Fannie Mae's economists and econometricians reviewed the methodology of the Fed study, and found reason to be concerned that the analysis did not support the stated findings. The findings are attached. Specifically, they noted that both the data and techniques used caused a serious downward bias in trying to measure our effect on mortgage rates.

We also asked several eminent economists outside of Fannie Mae to take a look at the Fed study. Dr. William Greene, a prominent econometrician, examined the methodology employed in the Fed study and concluded, "Based on my review of the model specification, I conclude that the results in the Passmore study may well be seriously flawed...I believe the study should be subjected to extensive scrutiny before being used as a guide to the magnitude of Fannie Mae and Freddie Mac's impact on conforming mortgage rates." I've attached his comments for the record.

Last year, we commissioned a study from Professor R. Glenn Hubbard, former Chairman of the Council of Economic Advisers and a Professor at Columbia University, on Fannie Mae's management of liquidity risk. We recently asked for his views on the Fed study. In a letter, which I would like to enter into the record, he noted, "In the study I conducted last year, I found that Fannie Mae's return on assets and net interest margin have been less volatile historically than those of large commercial banks. This finding is consistent with the possibility that Fannie Mae's overall business risk is lower as well. This possibility and its implications for differences in funding costs between Fannie Mae and other financial institutions have not been fully explored in recent studies, including a recent Federal Reserve working paper."

We have also asked Professor Alan Blinder of Princeton, a former Vice Chairman of the Board of Governors of the Federal Reserve System for his reaction to the study. In a letter which is attached for the record, he states that there are a number of questions that could be asked with respect to such an analysis. “Passmore's conclusions depend sensitively on both his assumptions and the details of his estimation methods, many of which can be legitimately questioned," Blinder wrote.

Real world observations also differ from the econometric estimates in the Fed study. Many local newspapers publish mortgage rate charts every weekend, like the example from the Washington Post (Exhibit 7), listing the rates offered by many lenders.

There is a substantial interest rate difference between the mortgages we finance, on the left, and those we don't finance on the right. The loans we finance typically cost between 20 and 50 basis points less than jumbo loans.

Not only do we lower rates, but we also make fixed-rate mortgages more available.

Exhibit 12

2.5

2.0

1.5

3.6

3.0

Our Role Enables the Availability of the 30-
year Fixed-rate Mortgage

$92,700

$132,700

$172,700

$212,700

$252.700

$292,700

Conforming Loan Limit
$322,700

$332,700

Loan Amount

$372,700

$412,700

$452,700

$492,700

$532,700

$572,700

$612,700

$652,700

As you can see in Exhibit 8, there is a dramatic increase in share of adjustable-rate
mortgages that begins just above our conforming loan limit. This difference is even more
pronounced when you compare our market to the bank-based systems common
throughout the world. Only in the United States are long-term, fixed-rate mortgages
readily available, and here they account for nearly four of every five single-family first
mortgages taken out by consumers.

In many bank-based systems in other countries, consumers only have access to the
adjustable-rate mortgage loans that are a match for the banks' deposit base. But long-
term, refinanceable fixed-rate mortgages are better for both consumers and the economy.
With a fixed-rate mortgage consumers don't have to worry that rising interest rates will
jeopardize their ability to make the payments on their home loan. And because the cost of
existing mortgages is not affected when interest rates go up, and consumers can refinance
their mortgages when rates go down, the fixed-rate mortgage contributes greatly to
economic stability.

By making the long-term, fixed-rate mortgage more affordable and more available to
American families, Fannie Mae fulfills its role as an instrument of national policy to
expand homeownership. We believe in that mission, and work every day to achieve it.
It is in the best interest of our mission - and of national policy to support homeownership
- to ensure oversight by a world-class financial regulator. Millions of American families
are counting on our mortgage finance system to continue to provide opportunities to
reach the American Dream of homeownership. A great deal is at stake here. The 1992
Act has led to a transformation in mortgage finance unleashing innovation to make

homeownership more affordable and more available in communities around the nation. I believe that Congress can build on that success, strengthening our regulatory regime to enhance our ability to achieve our mission and benefit millions of families in the future.

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

FEBRUARY 25, 2004

Thank you, Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. Good afternoon. I appreciate the opportunity to appear before you today. My name is Richard F. Syron. I am the Chairman and Chief Executive Officer of Freddie Mac, a position I took at the end of December 2003.

Prior to joining Freddie Mac, I was Executive Chairman of Thermo Electron Corporation, an S&P 500 firm with 11,000 employees. Prior to that, I held a number of positions, including the Chairman and Executive Officer of the American Stock Exchange, President and Chief Executive Officer of the Federal Reserve Bank of Boston, and President and Chief Executive Officer of the Federal Home Loan Bank of Boston. I also served as assistant to then-Federal Reserve Chairman Paul Volcker, and earlier as Deputy Assistant Secretary for Economic Policy of the U.S. Department of the Treasury.

It is a great privilege to lead Freddie Mac, which plays such a critical role in financing homes for America's families-and providing strength and resiliency to America's economy. I could aspire to no greater legacy than to restore public trust in an institution chartered by Congress to ensure the stability and liquidity and accessibility of the Nation's mortgage markets.

The issue of regulatory oversight reform of the housing Government Sponsored Enterprises (GSE's) is vitally important to our Nation's economy and to homeowners. My views on this important topic have been profoundly shaped by my experiences as a former regulator. My firm belief that capital should be tied to risk stems directly from my tenure at the Boston Federal Reserve, where I was deeply involved in restructuring New England's banking system following the credit strains of the late 1980's and early 1990's. My views on homeownership, however, have more personal roots. I grew up in Boston in a two-family home financed by a VA loan that my father was able to obtain when he returned from World War II. Today, in my comments to this Committee, I will focus on three areas:

• Why GSE's exist-and what they have accomplished;

• The imperative of regulatory oversight reform; and

My top priorities for Freddie Mac, particularly how we are remedying our past accounting errors.

Why GSE's Exist and What They Have Accomplished

One advantage of being a newcomer is the ability to ask provocative questionsand there is no more provocative issue in the housing world than the role of the GSE's and the benefits they bring. Since arriving at Freddie Mac just 8 weeks ago, this question has been vigorously discussed in the halls of Government, by national think tanks, in newspapers-and just yesterday in this chamber by Alan Greenspan. I approach this question from the perspective from what we know that is, the current system of housing finance and its known benefits-and weigh it against what we do not know, that is, what housing finance would look like without the GSE's.

What we know is based on 70 years of mortgage history. In the aftermath of the Great Depression, Congress chose to provide explicit Government insurance to both the housing and banking industries to entice investors back to housing. While the plan worked, it also put the government directly on the hook for the risks associated with loaning individual homebuyers large sums of money for long periods of time. Mortgages carried significant credit risk because of the differences in the ability of borrowers to repay their loans. However, interest-rate risk was more vexing. Even if a borrower did not default over the course of 30 years, money would be tied up in a fixed-rate asset whose value was subject to the vagaries of interest-rate movements over prolonged periods.1

To address this issue, Congress found an ingenious way to stimulate long-term investment in housing without exposing the public fisc to the risk of substantial loss: Create financial institutions with a limited nexus to the Government and give them the singular job of making markets stable and liquid, at all points along the business cycle.

The GSE model of housing finance has been a Congressional success story. By providing attractive returns on capital, the GSE's have proven to be effective man

1 These risks are real: Recall the huge credit losses that resulted from the "oil-bust" in the early 1980's, and the taxpayer bailout of the S&L's, which were in the untenable position of holding 6 percent mortgages in an 18 percent interest-rate environment.