Lapas attēli
PDF
ePub

Department; this has been the purview of HUD. The housing and real estate industries naturally look to HUD to address the housing mission, programs and products, and affordable housing goals that are central to the GSEs existence. In the new GSE regulatory regime we strongly believe that HUD should maintain its primacy in these areas.

Secretary Martinez proposed that HUD continue to consult with the Treasury Department on new activities requested by the GSE's. REALTORS® recognize that new programs and products could ave an impact on safety and soundness considerations. But REALTORS® believe that new program approval should remain at HUD with the same approval standards in current law. There is “substantial expertise,” as stated by Secretary Martinez in his testimony on September 10 before the House Financial Services Committee regarding mortgage and

housing markets programs. While REALTORS® have considerable respect for the financial expertise at Treasury, HUD expertise as our Nation's primary housing agency should not be relegated to a consultative role on matters of new programs approval or lines of business.

Secretary Snow and Secretary Martinez outlined the Administration's principles in subtle terms. Consequently, REALTORS® are guarded about the direction of draft legislation that we understand will be the starting point for GSE regulatory reform. Significant revisions in the GSEs' role in the housing finance system could introduce uncertainties and unintended consequences that will have ill effects for the GSE's and the housing sector. Federal Home Loan Banks

Secretary Snow's recent testimony to this Committee reiterated a call to create a credible, single regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. REALTORS® do not have position on regulating the Federal Home Loan Banks. Targeted, Not Sweeping Reform

REALTORS® firmly believe that targeted reform for the GSE regulatory system strengthens our housing finance system. We support a narrow bill that institutes safety and soundness regulatory reforms, and does no harm to the GSE housing mission, charter, or status. Given the fragility of the economy with mixed, weak signals about recovery, REALTORS® want to impress on lawmakers that safety and soundness concerns should not undermine the housing mission, programs and product innovations, or charter status of Fannie Mae and Freddie Mac. Targeted reform for the GSE regulatory system strengthens our housing finance system. REALTORS® expect that Congress will act judiciously to assure a critical role for HUD in GSE mission, program development and review. Congress should assure that under new regulatory oversight Fannie Mae and Freddie Mac would thrive and continue their critical roles in supporting American homeownership. In short order, these companies should have the best opportunities to help our citizens achieve homeownership. Conclusion

We applaud the Committee's efforts to build a more robust GSE regulatory structure. The National Association of REALTORS® believes that an overarching principle guiding any consideration of regulatory reform proposals

should assure that reform not become a reason or justification for rewriting the GSEs' housing mission or weakening the housing finance system.

Congressional intent and the Nation's homeowners have been well-served since 1992 when the GSEs' charter, mission, and status were reaffirmed. What is needed is a strong, rigorous safety and soundness regulator, while HUD retains mission and new program oversight.

The National Association of REALTORS® looks forward to reviewing the proposed legislation to reinvigorate GSE regulation. REALTORS® want to work with Congress to continue addressing housing and homeownership issues and supporting the mission and charter objectives of the housing GSE's.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM ARMANDO FALCON, JR. Q.1. In your written statement, you proposed that any new regulator be given “full discretion in setting capital standards.” For the record, what is the value of having both a minimum capital standard and a risk-based capital standard? That is, what purpose does each standard serve? A.1. Capital standards are designed to ensure that regulated institutions can survive periods of significant misfortune involving sizeable financial losses. In theory, a single standard that encompassed all relevant considerations would suffice to determine capital adequacy. In practice, that would be very difficult, and Congress has wisely required OFHEO and all depository institution regulators to implement both a leverage-based standard and a more finely tuned risk-based standard.

Evaluation of capital adequacy entails a broad range of considerations including not only an institution's current book of business; but also the current and prospective risk environment, its business strategies and potential changes in those strategies, the strength of its customer and supplier relationships, the strength of its internal controls, potential fragility if the markets in which it buys and sells, the structure of those markets and potential changes in the way those markets function, the vulnerability of the institution's reputation, the systemic importance of the institution, and many other factors.

Issues of practicality constrain the determinants of capital requirements to a small subset of these factors. Thus, for example, OFHEO's risk-based standard focuses on each Enterprise's, current book of business and two possible future risk environments. It requires sufficient capital to cover losses or current positions in extended, specific adverse' circumstances. This is a highly detailed rule that examines this aspect of capital adequacy in depth. It is important that the Enterprises be able to meet this requirement, but does not necessarily imply that capital is adequate. A high degree of protection against interest rate and credit risk can reduce the risk-based requirement to very low or zero levels, without addressing other risks.

The minimum capital (leverage-based) standard is a fail-safe mechanism that ensures a substantial amount of capital regardless of measured interest rate and credit risks. Incorporating all other risks into the risk-based standard would be problematic. They generally do not fit well into the scenario format because the range of possibilities is essentially infinite. Also, the magnitudes of other risks generally are not easily quantifiable, but rather are more a matter of judgment.

A separate standard that encompasses these judgments makes sense. While it would be possible to add the two requirements to make a single rule that would produce an overall requirement that would be considerably more volatile than the current combination, and might usually be higher than necessary. So far, the judgment exercised by Congress in setting the ratios used to determine the minimum capital requirements has worked satisfactorily. However, institutions and their business environments change over time. An expert safety and soundness regulator is best able to judge, if and when changes, to a leverage-based ratio should be made. Accordingly, Congress should give the regulator of Fannie Mae and Freddie Mac the same authority it has given depository institution regulators to adjust all capital requirements if necessary. Q.2. The Administration has suggested that the new regulatory agency should have more than the powers associated with conservatorship. Should one of the GSE's under your watch encounter serious financial difficulties, do you believe that the existing authority of your agency would be sufficient to manage the crisis? A.2. OFHEO has strong conservatorship authority that it may bring to bear should an Enterprise under its jurisdiction encounter problems that merit appointment of a conservator. This authority, while sufficient to manage a crisis, does not provide all the tools a safety and soundness regulator should have. OFHEO has supported legislative clarification of its authority to support its interpretation of the law. Additionally, OFHEO has called for legislative action to provide receivership authority that is available to other Federal financial regulators. It should be noted that existing statutory law permits the charters of the Enterprises only to be revoked by Congress, thus receivership would enhance the ability to oversee the Enterprises, and assure the markets of a full range of remedies available to the safety and soundness regulator while preserving Congressional control over charter termination. Q.3. OFHEO and the Finance Board clearly do not have the complete arsenal of Prompt Corrective Action tools that the OCC and other bank regulators have. In fact, the Finance Board has no statutory Prompt Corrective Action authority. Do you believe that a new regulator must have the same Prompt Corrective Action tools as the bank regulators? A.3. Yes, and OFHEO has an array of Prompt Corrective Action tools. Modeled on bank regulations, the Prompt Corrective Action regulations are broad and tied to capital levels. However, OFHEO has proposed legislative enhancements that would conform OFHEO's statutory authorities even more closely to the bank regulators; that is, express authority to act on safety and soundness matters.

It also should be noted that OFHEO has added to its Prompt Corrective Action rules a section on prompt supervisory response. This section provides an orderly procedure for OFHEO to act in cases where capital may not be impaired and provides both a description of key situations as well as an order for OFHEO actions. Thus, OFHEO has a regulatory structure that provides for action before capital levels are reached that trigger Prompt Corrective Actions. RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM ARMANDO FALCON, JR. Q.1. In your testimony, you suggested that the current minimum capital standard of 2.5 percent is sufficient to ensure the safety and soundness of the GSE's. However, you argued the new proposed safety and soundness regulator should have absolute discretion to change both the risk-based and minimum capital requirements, since, as you characterized it, the minimum capital standards acts

as a "fail-safe mechanism” to capture risks that allegedly cannot be addressed in the risk-based role.

Please explain in detail why the risk-based capital rule cannot address these alleged risks to the safety and soundness to the GSE's. If these risks cannot be quantified, on what basis would the regulator change the minimum capital requirements in order to act as a “fail-safe mechanism?” How would this basis for changing the minimum capital standard be different from the basis for determining the risk-based capital rule? Do you believe that it would harm the ability of Fannie and Freddie's regulator to perform its oversight functions if Congress placed restrictions on its ability to adjust the minimum capital standards? Why or why not? A.1. Capital standards are designed to ensure that regulated institutions can survive periods of significant misfortune involving sizeable financial losses. In theory, a single standard that encompassed all relevant considerations would suffice to determine capital adequacy. In practice, that would be very difficult and Congress has wisely required OFHEO and all depository institution regulators to implement both a leverage-based standard and a more finely riskbased standard.

Evaluation of capital adequacy entails a broad range of considerations including not only an institution's current book of business; but also the current and prospective risk environment, its business strategies and potential changes in those strategies, the strength of its customer and supplier relationships, the strength of its internal controls, potential fragility if the markets in which it buys and sells, the structure of those markets and potential changes in the way those markets function, the vulnerability of the institution's reputation, the systemic importance of the institution, and many other factors.

Issues of practicality constrain the determinants of capital requirements to a small subset of these factors. Thus, for example, OFHEO's risk-based standard focuses on each Enterprise's current book of business and two possible future risk environments. It requires sufficient capital to cover losses or current positions in extended, specific adverse circumstances. This is a highly detailed rule that examines this aspect of capital adequacy in depth. It is important that the Enterprises be able to meet this requirement, but does not necessarily imply that capital is adequate. A high degree of protection against interest rate and credit risk can reduce the risk-based requirement to very low or zero levels without addressing other risks.

The minimum capital (leverage-based) standard is a fail-safe mechanism that ensures a substantial amount of capital regardless of measured interest rate and credit risks. Incorporating all other risks into the risk-based standard would be problematic. They generally do not fit well into the scenario format because the range of possibilities is essentially infinite. Also, the magnitudes of other risks generally are not easily quantifiable, but rather are more a matter of judgment.

A separate standard that encompasses these judgments makes sense. While it would be possible to add the two requirements to make a single rule that would produce an overall requirement that would be considerably more volatile than the current combination, and might usually be higher than necessary. So far the judgment exercised by Congress in setting the ratios used to determine the minimum capital requirements has worked satisfactorily. However, institutions and their business environments change over time. An expert safety and soundness regulator is best able to judge if and when changes to a leverage-based ratio should be made. Accordingly, Congress should give the regulator of Fannie Mae and Freddie Mac the same authority it has given depository institution regulators to adjust all capital requirements if necessary. Q.2. Do you believe the current separation of regulatory authority that gives the power to oversee new GSE programs and activities to HUD, and safety and soundness to OFHEO, has undermined your ability to oversee the safety and soundness of Fannie and Freddie? Why or why not? A.2. The separate regulatory authority for new program review by HUD doesn't undermine OFHEO's safety and soundness authority.

OFHEO has endorsed bringing new program authority into the safety and soundness regulator as this is the case with other financial regulators. This will also permit the examination and on-site expertise of OFHEO to be brought to bear in making decisions on new programs and potentially produce fuller and quicker review of new programs.

All of these benefits may occur without any adverse impact on housing mission or safety and soundness. Congressional goals on Enterprise housing mission are in statute and must be followed by the safety and soundness regulator and indeed today in applying safety and soundness rules under its jurisdiction. OFHEO abides by Congressional housing policy in such areas as low- and moderate-income programs undertaken by the Enterprises. Q.3. You testified that while you have been OFHEO Director, HUD has never approved (or declined to withhold approval) a new GSE program or product that you believed would have undermined Fannie and/or Freddie's safety and soundness. In light of this history, why do you believe that the authority to approve any new GSE programs or products must be included in the oversight authority of the GSE safety and soundness regulator? What is wrong with the current GSE program and product review system, which includes OFHEO in a consultative role? A.3. HUD has addressed few new program proposals over the years since passage of the 1992 Act that required OFHEO to review the matters for safety and soundness consideration. Thus, our experience is not one of problems with the current situation insofar as safety and soundness is concerned, as noted in my response to Question #2 above.

However, OFHEO's "consultative” role may create a potential conflict should a situation arise where HUD and OFHEO have differing views on a particular program. For the reasons stated in my response to Question #2, it is my belief that the benefits of a new structure are more than sufficient to review the existing separation of functions. It would be beneficial, as is the case with other financial regulators, to have independent authority to review new programs for charter compliance.

« iepriekšējāTurpināt »