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 regulator 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 "ICBA 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 FHLB'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

rests. GSE programs must be safe and sound for the very purpose of maintaining that core foundation.

Some parties have expressed concern that safety and soundness review or oversight of GSE programs would interfere with the GSES' housing mission. These parties are concerned that a safety and soundness regulator, such as an agency under the Treasury Department, would not be sufficiently concerned about the GSEs' housing mission. MBA does not share this view.

In fact, we believe that Treasury has demonstrated repeatedly an ability to oversee program approval reviews without any adverse impact on housing. Treasury oversees all national banks and Federal thrifts in the country. The thrift industry, in particular, is a major participant in the housing industry, and the Treasury has successfully regulated thrifts since 1989. Treasury oversees new activities for thrifts, without any adverse affects on the housing industry, and with no interference with thrifts' ability to innovate and stay competitive. Further, Treasury's responsibilities include administering the Community Redevelopment Act for both banks and thrifts, ensuring that lending resources are available in communities.

Capital Standards

Q.2. 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.2. A financial regulator needs appropriate discretion to carry out its duties ensuring adequate capital standards is typically a core component of that role.

Today, OFHEO has no discretion in setting minimum capital standards. The minimum capital requirement is set entirely by a statute enacted in 1992, and cannot change as the marketplace changes or as the GSE's change. Even in the case of a financially distressed GSE or of a market crisis, OFHEO has no authority to alter the minimum capital requirement.

MBA believes that the GSE regulator should have the necessary discretion to determine appropriate capital requirements, commensurate with the goal of ensuring financial safety and soundness and prudent risk management. Fannie Mae and Freddie Mac today appear to be well-capitalized, so no imminent change is foreseeable. Ultimately, the mortgage market benefits if the regulator is empowered to act to prevent a crisis, rather than just respond to one.

RESPONSE TO A WRITTEN QUESTION OF SENATOR HAGEL

FROM ROBERT M. COUCH

Q.1. MBA has published an issue paper in which you suggest standards for determining when a GSE activity is outside the boundaries of the secondary mortgage market. Can you summarize this document for us, and do you think we should use it as a guideline for the regulator in evaluating Fannie and Freddie's programs, products, and activities?

A.1. MBA published an issue paper in 2001 entitled Defining the Boundaries of GSE Activity, available on our website at (controlclick this link): http://www.mortgagebankers.org/library/isp/

2003_4/03-03.pdf. Below is a summary of the issue paper, followed by an answer to your question about it.

This issue paper arose out of concern on the part of many MBA member mortgage lenders that Fannie Mae and Freddie Mac have begun to insert themselves into the primary mortgage market. The issue paper describes the important role the GSE's play in the secondary mortgage market, and compares and contrasts that to the role of the originating mortgage lenders in the primary mortgage market. Congress created Fannie Mae and Freddie Mac to provide liquidity in the secondary mortgage market. The GSE's work together with primary mortgage market lenders to provide the American public with our highly successful residential mortgage market. The GSE's enjoy legal and financial benefits of Government sponsorship, designed to ensure the GSE's provide secondary market stability and liquidity. If the GSE's were to use their Government sponsored competitive benefits to expand their activities into the primary market, their competitive advantage could permit them to dominate the primary market. Consumers would be the ultimate losers. Primary market domination backed by competitive advantages would stifle competition, raise mortgage prices, and limit consumers' financing options.

Many believe that the GSE's have been moving into the primary mortgage market. They have, for example, acquired interests in a range of nonlender primary market participants, begun advertising heavily directly to consumers (who do not participate in the secondary market), and they have worked to increase their market share by enforcing loan delivery standards that favor their proprietary technologies for primary market activities, to the detriment and demise of private market technology providers.

Current law is vague, leaving the GSE's vulnerable to criticism that the existing regulatory system is unable to provide adequate oversight of the GSES' mission and programs. Current law prohibits both GSE's from mortgage loan origination, but does not define loan origination. The issue paper provides a detailed description of the differences between the primary and secondary markets. In brief, primary market participants work directly with consumers. The secondary market is investment-related, involving a mortgage loan after it has been originated, and there is no consumer contact in the secondary market.

The GSE charters were established decades ago. More recently, in 1992, Congress required the GSE's to meet affordable housing goals. Congress did not thereby alter the scope of the GSEs' mission and did not intend a wholesale rewrite of their charters. A link between meeting a housing goal and an otherwise-impermissible GSE activity does not justify GSE entry into the primary market. Every GSE initiative must promote liquidity in the secondary mortgage market.

The issue paper further sets out standards and criteria for distinguishing between the primary and secondary markets. Generally, if an activity involves contact with borrowers or potential borrowers, or their agents or representatives, it is a primary market activity and is impermissible to the GSE's.

MBA believes this issue paper would provide very useful guidance to Congress in considering Fannie Mae's and Freddie Mac's

activities. MBA members are the lenders who originate the loans that Fannie Mae and Freddie Mac buy and guarantee. Our members have direct, hands-on experience working with the GSE'sthat is what our members do every day. Further, MBA established this issue paper by convening a blue ribbon panel of industry leaders from among our members. The panel extensively analyzed and reviewed the spectrum of GSE activities and the primary mortgage market. The panel solicited and received extensive comment from both Fannie Mae and Freddie Mac in preparing this issue paper. The resulting issue paper is an expert, detailed, analysis of the distinctions between the primary and secondary markets, and an approach for determining whether particular activities are beyond the boundaries of the secondary market.

It is important for Congress to address the boundaries of the secondary market. Currently, there are no clear boundaries, and the GSE's have been taking advantage of that lack of clarity to the detriment of the primary market. No regulator currently has the authority or capacity to address the problem, so it persists. MBA very strongly urges Congress to draw, and equip a regulator to enforce, very clear boundaries of GSE activity in the secondary mortgage market.