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In July, this Committee examined OFHEO's oversight of Fannie Mae and Freddie Mac and their accounting practices. I remain troubled by the fact that OFHEO never detected the complete breakdown in the accounting and audit function at Freddie Mac. While this breakdown did not directly implicate Freddie Mac's financial strength, I believe the integrity of financial data is a vital barometer of safety and soundness. The breakdown in internal controls that produced Freddie Mac's accounting mishap was a managerial failure that, if duplicated in a different function, could have had catastrophic implications. Sound corporate governance and management is a key element of safety and soundness.

In September, the Subcommittee on Financial Institutions held a hearing on the current oversight of the Federal Home Loan Bank System, and I want to commend Senator Bennett for his leadership and foresight in having that hearing. That hearing raised many questions regarding the current oversight of the Federal Home Loan Banks. I am hopeful that we will be able to expand upon some of those questions today.

Several Members of this Committee have put forth proposals to reform the regulation of the housing enterprises, and I want to recognize the efforts of Senators Hagel, Dole, Sununu, and Corzine in that regard. Your efforts have given this Committee a solid foundation upon which to build. I again want to thank all of the witnesses for appearing before the Committee today. We look forward to your testimony.

Senator Sarbanes.


Senator SARBANES. Mr. Chairman, thank you for convening this important hearing. We were originally scheduled to hear Secretary Snow on this very day with respect to the exchange rates and manipulation of currency to gain trade advantage. This is, of course, very much a pressing issue now, and the President goes to the Far East and will be meeting with officials in Japan and China. Of course, the subject of this hearing is an important issue as well, and I recognize that the Treasury has not yet come forth with its exchange rate report. I understand it will come by the end of the month and that you have rescheduled a hearing with Secretary Snow for October 30.

Chairman SHELBY. Absolutely, right here.

Senator SARBANES. And I look forward to that hearing and discussing that subject, in depth with the Secretary.

I take it we will have the report before that hearing, Mr. Secretary?

Secretary SNOW. Senator, I originally intended, to have the report with the testimony.

Senator SARBANES. All right. So we will have it before or at the hearing.

Secretary SNOW. Yes.

Chairman SHELBY. Will it be contemporaneous with the hearing? Secretary SNOW. Contemporaneous with the hearing, right. Chairman SHELBY. Okay.

Senator SARBANES. On today's subject, Mr. Chairman. The entities that we are examining-Fannie Mae, Freddie Mac, and the

Federal Home Loan Banks-together with the Federal Housing Administration, have made the American home finance system the deepest, most liquid, and most innovative system in the world.

These GSE's collect capital from around the globe to invest in mortgages for homeowners and rental properties here in America. They have helped to create the historically high homeownership rates we are currently enjoying in this country. About two-thirds of all Americans own their homes.

I might mention, since I see Secretary Martinez at the table, I heard the story on the radio this morning of your people in Florida. They own their home, but they do not own the land on which their home is located. These are these trailer homes in Florida.

Senator MARTINEZ. Yes, sir.

Senator SARBANES. Now they are going to redevelop high-cost condominiums. These people are being told they have to move their trailers, which they have not done in 25 years. Apparently they will just fall apart if they try to move them. You have a lot of elderly down there. It seems to me it is a problem HUD better look at. I hope you are doing that.

Mr. Chairman, you mentioned the size and complexity of the GSE's. I will not repeat those figures, but they obviously make the point. That, together with the central role they play in the smooth running of our mortgage markets, obviously means that we have a special responsibility in this Committee to ensure the public that the institutions are well-regulated, properly supervised, and thoroughly examined.

We are fortunate that at least thus far, as best we know, the problems at Freddie Mac appear to be governance and accounting problems rather than risk management problems. And the issues at the Federal Home Loan Banks, some of them, while serious, are still relatively small in nature. But it is appropriate that we look carefully at these issues.

I look forward to working with my colleagues to try to craft a piece of legislation that provides for strong safety and soundness with respect to the GSE's.

Finally, Mr. Chairman, let me say the Administration has requested an additional $7.5 million for OFHEO to conduct reviews of accounting practices at the Enterprises it regulates. I very strongly support that request, and I hope we will be able to work to make sure the appropriators include this additional funding in the fiscal year 2004 budget.

While we are deliberating on creating a new, more effective regulatory structure, I think we need to make certain that the current regulator is adequately funded in order to address the immediate situation which they confront. And I very much hope that that appropriation will make its way through the process and that the Administration's request will be positively addressed.

Thank you very much.

Chairman SHELBY. Senator Bennett.


Senator BENNETT. Thank you, Mr. Chairman. I appreciate your holding these hearings. I think they are probably some of the more significant hearings we will hold this year, not because there is a

crisis with respect to Fannie, Freddie, and the Federal Home Loan Banks in this area, but because we need to be alert to the possibility that a crisis might arise.

We have to recognize with some significant approval the job that Fannie and Freddie have done. The fact that some Federal Home Loan Banks want to get into that market more aggressively than they have been illustrates how important it is. Markets are working. They are working in ways that benefit Americans, and as Senator Sarbanes has indicated, Americans have a higher degree of homeownership than any other industrialized country. And the success of Fannie and Freddie is a large reason why that is the case.

But as they grow, people get nervous. As the numbers get into the trillions, even Congress begins to pay attention. And it is very appropriate that we air all of the issues as thoroughly as this hearing and other hearings will do, and that we look at the question of appropriate regulation in as careful a manner as we possibly


So, I congratulate you on holding the hearings. I look forward to the witnesses. I think it is a demonstration of the seriousness of the topic that we have two Cabinet officers as our first witnesses and three CEO's as our second panel of witnesses. This is not an issue that should be dealt with by the second team, and we are very glad that we are getting the first team here, both with this panel and the one that will follow. And I look forward to hearing what they have to say with great interest.

Chairman SHELBY. Senator Reed.


Senator REED. Thank you very much, Mr. Chairman. I appreciate the fact you are holding this very important hearing, and I welcome Secretary Martinez and Secretary Snow.

As we all know, the Government Sponsored Enterprises have played an invaluable role in stabilizing and improving the availability of funds to support homeownership in our country. This has resulted in the United States having one of the highest homeownership rates in the world, and strong and effective oversight of the GSE's is clearly an important part of their long-term success.

As we begin to delve into how to strengthen our GSE regulators, it is increasingly clear how complicated this task may be, especially if we decide to change the regulator for the Federal Home Loan Banks as well. It is my hope, Mr. Chairman, that you intend to hold several more hearings on this matter so that we can fully debate the many issues and hear from other stakeholders in the housing industry as well as housing experts on this matter. For example, proposals such as allowing the new regulator to set the minimum capital standard for the GSE's are worthy of their own hearing so that this Committee can better understand the ramifications of such a change in the housing market.

Needless to say, I look forward to this morning's testimony and hope it can help this Committee begin to decide what we can do to strengthen the regulation of our housing GSE's.

Thank you very much, Mr. Chairman.

Chairman SHELBY. I believe Senator Dole was here much earlier.


Senator DOLE. Thank you, Mr. Chairman.

First of all, I would like to reiterate something we all believe in: Homeownership is a cornerstone in the foundation of the American Dream. Each of us here today is committed to ensuring that every American can one day own his or her own home. Homeownership creates wealth and improves our neighborhoods and communities to the greater benefit of us all.

It is for this reason that we committed to strengthening every step in the mortgage process. This past June, when the Freddie Mac board removed its three highest executives, we learned of violations of generally accepted accounting principles at the GSE in order to hide profits so as to minimize volatility in earnings. That is an unacceptable practice that must never happen again.

While the uncovering of this scandal will result in the eventual restatement of earnings for the past 3 years, I fear that the clear lack of oversight could result in a coverup of potential future losses. Changes should be made to prevent this.

During the last Congress, the Banking Committee passed the Sarbanes-Oxley corporate accountability law to ensure greater transparency of our Nation's corporations. It strikes me as ironic that the next scandal would occur at a Government Sponsored Enterprise.

Let me be clear: Fannie Mae and Freddie Mac serve very important roles in our mortgage finance system by providing liquidity in the market. They were given a charter that, in 2001, the Congressional Budget Office estimated to be worth a $10.6 billion annual subsidy. With these built-in advantages, Fannie Mae and Freddie Mac have been able to increase homeownership, especially for lowincome and minority families. We all support this goal and will ensure that such efforts continue.

We must take steps to guard against the potential of any more scandals and to ensure that these organizations can continue their important mission. Because of the recent recognition that the current regulator lacks the tools and the mandate to adequately regulate these enterprises, I have introduced legislation with Senators Hagel and Sununu to create a world-class regulator in the Department of the Treasury. A consensus has formed in support of this initiative, and I strongly urge all of my colleagues to take a look at our legislation.

As we move forward on this issue, it must be remembered that the operations of these housing enterprises entail a certain degree of risk. Fannie and Freddie do a tremendous amount of hedging with derivatives, such as interest rate swaps. Together, they held more than $1 trillion worth of these interest rate swaps in 2002. A February OFHEO study concluded that not only might the GSES' demand for hedges outstrip supply in the near future, but also that a financial problem at one GSE could quickly spread to counterparties.

Clearly, this is not a situation we can afford to ignore, and we certainly cannot make only half an effort. I want to thank Chairman Shelby for scheduling this hearing and, in doing so, making this issue a priority. I look forward to working with my colleagues

as we seek to properly address the need for a well-funded, wellequipped, world-class regulator for Fannie Mae and Freddie Mac.

Finally, let me thank Secretaries Snow and Martinez for coming here today to discuss this issue. We thank you both for your time, your dedicated service, and for your interest in working with us on this issue of such importance to all Americans.

Thank you.

Chairman SHELBY. Senator Corzine.


Senator CORZINE. Thank you, Mr. Chairman. I appreciate your holding this hearing, and I welcome the witnesses. I would concur with the view that it obviously speaks to the importance of this issue that we have the leaders of the appropriate organizations to be here, both in this panel and the next. GSE's play an essential role, in my view, in aiding our economy and aiding one of those parts of our economy that has been a bright spot not only in recent years but also for a very extended period of time as our economy has been the strongest in the world over a period of history. Homeownership is a cornerstone of the American Dream, as Senator Dole mentioned, and that is both for individuals and our communities. And the size and the complex nature of the structures of the GSE's-and they truly are complex within any kind of context of one looking at a financial institution-account for billions of dollars of mortgage finance dollars. And the critical role they play in our housing market does require the oversight by a credible, capable regulator that is up to the job of providing rigorous oversight.

In my mind, the current system of supervision has failed to meet those standards, and I think the ongoing accounting issues at Freddie Mac and those that are now appearing at some of the Federal Home Loan Banks attest to that.

To that end, I introduced legislation several weeks ago that I believe evolves the regulatory structure in a way that meets the problem without undermining the successful role that the GSE's play specifically in the housing market and for our economy in general. There are really four key elements to this legislation I proposed, actually common with a number of the other discussions that others have put forward: Establish a new, independent regulator that is credible and capable; assuring safe and sound capital; promoting transparency through enhanced disclosures; and taking an incremental approach as opposed to a one-shot approach to consolidating the supervision of the Federal Home Loan Bank System under the regulatory framework contained in the bill.

I do believe we have to be careful here that we do not tinker with a system that has actually produced an enormous capacity to promote homeownership in this Nation. I think it has been absolutely key to that effort. And I understand that there are others that have proposals. I look forward to working with all on the Committee and certainly you, Mr. Chairman, and the Ranking Member. Doing this right is more important than doing it immediately. I concur with Senator Bennett that while there are serious problems and ones that we need to address, I do not think we are dealing with a crisis here. It is one that I think needs to be addressed in a way that makes certain that our markets continue to have the breadth and

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