are defined as the teachers, the firemen, the policemen, the public service providers in the communities that you and I live in that teach our children, protect our streets, keep our homes safe, and provide the necessary services that we have to have in those communities that we depend on—but yet at night, they go to another community to live, 50, 60, 70 miles away a lot of the time, or they live in underhoused conditions, housing that does not meet their needs, is not something that most families would want to live in. Working with the Congress and working with HUD and our friends at the GSE's, we hope to continue to try to find more and better ways to help those working families in this country to become homeowners and move toward the wealth creation scenario that we would all like to see continued.

So, Senator, we would like to see your continued help and support, sir.

Senator SARBANES. Mr. Chairman, let me just say in closing first that I welcome the Home Builders' initiative that you have just outlined for us about housing the working families. The Home Builders over the years have made a very important contribution, I think, to the economic and social strength in this country. First of all, you do it directly in helping to provide housing for our families. I think homeownership contributes to strong communities. Every study has shown that once people are invested in homeownership, their investment in their community, their concern for maintaining the community, strengthening the schools, and so forth and so on takes a significant leap forward. Of course, there is the broader macroeconomic impact of housing in this country and the strength that that brings overall to the economy.

We are mindful of that mission. We are also, of course, as Chairman Shelby pointed out, having sat here through the savings and loan-well, I cannot find an adjective

Chairman SHELBY. Debacle.

Mr. RAYBURN. I was on the business side of that, too, and it was not fun.

Senator SARBANES. it was rough, it was rough, no question about it so we want to make sure that

Chairman SHELBY. Senator Sarbanes and I have a little institutional history here.

Senator SARBANES. Yes, we have some memory on that.
Thank you very much for your testimony.

Mr. RAYBURN. Thank you.

Chairman SHELBY. I would just like to make a point. I did not read in Professor Carnell's statement that he is antihousing but he is sound housing.

If we are committed-and we are to a housing program for all Americans, we want to make sure that that has the financial footings underneath it. Otherwise, it will be a crisis, and we will have real problems, more so than we have ever seen. What we are trying to do is balance that, as I see it, to avoid that, to make sure that the institutions that finance our housing for the most part are sound and safe and mission-oriented. That is my goal, anyway. Professor Carnell, do you want to touch on that?

Mr. CARNELL. It is certainly mine as well, Mr. Chairman.

I might add that in 6 years as Assistant Secretary of the Treasury, I head no words spoken against housing. And if you think more broadly about what are the incentives for policymakers, housing has a special place in American policy, American values, and American politics. We have a large, well-organized prohousing lobby. We have no antihousing lobby. There is no incentive for elected officials to be antihousing.

And this notion that the Department of the Treasury is populated by these venomous gnomes who want people to be ill-housed is simply untrue, and I would note that it is a way of talking that we saw from the savings and loan lobby 20 years ago when they were basically resisting being brought into modern regulation.

So, I agree with you, Mr. Chairman, that we need to strike a balance here, and I just want to point out that I do not see the incentives for elected officials or major political appointees to be antihousing.

Mr. RAYBURN. As a follow-up

Senator SARBANES. Do you think there is a place in the scale, short of being a venomous gnome who wants the population to be ill-housed, where someone might be perceived as not being a forceful advocate for housing?

Mr. CARNELL. Certainly that is possible. Mr. Rayburn pointed to some tax issues, and there are disagreements about how tax benefits should be adjusted. But I never saw these people.

Senator SARBANES. Yes. I do not have to see the Treasury people as venomous gnomes in order to maybe have a little concern about how sympathetic they are to an active housing program, do I?

Mr. CARNELL. I do not see them as unsympathetic. I understand your point about wanting balance. So in that sense, the answer to your question is yes. But you talked about, for example, if you had a multimember agency. If you have Treasury and HUD on there, I think you are going to have balance. It may be from one Administration to another, we may disagree with policies. In a democratic government, that is just something we have to deal with, that sometimes people with power are people who are not going to share our values. But I think that structurally, it makes sense and that there is balance there.

Chairman SHELBY. Mr. Carnell, what if we created a regulator whose term would be longer than, say, a 4-year term? Mr. CARNELL. I think more than 4 years would be

Chairman SHELBY. Give some independence, maybe.

Mr. CARNELL. -yes-and I would say, too, that something that has been done with some agencies is you just appoint somebody to fill the unexpired term of their predecessor. I would not suggest doing that here.

Chairman SHELBY. No, that is not a good situation.

Mr. CARNELL. You want more continuity. You want this to be a good job.

Chairman SHELBY. You have a temporary deal there, and it just does not bode well.

Mr. CARNELL. Exactly.

Chairman SHELBY. Mr. Rayburn.

Mr. RAYBURN. Senator, if I might follow up on that, I would share that we would welcome Mr. Carnell as well as all of the

Treasury Department over on the prohousing side, but we would like a little proof

Chairman SHELBY. Mr. Carnell is a Professor at Fordham Law School now.

Mr. RAYBURN. -I know, but his track record was over there, though but we would like a little proof that that would take place, and it certainly has not based on their track record.

Chairman SHELBY. Well, gentlemen, we thank you for a spirited discussion and your insights into all of this.

The hearing is adjourned.

Thank you.

[Whereupon, at 12:25 p.m., the hearing was adjourned.]

[Prepared statements and response to written questions supplied for the record follow:]

PREPARED STATEMENT OF SENATOR ELIZABETH DOLE

As everyone knows, Fannie Mae and Freddie Mac were created to help more Americans own their own homes. Their mission-as set forth by Congress-is to promote home mortgage financing by bringing liquidity to the secondary mortgage market and making more funds available for Americans to buy homes. Today, their outstanding securities now exceed $4 trillion-or more than the entire U.S. public debt.

In order to carry out this mission, Congress granted Fannie and Freddie privileges that have not been extended to other participants in mortgage financing. Among these privileges is a line of credit with the U.S. Treasury to which the GSE's could turn for short-term capital needs. This line of credit demonstrates this Nation's commitment to the mission of the institutions, and also the special relationship between these institutions and the Treasury.

This relationship allows Fannie Mae and Freddie Mac to borrow money at a rate as much as 40 basis points below other well-capitalized financial institutions. In addition, the GSE's are exempted from State and local taxes and from registering with the SEC or paying the fees associated with such registration, exemptions not enjoyed by other privately held businesses and financial institutions. As a result of enjoying these advantages, Fannie and Freddie now have virtually unlimited market power in any activity they choose to enter.

A growing consensus has recently emerged that Congress should establish a regulator over Fannie Mae and Freddie Mac with adequate resources, staff, and authority to monitor new and ongoing activities of the GSE's.

A prime example demonstrating the need for such a regulator is the announcement by Fannie Mae last fall that an accounting error had resulted in a $1.1 billion understatement of shareholder equity. Upon reviewing reports, it appears this was an honest mistake made while complying with the Federal Accounting Standards Board's new rule number 149. As a result of this announcement, and the subsequent reaction in the markets, over $4 billion of market capitalization disappeared overnight.

Our financial markets also have additional concerns about Fannie Mae and Freddie Mac. For example, the ability of Fannie Mae and Freddie Mac to aggressively hedge against interest rate risks. While no one is questioning their ability to provide effective hedges-they successfully managed over $1 trillion dollars of interest rate swaps in 2002-I would note that a great deal rests upon their ability to properly manage such risks and we need only to look at the last few months to see that both Fannie Mae and Freddie Mac make mistakes.

Such concerns intensify market sensitivity, which will continue until Congress establishes a new regulator over these entities and its powers are implemented.

As Fannie Mae and Freddie Mac continue to grow in order to carryout their missions, I believe we must have a regulator empowered with sufficient authority to prevent fraud and mistakes that can easily add up to the loss of billions of dollars, and thereby protect the American tax payers.

Any new regulator must be able to determine whether or not new programs and products contemplated by the GSE's help them fulfill their mission or whether those areas cannot be filled by private industry. Further, such authority cannot be limited solely to safety and soundness concerns it is certain that actions exist that are safe and sound, but which nonetheless are inappropriate for Fannie and Freddie to take. Last summer, Senators Hagel, Sununu, and I introduced S. 1508, the Federal Enterprise Regulatory Reform Act of 2003. Our legislation gives the regulator authority to approve new products and thereby ensure Fannie Mae and Freddie Mac remain focused on their core mission of promoting affordable home mortgage financing, especially for those Americans who have never owned their home before. I hope my colleagues will join us in support of this important initiative.

Mr. Chairman, your dedication to this issue is greatly appreciated and I look forward to our continuing work on this important issue. The need for proper regulatory oversight of the GSE's is a high priority and I am committed to working through these issues with you.