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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.

MBĂ 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.

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 Chairman SHELBY. The hearing will come to order.

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 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
COMPTROLLER GENERAL, ACCOMPANIED BY

TOM McCOOL, MANAGING DIRECTOR
FINANCIAL MARKETS AND COMMUNITY INVESTMENTS

U.S. GENERAL ACCOUNTING OFFICE 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 GŠE's operate in a safe and sound manner, it is essential that effective governance, reasonable

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