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My hope, Mr. Chairman and colleagues, is that what is going to flow from these hearings, this hearing today and maybe those that follow it, is that some of the items-if you put two columns together where there is general consensus and areas where there is not consensus, we will be able to move maybe by the end of the day some of those items under lack of consensus, maybe move a couple of those over to the column where there is consensus. And if we can do that with a few of those today, we will have done good work.

Thank you.
Chairman SHELBY. Senator Sununu.

STATEMENT OF SENATOR JOHN E. SUNUNU Senator SUNUNU. Thank you very much, Mr. Chairman.

What is the saying? "Everything has been said, but not everyone has had a chance to say it.” But I will do my best to make a couple of additional observations that I do think are important as we begin this hearing.

As Senator Bennett said, we are here because we must be alert that a crisis might arise. We are trying to be proactive. We are trying to do the right thing in dealing with this important regulatory issue for the GSE's.

We have heard about some significant accounting issues, cases where in the Federal Home Loan Banks we have had portfolio losses. And I happen to believe that misleading investors is always wrong. I do not care whether you understate profits or overstate profits or intentionally suggest that things are not as good as they really are. That is always wrong. And the credibility and reliability of our capital markets depend on effective regulation to ensure confidence.

Let us all agree that the affordable housing issues that HUD has traditionally dealt with are very important, and the role that the GSE's might play in affordable housing is important. And those are issues that we will probably want to continue to deal with regardless of the final dispensation of this legislation. But let us also understand that the record has shown that the GSE's have actually lagged the markets in meeting affordable housing targets and goals. And I would ask unanimous consent that I be allowed to submit the documentation, studies, evaluations put together by HUD to that effect.

Chairman SHELBY. Without objection. [The information follows:]

Senator SUNUNU. That does not mean that they have not done important work in affordable housing, but it means that if we try to look at it objectively and on a statistical level, they have not always provided the kind of leadership that we might expect from a Government-chartered institution.

This is about safety and soundness of the GSE's and ultimately the credibility and strength in our capital markets. It is about having an effective regulator. And I very much appreciate the work and the discussion and dialogue that has already taken place, the legislation submitted by Senator Corzine, the discussions that I have had with other Members of this Committee that have not nec

essarily signed on to legislation but are approaching this in, I think, a very, very thoughtful way.

We have to be careful of a couple things: One, that we not allow politics to prevent us from doing the right thing for the GSE's themselves, for the taxpayers, and for the housing markets; and, second, that we not just accept a bill because we want to check off our list and say we passed legislation dealing with the GSE regulation issue and now we can get on to something else.

No bill would be far better than a poorly written bill. I believe this very strongly. If we pass legislation that is all form and no substance, we will be doing a disservice to the consumers, a disservice to investors, a disservice to taxpayers, and I think ultimately a disservice to the GSE's themselves, Fannie, Freddie, the Federal Home Loan Banks, because the employees at those important and fine institutions, their leadership, and their management want to operate in an environment of credibility, confidence, and certainty, just like any other participant in the private sector of the capital markets.

Thank you, Mr. Chairman.
Chairman SHELBY. Senator Stabenow.

COMMENTS OF SENATOR DEBBIE STABENOW Senator STABENOW. Thank you, Mr. Chairman. I would ask that my statement be included in the record.

Chairman SHELBY. Your statement will be made part of the record.

Senator STABENOW. Thank you. I would like to offer a slightly different view than my colleague who just spoke in that, first of all, I think the secondary mortgage market is essential to our housing sector and that, in fact, there has been great success, and I welcome the opportunity to in the future submit for the record evidence as to why these very important GSE's have been so significant in terms of providing housing opportunities to people.

We know that there is a growing interest in strengthening our housing finance regulators. I share that. We need a highly respected independent regulator for Fannie Mae and Freddie Mac, and that the Federal Home Loan Bank, of course, needs to be soundly regulated. But I appreciate the Chairman's comments at hearings in the past in terms of moving forward in a thoughtful manner, as the Chairman and the Ranking Member have done on other issues. And I am hopeful that we will move forward in a thoughtful manner and address what are legitimate concerns without, as they say, throwing the baby out with the bath water, because I believe that we have had many great successes for the American people through the systems that have been in place and providing housing which is so critical to all of us.

I welcome the Secretaries to be with us today as well. I look forward to your testimony. Chairman SHELBY. Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING Senator BUNNING. Thank you, Mr. Chairman, for holding this very important meeting. I would also like to thank all of our witnesses for testifying today.

Everyone on this Committee was very troubled at what happened at Freddie Mac. Most troubling for me was the fact that OFHEO had no idea, until Freddie brought it to their attention, what was going on there. No idea.

While I am happy that Freddie was able to self-police, I was astonished by OFHEO's attitude which seemed to come down to say, yes, we need more money, but the system worked. OFHEO's testimony reminded me of Kevin Bacon's character in “Animal House,” standing on the corner shouting, “Remain calm. All is well,” right before he is run over by the mob.


I am certainly happy that we have all come to the conclusion that Freddie and Fannie need to have a new regulator. But there are many pitfalls ahead of us. Nobody here wants to do anything that would harm our housing market, and this new regulatory structure could harm it if we do not do it right.

We should not simply rearrange the deck chairs on the Titanic. We should not simply move OFHEO into Treasury and let it run the same way. But we also must remember who is affected by what we are doing.

We have few large banks in Kentucky-few. We do not have the guys who compete with Fannie and Freddie. We have the guys who work with them. They use GSE products to make loans to underserved areas so they can bring the dream of homeownership to those who otherwise would not be able to afford it.

They also use GSE products for CRA compliance. They are scared to death that this will be harmed by this legislation. I want to make sure that they are not.

I have just one other major concern. On September 9 of this year, Assistant Secretary Abernathy was up here. I asked him if all GSE's, including the TVA, should have to register with the SEC. He said, “That is our position, yes.” I have the videotape if you would like to see it.

I understand that someone above his pay grade, which I assume is you, Secretary Snow, has said that TVA is not a GSE, and so that the statement did not apply. This is very troubling to me. If TVA, which was established by the Federal Government, runs itself as a quasi-public enterprise and is not a GSE, what is it? If the TVA is not Government-sponsored, who sponsors it? If it is not an enterprise, what is it?

Also help me comprehend why the Administration wants the Federal Home Loan Banks, which have a regulator and who do not sell public stock, to register with the SEC, while at the same time it does not call on TVA, which has over $26 billion in public traded debt and no regulator, to register with the SEC. I cannot comprehend the Administration's position on this.

I do look forward to further discussions on this question very shortly, since I will have a chance to question you in the question and answer period. I want to thank you for coming. We deeply appreciate your appearance here.

Thank you, Mr. Chairman.
Chairman SHELBY. Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD Senator ALLARD. First of all, Mr. Chairman, I would like to thank you for holding this hearing.

I would like to borrow a cliché from the medical community, and that is, “An ounce of prevention is worth a pound of cure.” And I think that my colleagues Senator Hagel as well as Senator Sununu hit upon the keyword, which is "confidence.” We simply must have confidence in the secondary markets as well as the GSE's. The GSE's themselves will benefit with confidence. The investors will benefit with confidence. With good confidence, the users benefit. Homeowners certainly are beneficiaries as well as the taxpayers.

So, I am delighted that we are having this hearing. Fannie Mae and Freddie Mac were chartered by Congress as Government Sponsored Enterprises to create a secondary mortgage market which has served us well. It is one of the things that has separated us from other parts of the world who are struggling with housing. We have housing now at an all-time high, and a lot of it is due to the fact that we have a very viable secondary mortgage market.

Although they are private companies owned by shareholders, the GSE's retain certain Government ties. For example, they have access to a line of credit at the Treasury Department and are exempted from paying State and local income taxes. In exchange for these benefits, they are required to serve all markets and must meet certain affordable housing goals. Since their creation Fannie Mae and Freddie Mac have been an important source of homeownership for all Americans.

Over the years, the GSE's have evolved into very large, very complex financial institutions. Because of their size, complexity, and importance to the financial markets, they demand the highest levels of oversight and scrutiny. Currently, the Office of Federal Housing Enterprise Oversight, referred to as OFHEO, is charged with ensuring the financial safety and soundness of the GSE's. But recent events have clearly demonstrated that OFHEO as currently structured is insufficient as a regulator. This causes me great concern due to the implications of homeownership, the markets, and because of the belief and implied Government backing of the GSE's.

Accordingly, the Bush Administration proposed creating a new regulator for the housing GSE's. The new regulator would be an independent agency with the Department of the Treasury, similar to other Federal financial regulators, such as the Office of the Comptroller of the Currency and the Office of Thrift Supervision. I strongly support creation of a new regulator within the Treasury Department because they have better financial expertise to oversee the complex financial transactions in which the GSE's engage.

In order to be an effective regulator, the new agency must have a broad set of powers comparable to other financial regulators, including additional enforcement powers and litigation authority. I also believe the regulator must have the ability to set capital standards for the GSE's. While we have found many areas of agreement, there are still many issues to be resolved, including mission regulation and inclusion of Federal Home Loan Banks. While I believe that we should move quickly in this debate, we must do so with care and deliberation. We must ensure any changes strengthen oversight of the GSE's and work to promote access to housing. I would like to welcome our witnesses today, particularly Secretary Snow and Secretary Martinez. I know this Committee will work closely with you as we continue to address the GSE reform.

Thank you for being with us here today, and I look forward to your testimony.

Thank you, Mr. Chairman.
Chairman SHELBY. Senator Chafee.

COMMENT OF SENATOR LINCOLN D. CHAFEE Senator CHAFEE. I just want to thank you, Mr. Chairman for holding this important hearing.

Chairman SHELBY. Mr. Secretary, both of you, Secretaries Snow and Martinez, we welcome you again to the Committee. Your written testimony will be made part of the record in its entirety. Secretary Snow, you may proceed as you wish.

STATEMENT OF JOHN W. SNOW SECRETARY, U.S. DEPARTMENT OF THE TREASURY Secretary SNOW. Thank you very much, Mr. Chairman, Ranking Member Sarbanes, and Members of the Committee. I greatly appreciate the opportunity to appear before you today with Secretary Martinez-can you hear me, Senator?

Chairman SHELBY. Bring it up closer to you.

Secretary SNOW. I greatly appreciate the opportunity to appear today before you with Secretary Martinez to address what is really a vitally important subject, a subject that raises complex and important issues and a subject that touches on something that has been mentioned in all of your statements a subject that is critically important, and that is homeownership in America. It is an important building block of individual financial security. It is also a building block for strong communities, as has been mentioned. So promoting housing opportunities, particularly for lower-income people, is a critically important national objective.

Our national system of housing finance, as has been pointed out as well, plays a critical role in doing that. So we need a strong, resilient housing finance system. And to have that strong, resilient housing finance system, you need a regulator with credibility. A strong, credible regulator contributes importantly to having a strong, resilient housing finance market, which in turn promotes housing opportunities.

But we have in the GSE's entities which are very large not just in terms of housing finance, but are very large in terms of the total U.S. financial system. And that is where we run into the fundamental issue we have to keep our eye on throughout these discussions. And it goes to the issue that Senator Hagel mentioned, that Senator Sununu mentioned, that others mentioned, of the so-called implied governmental guarantee. And that implied governmental guarantee can complicate the performance of the entire financial system of the United States.

We need a world-class regulator to watch that issue, to watch the soundness and safety of housing finance and the relationship of housing finance to the resiliency of our financial markets.

As Senator Allard said—and this is the situation we are dealing with here—an ounce of prevention. We do not face, in my view, any

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