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depth that these two institutions and actually the Federal Home Loan Banks have helped fund.

I will leave the balance of my statement for the record, but I have tried to be detailed about the nature of the proposal that I have laid down. Hopefully, we will all have continuing discussions on this, and I am sure we will.

Thank you, Mr. Chairman.

Chairman SHELBY. Thank you.
Senator Enzi.


Senator ENZI. Thank you, Mr. Chairman. I appreciate your holding this hearing and the Secretaries for being here for it.

The past decade has brought tremendous change to the housing industry. The increase of homeownership for families has been one of the great success stories of our economy. In Wyoming, the housing market presents many difficulties. Rural housing needs are ever increasing, affordable housing in atypical places like Jackson are in great demand, and the unique challenges of home lending to our Native American tribes are but a few of the issues that Wyomingites face.

In Wyoming, the Government Sponsored Enterprises have greatly helped to pull together the necessary financing and community backing to make homeownership in these challenging environments possible. Fannie Mae, Freddie Mac, and the Federal Home Loan Bank of Seattle have worked closely with nearly 50 community banks in the State to find creative solutions that are essential in helping families achieve the American Dream.

While the Government Sponsored Enterprises have facilitated and expanded the homebuying opportunities for families, the Enterprises, overall, engage in very complex and intricate financial transactions. At this time, the financial stability of the housing enterprises does not appear to be in jeopardy. However, I believe the regulators of the Enterprises should have the tools and resources necessary to oversee the complex financial transactions.

In early August, I sent a letter to Secretary Snow, together with Senators Bennett, Johnson, and Schumer, supporting the move of the financial oversight responsibilities of the Office of the Federal Housing Enterprise Oversight, OFHEO, to the Department of the Treasury, providing that the new regulator was sufficiently financed. I still support that move.

Since that time, the issues surrounding the move of the regulator have become more complex. Recently, there have been calls to add the regulator of the Federal Home Loan Bank System to the proposed regulator. While I believe that the Federal Finance Housing Board needs to improve its financial oversight over the Federal Home Loan Banks, I also believe that bringing the two regulators together just because they regulate Government-sponsored entities is shortsighted.

Fannie Mae and Freddie Mac operate quite differently than the Federal Home Loan Banks. Any proposal to bring the regulators together must recognize their unique differences and must place sufficient firewalls to keep the regulatory oversight of the two systems

separate. I strongly encourage that we review this matter more thoroughly before rushing to a judgment.

Again, I thank you for being with us today, and I would also like to thank the distinguished second panel for being with us as well. I look forward to their testimony.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Schumer.


Senator SCHUMER. Thank you, Mr. Chairman. I appreciate the opportunity to say something here. I will be brief and ask unanimous consent that my opening statement be put in the record.

Chairman SHELBY. Without objection, your opening statement will be made part of the record.

Senator SCHUMER. Thank you. And I want to thank the Secretary for being here as well.

I would just make one point here. What is vital to me here is that Fannie and Freddie be able to continue in their mission to perform to fill in niches in the market that the private sector may not be able to fill in or it takes 10 years to fill in afterwards.

I have found in my State, when we have particular problems in suburban areas, for instance, where costs have gone way up and policemen, firemen, and teachers cannot afford a home, Fannie and Freddie have been the only group to devise policies, working with banks, that will fill in those gaps and make it easier for those people to live there rather than commute 100 miles away. Or in our inner city, we have some poor people who have these are Hassidic Jews who have 10 or 12 children and are very poor. And they continue to live in the city. It is very hard for them to make out.

Again, Fannie and Freddie have filled in the lurch. If we go to a strictly actuarial standard here, I think we will lose those things. And so I am deeply concerned, Mr. Secretary, that while I have no problem giving Treasury an oversight responsibility in terms of safety and soundness-and I want to make sure that capital requirements-which, as you may know, I have been very much involved with when we wrote the old S&L law as a way to strengthen the S&L industry-are strong. I would feel very strongly-I would fight very strongly against the mission parts of Freddie and Fannie, the approval of new products going to Treasury, which has a more actuarial point of view, than to HUD-and I love both of you dearly; this has nothing to do with either of you—than to HUD, which cares about the housing mission. And that will guide much of what I do.

I think you can have both. You do not have to throw out the baby with the bath water. You can tighten up the actuarial oversight of Fannie and Freddie, given their importance, and still maintain the vigor of their mission. And having the actuarial part in Treasury and the mission part in HUD makes a great deal of sense to me. Thank you, Mr. Chairman.

Chairman SHELBY. Senator Hagel.


Senator HAGEL. Mr. Chairman, thank you. And welcome to our panelists this morning. It is always helpful and a pleasure to see

the Secretaries of Treasury and HUD with us. And we also appreciate the second panel, President Rice, Director Gould, and Chairman Raines. We look forward to their testimony.

As we discuss significant changes to the supervision of Fannie Mae, Freddie Mac, and perhaps to Federal Home Loan Banks, I think it is important to reflect on why we are here. What is our central purpose in the reform we are considering? Confidence.

Confidence in the regulation of Fannie Mae and Freddie Mac is critical for the future. The accounting and management problems discovered at Freddie Mac earlier this year shed light on a problem that some of us have been concerned about for some time. We must do a more responsible job of regulating Fannie Mae and Freddie Mac, we owe it to the residential mortgage market, we owe it to the investors, and we owe it to the American taxpayer.

Congress created Fannie and Freddie and provided them with an implied Government backing. Congress must, therefore, provide a world-class regulator. Our goal here is to create a strong, independent regulator with the tools necessary to effectively examine two of the world's largest financial institutions and the expertise to minimize the risk to investors and the public.

In introducing the Federal Enterprise Regulatory Reform Act, S. 1508, Senators Sununu, Dole, and I offered one model, a beginning for an effective new regulator. And I want to highlight two principles contained in our bill, and the Administration's proposal, which are, in my opinion, essential to a credible regulator for Fannie and Freddie.

First, the new regulator at the Treasury Department must have the authority to approve new programs and ensure Fannie and Freddie continue to focus on their core missions as defined and established by the Congress of the United States. I agree with Secretary Martinez that HUD should focus its energies on setting and enforcing meaningful, affordable housing goals for Fannie and Freddie. Treasury needs the authority to approve the new programs.

Second, an effective regulator must have broad authority over capital standards and the ability to adjust them as appropriate to balance risk and ensure safety and soundness. I am not advocating for immediately increasing the amount of capital that Fannie and Freddie must hold, but I strongly favor giving the new regulator the ability to do so when it believes it is appropriate.

Some have recently asserted that too much attention on safety and soundness will undermine Fannie and Freddie's ability to play a leading role in affordable housing. I believe just the opposite to be true. The more soundly these companies are capitalized, the stronger they will be perceived in the marketplace. Higher confidence by investors leads to lower interest rates for homebuyers. Mr. Chairman, to be effective, a world-class regulator needs these two components.

Finally, I want to comment on another important aspect of the reform we are considering, that is, the inclusion of the Federal Home Loan Bank System under the same new regulator that we construct for Fannie and Freddie. While I am not opposed to including the Federal Home Loan Banks, they differ significantly, greatly, as Senator Enzi has just mentioned, from Fannie and

Freddie. And these differences must be addressed and factored into any new regulatory reform we consider. Unlike Fannie and Freddie, the banks are cooperatives, owned by member institutions in their assigned States. They are locally controlled and sensitive to the unique and varied financial needs of local communities and issue their debt securities through a central Office of Finance, which is operated by the 12 Banks collectively.

While a consensus seems to be forming around inclusion of the Federal Home Loan Banks, that does not mean we have to do it right away or in the same bill as Fannie and Freddie. This is an option. It surely is an option. As with all reform, it is more important that we do it right than we do it quickly.

Again, Mr. Chairman, I appreciate your holding the hearing, and I also look forward to our witnesses and working with them through this process. Thank you.

Chairman SHELBY. Senator Crapo.


Senator CRAPO. Thank you very much, Mr. Chairman. I will be brief. I know we want to get to the witnesses.

I share the concern that has been raised by, I think, all of my colleagues with regard to the failure of OFHEO to pick up on the problems that have come to light recently and the impetus for this hearing. I appreciate the Chairman holding this hearing and the important issues that we are dealing with. I will just make a couple of brief comments on a couple of the issues that have already been raised.

First, I am very interested in the proposal to include the Federal Home Loan Banks in the regulatory system that we are considering establishing. I recognize the differences that exist and I am very concerned that as we approach this matter, we recognize those differences and assure that whatever we establish does not overlook the fact that very different approaches need to be taken with regard to the regulation and oversight of the Federal Home Loan Banks vis-à-vis Fannie and Freddie.

That having been said, I can also see some very significant benefits of having them both housed at Treasury and having a system where an independent regulator oversees the operations of both, because although there are major differences, there are also increasing numbers of similarities in the types of activities and objectives that both are seeking to address. And I am looking forward today very closely to listening to the testimony on that issue.

Second, with regard to the question of where the authority over missions and programs of the GSE's should be housed, I tend to see the validity, as several of my colleagues, most recently just Senator Hagel, have indicated, that the authority over the new programs, the new missions, needs to be with the financial regulator in Treasury. I will listen very carefully to testimony and points brought up on both sides of that issue, but it seems to me that we need to be certain that the regulatory system we put into place is one in which there is fairness, there is that balanced playing field that we always talk about in different contexts as we have different types of entities being regulated in the same arena, and that we make

certain that the scope of regulatory authority is sufficient for effective regulation and oversight to be accomplished.

With that, Mr. Chairman, I will withhold the rest of my comments and concerns until a later time. Thank you. Chairman SHELBY. Thank you. Senator Carper.


Senator CARPER. Thanks, Mr. Chairman.

To Secretary Snow, Secretary Martinez, welcome. It is good to see you both. We thank you for your presence here and for your stewardship, your responsibilities.

Before I talk just a little bit about some areas where I think there seems to be general consensus, and maybe a couple of areas where there is not, let me just say that some of you may recall hearing the old adage, “If it ain't broke, do not fix it." I have said that once or twice. Maybe some of you have as well. “If it ain't broke, do not fix it." I think what applies here, instead of that approach, is an approach that says, "If it is not perfect, make it better."

We have a wonderful ability in this country to generate capital and provide that capital for housing, and it is not broken. It is not perfect, and we can make it better, and my hope is that we will.

The problems that led to the passage of the Sarbanes-Oxley legislation are in many cases created when companies understated expenses and they overstated revenues. And they were deceitful about it. There was not enough disclosure or transparency. They got into trouble and, frankly, created a lot of problems for our country and led to the passage of the legislation.

This is not that kind of situation. The problem they had at Freddie Mac was a problem, for the most part, where they were not overstating revenues, but where they actually were understating revenues, and in some cases overstating expenses. Quite a different problem. I guess if you are going to have a problem, that is the better problem to have. But it is not right. It is not the right thing to do.

I want to mention three or four areas where I think there is general consensus for us to go forward, and one of those is the idea that we need to create an independent, strong regulator, and there seems to be consensus that it should be in Treasury. Second is that the regulator should not be subject to the annual appropriations process. A third area of general consensus, it seems at least to me, is that affordable housing goals should remain the purview of HUD. And, finally, the housing mission of the GSE's should not be changed. Not everybody agrees with those, but I think for the most part there is consensus around those points.

There are a number of areas where there is not a consensus. I will mention maybe three. One is the ability of the new regulator to set minimum capital standards. Second would be the location of program approval authority and the standard for those new programs. And last is the inclusion or whether or not we should include within this new regulatory scheme Federal Home Loan Banks in any kind of approach or the way we change business.

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