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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.

value to both Federal Home Loan Bank members and investors in Federal Home Loan Bank debt.

I believe the Finance Board has dramatically improved the job it does of ensuring the safety and soundness and housing mission compliance of the Federal Home Loan Banks. As I come before you today, I know of no immediate or imminent safety and soundness or liquidity imperative forcing us to do the job of recasting supervision of the housing GSE's any way but the right way—with a strong, independent regulator. We are all aware the stakes are high if gains made are diluted or lost in the course of attaining the worthy goals of GSE reform. These high stakes suggest to me the value of undertaking a complete review of all housing GSE's, their charters and missions, and their role in the capital and mortgage markets, not just for today but also for the future. Development by policymakers of a coherent national agenda clearly outlining Government and private housing finance roles and informed policy to ensure another seven decades of stability, growth, and innovation in housing finance will guarantee all parties to the debate are fully equipped to design a world-class supervisor able to evolve along with the housing GSE's and the markets of tomorrow.

A review of housing GSE charters and principles would not preclude, of course, immediate action with respect to OFHEO. OFHEO's mission could well benefit from budget independence and the granting of the full powers in use by other banking supervisors, including the Finance Board, under the Federal Home Loan Bank Act. I understand as well that Congress may decide to establish an enhanced regulatory structure for Fannie Mae and Freddie Mac that includes the Federal Home Loan Banks. If so, I would urge this Committee, of course, to equip the new regulator with the principles of strength and independence proven by the Federal Reserve, FDIC, OCC, and OTS, augmented by the proven housing GSE supervision features already in practice at the Finance Board. But your effort must also focus on the very real differences—differences of charter, differences of ownership, differences of capital structure that exist between the Federal Home Loan Banks on the one hand and Fannie Mae and Freddie Mac on the other and anticipate adoption of reasonable methods to accommodate those differences. This is no small task, and I respectfully ask you to proceed carefully.

As a matter of housing GSE policy, Congress and the Administration may also wish to safeguard in a consolidated regulator the potential for Federal Home Loan Banks to offer to their members products and services in competition with other housing GSE's to lower costs and increase choices for homebuyers.

Thank you, Mr. Chairman and Members of the Committee, for the opportunity to appear before you this morning. I am pleased to respond to any questions.

Chairman SHELBY. Mr. Falcon.

STATEMENT OF ARMANDO FALCON, JR.
DIRECTOR, OFFICE OF

FEDERAL HOUSING ENTERPRISE OVERSIGHT

Mr. FALCON. Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, thank you for inviting me to appear

Thank you.

Chairman SHELBY. Gentlemen, your written testimony will be made part of the record in its entirety. We will start with Mr. Korsmo, and you proceed as you wish.

STATEMENT OF JOHN T. KORSMO

CHAIRMAN, FEDERAL HOUSING FINANCE BOARD

Mr. KORSMO. Good morning, and thank you, Mr. Chairman, Ranking Member Sarbanes, and distinguished Members of the Committee.

In December 2001, this Committee and the Senate honored me with confirmation to membership on the Federal Housing Finance Board, and President Bush entrusted me with the Board's chairmanship. During my confirmation hearing, both Senator Sarbanes and former Senator Gramm impressed on me indelibly-their concern over the Finance Board's inadequate performance.

In response, I committed myself to leading the Agency to fulfill the intent of Congress in FIRREA in 1989 and the Gramm-LeachBliley a decade later, that is, to create a credible arm's-length regulator for the Federal Home Loan Banks. I testify today not as an apologist for the Federal Home Loan Banks and certainly not as a partisan for the Finance Board but, rather, as a safety and soundness regulator who takes his oath of office and his promise to this Committee very seriously.

In that spirit, I offer my experience at the Finance Board as you seek to establish policy for the supervision of the Nation's 14 housing-related Government Sponsored Enterprises.

The Federal Home Loan Bank Act grants the Finance Board the authority, the independence, and the executive branch voice that I believe are needed for robust supervision of Government sponsored public trusts.

Of course, not only are regulatory tools necessary, but also the willingness to use those tools. At this Committee's oversight hearing on September 9, I discussed the aggressive and disciplined agenda of improvement my colleagues and I have undertaken at the Finance Board. Today, in the interest of time, let me cite my earlier testimony and give you just a brief update on activities since that oversight hearing.

Our Office of Supervision is continuing its enhancement of bank supervision and oversight and its expansion of critical staff. The Finance Board now has more than double the number of examiners on staff when I took the oath of office in December 2001. This core of 18 staff examiners will expand to 30 by this time next year, and it is supplemented by additional financial analysts, accountants, and risk management and mortgage specialists. My prepared testimony includes a chart that summarizes the examiners' accreditations and experience, and I think you will find them impressive.

Effective oversight of GSE's also requires full transparency of the regulated entities. The day following this Committee's oversight hearing, the Finance Board unanimously adopted a proposed rule to require each of the Federal Home Loan Banks to comply with the periodic financial reporting provisions of the Securities Exchange Act of 1934. I regard SEC registration as critical to improving corporate and financial transparency, a factor of significant

value to both Federal Home Loan Bank members and investors in Federal Home Loan Bank debt.

I believe the Finance Board has dramatically improved the job it does of ensuring the safety and soundness and housing mission compliance of the Federal Home Loan Banks. As I come before you today, I know of no immediate or imminent safety and soundness or liquidity imperative forcing us to do the job of recasting supervision of the housing GSE's any way but the right way-with a strong, independent regulator. We are all aware the stakes are high if gains made are diluted or lost in the course of attaining the worthy goals of GSE reform. These high stakes suggest to me the value of undertaking a complete review of all housing GSE's, their charters and missions, and their role in the capital and mortgage markets, not just for today but also for the future. Development by policymakers of a coherent national agenda clearly outlining Government and private housing finance roles and informed policy to ensure another seven decades of stability, growth, and innovation in housing finance will guarantee all parties to the debate are fully equipped to design a world-class supervisor able to evolve along with the housing GSE's and the markets of tomorrow.

A review of housing GSE charters and principles would not preclude, of course, immediate action with respect to OFHEO. OFHEO's mission could well benefit from budget independence and the granting of the full powers in use by other banking supervisors, including the Finance Board, under the Federal Home Loan Bank Act. I understand as well that Congress may decide to establish an enhanced regulatory structure for Fannie Mae and Freddie Mac that includes the Federal Home Loan Banks. If so, I would urge this Committee, of course, to equip the new regulator with the principles of strength and independence proven by the Federal Reserve, FDIC, OCC, and OTS, augmented by the proven housing GSE supervision features already in practice at the Finance Board. But your effort must also focus on the very real differences-differences of charter, differences of ownership, differences of capital structure that exist between the Federal Home Loan Banks on the one hand and Fannie Mae and Freddie Mac on the other and anticipate adoption of reasonable methods to accommodate those differences. This is no small task, and I respectfully ask you to proceed carefully.

As a matter of housing GSE policy, Congress and the Administration may also wish to safeguard in a consolidated regulator the potential for Federal Home Loan Banks to offer to their members products and services in competition with other housing GSE's to lower costs and increase choices for homebuyers.

Thank you, Mr. Chairman and Members of the Committee, for the opportunity to appear before you this morning. I am pleased to respond to any questions.

Chairman SHELBY. Mr. Falcon.

STATEMENT OF ARMANDO FALCON, JR.
DIRECTOR, OFFICE OF

FEDERAL HOUSING ENTERPRISE OVERSIGHT

Mr. FALCON. Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee, thank you for inviting me to appear

before you today. I am pleased to provide my views on improvements that can and should be made to the regulatory oversight of Fannie Mae and Freddie Mac. My views are my own and are not necessarily those of the President or the Secretary of Housing and Urban Development.

When I took office as Director of OFHEO in October 1999, I quickly realized that the Agency's long-term success was jeopardized by inadequate resources, a constraining funding mechanism, and a lack of powers equal to those of other regulators. And so over the past 4 years, I have been a consistent advocate of legislation designed to address those shortcomings, and so I was encouraged by the Administration's comprehensive proposal. I am in general agreement with it, but I do have a few concerns that I hope can be properly addressed.

I would like to outline my views in the context of five guiding principles. They are: First, the regulator should remain independent; second, the regulator should be permanently funded, outside the appropriations process; three, the regulator should have powers equal to those of other safety and soundness regulators; four, the regulator should have full discretion in setting capital standards; and, five, legislation should build on progress made.

Adherence to each of these principles will strengthen supervision and the safe and sound operation of the Enterprises. Our ultimate goal and benchmark should be to establish a new regulator that is on an equal plane with the OCC and the OTS, both of which operate as independent safety and soundness regulators within the Treasury Department. I would like to elaborate on the five principles.

First, the regulator should remain independent. The concept of an independent Federal agency to oversee Fannie Mae and Freddie Mac was established in the legislative history of the 1992 Act that created OFHEO. The need for regulatory independence was born out of Congress' experience with the savings and loan crisis. I had the privilege of serving as counsel to the House Banking Committee for 8 years during that difficult period. One of the clear lessons learned was that all safety and soundness regulators should be objective, nonpartisan, and protected from political interference. This is especially critical at times when regulators must make difficult and sometimes politically unpopular decisions. In addition, independent regulation protects Congress' ability to receive the regulator's best judgment on regulatory matters unfiltered and without delay. With billions of dollars of potential taxpayer liability at stake, it is in everyone's interest that this important safeguard not be weakened.

Second, the regulator should be permanently funded, outside the appropriations process. Currently, OFHEO is funded annually through the Federal budget and appropriations process, even though the Agency does not utilize any taxpayer funds. OFHEO is funded through assessments on the Enterprises, but those assessments cannot occur until approved by an appropriations bill and at a level set by the appropriations act. OFHEO is the only safety and soundness regulator funded in this limited manner. At a minimum, this serious anomaly should be fixed.

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