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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 disNow, 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 econ. omy 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 discussion, that of an independent agency that operates outside of a Cabinet-level department.

There are three key aspects of this proposed structure that I would like to address with the Committee today.

Number one, ensuring regulatory independence. A regulator lacking true independence is often subject to a wide range of demands and influences that we believe would be detrimental to the supervision, business activities, and the mission fulfillment of the GSE's. It is critically important that this new world-class regulator not be hampered by a cumbersome board structure and not be dominated by any single agency represented on the board. This new regulatory body must have the authority to govern in a truly independent manner.

Number two, agency oversight responsibilities. The Bank System believes this independent regulator should have the following authorities:

Ensuring the safety and soundness of the housing GSE's.

Overseeing all mission-based goals and programs. There are obvious differences in the mission-based goals and programs of the two housing GSE's and the Federal Home Loan Banks. However, we believe a proposed new regulator should have the authority to review, approve, and monitor all mission-based goals and programs. Our current regulator has that authority, and we believe it should be preserved.

Setting capital standards. Along with independence, any worldclass regulator must have the authority to set both leverage- and risk-based capital standards. As you know, Congress conducted an extensive review and revision of our capital structure in the Gramm-Leach-Bliley legislation, and the Finance Board was given this broad authority in the Act. We believe any new regulatory agency should have the authority to raise and lower capital requirements as deemed appropriate and necessary. And anything less, in our opinion, would be a significant step backward.

Approving new business activities and programs. We believe a world-class regulator should preserve the Bank System's ability to innovate around existing products and services. In turn, the regulator should be diligent in examining and approving these innovations and exploring areas that represent new risks to the GSE's.

Speaking on behalf of the Seattle Bank, I believe our mortgage purchase program is a good example of where our regulator insisted on close oversight and examination prior to approving a new business line.

Number three, creating separate divisions for the Federal Home Loan Banks and the publicly traded housing GSE's.

While Fannie Mae and Freddie Mac and the Federal Home Loan Banks all share GSE status, we are fundamentally very different.

The Federal Home Loan Banks are cooperatively owned and capitalized by our members, most of whom are community banks occupying and delivering benefits to Main Street, while the other two housing GSE's must meet the quarterly earnings expectations of Wall Street investors.

To that end, the Bank System believes that creating separate divisions within a regulatory structure would add efficiencies in the provision of oversight and supervision.

In conclusion, I want to emphasis to the Committee that the onus of strengthen our system lies not only with Congress and the regulators, but also with the housing GSE's themselves.

We must be willing to take the steps necessary to efficiently manage our financial institutions in a safe and sound manner and provide world-class financial transparency and disclosure regarding our business operations. On that point there is no debate.

Where there is a difference of opinion among the Banks, and where there has been much discussion with our regulator and others, is concerning who should have authority over the financial disclosures and transparency—the SEC or the housing GSE regulator.

From the Bank System's perspective, we believe that a worldclass regulator would potentially be better able to set the framework and supervision for the level of financial disclosure now being demanded of our system.

However, if Congress were to choose the SEC to regulate these financial disclosures, the Bank System believes some very specific accommodation are necessary.

As you move forward in this legislative process, I would ask that you keep in mind that we are a cooperative system, owned by more than 8,000 banks, thrifts, credit unions, and insurance companies. That means every dollar of value we create is passed through to our members and their communities. That is why Congress created the Bank System, and that is why we exist today.

So, I thank you for your time this afternoon, and I will be happy to answer your questions regarding my testimony.

Chairman SHELBY. Thank you, Mr. Rice.

Yesterday, as everyone knows, Chairman Greenspan recommended, among other things, that the GSE's be limited in their issuance of debt and in their purchases of assets. At the same time, he spoke favorably regarding the securitization process and its value to the housing market and to homeowners.

Would you agree that there is greater risk in holding mortgages and MBS's in portfolio?

Mr. Raines.

Mr. RAINES. I think, Mr. Chairman, the answer is it depends on how you have hedged your portfolio and that you can, in fact, reduce the risk of a mortgage portfolio

Chairman SHELBY. And the quality of the portfolio?

Mr. RAINES. It depends on the quality of the portfolio, but as well how you would hedge the portfolio in order to demonstrate the amount of risk that is actually there. And there is a simple way to illustrate that, Mr. Chairman, that I think would be useful as we discuss these issues, if I can find it.

Chairman SHELBY. Do you want to come back to that?

Mr. RAINES. It is illustrated by our risk-based capital standard because it is a very important concept that Dick Syron was pointing out and that I also think is vital in understanding this whole discussion.

Under our risk-based capital standard, how much capital we have to hold depends on how much risk we have in our portfolio, and this chart illustrates in a simple way how the amount of capital that you should have depends on the level of risk.

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