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Third, where should authority for new program approvals be placed? We believe that in order for the housing GSE's to continue to be innovative in the development and implementation of new products to meet the demands of the marketplace, there should be a smooth and seamless process for getting these products online. Clearly, if a FHLBank, Fannie Mae or Freddie Mac develops a program that is inconsistent with safety and soundness or with their Congressionally mandated missions, there must be a review process to make that determination. But there should not be disincentives for the GSE's to be innovative and adaptive to new market conditions. Our housing finance system has evolved rapidly over the recent past due to changing technology and changes in the demands of consumers. The FHLBanks, Fannie Mae, and Freddie Mac must have the flexibility to develop the housing finance products needed by consumers in a timely manner and not have new products, programs and activities be bogged down by bureaucracy.

Fourth, what is the appropriateness of HUD's continuing role in the oversight of Fannie Mae and Freddie Mac? Because of its responsibilities and expertise, our preference is that HUD should continue to establish our Nation's housing goals and control the mission activities of Fannie/Freddie to achieve those goals. Conclusion

In closing, ICBA would urge the Committee to carefully and fully consider the issues associated with regulation of the housing GSE's before rushing to action. The ICBA has long_supported world-class, independent regulatory agencies such as the FDIC and the Federal Reserve, both of which are governed by boards that are independent of the U.S. Treasury.

There is no shortage of opinions and strongly held viewpoints on these issues. We concur with the sentiments expressed by a number of Members of this Committee that it is imperative that any regulatory restructuring be done right given its potential impact on the crucial housing sector of our economy and on community banks' continued ability to meet the lending needs of Main Street America.

Thank you for the opportunity to testify. I would be pleased to answer any questions.

PREPARED STATEMENT OF ALLEN J. FISHBEIN

DIRECTOR FOR HOUSING AND CREDIT POLICY
CONSUMER FEDERATION OF AMERICA

ON BEHALF OF
NATIONAL ASSOCIATION OF CONSUMER ADVOCATES,

NATIONAL COMMUNITY REINVESTMENT COALITION,
NATIONAL CONGRESS FOR COMMUNITY ECONOMIC DEVELOPMENT,
NATIONAL FAIR HOUSING ALLIANCE, AND CONSUMER FEDERATION OF AMERICA

OCTOBER 23, 2003 Good morning Chairman Shelby, Senator Sarbanes, and Members of the Committee. My name is Allen J. Fishbein, and I am the Director of Housing and Credit Policy for the Consumer Federation of America. I appreciate the opportunity to testify on proposals for improving the regulation of the Government Sponsored Housing Enterprises (GSE's). My written testimony today is also on behalf of the National Association of Consumer Advocates, National Community Reinvestment Coalition, National Congress for Community Economic Development, and the National Fair Housing Alliance.

CFA is a nonprofit association of 300 proconsumer organizations, with a combined membership of 50 million, founded in 1968 to advance the consumer interest through education and advocacy. My own background in the area of GSE regulation includes my tenure at HUD, where I served as Senior Advisor for GSE Oversight. My responsibilities at HUD included assisting with the supervision of the rulemaking that resulted in establishment of the present affordable housing goals for Fannie Mae and Freddie Mae, along with the management of other areas of the Department's GSE regulatory oversight.

As national consumer, community, and civil rights organizations committed to the promotion of fair and affordable housing for all of America's citizens, we watch with considerable interest the ongoing debate about possible changes to the regulatory structure for Fannie Mae and Freddie Mac and wanted to share a few of our observations.

We appreciate those in Congress who desire to assure the adequacy of safety and soundness and mission-related requirements for the Government Sponsored Housing Enterprises-Fannie Mae and Freddie Mac (GSE's). We also urge that Congress be very careful in tinkering with the GSEs' basic overall regulatory structure. At a minimum, such changes to the regulatory structure should do no harm to the GSEs' housing mission. However, we also believe that the current debate provides an important opportunity to clarify those areas of the GSEs' affordable housing mission that should be expanded. Fannie Mae and Freddie Mac have fulfilled an important part of their mission by providing affordable housing capital for low- and moderate-income and minority households. Yet much remains for the GSE's to accomplish in expanding fair and affordable housing opportunities for the residents of our Nation's underserved communities, such as providing greater assistance to firsttime minority, and low-income homeowners and securitizing multifamily rental mortgage products. Similarly, while the GSE's have been industry leaders in adopting policies to combat a number of predatory lending practices, such as their repudiation of the purchase of loans that included single premium credit insurance (SPCI), they have yet to address certain other egregious lending practices.

More specifically, we believe that important improvements to the present affordable housing goals requirement are desirable. Clearly the establishment of these goals has served an important function, encouraging the GSE's to better serve the needs of underserved areas and low- and moderate-income housing households. In fact, both enterprises have consistently met or exceeded the goal levels set for them. Nonetheless, the three broad statutory goals in place do not permit HUD to focus sufficient GSE attention to addressing some of the neediest segments of the mortgage market, such as low-income, minority, and other underserved homebuyers, or certain rental and rural housing, finance needs. Establishing an additional GSE home purchase goal, and providing HUD with supplemental authority to set subgoals for GSE activity for particularly pressing needs within the overall statutory goals, while not diminishing the ability of the GSE's to serve the needs of all consumers refinancing loans, would enhance the overall effectiveness of this important mandate.

Also, reform of the GSE housing goals should include provisions to expand opportunities for public input into this important area of regulation. We favor improvements to the GSE public use database presently maintained by HUD to make the information available fully comparable with data reported by mortgage lenders under the Home Mortgage Disclosure Act. Opportunities for public comment should also be provided in the event that a GSE did not meet its annual performance requirement and HUD as a result required the GSE to submit a remedial plan.

Our strong interest in affordable housing extends to other aspects of regulatory restructuring as well. We are particularly concerned that proposals to shift general charter oversight and new program approval authority away from HUD to the Treasury Department will detract from the regulatory focus on GSE performance of their housing mission. At the same time, funding the reasonable costs of this regulation through direct assessments of the GSE's, and not through the appropriations process, would go a long way to strengthening oversight capacity:

We are also concerned with the deliberations around two regulatory areas, capital requirements and the program approval process. First, the GSEs' capital requirement is one of the most critical and sensitive issues. We recognize that the establishment of appropriate capital requirements may at time involve tradeoffs, but we fear that unnecessary increases in capital requirements, particularly the minimum requirement, could result in higher costs to homebuyers. Simply, we should not make it harder for minority and low-wealth families to be able to afford to become homeowners.

Second, in evaluating any changes to the current program approval process, a delicate balance is required between a careful examination of whether a new GSE product serves its important public mission and the need to not over-burden these organizations' innovative efforts to provide new lending opportunities in the most difficult to serve communities. While there may be a need to improve the current approval process, we urge you to proceed cautiously, and resist efforts to over-encumber this process.

While this testimony focuses mainly on regulatory oversight of Fannie Mae and Freddie Mac, we also offer the following comments on regulation of the other housing GSE, the Federal Home Loan Bank System (FHLB System). We believe the FHLB System as it has evolved must also have clear and specific housing goals that challenge the lenders to better serve underserved populations. Should Congress decide to abolish the Federal Housing Finance Board, the system's regulator, and transfer authority another agency, we strongly prefer that mission oversight be transferred to HUD, and that the Department also be provided with authority to

establish new affordable housing requirements to ensure that activities undertaken by the FHLBanks are targeted to low- and moderate-income housing and other underserved community needs. These new requirements should build on the existing Affordable Housing and Community Investment Programs (AHP and CIP) and also work to increase FHLB member support for these and other affordable housing and economic development initiatives.

In closing, we thank you for your work in attempting to strengthen the effectiveness of the GSE's to serve the housing needs of America's underserved populations. We urge that you support provisions to strengthen the housing goals requirement, but also proceed with caution and resist the urge to make changes to their status or their charter that might result in fewer affordable housing opportunities.

Thank you again, Mr. Chairman, for the opportunity to offer our views on this important topic. I am happy to answer any questions that either you or other Members of the Committee may have.

PREPARED STATEMENT OF ROBERT M. COUCH
CHAIRMAN, MORTGAGE BANKERS ASSOCIATION

OCTOBER 23, 2003 Mr. Chairman and Members of the Senate Banking Committee, the Mortgage Bankers Association appreciates this opportunity to express our views on the important issues surrounding improving the regulation of the housing Government Sponsored Enterprises (GSE's). The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry. We have approximately 2,700 member companies engaged in every aspect of real estate finance. MBA members originate loans in the primary mortgage market that Fannie Mae and Freddie Mac purchase. MBA, therefore, has a keen interest in maintaining the safety and soundness of our country's real estate finance system.

Fannie Mae and Freddie Mac are the biggest participants in our country's secondary mortgage market. Their regulation has come under scrutiny lately, with many calls for improvement.

Treasury Secretary John Snow and Housing and Urban Development (HUD) Secretary Mel Martinez presented the Administration's proposal for GSE regulatory reform in testimony before the House Financial Services Committee on September 10, 2003, and before the Senate Banking, Housing, and Urban Affairs Committee on October 16, 2003. The two Secretaries proposed to move safety and soundness regulation of Fannie Mae and Freddie Mac to a new agency within the Treasury Department. They further proposed to task the safety and soundness regulator with approving new and ongoing programs and activities, in consultation with HUD. And they proposed to strengthen the regulators' authority and funding.

MBA reiterates its support of the Administration's proposals. MBA has long advocated strong and effective oversight of the GSE's. We believe effective safety and soundness regulation is critical because of Fannie Mae's and Freddie Mac's size and because of their importance to the housing finance system. MBA is pleased to see that the Administration and Members of Congress support strengthening the regulation of Fannie Mae and Freddie Mac.

MBA supports the Administration's proposal to improve and strengthen the general regulatory, supervisory, and enforcement powers with respect to the GSE's. Further, MBA endorses giving the safety and soundness regulator appropriate flexibility in setting capital standards, instead of relying on a rigid, statutory stress test that does not allow the regulator to react adequately to changes in the financial marketplace. MBA also supports the Administration's proposal to fund GSE regulation independently, through assessments on Fannie Mae and Freddie Mac outside of the Congressional appropriations process.

MBA also endorses the Administration's proposal on one of the most important aspects of safety and soundness, that is, program oversight. The GSEs' programs are a key determinant of their safety and soundness, and it is imperative that the programs be conducted safely and soundly. Only financially healthy, safe and sound GSĚ's can contribute to their housing mission. If, for example, a GSE were to embark on a program of purchasing especially risky loans, the GSÉ's safety and soundness would likewise be at risk. Or, if a GSE were to engage in a high-volume program that entails liquidity risks or systemic risks, the safety and soundness of such a program would be of critical concern to our housing and financial markets, and to a safety and soundness regulator. GSE programs and activities are intrinsically linked to safety and soundness.

The safety and soundness regulator, for these reasons, is in the best position to evaluate the appropriateness of GSE programs. The regulatory approval system should be robust, and should have a clear definition of what requires regulatory review. Congress should draw a clear line between the primary and secondary mortgage markets. In no event should the GSE's be permitted to encroach upon the mortgage origination process. In no event should the GSE's be permitted to use their Government sponsored benefits to distort the competitive landscape of the primary mortgage market.

MBA also believes that it is important that the regulator not micro-manage the GSE's, and that it not unduly constrain the GSEs' ability to innovate in a timely manner in response to marketplace needs. Regulatory approval for new programs must come in a timely manner, and should be based on clear and well-defined criteria.

In exchange for the benefits of Government sponsorship, Fannie Mae and Freddie Mac have an affirmative obligation to meet certain housing goals. MBA very strongly supports the affordable housing goals for Fannie Mae and Freddie Mac because the goals require the GSE's to focus some of their activities on lower-income Americans and those living in underserved areas. MBA agrees that HUD is the appropriate agency to set and enforce the housing goals for Fannie Mae and Freddie Mac.

The Mortgage Bankers Association strongly urges Congress to reform the oversight of Fannie Mae and Freddie Mac in this manner so that they can continue their role in supporting housing, especially affordable housing, in this country.

The Mortgage Bankers Association appreciates the opportunity to present its views on these important issues. We would be happy to answer any questions the Committee may have.

PREPARED STATEMENT OF IONA C. HARRISON

REALTY EXECUTIVES-MAIN STREET, U.S.A.
ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS®

OCTOBER 23, 2003
Introduction

Chairman Shelby, Senator Sarbanes, and Members of the Committee, I am Iona C. Harrison, a broker with Realty Executives-Main Street, U.S.A. in Upper Marlboro, Maryland. I am here on behalf of over 950,000 members of the National Association of REALTORS® to share our views on the important issue of GSE regulation and the housing finance system.

For the record, REALTORS® want to thank Senator Shelby, Senator Allard and Members of the Committee for reporting the “American Dream Downpayment Act.” The Senate Banking Committee unanimously approved this bill with two important amendments. First, the bill increases the FHA multifamily loan limits in high cost areas. Second, the bill provides a technical correction to improve the FHA hybrid ARM program. NAR is a strong advocate for this program. In fact, NAR lead a coalition of supporters who are hopeful that the bill will come to the Senate floor shortly. By adopting the American Dream Downpayment legislation Congress will send a strong message supporting the Administration on increasing homeownership opportunities in the United States. This legislation is evidence of the importance this Congress and Administration place on homeownership opportunity in the United States. NAR believes that a new independent safety and soundness GSE regulator combined with continued HUD authority over housing programs and mission will ensure that this commitment remains a high priority in future years. GSE Regulatory Reform

REALTORS® applaud Congress and the Administration for what we believe could become a measured, well-considered refinement to regulating the Government Sponsored Enterprises, Fannie Mae and Freddie Mac. The Bush Administration has outlined principles that will underscore the importance of the GSEs' mission, status, and safety and soundness oversight that make our housing finance system unique and so effective. Safety and soundness regulation would be lodged at the Treasury Department because of its financial expertise. REALTORS® support this move because it sends a clear message to housing finance and investor markets. But while safety and soundness regulation may move to the Treasury, REALTORS® strongly believe that the current housing mission should continue to be housed at the Cabinet-level Department of Housing and Urban Development. We strongly believe that HUD should continue to speak for housing, new GSE program oversight, and the GSEs' critical mission supporting homeownership.

Over the past decade the housing sector and American homeowners have benefited significantly from the strength of the Nation's housing finance system. At the core of our housing finance system are the secondary mortgage market and the Government sponsored mission of Fannie Mae and Freddie Mac. The National Association of REALTORS® supports a credible and vigorous GSE regulator. A strong regulator reinforces President Bush's and Congress commitment to housing and homeownership, promotes confidence in Fannie Mae, Freddie Mac, and the real estate and housing finance industries, and protects U.S. citizens against systemic risk. Although realtors support a strong regulator, we insist that regulatory reform does not imply and should not result in any weakening of the current housing finance system.

Congress deemed the Government Sponsored Enterprise model as an appropriate vehicle to advance housing and housing policy as recently as 1992. Fannie Mae and Freddie Mac were chartered as private corporations with publicly traded stock with the mission to bring new mortgage products to the market, and to use innovation and technology to continue simplifying the mortgage process. In exchange for the Federal charter to facilitate the residential secondary mortgage market, certain advantages were provided Fannie Mae and Freddie Mac. Since enactment of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Title XIII of Public Law 102–550), Congress, homeowners, the housing finance system, and the Nation's economy have all benefited tremendously. The unprecedented expansion of homeownership rates is undeniable testament to the efficiency and liquidity of the secondary mortgage market and the housing sector. Administration Regulatory Recommendations

In recent testimony to the Senate Banking Committee, Treasury Secretary John Snow and HUD Secretary Mel Martinez outlined the powers, duties, and authorities a new GSE safety and soundness regulator should have in a new agency within the Treasury Department and the relationship that HUD would have going forward. The proposed new supervisory agency would focus on safety and soundness, together with program and product approval, in consultation with HUD. Secretary Snow urged consideration of an agency_that would be independent of the Congressional appropriations process, and that Treasury would have, at a minimum, clearance of new regulations and Congressional testimony.

Secretary Martinez supported the Administration view that authority over new program approval be transferred from HUD to the new regulator in his testimony. Secretary Martinez advocated HUD retaining, authority over the GSE affordable housing goals, and called for expanded authority to enforce the housing, goals, impose civil penalties for failure to meet the housing goals, explicitly provide that the GSE's act to increase homeownership, and expand authority to set housing goals and sub goals.

NAR would like to comment on key elements of the Administration's plan that are most relevant for the real estate industry. Independent Regulator

REALTORS® would agree that Fannie Mae and Freddie Mac should have an independent regulator for safety and soundness. We would recommend that the new regulatory agency in the Treasury Department should have necessary and sufficient firewalls to ensure its political and operating independence similar to those that currently exist for the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) regulatory models. GSE Capital

In outlining the authority for the new regulator regarding GSE capital, Secretary Snow highlighted in his testimony a need for stability in capital standards. "Capital,” he said, “is the fundamental element of the financial condition of an enterprise, and the capital standards should not become the subject of frequent change.” REALTORS® agree with Secretary Snow on this general point regarding capital. These capital standards should be allowed to remain in place for a period of time sufficient to evaluate their effectiveness. GSE Mission, Program and Product Review

The Administration proposal to place GSE regulatory oversight and new program approval under the Treasury Department is a major change in regulatory oversight of the housing GSE's. REALTORS® expressed opposition to moving GŠE housing mission oversight from HUD when the Administration's plan was first released. Our concern is that housing policy has not been the purview or expertise of the Treasury

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