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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 1:30 p.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Cox, Castle, Royce, Barr, Weldon, Biggert, Hart, Kanjorski, Ackerman, Velazquez, Bentsen, J. Maloney of Connecticut, Hooley, Jones, Sherman, Meeks, Inslee, Ford, Moore, Hinojosa, Lucas, Shows and Israel.

    Chairman BAKER. This hearing of the Capital Markets Subcommittee will come to order. The purpose of our hearing, of course, today is to receive comment from the two principal Government-sponsored enterprises with regard to the report issued by the Congressional Budget Office analyzing the effect, amount and utilization of the subsidy created by the charter authority of the Government-sponsored enterprises.

    Additionally, we will hear comments from other interested parties as to their views of this matter, as well as comments with regard to H.R.1409, the matter now pending before the Committee with regard to the creation of a new regulatory structure for the enterprises.
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    And further, we will solicit opinion as to what, if any, additional modifications to the current regulatory model should be considered.

    As everyone knows, this has been a subject of long-standing interest to the Committee and one in which we are moving very slowly and cautiously to ensure that all perspectives are heard and understood.

    It would not be the intent as a result of our hearing today to reach any final disposition in this matter. And in fact, I would intend to convene additional hearings before the year is out on any approach which might be deemed advisable.

    To that end, I am certainly appreciative of all who have expressed interest in this matter. It has received significant attention. And I think, as market conditions continue to change, the need for continued review and consideration of all perspectives is particularly important public policy responsibility.

    With that, I'd like to recognize Mr. Kanjorski for any opening statement he may choose to make.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Mr. Chairman, since we began our extensive examinations into GSEs 16 months ago, we have met nine times to discuss these matters.

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    I suspect that very few other entities have received such scrutiny in either the 106th Congress or the 107th Congress, particularly without corresponding legislative action.

    During our numerous hearings, although I have consistently sought to identify the problems posed by GSE performance and regulation, I have so far concluded that no compelling reason exists for pursuing any legislation affecting them at this time.

    Nevertheless, our inquiry today will focus on two issues.

    First, we will again discuss the study compiled by the experts at the Congressional Budget Office on GSE subsidies. As we learned in May, Fannie Mae and Freddie Mac pass on about two-thirds of their Federal subsidies to homeowners in the form of lower mortgage prices, and this report confirms that GSEs are performing a function that Congress wants them to perform.

    Namely, they are working to help lower home ownership costs without Government funding.

    In return, the GSEs' stakeholders receive a share of the Federal subsidy to provide a financial reward for their efforts.

    Our second topic concerns H.R.1409, the Secondary Mortgage Market Enterprises and Regulatory Improvement Act. This bill would dramatically restructure the current regulatory system for Fannie Mae and Freddie Mac.
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    In my opinion, it also represents a solution in search of a problem.

    Nearly a decade ago, Congress created a rational, reasonable and responsive system for supervising GSE activities. That system, with two regulators, is operating increasingly effectively.

    H.R. 1409 would unfortunately interrupt this continual progress.

    Yet, some have continued to suggest that in order to avert another S&L crisis, we must act now to change the GSEs' regulatory structure.

    In studying H.R. 1409, we should therefore review the lessons learned from that debacle. This examination will help to ensure that we do not create another troubling situation requiring bail-out legislation.

    Before FIRREA, we had a Federal board which is currently serving as a chartering authority for some depository institutions and as their regulator. This same board also served as the operating head of a depository insurance program and supervised the activities of some housing GSEs.

    During our extensive deliberations over FIRREA, we determined that this concentration of powers contributed significantly to the S&L crisis. Consequently, we separated these overlapping regulatory functions when restructuring the industry.

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    However, by moving the supervisory responsibility over the GSEs to the Federal Reserve, H.R. 1409 would again concentrate regulatory power in one entity and ignore an important lesson learned in the thrift crisis.

    After all, the Federal Reserve, like the old Bank Board, already has chartering and regulatory authority over depository institutions.

    In addition, it develops and oversees many of our Nation's consumer laws and it received significant new responsibilities in the financial modernization law.

    Further, although it does not oversee deposit insurance, the central bank does manage our Nation's monetary policy. As a result, in times of hardship, the Federal Reserve might turn to GSE securities to help to manage interest rates and the money supply. That combination of conflicting duties could prove very dangerous and Congress should avoid creating it.

    In other words, we should not follow the same legal recipe that led to the thrift crisis.

    That said, Mr. Chairman, I am pleased that we worked together to put forward a balanced panel for today's hearing. Fannie Mae and Freddie Mac will have an opportunity to educate us about their concerns related to the CBO study and H.R. 1409. We will also—for the first time—finally hear from an individual representing FM Watch, which was noticeably absent from last year's GSE roundtable.

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    I additionally look forward to hearing the opinions of Martin Edwards with the National Association of Realtors, and James Miller, who headed OMB during the Reagan Administration.

    Several others also wanted to participate in today's hearing but could not do so. The National Association of Homebuilders, for example, supports a strong GSE regulatory system that balances safety and soundness concerns with mission fulfillment.

    Like me, it believes that the separation of powers among two regulators in the current system meets these objectives.

    The homeowners expressed additional dismay that H.R. 1409 ''ignores the extensive hearing record of the past year,'' and that it ''exacerbates'' the concerns that the group articulated about H.R. 3703 in the 106th Congress.

    AARP, a number of mayors, and others, have also contacted me to express their apprehensions about H.R. 1409. To ensure that our hearing reflects these views, I ask unanimous request, Mr. Chairman, to submit these materials into the record.

    In closing, Mr. Chairman, I share your desire to conduct effective oversight over the housing GSEs and to ensure that we maintain an appropriate and sufficiently strong supervisory system.

    If we decide to continue to pursue GSE reform in the 107th Congress, I also hope that we will follow a prudent course. Perhaps we could again use a roundtable discussion to identify the problems among the affected parties, reach consensus about a suitable course of action, and then, only if necessary, work to write legislation.
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    Mr. Chairman, I have the unanimous consent request for the materials.

    Chairman BAKER. Without objection.

    I thank the gentleman.

    Ms. Velazquez.

    Ms. VELAZQUEZ. Thank you, Mr. Chairman.

    I would like to begin by thanking Chairman Baker and Ranking Member Kanjorski for holding this hearing and allowing the Members of this subcommittee the chance to hear the response of representatives of our housing GSEs to the CBO study recently released.

    Of late, it has become fashionable to question the continuing value of our housing GSEs, particularly Fannie Mae and Freddie Mac. Arguments abound as to whether these two entities are overstepping their bounds or, conversely, not doing enough.

    Is it mission creep that we must be aware of? Or are we concerned that the GSEs are not doing enough for the very people that they are designed to help?

    We have looked at this issue, at the issue of safety and soundness, and we have reviewed the merit of the implied Government backing caused by the line of credit at the Treasury. We have pondered the question of whether these institutions are too-big-to-fail.
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    The issue of the day is the size and scope of the so-called Government subsidy provided to the GSEs, as calculated by the CBO, and whether or not the subsidy is being passed on to homebuyers.

    At the last hearing on this topic, a number of my colleagues raised concerns about the methodology used by CBO to calculate its latest estimate of $10.6 billion annual subsidy.

    While I acknowledge the validity of these concerns, I would also like to point out that when we get bogged down in the details of how this figure was reached, we obscured a larger point—that we need to be focused on ensuring that our rising home ownership rates survive the softening economy. And more importantly, that we continue to make strides in reaching our goals for increased home ownership rates among minorities.

    Last year, then-HUD Secretary Cuomo announced a new policy initiative to bring Afro-American and Latino home ownership up to 50 percent within 3 years. We are one-third of the way to that deadline.

    How are we doing? What steps have the GSEs taken to ensure that we get there? What can we in Congress do to encourage greater innovation to these entities in this process?

    These are the questions that we should be asking and issues that should be concerning us.
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    Yesterday, the Appropriations Subcommittee on VA/HUD marked up a bill that, by all accounts, will be disastrous for housing. Earlier this year, the Republican leadership passed a tax cut that will place very serious limitations on spending for social programs.

    The result is that now, more than ever, we need to encourage the activities of the housing GSEs. Their mission has become more important than ever.

    I look forward to hearing the testimony of Fannie Mae and Freddie Mac and to working with my colleagues on this subcommittee to ensure that we move toward an environment in which the housing GSEs can continue to make strides in increasing home ownership opportunities for all Americans.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Velazquez.

    Mr. Bentsen, do you have an opening statement?

    Mr. BENTSEN. [Nods in the negative.]

    Chairman BAKER. Ms. Hooley.

    Ms. HOOLEY. Thank you, Mr. Chairman, and Ranking Member, for holding these hearings today.
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    I couldn't agree with you more that Congress needs to continue working to increase home ownership for all Americans. While over two-thirds of American families presently own their own homes, overall, that's only 3.6 percent increase in the last decade. And you have to keep in mind that this last decade was the best decade we've ever had, an economic boom.

    But we still have a third not being able to share in the American dream.

    Mr. Chairman, it's no secret who the majority of these citizens are who can't afford their own home. The census clearly indicates that Americans who classify themselves as minorities are far less likely than white Americans to own a home.

    In the part of Oregon which I represent, these Americans tend to be of Hispanic origin, and although I know I'm hardly unique or special in that regard, Hispanics are the fastest-growing minority in the United States, and ignoring their problems, including the ability to purchase a home, will only erode the quality of life for all of our citizens.

    As such, I don't believe that the stated goals of today's hearing genuinely addresses this problem. Clearly, our reliance on the GSEs to increase home ownership have helped get us where we are today.

    I'm hoping they can do more. I'm not sure that doing away with their charter or subsidies or enacting H.R. 1409 would ultimately lead to lower mortgage rates for our constituents, or grow the mortgage money available for minority and low-income homebuyers.

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    Moreover, I'm equally doubtful that any of these options is necessarily going to increase home-buying opportunities for minority Americans.

    That said, I'm sure that some of our witnesses will disagree and, in the interest of fairness, I look forward to hearing their views and I look forward to learning how we are going to increase home ownership for all Americans, particularly our minorities.

    Thank you.

    Chairman BAKER. Thank you, Ms. Hooley.

    By time of arrival, Mr. Lucas, you're next for a statement. Do you have an opening statement, sir?

    Mr. LUCAS. [Nods in the negative].

    Chairman BAKER. Mr. Hinojosa.

    Mr. HINOJOSA. Thank you, Mr. Chairman.

    I want to thank you for the opportunity to be able to read a statement into the record. I welcome the opportunity to address the subcommittee on the important topic of housing and role played in housing finance by Fannie Mae and Freddie Mac.

    I take particular interest in today's hearing because of the far-reaching ramifications of this subcommittee's action. There are a handful of issues that most profoundly affect the quality of all of our lives. Housing is certainly high among that list.
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    Home ownership and affordable housing is central to the fabric of a community and to building wealth and security among our constituents. Real people with real hopes, dreams and needs, people seeking to fulfill their desire for a piece of the American dream.

    The question is how and who is getting it done?

    In that vein, I thought it would be helpful to share my experience with Fannie Mae and the work they have been doing in my congressional district. After all, we can talk about affordable housing and getting people in homes. But the real goal for all of us is to make it happen.

    Last fall, Fannie Mae and the National Association of Hispanic Real Estate Professionals launched a close-the-gap campaign. That campaign is intended to address the home ownership gap between the United States population at large and Hispanic and African-Americans.

    The Anglo home ownership rate is currently estimated to be at 73.9 percent, outpacing the Hispanic and African-American home ownership rates by as much as 26.4 percent to 26.1 percent, respectively.

    To diminish that gap in my district alone, Fannie Mae this spring provided $29.4 million in mortgage financing to 352 families to help ensure that home mortgage money was available at the lowest price.

    As of March, 2001, Fannie Mae has bought or guaranteed $606.9 million in mortgage loans with 10,443 families served.
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    Mr. Chairman, as a former business owner, I know that our Fannie Mae housing is good business. Its charter as drafted by Congress was designed to give it specific competitive advantages as well as restrictions.

    As an elected representative, I know that my constituents' housing needs are being addressed by the diligent work of Fannie Mae and Freddie Mac.

    Can GSEs do more?

    Certainly. And I will continue to call on them to do so. Likewise, as a purchaser of mortgages, Fannie Mae and Freddie Mac need the primary market to generate those loans. I will, therefore, look to lenders to keep pace with changing demographics and the credit needs of our communities.

    Mr. Chairman, I know that the time has run out. But I would like to ask that the entire statement that I have prepared be read into the minutes.

    Chairman BAKER. Without objection.

    Mr. HINOJOSA. Thank you.

    Chairman BAKER. Thank you, Mr. Hinojosa.

    Ms. Jones, do you have an opening statement?
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    Ms. JONES. Thank you, Mr. Chairman, I sure do.

    I'd like to say good morning to my Chairperson, Mr. Baker, Ranking Member Kanjorski, and Members of the subcommittee. I seek unanimous consent that my full statement be included in the record.

    Chairman BAKER. Without objection.

    Ms. JONES. We're here this morning to review another bill, H.R. 1409, that seeks to strengthen Federal regulation, supervision of Fannie Mae and Freddie Mac.

    Many of us have been here before. We started with safety and soundness, then to transparency, mission creep, validation of subsidies, to strengthening Federal regulation.

    I want to note at the onset that I feel that it's imprudent to offer new regulatory regimes when we've not allowed the existing schemes and processes to work.

    On what basis do we abandon the ship on HUD and fail to set sail in new, untested waters with the Federal Reserve Board?

    Mr. Chairman, I do not support efforts to increase the regulatory burden placed on GSEs, although I fully respect your decision to do so, burdens that will ultimately be passed on to customers.

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    If the information suggests that the GSEs have not done what they are required to do, let's fix it and move on. If the GSEs, however, are on track and accomplishing their mission again, let us move on.

    My concerns relative to this legislation are many. Primarily, I fail to see the need to transfer housing policy to the Federal Reserve Board. I believe the Fed has enough responsibilities in simply handling monetary policy and working with banking institutions relative to improving CRA.

    Moreover, this bill grants HUD authority over GSE housing goals, while yet basically transfers all housing powers to the Federal Reserve. One or the other ought to be in the same house.

    It provides bank regulatory extensive powers over housing and approving new GSE business activities. These new powers do not mesh with me.

    What historical knowledge does the Fed possess that will make it more effective in addressing housing issues of low- to moderate-income persons and minorities?

    In essence, the Fed is an inappropriate regulator in this area.

    Many of us on this Committee remember and sat through eight previous GSE hearings in which we examined with great detail Fannie Mae and Freddie Mac. From those hearings we examined safety and soundness to an exhaustive degree.

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    Afterwards, Fannie and Freddie Mac made pledges themselves to six voluntary commitments. For every one of these commitments, they have either completed or will complete. These commitments put them at the forefront of financial organizations.

    I fear that H.R. 1409 does little to help or improve upon the GSEs' ability to fulfill their housing mission. Their mission is an important one and I'm not concerned about market share wars, but I'm concerned about affordable housing in my district and across this country, particularly special housing needs of the elderly, home ownership for those who seek the American dream.

    I know I've run out of time, Mr. Chairman. I submit the rest of my statement for the record and would hope by the time we complete this hearing and the other ten or so hearings we've had, that we will get back to allowing Freddie Mac and Fannie Mae to meet the mission that they were originally set in place to do.

    Chairman BAKER. The statement will be inserted in the record, without objection, as will all Members' statements.

    Ms. JONES. Thanks, Mr. Chairman.

    Chairman BAKER. Mr. Israel, did you have a statement?

    Mr. ISRAEL. Thank you, Mr. Chairman.

    Let me state again that I have enjoyed the opportunity to learn about your concerns for this issue. At the same time, I believe that Fannie Mae and Freddie Mac are true American success stories, created by Congress to ensure that Americans have access to low-cost mortgage funds. Fannie Mae and Freddie Mac help millions of Americans, including many in my district, achieve the dream of home ownership.
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    At each and every hearing of this subcommittee, I have commented that, while we ought to explore these concerns, and while there is always room for improvement, we should not hinder Fannie Mae and Freddie Mac's ability to perform their core competency of creating affordable housing opportunities.

    Mr. Chairman, I wish to repeat that refrain this afternoon.

    I'm pleased that former OMB director James Miller will be here to testify today and I look forward to that testimony. In fact, I have noted that Dr. Miller's study estimated total interest rate savings to America's families to be between $8 billion and $23 billion a year, compared to an annual funding advantage held by the GSEs of between $2.3 billion to $7 billion.

    He concludes in this study, and I quote: ''Even using the lowest estimate of consumer benefits and the highest estimate of the funding advantage in our range of estimates, the value of the consumer interest cost savings resulting from Freddie Mac and Fannie Mae's activities significantly exceeds the highest estimates of their funding advantage.''

    I also believe it's important to note that on calculating the benefits that the GSEs receive, our own CBO may have failed to calculate the value Fannie Mae and Freddie Mac provide to American homeowners.

    In its calculations, CBO measures all of the costs, but only a portion of the benefits provided to consumers. For example, CBO concedes that it did not attempt to measure important benefits the GSEs provide, including their fulfillment of their statutory affordable housing goals, their investment in new mortgage products and technology innovations, and their continued commitment to increase minority home ownership.
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    In conclusion, we should be mindful of the important place Fannie Mae and Freddie Mac hold in the mortgage finance market before passing legislation or subjecting them to further unnecessary scrutiny which will only serve to make it more difficult for them to continue fulfilling their mission.

    Again, we should always be mindful of various concerns. We should always seek improvements. But we should not inhibit these important GSEs from performing their core competency of creating affordable housing for my constituents and for all of our constituents.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, sir.

    Mr. Shows, do you have an opening statement?

    Mr. SHOWS. [Nods in the negative.]

    Chairman BAKER. Mr. Moore.

    Mr. MOORE. [Nods in the negative.]

    Chairman BAKER. If no other Member has an opening statement, we'll proceed to our first panel.

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    I'd like to welcome here today individuals who are certainly no stranger to the issue.

    We have representing Fannie Mae, the Vice President and Chief Financial Officer, Mr. Timothy Howard, as well as the Senior Vice President for Government Relations from Freddie Mac, Mr. Mitch Delk.

    Mr. Howard, please proceed at your tempo.


    Mr. HOWARD. Thank you. Thank you, Chairman Baker, Ranking Member Kanjorski, and Members of the subcommittee. My name is Timothy Howard. I'm Executive Vice President and Chief Financial Officer of Fannie Mae and a member of Fannie Mae's office of the chairman.

    I appreciate this opportunity to continue our dialogue.

    I've submitted written testimony, including our perspective on the recent CBO study regarding Freddie Mac and Fannie Mae, with an appendix providing our detailed response to the study.

    To sum up my testimony, I'll briefly make three points this afternoon.

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    First, housing is a bulwark of our economy. The housing and mortgage market today is the strongest, most stable sector of the economy. It appears to be keeping the entire economy from falling into recession.

    The recent strong appreciation in home values has boosted the average homeowner's net worth. In addition, we estimate that homeowners refinancing their mortgages to benefit from falling interest rates or to take some equity out of their homes is pumping an additional $40 billion of consumer spending into the economy.

    Given the success of the American housing system and record home ownership, some theorists have begun to question whether this country is over-housed.

    We would forcefully assert the contrary.

    Housing is a powerful force in the economy precisely because the demand for housing continues to be so strong. Recent census data indicates that, if anything, we are heading toward a housing shortage, as demand outstrips supply.

    So the most important issue is not whether the country is over-housed, but how to keep us from being under-housed. Which leads to my second point.

    The housing sector depends on a strong, effective Fannie Mae.

    Under our congressional charter, Fannie Mae's job is to ensure a steady flow of low-cost mortgage funds to communities at all times under all economic conditions, even when other financial institutions choose to withdraw from the market.
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    This was never more apparent than during the credit crunch of 1998, when Fannie Mae and Freddie Mac greatly increased their mortgage purchases, making sure that homebuyers had access to the lowest rates in a generation, at a time when many borrowers had no access to credit at all.

    Today, the housing sector is counting on us for another reason—our unique focus on providing low-cost financing to historically under-served families, including minorities, families of modest means, women-headed households, new Americans, and other groups.

    The home ownership rate for these Americans is still around 17 percent lower than the national rate. And according to the new census, a key driver in the potential housing shortage is a projected boom in immigration and minority household formation.

    These families are Fannie Mae's bread and butter. Indeed, no company in America provides more home-buying funds for minority, lower income, and other historically under-served families than we do.

    In 1994, we pledged to provide $1 trillion by the end of the year 2000 to help 10 million under-served families own or rent a home.

    Last year, we met that pledge early and immediately launched our $2 trillion American dream commitment to help 18 million under-served families during this decade.

    Within that plan, we will provide $420 billion specifically to help 3 million minority families. These commitments have transformed our business, making Fannie Mae the largest affordable housing company in America.
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    Today, more than three-quarters of our business goes to families targeted under these commitments. We would be proud to compare our record of expanding equal housing opportunity with any other financial institution in America.

    And that leads to my third and final point today.

    Fannie Mae's net benefit to consumers can be measured every day. From our point of view, the best measures of the public benefit of Fannie Mae are the spread between jumbo and conventional mortgage rates, currently worth up to $21,000 over the full life of the loan, how many consumers benefit from our low-cost financing and what those benefits cost the Government, which, in fact, is zero.

    Our housing finance system is operating at peak performance. It's the envy of the world. The economy and millions of families depend on it. This means that any measure of our public benefit, or any proposed change to the housing finance system, must be based on indisputable, irrefutable analysis.

    By that standard, we believe it is fully justifiable to closely examine both the approach and the results of the most recent CBO study.

    Now let me preface my comments on that study by emphasizing our great respect for the Congressional Budget Office, its leadership, its public service in providing Congress with timely and non-partisan analysis.

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    In attempting to calculate a GSE subsidy, which, by definition, can only be theoretical, the CBO has tried to do something that is unique and extremely difficult. We believe, quite candidly, that the CBO came up short in this effort.

    Let me mention just five points that capture the bulk of our concerns with the study.

    First, we think its fundamental premise is flawed. CBO has attempted to quantify the value of a subsidy that does not explicitly exist. That's problematic by definition. Fannie Mae does not receive a dollar of Federal funds. Put another way, if the Government were to revoke Fannie Mae's charter, it would not recover a single subsidy dollar. But homebuyers would certainly face higher mortgage rates.

    Second, the Government's methodology for valuing express Government guarantees is detailed in the Federal Credit Reform Act of 1990, which can be used as a point of comparison.

    When Price Waterhouse did a study using the Federal credit reform approach, it found that the cost to the Government if Fannie Mae mortgage-backed securities had an explicit guarantee would be zero.

    Third, the study used the wrong data to calculate our funding benefits. It compared the yields on Fannie Mae and Freddie Mac debt to those of both A-rated and AA-rated financial companies, even though S&P has rated both Fannie Mae and Freddie Mac AA-minus on a risk to the Government basis.
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    CBO also misstated the amount of short-term debt the two companies issue. Correcting these two errors reduces the funding subsidy in 2000 from $6 billion to between $3 billion and $3.6 billion, and reduces the retained subsidy to virtually zero.

    Fourth, the study overstated the benefits from our mortgage-backed securities business. It concluded that Fannie Mae and Freddie Mac receive a $3.6 billion benefit from our MBS. But later in the report, conceded that most of this benefit goes directly to mortgage lenders and not to us. Correcting this error would reduce the gross subsidy by
$3 billion.

    And fifth, the study understates our benefits to consumers. It takes the benefit to homebuyers of lower mortgage rates and applies that only to mortgages that Fannie Mae and Freddie Mac owner-securitize. Because of market competition, however, every borrower eligible for a conforming mortgage enjoys lower rates, regardless of whether their mortgage is part of a transaction that involves Fannie Mae or Freddie Mac directly.

    Correcting all of these assumptions reverses the conclusion of the CBO study, erasing any net subsidy to Fannie Mae and Freddie Mac and taking our net benefit to consumers even higher.

    But let me make one final point.

    Even if one fully accepts the CBO's methodology and results, a benefit pass-through rate of 63 percent, which is the CBO's gross subsidy less the 37 percent retained subsidy, still would be quite high for any direct Government subsidy.
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    This discussion, then, is really about whether we pass on two-thirds of the benefits we receive, as CBO asserts, or a higher percentage, as we would claim.

    Arguably, in either case, we are doing what Congress intended us to do. We are delivering billions of dollars in public benefits without using a penny of public funds.

    The American housing finance system is the best in history and the best in the world, in large part because of the wise decision Congress made in 1968 to charter Fannie Mae as a private company.

    We look forward to doing whatever we can to help make this great system even better. And I thank you once again for the opportunity to be here today.

    Chairman BAKER. Thank you, Mr. Howard.

    Mr. Delk, welcome.


    Mr. DELK. Thank you, Chairman Baker, Mr. Kanjorski, and other Members of the subcommittee.

    I am Mitchell Delk, Senior Vice President of Government Relations at Freddie Mac.
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    It's a pleasure to be here with you today.

    Freddie Mac is in a great business—financing homes in America. Over the past 6 years, the home ownership rate has risen across all income, racial and ethnic groups. Minority families have experienced the fastest rate of growth.

    For most families, their home is their most valuable asset and greatest source of financial security.

    Chairman BAKER. Mr. Delk, if you could pull the mike a little closer. It's not real sensitive and we can't hear well.

    Mr. DELK. Home ownership also plays a critical role in stabilizing our economy. Throughout 2001, the Nation's robust housing market has defied the softening evident in other parts of the economy.

    Our system works so well, we often take it for granted. With Freddie Mac and Fannie Mae operating at the heart of the Nation's housing finance system, there is never a shortage of mortgage money. America's homebuyers enjoy the lowest possible rates. And they choose from an array of products.

    Former Office of Management and Budget Director Jim Miller and economist Jim Pearce estimate that our activities save families up to $23 billion a year in mortgage interest—at no cost to the Government, I might add. They conclude that the benefits we bring consumers far outweigh the value derived from our charters.
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    This is not the conclusion reached by CBO. Nor, however, is it the first time CBO has been wrong.

    Recently, CBO conceded having made errors totaling $2.1 billion when it first studied the issue in 1996. This is the exact amount CBO accused Freddie Mac and Fannie Mae of failing to pass on to homebuyers.

    Unfortunately, CBO's latest report is another contrived academic exercise. CBO's casual use of the term, ''subsidy,'' suggests that Freddie Mac receives a direct outlay of Federal funds.

    In fact, the corporation has never received a cent of Federal money and is one of the Nation's largest taxpayers.

    CBO's new report is based on wrong assumptions and flawed analysis. Simply correcting four of the largest errors would completely reverse the conclusion CBO appears determined to reach.

    First, CBO unfairly compares our funding costs to companies with lower credit ratings. Of the 70 firms considered, only eight had ratings comparable to Freddie Mac's S&P risk-to-the-government rating of AA-minus.

    Let me repeat this, please:

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    Of the 70 firms considered, only eight had ratings comparable to Freddie Mac's S&P risk-to-the-government rating of AA-minus.

    Second, CBO grossly over-estimates our share of long-term debt, further inflating our funding advantage.

    Third, CBO uses an arbitrarily low estimate of the difference between the conforming and jumbo mortgage rates. CBO's estimate of 22 basis points is well below the range documented in numerous studies. CBO itself used 35 basis points in 1996.

    Fourth, CBO credits Freddie Mac and Fannie Mae with reducing mortgage rates only on loans we actually purchase.

    In fact, thanks to our activities, all conforming market borrowers enjoy lower rates, whether we buy the loan or it's held in a bank portfolio.

    These errors and omissions disqualify CBO's report from serious consideration. Not surprisingly, however, our critics have seized on it in an attempt to impugn us. Their latest collection of half-truths and distortions shamefully misrepresents our service to low-income and minority families.

    Apparently, our critics haven't read Freddie Mac's annual report to Congress, which documents our outstanding support for affordable lending. I'd like to submit our report for the record.

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    Last year, 58 percent of Freddie Mac's business financed housing for one million families with low incomes or living in under-served neighborhoods. And nearly 14 percent of our business financed homes for minority families.

    In addition, Freddie Mac is the unquestioned leader in combatting predatory lending. Our critics cannot begin to match such a strong track record.

    Mr. Chairman, today you and Members of the subcommittee have a unique opportunity to question and assess the record of the subprime lenders, mega-banks and mortgage insurers criticizing us.

    Everyone knows they are good at manufacturing sensational reports every time you hold a hearing. But how good is their service to low-income and minority borrowers and their efforts to combat predatory lending?

    I predict their spin is more potent than their performance.

    Now I'd like to say a few words about Freddie Mac's financial condition and regulatory oversight.

    Freddie Mac is unquestionably safe and sound. The six voluntary commitments we announced last October with Members of the subcommittee, and which were fully implemented this spring, put Freddie Mac at the vanguard of world financial practices.

    Effective regulatory oversight is an essential complement to our strong financial position.
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    We believe that the regulatory structure set forth in the GSE Act is fundamentally sound.

    The regulatory structure ties capital to risk. It establishes a comprehensive set of enforcement authorities. And it provides substantive oversight without unnecessary intrusion. This enables Freddie Mac to respond aggressively to market developments with innovations to meet our mission.

    Mr. Chairman, in H.R. 1409, you propose changing the location of Freddie Mac's safety-and-soundness regulation. Given the gravity of this issue, any proposal to change the regulator should meet the following criteria:

    First, the proposed entity must be highly competent and credible. It must have the confidence of Congress, the public, and the markets.

    Second, it should support housing as an important public policy objective.

    And finally, the entity should enjoy bipartisan support.

    Mr. Chairman, Members of the subcommittee, I appreciate the opportunity to appear before you today. I look forward to working with you to secure the future of America's housing finance system and, with it, the dreams of millions of America's families.

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    Thank you.

    Chairman BAKER. Thank you, Mr. Delk and Mr. Howard.

    Last fall, we agreed, voluntarily or otherwise, to the terms for certain disclosures. And as part of that press conference, there was general agreement to proceed with the, quote ''regulatory piece.''

    H.R. 1409 represents my take at it, which it's pretty clear, neither of the organizations seems to be enthusiastic about.

    But I would wonder, since the date of that agreement and the public statement that we want to work on a regulatory reform that we would both like to have appropriate regulatory oversight, do either of you intend to forward any recommendation to me with regard to modifications to the current regulatory structure?

    Mr. DELK. Mr. Chairman, we'll be glad to submit to you in writing comments on H.R. 1409, and our views on the current regulatory structure.

    As I indicated in the oral testimony, we believe that the existing structure is a credible structure. Notwithstanding that, as I indicated also, we'd like to work with you and other Members of the subcommittee to address the concerns of the subcommittee.

    Chairman BAKER. Well, I don't think I need additional comment on H.R. 1409. I believe I've read enough about that. But my real question is, do you think the status quo is sufficient, or will you recommend any modification at all?
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    Mr. DELK. We think the status quo is sufficient.

    Chairman BAKER. OK. Contrary to the statement of last fall when we all agreed that we needed to have a stronger regulator.

    Is that correct, Mr. Howard?

    Mr. HOWARD. Well, let me first say that we would be pleased to continue discussions with you, Ranking Member Kanjorski, and others, on ideas for improving still further the efficiency of the housing finance system.

    We think, though, that given the high level of efficiency in the system, proposals for change face a high hurdle of clearance.

    Chairman BAKER. Let me move on because I will enforce the 5-minute rule today given the number of Members here today.

    Would that mean, then, that when OFHEO's OMB stress test is finally promulgated, you will agree to whatever the outcome of that test is because you believe OFHEO to be a good regulator?

    Mr. HOWARD. We have been engaged in discussions with a number of parties about the goals of the risk-based capital standard.

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    And we believe that OFHEO believes that it should attempt to, as closely as possible in the model, capture the risks as they exist in our business.

    Chairman BAKER. But what I'm getting at is, if you believe OFHEO is a competent regulator and no change is required at all, and they finally, after a decade-long struggle, produce the long-awaited stress test—let me rephrase.

    Have either of your organizations written the letter to OMB asking for an extension of the promulgation period from the current July 16th, which is a delay from the initial date, to any subsequent date?

    Mr. HOWARD. We have urged OMB to take the time necessary to make sure that the risk-based capital test that OFHEO is working on is workable and properly reflects the risks that we take.

    Chairman BAKER. Did that communication include an extension of the date?

    Mr. HOWARD. We did send OMB a letter several weeks ago requesting an extension.

    Chairman BAKER. Mr. Delk, did Freddie Mac do the same?

    Mr. DELK. We did. Let me, if I can, follow up. I know time is of the essence.
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    I think you know, Mr. Chairman, for years, Freddie Mac has embraced the concept of risk-based capital. We have managed our company by a risk-based capital stress test for over 15 years. We supported the concept in the 1992 legislation and we're anxiously awaiting the completion of the risk-based capital rule.

    Having said that, I think all concerned parties want to make sure, in fact, that the rule, in fact, does capture risk relative to the amount of capital we have.

    Or said another way, that in fact, the capital requirement is, in fact, aligned with the risk we take. And it's certainly going to take some time for OMB to make this assessment. We all want to make sure that there are not unintended consequences. But I don't think that that in any way undermines our support for the proposal.

    Chairman BAKER. Well, I was only making the point that if we are defending OFHEO here today as the premier regulator of the most sophisticated financial institutions in the modern world, and they finally come up with a decade-long weighted stress test to adequately assess risk, after the review by OMB, that there would be resistance to either enterprise in adopting whatever that regulatory structure might be.

    That's my hope.

    I would formally request copies of the correspondence sent to OMB requesting the extension of date.

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    One last question before I run out of time. Mr. Howard, I understand that Fannie is now engaged in the distribution and sale of debt securities in thousand-dollar denominational amounts.

    I have concerns about that because of the impact of liquidity potentially on community and independent banks.

    Does Fannie intend to sell those thousand-dollar denominational notes directly to investors?

    Mr. HOWARD. Congressman, all of our debt, both debt that goes to retail investors and debt that goes to institutional investors, is available at denominations as low as a thousand dollars.

    It's been true for retail investors since late 1996. We have made no change in the denomination of the investment product since that time.

    What you may be referring to is, a few months ago, we took some steps to make the pricing of our retail securities more transparent to investors by posting visible rates that retail investors could compare with alternative fixed income instruments on a screen available to brokers and to retail investors.

    So they had a better way of assessing the quality of securities that we've been selling since the early 1980s.

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    Chairman BAKER. But the distinction between having a note in thousand-dollar denominations and the total book value of a sale, that's a distinction of some significance.

    For example, can I purchase directly from Fannie Mae a thousand-dollar denominational debt security today?

    Mr. HOWARD. You could not.

    Chairman BAKER. And why would that be?

    Chairman HOWARD. We do not sell directly to individual investors.

    Mr. BAKER. Well, that's what troubles me because on page 46 of your offering circular, sales directly to investors.

    We may also sell debt securities directly to investors on our own behalf. We will not pay a commission to any dealer on direct sales.

    I'm at the end of my time. I don't want to take any more time today to get into this exchange. Please just forward at your leisure an explanation of what appears to be a conflict in the issuing circular and your understanding of the matter.

    Thank you very much.
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    Chairman HOWARD. I would be pleased to do that.

    Mr. BAKER. Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Mr. Howard, what is your experience with OFHEO as a regulator? Do you think that finally, they have matured to the point where they are starting to perform in accordance with the mission that the Congress gave them?

    Mr. HOWARD. Let me break that into two parts, Congressman.

    First of all, I have been very impressed with the quality and thoroughness of the work done by the examination staff. I find them to be very well informed, highly professional, and committed to the work they do.

    On the risk-based capital standard, the agency has set itself an extremely difficult task, which is creating a detailed model itself of two businesses engaged in enterprises that are complex.

    We are on record as saying that we thought the initial choice that was made by the regulator to do its own model rather than to use models developed by the enterprises as other banking regulators said they would do, was problematic.

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    And I think that that has contributed to the delay in completing the risk-based capital standard.

    Having said that, it now appears as if the OFHEO capital standards group is making progress on using what's inherently a cumbersome and difficult process to produce a standard that we hope will be workable.

    And when we met with OMB, we wanted to make all parties aware of the benefit to be gained by making sure that this approach did properly model our risk, because it will affect our behavior and will affect the availability of credit throughout the mortgage system.

    Mr. KANJORSKI. How soon do you think that the standards and the models established by the regulator are going to be complied with and arrived at?

    Or does Congress have to take some action?

    Mr. HOWARD. Based on what I have currently heard, my belief is that a regulation could be put out within a 90-day period, having been subjected to sufficient testing to let OFHEO and OMB know whether there are, in fact, any unintended consequences from putting this rule in effect.

    Mr. KANJORSKI. Would that have been vetted by both Fannie Mae and Freddie Mac?

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    Mr. HOWARD. Vetted may not be the correct term. It would be useful for us to be able to compare the results of the OFHEO model with our own internal model to make sure that we are treating risk in a way that is consistent.

    Mr. KANJORSKI. You're not in that process right now, but you will be as soon as the——

    Mr. HOWARD. We are not in that process directly at the moment.

    Mr. KANJORSKI. Mr. Delk, do you have anything to add in regard to the regulations being promulgated by the regulator?

    Mr. DELK. Not much more than I said earlier, Mr. Kanjorski, other than to say that our conversations with OMB have been intended to ensure that there are no unintended consequences.

    This is a very complex rule. It's the first of its kind. But, clearly, it is the way to assess and to determine capital adequacy based on the risk you take.

    And so, I concur with Mr. Howard. I think that this will be completed imminently. I think everyone wants to complete it. But, again, I think no one wants unintended consequences because it will be a model for other financial institutions.

    Mr. KANJORSKI. Do you concur with Mr. Howard's expressed evaluation of the regulators?
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    Mr. DELK. Yes. I would emphasize, I think, their examination staff is probably unparalleled. They have an individual heading the examination staff who has years of experience at the comptroller of the currency.

    I think they recently announced that they are bringing in a deputy director who is an individual who had extensive experience, in fact, retired from the OCC.

    So I think what they have done is put together a very good staff and I think Mr. Falcon deserves to be complimented for the staff he's put together.

    Mr. KANJORSKI. In my opening statement, you heard me indicate my dissatisfaction with the Federal Reserve as a prospective regulator as established under H.R. 1409.

    I wonder if in the 30 seconds remaining, either one or both of you could tell me, do you feel that we should look at a new regulator in the nature of the Federal Reserve, or should we stay with the existing regulator and just proceed?

    Mr. DELK. Let me preface any comment on that question by saying that the Federal Reserve is the most august body regulating financial institutions in the world.

    Having said that, I laid out in my opening statement three criteria that we would suggest that the Committee or subcommittee look at in considering whether a new regulator is warranted.
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    The first was that it be highly competent and credible. Unquestionably, the Federal Reserve is highly competent and credible.

    The second was, does it support housing as an important public policy objective?

    I think issues can be raised on whether, in fact, the Federal Reserve does support housing as a public policy objective. In fact, many economists at the Federal Reserve have raised the issue of whether we have too much investment in housing now.

    That clearly is not Freddie Mac's view, but I think that has been a concern. So I think that would raise at least issues on whether they would be a regulator of choice. And finally, I said the regulators should enjoy bipartisan support.

    We've heard today through opening statements a number of concerns through Members on the subcommittee about the Federal Reserve. So I'm not in a position to say whether they would or wouldn't. But at least under this criteria, at least two of the criteria, we raise serious concerns on whether that would be an appropriate policy choice.

    Mr. KANJORSKI. Thank you, Mr. Delk.

    Mr. Howard.

    Mr. HOWARD. We have similar criteria to what Mr. Delk outlined and believe it is at Congress' discretion to assess a regulatory structure and make sure that it's satisfied.
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    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Mr. Castle.

    Mr. CASTLE. Thank you very much, Mr. Chairman.

    I was just checking, but I wanted to ask questions about your legislation. That is part of this hearing, as I understand it.

    First of all, gentlemen, I have a great deal of respect for both of your organizations. I think you do a tremendous amount to aid with the financing of housing across this country and have helped in many ways.

    That doesn't mean it's perfect, however. That doesn't mean that there couldn't be things that could be done better.

    I'd be interested in your comments on the legislation of Chairman Baker with respect to the regulation, the possible change from the Office of Federal Housing Oversight to the Federal Reserve Board.

    I assume you're both adamantly opposed to that. Is that correct? Or your organizations are adamantly opposed to it, I should say.
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    Not you personally.

    Mr. HOWARD. I think it is incorrect to say that we are adamantly opposed to it.

    Mr. CASTLE. Can you do me a favor? Can both of you hold the microphones a little bit closer, or bring them closer to you?

    Thank you.

    Mr. HOWARD. I think it would be incorrect to characterize our position as adamant opposition to the Federal Reserve as a regulator.

    We do, as Mr. Delk mentioned, have some concerns about their commitment to our housing mission. Assuming that an adequate division of responsibilities can be worked out between a mission regulator and the Federal Reserve as a potential safety and soundness regulator, the Fed has enormous credibility and respect on the safety and soundness front.

    Mr. CASTLE. OK.

    Mr. Delk.

    Mr. DELK. I don't think I could add much more, Mr. Castle. I went through the criteria which we, in fact, think or would recommend that the subcommittee go through. And I do think that there are concerns regarding the Fed's interest in and commitment to housing.
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    Again, having said that, they are clearly the world's premier financial institution regulator. Anyone you canvassed worldwide would agree with that assessment.

    So I think it makes it a difficult call. But the balance I think swings to the point that it would raise serious policy concerns on whether they would be a regulator of choice.

    But having said that, again, we're not adamantly against it. But it does raise policy issues and we think that they are very serious policy issues.

    Mr. CASTLE. I don't have a particular opinion, either, at this point. Nor do I have anywhere near the knowledge to be able to form an opinion.

    But it just seems to me that this is a very significant question of very significant players in this field and it's something that we should all be paying attention to to see if we can come up with the right solution.

    Mr. HOWARD. And we believe that given the importance of the role that we play in the housing finance system, it is absolutely critical that our oversight committee be totally confident in the regulator that oversees our activities.

    Mr. CASTLE. Let me change subjects for a moment. And, again, I'm not that familiar with all of this, but I'm looking at the CBO testimony of May 23rd on the Federal subsidies for the housing GSEs.
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    My staff prepared a report which summarizes some of the things which reveals the value of Government subsidies to Fannie and Freddie as $10.6 billion a year with $3.9 billion, or 37 percent of that, being passed through to its shareholders instead of to mortgage borrowers.

    We all know—I mean, there are arguments about whether you're a Government agency at all or not. There are arguments about whether there is truly a subsidy or not, which you pretty much made here in your statements in answering the questions so far.

    And again, I'm not an expert on every word that's in here. But I assume that you disagree entirely with the underlying premise of what the CBO has said. You're not arguing about the numbers or anything of that nature. You disagree, because there are no direct subsidies, you disagree that there's anything that should be able to be encapsulated in terms of numbers one way or another.

    Am I saying that correctly?

    Mr. HOWARD. Let me attempt to be as clear as I can on this.

    The CBO method, because Fannie Mae does not receive direct Federal outlays, the method is inherently theoretical. They build a construct and attempt to evaluate in dollars the benefits that the charter conveys.

    Mr. CASTLE. What you said in your opening.
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    Mr. HOWARD. Because it's a theoretical approach, it is critically dependent on the assumptions that are made. And those assumptions can be made in a number of different ways which are reasonable, but which, if made in different ways, produce very different results.

    So I do think it's incorrect to lock into one particular set of assumptions and say this is the right number and furthermore, that this number, which is done in a theoretical construct, has policy implications, because by changing those assumptions, we think that the CBO made the assumptions incorrectly in cases having to do with our debt cost.

    Mr. CASTLE. But you're not saying, because it's a theoretical construct, it does not mean that it's completely invalid.

    You're suggesting that the numbers may be invalid because you don't agree with them. But you're not suggesting that the whole idea of doing a theoretical construct because of your long-standing history with the Federal Government is necessarily completely wrong.

    Or am I misstating? I want to make sure that I'm stating it correctly.

    Mr. HOWARD. I think you are stating it correctly. We completely agree that the charter that Congress gave Fannie Mae and Freddie Mac has value and does convey a benefit to us.

    We believe that that benefit flows very directly through our two businesses to the intended recipients, which are homebuyers. And we think that the CBO construct is one way, but not the only way, and we don't think the best way, of quantifying that flow of benefits.
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    Mr. CASTLE. I think I used up my time, Mr. Chairman. I meant to yield you some time, but I apologize.

    Chairman BAKER. Mr. Bentsen, do you have questions?

    Mr. BENTSEN. Thank you, Mr. Chairman.

    In his testimony before this subcommittee a month or so ago, Mr. Crippen, I think, made clear—and I apologize. I was reading through the transcript—made clear that you could believe CBO's subsidy arguments if you agreed with the assumptions that are in there.

    But, obviously, you all disagree with those set of assumptions. And I think that you make a very good point as well that—and I think we got Mr. Crippen to agree to this—that in fact, there's not one dollar of outlay from the Federal Government or from the taxpayers that goes to do this.

    And furthermore, I think we got the agreement that even if you agreed with the assumptions on the ratings and the spreads and the like, that if you agreed with the $3.9 billion in the year 2000, that $1.2 billion of that could be associated with fees and taxes that are paid.

    And yet, Mr. Crippen also said at that time in the testimony that he probably did not believe that were the Federal Government to just go ahead and appropriate $1.2 billion through some form of program, that we would be able to achieve the leverage that they otherwise found had been achieved.
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    And I think that's important for the record here.

    I want to turn for a second to H.R. 1409 and ask you about a couple of provisions of it. And I don't want to focus on the question of whether the Federal Reserve is the appropriate regulator or not. There are some issues there and I'll wait for other witnesses to ask that.

    But what I'm curious about, in your review of H.R. 1409, particularly as it relates to regulation and enforcement, how does it comport to the Bank Holding Company Act or the Gramm-Leach-Bliley Act?

    Does it treat, would the bill treat the GSEs in the same way in terms of things like cease and desist, receivership, and the like, as it would treat holding companies under the Bank Holding Company Act or Gramm-Leach-Bliley?

    Or does it give greater enforcement authority, comparably speaking, as it relates to the GSEs?

    Mr. DELK. Mr. Bentsen, let me not draw on my knowledge of the issue, but refer you to the GAO report that was commissioned by Chairman Baker.

    He requested GAO to look at this specific issue. And I think what GAO came back with, and I read this many, many times, nothing in that report suggests that there is a problem with the statutory enforcement structure that needs to be corrected.
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    In fact, that GAO found, and let me quote from the report: ''Based on each regulator's powers and authorities, it appears that each regulator has statutory tools available to address significant safety and soundness concerns.''

    So while there might be some differences, at the end of the day, and I think that I would argue that this is substantiated by the GAO study, OFHEO has the functional equivalent authorities or tools that it needs to ensure that we operate safely and soundly.

    Mr. BENTSEN. But as you look at H.R. 1409, would you see H.R. 1409 as increasing the amount of regulation over the operations of Fannie Mae or Freddie Mac? And how would you compare that to the existing regulatory authority they have over other financial holding companies?

    Would you view it as more excessive, as going beyond what the Bank Holding Company Act provides for, or what Gramm-Leach-Bliley provides for as it relates to other financial holding companies?

    Mr. DELK. I would argue that it, in fact, adds a lot of additional structure and oversight and involvement of the regulator that is, in fact, gratuitous.

    It's interesting also, if you think about the 1992 statute and the way it was structured, it was structured only 3 years after FIRREA and only 1 year after FIDICIA.

    And so, for anyone to argue, in fact, that Congress developed this in a vacuum I think is a little bit ludicrous.
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    They had the value of those two statutes, the value of the experience of those two statutes, and I think that was, in fact, the model that was used.

    However, the structure was, in fact, created to, in fact, oversee two companies that are, in fact, quite different from financial institutions for many, many reasons.

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Bentsen.

    Mr. Barr, did you have questions?

    Mr. BARR. Thank you, Mr. Chairman.

    Mr. Howard, if you could, I know people use this term subsidy a great deal in talking about Fannie Mae and Freddie Mac.

    What exactly does that term mean? What is the subsidy? I was looking here recently at an article from the Wall Street Journal, a very complimentary article and I think a very nice article. And all of a sudden, in the middle of the article, they all of a sudden launch into the use of the term, subsidy.

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    What exactly is the subsidy that people talk about in terms of your agencies?

    Mr. HOWARD. As I indicated in my opening statement, the term subsidy is used somewhat loosely in referring to the benefits that flow from our charter.

    Webster's definition of subsidy——

    Mr. BARR. Is any benefit that flows from a charter a subsidy?

    Mr. HOWARD. I would not call it a subsidy. But I wouldn't quibble with people who use that word to describe it. I just think using the term subsidy confuses the issue because, normally, a subsidy is a monetary outlay.

    And in this case, our benefit is not a direct transfer of funds that we can then direct at will.

    The benefit that we have is observable in the lower interest rates that attach themselves to loans that we can buy or guarantee versus loans that we can't.

    Mr. BARR. And you're not doing anything improper in that.

    Mr. HOWARD. I don't believe we are.

    Mr. BARR. Is it similar—I know a couple of years ago, particularly here in our work in this Committee, there was legislation that dealt with credit unions. And there was a lot of talk at that time that the credit unions receive a subsidy because of the way the tax laws work.
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    Is that a subsidy in the same sense that people apply the term to Fannie Mae?

    Mr. HOWARD. I'm not sufficiently familiar with the credit union structure to be able to opine on that.

    Mitch, can you?

    Mr. DELK. Mr. Barr, I think it's a very complicated subject matter when you talk about subsidies. I'm not an economist, and so I really am not familiar with what they are referring to. And therefore, I use kind of the commoner's definition of subsidy, as was articulated by Mr. Howard.

    So, not being familiar with the credit union model, I don't know that I can opine on that.

    Mr. BARR. The point I'm trying to make, I tend to agree with what I think you're saying, that people bandy this term about. And I'm not sure that either people that bandy it about really understand it. Perhaps they use it in a way to try and draw some negative implication from it. I don't know.

    But I was just curious as to whether or not there really is something that you can grab onto and sink your teeth into.

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    Mr. DELK. Let me add one thing to what I said.

    Mr. BARR. And I'm not sure there is.

    Mr. DELK. Let me add one point, if I can. I don't want to be disingenuous and insinuate that there are not benefits that accrue from the charter.

    Mr. BARR. No, I understand that, certainly. I understand that. And I think you all have been very forthcoming in that regard.

    Mr. Chairman, I'd yield whatever time I have remaining. I think you might have some additional areas of inquiry.

    Chairman BAKER. Thank you, Mr. Barr.

    On the question of subsidy, that is a benefit of operation in the market place which others do not enjoy which result in an enhanced profitability or a lower cost of product.

    In this case, currency is the product which, because of the implicit guarantee of the United States Government, and bond-holders making the assumption that the debt will be paid off by the United States Treasury in case of default, is a clear market advantage and therefore, defined as a subsidy.

    If we were to look at the current operation of Fannie and Freddie, a large wave of prepayments potentially could be the largest exposure.
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    And I'm bringing this up to the Committee only because of the observations made by the S&L crisis in the 1980s. The United States Government paid no dollar into any S&L prior to their foreclosure. The S&Ls put premiums into an FSLIC fund which was used to pay off losses.

    Unfortunately, the losses were far more widespread than anticipated. Therefore, the losses that needed to be covered exceeded the premiums' reserve by the industry, therefore calling on the United States taxpayer to pay off the losses.

    This is no different. There is no outlay by the United States Government, nor exposure by the United States taxpayer, until such time as there would be an untoward economic reversal resulting in a dollar loss to the institutions which could not be covered by their capital adequacy.

    Hence, the concern about leverage and capital adequacy is very important. Do we have a regulator who can tell us that it's adequate?

    Well, it's only taken them a decade and now we're being told that we want a 90-day extension from July 16th to take another quick look.

    In the meantime, pre-payment penalty I think is the largest potential exposure that they could have, as high-interest mortgage holders want to pay off those notes and refinance them at a lower rate.

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    Fannie and Freddie have to make very sure that they hedge against those downturns in interest cost because it has direct impact on their spread.

    Said another way—can they make money?

    They do this by using derivatives. Also issuing callable bonds that can be bought back before maturity, thus allowing them to pay, freeing them from the higher interest rate exposure and allowing them to issue replacement debt at the lower market rate.

    However, this means that they have to get their derivatives distribution exactly right. Too little callable debt means the profit spread gets squeezed and in 1998, when mortgage pre-payments were rampant, Fannie's interest costs went up more quickly than interest income and therefore, they had a net 4-percent revenue increase from its retained mortgages.

    That's not a good rate of return based on their history.

    So the point is I think I understand this. There is a subsidy. It is handed off to the corporations in the term of benefits guaranteed by the taxpayer and it's all just ducky as long as we remain profitable.

    Get a business reversal, a Jimmy Carter 21-percent interest rate, and hang onto your hat.

    I thank the gentleman for yielding.

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    Ms. Velazquez. Ms. Velazquez is not here. I'm sorry.

    Mr. Hinojosa.

    Mr. HINOJOSA. Yes, thank you.

    Mr. Howard, can you please tell me what you estimate the cost of Fannie Mae's restrictions to the housing market to be, and how the CBO estimate would change if those restrictions were factored in, in addition to your economic participation in the larger housing market?

    Mr. HOWARD. The same complications that present themselves in attempting to quantify our benefits also present themselves in attempting to quantify the restrictions that come with our charter.

    I could create a theoretical structure that would do that. But it wouldn't be particularly reliable.

    So, put another way, I don't know how to quantify the restrictions. But you make an important point, that there are restrictions. And our charter, which gives us benefits, comes with obligations to meet certain housing goals, to direct all of our activities into a single line of business.

    It comes with restrictions, loan limits, risk-based capital standards. All of those could be subject to some type of quantification.
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    We have chosen not to do it because it is inherently speculative. But that's the same basis on which I think one needs to be careful in interpreting the results of a study such as the CBO study.

    It suffers the same challenge.

    Mr. HINOJOSA. Let me ask another question, and I'll direct this one to Mr. Delk.

    One of the main reasons for the creation of your organization was to increase home ownership across the Nation and to create a fair and accessible housing market for minorities, minorities in search of purchasing homes.

    With that said, how is your enterprise helping increase home ownership and what have you done for the Hispanic community?

    Mr. DELK. Well, by the creation of Freddie Mac, what you have done is create a uniform national mortgage market. Whereas, prior to 1970, you saw various rates in various sectors of the country, geographic areas of the country, in large part depending upon the supply and demand of deposits.

    So by creating a secondary market, whereby there is a continuous flow of money into the country, what you have seen is the elimination of these pockets where money was plentiful and where there was a dearth of mortgage money.
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    So we've evened out that flow of mortgage funds across the country.

    While we have done that, we have in fact, as we stated earlier in the oral statement, we've lowered the interest cost for all mortgages that we could buy by 25 to 50 basis points, which translates into a $10 to $15 billion savings to homebuyers every year.

    So by lowering the cost, we're making mortgages more accessible.

    Having said that, Freddie Mac is engaged in a number of initiatives to expand the home ownership for Hispanic-Americans.

    We have recently announced an exciting initiative with the National Council of LaRaza and the National Association of Hispanic Real Estate Professionals to use an Internet-based program to reach out and educate Latino families about credit and home ownership through Latino real estate professionals.

    And we believe this is an exciting initiative that will bring education to these families and present them with opportunities to, in fact, be part of the American dream.

    Mr. HINOJOSA. Fannie Mae mentioned that they had a $1 trillion initiative and they met it. Then they started a new $2 trillion initiative.

    What size is yours?

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    Mr. DELK. Well, we don't have a commitment of that nature. We, in fact, are subject to the same affordable housing goals they are. But we haven't announced any initiatives that are dollar-related.

    Ours are more programmatic, including programs with various communities and various sectors within the economy and different groups.

    Mr. HINOJOSA. Well, is there another goal besides, say, a dollar figure like Fannie Mae announced?

    Mr. DELK. I'm sorry?

    Mr. HINOJOSA. I said, if you don't have a dollar amount in this new announcement that you made, is there a goal in the number of homes?

    How can I——

    Mr. DELK. How can you judge whether we're being successful?

    Mr. HINOJOSA. Yes, how can I judge how aggressive you're going to be?

    Mr. DELK. OK. Well, let me say, if you look over the last half-decade, our numbers for minority purchases have increased every year and therein lies our objective, is to continue that increase of minority purchases.
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    Last year, as I indicated in the opening statement, our minority purchases were 14 percent. And it's our objective to keep that going up in order to bridge the gap that exists between white ownership and minority ownership.

    Mr. HINOJOSA. Well, don't misunderstand my question. I really want to be supportive of you and Fannie Mae. But I do want you to get up on your tiptoes like they're doing and constantly be moving those targets further up so that we can close that gap amongst the minorities who want to own their own home.

    So I'd like to work with you on that.

    Mr. DELK. We would like to work with you. We share your objective of bridging that gap between white home ownership rates and minorities and, again, would be willing to work with you to ensure that, in fact, every year we're increasing our purchases by minorities, generally, but Hispanic loans in particular.

    Chairman BAKER. If I may, Mr. Hinojosa.

    Mr. HINOJOSA. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, sir. I'd like to get Dr. Weldon in before the break.

    Dr. Weldon.
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    Mr. WELDON. Thank you, Mr. Chairman.

    I'll direct my question to both witnesses. In criticizing the CBO study, you note that CBO ignores the extent to which the GSEs must bear the costs of increasing home ownership for those with low incomes.

    What is your estimate of the contribution of Fannie Mae and Freddie Mac to increased home ownership for individuals with low incomes?

    Mr. HOWARD. Congressman, last year, over 49 percent of the business Fannie Mae did, was to individuals with incomes at or below the area median in which they live.

    That was an all-time high that exceeded the statutory goal that was set for us by the Department of Housing and Urban Development.

    It's something that we take very seriously. We have a whole host of programs that are designed to achieve very high results in that regard and we are proud of our record.

    Mr. WELDON. You can't estimate the cost of actually doing that, reaching out to low income?

    Mr. HOWARD. It's hard to do that. We have not attempted a dollar assessment.
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    Mr. WELDON. Mr. Delk, did you have anything to add to that at all?

    Mr. DELK. I do not. We have not gone back and looked at and tried to quantify the benefits that were not included in the CBO study.

    Having said that, one of the criticisms of the study are there are many, many benefits that we bring, in fact, that are not taken into account by CBO.

    Certainly one you've cited would be a good example.

    Another would be, for example, the cost of originating a mortgage which has substantially gone down over the last few years because of a number of the innovations that have been pioneered by Freddie Mac and Fannie Mae.

    But these additional benefits to the consumer have not been attempted to be quantified.

    Mr. WELDON. There was a study done by FM Watch called ''Shuttered Dreams.''

    Are either of you familiar with that?

    Mr. HOWARD. I am now.
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    Mr. WELDON. Do you want to respond at all?

    Mr. HOWARD. To what?

    Mr. WELDON. Their conclusions in that study.

    Mr. HOWARD. If you have a specific question about it, I might be able to. But I'm not that familiar with it.

    Mr. WELDON. Well, they made some conclusions about where exactly the part of the subsidy that you pass through actually goes.

    Mr. DELK. Dr. Weldon, let me attempt to address that, if I could, very briefly.

    Mr. WELDON. Sure.

    Mr. DELK. My first comment would be, consider the source who issued that.

    I think Freddie Mac and Fannie Mae have done more to finance low-income and minority households than any financial institutions in the country.

    And I'm a little bit shocked that they would try to bring this subject matter up, given this coalition consists of sub-prime lenders and the mega-banks and the mortgage insurers.
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    Having said that, this paper is really a series of half-truths and distortions.

    For example, the whole premise of the paper is based on the CBO study and it makes the assumption that the CBO study is flawless.

    I think we've demonstrated, and I think others have demonstrated, that the CBO study is tremendously flawed and that the benefits we receive from the Federal charter that we have, in fact, are dwarfed by the benefits that go to consumers.

    And so, I think the original premise that the CBO study is correct, the whole study put out by FM Watch falls on its face.

    if that were not the case, it still would be a flawed study because it uses artificial and contrived methodologies to get to its desired results.

    For example, they totally take out the benefit that refinancing mortgages to minorities in fact, and low-income people, would produce.

    And so, they're really trying to crop the picture to, in fact, produce a subset of purchases and activities to, in fact, exaggerate the benefit we bring to minority and low-income borrowers.

    Again, I would say that our record is outstanding on this and I would hope that during the second panel, you would take the opportunity to ask the witness from FM Watch what, in fact, the members of that organization are doing to aid low-income families and minorities, as well as what they're doing to combat predatory lending.
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    I think you'll be surprised at the answer.

    Mr. HOWARD. I would add one thing to that. And that's that my quick read of the study suggests that these are contrived and made-up numbers.

    What we report annually or more frequently are real numbers in detail to real regulators on our service to targeted communities. And if you want to know what we are doing, look at the real data, not data made up and misanalyzed by a lobbying group.

    Mr. WELDON. I believe my time is expired. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Doctor.

    Mr. Ford and Mr. Royce, you both have waived?

    Mr. FORD. I just want to make sure that I can submit my statement for the record, Mr. Chairman, if you don't mind.

    Mr. BAKER. Absolutely.

    Mr. FORD. I want to raise the question that Mr. Delk raised regarding what are the FM Watch members doing to increase home ownership opportunities specifically as it relates to some of the communities in which Fannie Mae and Freddie Mac are both heavily involved, including mine in Memphis.
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    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Ford. I'd like to support that request in that the Freddie Mac information statement of March 30, 2001, page 18, for the record, states that those conforming loans above 95 percent of LTV—which means poor people buying houses—the percentage of loans in the portfolio represented is 4 percent, which means for folks who are paying, who have an LTV below 70 percent, meaning folks who are putting down $10,000 to $20,000, you would be interested to know that in the year 2000, constituted 65 percent of the agency's portfolio.

    So I appreciate the gentleman bringing that issue

    Mr. DELK. Mr. Chairman, can I make one point?

    Chairman BAKER. Certainly.

    Mr. DELK. That statistic is in our circular. I will say, though, that that particular statement ignores seasoning of the portfolio.

    Chairman BAKER. Certainly.

    Mr. DELK. I just want to make sure that the record is clear, if you don't mind.
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    Chairman BAKER. I think what we'll do, if you don't mind, is we'll explore this down the road and we'll have an exchange on the details to fully understand it, without prejudice.

    We will give you the opportunity.

    I want to make one other statement because I don't want to detain you. We have three votes in a row.

    Mr. Ford.

    Mr. FORD. Mr. Chairman, I think it's only fair that you let him make the statement for the record.

    Chairman BAKER. I'd like, if I can, Mr. Ford, to get it in writing. I've had discussions with folks before in the past that haven't proved fruitful, and I think we need to put this on a correspondence basis.

    I'll follow this up, and I'll share it with you.

    Mr. FORD. I mean, you put it on the record, these numbers. And if he has something that is different than that that speaks to something more current——

    Chairman BAKER. Mr. Ford, I'd point out, this is the Freddie Mac information statement. This is not the CBO, the irresponsible party. This is the company's own sheet.
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    Now, if there's explanations to help us better understand what this data represents, that should be given to us in writing and that's what I'm asking the gentleman to provide.

    Is that fair?

    Mr. FORD. Fair enough, Mr. Chairman.

    Chairman BAKER. Thank you, sir. I would make one other comment because I think I know your opinion on the matter. We are really down short of time. I don't want to hold you up for the votes. We'll go on to the second panel. But I wish to make you aware that I do intend to put on the record Mr. Crippen's response as I requested to your testimony and make that available to you.

    And in that response, he responded to my question on the matter of increasing competition among GSEs would have on the subsidy pass-throughs.

    CBO's analysis, which I understand you will fault, attributes the GSEs' ability to retain a portion of the subsidy to the fact that their GSE status limits competition from other financial institutions in the conforming mortgage market.

    If the number of companies granted a GSE charter were increased, the secondary market would become more competitive resulting in a larger portion of the subsidy being passed through to borrowers.
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    That is a very interesting idea which I do intend to fully explore and wanted to put it in the record for both enterprises' awareness, and then would welcome your comments at a later time, and we'll provide a copy of this letter to you, as well as fleshing out in more detail what that means.

    My assumption is that you don't want additional competition. My assumption is that creating another enterprise with the same standards and responsibilities, capital adequacy, same regulator, somebody who plays by the same rules, is something else that we perhaps should explore.

    I don't want to hold you. You're welcome to stay if you choose to stay and respond. We're going to go run and vote. We will put the Committee temporarily in recess, and I leave it to you gentlemen. If you'd like to stay, you're welcome. If you choose to leave, we'll go on to the second panel.

    Is that fair?

    Mr. HOWARD. Yes.

    Chairman BAKER. Thank you very much. We'll stand in recess.


    Chairman BAKER. We're back. If the witnesses and the audience would take their seats. Members are on their way to return.
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    I'd like to reconvene our hearing.

    Let me welcome each of our panelists here this afternoon for our second panel. Members will be returning from the floor momentarily.

    We'll proceed in what is our customary order, left to right, and welcome today our first witness on the panel, Mr. Richard Carnell, Associate Professor of Law, Fordham University School of Law.

    We'd certainly welcome you back from your prior capacity in the former Administration. We enjoyed working with you then and it's a pleasure to have you back, sir.


    Mr. CARNELL. Thank you, Mr. Chairman.

    I'm pleased to have this opportunity to discuss Fannie Mae, Freddie Mac, and H.R. 1409.

    I'll begin by briefly discussing some key provisions of the bill and I'll then touch on four broader themes that I develop more fully in my written statement.

    These themes are:
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    First, Fannie and Freddie play a double-game over whether they do or don't have a Federal guarantee;

    Second, Fannie and Freddie falsely argue that banks get a much bigger Federal subsidy than Fannie and Freddie;

    Third, people often say Fannie and Freddie are too-big-to-fail. I'll explain why that doesn't have to be true; and

    Fourth, regulators can act now to correct defects in the regulation of Fannie and Freddie.

    Turning to the bill itself I believe the bill would take important steps to remedy weaknesses in current law.

    Right now, OFHEO, a bureau of HUD, is responsible for keeping Fannie and Freddie safe and sound. The bill would abolish OFHEO and have the Federal Reserve Board regulate Fannie and Freddie.

    I support moving GSE safety and soundness regulation out of HUD. Having OFHEO part of HUD creates two types of problems.

    First, HUD lacks the will and the institutional credibility to stand up to Fannie and Freddie.
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    Second, and more subtly, having OFHEO in HUD encourages the White House in any Administration to regard the OFHEO director's job as a housing appointment and not a safety and soundness appointment.

    Nonetheless, I have several concerns about having the Fed regulate GSEs. Regulating GSEs could conflict with the Fed's responsibility for setting interest rates, since so much of the GSEs' business involves managing the risk of changes in interest rates.

    Regulating GSEs could also conflict with the Fed's role in making emergency loans to banks through the discount window. In particular, it could be seen as giving Fannie and Freddie a fast track to a Fed bail-out if they ever got into trouble.

    I recommending keeping GSE safety and soundness regulation in OFHEO, but making OFHEO an autonomous bureau of the Treasury Department.

    Another key provision of the bill would require Fannie and Freddie to comply with the public disclosure requirements of the securities laws, the same requirements as apply to all other large corporations.

    This provision makes good sense. Fannie and Freddie say they already comply with those disclosure requirements. But if that's true, why do they object to having the disclosure requirements apply?

    It's not enough for Fannie and Freddie to say they comply with the securities laws. All large corporations say that, but the SEC still finds violations.
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    Investors in Fannie and Freddie deserve the protection of the disclosure requirements.

    Finally, the bill would rightly correct some glaring defects in the safety and soundness statutes governing Fannie and Freddie, statutes that certainly are not functionally equivalent to those governing FDIC-insured depository institutions.

    The bill would strengthen regulators' authority to set capital standards, take prompt corrective action, and take enforcement action.

    It would also give regulators the authority they need to deal with a GSE in an orderly way if it became insolvent or critically under-capitalized. This would fill a dangerous gap in current law.

    Now to the first of my four broader themes.

    Fannie and Freddie play an extraordinarily successful double-game in dealing with their relationship to the Federal Government. The double-game has two parts.

    Fannie and Freddie emphatically deny that they have any formal, legally enforceable Government backing. So far, so good. But they do this in a way that leaves the impression that they have no Government backing at all. And yet, they then work to reinforce the market perception that the Government implicitly backs them.

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    Here's one example from Fannie Mae.

    Fannie Mae emphasizes, quote, ''the implied Government backing of Fannie Mae.'' That's Fannie's own words. And they then go on to say that that backing makes Fannie Mae securities, quote, ''near-proxies for Treasuries.''

    Now think about that. Fannie says its implied Government backing is so strong, that its securities are almost as good as U.S. Treasury securities.

    This double-game lets the GSEs have it both ways. It's sort of like telling Congress and the press—''Don't worry, the Government is not on the hook,'' and then turning around and telling Wall Street—''Don't worry, the Government really is on the hook.''

    It's amazing how they get away with this year after year, but they do.

    My second broad theme involves how Fannie and Freddie mistakenly argue that the Government gives FDIC-insured banks more generous subsidies than it gives Fannie and Freddie.

    Contrary to what you might expect, Fannie and Freddie get a greater net subsidy from their Government sponsorship than banks get from Federal deposit insurance. And there are six reasons for this which I detail in my written statement.

     First, the market perception of implicit Government backing applies to all GSE obligations. It isn't limited to deposits and there is no $100,000 limit like there is with deposit insurance.
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    Second, if Fannie and Freddie were to become bankrupt, there's no legal mechanism to handle their bankruptcy, a defect that your bill would correct, Mr. Chairman.

    The absence of this legal mechanism encourages the GSEs' creditors to believe that the Government would have to bail them out.

    Third, unlike banks, Fannie and Freddie don't have to make payments into an insurance fund. They're not even responsible for each other. So if there were a Government bail-out, the taxpayers would be left holding the bag.

    Fourth, Fannie and Freddie have their own special statutes. They're often exempt from having to comply with the same rules as other businesses.

    Fifth, Fannie and Freddie get such a sweet deal from the Government, that it's hard for anyone except another GSE to compete with them effectively. This lack of effective competition lets Fannie and Freddie keep a large part of their Government benefits, instead of being forced to pass those benefits through to their customers.

    Sixth, Fannie and Freddie do not have to provide public benefits that impose significant costs on their shareholders.

    Considering the great value of the benefits Fannie and Freddie receive from the Government, they should be doing far more to increase home ownership at the margins, such as by the lower-middle class, the working poor, and members of historically disadvantaged minority groups.
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    My third broad theme involved systemic risk.

    Fannie and Freddie are often called too-big-to-fail, meaning that if they ever got into trouble, the Government would have to bail them out to avoid unleashing systemic risk that would harm the financial system and the economy.

    But systemic risk is not inevitable. It results from human decisions. And if investors expect the Government to rescue troubled GSEs, investors will tend to let GSEs take greater risks. This in turn will increase the chances of the GSEs getting into trouble.

    But the Government, by acting in a timely way, can correct too-big-to-fail expectations. Congress did just that in the FDIC Improvement Act of 1991, which curtailed too-big-to-fail treatment of banks.

    It worked.

    My fourth and final theme involves opportunities for administrative action. Regulators can and should act now to improve the regulation of Fannie and Freddie. I suggest six ways they can do so without legislation.

    First, bank regulators should obtain accurate data on FDIC-insured banks' investments in GSE securities.

    Second, if banks have excessive concentrations of GSE risk, bank regulators should limit and correct those concentrations.
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    And let me emphasize—bank regulators can take care of both of those points right now. And in my opinion, they have no business running to this Committee and saying, give us more authority.

    They have the authority they need right now.

    Third, the SEC should end the mislabelling of mutual funds as, quote, ''Government,'' or, quote, ''U.S. Treasury funds when they actually contain large amounts of GSE securities.''

    Fourth, the Fed should review the current safeguards on the GSEs overdrawing their accounts at the Fed.

    Fifth, HUD should tighten its scrutiny of the GSEs' activities and mission.

    Mr. Chairman, you've taken on an admirable but unenviable challenge, seeking to fix problems before the crisis hits and before the scandal breaks.

    Your bill would make significant improvements in the regulation of Fannie and Freddie. More broadly, the bill and this hearing are important in continuing to focus the spotlight on the GSEs, their valuable Government benefits, and the question whether they give the American people a return commensurate with those benefits.

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    Thank you, and I'll be glad to respond to questions at the appropriate time.

    Chairman BAKER. Thank you. I was going to interrupt your remarks and ask you to wind up a bit. But you got to the really good part and I wanted to make sure you got that in.


    If you can, and I know that each of you has prepared testimony, we will have other Members participating. We're going to give flexibility here. If you need to go over 5 minutes, that's fine. But as best you can, try to keep it within the constraints.

    Thank you.

    Our next witness is Mr. Martin Edwards, Jr., Partner, Wilkinson & Snowden, Incorporated, who appears today here on behalf of the National Association of Realtors.

    Welcome, Mr. Edwards.


    Mr. EDWARDS. Thank you, Mr. Baker.
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    Good afternoon, Members of the subcommittee. My name is Martin Edwards from Memphis, and I am President-elect of the National Association of Realtors.

    As Chairman Baker mentioned, I'm a partner in Wilkinson & Snowden, a commercial industrial real estate firm in Memphis.

    I'm taught real estate finance for a number of years at the University of Memphis, the National Association of Realtors, and the Mortgage Bankers Association.

    Let me also introduce to you America's realtors, the nearly 780,000 members of the National Association of Realtors.

    For the most part, realtors are small, independent contractors, successful to the extent of their own initiative. Nearly 77 percent of realtors work in firms with fewer than ten employees.

    Together, we are the largest group of business entrepreneurs in America; realtors are extremely proud of our role in helping nearly 72 million people buy homes.

    Almost 68 percent of Americans own homes, as you've heard today, with the highest home ownership rate in the Nation's history.

    We are very proud that the Nation's housing industry is one of the only sectors of the economy that is standing tall as the U.S. economy struggles. The housing sector contributes 14 percent of gross domestic product.
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    For nearly 30 years, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks have used benefits of the Federal charters that Congress granted them to help build a housing finance system that is the envy of the world.

    Today's home ownership costs are lower and access to mortgage credit, even for borrowers with blemished credit, is easier and more equitable than ever before, due in no small part to the mortgage investment activities of Freddie Mac and Fannie Mae.

    Realtors across this country know from painful experience that booming mortgage lending and real estate cycles inevitably will slow. But Fannie Mae and Freddie Mac, unlike primary market lenders, remain in the the markets during downturns.

    In exchange for the advantages inherent in their Federal charters, the GSEs fulfill their charter obligations to benefit millions of America's homeowners and thousands of lenders.

    Despite realtors' general support of the GSEs, we do have our differences. We disagreed when the GSEs opposed increasing the FHA mortgage limits 2 years ago. In the future, it is likely that we will clash again on this and other issues.

    We've also had differences with the GSEs' disposition activities, but we are hopeful we can resolve these.

    Realtors firmly believe that GSE regulatory reform should not be a vehicle to alter significantly the critical roles that Fannie and Freddie play in the American system of home ownership.
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    Transferring significant regulatory authority from HUD and OFHEO to the Federal Reserve, as proposed by H.R. 1409, would effectively hamstring the GSEs. It would reduce their effectiveness as mortgage investors, make them more vulnerable to attempts by the mega-banks to control the secondary market, and limit customers' financial choices and home ownership opportunities.

    Mr. Chairman, the Federal Reserve has little experience regulating housing and real estate-related entities. We believe the central bank may have a natural conflict of interest in that the Fed's primary mission is to control the Nation's money supply by regulating the commercial banking system, particularly the bank holding companies, which are increasingly competing against the GSEs in the secondary mortgage market.

    Furthermore, the Federal Reserve has generated its own share of controversy by raising the prospect of classifying real estate brokerage and property management as a financial activity under the Gramm-Leach-Bliley Act.

    Realtors urge this subcommittee to consider the following questions before embarking on sweeping changes that affect the GSEs:

    What would housing finance be like without strong GSEs? Would this Nation be as well housed? Would as many families have access to the American dream? Would housing be as strong a sector of the economy as it is today?

    Chairman Baker, we share your concerns about improving the regulatory environment. However, we believe that the current GSE regulatory structure best serves the Nation's interests in housing.
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    We believe that the secondary market system works to the benefit of the mortgage lending industry, homeowners, and the Nation's housing policy.

    Realtors believe that without strong and vital housing GSEs, the Nation would not be as well housed, nor would the dream of American home ownership be reached by as many American families as it is today.

    Let me just close by making a comment regarding affordable housing and housing parity.

    The National Association of Realtors, in partnership with five minority real estate professional associations, have embarked on a major program to promote parity among white and minority homeowners.

    The Home Ownership Participation for Everyone, or HOPE awards, will recognize unsung heroes across the country who are helping to break down the barriers of minority home ownership.

    As we go forward with this and other projects, we want to make sure that the mortgage market remains accessible to minorities. Two of the very strongest voices for minority home ownership have been Freddie Mac and Fannie Mae.

    And I thank you for the opportunity to participate, Chairman Baker, and will stand for your questions.
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    Chairman BAKER. Thank you, Mr. Edwards.

    Our next witness is Mr. James C. Miller, III, the Director of LECG Economics-Finance.

    Welcome, Mr. Miller.


    Mr. MILLER. Thank you, Mr. Chairman, congressmen. Thank you for holding this hearing and thank you for inviting me to participate.

    As you probably know, I served as President Reagan's budget director, and before that, chairman of the Federal Trade Commission.

    As you may not know, I was trained as an academic and have published over a hundred articles in journals and such, and have published nine books.

    I have done some work in the GSEs, stretching back almost a decade, and have authored a series of reports over the past year or so.

    In my experience, the decisions made by Government affecting private institutions or commercial institutions or market-based institutions tend to be more difficult than the decisions those institutions make themselves.
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    Because sometimes the decision rules are unclear. Sometimes the information tends to be wholly inadequate for making an informed decision.

    Often, the incentives to make the right decision, the correct decision, aren't the best.

    Now this doesn't mean that you shouldn't make reforms. But what I think it does is urge caution when you're going to restructure an industry that's working palpably well because there may be unintended consequences.

    So I think it's important that you do have such hearings and look at these things with great care and in great detail.

    Two issues before this Committee, I understand, from your letter, Mr. Chairman.

    One is the CBO report recently issued, and the other is H.R. 1409. Let me comment on them seriatim.

    In anticipation of the issuance of the new report, back last fall, Freddie Mac asked Dr. James Pearce, an economist at Welch Consulting in College Station, Texas, and me, to evaluate the 1996 CBO report and comment on it. And we did.
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    And they asked us also to provide our own assessment of the GSEs, the benefits and costs.

    Briefly, we found that the 1996 report systematically overstated the benefits to the GSEs—they call them subsidies—and understated the benefits to consumers.

    When we made technical corrections in the CBO numbers because of some mistakes we believe they made, it wiped out this difference. The characterization that the GSEs are a, quote: ''spongy conduit,'' disappears.

    Now I have a copy of the report that we submitted, and I have submitted that for the record and I would appreciate it, Mr. Chairman, if you would include that with my prepared statement and that report as an attachment.

    Chairman BAKER. Without objection.

    Mr. MILLER. We concluded independently that the benefits to consumers ranged between $8.4 billion and $23.5 billion annually, and that the benefits to the GSEs ranged between $2.3 billion $7 billion annually.

    Now we did get an advanced copy of the 2001 CBO draft, and it's a draft that we guarded very carefully and it's confidence that we respected, and we responded to it.

    We were very pleased that the CBO made certain changes in their methodology, certain corrections. And I think this improved the quality of their analysis.
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    However, they compounded their mistakes in some areas, in our judgment. They also changed the methodology for counting the ''subsidy,'' from a flow method to a capitalized method, so they basically scored the subsidy when it happened, when the transaction took place, rather than over a period of time. And for reasons that I go into in the report, I think that's inappropriate.

    But it seems to me the major problem with the CBO methodology is very simple.

    In the minds of the CBO, in the model they adopt, and in the rhetoric that has been discussed so often about this, it's as if you, Mr. Chairman, and other Members of Congress lay on a subsidy, whether it's implicit or explicit, lay on a subsidy to the GSEs which they then parcel out to consumers, and they keep back a service charge.

    And CBO says that that service charge is one dollar for every three they get.

    This is totally incorrect. The institutional arrangement that you have put in place generates far more benefits than the funding advantage that is CBOs measure of the degree of the so-called subsidy.

    I put the word ''subsidy'' in quotes every time I use it. I think Mr. Barr raised that question. I think that is an inappropriate way of looking at it.

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    Suppose that there were property rights in some area in the economy that were not defined and not enforced. And you, Mr. Chairman, and other Members of Congress were to pass a law identifying, assigning property rights and enforcing the property rights.

    Well, we know that commerce then would flourish and the benefits generated from that would be far in excess of any kind of imputation of some subsidy to the firms, because you had put that law in place.

    So it's the whole institutional arrangement that has to be analyzed. And that includes all of the effects that the GSEs have on the mortgage market in bringing about additional competition and lowering mortgage rates all across the board.

    That was done in a limited way by CBO, but not in a thorough way.

    Let me comment briefly on H.R. 1409.

    I haven't gone through the regulatory morass facing the GSEs in great detail. It's very complicated, as you know. You know this far better than I do.

    But I've had a lot of experience in regulation. I've written books about regulation. And if I understand your bill, and I read the bill at one time and one of your staff members was kind enough to send me a section by section, what it says is you're going to place in the hands of the Federal Reserve Board the authority to be the regulatory czar for the GSEs.

    They cannot engage in additional kinds of activities without board approval. Under certain circumstances, the board could even fire members of the board of directors, can cap pay, can do a number of other things.
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    They have to make a finding that it's in the public interest. This is old public convenience and necessity regulation of the sort that we threw out, you threw out, with respect to the Interstate Commerce Commission, you threw out with respect to the Civil Aeronautics Board, and others.

    Surely, one thing we've learned is this old economic regulation, whether it's maximum interest rates in financial institutions or it's regulation of transportation: it just doesn't work.

    And surely, there would seem to be more cost-effective, less intrusive, more market-based ways of accomplishing the goals I think you want to achieve, and I want to achieve. And that is assuring safety and soundness.

    So, to sum up, I think any public policy initiative based on CBO's report today would be an error. And second, I think that H.R. 1409 is premature, at best. I would strongly urge you wait and see what OFHEO is going to come up with in their risk-based capital standards and if they get them right.

    Thank you, Mr. Chairman. I'd be glad to respond to questions.

    Chairman BAKER. Thank you, Mr. Miller.

    Our next witness is Ms. Leslie Paige, Vice President, Citizens Against Government Waste, appearing today on behalf of the Homeowners Education Coalition. Welcome, Ms. Paige.
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    Ms. PAIGE. Thank you, Mr. Chairman, Members of the subcommittee. Thank you for the opportunity to testify today.

    My name is Leslie Paige. I'm the Vice President at Citizens Against Government Waste. We are a non-partisan, non-profit taxpayer watchdog group with more than one million members and supporters nationwide.

    I'm also here today on behalf of Homeowners Education Coalition, which is a small ad hoc coalition of taxpayer groups, including the National Taxpayers Union, the Competitive Enterprise Institute, 60 Plus, the Free Congress Foundation, Capital Watch, the Small Business Survival Committee, and the American Association of Small Property Owners.

    Home EC's mission in this issue is to raise questions about the Nation's largest housing GSEs, and to participate in this public dialogue about their activities and the impact of those activities on taxpayers and the economy as a whole.

    The time to address the concerns of taxpayers regarding the GSEs is not at some future date when the GSEs might be facing a financial crisis.

    Been there, done that.
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    We experienced exactly that same type of scenario in the 1980s with the savings and loan crisis, which cost taxpayers hundreds of billions of dollars. And that bail-out basically occurred because Government officials created an oversubsidized environment and then were ill-prepared to deal with the unforeseen consequences of its actions.

    That sounds rather uncomfortably familiar to us.

    With the release of the CBO update, it's no longer tenable in our opinion to continue to argue that there is no subsidy. And it's a little surreal, I have to say, with all due respect to the gentleman sitting to my right, to be arguing about what a subsidy is. We all know that a subsidy is the value of a benefit conferred by the Government, in this case.

    And I appreciate, by the way, I wanted to tell you that I appreciated, Mr. Chairman, your earlier description of that.

    There are as many ways of handing out Government benefits as there are Members of Congress who have an idea of how to do it. But at the other end of that subsidy is a taxpayer waiting to bail it out if it goes bad.

    And the GSEs continue to try and tell us that there is no subsidy and it's tying them in rhetorical knots. They argue simultaneously that there is no subsidy, and then they go on to say that this non-existent subsidy isn't worth as much as the CBO says it is.

    And that, furthermore, the benefits they convey far outweigh the value of this non-existent subsidy.
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    There are subsidies. The value is substantial. And 37 percent of the subsidies are soaked up by the GSEs, according to the CBO.

    It's clear that they've converted their charters into very highly efficient profit-delivery systems. And we have nothing against the pursuit of profits, Mr. Chairman. But when this pursuit could result in another taxpayer bail-out of an out-of-control financial institution, we tend to take notice.

    There are very real reasons to believe that Government would bail-out the GSEs, in spite of official disclaimers to the contrary. Actions speak louder than disclaimers.

    The Federal Government has stepped in to bail out the farm credit system and Fannie Mae itself was afforded regulatory forbearance in the 1980s when it was in trouble.

    This is not just an academic exercise. The GSEs, in fact, are too-big-to-fail and as such, they merit the scrutiny of this Congress.

    Together, they either own or guarantee $2.4 trillion in mortgages and mortgage-backed securities. By 2003, they will have more debt and guarantees outstanding than the U.S. Treasury debt held by the public.

    But more importantly, these mortgage giants now control 71 percent of the conventional conforming mortgage market, according to a recent analysis by the American Enterprise Institute, which I'd like to attach for the record. They will own or guarantee 91 percent of that market within 3 years at their current growth rate.
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    They are purchasing more and more of their own mortgage-backed securities, which is an inherently riskier practice and which has been described by the Congressional Research Service as the repatriation of debt with no discernible mission-related purpose.

    In fact, we would submit that profit is the purpose and that motive is also the driving force behind their purchase of home equity loans, even though 70 percent of home equity loans are used for consumer purchases.

    Fannie Mae is securitizing Home Depot loans, loans which will be used for remodeling or consumer purchases.

    We'd like to know how this kind of financial activity gets low-income people into affordable housing. There are indications that they would like to get an increase in the conforming loan limit. That limit is already too high, in our opinion.

    Those who can afford a mortgage of $275,000 are not low-income borrowers. Congress should block any attempts to raise the conforming loan limits.

    The GSEs should not be subsidizing consumer loans, eyeing the jumbo market, getting into retail investment banking, or dabbling in e-commerce at a time when they are lagging in their mission to provide low-income people with affordable housing.

    The affordable housing goal, by the way, has become nothing more than a politically convenient fig leaf, in our opinion.
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    What is or is not a secondary market is very vague. We believe that mission creep is a problem and it's an inevitable problem for several reasons.

    The GSE charters are vague. Subsequent legislation hasn't done enough to clarify what the parameters are of the secondary mortgage market or what is an appropriate activity for a GSE to be engaging in.

    As a result, they tend to just interpret their charters as more of a set of a loose guidelines where anything that make them a hefty profit can be construed as helping low-income people.

    Strong supervision of the GSEs is a very advisable interim measure. But it is no substitute for market discipline, true market discipline.

    The optimum, long-term reform that we favor, and that is Citizens Against Government Waste, as well as the other members of our group, is full privatization of the GSEs. Taxpayers no longer need to subsidize mature businesses engaging in normal business practices which could achieve success on their own.

    Subsidy programs, whether they are implicit or explicit, they breed inefficiency, they breed waste, and they breed abuse. And they tend to hang on long after their mission has been accomplished and they put taxpayers at increased risk.

    We've seen this in a lot of other Government programs, from agriculture to transportation to energy.
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    If Congress wants to promote home ownership among low-income people, which I believe is the intent of the charters, the real question they should be asking is, is this the most efficient way to do that?

    The fact is that what we have now is that taxpayers are subsidizing mortgage debt and increasingly, consumer debt, and they are boosting the profits of the GSEs themselves.

    We believe that this is the least efficient, least transparent, and least accountable subsidy delivery system.

    On behalf of our one million members and supporters, we thank you, Mr. Chairman, for the opportunity to speak with you today and we are available to answer any of your questions.

    Chairman BAKER. Thank you, Ms. Paige.

    Our next witness is Mr. Edwin Rothschild, Principal, Podesta Mattoon, here today on behalf of FM Watch.

    Mr. Rothschild.

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    Mr. ROTHSCHILD. Thank you, Mr. Chairman, Members of the subcommittee.

    I am the Chair of the FM Watch affordable housing task force and I'm accompanied here today by my colleagues on that task force, Mr. David Tornquist, who has the distinction of having worked for both Mr. Miller and Mr. Raines, as a policy and budget analyst at OMB for 15 years, and Lottie Shackelford, who is the former Mayor of Little Rock, Arkansas and with the firm of Global USA, and is the current Deputy Chair of the Democratic National Committee and has a long interest in housing issues.

    I'd like to, if I can, Mr. Chairman, just go through the study that was referred to in the earlier panel that we have just completed, called ''Shuttered Dreams,'' and go through how we see the subsidy being allocated——

    Chairman BAKER. If you would, that's fine. But pull that mike a little closer because if you turn away, we lose you.

    Mr. ROTHSCHILD. All right. Is that better, Mr. Chairman?

    Chairman BAKER. Yes.

    Mr. ROTHSCHILD. OK. We have taken a look at the subsidy using the latest CBO study. We began this study prior to it using the 1996 study as a basis for that. But when you, Mr. Chairman, asked for an update, we decided to wait and issue our study with the most recent data.
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    The rest of the data that underlies this report is the data that the GSEs report, the GSE public use database that the GSes report to HUD, plus the HMDA database.

    So all of this is the official——

    Mr. BENTSEN. Mr. Rothschild, are these data in your appendices of your statement or not?

    Mr. ROTHSCHILD. Yes, they are in the statement.

    Mr. BENTSEN. Because I can't read that far away, but others may be able to.

    Mr. ROTHSCHILD. OK. Well, Figure 1 would be on page 3 of my statement.

    And if you look at that, I'm happy to go through what it details.

    First, as the CBO calculated, 37 percent of the $10.6 billion subsidy is retained by stockholders. So that's the far right quadrant.

    Then you have 29 percent of the subsidy that's passed through is in refinance loans. So basically, you have 66 percent of the subsidy not going to the home purchase market, which is 30 percent of the loans. And there's 4 percent in the other category which includes non-owner-occupied and multi-family homebuyers.
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    So that's the general distribution of the subsidy by those specific categories.

    The next figure I'd like to refer to is Figure 2, where we looked at it on the basis of income distribution, the amount of the loans, the value of the loans going to home purchases.

    Again, we're just looking at the home purchase category, the amount of the subsidy that actually goes to help put people into homes. Refinances are very, very useful because they help people pay less. But refinances don't put people into homes.

    So you have, looking at the median household income of $40,000, that's half the people in the country. Less than 5 percent of the subsidy goes to those homebuyers.

    We're talking about $500 million out of the $10.6 billion, while $3.9 billion goes to stockholders.

    Purchasers above the median income receive 26 percent of that subsidy.

    The next figure on page 5, Figure 3, we again divided the subsidy that goes to benefit home purchases by race, again using data submitted to HUD, HMDA data. And you can see there in terms of minority benefit, African-Americans, Hispanics, Asians, all received approximately 1 percent of the subsidy.

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    That's about $100 million each, while the stockholders got $3.9 billion.

    One other category, unknown race, that's a problem with the data. There are reports that don't contain that information so we don't know the racial category of that grouping.

    The last figure that we have here, we have more tables in our full report, but I think these summarize it adequately, you see the percent of the U.S. population. And this again refers to that quadrant of home purchases. And we divided that up to look at it in terms of percentage of the population versus the percentage of people who got the subsidy.

    And you can see that, with respect to African-Americans and Hispanics in particular, in terms of the percentage of the population, a very small amount, much less than their percentage of the population went to those groups.

    Now one thing we need to point out, and I think it has been mentioned from time to time, is that FM Watch is not coming up with this information.

    The fact is that Fannie Mae and Freddie Mac are not fulfilling their mission of assisting and supporting low-income and minority, particularly African-American and Hispanic, homebuyers.

    They have lagged the market. The private sector has done a far better job in supporting minority home purchases and low-income home purchases than Fannie Mae and Freddie Mac. That's been reported by HUD, by GAO, by the National Community Reinvestment Coalition and others.
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    I have a report here that was done by a very well respected housing analyst. It was done by the Public Justice Center, by Calvin Bradford, who looked at Baltimore, who said that the GSEs are lagging the market. They are not doing their job.

    They could be. And our argument is that the 37 percent that's being retained by the stockholders of Fannie Mae and Freddie Mac, that portion could be used so that the institutions, the GSEs, could do more for the very groups that they were chartered by Congress to do. And the usual argument, for example, one of the suggestions that's been made by housing groups is that Fannie Mae and Freddie Mac could be buying more CRA loans from banks that make them, the banks that subsidize those loans with other loans.

    But Fannie Mae, and we point out a statement by Fannie Mae's chairman, Mr. Raines, last year, in a question and answer session when he was asked by a housing advocate from Delaware whether or not he would use the resources of Fannie Mae to buy those loans, he basically said, no, we choose not to do that. We choose not to subsidize what the banks have subsidized.

    But they could. And I want to just reinforce what the Congress chartered them to do. And this is ''to provide ongoing assistance to the secondary market for residential mortgages, including activities relating to mortgages and housing for low- and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities by increasing liquidity of mortgage investments and improving the distribution of investment capital available for home mortgage financing.''

    In other words, they could earn less.
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    Finally, I would like to point out that having listened to the testimony of the two witnesses from Fannie Mae and Freddie Mac, I am astounded because I think every time someone comes out with a report, no matter who it is, that is critical of these institutions, it's like they never met a report that they didn't like unless it was written by themselves.

    It doesn't matter whether it's the CBO, whether it's HUD, whether it's the Fed, whether you, Mr. Chairman, hold a hearing on a particular date.

    All of it seems to be something that they can't possibly have done or agree with.

    And I would like to put into the record something that happened last year after The Washington Post reported on HUD's finding that Fannie Mae and Freddie Mac were lagging in loans to African-Americans.

    Fannie Mae circulated charts here on Capitol Hill, particularly to the Congressional Black Caucus, showing how they were not lagging the market. That was one that they did in May, 2000.

    In February, 2001, they showed, in fact, that they were doing better than the market in some years, from 1996 to 1999.

    But I have also attached HUD's data, where Fannie Mae has continually decreased its support of homebuyers, African-American homebuyers. Freddie Mac has about stayed the same, a slight increase. But the market is much greater.
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    In other words, the private sector, when it comes to originating loans, is doing far better.

    Mr. Chairman, I see my time is up. It was up before. So I'll stop and be happy to answer questions.

    Chairman BAKER. Thank you, Mr. Rothschild.

    Mr. Miller, let me start with you. In meeting with the GSEs last year, we reached an agreement. Whether they call it voluntary or I call it involuntary, we got together. And as a consequence of that, we announced that we would like to do the regulatory piece, as it was called this year, and suggest that for the interest of the GSEs themselves, as well as stakeholders and taxpayers, it would be good to assure that we had strong regulatory oversight.

    I wore out a good mailbox going back and forth every day, looking to see what they were going to send me. And it's still empty and I've got a new box, still waiting.

    So I came up with H.R. 1409. And I'm not suggesting that that's the end-all. Even Mr. Carnell has suggested that there might be a more appropriate regulator.

    Do you have any recommendations to change the status quo to assure taxpayers that what the GSEs tell us can be verified by a third party?

    To date, every regulator who has issued an opinion, regardless of what they said, has been challenged by the GSEs.
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    Where can we get a credible regulator? What should it look like? And what do we do to get there?

    Mr. MILLER. Well, Mr. Chairman, you need to establish the regulator and have oversight of the regulator's activities. And I think the regulator needs to establish the least intrusive means of assuring that the two enterprises are adequately capitalized, that they cover their risks.

    Chairman BAKER. On that point, OFHEO has taken now a decade.

    Mr. MILLER. Yes, I'm well aware of that, and I can understand your frustration. And I think you're quite justified in being upset about that.

    I think it's important for them to come forward with a set of standards.

    I do know enough about the standards that they propose to have a judgment about that. And that is that I think that they're not quite ripe and I think that it would be useful for them to withhold making them final for a few months in order to make sure that they work.

    It's almost like debugging software. If they make the program final, then they can't do any debugging. And so I think that that is important to do.

    It's in the interest of the taxpayer, as Ms. Paige is suggesting. It's in the interest of markets generally. It's in the interest of homeowners or prospective homeowners to have the GSEs in solid financial shape and to have very well understood, transparent standards and that their activities and that their capital be very transparent.
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    Chairman BAKER. So you feel that the work we're engaged in is appropriate. We may not have the right answer, but we shouldn't give up yet.

    Mr. MILLER. I think what you're looking for, the objective, is in fact, the appropriate one.

    As I indicated, I have significant, serious questions about the proposal to make the Federal Reserve essentially a regulatory czar.

    I think there are less intrusive, more market-based ways of assuring that capital standard than the provision in H.R. 1409.

    Chairman BAKER. Well, let me point out that OFHEO is the capital czar today and HUD is the product czar. And in the entirety of the application process that the GSEs have made to HUD, HUD has never to date denied one request for new product.

    Now I'm not suggesting that there's anything wrong with that. Perhaps every submission has been perfect. But I do find it over the life of any enterprise a bit irregular.

    If I may, let me jump to Mr. Carnell before I expire on my time.

    The question of subsidy has come about repeatedly. And I recall, Mr. Carnell, I believe you were a member of the Administration when Under Secretary Gensler testified before the committee and made the reckless and unprofessional comment, as it was characterized by many, that the line of credit to the GSEs should be repealed.
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    Concurrent with that, almost to the minute, after the hearing was over, I found that the market volatility was rather dramatic.

    Analysts, apparently, and shareholders, began to express some concerns with their pocketbook about the potential of your administration repealing that line of credit.

    Is my recollection of history correct? And do markets perceive that that line of credit is an essential component of the value of the GSE charter?

    Mr. CARNELL. Your recollection of history is exactly correct, except in one inessential detail, which is that I had left the Administration at that point, even though I fully concurred in what they said.

    And it's worth noting that Mr. Howard, who sat in this seat at the first hearing, called Under Secretary Gensler's testimony irresponsible and unprofessional.

    Now Mr. Gensler said that the Government did not guarantee Fannie Mae and Freddie Mac. What is irresponsible about that?

    I can tell you as a law professor, that's the truth, the Government does not guarantee Fannie Mae and Freddie Mac.

    Chairman BAKER. But when you read the face of the security, it's got it in type big enough I can read it without my glasses—not guaranteed by the full faith and credit.
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    Mr. CARNELL. That's right.

    Chairman BAKER. I don't know how much more clear we can make it.

    So why would the market react that adversely when we talked about repealing something that's not there?

    Mr. CARNELL. Well, I think there is a problem in the disclosures so far, Mr. Chairman, which is that Fannie Mae and Freddie Mac have been allowed to go around and tell people that the Government implicitly backs them.

    Implicitly backs is not a guarantee. That's why Under Secretary Gensler's testimony is not correct. But this comes back to the double-game that I talked about, where Fannie and Freddie say one thing to Members of Congress in this room and elsewhere, and they say something else on Wall Street.

    It's like a sailor who has wives in two ports and they never come together.

    Fannie and Freddie get to say different stories to different people and get away with it year after year. But the fact is that there is no Government guarantee here.

    Essentially, what the capital markets are doing is pricing the political risk of whether the Government would or would not bail Fannie and Freddie out in the future.
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    If they feel that the Government is developing a backbone, then the risk is going to go up.

    Chairman BAKER. I've exhausted my time.

    Mr. Kanjorski.

    Mr. MILLER. Mr. Chairman, could I offer an alternative explanation, I think?

    Chairman BAKER. Sure. Yes, sir.

    Mr. MILLER. And that is as follows. A lot of things can impact upon a company's price or the price of their stock.

    If there's a perception that a movement by this Committee or others in Congress would disrupt the markets in whatever ways beyond the question of this line of credit, that could have a significant adverse effect on the price of Fannie Mae, Freddie Mac stock.

    And that, I suspect, was the concern expressed.

    They have never used that line of credit, I understand. It probably doesn't matter very much. They make it very plain, as you point out, in big type.

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    The people that make markets with Freddie Mac and Fannie Mae are very sophisticated people. They are not likely to have the wool pulled over their eyes about that issue and whether they might be misrepresented.

    Chairman BAKER. No, I'm not alleging that at all. What I'm suggesting to you is, when I asked Fannie and Freddie directly, CEOs, since you don't use it, since you're so well capitalized, since you're so highly profitable, since it wouldn't equal a couple of weeks of your debt issuance, why don't we just get rid of it and clear it up?

    After oxygen is applied, they usually say that that doesn't make sense.

    Mr. Kanjorski.

    Ms. PAIGE. May I also interrupt, or am I going to be impinging on your time, Mr. Chairman?

    I want to address something that was said earlier about HUD.

    Chairman BAKER. If you'll be brief, yes.

    Ms. PAIGE. Very briefly. Thank you. HUD is not known to be one of the best managed agencies in the United States Government. In fact, it's very high-risk and it's been on our high-risk list and it's been the subject of lots of inquiries by Citizens Against Government Waste, as well as other members of HomeEC.

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    And when you mentioned earlier that they've never turned down a particular product request, I just wanted to mention the fact that the most recent thing that they did, that Freddie did, was the Lending Tree dot.com investment that they made in March, which was $2.5 million.

    Admittedly, that's a very small amount of money by their standards. But the question I think that we should be asking, we should be asking HUD, who has not yet ruled on whether that's a permissible investment, is what are they doing investing in any kind of a dot.com startup company in a volatile e-commerce market?

    Now HUD says that they're still waiting for data to make a decision. And I would humbly request that somebody ask HUD to finish up on a rule that they started last year which would start to define what kind of investments Fannie and Freddie are allowed to do that are supposed to be mortgage-related and non-mortgage-related.

    Draw a bright line so that we know where that is as taxpayers.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Paige.

    Mr. Kanjorski.

    Mr. KANJORSKI. Listening to all the witnesses and their various positions, I'm somewhat astounded. I'm not sure whether I'm in the world of Oz.
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    My friends on this side of the aisle are for regulation, more strict regulation, control of product. And my friends on this side of the aisle seem to be reporting something different.

    And then when I look down there and see the different groups you come from—let me start off first, Mr. Edwards.

    From my observation of the present state of the American economy, manufacturing, for all intents and purposes, would be classified as being in recession.

    The agricultural economy of the United States would be classified as being in recession.

    The dot.com economy of the United States would be classified as depression.

    There seems to be two fundamental industries that are still doing quite well, and that's home building and real estate. And perhaps the automobile industry if it still holds up, that are supportive of our present status of the economy.

    Would it be that way if we were to do away with Freddie Mac and Fannie Mae?

    Mr. EDWARDS. Thank you, Mr. Kanjorski.
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    As I said in my statement, we'll put together the home building and the real estate brokerage business into one industry and call it the housing industry.

    The housing industry now is probably your strongest sector of the Nation's economy, and it's remained that way despite the slowdown. Perhaps is that the American public believes that the home is, first of all, shelter, and then a safe investment, or you wouldn't have 68 percent of ownership.

    They—the American public—also believe that it is the right investment to get started in their financial future.

    And so, I think those are some of the factors that have kept the home ownership rate growing. Among others, certainly a big part of that is that we've got a mortgage interest environment which is healthy as far as acquisition because, as those interest rates come down, the present value of the loan amounts go up. And so, people are able to buy a home and obtain mortgage financing.

    Someone mentioned refinancing. Refinancing actually is healthy for the market because it keeps the markets and the neighborhoods stable. It keeps people in homes that might lose them otherwise.

    So I think a lot of these factors, Mr. Kanjorski, have come together. But I truly believe that Americans believe that home ownership is, first of all shelter, then a good investment in their future and their children's future.
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    Mr. KANJORSKI. Thank you.

    Mr. Miller.

    Ms. PAIGE. Mr. Kanjorski, can I add something to that, please? I'm sorry, sir.

    Mr. KANJORSKI. Very quickly, if you want.

    Ms. PAIGE. Thank you. It's just that Mrs. Hooley made a comment earlier today about the modest increase in home ownership and I think that should be re-emphasized, that there's been a 4-percent increase in kind of a long period of time. And there could be other attributable factors to that, including low rates of interest rates and lots of other things.

    Mr. KANJORSKI. Mr. Miller, you've had an opportunity to study this whole financing vehicle of real estate in the country.

    Do you have an opinion as to whether or not it is, one, a very efficient system of delivery from the market place? And two, whether these are well-managed and operated companies as opposed to, say, 15, 20, 25 years ago?

    Mr. MILLER. I have a reasonable degree of confidence that this institutional arrangement is working well. There are things that could be done to improve it. I'm not suggesting it's perfect.
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    I think these firms are managed well, from all that I've seen. And also, they're very competitive.

    I don't see any—I said in my testimony that I'm not one of these people who say, ''if it ain't broke, don't fix it,'' because that's the refuge of people that don't have much to say on their side.

    But I don't see any reason for alarm that would cause precipitous action.

    Mr. KANJORSKI. So you're talking about fixing around the edges, but not fundamentally changing the core of the product or the operations.

    Mr. MILLER. I think you need to make sure that these GSEs do meet standards for risk-based capital and whether you accept what OFHEO is doing here or not, I think you need to see what they're going to do.

    They're at the precipice of doing something rather substantial in the regulatory area. See what they do and then make a decision.

    Mr. ROTHSCHILD. Mr. Kanjorski, can I just make one quick comment?

    Mr. KANJORSKI. I just want to make an observation. I welcome you because we had a roundtable discussion and I don't think FM appeared at that when we had an opportunity for all these different interest groups to talk to each other.
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    I wish you had been part of that interchange because it would have helped us. I guess I want to make an observation with you.

    You do not represent anyone who has conflicting interests with these two organizations in any way. You are coming here strictly out of the interest of national policy and home ownership for minorities.

    You really do not have a financial interest, anybody that you represent in your organization.

    Is that correct?

    Mr. ROTHSCHILD. I think I would only comment that I think it's important for Congress to look at three elements. They've all been discussed. I'll answer that question if I can just get this one point out.

    That, on the one hand, GSEs are not accomplishing the mission they were designed to do with respect to——

    Mr. KANJORSKI. I'm going to stop you there. I listened to you before on that. And I know you represent a lot of the free enterprise sector of the community. I'm glad they're here. I'm glad they're active.

    But where were they when we needed a secondary market?
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    It seems to me all these people show up to cast aspersions on organizations that the Congress created to create a viable market. It's rather successful. Certainly, when I first came to Congress Fannie Mae and Freddie Mac were not nearly as economically sound as they appear to be today.

    And this is not to say—I agree with Mr. Miller. That's not to say that there's nothing we shouldn't be looking at.

    But where were you all when the private sector could have developed the secondary market? Hell, we didn't have to do it in Government. It's just that you didn't step up.

    Now I want to move to Mr. Carnell. I understand your philosophical position on GSEs. But it would be remiss for any of us to sit here and say that there isn't an implicit guarantee that the Federal Government in catastrophic economic circumstances wouldn't have to, for systemic risk, shore up these organizations.

    We would shore up Mr. Rothschild's organizations. There are banks that are just too-large-to-fail.

    Not too many years ago, we shored up Mexico because the catastrophic result of the domino effect would have been that the world economy could not afford a failure to step in.

    So to make this argument that, I don't care whether they print it. It's not supportive. We know that anything that is dealing in trillions of dollars in a depressionary economy is going to have to be shored up, or we're going to have to give up the entire system, that I think we would do anything before we come to that situation.
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    Or do you really believe that the Congress, the American people, don't believe in the concept of too-large-to-fail?

    Mr. CARNELL. I do not believe in the concept of too-big-to-fail. And as I said in my testimony, Mr. Kanjorski, whether or not too-big-to-fail is a reality is a matter of what you, other Members of Congress, and financial regulators do.

    If during good times you say to yourself, there's not a problem, or, in fact, you reaffirm too-big-to-fail, you and others are creating too-big-to-fail in doing that.

    One of my basic points is that there's a circularity with too-big-to-fail. Too-big-to-fail comes from expectations.

    If you stoke too-big-to-fail expectations, you reduce market discipline and you increase the chances of problems, and you also increase the shock to the financial markets if you disappoint them.

    In 1991, in the FDIC Improvement Act of 1991, which this Committee passed and was enacted, Congress made a major step back from the practice of treating banks as too-big-to-fail.

    If you looked back in 1990, you would see that the FDIC was protecting all depositors at banks as small as $500 million.

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    And in fact, a senior official of the OCC, echoing sentiments a little bit like what you said earlier, said to 200 London financial market people in my presence in 1990, that the FDIC's practice meant that you did not have to worry about losing a cent, no matter how much money you had on deposit at a U.S. bank, if the bank had more than $500 million in assets.

    Now go forward 2 years.

    On October 30th, 1992—this is less than 2 years after that statement by the number-three person at the OCC, and just 4 days before the Presidential election. The OCC closed a group of banks in Texas that had almost $9 billion. So that's 18 times the size that was described as being too-big-to-fail.

    And the financial markets took it in stride. The financial markets took it in stride because this Committee and other concerned Members of Congress had gone about changing market expectations.

    So the markets made adjustments. They weren't shocked. And it was possible to deal with things in stride.

    So what I'm saying, Mr. Kanjorski, is that too-big-to-fail expectations are not like hurricanes or earthquakes. They're something that we as human beings, they're something that you and other policymakers create by your decisions about how to act or not act.

    And they're something that financial market participants create by their decisions about risk-taking.
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    Mr. KANJORSKI. So it's your opinion that the Congress should have penalized the Federal Reserve when they went to the rescue of Capital Management.

    Mr. CARNELL. I think the Federal Reserve's action was irresponsible. I think it was and I said so privately at the time.

    As a Treasury official, I was not free to say so publicly at the time.

    Mr. KANJORSKI. How about the Mexican bail-out?

    Mr. CARNELL. That's a tougher issue. Let me emphasize that the U.S. had no legal obligation to go to the aid of the Mexican government.

    The issue is, were we better off tiding Mexico over that time, using an arrangement that, in fact, posed almost no risk to the U.S. Treasury because we got a complete claim on their stream of foreign oil.

    Mr. KANJORSKI. If you're having a hard time making that decision that that was a successful bail-out, then we have a difficult time communicating.

    Now I was not in favor of it at the time and if it had come to the Congress of the United States, it would have failed.

    I think the Administration took probably one of the best acts at that time that significantly saved the world economy.
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    Mr. CARNELL. I'm not criticizing the Mexican bail-out. What I am saying is——

    Mr. KANJORSKI. You were there. Looking with your hindsight, did you make a mistake or didn't you?

    That's a simple answer.

    Mr. CARNELL. There are two parts to it. I think that——

    Mr. KANJORSKI. You are definitely now in a classroom situation. Put yourself back in Treasury. You've got to make a decision one way or the other.

    I mean, don't try to carry water on both sides. Condemn the man you served as president and the Federal Reserve for the acts they did when they bailed out Mexico. Or agree that it was a wise decision.

    I'm going to go you one further, Mr. Carnell. I've served on this Committee long enough to know that in 1989, George H. Bush took the office of the President and in 7 days, he came up here with the RTC bail-out for the S&Ls.

    I thought that was one of the most politically courageous acts anyone had done. And I'm a Democrat. I can say that about a Republican President.
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    And I will tell you about a second great act he did in 1991. He went against his pledge for no new taxes and raised taxes, and I think participated to a large extent in the 8 years of the fantastic economy that we have just gone through.

    Now, I don't find that difficult as a Democrat to pay attention and pay respect to I think two courageous chapters in the profiles in courage. Lost his presidency because of it.

    No question in my mind.

    Mr. CARNELL. I agree that both of those actions by the first President Bush were courageous and right. I think you put very well the case for them.

    Let me emphasize that what the Government was doing in 1989, was not bailing out the thrift institutions themselves, but making sure that the Government could honor its own guarantee to their depositors.

    So it can be true that actions like this can be responsible. It can be true that they can be courageous. But I think we would be very mistaken to say that bail-outs in general are right and heroic and responsible.

    Mr. KANJORSKI. I'm not saying bail-outs in general. I'm saying that if any of us are sitting in this room and we are delusional enough to think that there aren't institutions in this system that are too-large-to-fail, because of the ramifications that would be caused both in the domestic and the international market, I think we're being intellectually dishonest with ourselves.
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    Chairman BAKER. Would the gentleman yield?

    Mr. KANJORSKI. Yes.

    Chairman BAKER. I would just trying to join in, Mr. Kanjorski, to steer it just a little bit in the conversation.

    The purpose of all of this is not to decide what we shall do in the vent of failure. The purpose of this is to determine how we can preclude the conditions for failure.

    And I am not confident, given the enormous amount of information the Committee has reviewed over the many months that we have been back and forth, that we are in a position to be able to say without question of conscience that we know for certain the status of these enterprises.

    That's all. However we get there is of no difference to me. I will take any game plan anyone chooses to put forward.

    But I don't think we have that assurance.

    Mr. KANJORSKI. Mr. Chairman, I agree with you. The only thing I'm disturbed about is that I think the next 3 to 6 months in the American economy is probably the most crucial period of time that we will experience in our lifetime.

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    And, for either the Congress or this Committee or the Administration or the leaders of industry and the economy of this country to further jeopardize this very delicate moment, I think is very dangerous.

    Chairman BAKER. Correct.

    Mr. KANJORSKI. So that's the reason I asked Mr. Miller, if these organizations are not being well run, or if he feels that they are at economic risk, then we do not have any alternative because of how large they are, we may have to bail them out.

    But we are not pressed with that time. For us to be attacking a fundamental pillar that's holding our economy up at this time, for whatever reason, because it doesn't philosophically, politically, or otherwise, appeal to us, I think perhaps it may be a misspent opportunity on our part.

    Chairman BAKER. Well, I would only respond this way.

    It's a very large ship on which all the future of every homeowner and every taxpayer and every economic interest, not only in the United States, but internationally, rely to a great extent.

    There are now 74 foreign central bankers, Alan Greenspans around the world, who hold billions of dollars on deposit at the New York Fed.

    This is of no mere incident, that this is of enormous significance.
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    And whether that ship stays on course, I'm not suggesting that we take a crew down to the basement of the ship and start cutting a hole in the hull.

    What I'm suggesting is there may be a few rusty spots that we need to examine or to go take a look at before we run aground and find ourselves in a circumstance from which we cannot extricate ourselves.

    I am indeed worried about it.

    Mr. KANJORSKI. I think you're looking at the ship as a cruise ship and I'm looking at it as a lifeboat.

    Chairman BAKER. Well, whether it's life or cruise, if it sinks, we all go down.

    Mr. Cox.

    Mr. COX. Thank you, Mr. Chairman, and I thank our witnesses. I think we've had a great discussion.

    I was just remarking privately up here that our witnesses are very aggressive advocates for their respective points of view.

    Chairman BAKER. Welcome to Financial Services.
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    Mr. COX. If I might just put a question to Mr. Edwards because I think your testimony is crystal clear. You certainly don't want to throw out the baby with the bathwater here. You want us to be cautious, and I hope that we will be.

    I want to ask a question on a very discrete subject. I hope it's also a discrete question.

    And that is, SEC registration of publicly traded securities issued by GSEs.

    The GSEs take the view that they essentially conform to existing Federal norms of disclosure. Would the realtors support, oppose or be neutral on making sure that those disclosures were exactly what is required of all other issuers?

    Mr. EDWARDS. Mr. Cox, I think I'd have to have a little bit more information to comment on that. I would be happy to get back to you. But I really don't know that we've considered it or what have you.

    Mr. COX. And actually, that tells me something, that at least that's not at the core of your concerns.

    Mr. EDWARDS. Right. I would like to make one other comment.
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    There's been several questions, and maybe this will help on the issue of home ownership. Ms. Paige and others have made a comment about there's only been a certain increase in the percentage of home ownership in a number of years.

    I would remind the Committee that the two GSEs are not only involved in home ownership. They're very much involved in rental housing.

    I have been involved in rental housing in my city and I have seen the help and—I'll call it the foundation—the support that we've gotten out of the GSEs as far as rental housing.

    That is to me one of the real large problems in this country, is the disappearance of rental housing.

    And so, it's not just home ownership we're talking about. It is the support of the rental housing community which is a lot of the lower income housing that you're talking about.

    This is a very serious issue in this country and I think we can't walk away without remembering that this support of not just home ownership, but good, quality housing.

    Mr. COX. I appreciate that. Mr. Miller, I wonder if I could ask you as the representative on the panel, the only one speaking, in your case, indirectly, for the GSEs, what your view would be on the question that I just put to Mr. Edwards.
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    Would repeal of the exemption from the securities laws be material to your concerns?

    Mr. MILLER. It strikes me, Congressman Cox, that the system today with the exemption is working well, lowers cost. I don't see any abuse of the sort that SEC registration——

    Mr. COX. Do you think that SEC regulation—that is to say, just the registration requirements imposes on new costs, that aren't already being borne by the GSEs in their disclosure?

    Mr. MILLER. Just the process of registration requirements, other regulations.

    Mr. COX. Because it strikes me that if the smallest business in my district has to register its securities, that, surely, somebody with a multi-trillion-dollar portfolio could afford to do it.

    And markets since the 1930s have become accustomed to a certain style and form of disclosure. And I think we're this close anyway.

    I just want to make sure that we're not going further than necessary in granting Government exemptions to people if it doesn't do any good and certainly, there's no investor protection involved.
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    Mr. MILLER. The logical implication is that maybe some of the firms in your district might well be exempt. Rather than not exempting anyone, maybe there should be selective additional exemptions, or the regulations should be less onerous.

    Mr. COX. Since I practiced securities law for a decade, I don't consider the registration requirements to be all that burdensome and unlike other laws and regulations, they don't change very often.

    Furthermore, the investing community is used to seeing this style and format of disclosure.

    And furthermore, I think the GSEs would tell us that they're pretty much there already anyway, that they attempt to do this even though they're exempt.

    So I don't know what we're buying by fighting it.

    Mr. MILLER. And the market-makers there are very sophisticated. I'm not speaking on behalf of the GSEs. Let me just make that clear, in any of my comments today.

    Mr. COX. I'm just going to you because you're as close as I can get on this panel. So I'm going to put that burden on you one more time and ask you, on the subject of encroachment, which has been raised by some of the panelists, you remember that President Reagan issued an executive order that essentially said that the Government should not compete with the private sector if the private sector could do the job.
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    Do you think that same thing should be true for Government-sponsored enterprises?

    Mr. MILLER. No, I think that basic philosophy ought to apply here for reasons that I outline in the attachment, the second attachment.

    I looked at this, and because basically the financial institutions, the other financial institutions have an upward-sloping supply curve for loanable funds, whereas the GSEs supply curve is very elastic, that to take away from the GSEs the same kinds of advantages that are now given to the other financial institutions would result in an inefficient mix of financial institutions, accounting for loanable funds.

    We're in the world of the second best. If we could start all over and clear out all the undergrowth of the Government, and so forth, and streamline everything, you would probably not have any special arrangement for GSEs.

    The problem is, as my mentor, Jim Buchanan, says, where you go from here depends on how you got here.

    And I think we have to work with where we are. I don't see Congress making dramatic changes in the financial institutions and the nexus between Government and the financial institutions.

    And therefore, I don't see good reason to make fundamental changes in the charters—let me put it a different way.
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    I see reason not to.

    Mr. COX. Across the hall, I've spent some time worrying about Internet taxes. In fact, we're going to be dealing with that when the moratorium expires in October, dealing with it, hopefully, before that time.

    And of course, in connection with passing the Internet Tax Freedom Act in the first place, I spent an awful lot of time, several years, talking to the Nation's Governors before winning the endorsement of the National Governors Association and the mayors and the county executives and so on because they are worried about their tax base.

    And I think the realtors actually share that concern. They're worried about making sure that we don't short-change State and local tax bases.

    Do you think that, given the financial success of the GSEs, that they should continue with an exemption from all State and local income taxes?

    Mr. MILLER. Mr. Cox, you know that my position on taxes is that whenever you can eliminate a tax, do it.

    There is a tendency for governments to reach too far and to tax too much. You can make a case for non-differential tax rates or not exempting some from taxes, whereas you do exempt others.

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    But this would not be a high priority for me.

    Mr. COX. Well, I think the Chairman is probably indicating my time is up. But I've got——

    Ms. PAIGE. Congressman Cox, could I respond to that for just one second? Or not?

    Mr. COX. In fact, I won't ask any more questions. And if the Chairman will just permit the panelist to answer the questions.

    Ms. PAIGE. Thank you, Mr. Chairman. I couldn't disagree with Mr. Miller more on the charters and the taxation issue.

    The charters are possibly where the problem resides. They're very vague and the subsequent legislation doesn't do enough to clarify where secondary mortgage market parameters are.

    We are not kind of advocating some wholesale privatization that's going to happen tomorrow. I think that's politically untenable and everyone knows that it's not going to work that way.

    But I think a continuing dialogue lays some groundwork for some future enactment of some reforms that would be helpful to taxpayers without harming homeowners or the economy or the GSEs.
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    And we would hope we would ramp up to an idea where we could discuss privatization. We're not going to be doing it tomorrow.

    And if they are as successful as they say they are, and we all say that they are supremely well managed, they can pay their taxes, and there are other things. They could probably pay their SEC fees as well.

    And it isn't even the fees that they're objecting to. It's just registering. It's having somebody look at their investments to be sure that they're safe and sound. They're objecting to that as well, besides the fees.

    So there are a lot of things that I think that they could be doing. And every time we suggest something, they say, well, we'll have to pass that on to the consumer.

    I'd like to see them maybe look at some other options, like taking less of a profit, since their mission requires them to look at affordable housing. And that's what they're supposed to be doing.

    Chairman BAKER. Thank you.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

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    Just for clarification, I think, if I understand this correctly, and for sort of full disclosure for the Members that are here, I think they is us because Fannie Mae and Freddie Mac are in existence only because Congress created them and they did not choose to not pay taxes somewhere. They did not choose to not file SEC registration.

    Congress chose that.

    Now there is a strong case that could be made that Congress has made mistakes along the way during the last 200-plus years.


    Again, that's a judgment call. We'll let everybody decide.

    To my knowledge, they haven't made many mistakes in the last 7 years on anything that I've voted for.

    But, in any event, I think we need to clarify that.

    Now, I also, and I'm sorry that Mr. Cox has left, but he raises an interesting point which is worth some review because with respect to the registration issue, it may be that the concern is not so much the registration as it is that it brings the Securities and Exchange Commission into the picture as a regulatory entity that they otherwise would not be.

    It's something to think about. Moreso than the cost question.
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    But I have a number of questions that I'd like to go over.

    Mr. Carnell, you talked about the implicit guarantee question. I think this is correct, that we also provide for a perceived implicit guarantee as it relates to FICOs and REVCORPs.

    They're backed by the funds or by the assessments. But the market has always treated them as having an implicit guarantee. And in fact, for legal purposes, many escrows are allowed to hold those, including public escrows, in the same way that they're allowed to hold a Treasury.

    So I don't think that we can say that the GSE debts are unique in that respect, that there have been subsequent times when we have allowed this.

    Mr. CARNELL. Just as an aside, Mr. Bentsen, I would note that FICO and REVCORP were created as sham GSEs. That is, FICO was created as a way to provide money, a little bit of money, to protect thrift depositors without it going on budget.

    And so what they did was they used the GSE model as a precedent for it.

    Mr. BENTSEN. I understand that. But nonetheless, they were created.

    And second of all, and I don't have all criticism for your statement. But second of all, I think we have to be careful when we make a direct comparison between the savings and loan industry prior to FIRREA or FIDICIA and the GSEs today because I think the savings and loan industry was a much different animal. I think the structure was much different. I think the markets were much more different.
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    And while you had funds to protect that, we all know that the taxpayers ended up spending a considerable amount of money in doing that.

    Now I do want to say that you were on point in your discussion of the regulator. And you hit the points exactly right when it comes to the inherent conflict of the Federal Reserve.

    I would add one other point.

    The way I read H.R. 1409 is the Federal Reserve would have veto power over the Treasury in allowing the GSEs to hit the line of credit which raises another conflict at the same time that the Fed may be conducting open market operations using GSE debt, which I think they are in the process of doing or, if not, strongly considering doing.

    But I think you're on target there, that if we were to consider a new regulator, that we would move in that direction.

    And I'm going to run out of time, although I would ask for the Chairman's indulgence because we had this long discussion about the relationship between the GSEs and the bail-out of the peso. And so, I'm going to get there.


    And you can do this for the record, if you will, because the individuals from the GSE really didn't get to this point.
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    The Chairman's bill, in providing for the GSEs to be under the regulatory authority of the Federal Reserve, provides for a number of new regulatory oversight and enforcement mechanisms.

    And what I want to know is where those comport or conform with other financial institutions as per the Bank Holding Company Act or Gramm-Leach-Bliley.

    Chairman BAKER. If the gentleman would yield.

    Mr. BENTSEN. Sure.

    Chairman BAKER. I can maybe help cut that sort.

    We requested the GAO, pursuant to last session, to go through and do an analysis of current bank regulatory authority and GSE authority. And where there was a disparity in the enforcement action given to the regulator, we move to the bank standard for enforcement.

    For example, if the GSE gets to a condition of insolvency, you can't put them into a receivership. You can only move them to a conservatorship.

    The distinction between the two is that in a receivership, stakeholders, creditors, shareholders, can take a haircut. In a conservatorship, they do not.

    So it's a very distinct difference in consequence to markets. Therefore, there's confidence that the GSE's debts will be honored.
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    That's just one. But there were a litany of things.

    So anything that the gentleman sees in the bill that appears to be new regulatory authority, are only those provisions identified in current bank regulatory authority made applicable to the GSEs.

    Thank you.

    Mr. BENTSEN. Well, I appreciate that.

    But I would appreciate for the record if you would——

    Mr. CARNELL. I would be glad to do that, Mr. Bentsen. And if I could just very quickly respond to your three points just for now.

    The first is that the Chairman's bill moves in the direction of making GSE safety and soundness regulation, for example, enforcement authority and prompt corrective action, more comparable to bank enforcement authority.

    But we're not talking about something here, despite the moaning and groaning from the previous panel, we're not talking about regulatory overkill.

    The fact is that OFHEO's authority right now in many respects is much weaker than that of the Federal banking agencies.
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    And the Chairman's bill reduces some of that weakness.

    Second, I would note that in making the GSE line of credit at the Fed contingent on the regulator recommending it, I think that's a good move in the Chairman's bill because it means that the step of the GSE going to the Treasury and borrowing that money has the regulator complicit in it.

    In other words, that increases the political risk to the regulator of the GSE going on the public dole through borrowing from the Treasury.

    I think, institutionally, that's helpful. It puts a little bit more backbone.

    Mr. BENTSEN. But the current law, if I understand it, allows—it's up to the Treasury Secretary to make that determination.

    Mr. CARNELL. Correct.

    Mr. BENTSEN. And so this would be a belts and suspenders effect, that you would have two regulators, one a political appointee and one theoretically not a political appointee.

    Mr. CARNELL. Yes. But I think the concept, as you suffer my testimony, I don't favor making the Fed the GSE regulator.

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    Mr. BENTSEN. Right.

    Mr. CARNELL. But if they were, I think the Chairman's bill is right on this point. And I think that if it stays at OFHEO, it would be right to enact a comparable provision saying that OFHEO needs to recommend it to the Treasury.

    Mr. BENTSEN. With the Chairman's indulgence, let me move on.

    Mr. Rothschild, in your statement, you talk a lot about refinances as a percentage of—I think you were just talking about the year 2000 in those numbers.

    And I would ask you or Mr. Edwards, since he's speaking for the realtors, just in the general market, not just the GSE market, what percentage of mortgages originated in 2000 were refinances versus actual new mortgages?

    Mr. EDWARDS. Mr. Bentsen, I don't know that I have an answer to your question. We can certainly try to find an answer to your question.

    Mr. BENTSEN. If you could find out because I know in various years, depending upon interest rate comparisons, refis have been a large portion of the mortgage.

    Chairman BAKER. Let me add on to your question. I'm not trying to cut you off.

    Mr. BENTSEN. Yes.
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    Chairman BAKER. If whoever is going to prepare the answer to that one, also needs to know how much of it was cash out because a lot of that refi stuff, people took money out and went and bought boats and stuff, just if we have that data.

    Mr. BENTSEN. Right.

    Mr. ROTHSCHILD. Just a clarification. Our data for refis and the home purchase, it was all based on 1999 HMDA and GSE data.

    Mr. BENTSEN. OK. Well, then, for 1999, so we're talking apples and apples.

    And then, Mr. Miler, you actually hit on a point that I thought about, which I thought is very interesting in this last exchange, or one of the prior exchanges.

    I don't disagree with the argument of the subsidy. And I'm not particularly afraid of the subsidy. I think what we're doing here is we're leveraging credit of the United States. And we do that in various instances.

    And there are groups like Ms. Paige's group and the Libertarians and others who think that that's an awful thing that we ought to do, and there are others who believe it's a good idea.

    But we do it in the municipal bond market. We do it all over the place.
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    Nonetheless, you raise the issue of the supply curve for loanable funds. And I haven't read your report, but I'll take a look at it.

    The argument has been made, not today, but made before, that the fear—and it was referenced with the rising amount of debt—the fear that the GSEs have access in effect to cheap money because of the subsidy and the lower borrowing rate that that creates.

    And as such, when an entity has access to more and more cheap money, then they will be chasing cheaper and cheaper credit along the way.

    And I'd like you to comment on that because it seems to me, at least under their initial structure, they are somewhat limited in where they can put their dollars, which is in mortgages in some form or fashion.

    And if you look at where mortgages are written, they are written pretty much from the top of the income scale down and they come down to a certain point to where people basically can't afford to buy a house or don't know that they can afford to buy a house. And there's a small percentage in there of people who voluntarily choose not to own a house or whatever, and there's a small percentage who pay cash.

    But I'm curious whether or not we're being contradictory where we say, on the one hand, they're borrowing too much to make too many loans and on the other hand, they're not making enough loans down the income scale because down the income scale, the credit risk does increase.
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    Chairman BAKER. And to whom is that directed? Which witness is that?

    Mr. BENTSEN. Well, to Mr. Miller and Mr. Rothschild can answer it.

    And that's it.

    Chairman BAKER. I need to get two more Members in before we get called for a vote. And whoever would choose to respond.

    Mr. ROTHSCHILD. In our report, page 11 that we published, you can see the percentage of loans purchased by income group by Fannie and Freddie.

    And what you find is that although, and this is not on the basis of 100 percent of the loans that are out there that they can buy in the conventional conforming market.

    So those who are making between zero and $40,000 a year, they're buying 26 percent of those making between zero and $20,000, 39 percent between $21,000 and $40,000.

    And yet, for the upper income categories, they're buying much more. Between $61,000 and $100,000, they're buying 52 percent of all the loans that are out there.

    You find a similar pattern of their purchases when you look at it by race.
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    For whites and Asians——

    Mr. BENTSEN. Of course, we realize that Ginnie Mae is in that market, in that lower end market as well, where they're created to buy those loans.

    And I guess the point I'm trying to make is that FM Watch and other groups have come back and said that they're issuing too much debt, they're chasing too much credit and creating the systemic risk in the market.

    And I think we do know that even though all of us want to see them go down the income scale, that there is greater risk the more you go down the income scale.

    Mr. ROTHSCHILD. Well, in a lot of those loans, there isn't greater risk. There may be lower cost, lower money to be made on those loans because they're smaller loans.

    So if you spend your time going after larger loans, you're going to make more money for every larger loan you buy versus the smaller loans.

    Mr. BENTSEN. The Chairman is about to step on me here, but I just don't agree with that statement at all. I think that statement is illogical.

    I don't know if anyone else wants to comment on this.

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    Chairman BAKER. For the gentleman's perspective, I believe there's academic study which indicates a review—it's more a question of the amount of downpayment as opposed to income levels.

    And as long as someone has their own equity at risk, the relative risk ratio between lower income and higher income is not statistically significant in my view.

    But that's something that we can explore. Somebody jump in and then I've got to get to Mr. Meeks.

    Mr. MILLER. I will give back the balance of my time.

    Chairman BAKER. Thank you.

    Mr. Meeks.

    Mr. MEEKS. Thank you, Mr. Chairman.

    Real briefly, and I apologize. There's been a lot going on today, for not being here to hear all the testimony. But let me just ask a couple of questions.

    You may know that I represent a district that's predominantly minority homeowners.

    And so, my first question goes out to Mr. Rothschild. Besides having GSEs purchase CRA loans, and I know that they're doing that and pushing that and that's good, despite when I initially got here, we found when we were doing the banking bill that there was a lot of opposition from banks that wanted to do CRA or continue CRA.
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    But I'm interesting in making sure that more minority homeowners exist.

    Let me just ask, what is your organization doing to help increase minority home ownership?

    Mr. ROTHSCHILD. First of all, Congressman Meeks, our organization represents a number of trade associations.

    So, first of all, we don't do that as an organization. But I think if you look at the data, which is what we analyze, that is, the private sector in terms of its origination of loans to low-income, to moderate-income, to minorities, is doing as a percentage of their business, of all of the business that they do, is doing a far better job of doing those kinds of loans, making those kinds of loans, than the GSEs are at purchasing them.

    Mr. MEEKS. Some data that I have seen and that we still see with a lot of the financial institutions, still in the year 2001, minorities with equivalent financial status as their white counterparts, are still being turned down.

    And just indicating, what I'm trying to find out, I believe in your study, Shattered Dreams, you also indicated that the GSEs have not done as much as they should to support minority home ownership, when I know also that, at least in my community, it seems as though a lot of individuals, a lot of minorities are being pushed toward the sub-prime lending market and/or for whatever the reason, advertisements or not feeling comfortable, being pushed toward the sub-primes.
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    And so, I know, therefore, you object to the GSEs moving into, if I understand right, moving into the sub-prime market. But if they are to increase their support of minority home ownership, wouldn't it then be a logical extension to go into the sub-prime market so that you're going after where African-Americans and minorities are going because of what the trend has been thus far?

    And they've been paying much too much money in the sub-prime market now at any rate.

    Mr. ROTHSCHILD. The fact is that HUD looked at this. They took out the sub-prime loans out of the analysis of the data that they analyzed, the HMDA data.

    And they found that, in fact, taking out the sub-prime loans, the GSEs are still not doing as well as the private sector in making the loans to minorities, to African-Americans, to Hispanics and to low-income.

    There are studies done just this past December by HUD that document that.

    This study that was done on the City of Baltimore, and it's fairly thick, shows that really what takes place is that when the GSEs come into a community, they are sort of the bellwether.

    They announce that if they're going to come into the community, the lenders follow and make those loans.
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    So you have to consider the role of the GSEs. They're two institutions. They buy most of the loans. They are the organizations, they're a duopoly that buy the bulk of the loans in the conventional conforming market.

    That's the market they buy in.

    Mr. MEEKS. Is that a good thing?

    Mr. ROTHSCHILD. Is it a good thing that they buy loans?

    Well, of course it's a good thing.

    Mr. MEEKS. And the market follows.

    Mr. ROTHSCHILD. FM Watch supports the fact that the GSEs are important to provide liquidity.

    Go back to the CRA loans. If the GSEs bought more CRA loans, which everyone that I know from the housing community says is a good idea, then the banks would have more money to make more loans.

    That's liquidity. That makes a lot of sense.

    But they're not doing it. They're very, very limited in the amount of CRA loans they want to buy. They don't want to use their subsidy to basically buy the loans that the banks have subsidized in making CRA loans.
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    I think that's a very, very important issue. I'll give you another issue.

    There are different definitions for CRA that define low- and moderate-income. They are lower than they are for the housing goals.

    If the housing goals definition conformed to CRA, it would direct the GSEs to buy far more low-income loans, which would make a big difference in the amount of low-income loans they buy.

    Mr. MEEKS. I want to follow up but I know that we're limited. I know that there's a vote coming up. But I want to just ask Ms. Paige a question also, real quickly, because I know that your organization says that it supports reasonable spending by the Government on behalf of the taxpayer.

    And I've not been too long elected to Congress. But since I've been here, and you tell me whether I'm wrong or right.

    Ms. PAIGE. You're right. You're right. Whatever it is, you're right.

    Mr. MEEKS. It seems to me that GSEs have brought private-sector liquidity to the secondary mortgage market and a sound investment for its investors and industry leading management practices without the need for Congress to appropriate a dime for these organizations, which seems to be based upon what your organization stands for, a good thing.
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    So I was wondering, would your organization support such an innovation by Congress?

    Ms. PAIGE. Thank you for the question, Mr. Meeks. And let me say that, without being too blunt about it, the GSEs are not private.

    The last time I checked, private organizations don't have a $200 billion line of credit with the Treasury. They don't have board members who are appointed by the President. They don't get to borrow at preferred rates. They don't get tax exemption.

    Most banks and financial institutions, mortgage bankers, they pay taxes.

    There's a raft of benefits that the GSEs get that put them in a hybrid situation. They're half and half. They've got a charter that gives them special benefits that are worth a lot of money, whether you agree with Mr. Miller's analysis or the CBO's analysis.

    It's a lot of money. It's billions of dollars.

    As they do that, they put the taxpayers at risk. We're what stands behind them, basically, us taxpayers and the Congress of the United States.

    So it isn't fully private. And so, we would want it to be fully private. And we're not suggesting that they would suddenly go away. What we're saying is that they would become players in the private market along with other players in the private market and there would be increased competition.
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    This is not as if—our suggestion would not suddenly make the GSEs disappear. They would become private organizations. They would compete with other private organizations.

    We don't know what that environment would be like. But I would dare say that it would be more competitive than it is even now because right now they compete with each other and that's it.

    Thank you, Mr. Chairman. I hope I answered your question.

    Chairman BAKER. Mr. Meeks, if I may, let me get Mr. Ford's question on the record. And if you don't have to dash off, I want to engage with you. You make some excellent points and I want to provide a little explanation, if I may.

    Mr. Ford.

    Mr. FORD. Thank you, Chairman. Before I start, I see so many friends in the audience, the distinguished Mayor from Arkansas, from Little Rock, Ms. Shakelsford, my dear friend. And certainly, all of the panelists are wonderful people. But there's really a wonderful person on the panel from Memphis.

    Chairman BAKER. Mr. Ford, since you're being so nice, please pull that mike close so that we can all hear you.

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    Mr. FORD. It's always good to see people from Memphis, Mr. Chairman, the President of the National Association of Realtors, my friend. We're delighted to have you here.

    If I could, Mr. Chairman, I know that a lot of things have been said about minority home ownership.

    FM Watch sounds so sinister, but those members of this organization who are here today to express their opposition to the GSE subsidy, FM Watch sounds a little—I think the people who make up the organization are good people. I disagree with them. I think you're wrong on this issue. But I hate to refer to you as FM Watch. But for lack of a better term. There's been a lot of talk about how minorities perceive, or blacks or Hispanics, perceive and there's been a lot of talk here about it.

    I do hope that this subcommittee at some point will take up an issue that appeared on the front page of the New York Times over the 4th of July holiday, squeezing out some other news about a particular congressman here in the House that dealt with how Nissan might be charging higher finance rates to African American car buyers.

    I hope it's an issue that the oversight investigations arm of our Committee will take up at some point.

    In relation to that, I know that the National Black Caucus of State Legislators, as well as the chairlady of the Congressional Black Caucus, both issued statements regarding this hearing and the impact that the GSEs have had on minority home ownership rates over the past years.
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    And if I could submit them to the record I would appreciate it, Mr. Chairman.

    Chairman BAKER. Without objection.

    Mr. FORD. I guess my question, or my thoughts, I hope home ownership rates increase for everybody, not just black folks. I happen to be African-American, but I think it's a good thing when people own homes.

    And as much as this debate may create a greater appetite for those in the financial services industry to provide opportunities for home ownership, it's a good thing.

    Now for both sides to dual back and forth about who is doing more in the low-income and middle-income housing markets is a good thing because you both could be doing a lot better.

    But to suggest that the GSEs have not provided enhanced opportunities for particularly black home ownership and home ownership in areas that have been overlooked by this market, I think is a little misleading.

    I understand what my friend, Mr. Rothschild, who comes from a great organization himself that he's a part of, but I think it's important to recognize that Fannie Mae, as well as Freddie Mac, and I know the distinguished professor made some points with my good friend, Mr. Bentsen, who is far smarter than me talking about all these financial terms and all.
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    But I think his larger point is that I think it's hard to measure this in a zero-sum game, or hard to analyze or assess this from a zero-sum approach.

    My great Chairman of this Committee, who understands these issues as well as anyone, whom I also disagree with, I think would also have to agree that, in large part, the GSEs have performed some good things for the economy and made possible home ownership opportunities for a lot of people who had been left out of the market and shut out of some of these opportunities.

    It's important to note that the realtors, the homebuilders and a whole array of organizations who sometimes agree, sometimes don't agree, all agree that the GSEs have indeed provided a valuable part and an important part of home ownership growth across this Nation.

    I guess my question would be directed to the professor and to Mr. Rothschild in particular.

    FY Watch uses HUD studies to compare Fannie Mae to the primary mortgage market.

    And forgive me for reading this. I'm not smart enough to understand this without being able to read this, Mr. Rothschild, so just bear with me:

    ''But there are serious issues with respect to HUD's methodology, including questions about the appropriate use of HMDA data, the importance of missing race data, and the treatment of sub-prime and manufactured housing lending.
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    ''The correct comparisons show that probably over time, Fannie Mae has led or met the market in lending to low- and moderate-income households and to minorities.''

    Perhaps you can respond to that or correct me or correct the record as it relates to that issue. And I would love to open it up to the professor as well, if he would be so kind.

    Mr. CARNELL. And since you mentioned FM Watch, let me just mention that there's somebody here representing FM Watch, and that's not me.

    I have no ties to them.

    Mr. FORD. They're not a bad group of folks to be associated with, but I appreciate your correcting the record.

    Chairman BAKER. If you can withhold to say a couple of minutes, because I want to make sure that we wrap this up before the next vote occurs.

    Mr. ROTHSCHILD. Sure. I would like to give my colleague here, who has been dying to make a comment, and it's a perfect segue because he did all the data work and can talk about the HMDA data.

    Chairman BAKER. And please identify yourself for the record, sir.
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    Mr. TORNQUIST. My name is David Tornquist. I'm also a principal at Podesta Mattoon. I worked on the FM Watch study.

    The criticism that you raise about the HMDA data has, of course, been raised by Fannie and Freddie in response to every study that has come out that criticizes their performance in the market.

    HUD has looked at the criticisms that Fannie and Freddie have made of the HMDA data and they have issued a report back, I think it was 2 years ago, where they have said that Fannie and Freddie exaggerate the problems with the HMDA data.

    And I would point out that they say that the HMDA data is acceptable to use to make assessments of the market shares of the GSEs' activities in the mortgage market, as well as the fact that HMDA is what HUD uses to enforce the affordable housing goals.

    But also, I would like to point out that we did not just simply rely on the HMDA data. We also relied on the GSEs' own data. From the GSEs' own data, we got the same results that we got from the HMDA data.

    So there shouldn't be a question of the accuracy of the numbers. You can argue about what you want to do about the numbers, but the numbers still show that Fannie and Freddie buy fewer loans from low-income people than from wealthier-income people and fewer loans from minority borrowers than they do from white borrowers.

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    Chairman BAKER. Anyone on the other side want to respond, or defense the data?

    Mr. CARNELL. I would just note that the general point that's being made there about Fannie and Freddie doing proportionately less is consistent with the Federal Reserve's study by Canter & Passmore. It's consistent with the 1996 Treasury study, as well as with the HUD report.

    One of the issues here is how much of the credit risk is being borne by Fannie and Freddie, as opposed to how much is borne by banks and thrifts.

    And the conclusion of all of these three studies that I mentioned is that banks and thrifts were doing more to extend home ownership in the groups we're talking about here than Fannie and Freddie were.

    And I want to note that that's all the more remarkable because Fannie and Freddie don't pay for their Government benefits, whereas banks do.

    The net subsidy to Fannie and Freddie is significantly greater than the net subsidy to banks, if indeed there is a net subsidy to banks.

    Mr. FORD. Mr. Chairman, I know that Mr. Miller addressed some of that in his remarks as well.

    If the president would speak.
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    Chairman BAKER. We'll give a couple of minutes to both Mr. Edwards and Mr. Miller.

    Mr. Edwards.

    Mr. EDWARDS. Well, I think I'd like to comment back on what I mentioned a while ago. We continue focusing on just home ownership and buying loans and not buying loans and home ownership.

    I've got to re-emphasize that Fannie Mae and Freddie Mac are also involved in rental housing. And that housing supplies housing for a lot of people that are not buying a home or are never going to buy a home.

    Chairman BAKER. Do you know what the percentage of their business is represented by what?

    Mr. EDWARDS. I do not know the percentage, but I will get it for you.

    I do know in our market place, Mr. Chairman, that they have been very successful and a very big part of assisting us in rental housing renovation and what have you.

    And so, I will get those numbers for you. But I think it's important for this group to know that we're not talking about just home ownership. We're talking about where people live in total housing.
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    Mr. ROTHSCHILD. And it's a very small percentage of their overall business, Mr. Chairman. And when they do get into multi-family type of housing, it's usually at the upper end rather than at the lower end.

    Chairman BAKER. Mr. Miller.

    Mr. MILLER. Let me say that, I won't take time now, but I might want to respond if you would allow, Mr. Chairman, in writing to the question of this vertical lending practice.

    Chairman BAKER. Absolutely.

    Mr. MILLER. Also, I want to take issue with Professor Carnell on the issue of to what extent the financial institutions, other financial institutions receive a similar benefit as bestowed upon the GSEs.

    Chairman BAKER. Without question.

    Mr. FORD. Would you summarize—I just think it's important, Mr. Chairman, that he be given one minute because that was at least part of your testimony that I had the opportunity to read.

    You touched on that a little bit. And since I relish the opportunity to agree with you on something, Mr. Miller, I'd appreciate it if you would just give us a little, maybe a minute summary of what it is that you talked about in your remarks.
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    Mr. MILLER. It's worth noting our agreement, isn't it, Mr. Ford?

    Mr. FORD. Absolutely.


    Mr. MILLER. In my judgment, while the other financial institutions do pay fees for some insurance, they have other benefits bestowed on them.

    If you will look in the second attachment to my testimony, there will be identification of some of those. I'd be glad to respond to you in writing about them.

    But there are similar benefits that are received by the other financial institutions. And it goes to the point that I think you raised a while ago that I was going to respond to when I conceded back my time. Dr. Pearce and I believe that there is a similar benefit at each level of loanable funds that goes to the other financial institutions. They have an upward sloping supply curve, the GSEs have essentially a horizontal supply curve.

    And for that reason, if you took away the so-called benefit from the GSEs, you would essentially have the financial institutions granting too many loans and the GSEs too few, and you would have an inefficient outcome in that case.

    There is something that Mr. Bentsen, raised, and the argument that because of the support of the mortgage market, too much money, too many loanable funds are going into the mortgage market.
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    That is a very valid argument.

    But I don't take issue with that in my analysis. It is a policy determination of the Congress whether to promote home ownership or not promote home ownership.

    Chairman BAKER. Thank you, Mr. Miller.

    Mr. FORD. Mr. Chairman, I think this is such a wonderful thing, regardless of what happens with the Committee. I do have my opinion on this.

    But for poor people and low-income people and moderate-income people to force the attention of you incredible minds on this issue and to have the GSEs engage, and FM Watch engage.

    When you pay attention to people in any market, good things can happen.

    So on behalf of all the poor people in my district, I say, thank you, Mr. Chairman, and I thank those of you who are here because, in the end, those who want to own homes and who are willing to make the commitment, will indeed have that opportunity.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Ford. I just want to respond to the gentleman's observation, and that of Mr. Meeks as well.
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    I have concerns about the affordability for homes for working people. And I don't believe that any sector of the current financial system is doing enough.

    On average, when you look at the portfolio of Fannie, Freddie, and a commercial bank, Fannie and Freddie will be somewhere below 5 percent of their portfolio fits the criteria of concerns you're looking at.

    A similar analysis using the same standards through a commercial bank portfolio will be roughly 13 percent.

    I don't think the argument today should be they're doing bad things, we're doing good things, regardless of the team. I think they both need to be doing better.

    Let's take an example.

    I'm a former realtor. Let's assume that a person wants to buy a $60,000 house.

    To have a conforming loan means you've got to have a 20-percent downpayment, unless you want to have private mortgage insurance. A $60,000 house, you've got to have $12,000 cash for a $48,000 conforming loan balance.

    Now I haven't in my real estate experience—you've got to add on 3 percent closing costs on average. The lawyers have got to get their cut.
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    So you're up to $15,000.

    How many working families do you know who are buying a $60,000 house are going to put 15 grand into it? Well, they don't. They have to have special programs.

    97 percent loan-to-value is a customary kind of program that Fannie has. It's a great program. They even have interest rate buy-downs. You also have downpayment help programs.

    If you live there long enough, you get credit each year for having lived there. You've got to go through a home ownership school.

    Those are wonderful programs.

    But Fannie and Freddie don't originate the loans. They buy the loans.

    You go to your hometown banker. He fills out the mortgage application. He services it, takes your credit, all that, and then he cranks it into this mystical box that Fannie and Freddie have called an underwriting system.

    All that means is you put the application in and if you don't come back looking right, you don't get approved. If you happen to have a septic tank on the property line, that's a non-conforming loan because it doesn't fit the secondary market criteria.

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    So there is a cookie cutter that stamps your loan. And if it fits, you get access to credit. If you don't, you're out.

    So a lot of the independent community bankers who are portfolio lenders, they extend the credit because they know you. And they hold it 15, 20 years, and they manage the entire risk of that mortgage inside their bank, are relatively few.

    On the other hand, when you go to Freddie Mac's own information sheet, which I found to be quite troubling, and I mentioned to the gentleman earlier in the day I wanted to get the response from Freddie, which they indicated it needed to be seasoned.

    It would take 12 pounds of cayenne pepper to get this in good shape.


    But I'm going to be looking at that response very carefully and I invite both gentlemen to sit down with me in a non-biased discussion of what these folks are really doing.

    Let me tell you, if you get close to five, you're going to know you had something.

    Now, in looking at this data, in describing the people I was just talking about, the ones you and I both think ought to get a better shake out of all of this, the loans according to their loan-to-value ratio range that are above 95 percent in loan-to-value, so that individuals putting 5 percent or less down, 3 percent closing close, that's somewhere manageable for a $65,000, $70,000 house.
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    Two percent of the portfolio. Two percent.

    Now where is the rest of it going? Folks are getting loans below 70 percent of LTV. Or let's go to 80. 80 and down. That's the folks putting up the $12,000 on the $60,000 house and, frankly, that's not where it's happening. It's in the big-ticket houses.

    You could come to Baton Rouge today, buy a $342,000 house, make that downpayment and have a $275,000 mortgage. That's a mortgage that Fannie and Freddie can buy. That's a conforming loan under the current rules.

    73 percent of the portfolio, according to the Freddie Mac information statement, not CBO, not Treasury, not any irresponsible party, of their portfolio is made up in those loans.

    That's my problem, guys.

    We are paying a lot of money in a subsidy to provide a housing opportunity for low-income individuals and it ain't working.

    Now on top of that, I'm not convinced that the safety and soundness questions are properly supervised. I'm willing to take anybody's deal on any front. If we can get the low-income portfolio percentages up to ten percent, sign me on. You all figure out what you want, I'm with you.

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    At the same time, we can figure out that the safety and soundness is there, so we have a secondary mortgage market security act, the worst thing in the world, for your interest, my interest, taxpayer interest, is to make the presumption that they are operating in a safe and sound fashion, don't do the due-diligence, and wake up one morning in a high-interest rate environment when they can't find a counter-party to hedge their risk, and we're all in the tank.

    That's what it's about.

    Now I appreciate you gentlemen staying for that explanation, because I've had frustration in trying to get folks to understand this is not all that I think it should be. And it's a very expensive delivery mechanism to provide a limited amount of benefit to the targeted community.

    And I don't like it. I just knocked over my ice.

    Mr. MEEKS. Let me——

    Chairman BAKER. Yes, sir.

    Mr. MEEKS. I haven't studied the report, but I don't know how much of that is bumped up by a city like New York City or Chicago or San Francisco.

    Chairman BAKER. I think we ought to find out.

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    Mr. MEEKS. Where you can't buy a $60,000 house.

    Chairman BAKER. Right.

    Mr. MEEKS. And if you're going to buy a house generally in New York, even poor people, it has to be $200,000, $250,000.

    Many times, it's a two-family home and so, therefore, they try to do what they have to do with the income from the two-family home, but that will bump up that price.

    Chairman BAKER. I'm saying to the gentleman, let's find out.

    Mr. MEEKS. In New York, that's what we're looking at doing.

    Chairman BAKER. I'm saying, you may be right, I may be wrong, the old song.

    I may be crazy, that's the next line.

    But I think we owe it to ourselves to sit down, find some folks—if we don't trust HUD and we don't trust CBO, you tell me where we can find somebody we can talk to who's got real numbers and find out.

    We owe it to ourselves to determine that.

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    Mr. Ford.

    Mr. FORD. I couldn't agree with you more, Chairman. But one probably objective way, if we can use that term, and we've used it somewhat loosely here, is if we see home ownership rates increasing, isn't that somewhat of an objective indicator that maybe some of these efforts on behalf of the GSEs, as well as those in the FM Watch and all of the competitors of the GSEs, isn't it some indicator that perhaps the system is working?

    I do think that Mr. Meeks' point is a valid one when you look at the price of the housing market in Washington.

    Chairman BAKER. I won't dispute the gentleman. And I'm not saying that they are without merit or that they don't provide a service.

    What I'm suggesting is that the service we get for what we pay may be not in balance, and that the percentages of resources that flow through to low-income families are not what they should be.

    And I'll say it on the private side as well. I don't think either team is getting where they need to be in light of what we are saying as a congressional chartering operation, this is what you're in business to do.

    Are you in business to make 22 percent rate of return on equity, one of the highest rates of return—always in the top 20 of the Fortune 500 and now the third and sixth largest assets corporations in the world.
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    I don't know what compensations look like over there. I'm sure they're probably all right.

    But the point is that there may be a way to squeeze money out of that operation toward the intended purpose, as opposed to saying, we don't need to change anything. This thing's great.

    Mr. FORD. But if they weren't making money, we'd probably hold hearings to bring them to task on that.

    I hear you. I just think that at some point, that home ownership rates and whether they're going up or down has to be considered or weighed in a far heavier way than perhaps some of the things that——

    Chairman BAKER. And the gentleman makes a great point. If this was 1979, we'd be having hearings because Fannie's insolvent.

    It's happened. They were insolvent for 5 years.

    So it's not something that can't happen. All we need to do is two things. Make sure we understand the risk, have a regulator we can blame so Congress isn't at fault, and encourage them to do the right thing by low-income individuals, and I go away.

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    But right now, we've got the worst of both worlds. They make a bunch of money. They don't help low-income folks. And we can't say for sure that it's not our responsibility.

    I don't see how any Member of Congress could just take that pill.

    Mr. FORD. Greg Meeks and I will sign on right away to the Richard Baker Immunity Act and GSE Failure right away to make sure that you're not responsible.

    Chairman BAKER. Let me tell you, I'm going to sleep better tonight just because of that.


    I want to cover one more thing before we call this thing to an end.

    Mr. Miller, let's come at this horse from a different end. I'm going to suggest that they're well-managed, that they're highly profitable, no potential of risk, a model of business excellence that ought to be held up to the world, envied by all, showing the path to home ownership with floodlights on every corner.

    It is an extraordinary model of business perfection in which I am in awe.

    I would suggest that, however, there might be one group of four or five people—let's just say the homebuilders and the realtors get together, and they want to make application for a GSE charter.
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    Knowing that you are a Reagan Republican who believes fiercely in competition, what would be wrong with that?

    Mr. MILLER. I would have no objection to that.

    Chairman BAKER. Wonderful.

    Mr. MILLER. But let me just say this. The problem that you have to address is the one that we talked about earlier briefly.

    And that is, what signals you're giving to the market. To the extent that the market might interpret action by this Committee, whether it is to propose, for example, withdrawing the line of credit, which they don't use, anyway, or some other initiative as taking Draconian action with respect to the GSEs, that would harm markets, harm their ability to carry out their mission of increasing liquidity in the mortgage markets.

    To the extent that the markets might view such an action that you just described as being the precursor of Draconian measures, that would harm markets and so, that would need to be avoided.

    But in the abstract, as a thought experiment, I don't have any problems with that.

    Chairman BAKER. Well, while I'm thinking about it, we do it all on the same terms and conditions, no special privilege. Whatever capital adequacy requirements, whatever regulatory oversight that appears to be so capable and efficient that we currently now have would be applied to the new applicants.
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    We could have Treasury review it, have the Fed review it, have everybody review it. But at the end of the day, having more competitive housing GSEs would drive the intended subsidy to the targeted groups and perhaps result in a more efficient and less costly and less risk exposure to the taxpayer.

    And I want to explore that.

    Mr. MILLER. That's where we would disagree. I do not believe that numbers are a necessary condition for competitive outcomes.

    My view based on observations, some testing, is that these GSEs are quite competitive. There are 12 other home loan banks around engaged in similar kinds of activities. There are private entrepreneurs engaged in similar kinds of activities.

    I don't think the addition of, as you characterize, another GSE or two GSEs or three GSEs, would change the behavior of the market very much.

    Chairman BAKER. Well, let's look at it this way. If we only had two banks instead of 8500, somebody would call that a concentration risk.

    If you had 12 GSEs instead of two, some folks might say that that might diminish risk. We wouldn't be creating new mortgage product because, as we all know, we have 70 percent home ownership only because of Fannie and Freddie. That can't possibly be improved on.

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    So what it might mean is that if a GSE offered a lower rate, there would be a little refinancing going on.

    But let me ask—and I do have regard for your intellect on this matter. And any member of the panel who would choose to respond, or anybody else out there who wants to speak——

    Mr. MILLER. Could I just clarify again, though?

    I think the question of the signal you send to markets would be important. We're going to set that aside.

    I don't have any reservation about your doing this as a thought experiment. But I would just caution—in my judgment, you would not change the behavior of the market. You would not, in the model that the CBO adopted and you implicitly seemed to be affirming, get more of this, ''subsidy'' passed along to consumers.

    As you know, I have a very different perspective of how all of that works.

    I don't think there would be improvements in the performance of that industry if you were to add another GSE.

    Chairman BAKER. I'd just come at this very simply. If I'm in the suit-making business and I'm the only one in town and everybody's required to wear a suit, I figure I can charge what I want.
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    If some yahoo moves in down the street and makes a good-looking suit for about $20 less, I might have to start looking at my prices.

    I may be wrong. But I'd like to request participants' recommendations, analysis of the concept. There are some academic papers of history out there on the subject.

    I just want to thank everybody for their long-standing tolerance. No one would have expected that you would have been here, including myself, at this hour of the day on this subject.

    I do appreciate very much your contribution and the two Members—yes, Mr. Meeks.

    Mr. MEEKS. Mr. Chairman, Mr. Ford and I were just talking. We thought it would maybe a good idea for the CBO to do a study where you maybe take out the five largest markets and the five smallest markets and see then where we come with the median income, with reference to the cost of housing that Fannie Mae and Freddie Mac had.

    Chairman BAKER. I don't have any problem with the gentleman's suggestion in getting a study. I suggest, based on reactions to the current study, we may want to get somebody else other than CBO or—and I'm serious.

    Let's try to get folks that at the end of the day, there's not going to be people looking over their shoulder saying, this one doesn't make sense.
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    We'll talk. Let's try to come up with a way of putting this together. I didn't think Mr. Kanjorski's idea of a roundtable last summer was going to be that productive and I was wrong. It turned out to be real good.

    This might be something where we might want to do a roundtable kind of thing later in the fall.

    I think we owe ourselves an honest discussion about the benefits that accrue and where they might be going sideways. And if I'm wrong, I'll say so. I've been wrong before. I've got H.R. 1409.

    I know I'm wrong.


    I have two statements that I would like to introduce for the record. One is by Chairman Mike Oxley and the other is a statement by the Council of Federal Home Loan Banks regarding the subject matter of today's hearing.

    Unless any Member has further comment—I've been reminded to announce that we will have, much to the dismay of many, another hearing on this matter later in the year, perhaps centered around the competitiveness concept, depending on the interim studies that may be engaged in.

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    But thank you for your—oh, yes. And we are very much interested in the Administration's position, once formulated, on the whole matter.

    Hearing adjourned.

    [Whereupon, at 5:37 p.m., the hearing was adjourned.]