issuing its own debt, that Treasury is also party to the debt of an entity which has no Government backing. That is the essential distinction here. We need to be on guard against this perception. It is a perception. It is not, in our view, a reality, but it is a perception of an implied guarantee.

Chairman SHELBY. But the trend in financial institutions generally dealing with regulation has been to insulate regulators from what we call political pressure; that is, like OCC and OTS. Why should we buck the trend?

Secretary SNOW. Well, in a number of ways we are doing that. We are suggesting that the President forego the ability to appoint members of the boards of Fannie and Freddie. We think that would be an important way to insulate.

We are suggesting that the budgets not come before the Congress any more. They are not dependent on authorizations and appropriations. That insulates it. We are saying that with respect to dayto-day operations, supervision, investigations, proceedings, the regulator be entirely stand-alone. But with respect to policy, we think the Treasury needs to be in a position to have a say or else there could be this very dangerous thing of a widening of that perception of an implied guarantee.

Chairman SHELBY. Mr. Secretary, you also mention in your testimony that you would like the new regulator of the GSE's to have the same product review authorities as the banking regulators have today, but with respect to both OCC and the Fed, banks are only required to notify their respective regulator after they have engaged in new activity. There is no preapproval standard in the bank regulatory world that I know of. How do you rationalize that? Secretary SNOW. Well, I do not think we are asking for a prior approval. We just need the ability to weigh in.

One of the things I have learned about regulatees is if they know they are being watched by a regulator, they tend to talk to the regulator in advance of doing what they might otherwise do. So I think there would be good communications on new products and activities.

Chairman SHELBY. But you are not asking for prior approval. Secretary SNOW. We are not asking for it and do not think we need it.

Chairman SHELBY. Secretary Martinez, since we have 13-14 Senators, I am going to try to enforce the 5-minute rule starting with myself. So you will have to be quick.

Secretary MARTINEZ. All right, sir.

Chairman SHELBY. The mission of Fannie Mae and Freddie Mac is expanding homeownership and the housing goals are a barometer of that mission.

Secretary MARTINEZ. That is correct.

Chairman SHELBY. Do you believe that the current housing goals are sufficient to fulfill the GSE's mission here?

Secretary MARTINEZ. No, sir, I think we should have an expanded goal of home purchase goal, and that goal would allow us to not only have the underserved areas, rural and central city, the low- and moderate-income and special affordable housing, but also a home purchase goal to ensure that they are involved even in refinancing booms with first-time homebuyers.

Chairman SHELBY. How do you see the dividing line between encouraging affordable mortgage lending and credit allocation? How do we make sure the goals are insulated from the political process? Secretary MARTINEZ. Well, I believe even now that they are, and I think they are set for a 3-year period of time. I think we can continue to do that, and I think it is important that we have the GSE's sticking to their charter. It is important that the mission for which they were chartered is being enforced.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you, Mr. Chairman.

Secretary Snow, I would like to pursue very quickly this implied guarantee issue.

First of all, let me ask you this question. Is it your view that Treasury is immune from political pressure?

[Laughter.]

Secretary SNOW. On a relative scale, absolutely.

Senator SARBANES. What does that mean?

Secretary SNOW. Just that; that we live in Washington, DC, and I get calls from members of this body and members of other bodies, and I listen to them, but basically the Department of the Treasury has a long tradition of standing for some very important ideas.

Senator SARBANES. Why are the OCC and the OTS, which are "in the Treasury," independent on a whole range of things-regulation, budget, statements to the Congress? They do not go through the Treasury.

Secretary SNOW. You know, they did at one time.

Senator SARBANES. I am hearing you are arguing that this entity, whatever it is called, should go through the Treasury; is that correct?

Secretary SNOW. Yes, very strongly I am recommending that, very strongly-not meekly and quietly, but strongly, in full voice. Senator SARBANES. What is the rationale on OCC and OTS? Secretary SNOW. Well, as I suggested earlier in response to Chairman Shelby's question, Senator, there is really a very different set of circumstances here. One, this is a new regulator, and it regulates entities that are very large individually relative to the markets. They are entities that are perceived-perceived-to enjoy an implied guarantee of the full faith and credit of the United States, and the Treasury Department is in the business of making the market for the U.S. debt. It is important that the integrity of what Treasury does is fully protected and that there is no confusion on that score.

Senator SARBANES. Why would there not be more confusion? Why wouldn't locating this regulator in the Treasury, with the Treasury having the authority over the GSE's and all of these respective areas, heighten the perception that there is an implied guarantee? It would seem to me that it is, in fact, increasing the likelihood of that perception because of this extensive Treasury involvement, an involvement well beyond what Treasury has with respect to the OCC and the OTS.

Secretary SNOW. Senator, I think it would do precisely what you are saying, unless you establish that new entity in a relationship to the Treasury, where Treasury could disabuse the markets of

that at any opportunity, whenever the risk of that misapprehension became visible.

Senator SARBANES. What does that mean?

Secretary SNOW. That means the Treasury needs to be in a position to articulate the fact that what the role of the GSE's is and avoid confusion in the marketplace if, in fact, there is a perception that we stand behind their debt instruments.

Senator SARBANES. Now, do you agree with Secretary Martinez that the goals for the GSE should be set by HUD?

Secretary SNOW. The overall housing goals?

Senator SARBANES. The goals, yes.

Secretary SNOW. Yes, absolutely.

Senator SARBANES. So, whether it is going to be 50 percent or 60 percent or 70 percent, HUD would decide; is that correct? Secretary SNOW. Yes.

Senator SARBANES. Now, why wouldn't the program, the programmatic content of the GSE's activities be an appropriate thing for HUD to do?

Secretary SNOW. You mean the new lines of business, getting

into

Senator SARBANES. Yes, the programs that they are going to carry out.

Secretary SNOW. Programs, right. Well, I think the programs, as I understand what Secretary Martinez said, would be with the GSE regulator, they would have the primary say.

But on the broad program activity that they are engaged in today, their goals, that remains under HUD.

Senator SARBANES. How about the narrow program activity? Secretary SNOW. The new program activity, which will be narrower than the base they are operating on, should be under the strong new regulator, wherever, Senator, that new strong regulator is.

Senator SARBANES. And why is that?

Secretary SNOW. Why is that?

Senator SARBANES. It affects safety and soundness?

Secretary SNOW. It is prudential. It affects not only safety and soundness of the housing finance market

Senator SARBANES. Does not the goal set-my time is running. That is why I am pushing here does not the goal setting affect safety and soundness?

Secretary SNOW. Goal setting is related to safety and soundness, but it is

Senator SARBANES. Well, suppose HUD increases the low- and moderate-income requirement from 50 percent to 60 percent, does that not have safety and soundness implications, significant ones? Secretary SNOW. It certainly could, and they should be

Senator SARBANES. And that is going to be left with HUD; is that correct?

Secretary SNOW. Yes, but then subsequently those would be taken into account, Senator, by the new regulator and appropriate adjustments made in the risk-based capital standards.

Senator SARBANES. Well, then the same thing could be done with program activity, could it not, if the program activity was left with HUD?

There is considerable concern, and presumably we will have another hearing

Chairman SHELBY. We are going to have another hearing.

Senator SARBANES. -to hear from those elements. There is considerable concern that Treasury is insensitive to the housing objectives, and indeed that there are some within Treasury that may be, in fact, antagonistic; that HUD has traditionally been the place where concerns for housing goals have been reflected, housing objectives, and that moving the program approval, which is, in effect, the subcategory to the goals, carries with it the possibility of undercutting the housing mission, which everyone here keeps saying is so important, and where such a good job has been done, and it is vital to the functioning of our economy, and we have the greatest homeownership rate, and so forth.

Secretary SNOW. Senator, I think everyone has said it is important. There have been some questions about how effectively it is being carried on, but the housing opportunities remain the broad objective, right? To achieve the housing objectives, you need a strong, resilient housing finance system. That is promoted by a strong regulator, as Senator Hagel was suggesting. But the strong resilient housing finance system is part of this much bigger thing, of which it is a large part, called the U.S. financial system, and we also need to get those relationships right and make sure there are not prudential risks to the soundness of the U.S. financial system. Chairman SHELBY. Senator Bennett.

Senator BENNETT. Thank you, Mr. Chairman.

I think Senator Sarbanes has gone directly to the issue that probably will cause the most controversy in the Committee as we try to draft this bill, and that is the relationship between the new regulator in Treasury and HUD. You made a statement that I think we would like to clarify. You said there will be no prior approval. There is prior approval now. HUD has prior approval, and presumably that will stay. The controversy, as I understand it, comes from the definition of what requires prior approval and the addition of the word "activities," and there is a lot of heartburn as to what activities might be stretched to mean.

Can we clarify that?

Secretary SNOW. What we have in mind when we talk about approval authority in the strong financial regulator is lines of business, is the GSE extending the lines of business that it is engaged in. The regulator needs to make sure that those extensions of its lines of business are consistent with its charter, consistent with the public interest, consistent with soundness and safety, and I would also say, Senator, consistent with this larger question of the resiliency of the financial system as a whole. So it is new lines of business is what I primarily have in mind.

Senator BENNETT. Is it not true that HUD currently requires prior approval for new lines of business?

Secretary MARTINEZ. The new lines of business, and I think partially going back to the very excellent point that Senator Sarbanes was getting at, I think I should add has only, it is a sporadic thing. I think in the last decade maybe only six times has a new product line been in the approval process, while goals are something that

has to be followed on a daily basis, and I think that is a crucial difference and distinction between the two.

HUD now will require prior approval, does not require prior approval, but they must come to us once a product is being launched. And so it is an ill-defined system as it currently is utilized, quite honestly.

Senator BENNETT. As I understand it, you must affirmatively stop the new program.

Secretary MARTINEZ. Correct. So that is not prior approval. Senator BENNETT. In other words, if you do not take any action. Well, it is prior approval in a sense. You have the right to veto it. Secretary MARTINEZ. I have the right to come back and say stop it. That does not mean that before it is launched they come to me and say, "Here is a product. Please approve it before we launch it,” although that has occurred in the past, also.

Senator BENNETT. Have you ever stopped it?

Secretary MARTINEZ. There has been one that was withdrawn and five that were not stopped. That, by the way, largely, precedes my time at HUD..

Senator BENNETT. You have said that the GSE's have lagged the market rather than led it, which is an interesting statement. Can you tell us why? Does anybody have any idea why that would be the case? And to the point, does it have anything to do with safety and soundness? Usually, people that are a little more conservative because they want to be absolutely sure they are not taking that much of a risk will lag a market, and it is the real risktakers who lead it. Is that an indication of what we are dealing with here that we need to pay attention to?

Secretary MARTINEZ. No, sir, I do not think it has to do with the market as such. I think part of it could be explained in that or is explained by suggesting that they do not deal in the subprime market. However, even when including subprime numbers, they would still lag the primary markets.

So, in any event, no matter how you look at it, I am not sure I can answer the question of why, and I do not think it relates to safety and soundness, but I think it is a very well-known point that our research would back strongly.

Senator, I have also been helped and have a little better answer for the prior question.

Senator BENNETT. Okay.

Secretary MARTINEZ. Programs require prior HUD approval; products do not.

Senator BENNETT. Okay.

Secretary MARTINEZ. The real problem comes in distinguishing between what is a program and what is a product, and the statute currently is too vague for that to make it really enforceable.

Senator BENNETT. That is the whole concern here, is the vagueness that we try to deal with.

A final question. Have they ever missed their goals? You say they have lagged the market, but have they ever missed their goals?

Secretary MARTINEZ. Yes, they have. From 1993 to 1995, they missed their goals. In more recent history, they have met their goals.