people for doing that. I must tell them that I hope they are not doing that on the assumption that if things go bad, I or my colleagues will bail them out. We will not.

On the other hand, I think it is clear that Fannie Mae and Freddie Mac are sufficiently secure so they are in no great danger. And I was glad to have Secretary Snow say when he testified that this is not something we are doing in response to a crisis. For once, Congress is getting out ahead of a problem. This is not the situation where, like the editorial writers, we come down from the hills after the battle is over and shoot the wounded. In this case, we are taking some anticipatory steps.

I don't think we face a crisis; I don't think that we have an impending disaster. We have a chance to improve regulation of two entities that I think are on the whole working well.

I have a particular concern. I know the ranking member of the Capital Markets Subcommittee has another concern about the independence and how well it will be able to function, and I share his views and will be working with him on that.

My primary interest—and I know I share this with others on this committee who care a lot about housing—is to make sure that nothing is done in this reorganization that weakens the ability, indeed the obligation of Fannie Mae and Freddie Mac to help us with our housing problem.

Now, housing is an interesting part of our economy. The argument that prosperity in general deals favorably with a lot of social problems has a lot of truth to it. By the end of the 1990s, the wages of low-income people had gone up. A number of things that we want to see happen happened from prosperity in general, but not in housing

Paradoxically, because of the nature of the supply-demand relationship with housing, because of the kinks in the pipeline that negatively affect the supply of housing, the very prosperity of the 1990s that was so welcome for most of us exacerbated the housing problem for many people, in particular geographic areas and for people in particular economic situations.

So it is all the more important that we muster the maximum resources to protect those people and to maximize the leverage.

So when you move the regulation to Treasury, if that is done, and you leave housing with HUD, I am skeptical that, absent anything else, that is going to sufficiently protect housing.

Now, of course there are differences, I would agree. In the current Administration it might make not much difference whether it is in HUD or Treasury or if it were at the Nuclear Regulatory Commission, for all the attention we have gotten to housing from HUD. But we are not legislating only for the next year and a half, we are legislating for the future.

So I intend to be pressing to make sure that if a transfer goes through—and there are other questions to be addressed, and the ranking member on Capital Markets will be addressing some of them—that the housing function is not only protected, but strengthened. I want to increase the leverage we have.

Fannie Mae and Freddie Mac do very good work, and they are not endangering the fiscal health of this country. But they do derive benefits from the current set of legal arrangements.

I am fully supportive of maintaining that set of legal arrangements as long as in return we get not just help for the housing market in general, which is important, and lowering housing costs in general, as they do, is a good thing, but also a particular use of the great resources that they have and the profits that they make to help us with affordable housing which the market in and of itself will not do.

So that is what we, many of us on our side, will be trying to do as we proceed, to make sure that whatever the final arrangements are, the housing function is not only protected, but enhanced, and that both the ability and the obligation of these two entities to help us with affordable housing is strengthened.

Thank you, Mr. Chairman.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Louisiana, Mr. Baker.

Mr. BAKER. Thank you, Mr. Chairman. I want to again commend you for your continuing leadership role in addressing this issue, which is really very vital not only to taxpayers, but homeowners alike, and prospective homeowners.

This is not an issue which has really convenient answers, but it is essential for this committee, and I appreciate the full committee providing the leadership to get us to resolution.

Over the years the committee has made various inquiries in this effort, from probing the enterprises to determine the adequacy of their efforts in meeting important housing goals, as the ranking member has indicated his interest, to express concerns relative to their overall regulatory oversight.

The questions have not been limited just to a couple of obvious issues. Over the years, questions concerning mortgage-backed securities, leverage ratios, duration gap, bank investment concentration of GSE securities and a lot of other unique issues have been before the committee.

I am, frankly, quite ready, in fact anxious to turn over the examination of many of these questions to a fully funded, properly constructed, independent regulator, full of professionals able to give analytical examination and appropriate answers to these myriad questions.

It is, frankly, not business that members of Congress should routinely find themselves engaged, and I am sure many of my colleagues will enthusiastically agree with that perspective.

I also look forward to eliminating, frankly, the political risk that now exists with regard to threatening changes to the GSE charter, almost as much as I look forward to making absolutely sure that the taxpayers will never be called on to pick up the tab for the failure of the system.

Others may suggest radical new capital regimes, perhaps unreasonable constraints on new product approval, or attacks on the basic structure of the charter. I do not intend and will not go there.

Responsible regulatory oversight is the goal, and the closure that results from this effort will be beneficial, in my judgment, to all concerned.

I do think it appropriate to make a clarifying statement today concerning my opinion of the work of Mr. Falcon and his regulatory agency.

I have certainly expressed frustration at times with the pace with which action has been taken, and on some occasions I have had disagreements with recommended actions.

But there is one clear observation I want to put on the record, on behalf of all those employees who have given their best effort over the years, and that is, you have made considerable effort, with limited resources and your constrained authority which you have been given to discharge your responsibilities in a professional man


In fact, Mr. Falcon, your testimony today is one of the best statements by anyone as to the direction that this Congress should take in providing adequacy of regulatory oversight. It is evidence of your leadership and your willingness to take a difficult stand and give professional counsel to the best of your ability. I commend you.

As to the current task, I am very pleased to have received excellent recommendations for the modification of H.R. 2575 from the Secretary of the Treasury. All of those recommendations are suggestions which we have previously considered, have previously agreed, and do now fully support.

In fact, there are few modifications required to H.R. 2575 to make the provisions wholly consistent with Treasury recommendations.

As the Secretary has stated, Fannie and Freddie are world class financial organizations, and they require a world class regulatory structure, which is independently funded, with all appropriate authority, and the ability to make professional decisions absent political interference.

That has been, and remains, my legislative goal. It is also evident that protracted discussion of these concerns really has had no adverse effect on home ownership opportunities.

For those who continue to object to any structural change in regulatory oversight, I suggest just taking a deep breath. What we have enjoyed and continue to enjoy, the lowest mortgage interest rates in our country's history. I suggest that Alan Greenspan and his effect is more powerful than any action this Congress or this committee might consider.

In fact, this effort is only to ensure that the secondary mortgage market has stability, not to place constraints that will in any way adversely affect any individual's ability to achieve the dream of home ownership.

Further, it is certainly appropriate to afford opportunity to all stakeholders in this process to give their perspective on this important decision, but it should be clear to all concerned that if we are to construct an independent regulatory structure, the Congress should make the final policy decision in a manner which is independent from any single business perspective.

The enterprises, after all, are creations of the Congress, created to meet the needs of all who seek the opportunity of home ownership. We must balance that requirement with the responsibility of limiting risk to the taxpayer. That is, and should remain, the policy decision that only the Congress should make.

Regardless of the final determinations, Mr. Chairman, of the committee with regard to the construction of H.R. 2575, I will respect the consensus opinion reached on the myriad of issues and fully support the Chairman's effort to achieve this reform.

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