4. Calculate the lifetime cost of worst-case increase in spreads for one month worth of CO issuances: The lifetime cost increase for each term to maturity (or term to call when callable) schedule is calculated as (Balance maturing at maturity M from run-off schedule) x (Spread between GSE AAA and Bank/Finance AAA for maturity M) × (Maturity in years, M) Estimate the total cost for one month worth of issuances by summing up lifetime costs of increase in spreads for all term to maturity (or term to next call) schedules: 1 The lifetime cost is defined as the total increase in funding cost over the contractual term to maturity or to earliest call date FMCG.сом em_FFHS 01_09-25 App B2 This estimate of $250mm is, however, somewhat of an understatement because interest costs are based on the term structure that reflects the term to next call date rather than the term to maturity for callable debt. If forward curve is an unbiased estimator of future rates, callable debt will be called only half of the time (i.e., when rates rise to the forward curve or less), thus our estimate is based on shorter terms for callables than are really appropriate Adjusting investment policies of those with "no SEC registration" indicia for GSE status takes time-likely to be many months. Advanced warning of the change in exemption from SEC registration will cushion this effect. Using a conservative 3-month adjustment period at $250mm per month yields $750mm. The annual yield increase on System debt issued under this scenario is 24 bp at $250mm in added lifetime cost. Spreading $250mm across the $674B in System debt outstanding as of 12/21/02 results in 3.7 bp of average extra funding costs. At $750mm cost (a three-month GSE indicia change estimate), the 3.7 bp incremental cost would be a bit higher and persist longer. (Rollovers of short-term debt would prevent the incremental yield from rising all the way to 3.7 bp x 3 or 11.1 bp.) FMCG.COM em_FFHS 01-09-25 App 82 B-6 PROPOSALS FOR IMPROVING THE REGULATION OF THE HOUSING GOVERNMENT SPONSORED ENTERPRISES THURSDAY, OCTOBER 23, 2003 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, The Committee met at 10:06 a.m., in room SD-538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY Chairman SHELBY. The hearing will come to order. This morning the Committee meets to hold our second hearing on proposals to improve the regulation of Government Sponsored Enterprises. During our hearing last week, we heard from the Administration and the Government Sponsored Enterprises. Today, we will hear from a variety of viewpoints, including the current regulators. These hearings will provide the Committee with a thorough debate of the critical issues that must be resolved in order to establish a strong and credible regulator for the Government Sponsored Enterprises. It is my view that any new regulator must oversee the Federal Home Loan Bank System as well as Fannie Mae and Freddie Mac. Comprehensive regulatory reform of this nature deserves careful consideration, and this Committee will work diligently to craft an appropriate reform package. Whether we can do so this fall is not clear, but I will certainly make this a continued priority as the Chairman. For our first panel today, we welcome three witnesses: Mr. John Korsmo, Chairman of the Federal Housing Finance Board; Mr. Armando Falcon, Director of the Office of Federal Housing Enterprise Oversight; and Mr. Douglas Holtz-Eakin, Director of the Congressional Budget Office. Our second panel will include five witnesses: Mr. John D. Koch, Executive Vice President and Chief Lending Officer, Charter One Bank of Cleveland, Ohio, testifying on behalf of America's Community Bankers; Mr. Dale Torpey, President and CEO of Federation Bank of Washington, Iowa, testifying on behalf of the Independent Community Bankers of America; Mr. Allen Fishbein, Director of Housing and Credit Policy for the Consumer Federation of America; and Mr. Robert Couch, Chairman of the Mortgage Bankers As sociation; and Ms. Iona Harrison, Chairman of the Public Policy Committee of the National Association of REALTORS®. I want to thank all of the witnesses for appearing before the Committee today. Senator Sarbanes. STATEMENT OF SENATOR PAUL S. SARBANES Senator SARBANES. Thank you very much, Mr. Chairman, for convening this important hearing. As you said, this is the second opportunity for the Committee to consider the question of how to effectively regulate the GSE's-Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Understanding and improving the supervision of the GSE's involves many complex and challenging issues. I think our hearing last week made that clear. Testimony from two Cabinet Secretaries and representatives of the regulated entities I think made valuable contributions to our deliberations. But I believe it is fair to say that there are a number of questions still to be examined. I look forward to further consideration of those issues today. Of course, the GSE's do not make the mortgage market function by themselves. They work in partnership with a network of lenders and realtors who are integral to the smooth running of our housing finance system. We will hear today from several representatives of these industries who interact daily with the GSE's. I look forward to hearing their perspectives, indeed the perspectives of all of our witnesses today, as we examine this question of effective supervision of these entities. Mr. Chairman, I want to commend you for putting together hearings with a variety of interested parties on this important issue so that we really get the benefit of a wide range of points of view. Finally, as I did last week, I want to underscore the importance of acceding to the Administration's request for an additional $7.5 million for OFHEO to conduct reviews of accounting practices at the enterprises it regulates. I very much hope that will be included in the funding for fiscal year 2004. It is an Administration request, and I very much hope that Congress will deliver on it. While we deliberate on creating a new, more effective regulatory structure, we obviously need to be sure that the current regulator is adequately funded. Thank you very much. Chairman SHELBY. Senator Bunning. STATEMENT OF SENATOR JIM BUNNING Senator BUNNING. Thank you, Mr. Chairman, for holding this very important meeting and hearing. I would like to thank all of our witnesses that are going to testify for their testimony. Last week, we heard from two Cabinet Secretaries as well as representatives from Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Now we will hear from the Federal Housing Finance Board, the CEO of OFHEO, and the representatives from the banking industry, the realtors, and the consumer groups. I applaud the Chairman for bringing so many who could be affected by the GSE legislation before the Committee. We all agree that Fannie and Freddie need a new regulator. Even Fannie and Freddie agree to that. But that was the easy part. Now we have to figure out how to do it. If we do not do it right, we are simply rearranging the deck chairs on the Titanic. It will sink. We all agree that we must not do anything in this bill that could harm our housing markets, and I warn those that are in positions of authority in the Treasury to watch what they say. As of yesterday, one of them popped his mouth off, and the market went completely haywire in the interest rates. We all agree we must worry about unintended consequences. I do want to reiterate a concern I voiced last week at the hearing we had. I had a number of small community banks in Kentucky, contact me about their concerns about this effort. We only have small banks in Kentucky, and they are scared to death. My small banks are worried that they will not be able to use the same GSE products they use today. They are worried about the products they use to stay in compliance with their CRA obligations, and they will not have them available if we do something to change the regulator. I would like to make sure my little banks are not harmed. I would like to hear from all of our witnesses on if they feel this concern is a valid concern. I would also like to hear from our witnesses on whether or not they feel the Federal Home Loan Bank should stay with their existing regulator or should be moved to a new regulator and why, because I do not agree with the Chairman on this, and I would like to hear from our witnesses. I will look forward to broaching this with our witnesses and in the question and answer period. Once again, I thank all of our witnesses for testifying, and we thank the Chairman for holding the hearing. Chairman SHELBY. Senator Johnson. STATEMENT OF SENATOR TIM JOHNSON Senator JOHNSON. Thank you, Mr. Chairman, for calling today's hearing to discuss the regulatory framework for housing GSE's, and I welcome the members of our panels today. It is critical that we move forward with regulatory restructuring, and today will give us an opportunity to get the current GSE regulators' take on what tools will be useful in strengthening oversight. But even more important, we will hear from those who work together with the GSE's to make affordable housing a reality for millions of Americans. Mr. Chairman, I have to admit that my patience has worn thin with Treasury at the moment. A statement yesterday from our Assistant Secretary of Financial Institutions, Mr. Abernathy, making veiled threats about what might happen to the GSE $2.5 billion line of credit with the Treasury if they do not get their way relative to a proposed safety and soundness regulator under the Treasury having the authority to approve new products and very low firewalls between the Agency and the Treasury Secretary and the politics of the Treasury Department are very distressing to me and should be distressing to anyone concerned about affordable housing for American families. I am disappointed at what appears to be a decreasing momentum for regulatory reform. Clearly, there is a significant agreement |