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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.

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Tuesday February 10, 2004

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A Framework for Strengthening GSE
Governance and Oversight

What GAO Found
GSEs should lead by example in connection with governance, accountability,
inlcgrily, and public trust issues. GSEs should strive lo achicvc model
corporate governance structure, provide reasonable transparency of
financial and performance activities, and adopt compensation arrangements
that focus on both long-term and short-term results. However, GSE
corporate governance has not always reflected best practices. For example,
currently, the Chief Executive Officers (CEO) of Freddie Mac and Fannie
Mac also scrve as the chairmen of their respective GSE boards, which is not
consistent with model governance standards that call for officers to work for
an independent board. GAO nolcs thal, as part of its regulatory agreement,
Freddie Mac has agreed to separate the position of CEO and the position of
chairman within a reasonable period of time. However, Fannic Mac has yet
lo lake this step. With respect to compensation arrangements, Freddic
Mac's focus on short-term financial results as performance largcis appcars
to have contributed to the CSE's recent financial reporting problems.
GSE regulators must be capable, crcdible, strong, and independent.
However, the regulatory structure for the housing GSFs Fannic Mac,
Freddic Mac, and the FIILBank System—is fragmented with safely and
soundness and mission oversight responsibilitics divided among three
regulators. A singlc housing GSE rcgulator offers many advantages over this
fragmcnlcd structure including promincncc in government, the sharing of
Lechnical cxpcrlisc, and the ability to assess tradc-olls belwccn sascly and
soundness considerations and ccrlain mission compliance activilics, such as
affordable housing initiatives. Although there are advantages of a single
director model for the new housing GSE regualor, GAO bclicves on balance
thal a board or a hybrid board and director might make the most serse lo
oversee the GSEs' safety and soundness and mission oversighl. To be
effective, the single GSE regulator must also have all the regulatory
oversight and enforcement powers necessary to carry out its critical

Because of a lack of clcar measures, il is dillicult for Congress,
accountability organizations, and the public lo dctcrminc whcthcr thc
bencfils provided by the GSEs'aclivilics arc in thc public interest and
outweigh thcir financial risks. Availablc evidence and data indicalc Lhal lhc
housing GSEs have made, in some cascs, progress in bcncfiling homebuyers.
For example, it is generally agreed that Fannic Mac and Freddic Mac's
activities have lowered mortgage interest rales, although there is debale over
the degree of these benefils. Ilowever, it is not clear that the housing GSEs'
large holdings of mortgage backed securities benefit borrowers. There is
also limited information as to the extent to which the FIILBank System's
more than $500 billion in outstanding loans to financial institutions have
facilitated mortgage lending.

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United States General Accounting Office Mr. Chairman, Mr. Ranking Member, and Members of the Committee:

I appreciate the opportimity to participate in today's hearing to discuss oversight of the govemment-sponsored enterprises (GSE), namely Fannie Mac, Freddic Mac, the Federal Home Loan Banks (FHLBanks), the Farm Credit System (FCS), and the Federal Agricultural Mortgage Corporation (Farner Mac). I note that the GSEs hand combined obligations, including nikortgage-backed securities (MBS) and other debt obligations, or $4.4 trillion as of September 30, 2003, and, as I will explain in detail later, the potential exists that the federal government may choose to provide financial assistance to the GSEs in an emergency. Accounting and financial reporting problems related to earings disclosed by Freddie Mac last year have raised several concems about the company's management and board of directors as well as the effectiveness of regulatory oversight that is designed to protect taxpayers from the risks associated with the GSEs. Recently reported investment losses at the FHLBanks have also served to raise public conccms regarding the well-being of GSEs. These evenis prompted Congress to consider the nex) for meaningful reformisto help strengthen the oversight of GSEs. 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 for regulatory agencies that oversee our financial institutions and our capital markets is directly relevant to the ongoing debate on appropriate regulatory oversight of GSES.

It is clear that many partics have different views on what needs to be fixed and how to do it. My comments today are intended to frame GSE oversight issues broadly and provide our views on some of the questions and options that must be addressed to better oversee the GSEs going forward. Although my comments will largely focus on the housing GSEs-Fannie Mae, Freddie Mac, and the FHLBank System-given the themes of our discussion today, I will also use examples from the other GSEs to illustrate my points. We look forward to working with Congress to provide assistance in defining these issues, exploring various options, and identifying their implications in order to address any weaknesses that could serve to threaten confidence in our financial markcts and that inhibit improvements in the current regulatory structure.

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