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The purpose of this requirement is to provide adequate information to the SEC, the holder of an issuer's equity securities, and the marketplace of a potential change in control when an issuer repurchases its own shares.

The Federal Home Loan Banks routinely repurchase the excess stock of their members. All repurchases must be made at par value. Repurchase transactions often occur on a monthly basis, although they may occur more frequently than that, at the initiation of the FHLBank or at the request of a member shareholder.

The ability to repurchase excess stock of members enables our banks to manage their capital position in view of prevailing market and business conditions, consistent with Federal Housing Finance Board requirements.

Repurchases of excess stock cannot result in the change of control of a Federal Home Loan Bank, nor can they benefit one member at the expense of another, because all transactions must occur at par value.

Accordingly, no investor protection purpose would be served by requiring the Bank System to comply with the issuer-repurchase requirements of the Federal securities laws. Moreover, the application of such requirements would result in costly and unnecessary filings, in view of the volume and frequency of bank repurchase transactions.

Again, this is just one example of several—illustrating the unique nature of the Bank System and the significant financial, operational, and legal challenges created when considering SEC registration for our 12 Banks.

However, it is important to note that the Bank System's ongoing questions and discussions have not prevented our institutions from working with SĒC staff over the last year on the process of registering under the 1934 Act-a process driven, in large part, by proposed rulemaking through the Federal Housing Finance Board.

A Task Force of the Bank Presidents’ Conference, as well as some individual Banks, have had a number of meetings with SEC officials to discuss the resolution of outstanding accounting and reporting issues.

In addition, the Seattle Bank Board of Directors, at our September 2003 meeting, adopted a resolution calling for SEC registration, pending resolution of all reporting and accounting issues. Our individual banks are also investing significantly in staff and resources in order to conform to SEC and Sarbanes-Oxley disclosure requirements.

If it is the will of Congress for the Federal Home Loan Banks to complete SEC registration, we believe we are moving in the right direction to make that happen in an appropriate timeframe and in a way that maintains our ability to carry out the Bank System's Congressionally mandated housing finance mission.

After all, that is why the Federal Home Loan Banks exist—to provide flexible, long-term financing that helps our member shareholders fund the hopes, dreams, and critical needs of their communities.

As you move quickly forward in this legislative process, I would ask that you keep top of 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 the Bank System exists.

We look forward to working with you in strengthening our cooperative and the oversight and supervision of the housing GSE's—for the good of the American public, our communities, and our members.

Thank you for your time this afternoon. I would be happy to answer any questions you may have regarding my testimony.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL

FROM RICHARD F. SYRON Q.1. In a June 25, 2003 press release, Freddie Mac stated it would start to provide disclosure on its fair value balance sheet on a quarterly basis. Does Freddie Mac still plan to disclose this information? If so, then when? A.1. Yes, Freddie Mac's objective continues to be to provide quarterly estimates of fair value balance sheet net assets for quarterly 2004 financial results subject to meeting our objective to return to timely financial reporting. We intend to return to timely financial reporting as soon as possible. However, we currently are not able to predict when we will do so. Q.2. How would fair value balance sheets enhance transparency? A.2. Our fair value of net assets represents management's estimation of the fair value of our existing net assets. Although it does not represent the value of the company as an ongoing concern, we believe it (along with our GAAP results and the interest rate risk sensitivity and other disclosures we publish) provides a useful perspective on our financial condition. This is because fair value of net assets takes a consistent approach to the measurement of all financial assets and liabilities, rather than an approach mixing historical cost and fair value techniques, as is the case with Freddie Mac's GAAP-based consolidated financial statements.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM RICHARD F. SYRON Q.1. In Chairman Greenspan's testimony before this Committee on February 24, 2004, in response to a question I posed about whether it is appropriate for Congress to recapture some of the implicit Federal benefits that are not passed onto homeowners in the form of lowered mortgage interest rates, Chairman Greenspan agreed that it was a “legitimate judgment for Congress” to recapture some of these “lost” benefits. Why shouldn't Congress demand more of Fannie, Freddie, and the FHLB's in light of the implied Federal benefits that have been documented by several studies? A.1. As we said in our testimony on February 25, Freddie Mac can and will do more to support homeownership and affordable housing. That said, we respectfully disagree with the premises of the question. Although Freddie Mac undeniably lowers interest ratesby an average of 25–30 basis points—this is not why Congress created Freddie Mac. More important, lowering interest rates is only one of the many indispensable benefits that Freddie Mac brings to America's families and the mortgage markets generally.

Congress created Freddie Mac to provide liquidity, support, and stability to the residential housing finance market and to support affordable housing. By fulfilling our mission purposes, we create value for homeowners, the housing finance system, and the overall economy that substantially exceeds the value of the benefits we receive from our charter:

We have created a national mortgage market where funds are available at virtually the same rate throughout the country, regardless of economic or market conditions. We achieved this by attracting capital from a broad base of investors worldwide,

which enables us to purchase mortgages at all times. • We make 30-year, fixed-rate, prepayable mortgages widely avail

able because we are much better able to manage the risk of such mortgages than other financial institutions. Only in the United

States are these mortgages widely available. • Our ability to buy mortgages at all times made the refinance

boom of the past few years possible. Homeowners took advantage of low rates to reduce their mortgage interest costs by some $200 billion dollars in 2001-2002 alone. And as Chairman Greenspan has observed, the ability of homeowners to reduce their mortgage costs and liquefy their home equity has provided crucial support

to the economy during the past several years. • We provide critical stability in the mortgage market during peri

ods of economic instability, such as during the Asian debt crisis of 1998 and the business and bank recession of 1990–1992. At these times, conforming mortgage rates would have increased dramatically except for our ability to continue buying mortgages and mortgage-backed securities. It is precisely during such periods of stress that the stabilizing role of the GSE's is most appar

ent. . We pioneered innovations such as automated underwriting that

have substantially lowered downpayment requirements, lowered costs, and reduced time in originating and closing mortgages. Equally important, through automated underwriting, we have

helped make mortgage underwriting fairer and more objective. • We have led the Nation in protecting consumers against preda

tory mortgage lending practices, and we are bringing the benefits of standardization to the subprime market. This leadership has especially benefited elderly, low-income, and minority families.

Many of these benefits are difficult to quantify specifically, but they have led to a housing finance system that is envied throughout the world. We believe the evidence clearly demonstrates that we fulfill the mission purposes for which we are created and create substantial benefits for homeowners, the housing finance system, and the economy. These benefits far outweigh any benefits we receive from our charter. Q.2. Do you think that your Affordable Housing Goals are an “inefficient" way of passing your implied Federal benefits to homeowners? How might your implied Federal benefits be passed more efficiently on to homebuyers? Please elaborate. A.2. As we stated in our answer to question 1, we create value for homeowners, the housing finance system, and the economy that substantially exceeds the value of the benefits we receive from our charter. The Affordable Housing Goals, though extremely important, are only one measure of the benefits we create.

Nonetheless, Freddie Mac provides a tremendous amount of support to affordable housing. We have met each of the three affordable housing goals for eight consecutive years—every year since HUD established permanent goals in 1995. Since the establishment of the goals in the 1992 Act, we have substantially increased our level of service to low- and moderate-income families and families in underserved areas. In 2003, we financed homes for almost 2.5 million low- and moderate-income families, a fourfold increase over our purchases of such mortgages in 1993. In fact, we financed more homes for low- and moderate-income families in 2003 than we did for all borrowers in 1993. In 2003, we bought more than $106 billion of mortgages made to minority families—again, an all-time record for us. By any standard, the goals should be considered a major public policy success.

In light of the GSEs stellar financial performance and in the context of GSE regulatory reform, the Administration has suggested creating new affordable housing goals and subgoals. Q.3.a. Do you believe that these more rigorous goals and subgoals are obtainable and appropriate, in light of your recent financial performance and the implícit Federal benefits you receive? Why or why not? A.3.a. We do not know exactly what the Department of Housing and Urban Development (HUD) will propose when it publishes revised affordable housing goal rules for comment later this spring. Until HUD issues its proposal, it is difficult to evaluate whether any revisions to the current goals will be obtainable or appropriate. Our own discussions with HUD suggest that the revised regulations will seek to promote the Administration's overall goal-which we enthusiastically support of increasing homeownership rates, particularly among minority families.

We believe that the goals, which have risen dramatically over the last decade, are already quite rigorous. Since 1993, the first year that HUD set the goal levels, the low- and moderate-income goal has risen from 28 to 50 percent, a 79 percent increase. In that same time, the underserved area goal has risen from 26 to 31 percent, a 19 percent increase. The special affordable goal has risen from 14 to 20 percent, a 43 percent increase, since HŮD shifted the goal from a dollar amount to a percentage of purchases in 1996. As we said in our answer to question 2, we have responded by dramatically increasing our purchases of mortgages supporting affordable housing, and we have met all of the goals for eight consecutive years.

Moreover, we believe that HUD should be very cautious. in considering new subgoals. For example, some have suggested creating a home purchase goal. This could reduce liquidity in the housing finance market by creating a disincentive for the GSE's to purchase refinance loans. The low mortgage rates of the last few years have allowed millions of American families to lower their housing costs and thus helped sustain the economy through a difficult period. A goal that discourages us from fully supporting the entire conforming market would not be in the best interests of homeowners or the national economy, and would be inconsistent with our mission. Moreover, Freddie Mac already provides strong support to home purchase needs. In each of the past 4 years (2000-2003), we have purchased more than $100 billion of home purchase mortgages each year. In 2003, we purchased nearly $150 billion of home purchase mortgages.

This is not to suggest that we can rest on our laurels. To the contrary, we can build on this record of success and continue working hard toward providing an even higher level of service to affordable

housing needs. The homeownership rates for African-American and Hispanic-American families are unacceptably low. Freddie Mac and its employees are committed to doing more. We are reexamining our business practices and policies top-to-bottom to come up with ways we can expand homeownership opportunities further and make mortgage finance as affordable as possible for all of America's families. Q.3.b. What more can Freddie Mac do to promote affordable multifamily housing? Please elaborate. A.3.b. Apartment homes constitute a major share of the Nation's affordable housing. Last year, we purchased a record $22 billion in multifamily mortgages, representing nearly 600,000 apartments, more than 90 percent of which were affordable to low- and-moderate income families under the HUD goals. We will continue to be extremely active in the multifamily mortgage market.

We agree, however, that there is more that Freddie Mac can and must do. According to the Joint Center for Housing Studies at Harvard University, households with one full-time minimum wage earner cannot afford to rent even a modest one-bedroom apartment anywhere in the country. The Joint Center also reports that as of 2001 there was a shortage of affordable market-rate apartments (the type we typically finance) of about 2 million units; We are also entering a critical period in which properties originally financed through low-income housing tax credits will need rehabilitation if they are to be maintained as decent housing for low-income families. Even conventionally financed multifamily properties built in the 1970's and 1980's will soon need funding if they are to remain viable sources of housing for renters. There needs to be greater and more diversified support for rural multifamily properties.

One of the most important ways to meet these needs are “targeted” affordable multifamily mortgages, in which public/private partnerships create apartments that the owner commits to maintain as affordable to specific income groups on a long-term basis. Most private primary market lenders, however, lack the specialized staff to process these loans and thus find them uneconomic to originate. In the short-term, Freddie Mac is working hard to find lenders who are willing to make the effort to originate these mortgages. To this end, we recently designated four companies as nationwide targeted affordable lenders. We chose these particular companies because they have invested in personnel dedicated to this type of lending and they are affiliated with construction lenders and tax credit equity investors, which enables them to provide a full range of funding options to affordable housing developers.

To aid us in the pursuit of more enduring solutions, we have created a Targeted Affordable Advisory Council. The Council, which met for the first time in January, consists of a variety of prestigious affordable housing market participants who have agreed to help us streamline our internal processes for this type of product, enhance our existing targeted affordable products and develop new ones. During March, Freddie Mac held a Tax Credit Symposium in which we called on industry experts to help us better understand tax credit investment risk so that we can increase both our debt and equity investments in tax-credited properties.

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