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Washington, DC. 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 Association; 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 about the need for strengthened regulatory oversight, and yet at last week's hearing, Secretary Snow put forward a proposal that I think raised as many questions as it answered.

It is essential, I believe, that any new GSE regulator, if housed in Treasury, be independent in the same way or in similar ways as the OCC and the OTS. I have signed a letter with some of my Committee colleagues supporting the idea that the GSE regulator may well be moved to Treasury, and yet I am disappointed that the Administration seems to want to retreat from the conventional wisdom that it is good policy to remove the financial regulators from political forces.

The whole point of this exercise is to create a credible regulator. Why would we want to do it in a way that increases its vulnerability to political whims, regardless of which party is in the White House?

We need to look at safety and soundness implications for allowing a regulator to set minimum capital requirements as well as the effects such a change in capital would have on the affordable housing mission of the GSE's. In addition, thoughtful deliberations must take place on how new products and activities should be addressed in any legislation to alter the regulation of GSE's. I share the concern that my colleague from Kentucky has expressed about the regulatory oversight structure of the Federal Home Loan Banks, and I think we need to approach that with great care as we progress on this issue.

And yet, at the same time that we look at changes in the regulatory structure, we have to take great care not to upset a system of housing finance that has allowed successfully millions of middleincome Americans to realize the dream of homeownership. There is a "First, do no harm” criteria here, I believe, that we need to address. In so many ways, the housing GSE's have helped to create a system that has strengthened our communities and broadened the reach of homeownership. That should continue to be our top priority, and I look forward to working with my colleagues in a bipartisan fashion on this Committee to that end.

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

STATEMENT OF SENATOR CHUCK HAGEL Senator HAGEL. Mr. Chairman, thank you. I want to add my welcome to our guests this morning, and I appreciate very much their testimony and an opportunity to exchange thoughts about a rather vital issue for the future of our housing market. Really, it is attached to and part of a significant dynamic of our economy, which you all understand, and we appreciate that.

Mr. Chairman, I also appreciate your continued focus on this issue, with this a hearing coming back to back with last week's hearing. And I would hope that this Committee will be in a position to actually finalize something soon, and I know the Chairman's commitment to that. There is little question, as my colleague from Kentucky noted, as to a requirement to reform what you are doing every day so that there is a new sense of confidence in the market as we move forward into this new century.

Thank you.

I might, as a matter of personal privilege, Mr. Chairman, acknowledge that our distinguished colleague from Kentucky's birthday is today.


It is worthy of note because there is a new serenity about him, a new peacefulness.


He is more docile than I have ever seen him, and I attribute it all to a wiser, more mature U.S. Senator on his birthday. Happy birthday, Senator Bunning.

Mr. Chairman, thank you.

Chairman SHELBY. Thank you, Senator Hagel. You noticed something we have not noticed about the Senator.

Chairman SHELBY. Senator Reed.

Senator REED. Thank you very much, Mr. Chairman. And Happy
Birthday. I cannot say anything else to begin.

Let me also say, Mr. Chairman, how much I appreciate these hearings. You have assembled an array of witnesses that will provide valuable insights to the Committee as we go forward, and thank you for that. I think it is good that we have the regulators here who can offer very specific recommendations based upon real experience over several years, and I think that is very valuable.

There are several issues, obviously, that I think we should touch upon: Whether the Housing Finance Board and OFHEO should be merged together in some new constellation of regulators; whether the GSE's' regulator should have the ability to set minimum capital standards—that is an issue that repeatedly comes up before us and amongst us; how we can best ensure that Fannie Mae and Freddie Mac and the 12 Federal Home Loan Banks are expanding affordable housing opportunities for low-income families. We talk a lot about the housing sector here. It is a very vital part of our economy, but, frankly, we are not doing enough to produce low-income homes in this country, and that is something that these Government enterprises should be at the forefront of trying to do. I know they have a mission and they are doing it, but I think we can do

Then, of course, the overarching question, the impact of any changes we make on the housing finance industry, as alluded to by Senator Bunning and others, that has to be foremost in our considerations.

Again, thank you, Mr. Chairman, for scheduling these hearings, and I appreciate your interest in this very important topic.

Chairman SHELBY. Thank you, Senator Reed.
Senator Bennett.


Thank you.

STATEMENT OF SENATOR ROBERT F. BENNETT Senator BENNETT. Thank you, Mr. Chairman. I simply join in thanking you for holding these hearings. They are very useful and informative. We are learning a great deal, and I am willing to get on with it.

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