[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF THE VOLUNTARY AGREEMENT
BY FANNIE MAE AND FREDDIE MAC
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
MARCH 27, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-7
U.S. GOVERNMENT PRINTING OFFICE
71-631 WASHINGTON : 2001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
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Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
Mail: Stop SSOP, Washington DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
ROBERT W. NEY, Ohio, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
CHRISTOPHER COX, California NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio KEN BENTSEN, Texas
RON PAUL, Texas MAX SANDLIN, Texas
SPENCER BACHUS, Alabama JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona JAY INSLEE, Washington
DAVE WELDON, Florida DENNIS MOORE, Kansas
JIM RYUN, Kansas CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
GARY G. MILLER, California RONNIE SHOWS, Mississippi
DOUG OSE, California JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
C O N T E N T S
----------
Page
Hearing held on:
March 27, 2001............................................... 1
Appendix:
March 27, 2001............................................... 43
WITNESSES
Tuesday, March 27, 2001
Brendsel, Leland C., Chairman and Chief Executive Officer,
Freddie Mac.................................................... 10
Howard, J. Timothy, Executive Vice President and Chief Financial
Officer, Fannie Mae............................................ 13
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 44
Oxley, Hon. Michael G........................................ 60
Bentsen, Hon. Ken............................................ 47
Crowley, Hon. Joseph......................................... 48
Jones, Hon. Stephanie Tubbs.................................. 49
Kanjorski, Hon. Paul E....................................... 52
Miller, Hon. Gary............................................ 59
Brendsel, Leland C. (with attachment)........................ 61
Howard, J. Timothy........................................... 151
Additional Material Submitted for the Record
Kanjorski, Hon. Paul E.:
OFHEO written response....................................... 54
Brendsel, Leland C.:
Freddie Mac and Fannie Mae: Their Funding Advantage and
Benefits to Consumers...................................... 103
``GSE Creep into Subprime Could Hurt Margin,'' American
Banker, March 26, 2001..................................... 144
J. William Seidman letter, Dec. 13, 2000..................... 145
Howard, J. Timothy:
Written response to questions from Hon. Richard H. Baker..... 162
REVIEW OF THE VOLUNTARY AGREEMENT
BY FANNIE MAE AND FREDDIE MAC
----------
TUESDAY, MARCH 27, 2001
U.S. House of Representatives
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises
Committee on Financial Services
Washington, DC.
The subcommittee met, pursuant to call, at 2:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Richard H.
Baker, [chairman of the subcommittee], presiding.
Present: Chairman Baker; Representatives Oxley, Ney, Shays,
Bachus, Jones, Weldon, Biggert, Ose, Hart, Kanjorski, S. Jones,
Sherman, Meeks, Ford, Hinojosa, Lucas, Shows, Crowley, Israel
and Ross.
Chairman Baker. I'd like to call this hearing of the
Capital Markets Subcommittee to order and welcome our witnesses
to the table. And I would like to note that there were Members
present before the Chairman, who was 5 minutes late because an
unnamed airline was 3 hours late leaving my fine city this
morning. But I did make it. We can take a look at that maybe
later.
I do welcome my participants to the hearing this morning.
This hearing is pursuant to an agreement reached last October
with the Government sponsored enterprises of Fannie Mae and
Freddie Mac, both of whom had been the subject of study over
the course of the last year with a series of hearings and
meetings with Members concerning the accuracy of current
regulatory oversight and appropriate overview of their business
operations, given the relationship between their business
success and the United States taxpayers.
Last fall, there was an important six-point plan publicly
agreed to in which the CEOs of both Fannie Mae and Freddie Mac
appeared and expressed support for this initiative, and second,
a willingness to work with the committee this session on the
construction of a new regulatory oversight body.
The purpose of the hearing today is to receive testimony
from representatives of both enterprises regarding the
compliance success with the terms of that agreement since last
October.
I certainly am pleased to have read their published reports
of the success of implementation to date. I'm looking forward
to a more detailed discussion and feel that this is an
extraordinarily important first step that we have taken to
ensure the safety and soundness of these two very important
business enterprises.
For Members of the subcommittee who have not been engaged
in this topic previously, these institutions are the third and
the seventh largest corporations in America by SSIs, are
extremely important in providing liquidity in the home
ownership market, and have for many decades been the reason for
facilitating access to home ownership to many individuals
otherwise without such opportunity.
So they perform excellent work. They are today, as I said
in all prior meetings on this subject, well managed, highly
profitable, successful enterprises. But our mission on this
subcommittee must be to have the long-term view and to ensure
that appropriate oversight is in place and remains in place in
the unfortunate circumstance of a downturn in our economy and
spiraling interest rates and a softening of loan demand, we
want to ensure that the adequacy of these financial enterprises
is sufficient to withstand such troubling times.
Hence, the reason for the agreement of last fall, the
hearing today, and the work ahead of the subcommittee for the
next several months with regard to the regulatory structure.
At this time I would like to recognize Mr. Kanjorski for an
opening statement.
[The prepared statement of Hon. Richard H. Baker can be
found on page 44 in the appendix.]
Mr. Kanjorski. Mr. Chairman, before commenting further on
today's proceedings, I must commend you for your continuing
leadership on Government sponsored enterprise issues. In the
106th Congress, in addition to passing legislation to modernize
the Federal Home Loan Bank system, we held hearings over 5 days
and roundtable discussions on legislation designed to reform
the regulation of housing GSEs and eliminate some of their
statutory benefits. Although that bill did not become law, it
did help lead to the development of six voluntary commitments
by Fannie Mae and Freddie Mac, the subject of today's hearing.
You deserve congratulations for playing an important role in
raising public awareness about these issues.
During our lengthy hearings last year on GSE regulation, I
believe we reached consensus on several points.
First, we agreed that we have the world's most successful
housing finance system and we gained an appreciation of the
important role that GSEs play in that system.
Second, we agreed that Fannie Mae and Freddie Mac have
grown significantly in recent years.
Finally, we agreed that we must have strong, independent
regulators for the housing GSEs. These regulators must also
have the resources they need to get the job done.
As one of the few remaining committee Members who
participated in the entire Congressional dialogue to resolve
the savings and loan crisis, I am acutely aware of the need to
protect taxpayers from risk.
It is in the public's interest to ensure that Fannie Mae
and Freddie Mac continue to operate safely and soundly. We can
best achieve this goal by pursuing a three-pronged supervisory
approach that includes regular Congressional oversight,
continued effective Government regulation, and increased market
discipline for the two GSEs.
Through our extensive studies last year and our hearings
today, we are fulfilling our obligations in Congress to conduct
regular oversight of the GSEs.
In addition, from my perspective, OFHEO operates with
increasing effectivness as the safety and soundness regulator
for Fannie Mae and Freddie Mac.
The agency has, for example, developed and implemented a
robust, comprehensive and continuous examination program that
works. And it will soon publish its long-awaited risk-based
capital standard rounding out the existing capital standards.
The voluntary commitments recently developed by Fannie Mae
and Freddie Mac promoting market discipline completes the third
leg of my supervisory tripod.
By strengthening capital adequacy and increasing
transparency, the overall package, in my view, constitutes a
sound set of measures to supplement OFHEO's formal regulatory
regime and augment Congressional oversight.
The voluntary commitments are also consistent with the
prevailing thinking of leading risk management specialists.
At our October press conference on the voluntary
commitments, I noted that the initiatives, when implemented,
would hopefully become a complement to and not a substitute for
OFHEO's already strong safety and soundness examination program
and capital requirements.
In that vein, I asked OFHEO to review the regulatory
environment surrounding the voluntary measures in advance of
today's hearing. In response, Director Falcon notes that these
enhanced disclosures improve the public's awareness of Fannie
Mae and Freddie Mac's financial condition and risk management
practices.
I agree and would ask, Mr. Chairman, unanimous consent to
submit this letter for the record.
Chairman Baker. Without objection.
[The material referred to can be found on page 54 in the
appendix.]
Mr. Kanjorski. If we once again decide to pursue
legislative action affecting the GSEs in the 107th Congress, we
must be sure not to diminish their ability to work efficiently.
In my view, we should also explore modernizing their
mission. For example, the GSEs could work to improve economic
development in our Nation's distressed areas or to create a
secondary market for investments made pursuant to the Community
Reinvestment Act. These worthy ideas merit our prudent
consideration.
Finally, throughout last year's deliberations on GSEs, I
consistently noted that we must move forward cautiously in this
area so as to ensure we maintain the delicate balance that has
lead to more than 67 percent of all American families owning
their homes.
On at least one occasion last year, however, our
committee's actions discouraged investors and raised home
ownership costs. As we proceed today, we must renew our efforts
to ensure that we do not repeat that mistake.
Mr. Chairman, I therefore look forward once again to
carefully, deliberately and objectively examining the many
issues relating to housing GSEs in the 107th Congress.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 52 in the appendix.]
Chairman Baker. Chairman Oxley.
Mr. Oxley. Thank you, Mr. Chairman. Many Members of our
subcommittee are taking on an important issue for the first
time. Government sponsored enterprises, better known as GSEs,
is one of those issues, and I'm pleased that we are having this
hearing today so that Members have an opportunity to learn
about the vital role the GSEs play in our housing finance
system and overall economy.
Expanded home ownership is a top priority for all of us.
Congress created Fannie Mae and Freddie Mac to broaden consumer
access to mortgage credit. Fannie and Freddie developed a
secondary market for conventional mortgages, and then a wider
market for mortgage securities.
Fannie and Freddie have greatly advanced their housing
mission and are a real success story. In order to continue
benefiting America's families, Fannie Mae and Freddie Mac must
operate according to the highest standards. They are two of the
leading financial institutions in this country, and they occupy
a central role in the mortgage and capital markets.
Fannie and Freddie are well managed, highly sophisticated
businesses. However, in light of their size and growth, a
number of concerns have been raised. These include the adequacy
of their supervision, the nature of their mission, and the risk
they could pose to the financial system in the event of a
downturn.
The voluntary agreement reached last October addresses many
of these concerns. And I congratulate you, Mr. Chairman, for
your leadership, as well as Ranking Member Kanjorski, on this
meaningful and timely agreement.
The commitments to meet higher capital, risk management,
and disclosure standards are impressive and commendable, and I
look forward to hearing from the witnesses about the specifics
of those commitments, the progress they have made in
implementing them, and their future plans.
In addition, we should take a look at the existing
framework for regulating Fannie Mae and Freddie Mac. We should
consider whether the current division of regulation between
OFHEO and HUD ought to be streamlined, and whether the
regulators have the powers they need to be effective.
More effective regulation, along with improved market
discipline resulting from the voluntary agreement, could give
Congress and the markets even greater confidence in Fannie and
Freddie.
Mr. Chairman, I look forward to this subcommittee's
responsible oversight of the GSEs, and I yield back.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 60 in the appendix.]
Chairman Baker. Thank you very much, Mr. Chairman, for your
interest and participation today. Are there other Members with
opening statements?
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman.
Chairman Baker. I'm sorry. I should go to the other side.
Ms. Jones, did you care to make an opening statement?
Ms. Jones. Thank you, Mr. Chairman. Good afternoon, Mr.
Chairman and Ranking Member Kanjorski and Members of this
subcommittee. I ask unanimous consent that my full statement be
included in the record.
Chairman Baker. Without objection, as will all Members'
statements be included in the record.
Ms. Jones. We are here again this afternoon to review
voluntary agreements that were established to improve
capitalization information disclosure and market discipline.
Many of us on this subcommittee remember and sat through
six GSE hearings and then to examine in great detail Fannie Mae
and Freddie Mac.
From those hearings, we examined their safety and soundness
to an exhaustive length, and I must note, at no time did we
find there to be any safety and soundness issues.
Both Fannie Mae and Freddie Mac pledged themselves to six
voluntary commitments, which we will review today and I won't
go through them. I'm proud to hear of their progress made by
both, and in stepping up to the challenge and demonstrating
that they're both solid and sound institutions. Their success
is America's success.
I hope our review this afternoon will allow Fannie Mae and
Freddie Mac to continue to fulfill their housing mission and do
what they do best. Their mission is an important mission, and I
am not as concerned about market share, but I am concerned
about affordable housing in the 11th Congressional District,
home ownership for those still seeking a piece of the American
Dream, and also special housing needs of the elderly.
Housing is still a key public policy concern for all of us.
GSEs were established to address many of these problems,
and all I say is, let them do their job. Again, if it ain't
broke, why fix it? Let Fannie Mae and Freddie Mac continue to
lead the mortgage finance industry in making credit available
for low- and moderate-income families.
I want to skip on just to the closing of my opening
statement, Mr. Chairman, to say that I hope that our review
this afternoon serves to clear the record about GSEs' safety
and soundness. I realize that there is much more to be done by
these organizations.
While home ownership rate sits at around 67 percent, and
some say is close to being saturated, there is still room for
improvement for those who are left out of this Nation's
prosperity.
For example, African Americans are still under 50 percent--
47.8 percent in home ownership. And the Hispanic community is
also under 50 percent--some 47.5 percent. That's not
saturation, Mr. Chairman.
I thank you for the opportunity to present my remarks, and
I look forward to an opportunity to be heard in this hearing.
Thank you.
[The prepared statement of Hon. Stephanie T. Jones can be
found on page 49 in the appendix.]
Chairman Baker. Thank you.
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman and Ranking Member
Kanjorski for calling this hearing this afternoon. I didn't
serve on the Capital Markets Subcommittee during the 106th, but
I did take note of the good work that you did.
You are being commended for your thorough oversight of
Fannie Mae and Freddie Mac. There can be no doubt of the
important role that these two companies play in helping to
provide affordable housing for all Americans.
In the 18th District that I represent, Freddie Mac has
provided hundreds of millions of dollars of loans averaging
$78,200 as the average loan. Fannie Mae has invested a total of
$759 million over its lifespan. This has made home ownership
dream a reality for many of my constituents in Appalachia.
In light of these questions, however, that were raised in
the 1992 GSE reforms that were passed following the savings and
loan disaster, Fannie and Freddie made six voluntary agreements
with Congressman Baker, our Chairman, last year designed to
strengthen safety and soundness of GSEs by increasing the
market transparency.
These agreements brought new levels of transparency to the
operations of these companies and exceed standards to which
almost all the private companies are held.
This hearing, of course, is designed to follow up on these
agreements and see if they have served the purpose of showing
that market disclosure can give us the assurances we need to
trust that Fannie Mae and Freddie Mac continue to fulfill their
role of providing affordable housing to all Americans while
remaining the Nation's stable institutions in which we place
our trust and faith.
So far, both Fannie and Freddie have been diligent in
following both the spirit and tenor of the voluntary
agreements. The lengths to which they have gone to meet these
six voluntary agreements is commendable, and I look forward to
hearing the details of the implementation of the six voluntary
agreements.
I also look forward to the discussion on the impact of
market discipline on safety and soundness.
Again, thank you, Mr. Chairman and Ranking Member for this
hearing.
Chairman Baker. Thank you very much, Mr. Ney. Are there are
other opening statements?
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman and Ranking Member
Kanjorski.
Home ownership is a key factor in asset and wealth creation
for individuals all over the world. For many Americans, a home
is the most significant purchase and/or investment they will
ever make. Increasing home ownership opportunities for my
constituents is a major component to my economic development
initiatives.
In fact, we go around the district urging the constituency
to rent the car, but own the house, and we teach them that
owning the house is an appreciating asset, while owning the car
is just a depreciating asset.
This is one of the reasons why I'm organizing a
Congressional Black Caucus housing summit in my district in
May.
Of all the bills and all of the questionable legislation
that Congress has passed, the creation of GSEs--Fannie Mae,
Freddie Mac and the Federal Home Loan Bank--was one of its
wisest and most effective laws. By creating a secondary market
for the mortgage industry, they have increased the supply of
cash available to their banking partners while at the same time
decreasing the credit risk to banks, making them more willing
to extend credit to many individuals and families seeking
inclusion in the American Dream.
The creation and work of the GSEs are critical factors in
American's nearly reaching a 70 percent rate of home ownership.
Fannie Mae and Freddie Mac have also had a significant impact
on ownership in minority communities.
In the year 2000, Fannie Mae and Freddie Mac assisted over
500,000 minority families with nearly $60 billion in financing.
Yet for all the good that has been done, including a nearly 5
percent increase in minority home ownership since 1994,
minority home ownership is still lagging the national rate by
some 20 percent.
I expect the GSEs, their lending partners and the Members
of this subcommittee to work together on rectifying this
inequity.
I have reviewed the voluntary initiatives that Freddie and
Fannie Mae agreed to last year as well as the progress they
have made toward implementing them. By meeting each of the six
initiatives, Fannie and Freddie will provide increased public
confidence in their already well managed and financially
profitable companies and hopefully allay most of the concerns
some of my colleagues have about their role in the home
mortgage industry.
Many of these initiatives exceed the best practices of any
of the Nation's most successful financial institutions. Perhaps
these initiatives will set a new national and international
standard for risk management and disclosure to help us to avoid
any future S&L-type debacles.
I look forward to learning more about Fannie Mae and
Freddie Mac's progress in achieving the initiatives and working
with them to maximize the success of their mission.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Meeks.
Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman. First of all, I want
to commend you, not so much for having this hearing, but for
fashioning the voluntary agreement last year, which--we're here
to look at the progress of that agreement.
So had it not been for your leadership, we wouldn't be here
today talking about the progress that's been made.
Chairman Baker. You're kind in describing it in those
terms. Others have different opinions.
Mr. Bachus. And I think all our goal, oversight goal, is to
see that Fannie and Freddie and the other GSEs are properly,
adequately capitalized; that there is market discipline and
there is transparency in disclosure. That helps the consumer.
It helps the taxpayer. It helps the GSE, and it is good for the
country.
I would add that over the last several decades, Fannie Mae
and Freddie Mac have really shaped the secondary mortgage
market by providing adequate liquidity. They have done a great
job in improving the distribution of investment capital for
residential mortgage financing, and we really have the best
financing system in the world for residential mortgages.
If you went to Europe, you couldn't even get a 30-year
mortgage. They are not available. So they have done a
commendable job.
We've got the highest rate of home ownership in the world,
the highest rate ever in this country. And individual consumers
I believe saved several thousand dollars a year because of what
was initially a Congressionally chartered effort.
I do know that there has been some criticism of the GSEs
because of their Government sponsorship. But I would think to a
great extent, these advantages are offset with serious
regulatory restrictions and affordable housing mandates that we
have put on these GSEs that other ``private sector'' entities
don't have. And I think we ought to keep that in mind.
Although Freddie and Fannie did have a 30-year record of
managing the secondary mortgage activity successfully, as I
said, we all welcome any additional efforts by the two GSEs
working with Congress and the oversight agencies to ensure that
the safety and soundness of their institutions are maintained
and improved.
And I think the voluntary initiatives announced last year
were a good approach to take. I look forward to hearing the
testimony of our two witnesses.
I once again commend the Chairman and would note that both
the GSEs represented today have taken the initial steps in
complying with certain of the agreements made last year, so I
commend you for that.
Chairman Baker. Thank you, Mr. Bachus. Your time has
expired.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman and Ranking Member
Kanjorski.
As a new Member of this committee and subcommittee, I am
looking forward to learning more about the issues related to
Government sponsored enterprises and their work in providing
affordable housing in the United States.
I hope to hear from Fannie Mae and Freddie Mac on their
implementation of the voluntary initiatives announced last
October on which this hearing is focused.
I'll just tell you at the start that these companies are
doing an admirable job providing affordable housing in South
Texas, and particularly in the Texas border region I represent
from McAllen, Texas to San Antonio.
The need for affordable housing along the border is great,
and the barriers of home ownership are unique. Fannie Mae has
shown flexibility and creativity in addressing the needs of our
immigrant population and low-income families who may not have
the long employment history nor the credit credentials often
required to get competitive mortgage rates.
Without these secondary lenders in the marketplace and the
specific HUD mandates to house minorities and the historically
underserved populations, I am fearful of the rates and
requirements that would be imposed upon the most economically
vulnerable members of our society.
Mr. Chairman, I think that we all should have an equal
chance at the American Dream. By partnering with commercial
banks, Fannie Mae and Freddie Mac, bringing consumers
affordable rates and flexible downpayment amounts, the system
appears to be working the way Congress intended in chartering
these GSEs. They bring competitive rates, creative programs and
opportunities for increased home ownership to our communities,
especially the minority communities I represent.
Some believe that home ownership in the United States has
reached its saturation point and that Fannie and Freddie may no
longer be needed. Mr. Chairman, as I look around my district
and talk to my constituents, I cannot agree with that
assessment.
The rate of home ownership for Hispanic Americans in the
United States lags an estimated 26.4 percent behind the larger
Anglo home ownership rate. We need to close that gap. If these
companies can help, then their job and usefulness is far from
complete.
In closing, I'll just say I congratulate this subcommittee
for its vigilance in overseeing the GSEs. I think this hearing
will be useful in reviewing the steps taken by the GSEs to
guarantee their financial soundness.
At the same time, I trust we will be careful not to cause
unintended adverse consequences in addressing GSEs that would
have a negative effect on our Nation's housing nor on the
interest rates paid by consumers.
I look forward to hearing the testimony of the witnesses,
Mr. Brendsel from Freddie and Mr. Howard from Fannie Mae.
Thank you, Mr. Chairman.
Chairman Baker. Thank you very much.
Mr. Israel.
Mr. Israel. Thank you, Mr. Chairman and Ranking Member
Kanjorski.
I am also a brand new Member of this subcommittee and
learned early of the Chairman's concern for enhancing the
safety and soundness of the GSEs. And I am sure that,
principally as a result of that concern, both Fannie and
Freddie embarked on its voluntary commitments that today make
them better and stronger companies.
I think we can all agree that the creation of Fannie Mae
and Freddie Mac is one of those instances where Congress really
got it right. They are an enormous public policy success. Their
creation has ensured that our housing system is better than any
other in the world, but it can be even better.
Their existence ensures that Americans have ready access to
mortgage funds at the same rate, no matter where they live in
the country, no matter what the financial state of the Nation
or the world.
The voluntary commitments that Fannie and Freddie agreed to
last fall are added measures to ensure that they will always
conduct their business safely and soundly. These commitments
not only demonstrate their financial strength, but they provide
not available previously windows to that safety and soundness.
This Nation is fortunate since no other country has a
secondary mortgage market created by Fannie Mae and Freddie Mac
that ensures we have mortgage credit available all the time, no
matter what happens in other credit sectors.
These are well run, safe companies that bring down the cost
of mortgage credit. Our work should strengthen this model, and
I thank the Chair.
Chairman Baker. Thank you very much, Mr. Israel.
There being no further Democrats, I'll go back to Mr.
Sherman.
Mr. Sherman. Well, Mr. Chairman, I was going to deliver
this really eloquent opening statement, but the gentleman from
New York just delivered it. So I thank him for his remarks and
the other remarks that preceded his.
I think that this voluntary agreement does a lot to
strengthen these two entities and that they do a lot to provide
for home ownership.
We obviously have not achieved the home ownership
percentages that I'd like to see, but we are certainly doing
better in every sector and with every community than we had
even 10 years ago. Thank you.
Chairman Baker. Thank you, Mr. Sherman. If there are no
further opening statements, at this time I would like to
introduce our two witnesses for the hearing today. I certainly
think they are no stranger to the subcommittee.
I wish to welcome the CEO of Freddie Mac, Mr. Leland
Brendsel, as well as the Vice President and Chief Financial
Officer, Mr. Timothy Howard.
Gentlemen, we will certainly make your complete testimony
as part of the record. Please feel free to proceed as your
pleasure. Mr. Brendsel, if you would please, sir. Welcome.
STATEMENT OF LELAND C. BRENDSEL, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, FREDDIE MAC
Mr. Brendsel. Thank you, Chairman Baker. And good
afternoon. Indeed, I'm pleased to be here and to appear before
this subcommittee.
I am the Chairman and Chief Executive Officer of Freddie
Mac. And I'm certainly pleased that Chairman Oxley could be
here earlier and look forward to working with him as well as
Members of this subcommittee as we move forward.
As you have already said, Chairman Baker, last October
Congressman Kanjorski, you, Members of the subcommittee,
Freddie Mac and Fannie Mae joined together in a landmark
announcement, one that provides, I believe, a model of
financial management for the new century.
Freddie Mac committed to a six-point plan that keeps us at
the vanguard of world financial practices. We did this to put
to rest any concerns about any future safety or soundness of
Freddie Mac, since indeed, as has already been said here today,
there are no concerns currently. Indeed, we are rock solid.
Freddie Mac plays a vital role in financing home ownership
and rental housing. It is something we are strongly committed
to. And we are determined to maintain the confidence of
Congress, of investors and of the public in our ability to keep
meeting our mission.
The commitments that we made last fall and announced with
you are real, they are significant, and I believe they
completely outpace the practices of other financial
institutions, with the single exception of Fannie Mae.
Even before we made these commitments, Freddie Mac already
had outstanding risk management and information disclosures for
investors and the public. But we are now providing more
relevant information about our condition than any other
financial company, I believe, in the world.
Our commitments meet or exceed recommendations of
international experts in financial regulation. The national
rating agency, Moody's, said last fall that they set new
standards not only for us, but also for the global financial
market.
We also asked former FDIC Chairman William Seidman for his
assessment of these commitments. And he concluded, and I quote,
``This package of disclosures and standards puts you in a
position of providing more and better public information than
any other financial institution, both regulated and non-
regulated.''
Now with your permission, Mr. Chairman, I would like to
enter his full comments for the record.
Chairman Baker. Absolutely. Without objection.
[The prepared statement of William Seidman can be found on
page 145 in the appendix.]
Mr. Brendsel. Thank you. Now let me walk through each
commitment and report on their status of implementation at
Freddie Mac.
I'm pleased to report that Freddie Mac's implementation is
nearly complete.
Briefly, the first commitment is public disclosure of our
independent rating. We announced our AA-minus risk-to-the-
Government rating from Standard & Poor's on February 27th.
To put this in perspective, of the ten largest bank holding
companies, only two have a rating this high on their senior
debt.
Originally we planned to obtain a rating once a year, but
now Freddie Mac has gone beyond that. We asked Standard &
Poor's for a continuous surveillance rating, which means that
S&P will notify the public if there is ever a change in our
financial position that affects our rating.
Our second commitment ensures that we maintain a high level
of liquidity. We announced that we met that commitment on March
8th. Freddie Mac has enough liquid high quality assets so that
we can meet all our financial obligations even if we are unable
to issue debt for 3 months. That's a high standard.
The Basel Committee on Banking Supervision suggested that
institutions maintain a liquidity reserve of between 1 and 3
months. We chose the more stringent 3 months. This sets a new
best practice for industry.
Our third commitment is semi-annual issuance of
subordinated debt. We completed our first $2 billion issue on
March 21st. It will be the first of many issues, of course.
The benefit of this commitment is twofold. The issuance of
subordinated debt enhances our already strong financial base.
In addition, it provides real-time information to the market
about our financial condition.
After 3 years, the sum of our core capital and subordinated
debt will equal at least 4 percent of our assets.
We expect that there will be an additional $8 to $10
billion of investor funds standing in front of our senior debt
holders.
A recent report by the Federal Reserve and the Treasury
views subordinated debt as a tool to enhance market discipline.
No bank has committed to a regular program of subordinated
debt, however. But Freddie Mac, along with Fannie Mae, stepped
up to the challenge.
Our fourth commitment is to implement a risk-based capital
stress test on an interim basis until our regulator, OFHEO,
completes the final rule. Yesterday, we announced that we
passed this test. Freddie Mac holds enough capital to survive a
10-year downturn much like the Great Depression. This is the
most rigorous test in the financial services industry.
And again, to put this in perspective, for the thrift
industry to pass this test, it would have to triple its capital
today.
Our fifth commitment is new quarterly disclosure about
credit risk. Going beyond our already extensive credit risk
disclosures that we currently provide to investors, Freddie Mac
has added a new forward-looking disclosure.
Most credit disclosure, in fact, is backward-looking,
focusing on charge-offs, loans that were already delinquent.
Our new measure predicts the impact of a 5 percent decline in
housing prices nationwide and the impact that would have on
losses of Freddie Mac.
We made this disclosure for the first time yesterday and
will include it for the record. It demonstrates Freddie Mac's
financial strength and the many layers of protection that we
have for our mortgage purchases.
Finally, our sixth commitment is new monthly disclosure of
interest-rate risk. We will meet this sixth and final
commitment with our regular monthly disclosure to investors in
the middle of April.
This commitment exceeds supervisory guidance made just last
week by the Federal Reserve and the OCC, I would point out.
These agencies encouraged large financial institutions to adopt
the recommendations of the commission headed by former Chase
Chairman Walter Shipley. They called on banks to move from
annual to quarterly disclosure of interest risk. Our move is to
monthly disclosure, which keeps us, I think, a step ahead.
Taken together, our six commitments represent a watershed
in financial practices. I think this is important. Because over
the next 10 years, America's families will need an additional
$6 trillion to fund their mortgage loans, a net increase,
reflecting anticipated growth in home ownership as well as the
growth in this Nation and the strength of its economy.
Freddie Mac will open doors of opportunity for the home
buyer of the future who is more likely to be a low-income,
minority or immigrant family eager to realize the American
Dream.
To meet our mission, Freddie Mac is wringing out every
unnecessary cost and barrier to home ownership. We're pushing
the limits of technology. We're searching the globe to find the
lowest cost funds for housing. Indeed, housing is one of the
few bright spots on today's economic horizon. More than ever,
the country needs Freddie Mac's strength and vitality, and the
six commitments demonstrate our determination to remain safe
and sound and to finance housing for generations to come.
So, Mr. Chairman and Members of the subcommittee, I
appreciate your support when we announced these commitments,
and I look forward to working with you in the future to secure
the future of America's housing finance system and with it the
dreams of millions of families.
Thank you very much.
[The prepared statement of Leland C. Brendsel can be found
on page 61 in the appendix.]
Chairman Baker. Thank you, Mr. Brendsel.
Mr. Tim Howard.
STATEMENT OF J. TIMOTHY HOWARD, EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER, FANNIE MAE
Mr. Howard. Mr. Chairman, Congressman Kanjorski, Members of
the subcommittee, I'd like to thank you for the opportunity to
come before you today.
My name is Timothy Howard and I am Chief Financial Officer
and a member of the Office of the Chairman of Fannie Mae.
Mr. Chairman, last October Fannie Mae's Chairman and Chief
Executive Officer, Frank Raines, was pleased to join you,
Congressman Kanjorski and others in Congress to announce that
Fannie Mae would adopt a series of six voluntary initiatives to
further strengthen our liquidity, transparency, market
discipline and capital.
Under your leadership, this was a signal achievement for
the safety and soundness of the financial system.
Consolidation and globalization in the financial services
industry is a reality today. In the last decade, the total
number of banks in America has fallen by 40 percent, and the
share of assets in the eight largest banks has almost doubled,
from 21 percent to 41 percent.
America's two largest banks now hold 19 percent of all bank
assets, nearly double the concentration of 8 years ago.
As financial institutions become larger, more global, more
complex and more interconnected, financial supervisors and
policymakers worldwide are proposing new strategies to
strengthen their safety and soundness and reduce the potential
for systemic risk.
Every large financial institution has the potential to
affect the fundamental safety and soundness of the financial
system. Fannie Mae is no exception.
With that in mind, over the last year, we engaged in a
series of discussions with key policymakers, including people
at Treasury, the Federal Reserve, and our own regulator, the
Office of Federal Housing Enterprises Oversight, to determine
how best to ensure that Fannie Mae's safety and soundness
protections are at the vanguard of evolving world practices.
And I would add, Mr. Chairman, that the hearings and
oversight by this subcommittee under your leadership has played
a critical role in our review.
We learned much that was useful. For example, the Basel
Committee on Banking Supervision supports the use of risk-based
capital standards with an economic stress test. The Working
Group on Public Disclosure chaired by Walter Shipley recommends
increased transparency as a means to enhance market discipline.
And a recent study by the U.S. Treasury and the Federal Reserve
suggests that issuing subordinated debt can strengthen market
discipline in a powerful way.
In the end, I believe the discussions we engaged in greatly
raise the level of understanding of Fannie Mae's role in the
housing finance system and our risk management strategies. They
also reaffirmed the fundamental wisdom of the changes to our
charter made by Congress in 1992.
Through these charter revisions, Congress provided for a
dedicated financial regulator, continuous on-site examination
with results disclosed to the public, and most far-reaching of
all, a risk-based capital standard with a severe economic
stress test long before the Basel Committee proposed this model
for others.
These measures in 1992 put Fannie Mae at the cutting edge
of regulatory discipline. But our discussions last year with
policymakers made it clear that Fannie Mae had the opportunity
to build on this cutting edge regulatory discipline by adopting
measures to enhance our market discipline.
That led to the joint announcement by Fannie Mae and
Freddie Mac last October 19th committing to the six voluntary
initiatives.
Mr. Chairman, Congressman Kanjorski, I am pleased to report
to you today that Fannie Mae now has implemented all six of
these voluntary initiatives during the first quarter of this
year, and in some cases, we have gone beyond our commitment.
In January we did our first issuance of subordinated debt.
This $1.5 billion, 10-year issue was rated AA-2 by Moody's and
AA-minus by Standard & Poor's. We priced it at a spread of 22
basis points over our senior debt. And since that time, it has
traded in a range of 18 to 28 basis points over our senior
debt.
That is a higher spread to senior debt than the
subordinated debt of many high quality commercial banks, and it
shows that investors do believe that our subordinated debt is
in a different risk category from our senior debt.
In late January we obtained and disclosed ``a risk to the
Government'' rating of AA-minus from Standard & Poor's. This
rating measures our inherent credit quality without assuming
Government support. No U.S. commercial bank holding company or
thrift institution has an S&P rating higher than AA-minus.
And we went beyond the October 19th commitment by seeking
this rating on a surveillance basis, which means that S&P will
change its rating during the year if our financial condition
changes.
We announced earlier this month that we have built enough
liquidity into our portfolio to allow us to continue to operate
smoothly and meet our obligations even if we had no access to
the agency bond market for 3 months. This is a statement very
few financial institutions could make.
We also said that we would disclose each quarter the
percentage of our on-balance sheet assets we hold as liquid
assets, again, going beyond the terms of the voluntary
initiatives.
And yesterday we announced that we had made the initial
disclosures of our interest rate risk and credit risk
sensitivities, as well as disclosures from our interim risk-
based capital stress test.
For our interest rate disclosure, we followed the
directives of the new Basel Accord and released the two
measures of interest rate risk we used to manage our business
internally: net interest income at risk, and our effective
duration gap. We are going beyond our commitment by releasing
our duration gap on a monthly basis.
We also made our first quarterly disclosure of the impact
on our credit losses of an immediate 5 percent drop in home
values. We are showing our credit loss sensitivities both with
and without the effect of credit enhancements to highlight the
role that loss-sharing arrangements play in our credit risk
management.
And finally, we carried out our first interim risk-based
capital stress test. We passed this test with a capital cushion
of between 10 and 30 percent of our total capital as of
December 31st, 2000.
Combined with our charter revisions in 1992, the six
voluntary measures we have just implemented place Fannie Mae at
the vanguard of risk management and disclosure practices
worldwide with cutting edge regulatory discipline bolstered by
cutting edge market discipline.
If there is any question or concern about how Fannie Mae is
doing, there are now several ways to find out. You can look at
the results of our supervision exams. You can look at our
capital levels, our regular stress test results, our external
rating reports, our monthly and quarterly reports on how the
economy is affecting our business, or changes in the value of
our subordinated debt.
No financial company in the world will tell you more about
its financial condition than Fannie Mae does.
Our new disclosures reinforce the fact that Fannie Mae is
one of the safest, soundest financial institutions in the
world. Our subordinated debt and risk-to-the-Government ratings
are among the strongest in the industry.
We have more than adequate liquidity to survive for 3
months without access to the credit markets, and we could
endure the worst economic shocks in history, shocks few other
financial institutions could survive, with significant capital
left over.
Mr. Chairman, Congressman Kanjorski, thanks to your
leadership and partnership, our safety and soundness regime is
now consistent with the best thinking in the world, and it goes
well beyond any federally-chartered bank or financial
institution today.
Together, we have produced an even safer, sounder Fannie
Mae, a stronger U.S. housing finance system, and a better
chance for more Americans to own a home. And we have done more
than that. Together, we have created in Fannie Mae nothing less
than a model for financial institutions in America and around
the world.
Mr. Chairman, we applaud you for your leadership and look
forward to continuing to work with you.
[The prepared statement of J. Timothy Howard can be found
on page 151 in the appendix.]
Chairman Baker. Thank you very much, Mr. Howard. Thank both
of you gentlemen.
My first question relates to the comment about the stand-
alone measure of the S&P rating, Mr. Howard. In your testimony,
the rating agencies rated your subordinated debt separate and
apart from Fannie's relationship with the Federal Government.
I visited with a representative of S&P not long ago trying
to understand the mechanisms by which ratings were established.
And there's a fine line that I think has been drawn, but that I
need to clarify from your perspective.
As I understand it, they set aside the value of a
governmental intervention by exercising the line at the
Treasury. But at the same time, they did calculate the value of
the ratings.
The fact that the market perceives that you have an
implicit guarantee, therefore, even in illiquid markets, you
have the ability to market your securities and debt instruments
in a manner which others may not, so that there is a buy-side
bias, as I would describe it, in the market toward the rate,
although it does take into consideration prohibiting the
exercise of a line of credit. Do you see that differently?
That's the way it was explained to me.
Mr. Howard. Let me go into my understanding of both the
rating Standard & Poor's did of our subordinated debt as well
as the risk-to-the-Government rating, because they are rating
somewhat different things, but from a common perspective.
In each case, Standard & Poor's assumes that our
fundamental operating practices, whatever causes them to be
what they are, whether it's a view by investors that the
Government would in some form support our senior debt or not,
they take no position on that. They simply say that whatever
your current operating practices are--``your'' being Fannie
Mae's--we assume those will continue in times of duress.
For our subordinated debt----
Chairman Baker. Excuse me. I'm sorry. But on that point,
whatever your existing business practices are will continue
during times of duress?
Mr. Howard. Yes.
Chairman Baker. That is, despite the fact that the
securities may say not guaranteed by the full faith and credit
of the United States, you could buy it with that assumption
anyway? That that's sort of the market practice today.
Mr. Howard. The investors with whom I speak, and Mr. Baker,
Chairman Frank Raines and I returned from Europe a month ago,
doing our annual visit with European investors. For 17 years,
Fannie Mae has been doing a visit with European investors in
the spring and a visit with Asian investors in the fall.
We talk to investors continually. The investors, including
the most sophisticated, fully understand that our debt is not
guaranteed by the U.S. Government. There is no ambiguity in
their minds on that point.
What Standard & Poor's does in rating our subordinated
debt, they have said explicitly they do not assume that in the
unlikely event that Fannie Mae were to encounter financial
difficulty, that the U.S. Government would guarantee or support
that debt. That's an explicit statement they make.
So the subordinated debt rating is a very pure credit
quality rating of our obligations, assuming no Federal support.
And that distinguishes it from the senior debt.
The risk-to-the-Government rating, in my understanding from
talking to Standard & Poor's, attempts to view the U.S.
Government as a potential creditor of Fannie Mae, and in effect
ranks the probability of the Federal Government ever being put
in a position where it has to make a decision whether to
support or not support the senior debt.
And in both cases, whether it's viewing the exposure that a
subordinated debtholder has to Fannie Mae's credit condition,
or viewing the Government's role as an entity that has
chartered Fannie Mae and may at some point face a decision
about whether or not to support senior debtholders, in each
case we have been accorded a AA-minus rating, which is
extraordinarily high. And that represents, in my view, the
fundamentally sound risk management practices that we have put
in place.
Chairman Baker. Let me follow up with the second part, Mr.
Brendsel, of the stated agreement of October. And first let me
congratulate both Fannie and Freddie for your success in the
implementation of the proposal to date. I want to acknowledge
that and that you have in my judgment made a good faith effort
to comply with the tenor and tone of the agreement.
However, that meeting of that morning, I announced the
intent to introduce legislation this year with regard to a
regulatory structure. I don't want to open a discussion as to
the details of the regulatory structure.
All I want is to confirm, since this is the first
opportunity you've had to visit in this forum since last
October, that you, both from a corporate perspective, view the
creation of a strong regulatory structure not only as
protection for the taxpayer, but an asset in the markets,
because it gives them confidence and you do have oversight that
is appropriate and sufficient.
Mr. Brendsel.
Mr. Brendsel. Absolutely.
Chairman Baker. Mr. Howard.
Mr. Howard. Yes. We believe that the existence of a strong
regulatory structure is very much in our interests, the
interests of our investors, policymakers, and anyone who has a
strong interest in the continued smooth workings of the U.S.
housing finance system.
Chairman Baker. Let me do this quickly. I really wish I had
a whole lot more time. But since we have a fair number of
Members, I'll try to stick to 5 minutes. I would just like to
have a little more in-depth analysis if I might, Mr. Howard, or
from both operations with regard to the spreads on the sale of
subordinated debt. It appears that the spreads have widened
instead of narrowed from the first offering at 22 basis points.
I've seen different reports where it's vacillated. But it seems
of late to have been significantly higher than it was at the
outset, and I wish to understand better whether that's a
liquidity issue in the market or other reasons. And I'll just
get that in writing at a later time.
Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
As I understand it, in developing the voluntary
commitments, you studied worldwide the best practices of
regulators for safety and soundness of financial institutions,
particularly those of your own regulator, OFHEO. How do your
commitments stand up in comparison with other financial
regulators, both inside and outside of the country?
Mr. Brendsel. Well, Mr. Kanjorski, as I commented in my
oral statement, our disclosures really stand up extremely well.
In fact I would call them world class in terms of the kind of
information they provide to investors.
Justice Brandeis once said ``sunshine is the best
disinfectant.'' And that's really what has occurred here. We
are providing the kind of information to the marketplace, to
investors that really exposes us to the sunshine, to the
scrutiny of our investors, and whether it is our practice to
issue additional subordinated debt, disclosure of our
independent rating, disclosure of our interest rate risk or
credit risk, they put us at the head of the pack.
And it really is reflecting the recommendations made by the
Basel Committee on Banking Supervision as well as the Shipley
Commission as well as recommendations by the Fed and Treasury
for commercial banks in this country.
Mr. Howard. The recommendations of both the Basel Committee
as well as the Shipley Commission were targeted primarily on
disclosure practices of institutions as a supplement to
regulation.
Although in the case of Basel, Basel did support quite
strongly the use of specific stress tests and internal models
in gauging the true risk of complex financial institutions. And
in that regard, the legislation in 1992 was quite far-sighted
in enshrining in statute the need to do just such a test, using
the actual data from businesses practices in determining the
amount of capital that the entity should hold in light of the
specific risks that it takes and the way in which it manages
them.
So in that regard, I believe OFHEO's regulatory structure
is indeed at the cutting edge of regulatory practice.
Mr. Kanjorski. Some have suggested that the recent GAO
report on OFHEO regulatory authority concludes the agency lacks
sufficient enforcement power to ensure that Fannie Mae and
Freddie Mac do not pose a threat to the economic stability of
our country.
The report, however, also notes that it appears each
regulator has the statutory tools available to address
significant safety and soundness concerns. These views seem to
be in conflict. I was just wondering if you would give us your
perspective on these two conflicting views.
Mr. Brendsel. My reading of the GAO report--and indeed,
it's my reading--is that it concludes that OFHEO does have
adequate regulatory authority that they need for regulating the
two institutions, albeit in some cases it is slightly different
than the authorities that banking regulators have.
But that is also appropriate, given that we are different
kinds of institutions. We're only two. We're only focused on
one line of business--residential mortgage loans. We're not
engaged in a myriad of activities like banks are. And indeed,
our regulator only has two institutions to focus on rather than
the thousands of banking institutions.
So overall, my conclusion on reading the report is although
different in some cases, they conclude that the authorities are
adequate and appropriate.
Mr. Howard. Congressman Kanjorski, I would echo that. I
would also add that the principal conclusion of the GAO report,
and I'll quote this, is that ``based on each regulator's powers
and authorities, it appears that each regulator has statutory
tools available to address significant safety and soundness
concerns.''
The GAO report did highlight areas where the powers were
different. But as Mr. Brendsel said, that seems to reflect
largely the different circumstances of banks and other
financial institutions versus Fannie Mae and Freddie Mac.
Mr. Kanjorski. I guess it is not proper to ask the hen
whether we should empower the fox, but do you feel that
Congress should give greater powers to your regulators? Is this
something we should presently investigate or potentially
legislate?
Mr. Brendsel. I think that overall, I would say first and
foremost, we support a strong and credible effective regulator.
Whatever the structure, whatever the particular authorities
that are necessary to carry out that objective that you give to
the regulator, we certainly want the regulator to be
professional, knowledgeable, have the appropriate authorities.
And ultimately, it's a decision for Congress to make.
And from my standpoint today, at least from what I
understand their authorities to be in my reading of the GAO
report, I would not recommend to Members of Congress that any
changes be made.
But first and foremost, we want a regulator that has
credibility and the confidence of you and of investors
worldwide.
Mr. Howard. Our view is quite similar.
Mr. Kanjorski. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman. I have a question for
both witnesses.
Freddie Mac and Fannie Mae operate with less equity capital
per dollar of debt than banks risk. Given your size, what would
you want to comment on the suggestions made that there's
undercapitalization and perhaps the capital adequacy needs to
be increased? Do you want to comment on that?
Mr. Howard. I'd be happy to. One of the principles of the
Basel Commission is that capital needs to be appropriate for
the risk undertaken. In Fannie Mae's case, and also in Freddie
Mac's case, we are doing business in a single asset class. U.S.
residential mortgages.
We do two things with that asset class. We guarantee the
credit and we take the interest rate risk for the mortgages
that we hold in portfolio. On the credit risk side, the
fundamental credit quality of residential mortgages is
extremely high compared with other asset classes--consumer
loans, loans to small businesses, loans to international
borrowers.
There's a wealth of data on that. And under the principle
that capital needs to relate to risk, if an entity is limited
to a single business which has a low embedded default rate,
less capital on an absolute basis can still mean a much
stronger institution if the entity holding that small amount of
capital is limited to mortgages.
Fannie Mae's risk-based capital test is designed to measure
exactly that, and it goes beyond that. Because by explicitly
relating capital to risk, it gives us the financial incentive
to hedge our risks and limit our risks in a fashion that we can
keep our required risk-based capital under our statutory
minimums.
One of the fundamental flaws recognized by international
regulators of the current ratio-based system that covers most
institutions including commercial banks is it requires a large
amount of capital as a buffer against what could go wrong,
equivalent to what you could as capital against the 100-year
flood. The only problem with that is entities that have to hold
that capital then have to go out and attempt to earn a return
on that excess capital, which gives them the incentive to take
more risk.
So the incentives under the additional capital system are
in my view precisely the wrong ones. A company that takes
modest risk and hedges it well can actually be considerably
safer, sounder and stronger than the one that has a higher
nominal amount of capital, but is taking more risks, because it
has a broader range of businesses and doesn't hedge as well.
Mr. Ney. Mr. Brendsel.
Mr. Brendsel. I'm not certain I can add to Mr. Howard's
dissertation, an excellent dissertation on risk-based capital,
other than to say ditto.
If we can survive, which is basically what is contemplated
in the 1992 legislation and essentially how Freddie Mac
operates today, if we can survive an economic calamity that is
basically equivalent to the Great Depression, that clearly
indicates we are extraordinarily strong and well capitalized,
even though you can't measure it by the typical kinds of
accounting ratios that many use. But that's not the appropriate
measure of capital adequacy and capital strength, as Mr. Howard
has pointed out.
Mr. Ney. Everybody talks about the crisis in affordable
housing. How do you feel that the six voluntary commitments
that have been made and are being undertaken in fact would help
with the mission of home ownership?
Mr. Brendsel. I think they're extremely positive, because
they will serve to maintain the confidence of investors in the
world's capital markets, the confidence of the public
policymakers, and indeed, the confidence of our customers, the
Nation's mortgage lenders, that we are there and will be able
to meet our obligations as well as provide the kind of
liquidity and stability to the mortgage market.
Ultimately that means there will be more mortgage money
available at lower rates, which is in essence the core of what
we're doing in terms of providing money to finance affordable
housing as well as housing for middle income Americans.
Mr. Howard. There is a very fundamental connection between
our safety and soundness and our ability to carry out our
mission.
As Fannie Mae continues to do its part to meet the large
number of unmet housing needs that still exist, we will by
definition get a larger profile. Our mortgage portfolio will
continue to grow. We will issue more debt. Our credit needs
will continue to grow.
A growing Fannie Mae is evidence that we are being more
effective carrying out our mission of making housing credit
more available and more affordable.
As we grow, this concern that exists legitimately among
policymakers over whether or not size equates to risk goes
fundamentally to the heart of these voluntary disclosures and a
strong regulatory system.
We feel that if we can be as transparent as any financial
entity in the world, we can continue to be innovative, be
aggressive in achieving our mission and reaching the pockets of
unserved areas and not have concerns be raised about whether or
not this should cause Congress to worry about our fundamental
safety and soundness and risk to the taxpayer.
Chairman Baker. Thank you, Mr. Ney.
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
Mr. Howard, can you--as you know, predatory lending is a
scourge in the minority community. Can you tell us about the
specific steps your company is taking to combat predatory
lending?
Mr. Howard. Yes. I would be happy to do that. Several
months ago we announced a series of guidelines to which we
requested that our lenders adhere in showing us credit-impaired
loans that might conceivably be eligible for purchase by us.
The areas that we specifically looked at included a number
of--the interest rate that could be charged on those loans,
whether or not there were prepayment penalties that were
unreasonably imposed on the loan, and the existence of prepaid
credit life policies that might result in an erosion of equity
in the property, making it harder for the borrower to stay in
the home.
We came out with a series of guidelines that were quite
explicit. We shared those with our lending partners, came to an
agreement that these were the right set to use, and have
implemented them. And we found that many originators have in
fact confirmed their origination practices to those standards.
So we think that even though our presence in the market as
far as guaranteeing or purchasing of those loans has not
increased as much as ultimately we believe it could, we think
we've already had an impact on lending practices which is
highly positive.
Mr. Meeks. Mr. Brendsel, Freddie Mac has bought billions of
dollars of subprime mortgages. In the same vein, how can you
ensure that these mortgages are not predatory?
Mr. Brendsel. First of all, we only deal with the good
guys. And there are some, as you've already pointed out,
Congressman, that are not the good guys. They're engaged in
abusive practice and so forth.
So what do we do? We have a combination of certainly
guidelines and requirements for any mortgage loan that we will
purchase that includes no high cost loans, no single-premium
credit life, no prepayment penalty in excess of 5 years,
required monthly reporting by all of our services, prompt
reporting of prompt payments. And so we begin with that.
Second, we have an audit program that on a regular basis
audits the customers that we do business with around adherence
to our policies and guidelines.
And finally, we engage in a fairly significant education
campaign overall, not only with lenders, but also increasingly
with consumers in communities.
We've been involved in something called the ``Don't Borrow
Trouble'' education campaign that we've now taken to 12 cities
that really is a public education campaign around, again,
alerting consumers to what to look out for when they go to get
a mortgage loan or any loan.
Mr. Meeks. And finally, let me just ask both of you I
guess, there's a new problem, or maybe it's an old problem,
that I have found in my district. While understanding that we
need the subprime market, I'm becoming concerned that we've
been finding individuals who had Class A credit, but they are
led into the subprime market.
And as a result of being classified improperly, they are
being robbed in essence of their individual buying power,
buying power that they would have, if not the money for the
mortgage, because of the incorrect classification.
And then I've heard this phrase, ``mission creep,'' that is
leading you into the subprime market. Can you tell me how do
you respond to that? Mission creep and the misclassification of
borrowers.
Mr. Brendsel. If ``mission creep'' means trying to clean up
practices in the subprime market, trying to find ways to
qualify more borrowers for low cost loans that can be purchased
by Freddie Mac, we plead guilty, absolutely. But in fact, we're
not going beyond our charter there. That's foursquare in
keeping with the purpose and mission for which Freddie Mac is
chartered.
Indeed, yesterday there was an article in The American
Banker that talked about some subprime lenders who were
complaining that we were engaging in some business, trying to
buy some business and purchase subprime loans, and it's going
to drive down their profit margins, drive down what I would say
is their excessive fees and returns that they are getting
today.
So, great article, great compliment, I think, to what
Freddie Mac is doing. I submitted it for the record actually.
Beyond that, though, I think what we've also discovered is that
there frankly are just many families that are in the subprime
market that really can qualify for a prime loan if only they
are reached by the right lender.
That's why we want to partner and team up with the right
lender with our tools, many of our automated underwriting
tools, so that they can qualify those families for a prime loan
at the lowest possible rate.
[The article referred to can be found on page 144 in the
appendix.]
Chairman Baker. Your time has expired, Mr. Meeks.
Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. I want to compliment
both gentlemen for their efforts to comply or conform to the
voluntary agreement. You're satisfied, so I'm satisfied.
I also say if you told me a year ago that I'd be reading
The American Banker, I'd say ``fat chance.''
[Laughter.]
Mr. Shays. But I want to continue what Mr. Meeks went on,
and I want to know, what is the lowest acceptable score that
you would have?
Mr. Howard. We have no automatic cutoff. We have programs
that will evaluate all borrower characteristics, credit score,
the property the person is borrowing.
Mr. Shays. So you have no score?
Mr. Howard. We have no bright line below which one cannot
get a loan.
Mr. Brendsel. We do not either.
Mr. Shays. And how are you pricing these borrowers' risks?
How do you determine that?
Mr. Howard. We look at the characteristics, and based on a
review of the characteristics compared with how loans with
similar characteristics have behaved in the past, we pick
prices that we believe adequately compensate us for bearing
that risk.
Remember, we have two objectives whenever we're
underwriting a loan. We want to make sure that the consumer
gets the lowest rate possible, but we also have to grade it and
price it so that we meet our safety and soundness objectives on
the other side. It's a constant balancing act.
Mr. Shays. Mr. Brendsel.
Mr. Brendsel. Same answer.
Mr. Shays. Same answer as his? Thank you. How are you
disclosing your activities to your shareholders? Should we have
been surprised this was happening?
Mr. Howard. What's the ``this''? I'm sorry.
Mr. Shays. How would you disclose your activities to your
shareholders? You know, you're getting into a new market it
seems to me.
Mr. Howard. We have been very open with our investors as
well as the Congress about our intent to be active in this
market.
I'll echo what Mr. Brendsel said in that this is in no way
mission creep. Mission creep has a connotation of doing
something you shouldn't be doing. And making loans to people
with less-than-perfect credit is not only totally within our
charter, it's something that we should do and it's something
that's right to do.
And as we can take more advantage of the benefits of
automated underwriting that allow us to more effectively grade
credit risk, we can and will be moving further into this area.
I will say that last year we have done an amount of this
business that's significant to the market.
Mr. Shays. I don't mean to be rude and interrupt, but I
only have 5 minutes.
How do you respond to the allegations that the GSEs are
using their ability to allocate business to the detriment of
the institutions that are outspoken critics of them, such as
moving up to the list of approved bidders for Fannie?
I'm going to give you a chance to--this is today's edition
of The American Banker. So don't give me as long an answer as
they have here.
Mr. Howard. It actually deserves a longer answer. I will
give you a short answer. The allegations are completely
baseless.
Mr. Shays. Let me just ask you, though. They're baseless
that you haven't done it, but how can you be assured that
others in your organization haven't made that--if someone said
my staff did something, I could say ``they're baseless,'' but I
would check it out. I would know they were baseless. You
don't----
Mr. Howard. Congressman, I have checked it out. The only
specific cite made in the article alleging threats was that we
removed Wells Fargo Bank from a list of approved or eligible
bidders for our debt. We did not do that. We have no such list.
Wells Fargo, as any other bank, can bring us debt
transactions anytime it wants to.
Mr. Shays. Fair enough.
Mr. Brendsel.
Mr. Brendsel. As I was reported in The American Banker, I
made a statement, wrote a letter indicating that Freddie Mac
has not, does not, will not engage in bullying or abusive
tactics. We have a clear corporate ethic against that kind of
thing. Second----
Mr. Shays. If any of your employees were implying that
might be the case, what would be your response to those
employees?
Mr. Brendsel. Depending upon the seriousness, clearly I
would do a review of that particular statement and obviously it
could result in an employee being fired.
Mr. Shays. You would consider that a very inappropriate
action?
Mr. Brendsel. Absolutely.
Mr. Howard. As would I.
Mr. Shays. Thank you very much.
Chairman Baker. Thank you, Mr. Shays.
Ms. Jones.
Ms. Jones. I'll pass. I'll pick up later on.
Chairman Baker. Mr. Ford.
Mr. Ford. Thank you, Mr. Chairman. Thank you both Fannie
Mae and Freddie Mac for being here. I want to follow up my
colleague, Mr. Shays, with a line of questioning he was sort of
following through.
I guess in the article from yesterday's American Banker
reads that ``The idea that Fannie and Freddie would dip their
toes''--it's sounding something like ``The Sopranos'', I might
add--but, ``would dip their toes further into subprime lending
has lenders concerned that their margins will shrink and their
profits erode. They also figure they will lose business as
prime lenders snap up their loans by offering better rates.''
I applaud you, both of you, for working to make housing
more affordable. It would seem to me, Mr. Chairman, that on
this subcommittee we would be applauding that and encouraging
that as well.
Would you mind--I know that you've had questions asked by
my colleague, Mr. Meeks and certainly by others on the
subcommittee--would you mind elaborating just briefly if you
could on some of your other efforts in the subprime market? I
know you started, Mr. Brendsel of Freddie Mac. I can't
pronounce your last name correctly.
Mr. Brendsel. Brendsel.
Mr. Ford. Mr. Brendsel. I'm sorry. Mr. Brendsel, if you
could elaborate for 30 seconds and perhaps, Mr. Howard, you
could as well, just summarize very quickly some of your
activities in the subprime market.
And why have you made these people so mad at you is what I
want to know. Is it you're providing more housing for people?
Is that essentially what it is?
Mr. Brendsel. Yes. Basically, it's all about competition if
you want to look at it that way. It is providing additional
consumer choice through other lenders.
After all, one of the reasons why someone finds themself in
a situation of having to take out a subprime loan is that
that's the only source of credit that they may be aware of.
And indeed, by working with a number of lenders, small as
well as large, providing them with the kinds of tools so that
they can originate those loans, it means that, you know, that
family can get a better mortgage loan.
Well, the subprime lender that was charging very high fees
and very high costs is going to be unhappy, and that's what you
see reflected in the article of yesterday.
Mr. Ford. Mr. Howard.
Mr. Howard. We are very much aware that there are many,
many borrowers who are not getting the best mortgage for which
they are qualified.
We have developed products, including our expanded approval
and timely payment reward mortgages that are designed to
address that. But we're also working very intensely with our
lender partners on figuring out how to get those products in
front of you.
We are surprised, frankly, that even with the products,
we're not getting the demand that we would hope we could. So we
think we have to come up with new ways for making those
products available and accessible to people who could benefit
from them.
And we are going to work very hard and very diligently
until we figure out how to do that. We think we have a service
to offer this underserved area, and we intend to do that.
And I think that's one reason why subprime lenders are
currently kicking up some dust around this.
Mr. Ford. Is it true that over the life of an average
subprime loan that a consumer will pay nearly $209,000 more
than a conventional loan?
Mr. Howard. It's certainly possible given the rates that
I've heard are being charged in that market.
Mr. Ford. I know we are discussing a potential tax cut
here, which I support, I might add, here in Congress, but I
cannot think of a better tax cut for working people than
helping them to save that amount of money over the life of a
loan.
To put some of these voluntary initiatives in perspective,
both of you, could you please comment as briefly--my time is
running out--on how safeguards like these compare to the norms
of industry? Have other companies, particularly those that are
part of FM Watch, taken similar steps or they simply mirror
what you all are doing?
Mr. Brendsel. I can't say how particular companies that are
members of FM Watch match up against these particular
disclosure commitments.
However, in general, I can say that based on my knowledge
of what financial institutions disclose, our commitments, our
disclosures put us clearly up ahead of the pack.
Indeed, last year, we retained PriceWaterhouseCoopers to
review our disclosure practices before we made these additional
commitments. At that time, they said our disclosures to
investors placed us among the best of the best in terms of
banking and financial institutions.
These additional commitments take us beyond the best.
Mr. Ford. Mr. Howard.
Mr. Howard. Our commitment is to remain at the forefront of
disclosure practices. We think we have now moved beyond that to
being best practice. If and as disclosure practices improve, we
will revisit what we're doing, and our commitment is to stay
ahead.
Mr. Ford. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Ford.
Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman. I'd like to yield 15
seconds.
Mr. Shays. Just very quickly. My concern and my questions
are, it's not a level playing field. We give you a charter
because of that. We cannot go into our business if we put
everyone out of business. And the question is, what's
appropriate for you to be in? And I'm not asking for a response
now, but I'm eager to have a second round of questions just to
pursue what is your legitimate business.
Thank you.
Mr. Bachus. Thank you. Gentlemen, you all make projections
on your debt in future years, and I've noticed that Treasury,
they make projections on what their debt is. And I'm told that
the debt of Fannie Mae and Freddie Mac will exceed that of the
U.S. Treasury by 2005.
Is that accurate? Are you aware of that?
Mr. Brendsel. I can't say whether or not those particular
projections are accurate. I can say that those types of
comparisons that you read are kind of comparing apples to
oranges, or I'd put it this way.
Declining U.S. Treasury securities outstanding is clearly
good news for the U.S. taxpayer.
Increasing Freddie Mac securities outstanding really
reflects good news for America's home buyers. And after all, it
is securities that are backed by mortgages on people's homes.
So our growth is in line with the growth of the U.S.
mortgage market. Indeed, for example, over the last 5 years,
residential mortgage debt outstanding has grown roughly 8
percent a year. We've grown roughly 9 percent a year. But that
reflects the strength of the economy, increasing home ownership
rates, the exploding home ownership rates that have occurred
over the last several years.
And so, clearly, that is good news for America's home
buyers as reflected in the strength of Freddie Mac, not any
risk to the U.S. Treasury or taxpayer.
Mr. Howard. I'd make a couple of points to that. First of
all, this is what we would call a high quality problem, having
Treasury debt disappear by the year 2010. When Treasury debt
totally disappears, my teenaged daughter will have more debt
outstanding than the U.S. Treasury.
Fannie Mae currently has about $640 billion in debt
outstanding, all of which is funneling capital into housing. A
very important point in comparing Fannie Mae debt with Treasury
debt is the fact that, because we deal exclusively in the
secondary market, we do not create debt except insofar as we
cause more mortgages to be made.
Whenever Fannie Mae buys a mortgage in the secondary market
by issuing debt, the proceeds of that debt are given to the
seller who then pays off their debt. So what's happening in the
aggregate is debt is shifting from that of the seller of the
mortgage to Fannie Mae.
We talked earlier that Fannie Mae debt has a stand-alone
rating of AA-minus. It's very high quality debt. So this is a
good problem to have in my view.
Mr. Bachus. Thank you. Mr. Howard, Moody's, in rating your
subdebt, stated ``It is Fannie Mae's intent to create a class
of securities that would reflect the market's views on the
firm's credit profile via the price at which it trades.'' Would
you explain?
Mr. Howard. Yes. What we're hoping to do is create a class
of security where investors know they have an economic interest
in the risk management practices of Fannie Mae.
And that's because we built into the subordinated debt a
feature that would cause the holders of that subordinated debt
to have their interest payments deferred for up to 5 years if
our capital falls below a threshold amount. And that threshold
amount is 125 percent of our so-called critical capital level.
With that financial incentive, we believe subordinated
debtholders will pay attention to our disclosures, monitor our
credit quality, and the reflection of their view will be in the
price at which that subordinated debt trades relative to our
senior debt.
Mr. Bachus. You just mentioned that you would defer
interest payments. A lot of times on subordinated debt, that
debt converts to equity. Is that right?
Mr. Howard. Subordinated debt can be structured that way.
We have deliberately chosen not to do that, because we want to
ensure that a holder of subordinated debt has the same interest
as the U.S. taxpayer.
The subordinated debt that converts to equity gives the
holder an interest in the company doing whatever it can to make
that subordinated debt principal pay off, even if the risk the
company takes are very high, the equity holders, if a company
is in trouble, basically want the company to go for broke,
shoot for the moon, on the hope they'll get paid off.
Debtholders want exactly the opposite.
So subordinated debtholders in that circumstance, if the
debt is not converted to equity, have exactly the same interest
as the Congress and the U.S. taxpayer, and that's what we
wanted to create.
Mr. Bachus. But of course, it might not bring you up to the
minimum capital standards, which you are intending to do by
deferring those interest payments.
Mr. Howard. No. But remember, the suspension of interest is
only triggered if we fall below those critical capital
thresholds which, given our risk management incentives and
practices, is a highly unlikely event. And again, that's
reflected in our stand-alone credit rating.
Mr. Bachus. Who is going to verify the commitments you've
make whether they're being acted upon?
Mr. Brendsel. Certainly it starts internally with our own
board of directors and our internal audit function. Externally,
of course, it will be verified by our regulators through their
examination function at OFHEO.
Mr. Bachus. So you do see part of their role is to verify
that the commitments you made to this subcommittee are
realized?
Mr. Brendsel. Yes.
Chairman Baker. You've expired your time, Mr. Bachus. We'll
come back to you.
Ms. Jones.
Ms. Jones. Thank you, Mr. Chairman. I want to commend you
for holding these hearings once again. It's kind of like deja
vu, though. Remember last year when you were holding these
hearings, Mr. Brendsel, Mr. Howard, and all the articles that
came out about Fannie Mae and Freddie Mac on the issues of
mission creep?
I want to quote specifically from an article in The
Washington Post that said, ``Today a hearing before
Representative Richard Baker, Chairman of the House Financial
Services Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises, was not scheduled to question
the company's lending guidelines, rather aimed at assessing
their progress toward a number of goals laid out last year.''
And on and on and on.
That was the intent of this hearing, was it not, gentlemen?
Is that why you came prepared to testify today, Mr. Brendsel?
Mr. Brendsel. Yes.
Ms. Jones. Mr. Howard?
Mr. Howard. Yes it is.
Ms. Jones. And I really didn't intend to question the issue
of mission creep, but seeing how everybody else decided they'd
go down the line on mission creep, I thought I'd go that route
myself.
It's true that the mission of both of your Government
sponsored enterprises allows you to go into the secondary
market? I'm kind of cross-examining like a prosecutor. Forgive
me. Give me short answers. Correct?
Mr. Howard. Yes.
Ms. Jones. And in that effort, Mr. Howard, you've been with
Fannie Mae maybe--in this position for the past 10 years. Is
that correct?
Mr. Howard. Eleven, yes.
Ms. Jones. Eleven. Excuse me. And in those 11 years as the
CFO of Fannie Mae, can you talk about why you chose to go down
the route that you've gone to look at your charter and make
some specific changes and what you thought you were permitted
to do under the law?
Mr. Howard. We last took a look at our charter in 1992 in
conjunction with Congress. At that time, Congress made some
changes, including giving us specific housing goals that we
have met every year since they've been in effect. It created a
new regulatory capital standard, which we're now discussing.
Subsequent to the 1992 law, we have made no request for
further charter expansion. We believe our charter as adopted by
Congress in 1992 is exactly the right charter for us to have to
carry out the mission that Congress has given us.
We have been operating within that charter, which is why on
the topic of mission creep, I have yet to hear a credible
description of what it is we are doing that exceeds the charter
that this Congress passed in 1992.
Ms. Jones. Mr. Brendsel, would you like to answer that
question as well?
Mr. Brendsel. Having been in Freddie Mac since 1982, now 18
years, I have a long history in the evolution of Freddie Mac.
First I'd say our charter is very clear as to our purpose,
our authorities, what we can do and what we cannot do. And over
time, while the regulatory structure has been changed and
enhanced certainly for Freddie Mac, we have not sought really
to change our charter in terms of our authorities with one
exception that I can remember, and that is in fact we proposed,
attempted to get a change to the charter requirement that we
have private mortgage insurance on every low downpayment
mortgage that we purchase.
We proposed making it more flexible so there would be
alternative forms of credit enhancement that we could use on
low downpayment mortgages. We saw that the evolution of the
capital markets meant that there were many other alternatives
other than private mortgage insurance to give us that
protection.
That particular proposal failed, but I still think it's a
good idea.
Ms. Jones. Do you know who Beneva Scholte is?
Mr. Howard. I've heard the name.
Ms. Jones. She's the contact person for the FM Watch report
that outlines how GSE mission creep threatens American
consumers, the report that came out about a week ago, just in
time for our wonderful hearing. Have you ever been in contact
with her?
Mr. Howard. I have not been personally.
Ms. Jones. Let me finally say that you've had an
opportunity since last year to comply with these six voluntary
agreements to put your ships in better shape than they already
were in, correct?
Mr. Brendsel. Correct.
Ms. Jones. You don't have any issue about entering into
voluntary compliance, do you?
Mr. Brendsel. No.
Ms. Jones. Did you welcome the opportunity to continue to
make these two companies the leading companies here in the
United States in pushing or providing for affordable housing in
the United States?
Mr. Brendsel. Absolutely. I couldn't have said it better
myself.
Ms. Jones. Thank you very much, Mr. Chairman. I yield the
balance of my time.
Chairman Baker. Thank you.
Mr. Weldon.
Mr. Weldon. Thank you, Mr. Chairman.
Mr. Brendsel, you stated regardless of disruptions in the
capital markets that that may make it impossible to borrow,
Freddie Mac has the means to meet our financial obligations for
at least 3 months.
Mr. Brendsel. That's true.
Mr. Weldon. I think, Mr. Howard, you said the same thing?
Mr. Howard. Yes.
Mr. Weldon. Could you give me a little more detail on how
you'd go about doing that?
Mr. Howard. I think we would both do it in a similar way.
First of all, we maintain a fairly sizable liquidity portfolio.
As of the end of last year, it was 8 percent of total assets.
That liquidity can be run off. They're high quality
securities that can be sold to allow us to pay down debt if we
don't have access to capital markets.
Mr. Weldon. What kind of securities are they?
Mr. Howard. Many of them, we made short-term loans to
banks, in the Fed funds market. We have AAA-rated securities
that can be sold readily for prices very close to what we paid
for them.
We also have over $300 billion in high quality Fannie Mae
mortgage-backed securities that can be pledged as security for
repurchase agreements that can then be used for borrowing. This
is very standard practice in the financial services industry.
And the use of those securities as collateral for repurchase
agreements would give us many months of access to borrowing
without having to issue debt.
Mr. Weldon. Mr. Brendsel.
Mr. Brendsel. My answer would be very similar. Clearly, we
start out with a schedule of what are all the outstanding
commitments and obligations that the company will have coming
due over the next 3 months, so we can have a clear idea on
that.
And then second, we make certain we have the kind of
liquidity that Mr. Howard was referring to, whether it was in
the form of very high grade, high quality corporate securities
and banking securities or our own mortgage-backed securities.
Mr. Weldon. Correct me if I'm wrong. It's very easy for you
to raise capital by just issuing debt, and that in itself gives
you a lot of liquidity in terms of giving you the ability to
expand your business. Would you say that that enhances safety
and soundness for your institutions?
Mr. Howard. Not just for our institution, but for the
financial system as a whole. So in times such as the fall of
1998 when credit was not readily available, we were able to
issue Fannie Mae debt that investors valued and would invest
in, take those proceeds and channel them into the housing
market.
So we can serve as a stabilizing force for the entire
system.
Mr. Weldon. Do you want to add to that at all?
Mr. Brendsel. This may be just a point of clarification.
This liquidity and contingency commitment would assume that we
would not be able to issue any debt at all for that 3-month
period.
Mr. Weldon. Right. I realize that. You have been conducting
the internal risk-based capital test, the so-called ``stress
test.'' In the agreement you committed to disclosing the
parameters of your testing models and the outcomes of the
testing. What level of detail are you going to be providing on
that? Or have you made that decision yet or not?
Mr. Howard. Yes. In implementing the interim risk-based
capital test associated with the voluntary agreements, we have
moved from using a model based on Fannie Mae's own
specification that we have been running since 1993 to one that
uses as its basis the notice of proposed rulemaking that OFHEO
put out in 1999.
So we use that as the basis plus amendments OFHEO has made
subsequent to that.
In addition, we added elements in our comment letter of
March 10th of 2000, which is publicly available, and made some
additional adjustments to approximate as closely as we could
what we think a final official standard might look like. And
those changes are available on our website as part of our
disclosure package.
So by going to OFHEO's website, looking at our comment
letter on our website, an observer can look at all of the
elements that we used in running our risk-based capital test on
an interim basis that we just announced.
Mr. Weldon. The same for you as well?
Mr. Brendsel. Similar. We've attempted to coordinate
wherever possible types of disclosures with Fannie Mae to
assure that investors wouldn't be confused.
Mr. Weldon. Have two standards.
Mr. Brendsel. Yes, two standards and so forth. And I
wouldn't say that in all cases we have adopted the identical
approach.
But I'd like to add one additional point about Freddie Mac.
We really began managing the company under a kind of a stress
test approach to assess capital adequacy and to maintain
assurances that we were appropriately capitalized beginning in
the late 1980s.
Indeed, we were an advocate of the legislation that was
crafted in 1992 establishing this very dynamic and forward-
looking, at the time an avant garde risk-based capital
approach, and we've been managing according to that at Freddie
Mac ever since.
Indeed, we were disclosing a lot about how we assessed
capital even before we made this final commitment. And now of
course, we're going to provide additional information including
general information around the kind of parameters in this
stress test that we use for this disclosure.
Mr. Weldon. Thank you, Mr. Chairman. I think my time has
expired.
Chairman Baker. Thank you very much, Mr. Weldon.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. I want to yield my
first 2 minutes to my good friend and colleague, Congressman
Israel.
Mr. Israel. Thank you. I thank the gentleman for yielding.
There seems to be near-unanimous praise on both sides of
the aisle for the voluntary initiatives that you are conforming
to, and you've already stated that those voluntary initiatives
help you meet your core competency, which is to provide
affordable housing.
I'm just wondering whether you can estimate the approximate
cost of conformance with the voluntary issues in terms of
personnel or hard dollars. Mr. Howard?
Mr. Howard. Most of the voluntary commitments codify or
make public practices that we have already undertaken. Those
practices do have costs, because we need to have high quality
staff to do risk assessment. We need to do lots of modeling to
help us get a sense for how best to measure and manage our
risk.
The one specific cost that's easy to track is the
additional cost we pay to issue subordinated debt. Because if
we didn't have a subordinated debt, we would issue senior debt
at a lower cost.
So for the first issue we did, $1.5 billion, we paid 22
basis points more. That's a pure additional cost.
We have committed to build our subordinated debt up to
roughly 1.5 percent of total assets, which over the next 3
years will be between $12 and $15 billion of subordinated debt.
And if we pay 22 basis points on all of that, that will be a
real incremental cost over and above the others that I've
mentioned.
Mr. Israel. Mr. Brendsel, if you answer briefly please.
Mr. Brendsel. Yes. The additional incremental cost on
subordinated debt would be similar. I think our first issue, we
had 22 basis points, which would amount to, on a $2 billion
issue, that we did about $4.4 million annually in additional
cost.
If, however, these commitments, including the subordinated
debt, provide greater assurance and confidence to the investors
in the stability of the company, really the confidence of
Congress and the public, that will be more than offset in terms
of overall cost on our senior debt.
Mr. Israel. I thank the gentleman for yielding.
Mr. Hinojosa. Thank you. I was looking at the closing
statement that Mr. Brendsel used, and he said that he looks
forward to working together with us to secure the future of our
housing finance system and with it the dreams of millions of
families.
So that brings me to one of the points that I made earlier
in my opening remarks, and that was my concern about the wide
gap that exists between the standard families owning a home,
Anglo-Saxon families, I think that there's a lag of 26 percent
behind Anglo-Saxon home ownership.
So can you tell me what your company is doing to close this
wide gap?
Mr. Brendsel. Yes. I can tell you what our company is
trying to do with all its energy and all the commitment of the
4,000 employees at Freddie Mac and their creativity.
First of all, I'd emphasize that we are committed to
closing that gap, finding every avenue that we can within our
charter.
Certainly, it includes developing new flexible mortgage
products that make it easier for a low-income or minority
family to afford their first home. It includes partnering with
organizations that know the Hispanic community well, like the
National Council of La Raza and the National Association of
Hispanic Real Estate Professionals.
Indeed, we recently entered into an agreement, a
partnership really, with those two organizations, $2 million to
develop web-based technology to increase home ownership
counseling for Hispanic families.
In addition, we're constantly trying to improve our
underwriting systems, use technology to drive down origination
costs, increasing the ability of a low-income family or a
minority family to get a mortgage loan. And, of course, we are
constantly exploring new ways to attract capital from
throughout the world at a lower cost, making it again more
possible to afford a home.
I think it's a journey. It's a journey that we've been on
for decades now. Clearly, there's a long way to go. Yes, the
average home ownership rate nationally approaches 70 percent,
67 percent. But as you have clearly indicated, the home
ownership rate for Hispanics as well as African American
families in this Nation falls well below and indicates that
there is still a lot more work to be done.
Mr. Hinojosa. Mr. Howard, your group has done a great deal
of effort in San Antonio to Brownsville, to McAllen, to Laredo
and that area, because I've seen some of the programs that were
introduced in these last 4 years as we were moving many
families from welfare to jobs, and in some cases not letting
them stay more than 2 years in Section 8 housing.
Do you have a way of monitoring and assessing the success
or failure of your new programs as they relate to get Hispanics
to own their own homes?
Mr. Howard. Yes we do. Last year, Fannie Mae announced our
$2 trillion American Dream commitment. That was the successor
to our $1 trillion initiative that we announced back in 1994.
In both cases, we established a very rigorous pattern of
announcing specific goals and then tracking and reporting on
how we were doing against those goals.
One of the subgoals of the American Dream commitment is a
specific minority lending initiative where we are setting
targets to help close the home ownership gap between
minorities, including Hispanics, and majority Americans.
But I've noticed in recent publications by FM Watch and
others, they're claiming that we have solved the home ownership
problem and that we should stop. That totally ignores the very
wide gap between minority home ownership and majority home
ownership that we are committed to working on to close.
And through the American Dream commitment and specific
target initiatives that we are working on with interest groups
as well as lenders and others, we will follow up on those
initiatives, track and report on them, and hopefully be a
positive force in achieving a good outcome.
Mr. Hinojosa. Would you repeat the name of the organization
that felt that you should stop?
Mr. Howard. FM Watch.
Chairman Baker. You'll be hearing more from those folks,
Mr. Hinojosa, I'm sure.
[Laughter.]
Chairman Baker. The gentleman's time has expired. I'll
start back on a second round. There being no further Republican
Members.
Just one comment again on the specifics of the arrangement
of last fall. The requirement to issue subordinated debt equal
to 4 percent as subtracted from the core capital, whatever that
difference turns out to be, an annual rating which now has
turned into a surveillance rating, new liquidity standard for a
3-month operating window, an interest rate risk disclosure and
credit risk disclosure that is new and heretofore not engaged
in, and each of you commented that you feel that that package
represents a substantive structural change in the level of
transparency and disclosure to the markets. Is that correct?
Mr. Howard. Yes it is, sir.
Chairman Baker. And to your knowledge, has it had an
adverse impact on your operations since you complied with these
activities?
Mr. Howard. None whatsoever.
Mr. Brendsel. No.
Chairman Baker. Well, I just want to make the point, and
this is coming from a little different perspective, that it is
possible to manage the affairs of Government sponsored
enterprises without necessarily legislation, but with
regulatory changes that do not result in adverse circumstances,
like throwing hundreds of thousands of people out of home
ownership. I feel that's a pretty substantive point to make.
Second, that with regard to the discussion of the regulator
piece that is yet to come, these are elements that a--I don't
want to say a well-run shop, because you all are
extraordinarily well run--would want to have in the
marketplace, coupled with a competent regulator so there's no
question about the stability of your debt issuances.
And the reason for bringing that up is I am concerned about
the consolidation of the counterparties because of mergers and
acquisitions internationally and domestically and your ability
to hedge risk appropriately.
I am concerned about the difficulty we may engage in if we
have a short-term 1998 liquidity problems and whether or not--
I'm not suggesting we haven't gone far enough, but what I'm
asking you is, what is your level of confidence, knowing now
that these new standards are operative, that the markets are
now expecting this, and you can't back off of it. It's a
requirement that you must go forward with. Am I reading
anything into the spreads on the subdebt as being any indicator
of any concern, particularly with the consolidation of
counterparties' potential liquidity problems in the broader
market, not within your shop?
How good do you feel about the deal we put together here
and its effect on being able to insulate taxpayers from any
adverse circumstances that could develop? Keep in mind we're
talking the 1980s and Louisiana/Texas oil and gas patch
circumstances that are in pretty dire consequences.
Mr. Brendsel. Mr. Chairman, I think I would answer the
question this way. We started from a point at the time that we
announced the commitments that we were already extraordinarily
well capitalized for the risks we take and face, because we're
only in the home ownership business and rental housing.
And we only added to that by the additional commitments.
Obviously, spreads on securities fluctuate from day to day for
a variety of reasons, many of which have nothing to do with any
one institution. So I don't know what you're reading into a
spread moving from 22 basis points to 28 basis points, but in
the scheme of things, that is just a random fluctuation.
I used to be the chief financial officer at Freddie Mac
years ago and I've lost my edge a little bit, so I'll let Mr.
Howard comment as well.
Mr. Howard. I put the movement in our subordinated debt in
this perspective. As Mr. Brendsel mentioned, each of us priced
subordinated debt around 22 basis points off our senior debt.
In our case, we traded as tight as about 18 and as wide as
28. That's a minus 4 plus 6 move. That is a range that is well
within what other issuers of subordinated debt have experienced
over the same time period. These are the high quality
commercial banks that have subordinated debt outstanding that
is quoted publicly in the market.
I would also say that over the last year, our 10-year
senior debt spreads to Treasuries have moved within a swing of
about 45 basis points, reflecting a host of factors, none of
them specifically being credit quality-related.
Chairman Baker. Well, the overall interest market since the
date of introduction of the legislation year til now has been
nothing but a continuous, steady downhill trend, and we're
enjoying a very low interest market at the moment, which
certainly has to have a much larger effect on the cost of
selling than anything else I can imagine. I'm again exceeding
my time.
Mr. Kanjorski.
Mr. Kanjorski. Mr. Chairman, I think I have asked all my
questions and heard all the answers. I suggest this has been a
very successful hearing.
Chairman Baker. Does any other Member wish to be heard?
Ms. Jones. Just very briefly. Some would say that the
current interest market has been influenced by conversations by
our chief officer of Government and other elected officials or
appointed officials in his Administration. Some would say that,
wouldn't they, Mr. Brendsel, Mr. Howard?
I'm not asking you to say it, because you can't say it, but
I can say it. That some of the articles would say that the
interest or the economy is in the position that it was--I think
it was the New York Times in fact that said that some in our
Administration have talked the economy down. You read that,
didn't you, Mr. Brendsel? You don't have to admit to it. But I
know you read it. Well, let me go on.
[Laughter.]
Ms. Jones. Standard & Poor's and Moody's, those are the
organizations that evaluated your economic status and debt
ratio, right? Correct?
Mr. Howard. Yes, that's correct.
Mr. Brendsel. That is correct.
Ms. Jones. And in fact, they're kind of like Alan
Greenspan. When he speaks, people listen. When Standard &
Poor's and Moody's give you a rating, people listen to that,
right?
Mr. Howard. Yes they do.
Ms. Jones. And in fact, in order to judge your soundness,
and what's the other word I want?
Mr. Howard. Safety.
Ms. Jones. And safety. Thank you very much. You went to
these institutions to have them evaluate you and even passed
what was part of the voluntary agreement.
Mr. Howard. Correct.
Ms. Jones. And so if I were sitting in your shoes, I would
feel pretty darn good about the--I wish my son would get A and
double AA and what are those other ratings?
[Laughter.]
Ms. Jones. But he says, Mom, give him time. But you're at
that status right now. Is that correct?
Mr. Howard. Yes we are.
Ms. Jones. I wondered if you might briefly elaborate for
me. One of my colleagues said something about when you can
raise capital by issuing debt. I can't think of his name. He's
seated four down on the side. He said that the way you can
raise capital for your company is by issuing debt. Is that
correct?
Mr. Howard. He may have said that.
Ms. Jones. Anyway, he raised the question. My question is--
and I'm not a business expert or anything--but most
corporations raise capital by issuing debt. You're not doing
anything unlike other corporations. Is that a fair statement?
Mr. Howard. I don't believe we are.
Ms. Jones. OK. And wouldn't it be fair to say that because
of the lack of affordable housing in the United States and
because there are so many people in need of housing, there's
room at the table for many, many financial institutions who
want to engage in mortgage lending in communities, regardless
of their color, economic interest, to get involved?
Mr. Howard. Very much so.
Ms. Jones. And that even though this is a competitive
market, Fannie Mae does not have to engage in threatening
tactics in order to be successful?
Mr. Howard. We do not and have not.
Ms. Jones. What about you, Freddie Mac? Do you have to
engage in threatening tactics in order to be successful?
Mr. Brendsel. No. We never have and we never will.
Ms. Jones. I'll yield, Mr. Chairman.
Chairman Baker. Thank you.
Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman. I just want to say that
both your organizations have been very helpful to me. Both
organizations are very responsive.
But I found the hair on my back rising when you talked
about going to any market where you see an opportunity, where
there's an overpricing and so on. It almost sounded a little
sanctimonious to me, with all due respect.
You all are given opportunities to compete that your
competition in a sense doesn't have. Is that correct?
Mr. Howard. This is a longer discussion, but I think that's
a complicated subject.
Mr. Shays. It is a complicated subject. And that's almost
an arrogant answer. I realize it's a complicated subject. But
the bottom line is, you are given certain opportunities that
your competition doesn't have.
Mr. Howard. We are given different opportunities from those
which our competition's been given.
Mr. Shays. Your cost of capital is less, correct?
Mr. Howard. In the long-term end of the market, yes. In the
short term, it is higher than our competition.
Mr. Shays. You don't have to file certain reports, correct?
Mr. Howard. That's correct.
Mr. Shays. You don't have to pay State and local taxes?
Mr. Howard. Through Congressional design.
Mr. Shays. I know that. I'm not saying that you have these
powers illegally. You have them. We've given them to you. And
doesn't that apply to you as well? It applies to both
organizations.
Mr. Brendsel. That's correct.
Mr. Shays. So you don't have to pay State and local taxes.
You can get capital, at least in the long-term, cheaper. There
are certain advantages you have.
And so what obligations do I have up here to make sure that
you don't use those advantages to basically put everyone out of
business?
Mr. Howard. We have a charter that precisely limits us to
channeling whatever those advantages may be into housing.
Mr. Shays. So the charter basically sometimes is going to
tell you that you can't go into a marketplace even if you
happen to think that the market is overpriced and you have
opportunities?
Mr. Howard. Yes, that's correct.
Mr. Brendsel. I think I would agree with many of the points
that you were making, Congressman. We compete with certain
tools, advantages, that come as a result of our charter. And
indeed, with those tools come special or different
responsibilities. We're limited obviously to only the
residential mortgage market.
Indeed, we're also limited. We can't originate a mortgage
loan. In addition, of course, we can't buy mortgage loans on
expensive housing, so-called jumbo loans.
Our charter is very clear. We can't go off into doing
credit cards. We can't go off into any number of different
other things.
Mr. Shays. The bottom line, the purpose for which you exist
is to enable Americans to buy more homes. That's the basic
purpose for why you exist. And you've done a pretty good job of
that. Am I wrong? Isn't that the basic purpose? If we want more
residential housing, we want more homeowner properties.
Mr. Howard. But beyond that, it's targeted residential
investment. That's why we have housing goals that guide us as
to where we should focus whatever benefits Congress gave us.
There are limits that come with the benefits.
Mr. Shays. So you could make a determination in your
charter allowed it that there's great opportunities in the
jumbo loan market?
Mr. Howard. No. That's expressly----
Mr. Shays. Maybe you didn't hear my question. If your
charter allowed it?
Mr. Howard. Yes.
Mr. Shays. And we tell you you can't go into that
marketplace. Why do you think we do that?
Mr. Howard. To focus our efforts where Congress deemed they
were most necessary.
Mr. Shays. So you have a problem with this subcommittee
overseeing your activities?
Mr. Howard. No.
Mr. Shays. Do you have a problem with our investigating the
possibility of providing more regulations?
Mr. Howard. No.
Mr. Shays. That's good.
Mr. Howard. Terrific.
Mr. Shays. We'll be watching.
Mr. Howard. We look forward to it.
Mr. Brendsel. Congressman, could I make an additional
comment? And indeed, with regard to the last point, we in fact
welcome the oversight.
Actually I think it makes us a better organization, a
better company, and it's really better for the Nation as a
result.
Finally, the other point I wanted to make is the issue of
benefits or advantages relative to others. Mr. Howard said it's
a complex issue. It's more complicated than simple, I think, as
has been reflected here today in our conversation.
Freddie Mac recently requested that James Miller, former
Director of OMB in the Reagan Administration, and James Pearce
with Welch Consulting, do a study to look at our companies'
advantages, the benefits we receive, and then the benefits to
consumers. That was a report they issued on January 9th.
Two points I would leave you with. One is it clearly shows
that the benefits realized by the Nation, consumers and
homebuyers, the value of those greatly exceeds the advantages
realized by Freddie Mac and Fannie Mae.
The second point they make is, in fact, there are many
other institutions in the marketplace in residential mortgage
markets elsewhere that possess their own set of federally
bestowed advantages, specifically banking institutions that
have federally-insured deposits and that are members or are
able to borrow from the Federal Home Loan Bank system, which
are themselves Government-chartered corporations.
And so, their final conclusion was, in fact, that we were a
more efficient way for the Government to support and encourage
the flow of mortgage credit to this Nation's mortgage markets.
Mr. Chairman, I'd like to submit that report for the
record.
[The report referred to can be found on page 103 in the
appendix.]
Chairman Baker. Without objection.
Mr. Hinojosa.
Mr. Hinojosa. Thank you, Chairman Baker.
I would ask Mr. Howard a question. Can you please tell me
what the predatory lending is and how it differs from subprime
lending?
Mr. Howard. Predatory lending in my view--and I'm not the
world class expert on this--does not have a precise definition.
In general, they are lending practices that are not in the best
interests of the consumers, and typically the consumer is not
made fully aware of prior to committing to a loan.
We have categorized predatory lending practices into
certain groups. And at that point, the basis for the guidelines
that we put out to our lenders.
But precisely because there is not a specific definition of
predatory lending, we entered into discussions with numerous
parties to try and come up with a right balance, because the
flip side of too restrictive guidelines is that people who have
only one place to get credit find they can't get credit
anywhere, which is an outcome we don't want. So we're
attempting to find that fine line between making sure that
people have loans they can afford, even if they have to pay a
higher rate because of their past credit, and abusive practices
that end up causing them to lose their home.
Mr. Hinojosa. I think Freddie Mac--I'd like to ask you what
is your company doing to respond to the problems that Mr.
Howard just outlined?
Mr. Brendsel. In predatory lending?
Mr. Hinojosa. Predatory lending, yes.
Mr. Brendsel. We refuse to purchase certain kinds of loans
that are generally regarded as being associated with predatory
lending practices, excessive interest rates on those loans,
single-premium credit life insurance, prepayment penalties that
extend for an excessive period of time.
We also refuse to deal with certain lenders that we have
determined are associated with predatory practices. So it's a
combination of having policies against purchasing certain kinds
of loans and also policies against dealing with lenders that
are associated with abusive practices.
Mr. Hinojosa. Thank you for that explanation. I wish to
yield the balance of my time to Congresswoman Jones.
Ms. Jones. Thank you, my colleague. Let me begin with the
question on restrictions and go through maybe a few
restrictions that Fannie Mae has as a result of being a
Government sponsored enterprise.
You're restricted to a single line of business, residential
mortgages. Is that correct, Mr. Howard?
Mr. Howard. Yes it is.
Ms. Jones. You are confined to mortgages under the loan
limit, currently $275,000 for a single family loan. Is that
correct?
Mr. Howard. Yes it is.
Ms. Jones. You're required to operate in all markets at all
times. Is that correct?
Mr. Howard: Yes.
Ms. Jones. Must meet percent of business goals for
affordable housing, correct?
Mr. Howard. Correct.
Ms. Jones. And meet a rigorous risk-based capital test in
addition to six voluntary agreements or policies you just
recently accorded yourself to. Is that correct?
Mr. Howard. Yes. Although currently we're meeting the
interim test because the regulatory test has not been
officially promulgated.
Ms. Jones. Now let me go to the charter purposes. One, to
provide stability in the secondary market for residential
mortgages. Is that correct?
Mr. Howard. It is.
Ms. Jones. To respond appropriate to the private capital
market, correct?
Mr. Howard. Yes.
Ms. Jones. To provide ongoing assistance to the secondary
market for residential mortgages, including activities relating
to mortgages on housing for low- and moderate-income families,
and following a reasonable economic return that may be less
than the return on other activities by increasing the liquidity
of the mortgage investments and improving the distribution of
investment capital available for residential mortgage
financing, correct?
Mr. Howard. That sounds right.
Ms. Jones. And finally, to promote access to mortgage
credit throughout the Nation, including central cities, rural
areas, and underserved areas by increasing, quote, ``the
liquidity'', unquote, of mortgage investments and improving the
distribution of investment capital available for residential
mortgage financing charter purposes, correct?
Mr. Howard. Yes.
Ms. Jones. And it is not your intention in any of the
activities that you engage in, Mr. Howard, Mr. Brendsel, to act
outside of those chartered purposes.
Mr. Howard. It is not.
Ms. Jones. Is that a fair statement?
Mr. Brendsel. That's correct.
Ms. Jones. Thank you. I yield the balance of my time, Mr.
Chairman.
Chairman Baker. Thank you, Ms. Jones.
Ms. Jones. Mr. Hinojosa's time actually.
Chairman Baker. Thank you, Mr. Hinojosa-Jones.
[Laughter.]
Chairman Baker. Mr. Shays.
Mr. Shays. Mr. Chairman, I didn't really need a full 5
minutes just to say that I really appreciate both witnesses
appearing before us.
You know, I'm new to this subcommittee. I find this a very
interesting subcommittee to serve on. I appreciate your
chairmanship of this subcommittee.
But I have a lot of constituents who both work with you and
appreciate your partnership and also compete with you. I have a
lot of consumers who have benefited deeply by what your
organizations do, but I'm absolutely convinced that the playing
field isn't level. And because it's not level, we have that
oversight responsibility.
I look forward to learning more about what you all do and
how you try to conform to your charter and so on. Thank you. I
thank you, Mr. Chairman.
Mr. Howard. We look forward to working with you on that.
Chairman Baker. Thank you, Mr. Shays.
There being no further comment from Members, I just wish to
wrap our hearing up today.
Someone asked earlier in the course of the hearing who
would be the overseer to assure third parties that the terms of
the voluntary agreement are successfully implemented over time.
Since we joined hands at the start, I guess it would be
appropriate for us not to release hands until we get a
regulatory structure that we can pass this responsibility off
to.
So I will announce, with the agreement of Mr. Kanjorski,
who had to leave a little bit earlier, that we will continue in
this fashion on some semi-annual or annual basis to receive
reports from the enterprises using today's report as the
benchmark against which future measurements can be made.
Second, and it's has been referred to widely, but we will
have legislation to introduce in the near term on the suggested
regulatory structure, which I have not yet, but do intend to
visit with both of the GSE management teams before the bill is
finally brought.
I also shared that with Mr. Kanjorski and assured him that
we would get him a copy of the bill before it would be finally
introduced.
We will also soon receive the report from the CBO relative
to the now long-awaited subsidy evaluation which could be the
subject of an additional topic.
Suffice it to say we are going to move very slowly, but I
want the Members of the subcommittee and the representatives of
the GSEs to understand that we're going to have a very
thoughtful through-the-summer type of discussion, no rush to
judgment. But I do believe that the steps we take in here build
a platform of a cooperative agreement that can be carried
forward, and that we won't find it necessary to result in some
of the exchanges which occurred in last year's debate and that
we can jointly perform the service of making good public policy
while not adversely affecting home ownership, and I think at
the same time enhance the marketability of the two enterprises'
products by creating a regulator that does have credibility.
To that end, gentlemen, I look forward to working with you
and Members of this subcommittee.
Mr. Brendsel. And we welcome the opportunity to work with
you, Mr. Chairman.
Mr. Howard. As do we.
Chairman Baker. Thank you very much. The hearing is ended.
[Whereupon, at 4:20 p.m., the hearing was adjourned.]
A P P E N D I X
March 27, 2001
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