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 implicit 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 HUD 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. We are also increasing our presence in the rural multifamily market. This area of the multifamily market has traditionally been the province of Federally sponsored programs, because most primary market lenders find it unprofitable to originate conventional mortgages on small, rural multifamily properties, but Federal budget cuts have diminished the amount of credit available to these properties. We have recently committed that this year we will buy loans to fund preservation and rehabilitation of properties financed in the past with loans made by the Rural Housing Services, while leaving the low-cost RHS loans in place. We are working with RHS to expand our activities in this underserved sector. Another area in which we have been increasingly active is the market for small (5-50 unit) apartment loans, an area of the multifamily market that is important source of affordable housing and which HUD has previously identified as underserved by the secondary market. Last year alone, we financed about 180,000 units in about 12,500 small multifamily properties. Like other small properties, 5-50 unit mortgages are expensive to underwrite, and as a result most of our purchases came through portfolio transactions with large lenders specializing in these properties. We are using the knowledge gained from these purchases to help us better understand their special characteristics, with the aim of bringing efficiencies and liquidity to this sector and increasing sources of credit for these properties. As many witnesses have stated before this Committee during the last several months, Mr. Greenspan testified on February 24, 2004 that it is crucial to have an appropriate and thoughtful process for GSE liquidation in the case that a GSE fails. He not only argued that it was important on safety and soundness grounds, but also that it was one of the few credible ways that Congress could combat the impression in the investment community that the Federal Government will bail out the GSE's in the event of a crisis. Chairman Greenspan emphasized the current conservatorship authority of OFHEO as evidence that Congress will bail out the GSE's with taxpayer funds if one of them fails. Q.4.a. Do you believe that the current OFHEO conservatorship authority helps reinforce the impression that the Federal Government will bail out the GSE's in a crisis? Why or why not? A.4.a. We believe that the conservatorship provisions of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the 1992 Act) help reinforce the impression that the Congress has reserved for itself the full range of resolution options in the event a GSE were to experience significant financial difficulties. The conservatorship provisions of the 1992 Act are designed to allow the conservator to operate a GSE that is experiencing extreme financial distress as a going concern. These provisions contain no mechanism for the use of taxpayer funds to resolve an insolvent GSE; rather, the conservator must use funds generated by such a GSE's business operations to pay the GSEs' creditors. The Congress carefully constructed the conservatorship provisions of the 1992 Act in recognition of the unique role of the GSE's in expanding, and lowering the cost of, homeownership. In passing the legislation that created the current regulatory oversight structure for the GSE's, the Senate Banking Committee stated, This judgment takes account of the important role that the While we cannot represent what an individual investor or investors as a group might think, the current conservatorship provisions together with the legislative history contemplate that the Congress would decide how best to resolve an insolvent GSE in the unlikely event of extreme financial distress. In addition, as required by law, all of the Freddie Mac's obligations and securities state clearly and conspicuously in bold type that they are obligations of Freddie Mac only, and are not guaranteed by, or debts or obligations of, the United States or any agency or instrumentality of the United States. Q.4.b. If it does, how can the liquidation authority for the housing GSE's be clarified in order to combat the investor impression that the GSE's will be bailed out with taxpayer funds in a crisis, while at the same time, ensuring that the housing mission of the GSE's is not unduly harmed in the process of liquidation? If it does not, do you think it is appropriate for Congress to make any changes to the current OFHEO conservatorship authority? Why or why not? A.4.b. We believe that current law provides ample conservatorship powers for restoring an insolvent GSE to sound financial condition. A conservator appointed for such a GSE has all the powers the shareholders, directors, and officers of the GSE have to operate the GSE as a going concern. For example, a conservator may pay a GSE's creditors to the extent that funds may safely be made available for this purpose. It is imperative that the GSEs' regulatory structure provides rigorous oversight and ensures the continued safety and soundness of the GSE's. Strong, credible regulatory oversight is key to preventing financial difficulties that could lead to the need to appoint a conservator. Although we believe that current law contains sufficient conservatorship powers, we would be willing to consider whether these powers could be enhanced to make sure the Congress, the public, and investors are confident in our safe and sound operation. Q.5. In his testimony, Chairman Greenspan reiterated his opinion, albeit admittedly minority opinion, that Fannie and Freddie should be privatized. Do you think that the GSE's should be privatized? Why or why not? How do you think it would affect the housing market and the Nation's housing finance system if Fannie and Freddie were privatized. Please elaborate. A.5. We do not support privatizing the housing GSE's. To do so would effectively dismantle a proven housing finance system in exchange for uncertain benefits. Advocates of privatization set forth several arguments, none of which make a convincing case. First, privatization advocates believe Government sponsorship is no longer needed to attract capital to housing or to provide an abundant supply of 30-year, fixed-rate, prepayable mortgages. This optimistic view contradicts the experience in other developed countries. In Canada, for example, homebuyers typically are restricted to a 7-year fixed-rate mortgage, must make a 25 percent downpayment, and are locked into higher interest rates or have to pay heavy penalties if they wanted to prepay. This view also ignores our own jumbo market, which is not served by the GSE's. On any given day, it is possible to look in a newspaper and find that mortgage rates on conforming loans are regularly one-quarter of a percentage point lower than those in the higher-balance jumbo market. Borrowers in the jumbo market not only pay higher rates, but they are also more likely to have to settle for an adjustable-rate mortgage (ARM). ARM's have the obvious advantage of lowering monthly mortgage payments in the first few years of homeowning, but they require borrowers to bear the interest-rate risk on the loan-rather than the capital markets bearing this risk. This results in higher borrower defaults over the longterm. Jumbo borrowers also typically make larger average downpayments than conforming borrowers. Higher mortgage-interest rates and larger downpayments make it significantly harder for low- and moderate-income families to become homeowners. This sanguine view of markets also ignores where we are in the credit cycle. History reveals that certain industries will slump, that certain regions will experience economic downturn, which, in turn, causes house values to fall and defaults to rise. We also know that with interest rates at historic lows, the mortgages put on the books today, in all likelihood, will require financing for decades to come. In short, it is easy to dismiss the risks of mortgage lending when times are good. GSE's were created precisely for those times when things are not going so well, however. GSE's absorbed significant losses during the oil bust in the 1980's and during the weakening of the economy in Northeast in the early 1990's. They also stabilized residential mortgage rates during the international financial crisis of 1998—and again after September 11-by continuing to provide liquidity to the secondary market for conforming home loans. Their actions ensured that mortgage credit remained available and affordable. A second argument concerns the allocation of capital to housing. The housing market has an enormous impact on the economy, directly accounting for more than one-third of the nominal growth in GDP over the past 3 years. And this does not begin to account for all the indirect support for consumption generated by record levels of refinancing in the past few years. Housing played an important countercyclical role in supporting the recent weak economy, as noted in the' President's 2004 Economic Report: |