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little better. All I have done is read about it in the newspaper, and I have long since learned that is not always a reliable source.

I think Chairman Greenspan shares my devotion to the market, and allowing the person who is getting the mortgage to make the choice whether he wants an ARM or a fixed rate. I have never had an ARM in my lifetime. I have always had a fixed rate. I have had various terms, 15 years as opposed to 30 years for a variety of reasons. No. As a matter of fact, I just signed up for an ARM. I lied. I am sorry.

[Laughter.]
Forgot that. That was just last week.
Chairman SHELBY. We will correct the record.
[Laughter.)
Senator BENNETT. Yes, correct the record on that.

As I listen though I think you are saying that if we decide as a matter of national policy we are going to limit the ability of the GSE's to grow, that means once we reach the ceiling, however or whatever we choose as the way and place to set it, that means that you have to wait till somebody pays off his 30-year mortgage before somebody else can get one. Is that an oversimplification if the pot is full? Some of the people behind you are shaking their heads.

Mr. SYRON. It is not totally the case because we still could secure it, take and securitize the 30-year mortgage.

Senator BENNETT. I see. The limit would come only from that which is supported by debt?

Mr. SYRON. Yes, that is right. Before I give up totally, do not forget that if we were to do that, we would be giving up the ability to tap foreign capital markets.

Senator BENNETT. I understand that. So there would still be some growth.

Mr. SYRON. Yes, sir.
Senator BENNETT. But it would limit the amount.
Mr. SYRON. It would have some limit on the amount.

Senator BENNETT. Back to my philosophical point. I do not like any form of governmental wage and price or product control. I like to let the marketplace decide what people get paid and what they can buy, and I think you are saying that the consumer is choosing this; even though the ARM is available, the consumers are making a choice.

The question is: Is that choice subsidized by virtue of the implied guarantee? In business I have never been able to cash in on an implied guarantee. I always prefer it in black and white, and I still do not understand where the implied guarantee—I guess it is the too-big-to-fail argument that we have heard here. Answer that question

Mr. RAINES. There is no difference. We buy adjustable rate mortgages. We buy fixed rate mortgages. It is the consumer who is deciding, and consistently the consumer decides 80 percent of the time they would like a fixed rate mortgage. But in the market we are not in, in the jumbo market is only 50 percent fixed rate mortgages, and that is because the market we are not in cannot support the same level of fixed rate mortgages. In fact, right at the line where the loan limit exists, as soon as a loan falls into an area that we can buy, all of a sudden the market shifts over to fixed rate mortgages. So this is the consumer's choice. Fannie Mae, today I believe, has 1,000 different adjustable rate mortgages that we are willing to buy. There is no lack of choice. You name an index. You name a feature. Somewhere in there we have in our system that mortgage and the ability to buy that mortgage.

Consumer choice is vital here, and every occasion I have seen where consumers have had the choice to fix their largest single expenditure, particularly in the lowest interest rate environment we have had in 30 years, they take that choice. Some people, because of the cost, have to take on more risk because they can get a lower initial rate. So they get that rate and take on that risk because they want to get in the home so badly, but as soon as they can, our experience is, they flip out of that adjustable rate mortgage into a fixed mortgage.

Senator BENNETT. Except for the jumbo market.

Mr. RAINES. Except in the jumbo market where it is simply so much more expensive that it just does not make as much sense for them to be in

Senator BENNETT. What is the line of the jumbo market these days?

Mr. RAINES. $333,700.

Senator BENNETT. You can see where I am going. My concern I have expressed to Mr. Rice when we had this hearing before, obviously safety and soundness has to be our primary goal here, but at the same time the way to be sure we have absolute safety and soundness is to require you to keep gold and make no loans whatsoever. That is pretty safe and sound, although with the commodity price maybe not even that is very good. We had to perform the mission. The question before the Committee, I believe, Mr. Chairman and Senator Shelby, is how do we construct a regulatory framework that gives us the ability to sleep at night on the safety and soundness issue and does not constrain the mission which the three of you and the organizations you represent have taken on and performed so admirably, that we do indeed lead the world by a very wide margin-this is not a close horse race-a very wide margin of homeownership, and that is a very difficult balancing act, and into it comes the new element that I had not thought of before this recent controversy raised by Chairman Greenspan of how do we do it in such a way that does not distort the market choices of the consumers that are taking out the mortgages, which is part, in my view, of fulfilling your mission. But it is a part which I had not addressed before. We have to make sure that the Government does not start picking winners and losers in product that is made available to the individual who takes out his mortgage, that he or she remains free to make, unimpeded by Government regulatory pressure, the right choice for him, and to switch if he decides he starts with an ARM and wants to go, we have to make sure that product is available for him to go. Is that a fair summary of the dilemma that we are facing here?

Mr. RAINES. It is, Senator, and it is going to get harder for you because the demand for mortgage credit in this decade, as I mentioned before, is going to double, and so we not only have to figure out how we continue to raise the $7 trillion that we are raising now, but we are also going to have to figure out how we get to $11

to $13 trillion while maintaining consumer choice and holding risk down.

If we had a static world where all we were doing was having to move around the current problem, it would be a lot easier, but we do not have a static world. These companies are going to have to figure out what investor have we not tapped? What part of the world has not invested enough in the United States? Who are we going to get to invest more than they have ever invested before in our housing market as opposed to their housing market? Our challenge is huge. This is what I worry about all the time. I do not worry about whether or not we know how to manage the mortgages we have on our books today. I worry about where we are going to find the money that is going to house this 30 million people who are going to be here in 2010, because if we do not, it is going to be a very simple result. We are going to have a shortage of housing capital. There will be higher prices to clear the market. Fewer people will qualify. So we will have a lower homeownership rate in the future than we have today, fewer people becoming homeowners, because we failed to come up with that additional $6 trillion of capital. So this is a huge, huge problem.

One of the reasons that I am so anxious for this Committee and this Congress to resolve these regulatory issues is so we can get about the work of doing this. We need a stable structure in order to take on this job. If it is up in the air, I cannot tell you that as we have in these prior decades, that we will be able to meet the task in the coming years.

Chairman SHELBY. Stable structure including a stable regulator. Mr. RAINES. Exactly.

Senator BENNETT. If I can just ask one question, to which I do not want an answer, but to get it on the record so that we might look at it, I wonder if some study could be made of how much that increased demand is being driven by our present tax laws that say you cannot deduct credit card debt but you can deduct home debt, and how much demand for mortgages is being driven by an effort to get their debt into a situation where the interest can be deductible, as it used to be? I remember filling out my 1040 and used to be able to deduct interest in any place, and now the only place it is deductible—and you see all of the ads on the television saying: Consolidate all your bills and get yourself into our home mortgage situation and then all the interest is deductible. At some point we should have a study done to see whether or not the tax laws are driving an artificial amount of people going into their home loans that might be changed. As I say, it is a question to which I do not want an answer here. Thank you for your indulgence.

Chairman SHELBY. Before I call on Senator Carper I just want to respond to something you said, Chairman Raines. You were talking about specialization earlier. Banks have asked for expanded authority over the years for activities, as they say, to reduce risk through diversification. Fannie, as I understood it now, is engaging in one less risky activity. Does that not contradict the standard investment theory to spread your risk? You see what I am getting at?

Mr. RAINES. Actually, Mr. Chairman, there is a lot of debate and there has been some good work on this question of how much you can diversify away certain risk. It is not clear to me, and I think our experience is not such, that looking at banks, that this diversification across businesses has been successful. The counter argument is if you are in many businesses, how many of them can you be good at? And how many management teams can you bring together to manage all of these businesses? The experience I think in the banking sector has been if one of those businesses goes down, the diversification does not seem to have any effect whatsoever. I am much more a believer in putting your eggs in the basket; and watching the basket. Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER Senator CARPER. Thanks, Mr. Chairman. To our witnesses, welcome and thank you for being with us today.

Mr. Raines, I walked in after you had given your testimony and Mr. Syron was just beginning his and I heard his testimony and that of Mr. Rice. I did not hear your testimony, and I am not going to ask you to give your testimony, but I what I would like for you to do is take just maybe a minute and just recap a couple of key nuggets that you would have us take out of here.

Mr. RAINES. I just tried to make four points in the testimony, that primarily we need to focus on the important goal of maintaining the best housing finance system in the world. Getting capital right is a very important part of that. Getting the receivership question resolved appropriately so it does not introduce new uncertainty into the marketplace is a very important part of that as well. And we have to make it possible to have innovation and not have it tied up in bureaucratic process.

Senator CARPER. Thank you. Yesterday, when Chairman Greenspan was here I asked him a question. I am going to ask you the same question. I asked him: What wrong are we trying to make right in this process, and what risk or what harm are we seeking to avert? Let me just ask each of you the same question. Mr. Rice, if we could just start with you.

Mr. RICE. I ask that question often, but I think what I really believe is at issue is a strong independent regulatory structure in order to manage the risk that is inherent with our business, and that by giving that regulator the powers to manage capital, to have independence, have the oversight responsibilities that are necessary, can restore a lot more confidence in this whole process.

I think that as you begin to pile on, so to speak, or look at other ancillary issues beyond, then it becomes a little more complex. I really do think that we are going to have to figure out and create a structure that allows an independent regulator to be accountable to the Banking Committee and Congress and engage in that dialogue of change rather than trying to statutorily try to make all those changes, because I think this is not just a turn of the screw and things are all right. I think it is a long-term discussion with trust and support for an independent regulator.

Senator CARPER. Mr. Syron, let me ask the same question. Again, the question is: What wrong are we seeking to make right and what harm are we seeking to avert?

Mr. SYRON. I think that is a very good question, Senator, because I think there is a confusion on it. First, in terms of what is right,

I think we have the most effective housing finance system in the world and the people in the rest of the world will tell us that. The wrong, in my mind, that we need to make right is I do not think we have an adequate regulatory structure for the GSE's, an adequately funded regulatory structure, and I do not know if it is an adequately structured regulatory structure. I think that is the issue that we need to make right.

The issue that I do not think is broken and that we do not need to make right is to reexamine the entire housing finance system of the United States to explore the issue of whether we want to privatize these organizations and radically change the way we provide housing finance in the United States.

Senator CARPER. Mr. Raines.

Mr. RAINES. I think the legitimate issue that we would encourage the Congress to look at is whether the regulatory regime for these important institutions is appropriate given the need in the future. The last time Congress did this was 1992, and in 1992 it made big changes. We did not have a safety and soundness regulator before 1992. We did not have real capital standards before 1992. We did not have housing goals before 1992. All of that happened in the 1992 Act. I think it made the system better. I think it made Fannie Mae better. I hope that through this process you prepare these companies for the task that we have going forward, which is to carry out the national policy of making homeownership and affordable rental housing more available, and to meet the needs of a growing country.

In crafting a better arrangement from a regulatory standpoint, do not harm the underlying mission of the companies.

Senator CARPER. I am sure you heard from the critics of GSE's, particularly private sector competitors of the GSE's who really believe that you have an unfair advantage here, and it is something they would like to change. What do you say to those people?

Mr. SYRON. Unfair advantage, I have found is always very much in the eyes of the different competitors. Our different competitors have advantages of their own. They have, in many cases, depository insurance. They have an ability, which we are not looking for, to come in and out of markets. They will come in and out of these markets at the excuse the expression-drop of a dime, depending on where things are most advantageous from their perspective. At least speaking for the two housing GSE's, our responsibility is to be focused on the housing industry. Business in the United States is the reason we are as effective as a Nation as we are is a very, very competitive situation. But everyone will look at their own situation and say someone else has an unfair advantage. When was the last time you heard a CEO come to you and say, "My company has an unfair advantage?”

Mr. RAINES. Senator, I think there is a lot of myth and legend about who has what unfair advantage. When you look at in terms of unfair advantages and you say, who has the best deal? I would love to have the deal the banks have. Why? We have to fund our balance sheet by issuing long-term debt in the capital markets. They fund most of their balance sheet with deposits, and those deposits are backed up by insurance and they are also backed up by the Fed window that allows them to borrow. This has a huge im

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