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tion. If HUD thought there was an issue, an activity that the Enterprises could not engage in and an enforcement action was necessary, it would be up to OFHEO to take the enforcement action.

As the safety and soundness regulator and responsibility for assuring that the Enterprises are in compliance with all of the laws and regulations that apply to them, we have to make sure that we understand what is going on in the area of their activities, and if we saw that there was a clear violation of a law, including their charters, we would step in and advise the company that it was not permissible. We have done that before.

But where they operate in the vast gray area, we defer to HUD on what is permissible and what is not. What I am suggesting is that we just take it a step further and give the safety and soundness regulator the authority to also opine in this gray area. There are different ways to do this to make sure that HUD continues to have a role when the activity involves some affordable housing or low-income housing program. I think something could definitely be structured there. But I think it is just a matter of making sure that the regulator—we do not prefer that the agency is operating under a cloud and leave themselves open to a potential legal challenge, that it be clear what they can and cannot do.

That is why I think it is the interest of the safety and soundness regulator to have this type of authority as all the others do. Senator BENNETT. Senator Corzine.

COMMENTS OF SENATOR JON S. CORZINE Senator CORZINE. Thank you, Chairman Bennett, and welcome to the panel. I apologize for not being here. I had another obligation.

Just a quick question to Director Holtz-Eakin. This 25 basis points has to be an average, cannot possibly be every single element. I think that is what Senator Bennett was talking about. It is a range of benefits to different mortgage takers. I would presume that since there are credit spreads in the mortgage market, in the mortgage lending market, that some people, while they may be spending a lot more than they would otherwise be, it is still going to be a lower spread than otherwise. I presume it is an average.

Mr. HOLTZ-EAKIN. There is certainly a spread, and this is an average result from our study.

Senator CORZINE. So that different elements of the market may benefit more than 25 basis points. Folks accessing with less quality credit or at least credit histories than other people, and therefore some of that might be more important for certain segments of the market than it would be others. It would not just be a standard 25 basis points.

Mr. HOLTZ-EAKIN. There will certainly be a spread, and what we will look at is those mortgages that qualify under Fannie's and Freddie's requirements.

Senator CORZINE. As you probably can recognize that sometimes the spread gets so much that supply and demand would actually allocate out some money at the long end of the widening of the spread, 200 basis points or 400 basis points for some element. It gets to a point where it is prohibitive or the market rate just gets to a marginal rate somebody cannot afford. I presume that at some level that occurs because of this.

Mr. HOLTZ-EAKIN. As an economist, I would never dispute the fact that some people get priced out of markets. I take that point. The degree to which that is an empirical phenomenon is not something we investigated.

Senator CORZINE. I think that when we are talking a about 25 basis point, I think I do not know what the outstanding mortgage lending money is, but on an average basis, on an annual basis, time discounted value over a period of time, that is actually a pretty substantial benefit to consumers, and since it would be different for different segments I still think it is a quite substantial benefit for mortgage production and homeownership which I think is one of the core cases of what we would be arguing, why GSE's have a reason to exist.

Mr. Holtz-EAKIN. In terms of the magnitudes, our estimate at the time was $10 to $15 billion a year in subsidy, of which something on the order of half to two-thirds shows up in the form of lower mortgage interest rates. So that is a way to divide up the degree to which the subsidy benefits consumers.

Senator CORZINE. It goes to the core of whether policymakers think that is an appropriate way to generate these kinds of issues enough.

Mr. Holtz-EAKIN. Absolutely.

Senator CORZINE. I have a question, Mr. Korsmo. I know these things could take months. What is the capital standards that the Federal Home Loan Banks have? We talked about minimum standards and there are risk-based standards, but what do they look like at the Federal Home Loan Banks? Maybe you answered that in your testimony.

Mr. KORSMO. Let me answer that question a couple of ways. Obviously, there is a statutory minimum of 4 percent that is included in the statute, a minimum leverage requirement that is based on the definition of capital that Congress has provided that goes to 5 percent. There is also a risk-based capital element that is established by regulation, as Mr. Falcon alluded to earlier with the case with Fannie and Freddie. The risk-based capital level that is provided by the regulatory definitions is below the statutory minimum, and so all the banks are operating under that 4 percent statutory minimum.

There is a variety of course among the 12 institutions—I should say there is a variety of levels of capital among the variety ofamong the 12 institutions I think they range from a low of about 4.2 percent maybe to a high in excess of 5.5. I know the Chicago Bank just announced their new level is approximately 5.15 percent. I can talk a little bit about what is included in the risk-based capital reg if that is

Senator CORZINE. But it has not really bitten.
Mr. KORSMO. No, it has not really bitten, that is correct.

Senator CORZINE. Have you looked at the nature of your riskbased capital standards relative to what OFHEO has developed with regard to the GSE's?

Mr. KORSMO. I have not. There is a comparison of course. The standards are different and the factors that go into the standard are different. For example, our scenarios are substantially different than the scenarios under which OFHEO develops their risk-based capital standard. It is much more

Senator CORZINE. I see the red light is on. Are those differences a function of a different mission, different purpose, or are they a function of different intellectual framework?

Mr. KORSMO. I think they are different intellectual framework, different methodology.

Senator CORZINE. If there was a consolidation, then we would want to think about how

Mr. KORSMO. They would have to be reconciled, yes, sir.
Senator BENNETT. Thank you, Senator.
Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD Senator ALLARD. Mr. Chairman, I would like to inquire about the Federal Housing Finance Board in its role as a nonappropriated agency, as you enact your own budget and assess the Banks on the cost of the operation. How important is this authority in your ability to carry out your mission?

Mr. KORSMO. I think it is significant, and I would certainly urge the policymakers to take a look at any new regulatory body or any change in the current regulatory structure to reflect the ability to generate a budget.

Senator ALLARD. So you think OFHEO or any new agency that we set up should have that capability?

Mr. KORSMO. Yes, sir, I do indeed. Obviously, there have to be some constraints. I think that the process at the Finance Board, whereby the budget is adopted by a majority vote at an open meeting provides the balance that is necessary to make sure that we are not penalizing the entities we regulate by the budget process.

Senator ALLARD. Dr. Holtz-Eakin, how do we apply accountability to a regulatory agency like this? I think back, for example, of the FDA. Before they approve drugs they go back to the industry and say, well, we are not going to approve any more applications for new drugs and we are going to slow down the process unless you work with us to increase fees on services. Is there a way that we can bring accountability into the budget process on that type of a proposal or do we already have it?

Mr. Holtz-EAKIN. I think accountability follows transparency on the part of both those being regulated and the regulator. So the degree to which the regulatory oversight process is transparent and made as clear as possible to all parties—the regulators, those regulated, and the Congress—will help accountability more probably than any other single factor, the observability of the actions of both parties. If I had to pick one thing, I would point to that.

Comparability across regulatory agencies is useful as well, so that in the same way that competition in private markets allows comparison shopping, having the same accounting standards and disclosure standards and being able to observe differences across

Senator ALLARD. I would like to have both of you respond to this question. How do we know you, the regulator or regulators, have established a reasonable budget? If it does not go through the appropriation process? Any of you who would like to respond to that. Mr. FALCON. I think what would weigh heavily on my mind is the fact that what powers you give us can also be taken away. If we abuse the authority that you would give us at OFHEO to set our own budget outside the appropriations process, and we abuse that authority by not being responsible with how we set our budgets, then you would have every opportunity to put us back in the appropriations process. But our budget process would be very transparent, and our assessments would be based on a regulation that would be set in formula, would be predictable to the companies that we regulate, and they would not be set without their input through the regulatory process.

Senator ALLARD. You imply in your comments that somehow it is always easy to get legislation through the Senate. It is not.

[Laughter.] How is it that we have, again, I come back to accountability, and Mr. Korsmo, maybe you want to speak on that.

Mr. KORSMO. I think Dr. Holtz-Eakin is right. It is the transparency of the process that is significant, and that is why one of the things we have done in the last 2 years at the Finance Board is to adopt the budget in an open meeting. Previously, it was done by notational vote. One year it was adopted by fiat of the chairman. I think the assurance of accountability that lies at least in the structure of the current Federal Housing Finance Board, besides the obvious element of transparency is the fact that the 8,008 financial institutions who are members of one or another of the 12 Federal Home Loan Banks and who pay those assessments ultimately, I suspect you would hear from them if they thought our level of assessment was inappropriate.

Senator ALLARD. I am going to move on my time is about ready to expire. Mr. Chairman, if I may just briefly

Senator BENNETT. Does anyone else have an additional question they would like to ask?

Senator SARBANES. Yes, but why do you notSenator BENNETT. Why don't you go a little bit over time. And I have one additional question.

Senator ALLARD. Then I do not have any questions. That will take care of it for me.

So we have divided responsibility. How do we get communication channels open so regulators can communicate back and forth, and maybe if you all, Mr. Falcon and Mr. Korsmo, would talk about that a little bit.

Mr. FALCON. It does occur through regulatory agencies. Our examiners are part of an interagency examination council, where they meet regularly to discuss evolving benchmarks, evolving regulatory practices, and best practices at the different entities that we all regulate. That occurs I think at different type of program levels within the agencies. It certainly, as issues come up that are of mutual interest to myself and the chairman, we certainly discuss those with each other.

Mr. KORSMO. I think that is one limitation under which we operate that could be corrected. Our examiners do not belong to FFIEC, Federal Financial Institutions Examination Council. I think that is a shortcoming. The ability for us to participate in that process

would be very important, particularly the opportunity to interact with other examiners of large financial institutions.

Senator ALLARD. So this would be to your advantage then in that respect, to be brought in with Fannie Mae and Freddie Mac with a Treasury regulator. That would give you an

Mr. KORSMO. I think that is a larger issue, Senator. A simpler approach to it would just be to make the Federal Housing Finance Board a member of FFIEC, which it is not today.

Senator ALLARD. I see.
Thank you, Mr. Chairman.
Senator BENNETT. Thank you.
Senator Sarbanes.

Senator SARBANES. Mr. Korsmo, you have been increasing the budget, but you could set the budget at the figure that you thought was necessary in order to adequately regulate, could you not?

Mr. KORSMO. We could. Again, I will mention that in the 20 months I have been there, what we have tried to do is proceed in a deliberate, disciplined, and orderly fashion. One of the things

Senator SARBANES. I understand that. I was prompted to ask you that question by your response to Senator Allard, saying that your member banks, you would presume, would protest if you were taking the budget up. But there is a conflict there, is there not? You are the regulator. If you do not think the budget is adequate you need to make it adequate whether they protest or not, do you not?

Mr. KORSMO. That is absolutely correct, sir, which I think you will see reflected in the budget for fiscal year 2004 where we have made a fairly dramatic increase.

Senator SARBANES. All right. I wanted to ask both you and Mr. Falcon this question. If an independent regulator were to be set up, perhaps not in the Treasury, or even in the Treasury, I mean wherever, should it be a single person regulator or a multiperson regulator, and why, or does it make any difference?

Mr. FALCON. My preference would be for a single head of the agency as opposed to a board or commission structure. I have not had experience being the chairman of the board, regulatory agency run by a board, but I can tell you from my experiences as a single head of an agency that it provides me the ability to take quick and decisive action as necessary without the need to consult with a board. It provides me to clearly set the mission of the agency. It allows me to make sure that all the policies are consistent with those as in my best judgment I think are appropriate.

Now, granted, you can have some of that with a board structure as well, but I think just as far as the ease in running the agency, the administrative functions, as well as setting policy, I much prefer a single head of an agency.

Mr. KORSMO. As Director Falcon has only had the experience of the single member or single director institution, I have only functioned with a board. There are certainly limitations inherent, and he has outlined them, in functioning with a board. The flip side of that of course is there are certain advantages I think that are inherent in having five individuals who come from different backgrounds, different perspectives, the opportunity to participate in the decisionmaking process.

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