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 Ĉongress 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 today 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.

Specifically, are we willing to risk the widespread availability of America's mortgage product of choice: 30 year, fixed-rate, prepayable mortgages without penalty?

Other countries are not able to offer their citizens the double benefit of this type of loan. For example, just across the border in Canada, the typical fixed-rate mortgage has a term of 7 years, a downpayment requirement of 25 percent, and punitive penalties for refinancing. And I would like to submit for the record, Mr. Chairman, just a sheet that

Chairman SHELBY. Without objection, it will be made part of the record.

Mr. SYRON. Thank you, sir.

Perhaps I am a conservative at heart, but when the stakes are high and the risks of failure are substantial, I will stick with known benefits. This is not the time to begin dismantling the world's finest housing finance system or to place limits on its growth. The 20-percentage-point gap between white and minority homeownership rates indicates there is more work for us to do.

Now let me turn to the imperative for regulatory reform. Regulatory oversight of the GSE's is essential. Given the known benefits of the Nation's housing finance system, it is crucial to proceed with an abundance of care, however, as we do this. Borrowing a phrase from our friends at the Homebuilders, I urge the Committee to "measure twice and cut once."

Any one of the key provisions under consideration, if done inappropriately, could have negative effects similar to privatization.

Given my time constraints today, my comments will be limited to three issues that go to the heart of the regulatory debate. The first is capital.

Capital adequacy is absolutely key to the continued confidence of the Congress, the public, and investors. Compared to institutions I have personally regulated, the GSE's have the most sophisticated risk-based capital standard. Although our present regulator has significant discretion in adjusting the risk-based capital requirements, I would support providing the new regulator additional discretion.

My strong preference for risk-based capital standards can be traced to my tenure at the Federal Reserve Bank of Boston during the infamous credit crunch of the early 1990's. While many financial institutions in the Northeast were well-capitalized on a riskadjusted basis, the cautionary raising of pure simple leverage ratios required them to liquidate a substantial portion of their assets. This resulted in a drying up of commercial credit that turned a 2year mild recession into a 5- to 6-year severe slump, causing a lot of lost businesses, lost jobs, and lost homes.

Notwithstanding my philosophical differences, I would support regulator discretion to increase the GSE leverage ratio in the event of a finding of an unsafe and unsound practice. However, in my mind, parameters should be put in place that define the circumstances under which such an increase could be undertaken, as well as the parameters for returning to the statutory minimum once the problems had been addressed.

The second issue I would like to mention is conservatorship.

Now, while it may be appropriate to draw on certain banking provisions to improve the GSE regulatory oversight structure, we strongly believe that liquidation is not one of them.

Receivership is an appropriate disposition mechanism when you are dealing with thousands of Federally insured depository institutions whose failure could have an impact on depositors and on deposit insurance funds.

However, receivership is widely perceived in the market to have little practical application to large financial institutions, whether they be commercial banks or the GSE's. As a result, in my mind, it is not appropriate for dealing with the two GSE's, whose funding comes from world capital markets increasingly and not depositors and whose closure would have substantial economic, market, and public policy consequences for the Nation.

While receivership might provide theoretical benefits, it would introduce substantial uncertainties into the global debt markets as well as the MBS markets. This would have significant implications on our ability to finance 30-year, prepayable mortgages.

For these reasons, we believe retaining conservatorship is the right approach, in the unlikely event that a GSE were to experience extreme financial distress. Receivership would serve little practical purposes and would be interpreted by global capital markets as a first step toward privatizing the GSE's.

Finally, the benefits of debt financing or the issue of the retained portfolio.

The availability and cost of mortgages for America's homeowners would be negatively affected by efforts to constrain our retained portfolio. The fact is buying mortgages and mortgage-backed securities for our retained portfolio is essential to fulfilling our housing mission.

First, our purchases create price competition and reduced mortgage rates for consumers.

Second, our retained portfolio ensures we can continue providing liquidity during periods of market stress. For example, during the 1998 Asian debt crisis, lending in many sectors of the economy was disrupted as investors fled to the safety of Treasury securities. To boost falling demand for mortgages, Freddie Mac and its colleague Fannie Mae remained steadfast in the market. As a result, America's homebuyers were able to obtain low-cost mortgages during that period of stress. This would not have been possible if we had to rely solely on securitization.

Our issuance of debt securities likewise benefits the housing market by allowing us to tap the global financial markets to the benefit of U.S. homebuyers. Many investors prefer the predictability of GSE debt over mortgage-backed securities, which are sensitive to prepayment risk. Restricting the use of this important funding mechanism likely would result in a reduced supply of funds and higher costs for homeownership.

In closing, I would like to say a few words about Freddie Mac. I am sadly aware that Freddie Mac's accounting issues are the source of much of the current controversy regarding the role of the GSE's, and I apologize to this Committee and the rest of the Nation for that. However, as with any episode such as this, it is critical to get the ship back on course without overreacting at the tiller.

One of my top priorities is to work with you to enact legislation that enhances our safety and soundness regulation. Regulatory reform is critical in light of the key role the GSE's play in our economy and in the achievement of the fondest hopes and dreams of Americans.

Equally important, I am focused on expanding Freddie Mac's commitment to mission. Freddie Mac is an institution with special privileges, and special responsibilities come with that. I am very concerned specifically about meeting the housing needs of minority families. We have to do that better, and we will.

Senators in today's New York Times on the front page, there is a picture of a family who is the third generation in that family to be living in a cellar. I am not talking about a basement apartment. I am talking about living in a cellar with no windows, next to a boiler and a sanitation system, because they can find no place else to live. We, as the GSE's, are not fully doing our jobs as long as that remains a widespread practice in this country, and we are committed to do better.

Thank you very much for the opportunity to appear before the Committee today, and I look forward to answering whatever questions you may have.

Chairman SHELBY. Thank you.
Mr. Rice.

STATEMENT OF NORMAN B. RICE

PRESIDENT AND CHIEF EXECUTIVE OFFICER
FEDERAL HOME LOAN BANK OF SEATTLE

Mr. RICE. Good afternoon, Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. I am Norman B. Rice, Chief Executive Officer of the Federal Home Loan Bank of Seattle. I would like to start today by underscoring the critical importance of this Committee's work-and that of Congress and the Administration-in supporting a world-class regulatory structure that ensures and enhances the safety soundness, and economic viability of the housing Government Sponsored Enterprises.

In my role representing the Council of Federal Home Loan Banks, I wanted to very clearly state our support for this effort.

The Federal Home Loan Banks are acutely aware of how much is at stake in this process for American taxpayers and our member shareholders. We understand that this Committee is considering the creation of a new agency. If so, it is imperative that the agency you create improves the oversight, the mission delivery, and the effectiveness of the business activities of the housing GSE's, and not hinder them.

When I testified before this Committee in October 2003, I outlined a set of four principles that framed the Bank System's bottom-line needs regarding a new regulatory structure. They include: Number one, preserving and reaffirming the Bank System's mission; number two, maintaining a strong, independent regulator; number three, preserving the Bank System funding through the Office of Finance; and, number four, preserving the unique cooperative and regional nature of the Bank System.

More specifically this afternoon, I would like to speak to the proposed regulatory structure we understand is currently under dis