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Q.4. At the July 17, 2003, GSE oversight hearing, you testified that OFHEO would conduct a special investigation of the accounting practices of Freddie Mac. The report of the investigation is now expected to be completed in November. Has the investigation provided you with any insights or further recommendations about how Congress might improve the oversight of the GSE’s? A.4. Yes, the investigation gave the Agency insights into additional authority OFHEO needs to be better able to accomplish its regulatory goals. These are included in the report of our special examination of Freddie Mac.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM DOUGLAS HOLTZ-EAKIN Conservatorship/Receivership Authority

The Administration has proposed that the new regulator have all the receivership authority necessary to direct the orderly liquidation of assets. Q.1.a. What difficulties would you see in moving to receivership powers akin to those held by the FDIC? A.1.a. One purpose of receivership is to prevent a failing institution from continuing to incur losses after its equity capital has been exhausted. In the case of Federally insured banks and Government Sponsored Enterprises, the Government has a direct interest in preventing failed institutions from taking on additional risks in an attempt to win back their losses. Another purpose is to transfer the function of the failed entity to a new service provider. For the most part, the FDIC seems to have adequate authority to ensure an orderly winding down of the affairs of a troubled bank without exposing the Government to excessive additional risks. I would note, however, that the housing GSE's are far larger than the typical failed bank and that their greater size may present special challenges to a receiver's attempts to limit risk and transfer operations to another firm or other firms. But with that caveat, the receivership powers of the FDIC would seem to be a reasonable starting point. Q.1.b. What impact would receivership authority have on the ability of the GSE's to access the debt markets? A.1.b. Providing receivership authority to a regulator might cause investors in debt securities to consider how they might be affected by the exercise of such authority and then to monitor the financial condition of the Enterprises more carefully. While that increased attention to financial fundamentals could reduce the price that investors pay for GSE debt, it would not be expected to interfere with access to the debt markets by financially sound GSE's.

For a failed GSE, appropriate receivership authority would preclude access to the debt markets, except as necessary to ensure an orderly transfer of functions to another financial institution. Office of Finance in the FHLBank System Q.2. If the regulator for the Federal Home Loan Bank System were to be moved into the Treasury Department, should the Finance Board's Office of Finance also be moved, or how would you suggest handling the Office of Finance? A.2. The Office of Finance, even though a part of the Federal Housing Finance Board, has no regulatory duty or authority. Rather, its role is to fund the lending operations of the Banks by issuing and servicing their debt securities as efficiently as possible. Given its purpose and function, it would be appropriate for the Office of Finance to continue to operate privately, outside of Treasury. RESPONSE TO A WRITTEN QUESTION OF SENATOR REED

FROM DOUGLAS HOLTZ-EAKIN Capital Standards Q.1. In your testimony, you mention that regulators can limit GSEs' risk exposure to taxpayers by having the capabilities to adjust capital requirements and other tools. Currently, the GSE safety and soundness regulator can adjust the risk-based capital standard. Why does the minimum capital standard need to be changed in addition to the regulator being able to change the riskbased capital standard? Please explain in detail. A.1. The risk-based capital standard is based on a complex computer-based effort to model the risk assumed by the GSE's. The minimum capital standard, by contrast, is intended to provide a margin of safety against unquantifiable risks, including systemic risks, and against errors and failures in the risk-based capital stress test. Indeed, the regulator who is responsible for setting the risk-based capital standard may be uniquely positioned to appreciate the limitations of that standard.

Both standards could be useful in providing a measure of protection for taxpayers against the adverse consequences of assumed risk. Thus, I see no reason to restrict the authority of the safety and soundness regulator to setting capital standards based solely on quantified risks. RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM DALE J. TORPEY Oversight of the FHLB Housing Programs Q.1.a. Your testimony addressed HUD's mission control for Fannie Mae and Freddie Mac. HUD, however, does not oversee the housing mission or affordable housing programs of the Federal Home Loan Banks. Do you believe that the Federal Home Loan Banks' affordable housing mission needs to be changed? A.1.a. ICBA believes that the Federal Home Loan Banks have performed extremely well in accomplishing their affordable housing mission. According to the FHLBanks' Office of Finance, during 2002, the FHLBanks contributed some $286 million to the Affordable Housing Program. Since the program's inception in 1990, the FHLBanks have awarded over $1.7 billion in AHP subsidies helping to create nearly 359,000 housing units for low-income families. ICBA does not see any need to make changes to this program. Q.1.b. If a single regulator for the GSE's is created, should the FHLBanks' housing mission be treated differently than that of Freddie Mac and Fannie Mae?

A.1.b. Congress established different ways for the FHLBanks to fulfill their housing mission compared to those established for Fannie Mae and Freddie Mac. Congress gave Fannie Mae and Freddie Mac goals for the purchase of mortgage loans for certain geographic areas and for certain consumers based on income levels. These goals are consistent with the secondary market function of Fannie Mae and Freddie Mac. Congress, however, created a very different program, the Affordable Housing Program, for the FHLBanks. This program funnels a specified portion of the FHLBs' net income to their members so they in turn can help their customers qualify for affordable housing loans. ICBA sees the difference in these programs as complementing the differences in the function, operation and structure of the FHLBanks that serve primarily as a source of funding to their members, versus the secondary market function of Fannie Mae and Freddie Mac. Prompt Corrective Action Q.2. 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.2. We believe that the GSE's should have strong regulatory oversight. ICBA has not yet concluded its analysis of the differences in regulatory powers of OFHEO and the Finance Board as compared to those of the bank regulators, and we have not yet determined if the GSE regulators should have the exact same powers as those of the bank regulators. Program Approval Authority Q.3. Do you believe that moving prior program approval from HUD to a new safety and soundness regulator would have any adverse impacts on the GSEs' housing mission? A.3. ICBA testified that 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. As we stated, if a FHLBank, Fannie Mae, or Freddie Mac develops a program that is inconsistent with safety and soundness or with their Congressionally mandated mission, there must be a review process to make that determination. We continue to believe that 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 housing GSE's 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. Because of its responsibilities and expertise, we prefer that prior program review for Fannie Mae and Freddie Mac remain in the hands of HUD. We would also reiterate our strong concern that given the Treasury Department's existing tax and fiscal policy responsibilities, moving authority for housing policy to Treasury would likely present clear conflicts of interest. Also, as we testified, we share the concerns expressed

by others regarding the historical absence of housing expertise at Treasury. Capital Standards Q.4. Could giving the GSE regulator, be it the current regulator or a new regulator, greater discretion over minimum capital standards have any adverse consequences on the mortgage market? A.4. Congress has established the minimum capital standards for Fannie Mae and Freddie Mac, and the equivalent for the FHLBanks, while giving their regulators the responsibility to set risk-based capital standards. As ICBA testified, this should continue to be the case. Market factors and potential risks can change rapidly and it is appropriate for a regulator to have the ability to adjust risk-based capital standards and risk factors through the regulatory process. Congress should retain the authority to modify statutory or minimum capital or leverage standards as these standards can affect the amount of capital flowing to the housing sector. RESPONSE TO A WRITTEN QUESTION OF SENATOR HAGEL

FROM DALE J. TORPEY Minimum Capital Q.1. In your written testimony, you state that ICBA supports a “politically independent,” “world-class” regulator like the OCC and the OTS. However, you object to that new regulator having authority to adjust minimum capital, a power which is granted to the OCC and the OTS. Shouldn't a truly world-class regulator, like our Nation's bank regulators, have the authority to adjust minimum capital? A.1. When Congress wrote legislation governing the housing GSE's, it set the minimum capital standards for Fannie Mae and Freddie Mac and the minimum leverage ratio for the FHLB's, and also gave guidance for their regulators to establish risk-based capital ratios. We believe this has worked well so far and see no reason for change. ICBA has been concerned that a politically influenced reg. ulator would use the minimum capital or leverage standards as a way to increase or decrease the capital flowing to the housing sector for political reasons rather than to control risk. If regulators see that the risks facing the GSE's warrant increases in capital, they have the ability to require higher levels based on a methodical, risk-measurement process. If warranted, regulators are able to set risk-based capital standards so that the entities hold more capital than would be required by minimum capital or leverage standards.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM DALE J. TORPEY Regulatory Restructuring Q.1. In your testimony, you argue that "the FHLB's should continue to be regulated by a separate and independent agency” and that the "ICBĂ Board (has) voted unanimously to oppose including the FHLB's in any proposed new supervisory and regulatory structure for Fannie Mae and Freddie Mac in the U.S. Treasury Depart

ment.” However, you also state that “the ICBA may not oppose the concept of a new independent regulator for all . : . housing GSE's outside the Treasury Department.” How could GSE regulatory reform legislation be drafted to address the differences between Fannie and Freddie and the FHLB's but remain consistent enough so as to establish a level playing field between the housing GSE's? Do you have any specific recommendations? A.1. ICBA has only started to look at this very complex issue. We see many differences between the FHLB's and the other two housing GSE's and we have begun to identify them. For example, ICBA members place a great value on the regional structure of the FHLB System and would not want to see legislation that pushes the System toward consolidation so that its structure looks more like Fannie Mae's and Freddie Mac's for the ease of regulation and oversight. The FHLB System is a cooperative and its member users should continue to be eligible to hold seats on FHLB boards of directors. Yet, it is probably not appropriate for Congress to set aside a number of seats on the boards of public companies Fannie Mae and Freddie Mac for their seller/servicers. One idea that has already received some level of public discourse is the creation of a single, independent regulator for all three housing GSE's—but which would have two separate divisions, one for Fannie Mae and Freddie Mac, and the other for the FHLBanks. ICBA continues to study this and other ideas. Cost of Funds Q.2. Do you believe that if the FHLB System were not regulated by the proposed new regulating entity the cost of capital for the banks, relative to Fannie and Freddie, would eventually increase? Why or why not? A.2. We do not believe that cost of funds will be materially impacted by who the regulator is. Fannie/Freddie and the FÉLB's have long had different regulators and this has not been an issue. More important to the capital markets is whether or not GSE status remains intact, and other factors that might affect the bond ratings of the individual GSE's. RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM ROBERT M. COUCH Program Approval Authority Q.1. Do you believe that moving prior program approval from HUD to a new safety and soundness regulator would have any adverse impacts on the GSEs' housing mission? A.1. Moving prior program approval from HUD to a new safety and soundness regulator would strengthen the GSEs' housing mission. The GSE's are committed to their housing mission. Moving regulatory oversight of their programs will not change their commitment at all. It would merely ensure that they carry out their mission safely and soundly, something everyone supports.

There is no question that the GSE's must operate their programs safely and soundly—they would fail in their housing mission otherwise, and that would be unacceptable to all. Safety and soundness is the core foundation upon which the entire GSE housing mission

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