Mr. Chairman, while finding a consensus on these issues may be difficult, I am committed to working with you and my colleagues on this Committee to find solutions that balance the ability of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to meet their critical missions with the need for world-class regulation of the GSE's.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Hagel.

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. Mr. Chairman, thank you.

Mr. Chairman, I add my welcome to our distinguished panel. Chairman Raines, Chairman Syron, President Rice, thank you for appearing.

As we know, the secondary market plays a critical role in housing finance. Congress should not diminish this role. However, as Government Sponsored Enterprises like Fannie Mae and Freddie Mac dominate this landscape, Congress has a greater responsibility for strict oversight and comprehensive supervision. The stakes are profound, particularly when questions are raised about the implicit U.S. Government guarantee and the GSE's' growing relevance to our financial system.

Have these institutions become too big to fail, as some would argue. Will a financial crisis ensue if they are left inadequately supervised, as I believe Chairman Greenspan asked yesterday in his testimony.

Clearly, the existing regulatory framework requires strengthening to ensure that prevailing risks are mitigated. This is in the interest of the housing industry, the private capital markets, investors, and the American taxpayer. Few would argue the importance of housing to the national economy and the increasing role of the GSE's.

There are currently over $7.2 trillion in mortgage loans in the United States; 45 percent of all those loans are owned or guaranteed by Fannie Mae and Freddie Mac. This Committee should bear in mind that other companies also engage in the primary and secondary markets as well. These private companies face extensive regulatory oversight from multiple supervisors, including Federal and State banking agencies and the Securities and Exchange Commission. This comprehensive oversight can require, if certain conditions exist, prior product approval, limitations on growth, minimum capital standards, and even receivership.

Clearly, a gap exists in the regulatory framework of financial institutions and the Government Sponsored Enterprises. In introducing the Federal Enterprise Regulatory Reform Act, S. 1508, the intent sought by Senators Sununu, Dole, and I is to create a fundamentally strong regulatory framework, an agency with the capacity to establish capital guidelines, and, when necessary, have the discretion and authority to limit its activities.

These are integral regulatory rules that have been successfully applied by the U.S. Federal banking agencies. They are principles founded on the premise of curtailing risk when conditions are necessary. I am confident these measures will serve to enhance the confidence in the mortgage industry as well.

I might add, Mr. Chairman, also the intent of our bill was not to undo GSE's, nor to put GSE's out of business. That may come in a different era at a different time, but that has not been the intent of our legislation.

I again thank you, Mr. Chairman, for your leadership on this issue and look forward to our distinguished witnesses. And I might add I will probably not be able to engage the entire time since I am due to chair a hearing here shortly. But I wanted to be here to at least give the witnesses an opportunity to make their statements so I could benefit from what they have to say, and I will stay longer if I can. But, again, thank you for coming, gentlemen. Chairman SHELBY. Thank you, Senator Hagel.

Senator Crapo.

STATEMENT OF SENATOR MIKE CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman, and also to Chairman Raines, Chairman Syron, and President Rice, we appreciate your coming before us today and look forward to your discussion with us. These are very critical issues.

As this Committee considers creating a new independent regulator for Fannie, Freddie, and the Federal Home Loan Banks, it is important that we recognize that although these GSE's have much in common, these entities are structurally different. And as we approach this issue, the first question that we must address is whether all three should be included under the same regulator, where the regulator will be located, and the level of independence of that regulator. And if they are all included, I am interested in learning today how you believe this regulator should be structured so that it can maximize the value and benefit of each GSE.

Would you support creating divisions within the regulatory structure? Should there be an advisory body in addition to or as a part of this regulator? If so, who should be included, and what value would this advisory body provide?

Additionally, there has been a lot of discussion about capital standards, and I have asked questions on it in, I believe, every hearing that we have held. Can each of you explain your capital standards and how they work and how each of your capital requirements compares to the commercial banks or the circumstances that you might face under such an independent regulator as we are talking about?

There are questions as to whether capital standards should be addressed statutorily, as a floor of some sort with broad discretion in the regulator, or whether the legislation that is established should instead not worry about setting any particular levels, but setting the standards by which capital should be evaluated by the regulator.

In yesterday's testimony, Chairman Greenspan said, "World-class regulation, by itself, may not be sufficient and, indeed, as suggested by Treasury Secretary Snow, may even worsen the situation if market participants infer from such regulation that the Government is all the more likely to back GSE debt." I wonder what your responses are to the issues raised by Chairman Greenspan with regard to this implied guarantee that the marketplace seems to place on GSE debt.

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.