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Treasury that would regulate Fannie Mae and Freddie Mac. NAHB believes that it is Congress' responsibility to scrutinize the regulatory oversight of the housing GSE's, and to ensure that they provide the Nation's network of community-based financial institutions with the safest, soundest source of residential mortgage and community development credit possible. While all three GSE's have much in common, NAHB believes it is important to both recognize and preserve the unique nature of the FHLBanks. For example, unlike Fannie Mae and Freddie Mac, the FHLBank System is a cooperative owned by its member institutions. The FHLBanks' stock is not publicly traded and does not fluctuate in value. In addition, each of the FHLBanks is jointly and severally liable to all the others.

Each of the three GSE business models has their strengths. Any revised regulatory system should continue to respect those differences, while advancing the common goal—to maintain their financial safety and soundness. FUNDING OF REGULATOR

President Bush's fiscal year 2005 budget proposes to increase the amount of resources allocated to regulating the housing-related GSE's. The proposed budget earmarks $83 million to establish a new office within Treasury. The budget also anticipates that HUD will incur approximately $6.25

million in the establishment and enforcement of affordable housing goals, ensuring GSE compliance with fair housing laws, and providing consultation to the safety and soundness regulator on new activities. The activities of the safety and soundness regulator would be funded through mandatory assessments on all of the GSE's; the mission oversight costs at HUD would be assessed on Fannie Mae and Freddie Mac.

NAHB believes that those who supervise and regulate the GSE's should possess adequate authority and resources. The housing-related GSE's are engaged in a myriad of complex financial transactions. It is crucial for the regulator to possess a high degree of experience, knowledge, and familiarity with current accounting, risk-management and housing-related issues so that they are credible, confident, and capable. Furthermore, NAHB believes that it is entirely reasonable for the GSE's to fund the responsibilities of their regulator. INDEPENDENT REGULATORY BODY

The idea of a stand-alone independent regulator has been floated as a compromise to break the current impasse among policymakers on the key issues of program oversight and political independence of the regulator. It is argued that a stand-alone agency would resolve concerns about independence of the regulator from Treasury, as well as Treasury's oversight of new programs. It might also ease concerns about including the FHLBanks in the new system since a merged agency would avoid a perception that any of these Government Sponsored Enterprises are subject to more effective regulation than any of the others.

While not our first preference, NAHB would be open to exploring the concept of a new independent regulator for all three housing GSE's outside the Treasury Department, depending on how key details are implemented. NAHB's primary concern in either regulatory scenario is that the mission regulator must have a housing focus and expertise and the safety and soundness regulator must have sufficient respect and authority to satisfy Congress and the capital markets.

In addition to the funding and political independence issues addressed in other sections of this testimony, NAHB notes that other preliminary characteristics to consider are the corporate structure of the agency, and how its managers will be selected. Given the diversity and complexity of supervisory issues the agency will address, NAHB initially recommends the agency be structured as a board of directors rather than a single agency head. In this scenario, NAHB suggests that a HUD representative should serve on the board in order to ensure that it possesses a housing-oriented focus and experience. NAHB also suggests that the board comprise stakeholders from various industry sectors. As mentioned above, it is imperative to recognize the differences between Fannie Mae, Freddie Mac, and the FHLBanks. This could be effectuated by establishing two divisions and maintaining separate funding for the costs of regulation. Conclusion

NAHB appreciates the opportunity to share our views on the regulatory framework for Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System. The critical supports provided by these housing Government Sponsored Enterprises (GSE's) were an essential component to the recent success of the housing market in sustaining the Nation's economy. NAHB appreciates the Committee's efforts to assess and seek improvements to the regulatory framework of these GSE's. We look forward to working with the Committee as you progress toward fashioning a narrow regulatory solution to the oversight of these important housing institutions.


FROM ALAN L. BELLER At our October 23, 2003 hearing, Federal House Finance Board (FHFB) Chairman Korsmo testified that he recommended to Congress that all 12 Federal Home Loan Banks (FHLB's) comply with the Securities Exchange Act of 1934. However, some of the 12 FHLB's have argued that, due to the unique nature of the System, disclosure registrations as required under the Securities Exchange Act of 1934 are difficult to implement, and would prevent the FHLB's from efficiently offering securities to the market. Only the Cincinnati FHLB has voted to implement the disclosure registrations of the Securities Exchange Act of 1934. Q.1.a. What is your reaction to that argument? Do you foresee any major impediments to Securities Exchange Act of 1934 compliance for the FHLB's? Why or why not? A.1.a. We do not foresee any major impediments. We have met with representatives of many of the Banks and with staff of the Federal Housing Finance Board to discuss a number of aspects of the requirements and timing of registration under the Securities Exchange Act of 1934. In particular, we have addressed what have been identified as four threshold accounting issues. As noted in my testimony, we have resolved those issues.

In addition, Commission staff members have worked with representatives of a number of the Banks to discuss accommodations the staff will make to address concerns the Banks have raised. The Commission staff has clearly indicated that it will provide "no-action,” interpretive or other relief, to accommodate each Bank's preference to register a class of its capital stock rather than a class of debt. We believe that the investors in the publicly issued debt of the Banks are entitled to the same level of information as that provided to investors in debt securities of other public companies. However, if the Banks register a class of their capital stock with the SEC, they would be subject to certain disclosure and other requirements beyond those to which companies that have registered only their debt securities with us, and not their common stock or other equity securities, are subject. In our discussions with the representatives of the Banks and the Finance Board, the Commission staff has agreed to provide relief from provisions of the securities laws that would make the requirements to which they are subject consistent with those of companies who have registered only their debt securities with us.

The Federal Home Loan Banks, although federally chartered entities, have many of the same disclosure issues faced by any financial institutions whose securities are issued to, and held by, the public. The Federal Home Loan Bank System is one of the largest issuers of debt securities in the world. The debt of the Banks does not carry the full faith and credit backing of the United States and investors in the Banks' debt must, therefore, look only to the Banks for repayment of the debt. Therefore, disclosures by the Banks should give the holders of their debt a materially complete and accurate picture of the Banks' financial and operational situation to provide investors in their debt with sufficient information on which to evaluate an investment. As noted above, we believe that the holders of debt issued by the Office of Finance, for which the 12 Banks are jointly and severally liable, are entitled to the same type of information that is provided to investors in other public debt securities. We believe that the Commission's detailed disclosure rules and filing requirements and the staff review and comment process provide the best framework for disclosing information to which investors are entitled. In addition, we have a long history of reviewing complex entities that comply with the disclosure requirements of the Exchange Act and other Federal securities laws. Q.1.b. Would registration prevent the FHLB's from efficiently offering securities to the market? A.1.b. No. Under the Securities Exchange Act of 1934, publicly reporting companies are required to file periodic and current reports. Registration under the Securities Exchange Act of 1934 is not tied to the timing of offerings as it is under the Securities Act of 1933. There would, therefore, be no impact on a Bank's timing or other aspects of offering securities as a result of Exchange Act registration. Some Banks have expressed concern that staff review of a Bank's Exchange Act reports might require a Bank to cease selling its securities. However, the staff does not advise or instruct a publicly reporting company to stop selling securities based on its comments on the company's Exchange Act filings. As is the case now, if a Bank uncovers a disclosure issue the Bank itself must determine whether or not it should continue to sell securities in the public markets. While registration under the Exchange Act may cause the Commission staff to raise a comment which could alert a Bank to a particular issue, it would, as now, be up to the Bank to determine whether the issue was significant enough to temporarily curtail securities offerings until the appropriate disclosure provided to the public. This would be the case whether the issue was identified by the Bank itself or by the Commission staff in a comment letter.

Fannie and Freddie have argued that due to the nature of the mortgage-backed securities market structure, the fees associated with the Securities Act of 1933 disclosure would be onerous, seriously slowing the offering of mortgage-backed securities to the “To Be Announced” (TBA) market, as well as being unfairly costly. They also claim the volume of the securities they offer also makes such registrations difficult for the SEC to handle expeditiously. Q.2.a. What is your reaction to that argument? In your opinion, can the SEC handle such registrations? Would it be too difficult to implement or too costly? A.2.a. We have a long history of overseeing the disclosure and offerings of companies in many diverse industries including financial companies that perpetually offer securities to the market. The current registration fee is $126.70 for each $1,000,000 of securities offered. Since Fannie and Freddie issue a large volume of securities, the fees they would pay for registering the offer and sale of securities under the Securities Act of 1933 could be large. We have no reason to believe that subjecting Fannie and Freddie to the same fees, disclosure, and review as other companies that offer mortgage-backed securities to the market would be unfairly costly to Fannie or Freddie or present any difficulties for the SEC. However, as noted below, we do not know whether or how requiring registration of the mortgage-backed securities would impact the mortgage market, and we have consistently stated that an evaluation of this impact should be part of any consideration of whether their mortgage-backed securities should be registered under the Act. Q.2.b. What would be the effect of implementing SEC registration on the liquidity of the Nation's housing finance system and on the end mortgage interest rates available to the homebuyer? A.2.b. It has been our priority that investors who purchase and sell stock or “straight” debt (that is, non-mortgage-backed debt) of the GSE's are entitled to the corporate information publicly registered companies must disclosure under the Securities Exchange Act of 1934. Fannie Mae has registered its common stock under the Exchange Act and is now fully subject to the Commission's disclosure rules and the requirements of the Sarbanes-Oxley Act. Freddie Mac has not yet completed the process of registering under the Exchange Act but has stated it intends to complete the registration process when it completes its restatement and audit of its financial statements. Both of the GSE's continue to be exempt from the requirements to register the offer and sale of securities under the Securities Act of 1933 and as such the timing of their offerings and therefore, as noted above, their liquidity will not be impacted by Exchange Act registration.

Registration of offerings of the GSE's mortgage-backed and related securities under the Securities Act may raise issues regarding the impact on the mortgage market, especially the TBA market. A decision to require registration under the Securities Act of offers and sale of mortgage-backed securities should properly take into account consideration of whether, and if so, how such registration might impact the mortgage market and the operation of the TBA market. The staff of the Commission does not have expertise to determine whether or how this might impact the mortgage market. As noted above, we have consistently stated that an evaluation of this impact should be part of any consideration of whether Fannie's and Freddie's mortgage-backed securities should be registered under the Securities Act. Q.3. It is my understanding that Freddie's compliance with the 1934 Act is being delayed due to its ongoing revisions of its financial statements. Freddie is expected to release its revised earnings sometime this month. Has Freddie communicated with the SEC regarding when they expect to come into compliance with the 1934 Act? When specifically do you believe they will be able to do so? A.3. Freddie Mac has indicated it intends to complete the Exchange Act registration process when it completes its restatement and audit of its financial statements and is current in its financial statements. Most recently, Freddie Mac has indicated it believes it will complete registration under the Exchange Act by mid-2005.





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 Committee will come to order.

Today, the Committee continues its consideration of needed reforms to the regulatory regime for the housing GSE's. This is the fourth hearing on this matter. The time and the resources that the Committee have dedicated to this matter underscore its importance.

Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System provide liquidity to a vital sector of our national economythe housing markets. Because of their crucial roles in our economy, the financial condition, and safe and sound operations of these institutions must be diligently monitored.

Given their size, and their sophisticated risk management strategies, this monitoring is no simple task. It is one of my top priorities to report legislation from this Committee that will create a new housing GSE regulator that will have the stature, sophistication, and necessary regulatory tools to ensure that these institutions continue to carry out their public policy mission in a safe and sound manner.

Today, the Committee will hear from Alan Greenspan, the Chairman of the Board of Governors of the Federal Reserve System. Chairman Greenspan will share his insights with this Committee on the role that the housing GSE's play in the housing sector, the impact of their operations on our financial markets, and the need to establish a strong, credible regulator. Senator Allard, do you have an opening statement?

STATEMENT OF SENATOR WAYNE ALLARD Senator ALLARD. Mr. Chairman, I do have just a very brief statement.

First of all, I would like to thank you for your diligence in following this issue. It is very important, I think, and I would also

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