PROPOSALS FOR IMPROVING THE REGULATORY REGIME OF GOVERNMENT SPONSORED ENTERPRISES TUESDAY, FEBRUARY 10, 2004 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:01 a.m., in room SD-538, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY This morning, the Committee meets to hold our third hearing on proposals to improve the regulation of Government Sponsored Enterprises. The intention of these hearings is to build a solid record as the Committee continues to pursue legislation to establish a strong and credible regulator for the GSE's. I would like to welcome Comptroller General David Walker from the General Accounting Office as our first witness this morning. Mr. Walker became the seventh Comptroller General of the United States and began his 15-year term when he took his oath of office on November 9, 1998. During Mr. Walker's tenure, the GAO has completed a number of important studies on the topic of GSE's. We are fortunate to have this body of work to draw from as we consider regulatory reform, and we look forward to discussing the broad array of issues with you today, Mr. Walker. Our second panel includes three witnesses: Mr. Alan Beller, Director of the Division of Corporate Finance and Senior Counselor to the Securities and Exchange Commission; Professor Richard Carnell, Associate Professor of Law at Fordham Law School; and Mr. James R. Rayburn, President of the National Association of Home Builders. These witnesses have distinguished professional backgrounds which will enable them to provide this Committee with sound insights on particular aspects of GSE regulation. Mr. Beller, the Committee will benefit from your expertise in the area of corporate financial disclosure as we consider how to improve transparency and ensure meaningful GSE financial disclosures. Mr. Carnell is a former Assistant Secretary for Financial Institutions at the Department of the Treasury and also a former Senior Counsel to this Committee. We will be particularly interested in your insights as to how to give a new GSE regulator the same stature and credibility as our bank regulators. Finally, Mr. Rayburn F will provide us with some insights on any impact that GSE regulatory reform will have on our Nation's housing markets. Comprehensive regulatory reform deserves careful consideration, and this Committee will work very diligently to craft an appropriate reform package. The GSE's play a vital role in expanding homeownership, and I strongly support their mission. However, the Congress cannot sit idly by after the events of last year. It is our duty to maintain the continued strength of the U.S. home mortgage market. But we must also put in place, I believe, a GSE regulator that has the necessary independence, strength, and credibility to carry out its mandate. That mandate is to ensure that all the housing GSE's fulfill their public mission in a safe and sound manner. In order to create an improved regulatory structure, I believe we must have a full and open debate on a variety of issues, such as the structure of the regulator, authority for the program review, and capital requirements. These are not easy questions to resolve, but I am confident that this Committee can reach a consensus on these issues. I want to thank all the witnesses for appearing before the Committee today. We look forward to hearing your testimony and the discussion to follow. Mr. Walker, your written statement will be made part of the record-Jack, do you have an opening statement? COMMENT OF SENATOR JACK REED Senator REED. No, sir, I do not. I would just like to thank you for holding this important hearing and the witnesses for being here today. Chairman SHELBY. Senator Sununu. COMMENT OF SENATOR JOHN E. SUNUNU Senator SUNUNU. No, Mr. Chairman. I just want to echo the remarks of my collegue. Chairman SHELBY. Okay. Your written statement will be made part of the record in its entirety. You proceed as you wish. STATEMENT OF DAVID M. WALKER FINANCIAL MARKETS AND COMMUNITY INVESTMENTS Mr. WALKER. Thank you, Mr. Chairman and Senators. It is a pleasure to be here to talk to you today about oversight of Government Sponsored Enterprises. As you know, Government Sponsored Enterprises had combined obligations, including mortgage-backed securities and other debt obligations, of $4.4 trillion as of September 30, 2003. In my view, our past experience in the savings and loan industry, the recent accountability breakdowns in the private sector, and the importance of gaining public trust and confidence in regulatory agencies that oversee our financial institutions and capital markets, these factors are directly relevant to the ongoing debate and appropriate regulatory oversight of GSE's. In our view, in order to ensure that GSE's operate in a safe and sound manner, it is essential that effective governance, reasonable transparency, and effective oversight systems are established and maintained. In particular, we believe the GSE's should lead by example in the area of corporate governance. The GSE regulators must be strong, independent, and have the necessary expertise in order to do their jobs, and GSE mission definitions and benefit measures need to be clearly established. However, our work has also found that GSE governance does not always reflect best practices, and some of these other areas require attention at this time as well. Furthermore, the regulatory structure for housing GSE's is fragmented, and serious questions exist as to the capacity of GSE regulators to effectively fulfill their responsibilities. To prevent the need for the Federal Government to ever have to provide financial support to a GSE and to minimize the financial risk of instability, it is critical to ensure that proper corporate governance, reasonable transparency, and effective oversight mechanisms are in place. Not only should GSE's be sensitive to good governance, but it is also all the more important that they lead by example in connection with accountability, integrity, and public trust issues. A regulatory system of GSE oversight must have the necessary strength, independence, and capability to protect against the significant risk and potential cost to taxpayers posed by the GSE's. We have consistently supported, and continue to believe in, the need for the creation of a single regulator to oversee both safety and soundness and mission issues associated with the housing GSE's. A single regulator could be more independent and objective than separate regulatory bodies and could be more prominent than any one alone. Further, a single regulator would be better positioned to consider potential trade-offs between mission requirements and safety and soundness considerations because such a regulator would develop a fuller understanding of the operations of these large and complex financial institutions. To be effective, the single regulator must have all the regulatory powers, enforcement authorities, technical expertise, and technological capabilities necessary to oversee GSE operations and compliance with their missions. In this regard, we believe that a hybrid executive director and coordinating board model, possibly similar to the one applicable to the Pension Benefit Guaranty Corporation, should be considered by the Congress. Irrespective of the regulatory model, without clearly defined measures of the GSE's benefits, it is not possible for Congress, accountability organizations, and the public to determine whether the Federal Government should be potentially subject to the financial risk associated with GSE activity. In some cases, there is a lack of measurable mission-oriented criteria that would allow for meaningful assessment of GSEs' mission achievement or whether the GSEs' activities are consistent with their public interest charters. In some cases, it is clear GSE's have contributed to their public missions for which they were initially created. In this regard, it is generally agreed that Fannie Mae and Freddie Mac's mortgage purchase activities have lowered the interest rates on qualifying mortgages below what they otherwise would have been. At the same time, additional studies may be necessary to more precisely estimate the extent to which GSE activities have benefited certain homebuyers, especially those who can least afford a home. In this and other areas, there is substantially greater uncertainty regarding the benefits of GSE activities, both individually, collectively, and as compared to private non-GSE lenders. As a result, more research is needed to clarify these issues. Additionally, the lines that initially existed between Fannie Mae and Freddie Mac, on the one hand, and the Federal Home Loan Bank System, on the other hand, have blurred over the years. This can lead to legitimate questions regarding how many GSE's do we need to get the job done. In some cases, the absence of specific criteria and guidance complicates the efforts to assess the need for and the benefits of GSE's. Finally, I would like to also point out that there are other limitations in the evidence and research on benefits provided by GSE activities. There is limited information as to the extent to which the Federal Home Loan Bank System's more than $500 billion in outstanding advances as of mid-2003 have facilitated mortgage activity. There is limited information available on the extent to which Fannie Mae and Freddie Mac's investments in nonmortgage assets, such as long-term corporate bonds, serve their public missions. And there is virtually no evidence available as to whether Farmer Mac's activities have benefited agricultural real estate markets. Without quantifiable measures and reliable data, Congress and the public cannot judge the effectiveness of GSE's in meeting their missions or whether the benefits provided by these entities are in the public interest and outweigh the potential financial risk. To improve the quality of information about GSE activities, we believe that the GSE's should have a single regulator dealing with safety and soundness and mission activities, and that additional research is necessary with regard to some of the items that I have noted in my statement. Mr. Chairman, that would conclude my opening statement. I would be more than happy to answer any questions that you and the other Senators may have. Chairman SHELBY. Mr. Walker, the discussion, among other things, on the structure of a new GSE regulator has focused on two models: an independent bureau of the Treasury, like the OCC, for example, or a stand-alone independent agency, like the SEC or the FDIC or others. If the Congress chose to adopt the independent agency structure, how do we ensure that this regulator has sufficient stature and credibility to provide strong oversight of the GSE's? Mr. WALKER. Well, obviously, the structure can be important. One has to ascertain what are the proper qualifications for a person who would end up leading and overseeing this entity whether or not they should be Presidential appointee with Senate confirmation, what type of authorities they should have, including from a regulatory standpoint and an enforcement standpoint. So, I think those are the substantive issues that one would have to look at. Mr. Chairman, I know there has been some controversy regarding the issue of whether or not to combine the safety and sound ness mission issues. I think whether you go with an independent agency or whether you go with an entity within an existing department or agency, like the Treasury Department, it might merit considering having an executive director model with a coordinating board. Chairman SHELBY. A board with prestige, right? Mr. WALKER. Yes, a board with prestige. For example, you could have the Secretary of the Treasury, the Secretary of HUD, and other appropriate parties Chairman SHELBY. The Fed, the Chairman of the Fed. Mr. WALKER. Potentially. Chairman SHELBY. SEC Chairman, maybe. Mr. WALKER. Potentially. But the idea is that, to the extent that you want to make sure that there are responsible authorities, knowledgeable parties who are concerned with and interested in safety, soundness, and mission, and who could help to make sure that all those issues were considered. Chairman SHELBY. Could you describe some of the problems of Fannie Mae and the Farm Credit System during the 1980's, their underlying causes and the nature of the Government's assistance? Mr. WALKER. I might get a little bit of help on that since that is before my time, Mr. Chairman, if you do not mind. This is Tom McCool, who is the Managing Director of our Financial Markets and Community Investment, with your indulgence. Mr. MCCOOL. Mr. Chairman, yes, well, Fannie Mae was given forbearance. Fannie Mae was not actually given direct assistance, but they were in trouble and they were given forbearance from a capital and tax perspective. My understanding or my recollection is-it was actually before my time as well-that the Farm Credit System was actually given assistance as part of a bailout, and then it was also reengineered to hopefully be a more independent-the Farm Credit Administration was reengineered to be a more effective agency and a more stand-alone, arm's-length regulator. Chairman SHELBY. Mr. Walker, your written testimony notes that OFHEO cannot place Fannie Mae or Freddie Mac into receivership. They can go in as a conservator, as I understand, which is different. Based on your analysis, do you believe that the existing statute authorizing the appointment of a conservator gives the regulator sufficient authority to resolve a troubled GSE? Mr. WALKER. Based upon the past experience with the savings and loan industry, et cetera, we believe that consideration should be given to expand that beyond just a conservator, and in some usual circumstances to allow for receivership. That is not something that one would expect to happen. I would hope that it would not happen. But, on the other hand, we believe it is something that needs to be in the toolbox of the regulator. Obviously, that is something where it would be necessary to prescribe some type of guidance as to when and under what circumstances receivership would be used. Chairman SHELBY. But you have to be ready for it. Mr. WALKER. Correct. It should be in the toolbox, in our view, Mr. Chairman. |