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I do have to take issue to some extent with those who would say that the Administration is critical of Government's role in and support of making sure we have strong, affordable housing in the United States. I certainly do not believe that any of the efforts that are undertaken by any of those who have introduced legislation or by those who have supported the idea of an independent regulator is intended to diminish the value of our Government's commitment to developing the best approach to affordable housing that this Nation can put together. The question instead is: How do we protect the U.S. taxpayer? How do we make certain that the housing industry and the mortgage industry are operating as efficiently and as safely as possible so that we do not face some of the very terrible circumstances that we have faced in other arenas? And how do we make certain ultimately that we achieve our objective of solid, affordable housing available to the maximum extent possible in our society?

I look forward to working with you on these issues and welcome your expertise and advice today. I should also say, Mr. Chairman, that like Mr. Hagel, I have not only another hearing but also I think half of my constituents from the State of Idaho are in Washington, DC, today.

[Laughter.]

And so I may have to slip out. But I can assure you, I will listen to as much as I can, and I will read every word of your testimony and listen to the points that you have made.

Thank you very much.

Chairman SHELBY. Senator Stabenow, do you have an opening statement?

STATEMENT OF SENATOR DEBBIE STABENOW Senator STABENOW. Thank you, Mr. Chairman. I do have a few comments. I would say to Senator Crapo, though, that I think the other half of the people here in town are from Michigan today, so I apologize in advance. Many of us are trying to be in many places at once today. But welcome to those who are here. We appreciate very much your leadership and your testimony today, and I think this is such an important topic, and I hope we will be focused on what is in the best interest of the American people and the important role that GSE's have played in helping to create a housing market that is affordable and available to people and to help keep the economy moving forward by the fact that we have had the housing market continue to be strong even in the face of other very challenging times in the economy. And I know that each of you have played a role in that.

Yesterday, we were able to hear from Federal Reserve Chairman Greenspan, and I must say that the views he offered I did not agree with, and some of the comments. And I hope that there is, in fact, not going to be support for privatizing GSE's. I do not believe that is in the best interest of the families that I represent in Michigan or people across the country,

I think the relationship between GSE's is unique. There is no doubt about it. But there is immense value to the public in the relationship that we have together. In return for a limited amount of Government benefits, the American public sees great rewards, in my judgment.

We task the GSE's with important projects like meeting affordable housing goals, and this allows these private sector companies to do good work simply by doing the business that you were set up to do. In addition, we are able to see great rewards to the public through the mortgage cost savings that the GSE's create.

I do think there are important questions for the Committee, Mr. Chairman, and I appreciate your ongoing efforts. I would hope that we would ask questions such as: How can we ensure we have a strong, respected, independent regulator, with adequate and reliable funding? How can we create a regulatory environment where Fannie and Freddie can innovate and create new products without burdensome and bureaucratic approval processes by Federal regulators? How do we make sure that accounting problems like those at Freddie Mac never happen again? And how can we raise the bar and ensure that Fannie Mae and Freddie Mac do as much as possible to expand homeownership opportunities to first-time homebuyers and minority homebuyers and working-class families who are good credit risks but lack the funding for a downpayment or closing costs?

I think we have important work in front of us, Mr. Chairman, and I appreciate your ongoing efforts in the hearings that we have had. Thank you.

Chairman SHELBY. Your written testimony will be made part of the record in its entirety. Mr. Raines, we will start with you, if you will sum up your testimony.

STATEMENT OF FRANKLIN D. RAINES CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FANNIE MAE

Mr. RAINES. Thank you very much, Mr. Chairman, and thank you, Members of the Committee, for an opportunity to testify before you once again on this important legislation concerning strengthening the safety and soundness of Fannie Mae.

On behalf of Fannie Mae, let me express all of our appreciation for the hard work this Committee has put in over the years and particularly in the last several months on this very important topic.

I would just like to make four points in my summary statement.

First, as I have testified before Congress previously, Fannie Mae supports legislation to establish a strong, well-funded, and respected safety and soundness regulator for the housing GSE's, and we do so because it is good for housing, the financial system, and our company. Private investors provide the capital that we use to purchase mortgages and to capitalize our business. They believe Fannie Mae is a good investment, but not because of any implied Government guarantee of our obligations. Instead, they count on the Government to apply rigorous oversight to the company because our mission is so critical to the national housing policy. Investor trust and confidence, combined with our low-risk and highly efficient business that focuses exclusively on mortgages, lowers our borrowing costs and that allows us to purchase and guarantee lower-cost mortgages for homebuyers.

The second point I would like to make is about our capital. Fannie Mae believes our regulator should have flexibility over our capital regime, which Congress established in 1992 with two parts. We have a minimum capital standard. It is bolstered by a riskbased capital requirement with a stress test which requires us to hold enough capital to survive sustained depression-like economic conditions. Our capital requirement is still ahead of its time. Nevertheless, we support legislation that would provide our regulator with full flexibility over our risk-based capital requirement since it is the regulator's premier tool to ensure that we are well-capitalized.

We also understand the interest in being prepared for unanticipated events, so we believe that if any unanticipated safety and soundness risk should arise, a risk not covered by our risk-based capital requirement, then our regulator should have the ability to temporarily increase our minimum capital to protect against that specific risk. Then when the risk goes away, the capital surcharge would go away as well. But we would urge Congress to ensure our minimum capital standard does not become a tool to alter National housing policy by restricting the flow of capital into housing.

And, finally, to fully match our capital against our risk, we recommend that our regulator should take into account our total capital as bank regulators do for banks. Specifically, banks can earn the rating of "well-capitalized” if they boost their total capital level beyond their regulatory requirement. Four years ago, Fannie Mae volunteered to issue subordinated debt to boost our capital, bringing our total capital today, including loan loss reserves and subordinated debt, to 4 percent of our balance sheet assets. Offering the regulatory designation of “well-capitalized" for our total capital would encourage future management to maintain this high standard. All told, we have $35 billion in total capital, plus $14 billion in subordinated debt. A recent Federal budget document suggested that a small mistake could harm our company. The opposite, of course, is true. It would have to be a colossal blunder to deplete $49 billion in capital and subordinated debt.

My third point is in the unlikely event of a large catastrophe that would threaten our company, our financial regulator would need the authority to step in and take over the business. The question has been whether our regulator should have the authority to impose a receiver or a conservator. Receivership makes sense for Federally insured banks. The deposit insurance fund must be reimbursed from the assets of the bank when it makes depositors of failing banks whole. So the Government has to ensure that it has the first claim to assets before other creditors are paid. For Fannie Mae, conservatorship makes more sense.

Here the task in the unlikely event of failure would be to conserve the assets of the corporation for debt holders since that is their only source of repayment. Because the Government has no investment in the company, there is no need for a receiver to protect the Government's investment. There is certainly no reason to complicate matters for debt holders who have invested in our securities based on the current arrangement.

My fourth point is about mortgage innovation, which created the best housing finance system in the world and is critical to meeting this growing Nation's growing housing needs in the future.

A few weeks ago, Fannie Mae launched a major expansion of our American Dream Commitment, a pledge we made 4 years ago to provide $2 trillion for 18 million minority and underserved families to own or rent a home before the decade was over. Because the housing market has been so strong, we met our top-line goals after only 4 years. So we launched an expanded plan focused on three goals: First, to create 6 million new homeowners, 1.8 million of them minorities, over the next decade; second, to help families at risk of losing their homes to stay in their homes; and, third, to expand the stock of affordable housing.

To carry out this plan, which will advance the President's goal to narrow the minority homeownership gap in America, we plan to launch immediately about 60 different mortgage initiatives with a range of lending and community partners, and ultimately the initiatives could exceed 100.

We believe that our financial regulator should have the authority to review at any time any activity by our company from a safety and soundness standpoint. We also support current requirements for prior approval of new programs.

But we oppose expanding the reach of prior approval to include mortgage activities and processes because such micromanagement would harm our ability to achieve these goals and respond to market needs, which is exactly what Congress intended us to do.

We would have to ask what public policy purpose would be achieved by slowing or stopping our ability to fight predatory lending, to expand low downpayment lending to teachers, police officers, and fire fighters, to help families with slightly imperfect credit get a low-cost loan, or to help minority families become first-time homebuyers.

In conclusion, Mr. Chairman, Congress has helped to create the best housing finance system in the world, a system other countries envy and want to emulate. By strengthening our financial regulator, Congress can further strengthen this system to ensure all Americans have the best housing opportunities in the world.

With that goal in mind, I have tried to make four points today: Fannie Mae supports having a strong, credible, well-funded financial regulator; we support having a strong capital regime matched to our risk; we believe that conservatorship is the best way to protect our creditors in the remote chance of failure; and we urge Congress to support mortgage innovation.

These are not esoteric issues. This is important. There is a lot at stake. On the front page of The Washington Post last week, there was an interesting article about the economy. It opened with a story of Greg and Mary Beardmore of Green Bay, Wisconsin, who were struggling on a reduced income in a tough job market. Yet they were unusually sunny about their future.

As the article stated, the Beardmores have kept their heads above water by refinancing their mortgage, lowering monthly payments, and taking heart in the swelling equity in a home that has gained $100,000 in value since they moved in 8 years ago. Mary Beardmore said, “I do not feel like I am losing ground because I have the security of my home. If we had to sell our house to stay afloat, we would do it very quickly. So, you know, I think it is okay.”

I mention the Beardmores because families like them are depending on us to get reform right and to do no harm to housing. And Fannie Mae stands ready to work with this Committee and the Congress to achieve this goal that we share. And thank you very much for the opportunity to testify.

Chairman SHELBY. Thank you, Chairman Raines.
Chairman Syron.

STATEMENT OF RICHARD F. SYRON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER, FREDDIE MAC

Mr. SYRON. Thank you, Chairman Shelby and Members of the Committee. I must say it is an honor to be here today. I am the new kid on the block, but I could aspire to no greater legacy than to restore public trust to an institution chartered by Congress to ensure the stability, liquidity, and accessibility of the Nation's mortgage markets.

I must say I approach the issues before the Committee toda largely from

the perspective of a regulator, having been President and CEO of the Federal Reserve Bank of Boston. But like most Americans, I am also a homeowner. I grew up in Boston in a twofamily home financed by a VA loan that my father was able to get when he came home from World War II.

I have only been on the job 2 months, but I am convinced that legislation is essential to enhance the GSE regulatory oversight structure. I think it may even be overdue. World-class regulatory oversight is critical to the achievement of Freddie Mac's mission and to maintaining the confidence of the Congress, the public, and financial markets.

Today, I want to talk about two things: Why we exist and why regulatory reform is needed, and our position on some of those issues.

Homeownership, as we all know, is at a record high. Families build wealth. Kids do better in school. Neighborhoods are safer. And in recent years, housing has been referred to as the backbone of our Nation's economy, actually accounting for more than a third of the growth in nominal GDP in the last couple of years.

These are real benefits. They are real outcomes of a bipartisan decision to support homeownership by creating two institutions with the singular job of making mortgage markets stable and liquid. Unfortunately, sometimes we tend to take the GSE model of housing finance for granted.

In a vain search for greener pastures, this important debate today is at risk of wandering from a focus on real things to philosophical debates on issues such as privatization.

Freddie Mac strongly supports enactment of legislation to strengthen the GSE regulatory structure. Thus, we would respectfully encourage the Committee to focus on specific ways, as you have, to improve the GSE regulatory structure and avoid becoming sidetracked by side issues. To put it bluntly, let's get a top-notch regulatory structure in place and then get back to the job of putting more people, particularly minorities, in homes.

Now, just very quickly, a little background. GSE privatization may sound attractive in theory. But while the real benefits are there, the potential benefits of privatization are highly speculative.

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