• Ensure that neither the U.S. Treasury, nor the independent GSE regulatory unit, has the ability to impede or limit our access to the capital markets without cause. Not limit the financial management tools available to prudently manage the financial risks inherent in our funding and business activities.

Preserve the Unique Nature of the Bank System

While all three GSE's have much in common, we believe it is important to both recognize and preserve the unique nature of the FHLBanks.

Therefore, any legislation must:

• Preserve the cooperative ownership of the Bank System and the joint and several liability that is the underpinning of the Bank System.

• Preserve the unique regional structure of the 12 Banks that assures we are locally controlled and responsive to the financial and economic development needs of our communities.

I also would like to speak more specifically to the regulatory structure we understand is under discussion-that of an independent agency that operates outside of a cabinet-level department.

I will present to you this afternoon the Bank System's view on the following aspects of this proposed structure:

• Ensuring regulatory independence.

• Agency oversight responsibilities.

• Creating separate divisions for the Federal Home Loan Banks and the publicly traded housing GSE's.

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 mission fulfillment of the housing GSE's. The regulator of this new, proposed agency must have a laser focus on following the will of Congress in assuring fulfillment of the mission and the safety and soundness of the housing GSE's, not the agendas of outside agencies and other political influences.

We know that some have discussed the possibility of an advisory body in addition to or as a part of this regulator. The Bank System understands the potential value of a board or advisory committee, and the regulatory role other cabinet-level departments have played in the past. However, it is important that the new "world class" regulator not be hamstrung by a cumbersome board structure, and not be dominated or controlled by any single agency represented on the board. This new regulatory body must have the authority to govern-promulgate rules and perform its safety and soundness role.

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 for the two housing GSE's and the Federal Home Loan Banks.

We are required to annually contribute 10 percent of our net income for affordable housing grants, while Fannie Mae and Freddie Mac have affordable housing goals. However, we believe a proposed new regulator should have the authority to review, approve, and monitor all mission-based goals and programs.

Though we appreciate the goals the other housing GSE's maintain, we believe that in addition to greater consumer access to credit, one of the best ways of passing along our subsidy is through our Affordable Housing Program and the direct 10 percent contribution made by each of the 12 Federal Home Loan Banks annually.

In addition, our current regulator has that mission-oversight authority, and we believe it has served the Bank System, its members and their communities very well.

• Setting capital standards.

Along with independence, any world-class 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 GrammLeach-Bliley legislation, and the Federal Housing 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. Anything less, in our opinion, would be a significant step backward.

• Approving new business activities and programs.

Having the capacity to innovate and keep pace with an evolving financial services industry is critical to all 12 Federal Home Loan Banks. 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 risk to the GSE.

Speaking on behalf of the Seattle Bank, I believe our Mortgage Purchase Program (MPP) is a good example of where a regulator insisted on close oversight and then approved a new business line. This new activity was and remains fully consistent with our mission and the statutory authority Congress conferred, but prior review was appropriate because it entailed substantial new risks.

Likewise, going forward, the new regulator should enjoy and exercise the same authority to approve innovation. In turn, a Federal Home Loan Bank should be expected to demonstrate, first, that it has the capacity to manage the business before it is allowed to incur substantial new risk. Since nothing is static in financial services generally-and housing finance in particular-it is incumbent upon the regulator and regulated alike to remain vigilant. To that end, we continue to strengthen our internal infrastructure in an effort to better manage the risks of this new business, which has proven to drive significant value back to our member shareholders and lower housing costs for consumers.

Creating Separate Divisions for the Bank System and the Publicly

Traded Housing GSE's

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

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 Streets across the country, 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 appropriate oversight and supervision. Our assumption is that staffing from previous regulatory agencies such as the Finance Board and OFHEO-could be retained to provide a baseline of expertise for the two divisions.

In concluding this afternoon, I want to emphasize to the Committee that the onus for strengthening our system lies not only with Congress and 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. The Federal Home Loan Banks unanimously support providing enhanced, comprehensive, and fully transparent securities disclosure. 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, the Federal Housing Finance Board, and others-is concerning who should have authority over financial disclosures and transparency: The Securities Exchange Commission (SEC) or the housing GSE regulator. From the Bank System's perspective, we believe that a world-class regulator with the experience and expertise to oversee the housing GSE's would, potentially, be better able to set the framework and supervision for the level of financial disclosure now being demanded of our system.

If Congress' intent is to create a new, independent regulatory structure for the housing GSE's, why not invest the agency with the authority to oversee financial disclosure? Why not accommodate in this new framework the resources and expertise to supervise financial disclosure that conforms to SEC standards, yet fits appropriately within the Congressionally mandated scope of the housing GSE charter and mission?

We would respectfully request that this Committee consider this as an option as you continue your regulatory restructuring discussions for the housing GSE's. However, if Congress were to choose the SEC to regulate these financial disclosures, the Bank System believes some very specific accommodations would be nec

essary.

The Banks have identified financial, operational, and legal considerations that could lead to uncertainties and risks to the system and adversely affect their ability to carry out their Congressionally mandated housing finance mission.

As just one example-issuer stock-repurchase requirements.

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 SEC 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 require

ments.

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 rates— by 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 available 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 periods 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 apparent.

• 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 predatory 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