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current crisis, but we never want to get close to the point where we would face that problem.

The best insurance against ever getting there, at the same time the best insurance of having a strong, resilient finance market which promotes strong homeownership, is a sound regulator.

In my extended testimony, I laid out what I think are the elements of a strong regulator. Some of you have mentioned them. Senator Hagel mentioned them. First, a sound regulator, in the context that I am talking about, a strong regulator who is focused both on soundness and safety of housing, but in the context of the soundness and resilience of the entire financial system, that regulator has to have a say on new products and new lines of business. Any strong financial regulator has that. Nowhere in the world is there a strong financial regulator who does not have an important say on the lines of business of the entities that it regulates.

Second, that strong, effective regulator has to have an important say on capital standards, and it has to have the ability to adjust the capital standards to whatever the circumstances are that dictate a change in those standards. A good regulator has flexibility. A good regulator responds to the circumstances that that regulator finds call for action. And so a second element here would be flexible control over capital standards.

Third, I think the regulator needs to have appropriate winddown authorities; that is, if for some reason one of these entities got into difficulty, just like any other private sector entity, there needs to be the ability to pay the creditors. Wind-down authority, but wind-down authority recognizing that you, the Congress, have chartered these entities.

Fourth, I would suggest that the proposal would be stronger and better if it did include the Federal Home Loan Banks. They, too, are part of this very large housing finance market. They, too, have implications for the resiliency and soundness of our entire financial system. They are engaged in activities that are very similar to those of the other housing GSE's. There are some important differences. They would need to be recognized in the legislation. I would acknowledge that. But I think if we are going to deal with this issue really effectively, we should also look at including the Federal Home Loan Banks.

Finally, there is the question: Where should this new, strong regulator be? Our focus is with the strong regulator rather than its venue, and I have said in the House that if the Congress, if the Senate Banking Committee wants to consider Treasury, we are happy to have that discussion. But only if—and I need to be really clear on this because of the enormous problems that can develop otherwise for the financial system in the United States-only if the Treasury adds some value and avoids the implication that the implied guarantee is being reinforced, because in that lies real trouble.

So we would say if the Congress, if the Banking Committee wishes to consider Treasury, we would suggest you only do so if you put Treasury in a position to have some real say with the new regulator, a real say so that if there is confusion about this entity's being in Treasury and thus creating a larger governmental hug, a reinforced implied guarantee, we can disabuse the markets of that impression.

Now, how do we do that? We would say that Treasury should have a say on new regulations. It should have a say on testimony. And it should have a say on budget.

But let me conclude simply by saying the important issue here is a strong regulator. There were suggestions to have that strong regulator be an independent body. Wherever you go on that path, I would suggest the important thing is to make sure the new regulator really has credibility, really can do the job, really has the tools that all world-class financial regulators have, a say over new products, a say over capital standards, and a clear say over winddown authority.

I thank you very much.
Chairman SHELBY. Secretary Martinez.



Secretary MARTINEZ. Mr. Chairman, thank you very much. Ranking Member Sarbanes and distinguished Members of the Committee, it is a pleasure to be here today, with my colleague Secretary Snow, to talk about this important set of proposals of regulations for the Government Sponsored Enterprises.

Before proceeding to talk about that, I want to just take a brief moment to thank the Committee for your support yesterday of the American Dream Downpayment Initiative. The President and I were in Dinuba, California, yesterday talking about homeownership and the importance of downpayment assistance, and your move yesterday on that legislation is an important step in that direction of creating homeownership opportunities for more American families. So we thank the leadership of the Committee and all of the Committee Members for your support.

We believe that Congress, at this point in time, has not only an opportunity, but also really an obligation to move forward in this area of reform of the regulatory oversight of the GSE's. Fannie Mae and Freddie Mac have a vital public role to play in providing homeownership opportunities to low- and moderate-income families. The fact that we are a Nation of homeowners reflects the beneficial impact of the role these companies were created to perform, has on American life. The Bush Administration is committed to creating opportunities for homeownership in America, and that is why we believe it is important that these companies fulfill their mission. The best way to ensure that they do so is through real and lasting reform that enhances their financial regulation, while preserving and expanding their commitment to affordable housing.

The Administration is committed to a society where every individual has the opportunity to gain the independence and dignity that comes from homeownership. This commitment is embodied in the President's budget proposals which have consistently increased funding for successful initiatives, like the HOME Investment Partnership Program, housing counseling, and the Self-Help Homeownership Program. The commitment is embodied in the President's challenge to the housing industry to join with us in creating

5.5 million new minority homeowners by the end of the decade. It is embodied in the Blueprint for the American Dream Partnership, through which HUD has brought together the private, public sector and not-for-profit and the Government agencies to meet the President's challenges.

Fannie Mae and Freddie Mac are founding members of the Blueprint Partnership, and we appreciate their pledge to invest billions of dollars to lift more families into homeownership.

The Administration's commitment to homeownership opportunities is not confined to our activities at HUD. It begins with the President and stretches across the whole of the Federal Government, and our proposal today reaffirms that commitment.

Our reform proposal is consistent with this Administration's commitment to do everything necessary to foster a healthy and vibrant housing industry, which today accounts for roughly 14 percent of the Nation's gross domestic product. The potential impact of Fannie Mae and Freddie Mac upon the economy and housing programs makes it critical that we ensure their safety and their soundness.

To be effective, a regulator charged with overseeing prudential operations, including safety and soundness, needs the proper tools to do its job. Currently, safety and soundness regulation is divided with new program approval authority being at #UD and financial oversight of the Office of Federal Enterprise Oversight. It is clear to us that both elements of safety and soundness regulation need to be consolidated in a single regulator. Splitting this regulation between two regulators weakens each one.

The decision of whether to approve or deny any new activity is based partly on its effect on the prudence of a company's operations. It makes little sense to have one entity deciding whether or not to approve a new activity while another determines whether that activity meets the prudential operation test.

New activities oftentimes directly impact the housing and mortgage markets, and for that reason, the Administration believes that HUD should retain a consultative role. Other new activities do not involve housing or mortgage market issues and are therefore most appropriately addressed by a strengthened regulator. As part of its consultative role, HUD will provide the benefit of its regulatory experience in such issues, and I do not see establishing a new and stronger regulator, potentially at the Treasury Department, as something that will harm the housing market. I see the opposite result: A strengthened housing finance system continuing to provide homeownership opportunities for all Americans.

We are not proposing to alter the Congressional charter of Fannie Mae and Freddie Mac, nor do we have any intention of stifling innovation in the marketplace. Just as other financial institutions are subject to new activity approval, yet have been leaders in mortgage innovation, so too can Fannie Mae and Freddie Mac thrive under the Administration's proposal. Any new business activity that Fannie Mae and Freddie Mac wish to undertake will be reviewed with respect to consistency with the charter act, with respect to whether it is in the public interest and with respect to safety and soundness. The Federal Housing Enterprise Financial Safety and Soundness Act recognizes the need to take all of these concerns into account in the review process.

While prudential operations, regulation, including safety and soundness regulation, should be exercised by a single, independent regulator, the Administration strongly supports retaining and enhancing the housing goals at HUD.

Congress established Fannie Mae and Freddie Mac to provide market liquidity and to facilitate the financing of affordable housing for low- and moderate-income families. Congress also mandated that the HUD Secretary set housing goals to ensure that those needs are met.

The affordable housing goals require Fannie Mae and Freddie Mac to focus on individuals in those communities most in need. This includes very low-income families and low-income families in low-income areas, low- and moderate-income families and underserved areas, such as central cities and rural areas.

Today, the low- and moderate-income housing goal requires that at least half of all Fannie Mae and Freddie Mac mortgage purchases benefit families in this income bracket. As the President's budget noted in February, numerous HUD studies and independent analyses have shown that the GSE's have historically lagged the primary market, instead of led it, with respect to funding mortgage loans for low-income and minority homebuyers. The GSE's have also accounted for a relatively small share of the first-time minority homebuyers.

The national home purchase goal we have proposed is a tool to specifically promote affordable homeownership. As the Members know, low interest rates in recent years have led to a boom in refinancings. Although Fannie Mae and Freddie Mac provide liquidity in refinancing, the share of funding they provide for home purchases declines during years in which refinancings are high. Our intent is not to saddle Fannie Mae and Freddie Mac with a series of stifling mandates as the opponents of reform have suggested, but to ensure, through a national home purchase goal, that they do not overlook those to whom they owe their primary devotion. This goal will certainly not unduly limit the ability of Fannie Mae and Freddie Mac to serve the refinance market or the multifamily market.

Allow me to also clarify this proposal for a new goal, as some confusion has arisen over it. HUD is not asking for the authority to set overall home purchase levels for Fannie Mae and Freddie Mac, but instead is asking for the authority to ensure that the home purchase activity that takes place be equitably distributed among central cities and rural ares, low- and moderate-income families, special affordable homebuyers, and first-time homebuyers, just as HUD does for the existing housing goals. That is why HUD has asked for the authority to establish home purchase subgoals corresponding to these four categories, similar to the subgoal authority it presently has under the three existing goals. HUD is not asking for the authority to set home purchase subgoals in individual metropolitan and regional markets. HUD seeks only to set national subgoals so that Fannie Mae and Freddie Mac's home purchase efforts are fairly spread among these four categories. HUD also asks that these subgoals be enforceable.

HUD is the appropriate agency to develop and enforce the housing goals. Institutionally, our mission is devoted to furthering the

goals of affordable housing and homeownership, and HUD has the most expertise of any Federal agency in this area. Furthermore, the housing industry looks to HUD as the agency in which this authority should reside.

In the Administration's proposal, HUD will not only retain authority to set meaningful housing goals, but will also be better equipped to ensure that Fannie Mae and Freddie Mac meet them. There will be sufficient funding, more accountability for Fannie Mae and Freddie Mac, and strengthened housing goals.

One of the ways in which the Administration proposal has proposed strengthening HUD's housing goal authority is by creating a new GSE Housing Office within HUĎ, funded by the GSE's, to establish, maintain, and enforce housing goals. We also need to improve the Secretary's enforcement authorities with respect to these goals and have proposed doing so.

It is also very important, Mr. Chairman, that fair housing requirements and enforcement that pertain to Fannie and Freddie remain at HUD, given HUD's expertise in fighting housing discrimination. HUD will have full enforcement power for those authorities in the same way it enforces the Fair Housing Act.

A strengthened regulator is in everyone's best interests, and we strongly encourage it. The importance of Fannie and Freddie in the housing financial system is undeniable, and real reform is necessary to ensure the public of the ability of the two companies to make low-cost mortgage financing available to low- and moderateincome families.

We look forward to working with the Committee as we develop a set of new proposals to have a strong regulator for these very important institutions.

Chairman SHELBY. Mr. Secretary, thank you.

Secretary Snow, assuming that the new GSE regulator were placed within the Treasury Department, in terms of independence, should the new regulator differ from the OCC or OTS model? And, if so, why?

Secretary SNOW. Mr. Chairman, I think there should be some differences.

Chairman SHELBY. Why?

Secretary Snow. Basically, because the OCC regulates 2,000 national banks and has little risk of what the economists and political scientists call regulatory capture. The size of few of these entities approaches the size of the two large GSE's.

Chairman SHELBY. But in aggregate, they are larger, are they not?

Secretary SNOW. And
Chairman SHELBY. Wait a minute.

Secretary SNOW. Well, in the aggregate, but there are far more than one or two banks. But the more important point is they are not issuing debt that is treated as agency debt that has a perception of some Government guarantee.

Now, we do not believe there is any Government guarantee, and we go out of our way to say there is not a Government guarantee, but yet the market has a perception. I think it is terribly important that if the entity is in Treasury, the Treasury Department be in a position to continuously avoid the confusion, as Treasury is

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