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ship opportunities for less advantaged Americans. Small banks form an important component of our housing finance system, and we do not see any reason why improving the regulation of the housing GSE's would have a negative impact on their operations. In contrast, we would expect that improvements in the regulatory oversight of the housing GSE's would help to ensure that we have a system in place that serves the needs of small banks and their customers both today and in the future, and I am committed to that result. Q.2. As you know, the OCC and the Fed require banks to notify their respective regulator after they have engaged in a new activity. Why do you think the OCC/Fed model would not work for the GSE's? A.2. The Administration has proposed that the authority for approving new activities of the housing enterprises be transferred from HUD to the new regulatory agency, and we do think that the OCC model for new activity approval is an appropriate model for the new regulatory agency. The key element is flexibility: Flexibility in bringing new products on line and flexibility to provide fully adequate supervision. RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER

FROM JOHN W. SNOW Q.1. Secretary Snow, the initial thinking after Freddie's problems erupted was to put Fannie and Freddie's regulator into Treasury to bring confidence to the market. Is this still a timely rationale for moving the regulator into Treasury or have the markets calmed themselves regarding Fannie and Freddie and this issue has died? A.1. While the recent problems experienced by Freddie Mac highlighted problems with the housing GSEs' current regulatory oversight regime, the rationale for regulatory reform goes beyond these recent events. Because housing finance is so important to our national economy, we need to have a world-class regulatory agency to oversee the GSE's in a manner that is consistent with maintaining healthy national markets for housing finance. There is a general recognition that the supervisory system for the housing GSE's has neither the tools, stature, authority, nor resources to deal effectively with the current size, complexity, and importance of these enterprises. As with all forms of Government regulation, policymakers should continually evaluate where improvements can be made. It is in that regard that the Administration is recommending improvements to the oversight of our housing finance system. Q.2. Secretary Snow, Treasury is now interested in including the Federal Home Loan Banks in a bill. I was confused after your testimony today because in it you say "that all housing enterprises be included in a single program of world-class supervision.” But in your response to Senator Hagel you said there should be two divisions, one for the Banks and one for Fannie and Freddie. Do you mean one bureau with two divisions or two bureaus? Please clarify what you mean. What is your thinking for the structure you propose? A.2. The key point is that whatever the structure of the new housing GSE regulatory agency, the new agency should have the same set of enforcement tools and the same overall financial supervisory regime in place for all of its regulated entities. At the same time, the underlying statutory authority and business operations of Fannie Mae and Freddie Mac in comparison to the FHLBanks is different, so some specialization in regulation may be necessary. One way to address these issues would be to create one regulatory agency with two divisions. One division would be responsible for Fannie Mae and Freddie Mac, and the other division would be responsible for the FHLBanks. Under such a structure, benefits in financial oversight could be achieved through the sharing of best practices in examination procedures and overall measurement of risk, while at the same time the unique characteristics of each of these entities could also be considered. Q.3. Secretary Snow and Secretary Martinez, if Fannie and Freddie are put into Treasury, you discuss wanting new program and/or new activity review. The GSE's are concerned that this might impede their ability to be creative and innovative with new mortgage products. Do you agree? A.3. We see no reason why the GSEs' innovation should be stifled under a process whereby the new regulatory agency has authority to approve new activities. Our Nation's bank and thrift regulators have fostered and encouraged innovation using the same type of approval authority, and we see no reason why providing similar authority to the new regulatory agency would stifle innovation by housing GSE's. Q.4. Secretary Snow, the GSE's are concerned that giving the regulator greater discretion to change risk-based capital standards might result in higher costs for homeowners and renters. Has Treasury considered this concern and what is your response? A.4. In developing our approach to regulatory reform for the housing GSE's we have been focused on two core objectives: Promoting a sound and resilient financial system, and increased homeownership opportunities for less advantaged Americans. To serve both of these objectives we need to devote careful attention to the resilience of our system of housing finance. Housing finance is so important to our national economy that we need a strong, world-class regulatory agency to oversee the prudential operations of the GSE's and the safety and soundness of their financial activities consistent with maintaining healthy national markets for housing finance.

In providing the new regulatory agency with the discretion to change risk-based capital standards, we would not expect the new regulatory agency to initiate such a change unless the risks undertaken by the GSE's warranted such a change. In that regard, changes in capital standards should go toward strengthening the financial position of the GSE's and further promoting our goal of a strong and resilient housing finance system that serves the needs of our Nation's homeowners today and in the future, ultimately increasing home affordability. Q.5. Secretary Snow, do you know if anyone in the Government has studied or is studying what the cost or impact to the Federal Home Loan Banks will be of registering their stock with the SEC? (If he says no. You might suggest that some staff attention be given to this issue.) A.5. The FHLBanks have raised the concern of potential costs or unintended effects of registering with their stock with the SEC. It is my understanding the FHLBanks and the SEC continue to discuss details (for example, how the joint and several liabilities of the FHLBanks will be described) regarding concerns the FHLBanks have raised with registration. I am confident that these types of concerns can be worked out, which would then remove any remaining impediment to the FHLBanks' registering with the SEC.

As it relates to studying the issue of cost or impact on the FHLBanks, it is difficult to see how providing greater financial disclosure to the market could have a negative impact on the FHLBanks unless such disclosure reveals new information to financial market participants that raises questions regarding the FHLBanks' credit quality. RESPONSE TO WRITTEN QUESTIONS OF SENATOR SHELBY

FROM MEL MARTINEZ The mission of Fannie Mae and Freddie Mac is expanding homeownership, and their housing goals are a barometer of that mission. Q.1.a. Do you believe the current housing goals are sufficient to fulfill the ĠSEs' mission? If yes, then why change the current system? A.1.a. No, HUD believes the current goals are not sufficient to ensure that the GSEs focus on expanding homeownership. Goals must be dynamic to ensure that areas where there is a need can be adequately targeted. Under the Administration's proposal, HUD would receive enhanced authority to establish and enforce housing goals for the GSE's. This enhanced authority would include the ability to establish an annual home purchase goal for the GSE's which could be specifically targeted to first-time homebuyers, lowand moderate-income homebuyers, homebuyers in underserved areas, and homebuyers of special affordable housing. Other proposed enhancements include the ability to add, modify, or rescind existing goals as needed to better serve housing needs. In addition, to ensure that this function is given significant attention, the Administration also proposes establishing a new office within HUD, with the costs of regulation to be funded, as with other financial regulators, through assessments on the regulated entities, the GSE's. Q.1.b. What do you see as the dividing line between encouraging affordable mortgage lending and credit allocation? How do we make sure these goals are insulated from the political process? A.1.b. Congress chartered both Fannie Mae and Freddie Mac to fulfill certain public purposes, including providing ongoing assistance to the secondary market for residential mortgages, which includes activities relating to mortgages on housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities. The Department's housing goals for the GSE's are in furtherance of these purposes and reflect Congress's objectives. In return for confining their businesses to meeting these objectives, the GSE's receive substantial benefits, estimated by the Congressional Budget Office in May 2001 at $10.6 billion per year.

With enactment of the Federal Housing Enterprises Financial Safety And Soundness Act, FHEFSSA, in 1992, Congress clarified the GSEs' public purposes further by establishing specific affordable housing objectives and mandating that HUD establish quantitative targets under each goal. As a result of these actions, the requirement for improved performance and accountability in affordable mortgage lending and the requirement to allocate credit for these purposes are the same thing. In setting annual targets for each GSE under the FHEFSSA and to ensure that the Enterprises are able to provide liquidity to residential mortgage markets as intended by their charter acts, HUD evaluates the level of each goal against six factors as set forth in the FHEFSSA. These factors include the size of the market for each goal, the GSEs' past performance under the goals, and the GSEs' ability to lead the market. The purpose of these considerations is to assure that the goal levels are appropriate. The process and methodology that HUD relies upon in making its determinations weigh these considerations based on objective market data and are published for evaluation, review, and comment in each proposed rule for new goals. This transparent process ensures that goal levels are established in an environment that is objective and insulated from undue political influence. Q.1.c. How would the home purchase goal proposed by the Administration differ, operationally, from the current housing goals? A.1.c. The Administration's proposal would allow HUD to establish, through regulation, four components of an annual home purchase goal for single-family dwelling units. These components would include first-time homebuyers; low- and moderate-income homebuyers; homebuyers in central cities, rural areas, and other underserved areas; and homebuyers of special affordable housing. The components, expressed as percentages of each GSE's home purchase mortgage business, would be established at levels that would increase the GSEs' secondary market financing of home purchase mortgages serving the charter missions of the GSE's and the goals established by the FHEFSSA. The components would be enforceable as goals.


FROM MEL MARTINEZ Q.1. In your September 10 House Financial Services testimony, you said that you felt that it was important to place new program and activity approval authority with the proposed

new regulator entity at Treasury. You said it should be moved to Treasury because you felt that such authority impacted the safety and soundness of the GSE's.

You have proposed the creation of a new oversight office within HUD to oversee affordable housing goals. With an appropriate level of funding and a staff skilled in evaluating the financial implications of new programs and activities, why do you believe that such a HUD office would be unable to effectively regulate new program and activity approval?

A.1. The Administration's proposal provides for establishing a new regulatory office within the Treasury Department. The new office, consistent with Treasury's experience as a financial regulator, would be responsible for overseeing the GSEs' safety and soundness. The new office also would have authority to review GSE activities that frequently present safety and soundness issues as primary concerns. Because new activities may also have mission implications, the new office will be required to consult with HUD in its reviews. This approach allows HUD to retain a key role as the GSEs' mission regulator while also ensuring that the new safety and soundness office has all the tools necessary to function as a world-class regulator.

In your testimony, you have argued that the GSE's lag the private market in lending to minority and first-time homebuyers. It is my understanding that the studies you cite include data from the Home Mortgage Disclosure Act (HMDA), which doesn't reflect purchases of seasoned loans, and includes data from the private market that includes a higher percentage of the subprime market than the GSE's. Q.2.a. Can you cite for the record a study that compares minority and first-time conventional loan borrowers using data that includes seasoned loans that definitively demonstrates that the GSE's lag the private market among borrowers with similar income, credit, wealth, and racial profiles? A.2.a. HUD and private researchers have published numerous studies on the GSEs' performance in funding affordable home purchase mortgages. These studies concluded that both Fannie Mae and Freddie Mac have lagged the primary market in purchasing loans for groups covered by the housing goals: Low- and moderateincome and special affordable borrowers and borrowers living in underserved areas. HUD's most recent study analyzed GSE and market data through the year 2000.

This response presents updated data for 2001 and 2002 and includes analysis of first-time homebuyers. The analyses reported in the tables below compare characteristics of loans originated in the conventional conforming market, as shown in HMDA data, with characteristics of loans purchased by the GSE's, as shown in the data they have provided annually to HUD.

Loan characteristics (such as underserved area loans) are presented in the form of percentage shares of loans originated in the conventional conforming market, as compared with corresponding percentage shares of loans purchased by Fannie Mae or Freddie Mac. The percentage shares (or ratios) for the market are limited to loans originated during the current year, adjusted to exclude loans originated by “B and C” subprime lenders. As explained below, the GSEs' purchases include both (a) current-year, newly originated mortgages and (b) prior-year, seasoned mortgages, for which percentage shares can be presented in alternative ways.

Question 2(a) raised the issue of the GSEs' purchases of seasoned loans. It is not possible to provide consistent comparisons including seasoned loans as well as newly originated loans, because the market data, provided under the Home Mortgage Disclosure Act (HMDA), do not include the seasoned loans that are available for

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