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Thank you for the opportunity to appear today. I look forward to working with Chairman Shelby, Ranking Member Sarbanes, and the Members of this Committee to secure the future of our housing finance system and, with it, the dreams of millions of families.

PREPARED STATEMENT OF NORMAN B. RICE PRESIDENT AND CHIEF EXECUTIVE OFFICER, FEDERAL HOME LOAN BANK OF SEATTLE

OCTOBER 16, 2003 Good morning Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. I am Norman B. Rice, President and Chief Executive Officer of the Federal Home Loan Bank of Seattle.

I would like to thank Chairman Shelby and the Committee for the opportunity to speak today on behalf of the Council of Federal Home Loan Banks, and the more than 8,000 member financial institutions that partner with us in building healthy communities and economies across our country.

I think it is appropriate for me to start this morning by commending Congress for two things regarding the Federal Home Loan Bank System.

The first is for creating the 12 banks under the authority of the Federal Home Loan Bank Act of 1932. Congress created the banks to both stabilize and improve the availability of funds to support homeownership in this country. And the banks have delivered an unmatched legacy of innovation and service to the U.S. housing market for the last 70 years.

The second is for the current work underway regarding regulatory restructuring of the housing GSE's. Clearly, Congress has the right and responsibility to scrutinize the regulatory oversight of the housing GSE's, and to ensure that they provide the Nation's network of community-based financial institutions with the safest, soundest source of residential mortgage and community development credit possible.

Like the Members of this Committee, the 12 Federal Home Loan Banks seek world-class regulatory oversight of our system. After all, our members have almost $40 billion in private capital invested in our banks. Due to our joint and several liability, we seek the same quality oversight and transparency that are of paramount concern to you, the U.S. Treasury, bondholders, and the public.

Along with the regulatory reform process now underway, the Bank System is also working toward voluntary SEC registration, pending resolution of critical accounting and reporting accommodations.

On September 17, 2003, the Federal Housing Finance Board issued a proposed regulation that would require the 12 banks to register their stock with the SEC under Section 12(g) of the 1934 Securities and Exchange Commission Act. Under this regulation, the Federal Home Loan Banks would also be required to submit periodic and current reports such as )-K's, 10–Q's and 8-K's.

Each bank has until January 15, 2004 to provide comments on the proposed regulation to the Finance Board.

The Seattle Bank Board of Directors, at our September 2003 meeting, adopted a resolution calling for voluntary SEC registration, and we are now moving to make that happen.

In addition, over the last year, the system's SEC Task Force has met several times with SEC officials to discuss the resolution of outstanding accounting and reporting issues we believe are necessary to accommodate the unique cooperative structure of the Bank System.

The bottom line: The goal of the Federal Home Loan Banks is to provide complete and transparent financial disclosures that are considered no less than “best in class.”

So, I am pleased to sit before you today representing the collective intent of the Federal Home Loan Banks to work diligently toward that goal as the process and debate around regulatory reform moves forward.

Among the 12 Federal Home Loan Banks you will find at least three banks—Boston, Cincinnati, and Indianapolis—that do not support direct regulatory oversight by the U.S. Treasury. These banks strongly believe that because the Bank System and Treasury are competitors in the capital markets—and Treasury provides an emergency line of credit to the banks—a systemic conflict of interest would be created. Therefore, they support maintaining the current regulatory structure provided by the Federal Housing Finance Board, which was approved by Congress in 1989 when finalizing FIRREA legislation.

It should come as no surprise that I have some views on this topic.

At the urging of the bank members of our system—the Nation's home lenders who own our cooperative-we have chosen to compete. That's why we jumped with both feet into the mortgage purchase business. In the end, the Nation's home lenders will better serve the Nation's homebuyers if there are choices and competition in the secondary mortgage market.

We welcome that competition because we are convinced we have a better way to meet our Congressionally mandated housing mission—to create homeownership opportunities. Because we are a cooperative, we are not beholden to the kinds of expectations of Wall Street investors, and because of the way we purchase mortgages, more of the risk is dispersed to those best able to manage the risk.

From a public policy point of view, full-fledged competition among GSE's is a way to more prudently manage GSE growth and to disperse risk among more investors.

The decisions you are about to make on regulatory reform and oversight will directly influence how this country best serves our network of community banks and consumers, and how we best protect the public interest and investment in the housing GSE's.

It is my job, as a President and CEO of one of the 12 Federal Home Loan Banks, to preserve and enhance the strength, integrity and value of our Bank System, and continue its legacy of service to our member financial institutions and the communities they serve.

Every day, I remind myself that I work for a cooperative that has, at its core, a public mission of making our communities better places to live and work. I do not own any part of this bank; it is owned by our members, and we are, at all times, fully accountable to them.

My role is to protect and enhance this cooperative, for the good of our financial institutions, our communities and the overall public interest invested in the Federal Home Loan Banks—the same purpose that each of you bring to this process.

I look forward to continuing to work closely with Members of Congress and the U.S. Treasury as we look for new and better ways of strengthening the oversight and value of our housing GSE's.

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

I believe there are two threshold issues that can help you attain your benchmark purpose of protecting the public interest in the housing GSE's.

First, there is much that separates the Federal Home Loan Banks from the two other housing GSE's, and these differences must be fully recognized and factored into any regulatory reform measures being considered.

Let me list what I consider to be the key differences: • Our mission is somewhat broader than the other housing GSE's, incorporating

economic and community development. • There are different capital requirements, with the FHLBanks required to hold 4

percent capital and the others required to hold a lower percentage. When new capital rules were established by Congress through Gramm-Leach-Bliley, there was wide agreement among economists that the Federal Home Loan Banks were required to hold too much capital against advances. Given that the Bank System has NEVER suffered a credit loss on advances, a 4 percent minimum requirement, we believe, is excessive. It is important to keep in mind that requiring too much capital can sometimes work against the goal of safety and soundness. If an enterprise is underleveraged, it can create pressure to take greater risk in order to generate better return on equity. In the secondary mortgage business, the likelihood of credit losses within the Bank System has increased. However, Fannie Mae and Freddie Mac, who get paid a fee to put credit risk on their books, are required to hold less capital, while the Federal Home Loan Banks—who compensate lenders for keeping the credit risk on their own books—are required to hold nearly twice as much capital. We believe

capital requirements should be standardized for all three housing GSE's. • The Bank System is cooperatively owned and capitalized by our members, while

the other housing GSE's must meet the earnings and stock valuation expectations

of Wall Street investors. • Two housing GSE's pay Federal income taxes, but the Federal Home Loan Banks

pay special taxes equivalent to the Federal corporate income tax rate of 26 percent. We are required to contribute 10 percent of our net income for affordable housing grants while the other GSE's have affordable housing goals. This is a highly efficient way of passing on our GSE subsidy, to directly impact affordable housing and economic development in the communities we serve. Though we appreciate the goals the other housing GSE's maintain, we believe as do most—the best way of passing along our GSE subsidy is through our Affordable Housing Program and the direct 10 percent contribution made by each of the 12 Federal Home Loan Banks annually. The Bank System, in 2002, generated $199 million to award as AHP grants and subsidies, and over the last 13 years has awarded more than $1.7 billion in grants and subsidies, making the banks one of the largest sources of private funding for affordable housing in the Nation. The Affordable Housing Program targets incomes lower than those established by the housing goals administered by HUD. Affordable Housing Program subsidies must be used

to fund the purchase, construction or rehabilitation of: • Owner-occupied housing for very low-income, or low- or moderate-income (no

greater than 80 percent of area median income) households; or Rental housing in which at least 20 percent of the units will be occupied by and

affordable for very low-income (no greater than 50 percent of area median income) households.

AHP subsidies may be in the form of a grant (direct subsidy) or a below-cost interest rate on an advance from a Federal Home Loan Bank member institution. In supporting home purchases, AHP funds may also be used for downpayment assistance for income-eligible, first-time homebuyers.

These are not inconsequential differences.

But, in fact, we increasingly have more in common. Most importantly for purposes of this discussion, we are all managing increasingly complex sets of financial, operating, and accounting risks. For example, all three housing GSE's pursue very sophisticated interest rate risk management strategies. And, all three would benefit from more rigorous oversight of these activities.

In my view, as business activities and associated risks converge among the GSE's, so, too, must the regulatory oversight evolve and adapt to a more complex world, and to greater scrutiny by Congress, the marketplace, and the American people.

Also, the choices you make on regulatory reform must be based on an underlying philosophy about the housing GSE's. In your judgment, is the public interest best advanced by encouraging competition among the housing GSE's or encouraging market domination by them?

It should come as no surprise that I have some views on this topic.

At the urging of the bank members of our system—the Nation's home lenders who own our cooperative—we have chosen to compete. That's why we jumped with both feet into the mortgage purchase business. In the end, the Nation's home lenders will better serve the Nation's homebuyers if there are choices and competition in the secondary mortgage market.

We welcome that competition because we are convinced we have a better way to meet our Congressionally mandated housing mission—to create homeownership opportunities. Because we are a cooperative, we are not beholden to the kinds of expectations of Wall Street investors, and because of the way we purchase mortgages, more of the risk is dispersed to those best able to manage the risk.

From a public policy point of view, full-fledged competition among GSE's is a way to more prudently manage GSE growth and to disperse risk among more investors.

The decisions you are about to make on regulatory reform and oversight will directly influence how this country best serves our network of community banks and consumers, and how we best protect the public interest and investment in the housing GSE's.

It is my job, as a President and CEO of one of the 12 Federal Home Loan Banks, to preserve and enhance the strength, integrity and value of our Bank System, and continue its legacy of service to our member financial institutions and the communities they serve.

Every day, I remind myself that I work for a cooperative that has, at its core, a public mission of making our communities better places to live and work. I do not own any part of this bank; it is owned by our members, and we are, at all times, fully accountable to them.

My role is to protect and enhance this cooperative, for the good of our financial institutions, our communities and the overall public interest invested in the Federal Home Loan Banks—the same purpose that each of you bring to this process.

I look forward to continuing to work closely with Members of Congress and the U.S. Treasury as we look for new and better ways of strengthening the oversight and value of our housing GSE's. Thank

you

for your time this morning. I would be happy to er any que ns you may have regarding my testimony.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM JOHN W. SNOW Prompt Corrective Action Q.1. Clearly, OFHEO and the Finance Board do not have the complete arsenal of prompt corrective action tools that the OCC and other bank regulators have. In fact, the Finance Board has no statutory Prompt Corrective Action authority.

Do you believe that a new regulator must have the same Prompt Corrective Action tools as the bank regulators? Has the Administration given any thought as to how to fashion Prompt Corrective Action triggers for the Federal Home Loan Bank System, given its unique capital structure? I would be interested in any input that you might want to offer. A.1. Prompt Corrective Action requirements are important for ensuring that financial institution regulators take the necessary regulatory actions at appropriate times depending on the financial condition of their regulated entities. Such requirements provide greater assurance that financial problems will be corrected before it becomes too late. The Prompt Corrective Action provisions that are in place for bank regulators provide a good model for evaluating and developing such requirements for a new regulator for the housing Government Sponsored Enterprises (GSE's). Receivership/Conservatorship Authority Q.2. Your written testimony indicated that the new regulatory agency should have more than the powers associated with conservatorship.

Which are the particular receivership authorities that you believe would be necessary? If the primary intent of a conservator is to maintain the ongoing business value of an enterprise, wouldn't broader receivership powers be unnecessary? What impact would receivership authority have on the ability of the GSE's to access the debt markets? A.2. The Administration has proposed that the new regulatory agency for the housing GSE's should have broader powers than those associated with conservatorship. In particular, the new regulatory agency should have all receivership authority necessary to direct the orderly liquidation of assets and otherwise to direct an orderly wind down of an enterprise, in full recognition that Congress has retained to itself, in the case of Fannie Mae and Freddie Mac, the power to revoke a charter. The Finance Board has the authority to liquidate a FHLBank under certain circumstances.

We would not expect that providing the new regulatory agency with receivership authority would

have an undue negative impact on the ability of the housing GSE's to access debt markets. Providing the new regulatory agency with the ability to complete an orderly wind down of a troubled regulated entity should encourage greater market discipline as creditors would have to evaluate fully their investment decisions. As with the powers granted to bank regulators, we would expect that the new regulatory agency could use its authority to place an entity in conservatorship if that was the appropriate course of action. However, if financial circumstances were sufficiently troubling, placing an entity in con

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