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RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING
FROM MEL MARTINEZ Q.1. As I said in my opening statement, I am very concerned about the unintended consequences this legislation may have on small banks. I am especially concerned that they may find themselves limited in products they can use to make loans to underserved populations and for CRA compliance. Do I have your commitment today to do what we can to ensure small banks are not adversely affected by this legislation? A.1. The Administration's GSE regulatory reform proposal provides that the new GSE regulatory office responsible for safety and soundness regulation will have the authority to make determinations with regard to the permissibility of new GSE activities. In carrying out this review authority, the new regulator must consult with HUD. The Administration believes that this new procedure will ensure that in any review of GSE activities, the GSEs' safety and soundness, as well as the GSEs’ affordable housing mission, will be fully considered. Small banks, such as those in Kentucky that have expressed their concerns to you, serve important roles in funding affordable housing loans through their CRA programs. The Administration fully understands the extent to which CŘA lenders, such as small banks, rely upon the GSE's to purchase seasoned portfolios of CRA-eligible loans and to offer products that meet those obligations. For these reasons, the Administration is confident that its regulatory proposal is the right approach. HUD's consultative role in new activity review along with enhanced goalsetting and enforcement authority will continue to provide strong oversight with respect to each GSĖ's affordable housing mission. Q.2. As you know, the OCC and the Fed require banks to notify their respective regulator after they have engaged in a new activity. Why do you think the OCC/Fed model would not work for the GSE's? A.2. With respect to the OCC/Fed model for regulation, the Department will defer to the Treasury Department because it is more familiar with the specifics of these models. However, I would like to point out that in developing its current proposals, the Administration followed the model previously established by Congress wherein prior approval was determined to be the appropriate method of reg. ulation for Fannie Mae and Freddie Mac. (This approach was instituted under Fannie Mae's Charter in 1968 and Freddie Mac's Charter revision in 1989. The 1992 Act reaffirmed the Department's authority for prior review.) The GSE's are limited-purpose corporations. At the time the 1992 regulatory legislation was enacted, it was apparent that the GSE's had also grown substantially since their creation, both absolutely and relative to the mortgage market. No single bank commands the market share that Fannie Mae and Freddie Mac do. Collectively, the Enterprises currently account for more than 70 percent of the conventional conforming mortgage market and between 40–50 percent of the entire mortgage market. In addition, the enterprises' mortgage-backed securities are widely held by other financial institutions in this country. These levels of concentration are so significant, and the implications of any unsafe enterprise activity so widespread, that
the risk of significant financial impact extends well beyond the Enterprises themselves to the Nation's entire financial system. Given these implications and restrictions, the Administration believes that Congress was correct in mandating a prior approval review. RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM MEL MARTINEZ Q.1. Secretary Snow and Secretary Martinez, if Fannie and Freddie are put into Treasury, you discuss wanting new program and/or new activity review. The GSE's are concerned that this might impede their ability to be creative and innovative with new mortgage products. Do you agree? A.1. HUD understands that the ability of the GSE's to innovate new products is important to achieving their public purposes. The Administration's proposals are intended to strengthen regulation in a manner that ensures prudent oversight without impeding either GSE's business operations or their ability to innovate in carrying out their public purposes. As the Department responsible for ensuring that the GSE's carry out their affordable housing mission, HUD has an interest in supporting the GSEs' ability to develop the tools necessary for this purpose. The Administration's proposed procedure for reviewing new activities requires that HUD serve in a consultative capacity, thereby helping to ensure that new activities are consistent with the GSES' public purposes and that reviews are conducted expeditiously. The Administration's new procedure will also ensure that in reviewing new activities, the GSEs' safety and soundness, as well as their affordable housing mission, will be fully considered. Q.2. Secretary Martinez, you do not discuss the Federal Home Loan Banks in your statement. I wonder if you have any opinion about them regarding their housing mission and moving their regulator into Treasury? A.2. Fannie Mae and Freddie Mac share many characteristics with the Federal Home Loan Banks (FHLBanks). Congress created all of these enterprises to serve specific public purposes, and they all have a housing mission. We welcome a discussion on this issue and look forward to working with Congress, the FHLBanks, and other interested parties regarding the appropriate regulatory structure for the FHLBanks. RESPONSE TO A WRITTEN QUESTION OF SENATOR SHELBY
FROM FRANKLIN D. RAINES Q.1. The Administration has proposed that the new regulator have all the receivership authority necessary to direct the orderly liquidation of assets. What difficulties would you see in moving to receivership powers akin to those held by the FDIC? What impact would receivership have on the ability of the GSE's to access the debt markets? A.1. The receivership powers granted by Congress to the FDIC primarily protect the FDIC insurance deposit fund. The FDIC, as receiver, is charged with closing and/or selling a failing institution and giving priority to the claims of insured depositors. The charter of the troubled bank or thrift is extinguished. The receivership powers of the FDIC under Section 11 of the Federal Deposit Insurance Act (FDI Act) are complex and have been subject to extensive interpretation by the FDIC.
The FDIC is not required to put a bank or thrift into receivership; it may also elect to put an institution into conservatorship under Section 11 of the FDI Act in an effort to return the institution to financial health. The FDIC can also avoid putting an institution into receivership if the FDIC, the Fed, and the Treasury determine (in consultation with the President) that putting a bank or thrift into receivership “would have serious adverse effects on economic conditions or financial stability and any action or assistance
would avoid or mitigate such adverse effects ...." 12 U.S.C. 1823(0)4)(G).
Simply importing all of the FDIC's receivership powers under Section 11 of the FDI Act into the GSE legislation raises several issues.
First, many of the provisions of Section 11 serve primarily to protect insured deposits, which the GSE's do not have. It is unclear exactly how those sections might be applied to the GSE's.
Second, H.R. 2575's provision on "enhanced conservatorship” appears to import all of the FDIC's powers as a receiver without providing any of the protections that exist for insured banks or thrifts. The proposal does not provide for an exception similar to the one that would apply to large banks or thrifts that might prevent those institutions from being placed into receivership by the FDIC. Given the importance of the GSE's to the housing markets, the serious consideration that would be given, for example, to Citibank before putting the institution into receivership, would be appropriate for the GSE's.
H.R. 2575 also does not appear to protect expressly certain types of contracts in the event of receivership. The “qualified financial contract” exception to the FDIC's receivership powers (and the FDIC's interpretations thereof) was adopted to provide certainty to financial markets as to the treatment of these contracts by a receiver or conservator for an insured depository institution. Similar protections are included in the U.S. Bankruptcy Code for application in nondepository institution bankruptcies. In addition, the FDIC has provided by regulation (12 CFR 360.6), subject to the requirements therein, assurances to the markets and holders of mortgage-related securities issued by insured depository institutions that the FDIC will not reclaim, for the receivership or conservatorship estate, mortgage loans transferred by an insured depository institution into a securitization. Absent such express protections tailored to the GSEs' business, wholesale importation of the FDIC's receivership powers into GSE receiverships could, for example, impair the value and liquidity of the mortgage-backed securities issued in existing GSE securitization transactions, thus unnecessarily increasing costs and decreasing liquidity. Therefore, we believe that express protections for certain contracts and securitizations are critical to providing certainty to the markets and insuring that the cost of raising funds for the secondary mortgage market is not unnecessarily increased.
Creating uncertainty is not necessary to enhance the power of the conservatorship provisions of the 1992 Act if such enhancement
is Congress' goal. For example, specific and additional grants of authority could be given to a GSE conservator within the framework of the 1992 Act and by including express limitations on repudiation or recharacterization of GSE contracts in the 1992 Act.
We note that our answers above do not change the point made in our testimony before the Committee on October 16, 2003. We do not see any need for any change to the conservatorship provisions that exist in the 1992 Act. In 1992, Congress affirmatively rejected the receivership model for the GSE's in favor of the conservatorship model. The legislative history of the 1992 Act makes clear that Congress considered and rejected the receivership option for the Enterprises. The Senate Committee Report notes that the version of the 1992 Act first passed by the Senate (which contained conservatorship provisions substantively similar to those eventually enacted) “does not contain authority to appoint a receiver for the Enterprises.” The Report explains:
The Committee determined that providing for the appointment of a conservator was sufficient. This judgment takes account of the important role that the Enterprises play in our Nation's economy. The Enterprises are clearly distinguishable from even the largest depository institutions, each of which may cease to be able to compete as a provider of financial services with varying degrees of economic impact. If the appointment of a conservator for an enterprise were ever to become imminent, the Congress would have the opportunity to consider the reasons for the Enterprise's condition and the options then available to address that condition. The legislation provides for continuing reports to the Congress on the capital condition of the Enterprises, so the Committee expects the Congress will have more than ample notice to proceed deliberately in considering any possible future action with respect to the enterprises.
Senate Report, 102–282, at 16.
The conservatorship powers Congress authorized in 1992 are very broad and would permit the conservator to run the institution on a day-to-day basis, including selling off assets, until the GSE returned to financial health or Congress took some other action. Pursuant to the 1992 Act, a conservator has “all of the powers of the shareholders, officers, and directors" of Fannie Mae or Freddie Mac. 12 U.S.C. 1369A(a). In addition, a conservator may (i) avoid any security interest taken by a creditor with the intent to hinder, delay, or defraud the company or its creditors, (ii) enforce any contract notwithstanding a provision of the contract providing for the termination of the contract upon the appointment of a conservator, and (iii) receive a stay in a judicial action or proceeding for up to 45 days. OFHEO also may require that a conservator set aside and make available for payment to creditors amounts that may be safely used for such purpose; all similarly situated creditors must be treated similarly. The appointment of a conservator does not affect OFHEO's authority under the 1992 Act to oversee the companies and to impose requirements and restrictions based on the capitalbased classification system. RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM FRANKLIN D. RAINES Q.1. I realize that the GSE's have continued to meet their affordable housing goals. However, in light of the rising housing costs in many communities across the Nation, do you believe the current goals are sufficient to expand homeownership in high-cost communities across the country? Why or why not?
A.1. The current goals are only one measure of Fannie Mae's efforts to make homeownership more affordable in communities across the country. We believe the current goals are very demanding, particularly in the current business environment, and they are ensuring that we continue to expand homeownership. The low- and moderate-income goal applies across the Nation, including in highcost communities, and to reach and exceed that goal we innovate to create products and partnerships that make homeownership more affordable to low- and moderate-income families everywhere.
Many low- and moderate-income renters aspire to homeownership, but they often face daunting barriers such as the difficulties in accumulating a downpayment or qualifying for an affordable mortgage, especially with imperfect credit. Fannie Mae has worked with lenders and community partners to develop products and seryices to overcome these barriers. We have developed automated underwriting that has lowered the costs of mortgage originations, new low-downpayment products that help people get into homes with as little as $500 down, and products with flexible underwriting that serve credit blemished borrowers. We have worked to expand employer-assisted housing programs; many employers especially in high-cost areas—have found it is in their interest to help employees afford a home as part of the employer's recruitment and retention strategies. These initiatives make homeownership more affordable in high-cost areas and help us meet our regulatory requirements. The results are clear, as shown below: Low-Mod Borrowers Represent Greater
Share of Business Over Time
Source: Fannie Mae The affordable housing goals set by HUD do not limit us to serving only targeted borrowers. They require us to devote a percentage of our business to these populations, but our mission is to serve a broader market. Our charter mandates that we provide liquidity to