thank Chairman Bennett and the Subcommittee for the oppormy perspective on the unique and vital role the Federal Home in building strong communities and healthy economies across Home Loan Banks have a long history of service and account- history of our banks that I want to talk with you about this after- ique in that sense. By constructing the Home Loan Banks as a in a cooperative that provides each one of its members-small me access to a stable, low-cost, and reliable source of wholesale you cannot do what we do in a publicly traded company where s is building investor value for tens of thousands of individual differently in the Federal Home Loan Bank System. We have a hip with each of our members-they are both our owners and our ow them by name. We understand their individual market needs heir communities. They are represented on our boards and provide -ur 12 banks. ng GSE or financial institution can replicate this partnership of d community. Bank, we like to use the term "rock solid” to characterize our orgabusiness relationship we have with our members. It conveys a ility and commitment to our cooperative, and the unwavering be's investment is being managed for the long-term, not just quarter s how our member financial institutions see us-as a safe, sound use to more effectively manage their balance sheets-in good ecobad-for the purpose of better serving their local customers and erative structure of the Bank System, it is also important to unle of our membership. The overwhelming majority of our member ons are smaller, community-based companies. Our typical member illion in assets, almost half of our members are located in rural re independently owned. he Nation's largest lenders. Our Congressionally mandated mission credit available for our local communities. Given the realities of ices industry, which has consolidated enormously, it would simply ulfill our mission unless we also supported the largest lenders who vast amount of lending activity. For example, the top three U.S. unt for 37 percent of all home mortgage originations. The top 30 at for 60 percent of all loan originations. , the Bank System cooperative is a place where financial institushare mutual interests and share mutually in the benefits of their you today, the Federal Home Loan Banks and the housing GSE's cant challenges and changes regarding their business practices, ure and mission-based programs and activities. to discuss and determine in the coming months, and potentially financial institutions, businesses, homebuyers, and the American mittee and other Members of Congress consider the future of the an Banks and the housing GSE's, you will no doubt be inundated with recommendations and solutions from many people representing many of the constituencies that have come before you today. As a former public policymaker, I remember that process all too well. But in place of recommendations and solutions, I would like to offer you two things today: Some baseline questions and principles to consider in your discussions in the weeks and months ahead, and clear evidence of the powerful impact the Bank System has on our country's financial services industry, our communities, and our economy. First, two questions that I believe appropriately frame the issues now before Congress regarding our Bank System and housing GSE's. • What are the benefits and risks that the housing GSE's present to taxpayers? • How are the risks best managed? Over the course of any week in my job, I am asked by a number of people what the Federal Home Loan Bank of Seattle is, and what it does. For those not involved in the banking and financial services industry, our system is, for the most part, unknown. So, I am always pleased to provide some quick education, and pleased because of the answer I am able to give: We help ensure that Americans have homes and healthy local economies. How do we do that? By connecting financial institutions of all sizes to the capital markets. This provides our member banks with a stable source of lower-cost funds that they use in their own communities to support homebuyers, businesses, and farmers. But perhaps an even better way to illustrate the benefits of the Bank System is to imagine our country without the 12 Home Loan Banks. Consider the following: • In 2002, the Bank System extended nearly a half trillion dollars in advances (what we call loans) to our member financial institutions, strengthening local economies, and increasing homeownership. Imagine those dollars gone. • Since 1991, the Federal Home Loan Banks have awarded $1.6 billion in Affordable Housing Program grants, helping to create 360,000 low-income housing units across the country. Each of our 12 Banks annually provides 10 percent of their net income for affordable housing. Last year, that totaled about $200 million. Imagine those dollars gone. • In 2002, the Bank System provided nearly $9 billion in reduced-rate, long-term Community Investment Program (CIP) advances, used by our member financial institutions to finance commercial and economic development initiatives that benefit low- to moderate-income families and neighborhoods. Since CIP began in 1990, our Banks have issued nearly $36 billion in reduced-rate loans. Imagine those dollars gone. Now imagine the collective impact on our national economy, not to mention individual business owners, homebuyers, and farmers. Ask yourselves who would provide the bank credit to support your local economies? How would your local bank compete if they did not have access, through their regional Home Loan Bank, to the capital markets? Where would these institutions turn, in good times and bad, to meet loan demand despite the outflow of consumer deposits from the banking system? Where would your constituents go to get loans to buy homes and run their businesses? Now go one step further: If the housing GSE's did not exist today, what would Congress put in their place? I believe you would come back to something that looked a lot like the Federal Home Loan Bank System. Here's why: • The Bank System is funded entirely through private capital. The cooperative is built by private owners who have put more than $36 billion of their own money at risk to capitalize the Bank System. • The Bank System is cooperatively owned to support-rather than compete withthe private marketplace. Our stock is not publicly traded. We are not driven by an imperative for double-digit growth to meet expectations of the stock market. We do not have third-party investors pulling value out. Every dollar of value created by the Bank System is poured back into the housing finance system, ultimately benefiting your constituents, the consumers of bank credit. Those are bank owners, business owners, farmers, homebuyers, nonprofit housing corporations, neighborhood social service organizations, municipalities, and many, many others. • The Bank System has the capacity to innovate and keep pace with an evolving financial services industry. This is why the Bank System offers mortgage purchase programs. Our members have told us they can better serve homebuyers and local markets if there is more competition in the secondary mortgage markets. It is no accident that our System's program volume has accelerated from zero to almost $100 billion. Without question, there is a private-market demand for competition, chat competition is healthy-it is good public policy. And it is t to remember that when programs such as these boost earnings in our banks, that provides more funding for affordable housing velopment in our communities. At the Seattle Bank last year age Purchase Program generated $1.75 million in additional ÅHP int here is, you cannot disconnect profitability and mission with n is organized by region, ensuring that each bank is connected › local markets. Twelve Home Loan Banks were created to focus , to know their local member financial institutions and create vices that meet their customers' needs and the affordable housing elopment needs of their communities. 1 pays its fair share of taxes. The Home Loan Banks carry a spehat cannot be sheltered and is equivalent to a Federal corporate Bank System has been required, since 1989, to pay off the and provide 10 percent of its net income in support of low-income the single-largest private source of housing subsidy in the United › is a reliable source of liquidity through all parts of the economic primary reason why financial institutions join the Bank System. capacity to access the capital markets on their behalf. That is lown economy, demand for advances across all of our banks has half trillion dollars. it is not a difficult task for me to list the benefits provided by Over the last 70 years, the 12 Home Loan Banks have consistrelevance to our members and their communities. stion-especially in today's environment-is whether or not the naged appropriately. While it is one thing to say our advance and programs drive profitability and support mission-based programs ich they do—it is quite another to ensure that the risks inherent are being managed appropriately. stifying on this panel today will address other key issues regardem, including risks associated with financial management, governry oversight. ted some attributes and principles that should underlie a modern ould like to also articulate some basic principles as you consider ng forward. ould be disingenuous of me or anyone else to state that the Home other housing GSE's are far bigger and more complex, and thereId to different risk standards. Clearly, the bar has been raised 1 services industry in this regard. oves that we have done a great job for a long time-not a single advances since the inception of the Bank System in 1932-I also 2003, not 1932, and much more must be done. Your constituents anding the highest levels of accountability, and we must deliver of consolidation of the GSE regulators: Whether or not Congress y do two housing GSE's have lower capital requirements than the cy goal is advanced when roadblocks are put in front of our Bank espond to our members' stated desire to have greater competition mortgage market? And when, in fact, those roadblocks actually to drive more funding to our member financial institutions and ? I have heard it called "mission creep." From my point of view, ission leap”—it allows us to take more significant steps toward on, not walking away from it. While it is often frustrating to me that the Bank System's mission and impact is understood by so few, I think it is apparent that this Nation and your constituencies our financial institutions and local communities-would struggle mightily if we failed to do our job. Today, as one of 12 presidents within the Federal Home Loan Bank System, I stand committed to work with you to find better ways to serve the ever-changing needs of the financial services industry and our communities. I want to be clear that I believe the onus for strengthening our system lies not only with Congress and regulators, but with the Home Loan Banks themselves. We must further step up and accept the risks in our system and industry, and accept that more intense public oversight is inevitable. We welcome that public oversight because, if done smartly, it will strengthen our Bank System and, ultimately, the economy of this country. In closing, I would like to leave you with some principles that I believe should inform your discussions and decisions in the months to come: • Private capital is the most effective cushion to guard the public against the risks inherent in our enterprises. As cooperatives, the Home Loan Banks are capitalized by their customers, who are risk-averse, and who monitor risk-taking in a way that third-party shareholders cannot. • Insist on competition among housing GSE's rather than competition with the private financial services industry. • Demand that more of the value created by the housing GSE's be delivered to the housing finance system and consumers rather than private investors. • Demand consistent, strong and smart regulatory oversight for all housing GSE'sand recognize the critical differences between the Bank System and publicly traded housing GSE's. • Demand an intense focus on our mission, hold us accountable, and keep in mind what America would look like if the Home Loan Banks did not exist. Mr. Chairman, this concludes my written remarks. Thank you, again, for allowing me the opportunity to speak with you today. I would be happy to answer any questions you or other Members of the Subcommittee may have. PREPARED STATEMENT OF MICHAEL MIDDLETON CHAIRMAN AND CEO, COMMUNITY BANK OF TRI-COUNTY, WALDORF, MD SEPTEMBER 9, 2003 Good afternoon Chairman Bennett, Senator Johnson, and Members of the Subcommittee. Thank you for the opportunity to appear before you today to discuss something that is very important to my business and to my community-the Federal Home Loan Bank System. I am Michael Middleton, Chairman and CEO of Community Bank of Tri-County, in Waldorf, Maryland. I serve as Maryland's elected Director on the Federal Home Loan Bank of Atlanta's Board of Directors and am honored to serve as the Vice-Chairman of that Board. I am also a Member of the Board of the Council of Federal Home Loan Banks. I am pleased to testify today on behalf of the Atlanta Bank. I am Chairman and CEO of a bank that is a member and long-time user of Federal Home Loan Bank advances, as well as other products, particularly in the community investment area. I believe this experience, together with my 5 years of service on the board of the Federal Home Loan Bank of Atlanta, gives me a broad perspective on the Federal Home Loan Bank System that I hope can provide helpful insight to the Subcommittee. Community Bank of Tri-County has over $300 million in assets and is a true community bank serving southern Maryland. Our customer base draws from a broad economic range and includes rural, agricultural, small business owners, and the families employed by high tech companies that support three naval facilities. We try to tailor our services and products to meet the needs of our communities while competing with large regional and national financial institutions. At my bank, we take our Community Reinvestment Act responsibilities very seriously. Moderate to smaller-sized community banks are increasingly challenged in meeting their CRA requirements. The FHLBank's programs, explained in greater detail below, provide us with the tools and skills to fulfill this statutory and community responsibility. The FHLBank System helps level the competitive playing field I S bling Community Bank to continue to be part of the economic rn Maryland. ware, the 12 Federal Home Loan Banks are Government Spon- e Loan Banks and their members (federally insured savings as- the Federal Home Loan Banks to maintain a balance between deral Home Loan Banks' cooperative nature, the financial strate- an Bank Programs—How They Meet Their Mission Locally on the Federal Home Loan Bank of Atlanta and its programs to ervices to our communities. Like much of the country, our area ble housing. The price of housing continues to rise and demands vailability of workforce housing throughout our local market. Our enters are growing, resulting in greater need for improved medolunteer fire/rescue support facilities. The Federal Home Loan invisible, but vital, partner in fulfilling these needs. We use the |