SPEAKERS CONTENTS INSERTS
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THE TREASURY DEPARTMENT'S
VIEWS ON THE REGULATION OF
GOVERNMENT SPONSORED ENTERPRISES
Wednesday, September 10, 2003
U.S. House of Representatives,
Committee on Financial Services,
The committee met, pursuant to call, at 10:06 a.m., in Room 2128, Rayburn House Office Building, Hon. Michael G. Oxley [chairman of the committee] presiding.
Present: Representatives Oxley, Leach, Baker, Bachus, Castle, Royce, Lucas, Ney, Kelly, Paul, Gillmor, Manzullo, Ose, Biggert, Toomey, Shays, Shadegg, Miller, Hart, Capito, Tiberi, Kennedy, Feeney, Hensarling, Garrett, Murphy, Brown-Waite, Barrett, Harris, Renzi, Frank, Kanjorski, Waters, Sanders, Maloney, Gutierrez, Velázquez, Watt, Hooley, Carson, Sherman, Meeks, Lee, Inslee, Moore, Gonzalez, Ford, Hinojosa, Lucas, Crowley, Israel, Ross, McCarthy, Baca, Matheson, Miller, and Scott.
The CHAIRMAN. The committee will come to order.
The committee is meeting today to hear from the Secretary of Treasury and the Secretary of Housing and Urban Development regarding their views on the regulation of government sponsored enterprises. Pursuant to rule 3(f)(2) of the rules of the Committee on Financial Services for the 108th Congress, the Chair announces he will limit recognition for opening statements to the Chair and ranking minority member of the full committee and the Chair and ranking minority member of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, and the Subcommittee on Housing and Community Opportunity, or their respective designees, for a period not to exceed 22 minutes, evenly divided between the majority and the minority.
Page 2 PREV PAGE TOP OF DOC Prepared statements of all members will be included in the record, and the Chair now recognizes himself for an opening statement.
I want to first welcome Secretary Snow and Secretary Martinez back to the Financial Services Committee this morning to discuss the regulation of the housing government sponsored enterprises, or GSEs, and thank you both for joining us today. It is my understanding the Treasury Department and the Department of Housing and Urban Development have been working closely together with the President to develop a proposal to reform GSE regulation. I am looking forward to hearing your insights and recommendations.
The U.S. Housing market has been the engine of growth for the domestic economy over the past several quarters. Despite a slowdown in nearly every economic sector, the housing market has remained vibrant. Now that an economic recovery seems to be on the horizon, it is important that we act in a reasonable manner to improve the regulation of the GSEs while at the same time ensuring that we do not have an adverse impact on housing or the equity markets.
Ultimately, it is the U.S. Taxpayers and homeowners we must keep in mind as we seek to improve the current state of regulation. I hope to work in a bipartisan manner to ensure that any action this committee undertakes has broad support as well as input for the Administration.
The housing GSEs were established to provide liquidity to the housing market and to facilitate access to affordable homes. These entities have been extremely successful in this role and have enabled millions of Americans to achieve homeownership. Their operations have been the model for housing finance around the world.
However, the GSEs have developed over the years into much more sophisticated entities than originally envisioned. They have become highly complex financial institutions with obligations in the trillions of dollars. As such, it is important that the GSEs have a robust and sophisticated regulator to ensure that they continue to operate in a safe and sound manner.
Page 3 PREV PAGE TOP OF DOC A strong regulator will send a signal to the markets that these entities have solid management practices. Confidence will be restored in the GSEs, and they will be able to get back to their important work without the distractions that have been plaguing them over the past several months.
This is not to say that this committee will not continue to actively oversee their operations. If there is a change in the regulatory structure of the GSEs, this committee will have to closely monitor the development and actions of the regulator.
In my opinion, the current regulators do not have the tools or the mandate to adequately regulate these enterprises. We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight. These problems only came to light when the company announced them on their own accord. It is encouraging to know that the boards of these companies are active and engaged, seeking to operate in the best interest of their shareholders. However, these irregularities which have been going on for several years should have been detected earlier by the regulator.
I would like to thank subcommittee Chairman Baker for his hard work in reviewing the GSEs and highlighting for the committee the need for increased regulatory oversight of these entities. He has demonstrated true leadership on this important subject matter. As we move forward, I expect to draw on his expertise in this area.
Secretary Snow and Secretary Martinez, I do indeed look forward to your testimony and welcome you back.
And I now recognize the ranking member, the gentleman from Massachusetts, Mr. Frank.
[The prepared statement of Hon. Michael G. Oxley can be found on page 50 in the appendix.]
Mr. FRANK. Thank you, Mr. Chairman.
Page 4 PREV PAGE TOP OF DOC I appreciate hearing from the two Cabinet secretaries, but I would say at the outset that before we move on any legislation, I would hope we would have some additional hearings. And, in particular, I think it is important that the variety of groups in our country who care about housing be invited, because that is my major focus here, as it has been during my service on this committee.
I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury.
I must say we have an interesting example of self-fulfilling prophecy. Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation. And as I said, it is a self-fulfilling prophecy by some people.
So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickelnor anybody else in the Federal Government. And if investors take some comfort and want to lend them a little money and less interest rates, because they like this set of affiliations, good, because housing will benefit. But there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own.
Now, we have got a system that I think has worked very well to help housing. The high cost of housing is one of the great social bombs of this country. I would rank it second to the inadequacy of our health delivery system as a problem that afflicts many, many Americans. We have gotten recent reports about the difficulty here.
Page 5 PREV PAGE TOP OF DOC Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing, and that is what I am concerned about here. I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals. I worry frankly that there is a tension here.
The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn't bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.
I want Fannie Mae and Freddie Mac to continue as government sponsored enterprises with some beneficial arrangement with the Federal Government in return for which we get both the general lowering of housing costs and some specific attention to low-income housing. In particular, I am concerned right now that there has beenand it has been raised by Fannie Mae, it has been raised by one of the rating agencies that have been critical of the Federal Home Loan Bankmanufactured housing.
Manufactured housing is a very important housing resource for low- and moderate-income people. You talk about increasing homeownership among low- and moderate-income people, and disproportionately, if you look at the increases in homeownership, it has come with their ability to get manufactured housing; and I do not want to see Fannie and Freddie pushed in the direction of being tougher on manufactured housing. And many of us will be in touch with Secretary Martinez to see how we can improve this.
Page 6 PREV PAGE TOP OF DOC I have talked to my colleagues in the Congressional Black Caucus, and the Blue Dogs. This is a very important and, I think, somewhat underrated form of housing. I think we now see pressure on it that is generated in part by exaggerated fears of a financial crisis.
So I am prepared to look at possibilities here, but in particularand this is the major point I want to make; I saw this in the letter from the homebuildersI do not want to see any lessening of our commitment to getting low-income housing.
And here is my concern: If you move the regulator to Treasury and you leave HUD with the mission, I am not sure that it isn't ''mission impossible,'' or at least implausible. What is HUD going to do, yell at them? I mean, if all the regulatory authority and all the clout is over in Treasury, what is left in HUD? And I noticed that the homebuilders raised that.
So my threshold question is, if you move this regulator to Treasury, if you bifurcate in terms of the Cabinet departments the responsibility for the low-income housing mission, including manufactured housingvery important to me, as I saidand other forms of housing, if you bifurcate that, what real strength is there left behind the mission if most of the regulation and most of the teethI guess if you put all the teeth from Treasury, having HUD gum them into doing more low-income housing doesn't strike me as the ideal situation.
And that is why I say, Mr. Chairman, in closing, that as we proceed on this, I would hope we would have a day when groups, a range of groups that are concerned with housing, could specifically address that. Thank you.
The CHAIRMAN. I think the gentleman makes a good point, and we certainly will address that.
The gentleman from Louisiana, the chairman of the Capital Markets, Insurance and GSEs Subcommittee.
Mr. BAKER. Thank you, Mr. Chairman. I want to express my appreciation to you for your continuing leadership on this most difficult issue. Without your commitment, I am fairly confident we would not be in a hearing room today to discuss potential regulatory reform. So my deep appreciation to you for this.
Page 7 PREV PAGE TOP OF DOC To Secretary Martinez and Secretary Snow, your willingness to participate here today is very warmly received. And let me just make a personal observation. Having worked with various folks over time, I have not enjoyed the professional leadership and responsiveness to what is a very difficult and controversial issue with more capability than you two gentlemen have exhibited.
There was a prior occasion, Under Secretary Gensler, during the Clinton administration, testified and took a very brave stand on issues that led unfortunately to significant market disruption the following day. It is my opinion that given the way in which you have come at this issue, working now for many months to come to the best study positions that you could offer, that much of what you have in the testimony today reflects prior legislative approaches. Much of what is in 2575 is addressed in the testimony, and I just want to publicly commend both of you as public servants for the demonstrated leadership you have exhibited.
I want to briefly and very briefly just characterize why we are here in light of the ranking member's comments as to the necessity for this hearing today. Because many members would not want to sit down and read the history of Fannie or Freddie as light reading one evening, it was first created, Fannie, by the FHA Administrator back in 1938, but only authorized at that time to acquire FHA-insured mortgage loans. It was years later they were then expanded to acquire VA-insured mortgage loans.
It wasn't until 1970, 1970, that Freddie Mac was created and that Fannie and Freddie were both given the ability to acquire conventional mortgages before they were really on the road to the big time.
There is one other additional historic period important to reflect on because of the viewwhat are we worried aboutthere is no problem, nothing bad can happen. It goes to the period when David Maxwell assumed the role as CEO of Fannie Mae in 1981. It is just instructive.
Page 8 PREV PAGE TOP OF DOC On that day, Fannie was losing a million dollars a day. They had $56 billion of home mortgages that were under water. Now, it wasn't of their own making. There were national economic circumstances no one could have predicted, but the fact is, they were in trouble. Had it not been for creative government accounting and the leadership of David Maxwell, Fannie Mae might not be with us today.
More recent history has given us another unexpected and unfortunate lesson. If I had to construct a list of the potential concerns, managerial risk at Freddie Mac would have probably been 99 on a list of 100. Needless to say, we were all shocked to see the disclosure of these events of corporate governance mismanagement. These institutions had always been held up as the model for others to emulate, and appropriately so.
The point to be made about these two brief scenarios of history is that the GSEs are just corporations. It is difficult to believe they are just like every other American corporation, but they are shareholder owned, good old American corporations, built in pursuit of profit, subject to the same earnings pressures as any other corporation. They are not infallible, although they have enjoyed acknowledged success.
Given the environment and the concerns of the committee and this Congress about the reform of corporate governance, how appropriate is it for us in this environment to reflect upon these enterprises and determine how we can enhance safety and soundness? In recognizing there may be a potential for loss, we must also recognize that these individual institutions are unusual in that they have a direct responsibility between the losses of the enterprises and the taxpayer. Do not forget that a GSE model is unique. If they make a profit, they get to keep it. If they lose money, the taxpayer gets the right to pay it off.
As of the last quarter of 2002, the combined outstanding debt of Fannie and Freddie was $1.99 trillion, not an insignificant number; and to appreciate it in the current context, consider the following remarks issued yesterday by the International Monetary Fund from its semiannual global financial stability report, released just yesterday: Recent developments have highlighted the extremely large, highly leveraged nature of these enterprises and the risks they are managing.
Page 9 PREV PAGE TOP OF DOC Now, inappropriate or not, I find the IMF's concern about capital adequacy rather unique, but if they now have this concern, certainly the Congress should share it. To provide any level of assurance to taxpayer protection, we must have world-class regulatory capability.
Let me say in defense of OFHEO, it has been dramatically underfunded since its creation in 1992, and this lack of support translates into lack of resources and capabilities to analyze the world's most sophisticated financial institutions. The regulator has not only been outmanned, it has been outlobbied. But those observations are not sufficient to explain why OFHEO has taken 10 years to develop a capital stress test and being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed.
This is not world-class regulatory work. There are too many unanswered questions, the stakes, too high. It is up to the committee to take action needed to get appropriate answers. Taxpayers need to be assured. Potential homeowners need to have access to affordable homeownership opportunities. And contrary to the view of many, this effort will lead to enhanced mission compliance and opportunities for low-income and affordable housing.
I am of the opinion, and have been of the opinion, these enterprises do not meet the satisfactory minimum level in providing homeownership opportunities to minorities and low-income individuals. We cannot let protest in the past keep us from doing what is right in the present. It is time we create a strong, independent regulator, independently funded with all the powers necessary to take on the task.
I believe the Secretaries' testimony is pivotal in setting out the initial step the committee must take. It is not time for additional reflection. I have been criticized in the past for having too many hearings and recommended legislative approaches. Now it is time to act and put this chapter behind us and move on to doing what is right for our American economy.
Page 10 PREV PAGE TOP OF DOC Thank you, Mr. Chairman, for your courtesy.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Pennsylvania, ranking member of the subcommittee.
Mr. KANJORSKI. Mr. Chairman, before we hear from the Administration on the need to alter the current regulatory system for government sponsored enterprises, I feel it is very important to outline my views on these matters for our two distinguished witnesses who are appearing before us today.
As I said in our very first hearing on GSE regulation in March 2000, we need to have strong, independent regulators that have the resources they need to get the job done. I continue to support strong GSE regulation. A strong regulator, in my view, will protect the continued viability of our capital markets, promote confidence in Fannie Mae and Freddie Mac, insure taxpayers against systemic risk, and expand housing opportunities for all Americans.
To ensure that we have strong GSE regulation, I further believe that any further legislative reform efforts should adhere to several principles. First, a strong regulator must have a single leader for a set term with sole responsibility for making decisions. In order to conduct robust supervision, a strong regulator must also have a funding stream separate and apart from the annual appropriations process and without improper administrative interference. Moreover, a strong regulator must have robust supervisory and enforcement powers.
Accordingly, some have suggested that we should model GSE regulatory authority after those of other financial regulators. While these proposals have merit, we must determine the applicability and appropriateness of providing these banking standards to GSE before proceeding.
In order to maintain credibility, a strong regulator must additionally have genuine independence. Unless I am convinced otherwise, such independence must consist of complete autonomy from the enterprises. It must also include sufficient protection from outside special interest groups. It must further have substantial freedom from political interference.
Page 11 PREV PAGE TOP OF DOC The last point is especially important. As a result of my experience during the savings and loan bailout, I will approach any proposal to assert general oversight or supervisory controls by the Administration or the Congress over any GSE regulator with great skepticism. We must not allow politics to again cause systemic implications to our economy. Because our housing marketplace is one of the most important sectors in our struggling economy, we must also tread carefully on our forthcoming congressional examinations.
In short, we have a delicate balancing act ahead of us as we work to develop any legislation to modify the regulation of GSEs. We must focus our work on regulatory proposals and not make fundamental changes in ways in which GSEs operate to their charter or to their mission. It is also my hope that we will develop a balanced bipartisan plan of action for addressing these issues.
In closing, Mr. Chairman, I commend you for your leadership in these matters. I also look forward to working with you in a judicious and objective manner in order to ensure that we do not upset our securities markets or raise homeownership costs in the weeks ahead.
The CHAIRMAN. The gentleman yields back.
The Chair is now pleased to recognize the chairman of the Housing and Community Opportunity Subcommittee, the gentleman from Ohio, Mr. Ney.
Mr. NEY. Thank you, Mr. Chairman. I want to thank you, Mr. Chairman, for the hearing. I appreciate the opportunity. I will make this a brief opening statement because I know you want to go on with the witnesses.
I also want to start by thanking Secretary Martinez and Secretary Snow for being here. I know you have busy schedules, and as you know, this is an important issue.
As chairman of the subcommittee, I have a keen interest in the strength of our Nation's mortgage market as our members do on both sides of the aisle.
Page 12 PREV PAGE TOP OF DOC GSE regulation is an incredibly important issue for all Americans. The United States mortgage and credit markets are the envy of the world. The mortgage market has single-handedly kept the economy afloat during the recent economic times. I know we are also aware of that. I think that a consensus has emerged that it is time to create a new safety and soundness regulator for Fannie Mae and Freddie Mac at the Treasury Department.
The important role that GSEs play in the capital markets and the possible risks they could pose to the financial system, reconstituting a safety and soundness regulatory scheme, mechanism, under Treasury I believe is a prudent and necessary step. Such a move would send an important signal that we understand the importance of GSEs in the secondary mortgage markets in maintaining a stable economy and providing affordable housing to all Americans.
While there is a consensus regarding the safety and soundness regulator, I am anxious to hear from our witnesses today on what they believe should be done with HUD's oversight responsibilities for the important housing mission of the enterprises, including approval authority for any new program and enforcement of compliance with affordable housing goals. I want to commend HUD for all their diligence on this issue since I have been involved with working with HUD.
I will be asking some specific questions on the issues, but I would like to make one personal observation. I think it is important to permit the housing GSEs to have sufficient flexibility to adapt to a changing mortgage market. We know today how things change quickly in the United States. The liquidity that Fannie Mae and Freddie Mac provide to the market should not be compromised by unnecessary government regulation.
First, I believe that there are several important components that are integral to providing enhanced regulations for GSEs while not impeding their ability to support affordable housing in America. For example, I think it is imperative for HUD to continue to have an important role as it relates to the mission's charter and affordable housing goals of Fannie Mae and Freddie Mac; that role of oversight will be good for consumers, good for the Nation, and good for housing.
Page 13 PREV PAGE TOP OF DOC I also have no doubt that the Treasury Department is unparalleled in its ability to manage safety and soundness for these corporations. However, Congress has traditionally charged HUD with the job of supervising affordable and minority housing in our country, and I believe that these goals can be reached amicably. I believe the White House is going in the right direction, as are the committee and the members, and they will be able to express their views on the intricate details of how this bill gels through.
I am also interested to hear what our witnesses think should be done regarding the capital requirements for Freddie Mac and Fannie Mae, if anything at all. Personally, I believe the minimum requirements Congress has mandated for GSEs have done a good job of setting a strong safety and soundness standard. I think it would be a mistake for this committee to change those requirements into a regulatory reform, massive bill. Likewise, I think we should allow the newly required risk-based capital requirement to take hold before we begin questioning it. I know there are many critics of OFHEO, obviously, and its risk-based capital regulation; however, we should allow a decent amount of time to evaluate its effects before we begin to completely dismantle it.
The Department of Housing and Urban Development must maintain its role of leadership in promoting housing, as it has so effectively done under Secretary Martinez. This agency has an important role in ensuring that our Nation is focused on providing decent, affordable housing for all Americans. We must respect that mission.
Mr. Chairman, I believe you are on the right track. I give you credit for this hearing, and I know that we need to do the job right versus just doing the job fast. Thank you.
The CHAIRMAN. The gentleman yields back.
The gentlelady from California, the ranking member of the subcommittee.
Ms. WATERS. Thank you very much, Mr. Chairman.
Page 14 PREV PAGE TOP OF DOC Secretary Martinez, I am pleased that you are here, and I think that this is a most important hearing. I am told that there are some other members who have been talking about having more hearings on this subject and not rushing to judgment in any way about these proposed changes.
Secretary Martinez, I oppose the transfer of program approval from HUD to Treasury and I oppose any expansion of new approval to include so-called ''new activities.'' it is important that the mission of affordable housing for low- and moderate-income people stay with HUD, without giving the Secretary any additional authority over the program activity business process of Fannie Mae and Freddie Mac.
Under current law the GSEs must submit a new program approval request to HUD if the initiative is significantly different from a program that has been previously approved or it is an activity in which the GSEs have not previously engaged. Section 108 of H.R. 2575, Mr. Baker's bill, would give HUD the ability to micromanage the GSEs. The process can only be intended to slow down the ability of the enterprises to partner with lenders to bring new mortgage products to market, including products that assist the disabled, provide needed housing rehabilitation and provide down payment assistance. Banks are not subject to such burdensome processes.
Fannie Mae has worked with lenders to expand access to low down payment mortgages and to extend financing to those with imperfect credit. These innovations are possible because they are not stifled by an additional layer of government approval.
This morning we have the opportunity to establish the framework of how the government sponsored enterprises, the Federal National Mortgage Association, Fannie Mae, and the Federal Home Loan Mortgage Corporation, Freddie Mac, will be regulated. Fannie Mae, as the number one provider of mortgage funds to low-income families, has been a strong and consistent partner in providing homeownership. Last year they served 2.9 million families in their affordable housing goals, and 1.8 million families were served in their underserved areas, geographically targeted goals.
Page 15 PREV PAGE TOP OF DOC Nothing has happened with Freddie Mac that has raised any questions about the mission or charters of the two companies. Given housing's importance to the economy and the importance of homeownership to America's families and communities, there should be no interest in changing the GSE's mission.
Mr. Chairman, thank you. I yield back.
The CHAIRMAN. The gentlelady yields back.
We now turn to our distinguished panel and let me say at the outset, it is rare that any committee has two distinguished Secretaries from the Cabinet testify, and we are honored to have both of you here today. And also I think you can tell by the attendance by the members that we have a great deal of interest in this entire issue, and for that I am personally thankful to the members.
And, Secretary Snow, we will begin with your testimony. Once again welcome back to the committee. You need to turn your mike on.
STATEMENT OF HONORABLE JOHN W. SNOW, SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Secretary SNOW. See, HUD and Treasury are already working in a full state of cooperation.
Thank you very much, Mr. Chairman, Ranking Member Frank, and members of the committee for this invitation to Secretary Martinez and me to appear before you today.
This committee has demonstrated a strong record of interest in effective supervision of and regulation of the government sponsored entities, as well as in affordable housing and a strong, healthy housing market. There is general recognition that the supervision, the supervisory system for housing-related government sponsored entities, neither has the tools nor the stature today to deal effectively with the current size, complexity and importance of these entities which over the last decade or so have become among the largest and most far-reaching entities on the American financial scene.
Page 16 PREV PAGE TOP OF DOC As we attempt to remedy this situation, we must be mindful that we have two corresponding objectives that should guide us: first, a sound and resilient financial system; and second, increased homeownership opportunities for less-advantaged Americans.
I am here today to outline the Administration's recommendation for important improvements that we think can be made to the oversight of our housing finance system. Secretary Martinez will discuss in particular the measures that the Administration would like to see implemented to reinforce and strengthen the focus on the objective of increasing ownership opportunities.
First, let me outline the proposal itself, our recommendation. What is the Administration recommending? Well, we recommend that Congress enact legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related GSEs. Housing finance is so important, it is so far reaching, has such significance to the national economy that we need a strong, world-class regulatory agency to oversee the prudential operations of the GSEs and the safety and the soundness of their financial activitiesconsistent, however, with maintaining healthy national markets for housing finance, which always has to be a priority.
Such legislation should fulfill this underlying purpose and not merely be an exercise in moving existing agencies from one part of the government to another part of the government. In other words, we are looking for a value-added proposal here that enables the new entity to be located within a Cabinet agency which will give it more heft, more significance and more expertise and better policy guidance.
We should keep our eye on the crucial task of getting the regulatory organization right. We think that is the key thing here. In addition to the housing goals, which Secretary Martinez will discuss, the legislative objective should be to create a strong, credible and well-resourced supervisor with all the powers needed to do the job.
Page 17 PREV PAGE TOP OF DOC Let me turn now to the issue of what those powers of the new agency should be. As we see it, this new agency's power should be comparable in scope and in force and in effectiveness to those of other world-class financial supervisors, fully sufficient to carry out the agency's mandate. What does this mean? Well, as we see it, it means that the agency should have broad, general, regulatory, supervisory and enforcement authority with respect to the enterprises. In my written testimony I give a detailed description of those powers.
Another key issue with respect to financial regulation of the GSEs is capital and how capital will be treated. Capital, of course, is the fundamental element of the financial condition of an enterprise and the capital standards should not become the subject of frequent change.
But having said this, I am in no way proposing a moratorium on making any adjustments to the risk-based capital standards. The existing statutes place a clear responsibility on GSE supervisors to ensure that each GSE retains adequate capital to support its risks and to give supervisors the power and the duty to require capital changes as risks change. We would fully expect the supervisors to make full and proper use of this authority as any need arises.
At the same time, we feel that there is a need for the new agency to have even greater flexibility, even more authority to adjust risk-based capital standards for the GSEs than is provided under current law. Broad authority over capital standards and the ability to change them as appropriate are of vital importance to a credible, world-class financial regulator. Capital standards need to be flexible enough to employ the best regulatory thinking, conscious of the enterprise' own measures of risk, and adequate to ensure that the enterprises operate in a safe and sound manner with capital and reserves sufficient to support the risks that arise in their business. We believe the legislation should provide the new agency with this more ample and more flexible authority.
Page 18 PREV PAGE TOP OF DOC Where should the new agency be located? The administration is prepared to consider putting the new agency within a Cabinet department if, Congress considers the additional benefits of the stature and the policy support that can come with that to be valuable. Any such arrangement would need to protect the independence of the agency over specific matters of supervision, enforcement and access to the Federal courts.
But it is our view that if real value is to be provided by the Cabinet agency by placing the new regulator within a Cabinet department, then we need to be able to draw upon the resources of that department for policy guidance and for expertise. At a minimum, the new agency should be required to clear new regulations and congressional testimony through the department. If that combination of operational independence and policy oversight is provided in the legislation, the Administration would be willing to support putting that new agency in the Department of the Treasury.
Another subject of enormous importance with respect to the GSEs, of course, is corporate governance. Corporate governance, good corporate governance, as we have come to recognize, requires that there be great clarity that the people running large companies are there to serve the interests of the stockholders and that their incentives and loyalties be aligned with those of the stockholders. The principle here, of course, is that one man cannot serve two masters simultaneously.
Freddie Mac and Fannie Mae are large, experienced publicly traded enterprises that have grown significantly and taken important places in our capital markets. Reflecting on that fact, we would recommend that the Congress consider whether the statutory requirement for Presidential appointment of members to these publicly traded GSE boards of directors serves a useful purpose anymore; and if you are so disposed, we would support thatthat is, the Administration would support their elimination, as well.
The question arises, how broadly should these new regulatory powers be applied to the GSEs? Is it all GSEs or is it just Fannie Mae and Freddie Mac?
Page 19 PREV PAGE TOP OF DOC I want to make it clear that I have not limited myself in my remarks to one group of housing GSEs. The importance of our housing finance markets requires that all of the housing GSEs be included in a system of world-class supervision. Therefore, we see the need for and the desirability of the Federal Home Loan Banks' being under such a regime, just as we see it desirable for Freddie Mac and for Fannie Mae. However, we recognize that while broad-based support appears to exist for action on how to provide that supervisory system for Fannie and Freddie, a similar consensus may not exist with respect to the Federal Home Loan Banks. We would, however, be willing to and would look forward to working with Congress, the Home Loan Banks and other interested parties to see if a resolution can be achieved on this issue as well.
So, in conclusion, where are we? Let me review once again our main purpose in being here this morning. It is to discuss how best to promote the strength and the resilience of our housing finance markets in order to increase, make further progress in advancing homeownership throughout the Nation.
The housing-related GSEs were created by Congress to assist in that very mission. Our aim must be to give them the caliber of supervisor that the importance of their mission requires. In so doing, I am confident we will promote greater confidence in the marketplace among investors in these entities and thus, in that way, we would advance the larger goal of homeownership.
Thank you very much.
The CHAIRMAN. Thank you, Mr. Secretary.
[The prepared statement of Hon. John W. Snow can be found on page 73 in the appendix.]
The CHAIRMAN. Secretary Martinez.
STATEMENT OF HONORABLE MEL MARTINEZ, SECRETARY, DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Page 20 PREV PAGE TOP OF DOC Secretary MARTINEZ. Chairman Oxley, it is a real pleasure to be with you today, and Ranking Member Frank and other members of the committee; and I really am delighted to have an opportunity to join my colleague, John Snow, Secretary of the Treasury, to discuss these important matters relating to GSE oversight and regulation.
Secretary Snow has outlined the principles and priorities the Administration supports. He and I are in full agreement. Congress and the Administration have an opportunity and an obligation to strengthen the regulatory structure of the GSEs.
A strong regulator is in everyone's best interest: the Administration, the Congress, Wall Street, investors worldwide and, most importantly, the American taxpayer.
The administration has a dual goal. We must ensure that through the GSEs financing is available for low- and moderate-income families, and we must ensure that the GSEs are subject to rigorous oversight so that they are serving their public purpose. The housing sector directly accounts for about 14 percent of the Nation's total gross domestic product and the housing market actively drives closely related components of the economy as well.
The GSEs play an integral role in our Nation's housing finance system by expanding the availability of mortgage credit. The liquidity and stability they provide have helped buoy the Nation's economy. Because of the housing GSEs' impact on the economy, it is critical that we ensure their safety and their soundness.
The Office of Federal Housing Enterprise Oversight was established following the thrift crisis as an independent safety and soundness regulator. It was placed within HUD, and it was essentially to regulate Fannie and Freddie Mac. There is a misconception that HUD controls and has direct authority over OFHEO in the exercise of safety and soundness and duties. HUD does not. By statute, Congress has mandated that OFHEO's safety and soundness determinations must be made independently of HUD.
To ensure that the GSEs have appropriate financial oversight and are held accountable to their public mission, the Administration supports strengthening the power of the GSEs' regulator. Doing so would make the regulator more comparable to the stature, powers, authority, and resources of other financial regulators charged with safety and soundness oversight. Such a concept has worked well for financial regulators in other instances, including the Comptroller of the Currency and the Office of Thrift Supervision.
Page 21 PREV PAGE TOP OF DOC Currently, safety and soundness regulation is divided, with new program approvals at HUD and financial oversight at OFHEO. It is the position of the Administration that both elements of safety and soundness regulation need to be consolidated in a single regulator. As Secretary Snow noted, the Administration considers it appropriate to transfer authority over new program approval from HUD to a new, strengthened regulator. HUD supports transferring and strengthening such authority to include review of all activities, new and ongoing; and such changes will consolidate and enhance the regulator's oversight responsibility and increase investor confidence in the GSEs.
As part of this transfer, the Administration is also proposing that the HUD Secretary continue to be consulted on new activities requested by the GSEs. Many new activities directly impact the mortgage and housing markets where HUD has substantial expertise. This makes it essential that such consultation take place.
While safety and soundness regulation should be exercised by a single independent regulator, the Administration strongly supports retaining another core element of the GSEs' charter, the housing goals, at HUD.
Congress established Fannie Mae and Freddie Mac to provide market liquidity and to facilitate the financing of affordable housing for low- and moderate-income families. Congress also mandated that the HUD Secretary set housing goals to ensure that those needs are met. The affordable housing goals were created to ensure the GSEs are serving individuals in those communities that are most in need. These goals direct the GSEs to serve low- and moderate-income families and provide funding in underserved areas such as the central cities and rural areas.
A third goal directs the GSEs to finance housing for very low- and low-income families.
Today, the low- and moderate-income housing goals require that at least half of all of Fannie Mae and Freddie Mac's mortgage purchases benefit families in those income brackets. But as the President's budget noted in February, numerous HUD studies and independent analyses have shown that the GSEs have historically lagged the primary market, instead of led it, with respect to funding mortgages loans for low-income and minority households. The GSEs have also accounted for a relatively small share of first-time minority homebuyers.
Page 22 PREV PAGE TOP OF DOC HUD is the appropriate agency to develop and enforce the housing goals. Institutionally our mission is devoted to furthering the goal of affordable housing and homeownership, and HUD has the most expertise in this area. Furthermore, the housing industry looks to HUD as the agency in which this authority should reside. Therefore, to strengthen HUD's housing goal authority, the Administration considers it appropriate to:
Number one, create a new GSE housing office within HUD, independently funded by the GSEs to establish, maintain and enforce the housing goals;
Number two, grant HUD new administrative authority to enforce its housing goals;
Thirdly, to institute enhanced civil penalties for failure to meet the housing goals. Explicitly provide that the GSEs act to increase homeownership; and expand authority to set housing goals and subgoals beyond the three currently established for moderate-income, geographic area, and special affordable housing.
Let me stress that we believe such a comprehensive change to the regulatory structure will strengthen the confidence of all GSE stakeholders. Investors will be better protected under a regulatory system that empowers the regulator to do the job we expect of them, and the American taxpayers will ultimately benefit.
Secretary Snow and I look forward to working with the committee members to strengthen oversight of the housing GSEs, to ensure that they are in every way meeting their public purpose and that homeownership continues to be an affordable option for American families.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Mr. Secretary.
[The prepared statement of Hon. Mel Martinez can be found on page 69 in the appendix.]
The CHAIRMAN. And to both of you, we thank you for your excellent testimony and your continued cooperation in this endeavor. And, indeed, it is an endeavor that will be successful only if we have an opportunity to work together to craft bipartisan legislation that deals with the goals, I think that all of us share, in terms of a world-class regulator for the GSEs, as well as a continued commitment on the part of HUD towards low-income housing.
Page 23 PREV PAGE TOP OF DOC And I suspect that the turnout today from the members indicates that strong interest, and you both will be focal points moving forward to get legislation passed.
I was reading a recent brokerage firm report that indicated that Congress' efforts to strengthen the regulator for the GSEs will ultimately be looked on favorably by the capital markets, and I think both of you mentioned that a first-class regulatory structure is in the best interest of both the GSEs in this case and the markets, and that ultimately it would appear, based on this study, that that is the case. And that is clearly our effort.
Secretary Martinez, you mentioned you were talking about housing goals within HUD. How much of that can be achieved through the regulatory structure and how much has to be achieved by legislation?
Secretary MARTINEZ. I believe it is necessary for legislation to enhance the effectiveness of a regulator as it relates to goals. Right now, we can set goals, but we really need enhanced authority to enforce those goals, to enforce broader civil penalties so that, really, there will be teeth behind the goals that we set.
We also want to make sure that we create a set of subgoals because, right now, the goals are a bit broad, and we want to make sure that by setting subgoals, we then can create the right regulatory framework to give some targets and also to have the enhanced oversight authority which would really have to come through legislation.
The CHAIRMAN. So Congress would have to set up the overall structure of what you anticipate and then allow you to work within that framework?
Secretary MARTINEZ. Correct. And then we can have regulations to follow.
The CHAIRMAN. Secretary Snow, you mentioned the potential of including all GSEs in the regulatory change, specifically the Federal Home Loan Banks.
It has been my observation, at least at the current time, that there is a divided opinion among the Federal Home Loan Banks, in a general sense of regional difference, I guess. It appears that the West Coast entities appear to be a lot more enthusiastic about being included. In my area, in the Midwest and, I suspect, the South, there is far less enthusiasm.
Page 24 PREV PAGE TOP OF DOC Is it possible during a relatively short time period of passing legislation that we would be able to include the Federal Home Loan Banks without a consensus within that community?
Secretary SNOW. Mr. Chairman, I doubt it. I think unless a consensus develops fairly quickly that we would get bogged down in lots and lots of time-consuming efforts that would jeopardize the larger objective here of putting in place that world-class regulator I talked about for Fannie Mae and Freddie Mac. So I would not personally want to see that issue get in the way of moving forward on legislation for which there seems to be pretty much broad-based support today.
I would hope, though, that the Federal Home Loan Banks would caucus and would review the situation and meet with us and meet with Members of Congress and see if there could not be some resolution on that within the time frame to get this legislation done this year.
The CHAIRMAN. Thank you, Mr. Secretary.
Mr. Secretaryboth of you actuallyI would like you to indicate at least some general positions on the special exemptions that the GSEs currently now enjoy. Specifically, I think our members, and I certainly, would be interested in the tax status of GSEs and their exemption from registration under the 1933 Act.
How does that play into what your testimony has stated and in terms of our trying to pass legislation?
Secretary SNOW. Mr. Chairman, we do not propose addressing those issues in this legislation. And I think the important focus for this legislation is that strong, effective, world-class regulator. So it would be our view that those issues do not need to be addressed now.
Some of those issues, like the 1933 Securities Act, we actually come down saying they should not be addressed on substantive grounds because we don't see the need for Freddie or Fannie to be put under the 1933 Act.
Page 25 PREV PAGE TOP OF DOC The 1933 Act basically deals with fraud in the issuance of securities. There is no evidence of that. The SEC itself has indicated, I understand, that they would not want to see that happen because given the volume of issuances by the two major GSEs, they would swamp the resource base of the SEC; and there is no evidence of any need to deal with the fraud issue.
So we would actually oppose putting them under the 1933 Act.
The CHAIRMAN. Secretary Martinez.
Secretary MARTINEZ. I believe Secretary Snow and I have concluded that the most important thing we can accomplish through these hearings and with the proposed legislation we presented today is a strengthened regulator.
There are many other issues that could arise, and we would be happy to continue to see the development of legislation. But today, our proposal is the focus of what we recommend, and I think it solely focuses on a strong regulator, a combined regulator for all of safety and soundness, and then the strengthened aspects of regulation at HUD to give us the real tool box that we need to enforce the parts of it that would remain at HUD.
The CHAIRMAN. Thank you. My time has expired.
The gentleman from Massachusetts.
Mr. FRANK. Secretary Martinez, I was glad to hear you say that, and on page 3 you make some very strong statements about the need to enhance the Federal executive ability to impose the housing goals.
Are you going to be developing specifics that give us these?
Secretary MARTINEZ. Yes, sir. We would have very specific recommendations
Mr. FRANK. I think that is very important.
Secretary MARTINEZ. Yes.
Mr. FRANK. The problem you have is, there could be a tension between the Treasury worrying about safety and soundness and HUD worrying about affordable housing; and there is a tension there. One way is that if affordable housing was as safe and sound as everything else, we wouldn't need a government mandate to do it. There is a certain amount of greater risk. You want to minimize it. How does HUD stay equal in this tug-of-war?
Page 26 PREV PAGE TOP OF DOC Secretary MARTINEZ. Those tensions exist today, but the problem today is that we don't haveHUD doesn't have the ability to really impact the regulatory framework within OFHEO, while at the same time there is this perception that there is some oversight that the Secretary of HUD may exercise.
Mr. FRANK. I just want to tell you, I agree with the goals you spelled out. I am skeptical of what is going to happen to the housing mission if most of the regulation is in Treasury
Secretary MARTINEZ. We still have a consulting role. I mean, in other words, as it relates to the mission, as it relates to new program approval, the proposal is going to continue to come to HUD for consultation before product approval of new products would happen.
Mr. FRANK. I am unimpressed by the right to consult. By virtue of my job, I have got the right to consult with a lot of people who ignore the hell out of me, so that reinforces my fears.
If Treasury regulates and HUD consults, Treasury wins. And you talk about more than consulting here in terms of the goals.
Secretary MARTINEZ. Well, on the other part of it, see, the problem is that safety and soundness should all be in one place, and we believe that not only the ongoing mission of the GSEs and current programs, but potential new programs should come under close scrutiny and regulation.
Beyond that, we at HUD would then have the real enhanced type of regulation that would enable us to assist you as you are seeking to make sure that these entities are really meeting their housing goals.
Mr. FRANK. Well, I am skeptical again if all the regulatory authority is there, they approve new programs. You set out some goalsnew administrative authority went out, enforced housing goals, et cetera; and you have to show me that there is not going to be a situation where Treasury is pushing in one direction and affordable housing in the other. I will need to see specifics here to believe that
Page 27 PREV PAGE TOP OF DOC Secretary MARTINEZ. We will give you some specifics. But the truth of the matter is, there is going to always be some tension between insisting on a certain set of goals and then also
Mr. FRANK. I agree, Mr. Secretary, but here is my point. I think Treasury is going to be the big brother here, and if one set of goals is in Treasury and the other set is in HUD, I worry about an institutional disadvantage for the set of goals that are important to me.
Let me, with that, turn to the Secretary of the Treasury, because what I am struck by here is what is not in here; and I am glad it is not in here. We have heard descriptions of the situation regarding GSEs as a great crisis and an imminent threat to financial stability. This does not change the essential relationship of the GSEs legally.
I am not for changing that, but I think we ought to note that this is not a document put forth by people who think that the sky is about to fall or that we are going to have serious damage; and I am struck by that moderate quality.
Let me ask you, Mr. Secretaryand again I appreciate that there is not a lot of rhetoric in here about how terrible these are. I appreciate that you think we should enhance the regulation, but I get the impression that you were talking more about guarding against potential future problems developing, rather than feeling that there is an urgent need to stave off some crisis.
Are we in a crisis now with these entities?
Secretary SNOW. No, that is a fair characterization, Congressman Frank, of our position. We are not putting this proposal before you because of some concern over some imminent danger to the financial system for housing; far from it. Rather what we are saying is, since 1992, or whenever it was that OFHEO was established by statute, over a decade ago, these housing markets have developed.
Page 28 PREV PAGE TOP OF DOC Mr. FRANK. Getting bigger.
Secretary SNOW. Huge. Hugely. And those entities have grown and become now very large players on the whole financial landscape of the United States. We just feel it is time to
Mr. FRANK. Good. I think it is important to have that, to make it clear that that is the context.
Let me just close by saying, I look forward to this, and I have given you my skepticism. Housing has been my primary issue, affordable housing has been my prime issue, and I need to be convinced. We haven't done as good a job as we should in enforcing those goals, but I will have to be convinced that they won't be at an institutional disadvantage.
Secretary SNOW. I don't think I will convince you by this, but as I view this institutional arrangement that we are proposing, Secretary Martinez and HUD would have the clear primacy on the question of what is the mission.
Mr. FRANK. And what happens if they don't meet the mission?
Secretary SNOW. If they don't meet the mission, the Secretary is asking for enhanced authority to have disciplinary powers to strengthen his hand in seeing that the entities do meet that.
Mr. FRANK. I just worry that we are going to get them in a situation where the most important question for Fannie Mae and Freddie Mac to answer is who do you like better, your mother or your father?
Secretary SNOW. Well, as Secretary of the Treasury, if this authority comes to Treasury, I would view our responsibility as soundness and safety within the larger parameter of the goals that are given to the GSEs by
Mr. FRANK. I appreciate that. Ten more seconds. But obviously if we can find some way to write that sort of thing into the law, because personalities change, I would feel maybe a little less skeptical.
Page 29 PREV PAGE TOP OF DOC The CHAIRMAN. The gentleman's time has expired.
The gentleman from Louisiana Mr. Baker.
Mr. BAKER. I obviously have a number of subjects I would like to cover, but I am going to focus in this first 5-minute opportunity on two different approaches. One is just a clarification, as I understand, the explanations of intent. And two arewith regard to enhancements I see in your approach over H.R. 2575.
With regard to capital, Secretary Snow, I was very pleased to hear your comments so forthrightly with regard to the moratoria issue. There has been much discussion that there would be some 5-year artificial prohibition on regulatory action. And I want to go just a bit further in understanding the broad authority for supervision of capital adequacy.
My question goes to the point that although you preface it by saying, we do not intend in any way to adversely impact the risk-based capital standard recently promulgated by OFHEO, you do wish for the new regulator to have unbridled authority to adjust minimum risk-based capital adequacy based on an assessment of risk and the leverage ratios of either enterprise. Is that a fair characterization?
Secretary SNOW. Yes, that is.
Mr. BAKER. Secondly, that with regardand this is perhaps something for both gentlemen. With regard to product approval, as I read the testimony, it appears that the broad authority again granted or requested in that instance is not only to prospective, but to currently authorized products that you may wish to review for whatever reason. In other words, you are looking for a broad grant of authority with regard to product approval. Is that a fair characterization?
Secretary SNOW. Yes, sir.
Mr. BAKER. Then there are two points that I find very important that are beyond what has been proposed in 2575. One is with regard to the importance of the Presidential appointment of board members. Some have expressed concern that if the agency is located within the Treasury, that that will politicize the environment in which managerial decisions may be made. This sends an extraordinary message, in my opinion, to the broader market that you want the management of this enterprise to be separate and distinct from political appointment, which is athe first time this proposal has been proffered. Is that correct?
Page 30 PREV PAGE TOP OF DOC Secretary SNOW. Yes. Very much so, Mr. Baker. We view these as large, substantial and important private enterprises, and private enterprises don't have their board membership determined by a political process involving the President of the United States. They have it through a nominating committee.
And we think that normal corporate governance processes that apply to other major companies and other financial institutions, and which is now recognized as the right way to do things, that is the nominating committee taking the lead on board membership, should apply as well to Freddie and Fannie.
Mr. BAKER. Terrific.
The next is, with regard toI had recommended at one time consideration of a receivership process in the unlikelyacknowledged unlikely event there would be adverse economic developments, and it would be a necessity to act. In lieu of granting the regulator customary receivership authority, what I understand is an enhanced conservatorship, fairly unlimited, where the regulator could make appropriate decisions on behalf of the taxpayer, liquidate assets as required, satisfy creditor claims, whatever is necessary up to the very last chapter of the process, which would be included in a receivership, but not in your plan, and that would call for the revocation of the charter, which would now, under this view, be left for congressional determination; that you view it appropriate for something of that magnitude to be determined as a matter of public policy, not as an executive responsibility to close out. Is that a fair description?
Secretary SNOW. That is precisely what we are suggesting.
Mr. BAKER. Well, let me say on both of those last two points, these are significant improvements over proposals in the past, and I think you are to be credited.
I have a significant list of other things, but I will defer for other Members. Thank you very much, sir, for your leadership.
Page 31 PREV PAGE TOP OF DOC The CHAIRMAN. The gentleman yields back.
The gentleman from Pennsylvania Mr. Kanjorski.
Mr. KANJORSKI. Thank you, Mr. Chairman.
Mr. Secretary, let me get this straight. You did answer Mr. Frank's testimony that there is nothing occurring of high risk. And since we are talking about reforming some of the largest financial institutions and their regulatory mechanism, what is the pressure to do this in the next 6 weeks? Congress is anticipated to adjourn sometime late October, early November, and this proposal comes to us timely in terms of we are glad to have the Administration make a proposal. But I think to put a 6-, 8-week time frame on it raises some interesting questions.
Secretary SNOW. Well, Congressman, obviously you will have to decide what priority to give it and whether to deal
Mr. KANJORSKI. So there is nothing essential that we move through and have daily hearings here and move a piece of legislation because there is no high risk to the system?
Secretary SNOW. No. We are not before you, as I answered Congressman Frank, because of an imminent risk that we perceive of any kind. Rather there seems to be a coming together of the parties who take an interest in this subject behind a set of proposals that I think are pretty close to what I have outlined here, maybe not precisely, but pretty close, that gives us an opportunity to use that momentum to move forward, if the Congress chooses to do so, and we would urge you to do so.
Mr. KANJORSKI. I am impressed with the work you have done, but I worry about some of your definitions. I agree that we should have a strong, independent, world-class regulator. Now, my question to you is can you name any world-class regulator or financial institutions of the United States that has their policy set and their testimony reviewed by Treasury?
Page 32 PREV PAGE TOP OF DOC Secretary SNOW. No. We don't review the
Mr. KANJORSKI. So are you using the terminology ''world-class,'' but you are not talking about making the type of regulator here that regulates the banking system or other entities in this government? You are talking about a usurpation of authority over the regulator by Treasury.
The idealet me put it very succinctly. The idea that Treasury on behalf of the Administration would be reviewing testimony that is going to be made to this Congress is most offensive for a very simple reason. The World Trade Center disaster, the EPA's Administrator was going to release notice to the American people of hazardous materials in New York. It was this Administration that put a clamp on the release of that information.
Why should we as the Congress in representing the American people assume that if there were real dire information that was going to be released or disclosed by the Administrator at a time that was not propitious to the Administration, politically or otherwise, that they wouldn't put a clamp on that testimony?
Secretary SNOW. Congressman, as I am sure you are aware that Treasury has that very authority today with respect to the IRS.
Mr. KANJORSKI. Well, the IRS
Secretary SNOW. The IRS is an institution of great sensitivity.
Mr. KANJORSKI. I am not sure that quite frankly we should brag about the IRS. Didn't we just recently have to pass a Taxpayers' Bill of Rights?
Secretary SNOW. You asked me whether orCongressman, whether or not there was any entity in Treasury which would serve as a predicate for this. I am saying the IRS is a predicate.
Mr. KANJORSKI. Well, if that is the best example you can give as a world-class regulator, the IRS, I don't think the American people
Page 33 PREV PAGE TOP OF DOC Secretary SNOW. You asked for review of testimony, and I said Treasury does review IRS.
Mr. KANJORSKI. I asked for an example of a world-class, strong regulator.
Secretary SNOW. Until I think it is the mid-1990s, that Treasury did have thatdid review the testimony of the OCC.
Mr. KANJORSKI. And thank heavens we put that aside. What I am suggesting is, look, I am one of the few members of this committee who was here in the S&L crisis, and I think if we are going to attach anything, it was a conference committee that adopted a piece of legislation in 1982 that almost destroyed the financialthe S&L industry in this country and caused a catastrophe 10 years later that we are still paying to bail out in this country.
And I don't think that, one, we should rush to judgment. Two, I certainly don't want political influence, whether it be the Administration or this Congress, getting involved with an independent, strong, world-class regulator.
The day that the Federal Reserve wants to concede that the Secretary of the Treasury and the White House should pass on its testimony, that is when we should allow the regulator of these entities to have their testimony passed on by the White House and Treasury, and not until that day, if we are going to use the term world-class, and I believe we should.
And I think that using that term ''world-class'' sets a standard now for Treasury and for Housing to really work with this committee and the Congress to establish a world-class, independent, strong regulator, which doesn't mean that they have to carry their testimony and have it filtered by the Administration or Secretary of Treasury.
Secretary SNOW. Congressman, can I just respond to put thisto give you our perspective on it and why we are recommending it as we are?
The Treasury's role would be limited basically to policy. The regulatory functions, the day-to-day supervision, the day-to-day oversight, the enforcement actions, the litigation and so on would be fully and completely under the control of the new regulator.
Page 34 PREV PAGE TOP OF DOC Mr. KANJORSKI. The housekeeping would be under the regulator?
Secretary SNOW. I would not call litigation and enforcement housekeeping. That is the guts of what regulators do.
Mr. KANJORSKI. Regulators have a responsibility to come to this Congress and the American people and, without a filtering process, to tell us what the status is of the bodies they regulate, what they are in, what is the problem. They don't have the responsibility of coming up here and giving us filtered information that meets the considerations and the interests of the Administration at any given time.
I am not just suggesting this Administration, but the policy we are talking about establishing here and the world-class regulator is going to be in place for the next 10, 20, 30 years, and I would not be very impressed with Mr. Greenspan coming up here and talking for an hour or two to tell us how the economy is if I knew that the Administration and the Treasury just spent the last 2 weeks filtering his testimony.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Iowa Mr. Leach.
Mr. LEACH. Let me just begin by thanking Chairman Baker and Chairman Oxley for an extraordinary job of bringing us to this point, and also the two Secretaries for moving their departments as far as they have. But, the big picture is, and I think it has to be emphasized, that these are two private sector enterprises, but they have public powers, and one of the great questions is should they be regulated at a different level than all other private sector organizations? And up to this point in time, regulation of these GSEs has been largely written by the GSEs, and that should be understood. And now the question becomes where do we go from here?
And I think the Secretary is exactly right, that these should come under the executive branch. And clearly he was being a little understated when he said an executive branch department. It must be the Treasury.
Page 35 PREV PAGE TOP OF DOC And here then the question becomes, what about the Federal Home Loan Bank System? It is absolutely imperative that they be regulated the same way, and there shouldn't be a compromise on this. It is just definitive that OFHEO is an inadequate regulator, well-meaning but inadequate. The Finance Board is grossly inadequate, and its inadequacy is so stunning that not to insist that it be brought under Treasury in the same kind of way at this time would be a massive mistake.
Now, in the initial organization that we set up between OFHEO and Treasury and HUD, there is an effort by the GSEs to bifurcate responsibility and, for example, have the mission with HUD, and frankly, it is a mission that HUD has never looked at very seriously. I am not relating to any particular Secretary, it is just not a mission that HUD has taken seriously. I think it is clearcut that mission should go with the regulator. It should be at Treasury as well.
Now, finally, there is a little bit in the background of this that I am uncomfortable with. And Chairman Baker was quite thoughtful in his delineation and questioning of you, Secretary Snow, but the press has reported that kind of in a compromised way that there have been quiet understandings that have been developed between Treasury and the GSEs about no change in some sort of regulatory framework that exists for a 5-year period. I will tell you that that is nonsense.
The notion that a publicly empowered, private sector enterprise should have lower capital standards than a private sector enterprise is really defiant of common sense, and I think that you ought to have a full understanding that a regulator should respond to the public interests and to the competitive interests of the American enterprise in as equitable a way as possible, and that no new regulator should be shackled by any understandings prior to its establishment.
And that doesn't mean that the current framework isn'tis all bad, because it certainly isn't. There are aspects that are quite thoughtful. But to shackle a new regulator with any implicit understandings to begin with, I think, would be defiant of the idea of the independence of that regulator and also defiant of common sense.
Page 36 PREV PAGE TOP OF DOC Here, America is a little bit embarrassed. I mean, the IMF this week, of all things, and I am amazed that they have entered into this fray, but it suggested that the GSEs are undercapitalized. Whether they are right or not is not so much the question as it isit is very interesting that you are getting both world and national attention to American regulatory oversight. And I think it is something we can't take lightly.
And so I would be very, very concerned that there be implicit agreements made in advance that don't fit the circumstance, and I would also be very concerned if we don't do it in a profoundly correct direction rather than in a slightly correct direction at the very beginning.
And, Mr. Secretary, I would like you to comment on that, if you would.
Secretary SNOW. Well, I am in very broad agreement with what you just said and don't take exception to it, to any of it.
The legislation, in my mind, would be much better, as I suggested, if it could include the Federal Home Loan Banks. I think itif it doesn't, then one big piece of this integrated set of relationships is left out, and I think will eventually be picked up, but the sooner it can be picked up, the more coherent the regulatory framework would be. I agree with you.
On the issue of implicit understandings, there can't be any. There aren't any. There was some newspaper article to the effect of some 5-year moratorium. That is why I explicitly dealt with that in my comments. Where that came from I have no idea, but there can't be any shackles or any restrictions of that sort on the new regulator.
At the same time, I make the point that things like these risk-based capital standards probably should not be changed willy-nilly. There is some logic in a regulator having some precedental value of rules that have been entered into. But what we are asking for here is that the current statutory restrictions on the regulator in the construct of those risk-based standards be removed. That is thethat all of those restrictions, all of those definitions of how the regulator should do it be removed.
Page 37 PREV PAGE TOP OF DOC So I am in broad agreement. There are no understandings, implicit or otherwise, that would restrict the new regulator. The new regulator, though, will enter the fray working with a set of arrangements that it will want to review, but which are in place, and which will set the rules of the road for some interim period of time as the new regulator begins to review and think through what, if any, more appropriate sets of arrangements should be established.
The CHAIRMAN. The gentleman's time has expired.
Secretary MARTINEZ. May I just quickly comment, Mr. Chairman? Mr. Leachand I don't take any personal offense about the comment about the seriousness with which HUD has approached its purpose, and I won't comment on prior HUD Secretaries, but I do want you to know that as I have looked at my responsibilities and tried to exercise them, that I have also found the resources that HUD has had available to exercise that mission seriously are not there, which is why I have insistedand this proposal includes a number of things that I think are vitally important to us being able to fulfill that mission.
One of them, for instance, which I think is tremendously important, is the assessment authority, to give us the teeth necessary to really enforce the goals that Fannie and Freddiewhich, by the way, I should also state they have always made and met the goals that HUD has set for them.
But I still believe having an enhanced opportunity to do that type of mission would really be the kind of seriousness of purpose that would allow us to fulfill it.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Vermont Mr. Sanders.
Mr. SANDERS. Thank you very much, Mr. Chairman.
And thank you both, Mr. Martinez and Mr. Snow, for being with us today.
Let me begin, very briefly, by concurring with the statement that Mr. Frank made a few moments ago. Clearly there is a major housing crisis in this country. Barbara Lee and I and others are working on a national affordable housing trust fund concept, which has over 200 cosponsors.
Page 38 PREV PAGE TOP OF DOC Mr. Chairman, I hope that this committee would be able to work with Mr. Martinez, putting on a major conference which gives us the opportunity to hear from housing advocates all over this country as to how we can solve the housing crisis. And I hope that that is something that we could do.
But let me for a moment change directions and ask Secretary Snow a few questions. Mr. Secretary, let me begin by thanking you very much for the meeting that we held in your office last July with some Members of Congress, the AFL-CIO, the AARP and other groups who were very concerned about the proposed cash balance pension regulations that were drawn up by the Treasury Department.
As you know, it is our view that these proposed regulations would not only be a disaster for older American workers, but that, in fact, they would be illegal and are in violation of Federal age discrimination law. Now, since that meeting that you graciously hosted, several positive developments have taken place for workers who have seen their pensions slashed by up to 50 percent as a result of cash balance pension schemes.
Number one, on July 31st, the Southern Illinois Federal District Court ruled that IBM's cash balance pension conversion violated the pension age discrimination laws that are on the books. They are illegal.
Number two, just last night an amendment that I offered to the Treasury/Transportation appropriations bill to prohibit the Federal Government from using any taxpayer dollars to assist in overturning this pro-employee Federal court ruling won with overwhelming support, bipartisan support, 258 to 160.
So what I would like to ask the Secretary are two questions. First, Mr. Secretary, given the IBM court decision and last night's overwhelming vote against cash balance plans, will you commit today to either withdraw the proposed regulations on cash balance plans or at least commit to not moving forward to finalize them?
Page 39 PREV PAGE TOP OF DOC Second question, Mr. Secretary, I want to ask you about a very serious related issue. According to an article in today's Wall Street Journal, quote, ''in an unexpected move that involved doctored Treasury documents, the House passed an amendment that could prevent the Treasury from issuing controversial pension regulations.'' From the Wall Street Journal.
On Monday, an IBM lobbyist, Susan M. Semantakowski, sent a document she called the, quote, ''Treasury Statement of Opposition,'' end of quote, to various lawmakers' staffs, including Mr. Gutknecht. The Treasury document on official Treasury letterhead, and I have that document here, noted, quote, ''Treasury strongly oppose the Sanders amendment,'' end quote, and advised lawmakers to oppose the amendment, which it said will weaken the defined benefit plan.
Tara Bradshaw, a spokeswoman for the Treasury Department, said, ''the agency didn't issue the document. It is a Treasury-generated fact sheet, stating our position on a set of past documents that were never offered.''
However, they were not sent in the format that you provided, and therefore appear to have been doctored. We were not aware the document had been circulated beyond a very limited number of select staff.
Mr. Secretary, my question to you, second question, is did the Treasury Department authorize sending out these talking points against this amendment? Your spokesperson indicates that it was not the case? Number twowell, can you tell me that, sir?
Secretary SNOW. I am not aware of any authorization for any talking points of the sort you are commenting on.
Mr. SANDERS. Do you agree with your spokeswoman, Tara Bradshaw, that the agency didn't issue this document?
Secretary SNOW. Yes. Certainly I am not aware of it. If she said it, then she would know, and I would agree with her.
Mr. SANDERS. If that is the case, would you agree with me that this is a very serious fraud? If IBM or any other company was sending around doctored Treasury documents using the letterhead of the U.S. Department of Treasury, is this a potentially very serious violation of Federal law?
Page 40 PREV PAGE TOP OF DOC Secretary SNOW. Congressman, I better not comment, because I really don't know the facts on this, but it is certainly something that I intend to look into, now that you have brought it to my attention. This is really the first I have heard of this.
Mr. SANDERS. Well, this was in the Wall Street Journal today.
Sir, if your spokesperson is correct, and if a private corporation was using the letterhead of the Department of Treasury to fight against an amendment which, in fact, won overwhelmingly, I would hope that you would agree with me that is a hugely serious issue warranting an investigation by your Department and the Department of Justice. Can I have your commitment to go forward on that?
Secretary SNOW. I will certainly look into this and try and get at the base of what the facts are and take whatever steps are appropriate in response.
Mr. SANDERS. Can I expect to hear from you
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Ohio Mr. Ney.
Mr. NEY. Thank you, Mr. Chairman. I want to ask a question of Secretary Snow.
I am aware, as you are, of the strength of the housing market in the United States and how that has supported our Nation's economy, which, as I stated earlier during a recent economic downturn. The market, as you know, relies on a constant flow of liquidity provided by the secondary mortgage markets, and the strong capital base among the regulated companies. I think we can all agree that the stability of a strong capital regime is important not only for safety and soundness, but also to signal the strength of this sector of our economy.
Now, it is my understanding that you are recommending no change to minimum capital standards for Fannie Mae and Freddie Mac and no current change to the newly adopted risk-based capital standards. I state this because it is important to have stability in the capital markets. Is that correct?
Page 41 PREV PAGE TOP OF DOC Secretary SNOW. Yes. That is right. What we are recommendno, we are not recommending any change in the current standards as part of this legislation. That is correct.
Mr. NEY. Mr. Chairman, the second question, we all recognize the issue of GSE regulations as vital to our Nation's housing markets, and as Chairman of the housing subcommittee, I believe that your comments about the need to strengthen the safety and soundness are critical to the stability of the U.S. Housing markets. I commend you on that.
As we move forward, I just want to make sure that we are all taking from the same page. So to be clear, what we are talking about today is moving safety and soundness regulation of Fannie Mae and Freddie Mac to the Treasury Department?
Secretary SNOW. Yes.
Mr. NEY. We are not really talking about any adverse change to the housing mission, nor are we talking about any changing to the GSE charter or status in the marketplace. Is that correct?
Secretary SNOW. That is basically correct, although, as Secretary Martinez has said, the Administration is recommending strengthening the hand that HUD has on that side. And we are recommending one change, and that is that the President no longer have responsibility for appointing some number of directors to the two entities. Other than that, no.
And we would, of course, want to see the strong regulator put in place, and then the strong regulator would deal with subsequently the issues you raise, like what are the appropriate risk-based capital standards. But we are not changing those in the legislation.
Mr. NEY. Thank you, Mr. Secretary. Thank you.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from Illinois Mr. Gutierrez.
Page 42 PREV PAGE TOP OF DOC Mr. GUTIERREZ. I want to thank you. I want to thank Treasury Secretary Snow and HUD Secretary Martinez for appearing before us today. It is clear, after having read their statements and listening to their testimony, that they understand the vital role of GSEs in making home ownership a reality for low-income and minority families. And I want to tell them both that I look forward to working with them in this process to improve the financial regulation of the companies and allowing their important role to continue.
You know, we have the best housing finance system in the world, but it is not for everyone. Home ownership rates are at historic highs, 68 percent, but it is only at 47 percent for African Americans and 46 percent for Hispanics. The GSEs have a congressionally chartered mission to make home ownership more affordable and more available.
I want to make sure that in this legislative process, these companies are able to continue their work to reach potential homeowners in underserved populations and underserved areas of our Nation. HUD establishes clear goals that companies must meet in lending to low- and moderate-income Americans in underserved areas, and special needs populations, and I was delighted to hear from Secretary Martinez that they have always met the expectations of HUD.
And I know the Secretary wants more resources in order to make those housing opportunities available to more. I know that many of us work with both Freddie Mac, and I particularly with Fannie Mae in my congressional district, and I understand they have pledged $700 million in housing capital to several4.6 million minority Americans by the end of the decade. I want to applaud those efforts.
In whatever final regulatory structure is determined for housing GSEs, we should be careful to preserve the ability of all housing GSEs to improve the secondary mortgage market by developing innovative new products which are consistent with their mission. And they have many. Parents can help now. We have got it down to 5 percent. There is all kinds of things taken into consideration so that people can get into it, and I think that is what makes Fannie Mae and Freddie Mac unique.
Page 43 PREV PAGE TOP OF DOC So I support strengthening. And I would just like to ask Secretary Martinez and Secretary Snow if they can just assure us today that the new structure that is being proposed will not disrupt the important mission these companies play for potential homeowners in underserved populations and in underserved areas of our Nation?
Secretary MARTINEZ. Sir, I believe that it is important for us to keep in mind that the GSEs and Fannie and Freddie, specifically, play a vital role in the housing market in our country; that they have had a tremendous impact in the booming housing market that we have enjoyed over the last several years.
In addition to that, I just also want to make sure that we state that President Bush is committed to increasing minority home ownership. We have had that as a focus in our Department. And Freddie Mac and Fannie Mae have been part of the Administration's American dreamBlueprint for the American dream, commitment partners in that effort. They do good work. We want to ensure that also is the case into the future. By providing us with some additional tools for us to fine-tune the housing goals, I think it would only enhance our ability to enforce the housing goals, but also their ability to meet them.
I also believe, Congressman Gutierrez, that as we look to expand the role of homeowners, as you expressed and as we are working together to do, that creating more investor confidence in the GSEs, that giving the financial markets that confidence of a strong, world-class regulator will invite more investors to come into the housing market to invest, therefore providing more liquidity and hopefully lower mortgage rates, and that at the end of the day is the real key to increasing home ownership for low- and moderate-income people.
Mr. GUTIERREZ. I thank you, Mr. Secretary, for that response. I look forward to working with you and Secretary Snow in achieving what we need to achieve to put confidence that is necessary into it, but allowing them the ability to be innovative, to be creative, and to put the products out there.
Page 44 PREV PAGE TOP OF DOC I would like to yield the rest of my time to the gentleman from Vermont Mr. Sanders.
Mr. SANDERS. I thank my friend very much.
Mr. Snow, you didn't get a chance to answer the question, the first question. That is, given the IBM decision from the Southern District of Illinois and last night's vote on cash balance plans, will you commit today to either withdrawing the proposed regulations, or at least commit to not moving forward to finalize them?
Secretary SNOW. Congressman, I want to review that legislation that carried last night. In the process of reviewing those court decisions, I have not yet fully digested the three major decisions that have come down since our good meeting over at Treasury, but let me say this to you. We take seriously these concerns that you, among others, have been in the forefront of raising. I think I expressed to you my commitment to deal with this issue with the utmost seriousness that it deserves. And let me say, without making the commitment you are asking me to make, that I will commit to work with you toward finding a satisfactory resolution to what now is a very, I will grant you, tangled situation.
The CHAIRMAN. The gentleman's time has expired.
The gentleman from the first State Mr. Castle.
Mr. CASTLE. Thank you, Mr. Chairman.
I would just like to thank the distinguished Cabinet Secretaries for being here, for making real proposals before this committee. We are used to attacking and defending. We often don't get red meat such as this to deal with. I for one have enjoyed this morning and enjoyed what you have done.
I just would like to clarify a couple of things. Let me start with you, Secretary Snow. On page 6 of your written testimony, you stated in the context of this accommodation of operational independence and policy oversight, the Administration, quote, would be willing to support proposals to establish a new agency at the Bureau of the Treasury.
Page 45 PREV PAGE TOP OF DOC That is not quite as strong as, we are proposing, or we absolutely agree with. Is there a reason why that is not quite as solid?
Secretary SNOW. Yes. I will tell you, Congressman Castle, what the hesitancy there is. We don't see a lot of merit in simply putting OFHEO in Treasury. If you want to do that, you might as well just leave it where it is. What we are talking aboutand I understand this sensitivity on politicization, but what we are talking about is putting it in Treasury so that the policy resources of Treasury, the expertise of Treasury can be brought to bear on the new regulator not in a way that is politicized. I want to make that clear, but in a way that brings thisthe range of expertise that Treasury has, dealing with all financial marketsto bear on the question of these important housing markets which also impinge on all of those.
Mr. CASTLE. But it is not a hesitancy to have this regulatory agency in Treasury, it is more of what you just stated.
Secretary SNOW. No. If we got it on those terms, we would strongly recommend it.
Mr. CASTLE. What about funding sources? You stated on page 2, inadequate resources. Would the funding sources be dedicated sources or subject to appropriations? Have you given any thought to that?
Secretary SNOW. We feel that, again, it would be best and we would strongly recommend that it not go through the appropriations process. We think the strong, independent regulator concept is enhanced by the self-funding rather than being dependent on Congress, which opens it up to politicization.
Mr. CASTLE. Thank you.
Tell me the rationaleand honestly I don't understand the technical differences in some of these things as perhaps I should, but the inclusion of the Federal Home Loan Banks. Most of the concern here has been aimed at Fannie Mae, Freddie Mac, and you don't hear as much about the Federal Home Loan Banks. And I see in these proposals that they are included, probably rightfully so, but I would like to hear the rationale.
Page 46 PREV PAGE TOP OF DOC Secretary SNOW. The rationale is that the Federal Home Loan Banks, in the aggregate, have a very large impact on financial markets and raise similar sorts of soundness and safety issues, and are very similar in nature in many ways to the other government-sponsored entities, to Fannie and Freddie, and, therefore, we feel logically there is a fit. They are doing basically the same thing with the same sort of Federal involvement, and the same sort of soundness and safety issues. That is the rationale.
Mr. CASTLE. Secretary Martinez, you sort of have been answering this through this morning, but just in sort of a general sense, it is your conclusion that if this restructuring took place pretty much as outlined by the two of you here this morning, either by legislation or fiat of the executive branch or whatever it may be, that the focus on housing that you speak about, particularly low-income and middle-income-type housing, is a mission that you could carry out better than you do today?
Is the bottom line, is the scalethis would be an improvement in terms of the delivery of your services?
Secretary MARTINEZ. I think it would be a tremendous improvement because the real importance to our mission is in the housing goalin theis not in the new product approval, in which we would only have that consultation role. But it is in the other part, which is in the housing goals, and the setting of the goals, and the enforcing of these housing goals. I think that in that instance that we will have a tremendously enhanced ability to do the job.
I believe also, dovetailing into the answer that Secretary Snow gave to you with respect to the location of the regulator, I believe it is tremendously important that we have a world-class, fine regulator with all of the tools needed in that tool box to be an effective regulator. That is far more important than the location of the regulator. And in the way we have described it here, safety and soundness, including current and new program approval, should be under one roof with one regulator, not bifurcated, not divided.
Page 47 PREV PAGE TOP OF DOC And then the second part, the housing goals would remain at HUD. And also very important, the fair lendingobservance of fair lending would also remain at HUD. But with the scheme we are proposing, it will enhance our ability to meet the desired goals of why the GSEs were created, which is providing mortgage money to low- and moderate-income families, to first-time home buyers and minority home buyers.
Mr. CASTLE. Thank you, gentlemen. I agree with what you are trying to do. I hope we can work together to make sure we do it correctly.
I yield back.
The CHAIRMAN. The gentleman yields back.
The gentlelady from California Ms. Waters.
Ms. WATERS. Thank you very much.
First of all, let my say to Secretary Snow that when I rushed in this morning and gave my opening statement, I failed to acknowledge you, and let me apologize for that. I am certainly pleased that you are here and have enjoined working with you, and appreciate the assistance that you gave to us on the Haiti issue. So welcome.
Secretary SNOW. Thank you very much.
Ms. WATERS. We are glad that you are here.
My question is directed to toward Secretary Martinez. In your testimony, you described how you would like to strengthen HUD's housing goal authority by way of creating a new GSE housing office within HUD, independently funded by the GSEs to establish, maintain and enforce the housing goals.
You also go on to describe that it would grant HUD new administrative authority to enforce its housing goals, institute and enhance civil penalties for failure to meet housing goals, explicitly provide that the GSEs act to increase home ownership and expand authority to set housing goals, set goals beyond the three currently established for moderate-income, geographic area and special affordable housing.
Page 48 PREV PAGE TOP OF DOC Mr. Martinez, I am very much aware of Fannie Mae's contribution to affordable housing. Fannie Mae provides the most affordable housing capital for low- and moderate-income and minority households of any company in the Nation. In 2002, Fannie Mae financed over $136 billion in loans to nearly 985,000 minority families.
Fannie Mae also, I am told, must achieve specific affordable housing goals set for the company by you, the Department of Housing and Urban Development. And the company has surpassed every goal since HUD first began setting goals in 1994.
Above and beyond the HUD goals, Fannie Mae leads the market in providing home financing, of course, to minorities.
Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs ever missed their housing goals?
Secretary MARTINEZ. The housing goals as formulated currently have always been met by the GSEs, but what we are talking about here is to enhance those goals, because while I am not here to suggest to you that GSEs are not valuable and have not played a tremendously important role, and that they are a tremendous asset to the housing market, I also must point out to you that our studies show, and other independent studies also show, that they have historically lagged the primary market instead of led it with respect to funding mortgage loans for low-income and minority home buyers.
So they have also accounted for a relatively small share of first-time minority home buyers as compared to the market at large, without the advantages of being a government-sponsored enterprise.
Ms. WATERS. As compared to the market at large?
Secretary MARTINEZ. Correct.
Ms. WATERS. Meaning all of the banks and financial institutions and the mortgage companies, they have lagged in first-time home buyers?
Page 49 PREV PAGE TOP OF DOC Secretary MARTINEZ. Correct.
Ms. WATERS. I would like to see that study.
Secretary MARTINEZ. Well, my point in that is not to suggest that we don't value their contribution. We tremendously value it. But at the same time we also believe that in order for us to fulfill our mission like you expect us to do, that we have got to have the tools to do it. We need to have an office that is devoted to GSE oversight and regulation, those parts of it that we will keep at HUD.
In addition to that, we need to have the financial ability for assessment, just like other regulators of financial institutions do, so that it is depoliticized and it is handled as a regulatory matter. We believe that those things being done in the way we are proposing here will enhance what you and I are both trying to do, which is get more home ownership opportunities into minority households and into low- and moderate-income people so they can taste the dream of owning a home.
Ms. WATERS. Well, certainly, Mr. Secretary, we certainly do have the same goals. What I don't want to see is an expanded bureaucracy. You are talking about setting up a whole new office, and you are talking about having them pay for it. As you know, many communities depend on these GSEs for all kinds of new activity that will lead to home ownership. And they support this in many different ways, and sometimes some very constructive ways. I don't want that stifled. I don't want another layer of bureaucracy to prevent that kind of flexibility. And I am really worried about them, if they have met all of their goals, and you think that they need to have new goals set because they are good at what they do, why don't you just set new goals and let them continue to do what they do, rather than setting up a whole new bureaucracy to do it?
Secretary MARTINEZ. Because right now we don't have the ability to fine-tune the goals, to set them the way that we want to set them. That is why we are asking for the additional power through this legislation. In addition to that, I truly believe
Page 50 PREV PAGE TOP OF DOC Ms. WATERS. And you are saying that you have to have a whole new office to do that?
Secretary MARTINEZ. Here is what I want you to understand. I don't want to juxtapose your appreciation for GSEs and mine. We are on the same boat. We agree that they have been good and valuable, they do a lot of good in neighborhoods. They have created liquidity in the mortgage markets.
What I am looking to do is to enhance that opportunity, to give the markets more confidence in the GSEs, and then give us the ability to live up to the responsibility we are given by Congress, which is to oversight appropriately.
In order for us to get it done and get it done right, I believe that we need these enhanced opportunities and these enhanced powers, and that really is as a result of having been in HUD for a couple of years, having had an opportunity to look at issues that have come up, and not always felt like we hadwe had the expectations that we would carry it out, but not always the ability to carry out our mandate.
Ms. WATERS. We may not haveis my time up? Okay. Thank you.
Mr. BAKER. [Presiding.] Mr. Royce.
Mr. ROSS. Thank you, Mr. Chairman.
Secretary Snow and Secretary Martinez, we thank you both for your testimony. And I want to share with you, I have proposed to create an independent regulator in the Treasury Department with greater enforcement powers to oversee the three housing GSEs, Fannie, Freddie and the Federal Home Loan Banks.
And I think this proposal is important not only because it creates a new agency in Treasury, but also because it includes regulation of all three housing GSEs, and it mandates the new agency Director to work with other financial institution regulators through FFEIC. This country needs a world-class regulator of the housing finance sector, and I think we all know that Treasury has the expertise to create one.
Page 51 PREV PAGE TOP OF DOC Experts believe that all three GSEs need to be in the mix if we want to achieve effective safety and soundness oversight. These are the largest derivative players in the world. We are talking in each case about portfolios that are in excess of half a trillion dollars in interest rate derivatives. So the new regulator needs to see the whole market to ensure the best practices of risk management.
There is another argument for including all three GSEs in regulatory reform. The bond market experts that I have talked to have told me that if Fannie and Freddie receive a new regulator under Treasury, and if the home loans remain under the finance board, then on a relative basis, Fannie and Freddie would have a competitive advantage in the bond market, and thus a lower cost of capital.
We should not enact legislation that favors one group of GSEs over the other. I know some of my colleagues are concerned that while right on the merits, inclusion of the Home Loan Banks could derail regulatory restructuring for Fannie and Freddie, and others have suggested that we should not include the home loans in any legislative effort because it is politically difficult.
Well, I disagree with both of those views. Over the last 2 months, I have sensed momentum building for this proposal to include the three GSEs. Some of the most significant players in the bank system have endorsed this concept. These are not just west coast players. I know this as a fact. I have had conversations with them. I believe support is much broader than the Chairman indicated. And as the others understand they are going to be at a cost of capital disadvantage, they will come around as well.
So, Secretary Snow, we have an historic opportunity here to create the optimal world-class regulatory framework to protect the financial system and the taxpayer, and I think this is the time for us to show leadership. We heard from Federal Reserve Chairman Greenspan. He said we need all three GSEs included, to view GSEs in total. You have said all three should be in. We know it is the right thing to do. We know momentum is building for it. Why don't we just do it?
Page 52 PREV PAGE TOP OF DOC Secretary SNOW. Well, Congressman, I am in broad agreement with everything you have said. And I, of course, reviewed, before coming up here today, H.R. 2803, your legislation, and see, as you know, broad complementarity between your legislation and what we are proposing as a set of concepts.
No, for the reasons you state, this is one market. They are part of this market, and they ought to be included. And the reason I suggested earlier that I thought that, despite some holding back on their part now, there was a good prospect that they could come aboard, is the very cost of capital discrepancy which would be created, which I think there is a growing recognition of. And that will compel their entry into this regulatory system, or else they will be at a terrible competitive disadvantage. So I think, at least I am hopeful, that as they see this legislation moving, they are going to want to be aboard.
Mr. ROYCE. Well, I think we should includeyou know, as we move forward, I think for all of the reasons that you have indicated, Secretary Martinez has indicated, we should put forward this legislation in the optimal version and see if we cannot gather political support for it as we mark up the legislation. That is what I am proposing.
Secretary SNOW. Congressman, I would very much agree with you and hope that we can do that. I do want to make this point clear, though, that from the Administration's point of view, from Treasury's point of view in particular, just changing the geography creates no rationale to put it in Treasury.
The rationale for putting it in Treasury is this broader market knowledge which can be brought to bear on these issues because these markets integrate with lots of other markets.
Mr. ROYCE. And the expertise and managing those and so forth. Thank you, Mr. Chairman.
Mr. BAKER. The gentleman's time has expired.
Page 53 PREV PAGE TOP OF DOC Mrs. Maloney.
Mrs. MALONEY. Thank you, Mr. Chairman.
I thank you, Secretary Snow and Martinez, for your testimony, and I am pleased that the Administration has joined the debate on reform of the GSE regulators. I personally have long believed that the GSE regulators should be strong and independent and not subject to the yearly appropriations process to preserve safety and soundness, and I have cosponsored legislation in the past, advocating this position. I believe the current situation where OFHEO's resources appear to be stretched thin as it deals with the Freddie Mac restatement is an example of why this reform is needed.
But before I get into specific questioning, I also want to say that I am very concerned with the developments at the Federal Housing Finance Board on the issue of multidistrict bank membership. If we are going to have a 21st century Federal Home Loan Bank system, I believe it needs to reflect the reality of today's financial services industry where company operations are no longer confined by region or state lines. And I want to let you know that I want to work with you to resolve this issue, if it is determined that legislation is needed to make multidistrict membership possible.
My first question deals with GSE loan limits. Currently the GSE loan limit is well below the cost of the average moderate family home in the district that I represent, and many others across the nation. And I would like to know, is there any inclination on behalf of the Administration to further reduce that limit in any legislation, and do you favor keeping the process the same for setting the loan limits?
Secretary MARTINEZ. Congresswoman Maloney, if I might try to answer that. I would say that we have reviewed that at HUD from time to time, and have concluded that under the various suggestions that have been made, the limits would probably remain the same, given a different way of analyzing it from what currently is done.
Page 54 PREV PAGE TOP OF DOC And at this time we would be willing to discuss this further with Members if this is your desire, but we do not have a proposal to alter the current way in which the loan limits are set. It is not part of what we are proposing today, but we would be open to discussing it further.
Mrs. MALONEY. Thank you.
And, Mr. Snow, you mentioned the wider range of knowledge of Treasury, and I would like to really question how GSEs would fit into Treasury's role as a participant in the capital markets. And as you know, the Federal deficit will well exceed a record half trillion dollars in fiscal year 2004, and are you concerned that there could be a potential conflict between Treasury's role as a participant in the capital markets actively working to finance the U.S. debt, which now will be with us for many years, and the role as a regulator of GSEs, who are massive participants in the markets in their own right, and woulddo you see a conflict, or would you favor specific measures to prevent conflicts?
Secretary SNOW. Congresswoman, today, recognizing that both Treasury and the GSEs are large participants in the debt markets of the United States, we have a process for very close coordination. And before the GSEs go into the market with their debt instruments, they coordinate with Treasury so as to make sure that we know what they are doing, and we aren't acting in some way which exacerbates some market condition.
I don't see any reason why that would change. And whether we go forward withwhether you go forward with legislation to create this new entity, or whether that entity is in or out of the Treasury, that coordination, which is a well-established practice, would continue.
Mrs. MALONEY. So you don't think there would ever be a situation where Treasury would threaten GSEs because of how their debt issuances could increase competition with the U.S. government and the debt market?
Page 55 PREV PAGE TOP OF DOC Secretary SNOW. No, ''threaten'' is the wrong word. There is an interesting coordination, though, and that coordination goes on today where we regularly are in conversations with the GSEs about their debt issuances. That is I think an important practice, to continue to preserve orderly markets, but it is not a matter of threatening. It is a matter of maintaining orderly markets.
Mrs. MALONEY. My time is up. Thank you very much.
Mr. BAKER. I thank the gentlewoman for yielding.
Mrs. KELLY. Secretary Martinez and Secretary Snow, thank you very much for your patience with our questions.
Secretary Snow, I want to congratulate you on the structure of what I perceive to be an attempt to remove politics from a regulating system. The independent funding that you have asked for the new agency is one step. The other step is the fact that you would remove all presidential appointments from the boards. I think that limiting those two political possibilities with regard to this new agency really goes a long step toward removing politics, and I congratulate you on that because I think the American public really does not want a political situation. This is a financial situation and should be not involved in political structures, but if you are asking for no presidential appointments on the Fannie and Freddie boards, would you also call for no presidential boards on the boards of the Federal Home Loan Banks?
Secretary SNOW. That is an issue that I have not addressed in my testimony and for some reason have not had a chance to give much thought to. Let me think about that and get back to you because I have not. Maybe Secretary Martinez
Secretary MARTINEZ. I believe that currently board members of the home loan bank boards are not Presidential appointments.
Secretary SNOW. The Federal Housing
Page 56 PREV PAGE TOP OF DOC Mr. MARTINEZ. That is right. There are no Presidential appointments.
Mrs. KELLY. So what you are saying then, there would be no Presidential appointments to the boards of Fannie, Freddie, any of the GSEs, including the Federal Home Loan Banks, if the Federal Home Loan Banks were to be a part of this agency; is that correct?
Secretary SNOW. That is my understanding. Because they are currently appointed by their
Secretary MARTINEZ. Members of the Federal Housing Finance Board.
Secretary SNOW. By their board members, yes.
Mrs. KELLY. I wanted to ask one more question, and that is, in your testimony, you talk about timely corrective action. Would you be willing, both of you, to talk about what you consider to be timely corrective action? What do you envision in terms of some kind of an absolute stringent action and a strong fine? What are we talking about here?
Secretary MARTINEZ. Well, I would sayand, by the way, I also want to point out that our request is also that those parts of HUD's oversight over the GSEs that remain would also be independently funded, just as the Treasury would be. But I would say that, for instance, if we were to find a deficiency in meeting housing goals that we would immediately have the opportunity for enhanced civil penalties that could accrue or to take other administrative actions to enforce our housing goals so that we could direct the GSEs to take certain actions to enforce the housing goals. Right now, while they have always met them in the past, I think the goal setting as well as our enforcing of the failure to meet them would be a little up in the air.
Mrs. KELLY. Secretary Snow, do you want to answer that?
Secretary SNOW. With respect to the soundness and safety and that whole range of the regulatory jurisdictions, the timing would depend on the regulator's determination of what is needed. I wouldn't put any strictures or constraints on the regulator.
Page 57 PREV PAGE TOP OF DOC Mrs. KELLY. So you would leave it up to the regulators?
Secretary SNOW. To act as needed, yes.
Mrs. KELLY. I would like to explore that with both of you a little bit more, but I am going to yield my time. Thank you very much for being here.
Mr. BAKER. [Presiding.] I thank the gentlelady for yielding back.
Mr. GONZALEZ. Thank you, Mr. Chairman.
I am going to make some general observations which will be the backdrop for the questions.
You have heard a lot about consensus. My understanding of the consensus that has been reached among members is that OFHEO did not do a great job, and we can improve on it, and we should improve on it. That is our responsibility and duty. But I haven't heard the consensus that we are going to change the character or the purpose of a GSE. Because I would challenge everyone to say if you don't have them in the present capacity in what they do, then who would fill that void? And there is room for everyone out there. I truly believe that. I believe in the competition and I believe in the products being out there, whether it is the private sector or GSE. It is a combination. But there is a demonstrated need for the GSE. That is why they were created and why they continue to be viable today.
There should be constant, effective oversight. How are we going to do that? We can do it better than OFHEO. My fear, though, which you all have outlined, and my understanding is that you all are in agreement, there is a meeting of the minds that you understand GSE's role, how pivotal and important they are, and you want to maintain that. So I am hoping that I am reading that correctly.
Secretary MARTINEZ. Let me leave no doubt about that. You are reading that totally correctly. There is no misunderstanding there.
Page 58 PREV PAGE TOP OF DOC Mr. GONZALEZ. I appreciate that because then we are all on the same page when it comes to that. Let us just see when we get to the last chapter it remains in that form.
My question to you is, my fear iswhich you have outlinedreally it does contemplate indirectly or de facto changing the charter, changing the mission, changing the status, and even micromanaging GSEs if you think about what you all are proposing. Because if you go over just your statements, which are general in nature, I know, but the powers are going to be so broad that this world-class regulatory agency is going to have that they could affect it, and I can say de facto or even directly with some of the powers that you would have.
So the first question, and it will address it and will allow you to elaborate on it, let us say Secretary Martinez is in sync with the GSEs as to the goals, the mission, the product that gets them there, the means to the end. But you are only consulting. They only consult you, this world-class regulatory agency that may be within Treasury or I don't know where. Whichmy second question is world-class regulators require world-class expenditures and finances, but that is the second part of the question. The first one is the Secretary is in sync with GSE and such, they know the products that will get them there but wouldn't Treasury, if the regulator was in Treasury, have the final say? Don't they trump you? Don't they trump the GSE, which goes back to micromanagement?
Secretary MARTINEZ. What I view as a more important function of HUD's role as the housing-oriented department is the housing goals. I believe that as to safety and soundness, where now we have absolutely no oversight over the GSEs because it is done by OFHEO which by statute is independent of HUD and the only change would be that also the current and new programs would then be reviewed by Treasury or by the new regulator, the fact of the matter is that new program approval is not as vital a function towards the housing goals of the GSEs as the goals themselves. So we believe that under this regulatory scheme it will not lead to necessary conflict but it also will enhance our ability to enforce the goals and set the goals more appropriately, while giving Treasury the ability to do appropriate oversight over safety and soundness.
Page 59 PREV PAGE TOP OF DOC Don't forget that we are looking now at entities that are in the neighborhood of $1.5 trillion. These are very vital entities to the American economy, and I believe that by definition HUD is not a financial regulator. Some of these other regulations that you might define as micromanaging are really no different than the regulations that today any commercial bank has to live by in terms of bank examiners and other bank regulators.
So I don't believe that we are really looking to micromanage the entities. In fact, they are successful, and they are vital. What we are looking to do is enhance the confidence that the investor community would have in this regulatory scheme that would then give them an enhanced ability to continue to attract more and more market from around the world into the housing market for the American taxpayer.
Mr. GONZALEZ. But the new regulator has the final say as to how you get from A to B?
Secretary MARTINEZ. It has the final say as to safety, soundness and current and new product approval, but it does not have the final say as to what the housing goals should be. And even today we have that current tension.
Mr. GONZALEZ. I understand that, but how you achieve those goals is pretty important, isn't it?
Secretary MARTINEZ. Yes. But the regulator doesn't tell Freddie and FannieHUD doesn't tell Fannie Mae and Freddie how to achieve those goals. We tell them here are the housing goals
Mr. GONZALEZ. The Treasury, would because they would have final say over a particular product at any given point in time.
Mr. BAKER. That has to be the gentleman's last question because he has expired his time. But would you care to respond?
Mr. GONZALEZ. If Secretary Snow or Secretary Martinez would answer.
Page 60 PREV PAGE TOP OF DOC Secretary MARTINEZ. I think since I have been in the line of questioning maybe I should finish what I started, but I do believe that at the end of the day with consultation from HUD that we would achieve the kind of joint decision that is necessary and that responsibly we should come to it. I mean, it is not an either/or. I think we can work together to get this done; and, frankly, I would be greatly relieved not to have the appearance of authority without the actual authority that currently HUD enjoys.
Secretary SNOW. Could I just respond as well that we think of this new regulatorthe GSEs take their mission and their goals from HUD and, within those set of parameters, the new regulator would regulate with respect to safety and soundness. On this issue of micromanagement, the powers that we are seeking to give the new regulator are the powers that first-class bank regulators have, that the OCC has or Federal Reserve has, and I do not think anybody says that the Federal Reserve or the OCC is micromanaging the Nation's banks and neither by using these powers will the new regulator be involved in micromanaging these financial institutions.
Mr. BAKER. The gentleman's time has expired.
Mr. PAUL. Thank you, Mr. Chairman.
I first want to compliment Mr. Baker for having pursued this issue. He has been looking at it for quite a few years and has kept it alive, trying to point out some of the problems that the GSEs face with the excess of debt and some of the problems that we face. But I think that, from the conversation I have heard today, the consensus is that we just do not have enough regulations and all we need is a world-class regulator and everything is going to be okay.
I think we are failing to look at the real problem and the cause of our crisis we face. I am concerned that we are going to have a world-class adjustment to the distortions that we, the Congress, the Fed, and the Treasury have created over these last several decades; and it seems like there is essentially no concern about that.
Page 61 PREV PAGE TOP OF DOC These programs were originally set up to help poor people get affordable housing; today we have a program that helps people buy a house for over $300,000 and get subsidy for their mortgage payment. At the same time, the administrators of these programs make millions of dollars. So I think we have lost our way on this.
But the biggest concern I have is that Congress is not looking at the real problem, and to me it has been this implied credit and implied guarantee of this credit, are we going to get rid of this line of credit? Not likely, because that would cause a bit of chaos. But that is what has really blown these markets up, and they are distorted.
Also, we have the Fed very much involved in this. They probably wouldn't admit it, but the Fed on occasion will buy GSE securities. Foreign central banks buy these securities because it is implied that the Fed is going to come to the rescue.
Right now, overseas foreigners are buying less of these securities, and the dollar is a little weaker, and what is going to happen when they quit buying them or selling them and what is going to happen to our investors who buy Ginnie Mae and Freddie Mac? When the dollar weakens, interest rates go up. Already the interest rates are rising long term. Could a world class regulator deal with that? Not likely. I mean, I am concerned that there is going to be a panic out of these things. As the dollar goes down, interest rates go up. And we still haven't looked at the problem and that is this allocation of credit, taking money out of the market, excess of credit to begin with because the Fed is pumping it up just like they pumped up the credit into the NASDAQ and you had to have a burst in that bubble.
Some people think there could be a bubble here. Who knows, though? It might be a great bit of distortion, but there will be a correction.
I am concerned, and I would like Secretary Snow to comment on this. Do you have a concern yourself about what could happen here? This is a huge amount of debt, a lot of investors, a lot at stake. What happens if mortgage rates go up three points in the next year and the dollar keeps weakening? We have a huge current account deficit, and the currency always goes down when you run an account deficit like this.
Page 62 PREV PAGE TOP OF DOC So I would say that we are missing the whole point here thinking that all we need to do is come up with a new agency and a world-class regulator and we are going to do some good if we don't address the subject of the dollar and interest rates.
Secretary SNOW. Congressman, as you know, the dollar and the interest rates are largely a function of monetary policy, right? And, no, we are not proposing to put the Fed under this new regulator. What we are proposing to do is to put these housing entities that have such impact on financial markets under this new regulator and give that new regulator the complete authority that would be needed to deal with the soundness and safety of the financial system that it oversees. That would be helpful.
Some of the issues you deal with are properly approached through a sophisticated, risk-based set of capital standards with a sophisticated regulator applying those risk-based capital standards and adjusting the capital requirements to the risks; and those risks include the ones you have outlined, the risks of interest rates going up 300 basis points or falling 300 basis points. That is what that sophisticated new regulator would be required to look at.
We are saying, remove the current statutory restrictions on how you look at risk-based capital. Let the regulator free to apply the most sophisticated and current and modern approaches to the question of appropriate capital structure for these entities.
So, no, we do not go the whole way here in dealing with some of the external factors that drive these markets, but taking those external factors is something we cannot control through this entity. We give the entity the ability to set the capital standards in a way to take those factors into account.
The CHAIRMAN. [Presiding.] The gentleman's time has expired.
The gentleman from North Carolina, Mr. Watt. Do you want to try the other mike? This is not a conspiracy. It is like pitching from the stretch.
Page 63 PREV PAGE TOP OF DOC Mr. WATT. Nice to know that my baseball coach is not conspiring against me.
The CHAIRMAN. Only once a year.
Mr. WATT. Thank you, Mr. Chairman.
I thank Secretary Martinez and Secretary Snow for being with us. It has been interesting.
I guess I have the capacity intellectually to differentiate between regulation of safety and soundness on one hand and the mission of the GSEs on the other hand as a practical matter. However, there are some real concerns that I have and I guess I need to put them out not necessarily for an answer today but to try to talk through publicly what my attitude might be unless some of these questions can get answered.
It is a very powerful statement in your testimony, Secretary Snow, and that you have reinforced, that this Administration views the GSEs as, quote, ''private enterprises.'' private enterprises really have not done very well in achieving things other than making money. Most them do not really give much of a damn about poor people and whether they have housing or not, and it seems to me that an overemphasis in that direction can only make matters worse.
Secretary Martinez was absolutely right in his response to an earlier question when he said that the problem is that HUD has never had the resources to meet the mission that it has been given, and I wonder whether this further bifurcation doesn't exacerbate that.
I also wonder whether this may be a massive shell game, much on the order of what we did with the INS when this Administration decided we didn't need something called an INS anymore. Let us transfer the responsibilities over to the Attorney General and let the Attorney General deal with this.
There seems to be a growing first and second team, first and second class of departments and the importance of departments in this Administration. Those that control the financial aspects of what is going on in the world and the security aspects of what is going on in the world seem to be getting bigger and bigger and bigger, and the ones that have some involvement with the human aspects of what is going on in our domestic environment seem to be getting smaller and smaller and smaller with less emphasis. So I am worried about that.
Page 64 PREV PAGE TOP OF DOC I do not know how transferring oversight from OFHEO to the Treasury does anything other than move a shell. It is kind of enlightening to me that there is nobody here at this table to testify on behalf of OFHEO. Where are they? What do they think about this? Are they so second class now in this hierarchy that we are not even going to regard their opinion? They have been the regulators. They are the regulators currently.
So there are some bigger issues going on here that I have trouble dealing with, and I will keep trying to grapple with them. I am trying to keep an open mind about this. I am not adverse to what is being proposed. I just don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poor people and lower income and middle income people who need housing, when it is quite obvious to me that the private enterprise mentality of the GSEs and this Administration is directly at odds with the public mission of providing more housing to lower income people.
The CHAIRMAN. The gentleman's time has expired. You may respond.
Secretary MARTINEZ. If I may comment on a couple of issues that Mr. Watt has raised.
First of all, Mr. Watt, let me say that I don't believe we are intrinsically changing the mission of the GSEs, because we are not touching the charter, and their mission is really given by their charter, not by what we are talking about here, which is the regulations of their safety/soundness, new program approval, and their housing goals.
Secondly, sir, I hope you will support this proposal that we have, because we are not going to create a smaller HUD. We are going to strengthen HUD. You are going to give me by this legislation a new GSE housing office within HUD. You are going to give me the ability to have that office independently funded so I do not have to have that office be only funded through the political process, and that is the way other financial regulators are funded. You are going to also give me the ability to have enhanced administrative authority to ensure those housing goals that we set are being followed. I am going to have enhanced civil penalties to enforce those housing goals, and the housing goals essentially are what you and I
Page 65 PREV PAGE TOP OF DOC Mr. WATT. Until the Treasury tells you, you can't do it.
Secretary MARTINEZ. That is not correct. That aspect of what I do will not in any way be under Treasury. The part that is less important to what we do but that is more connected to safety and soundness has to do with new and current program approval. Those things are more closely connected to safety and soundness. They should be under one regulator, not divided under two regulators.
The CHAIRMAN. The gentleman's time has expired again.
Secretary MARTINEZ. One last thing, if I may say, if in fact there is an inference that right now because OFHEO somehow is under HUD that OFHEO and I are working together in oversight of GSEs, that is a misperception.
Mr. WATT. All the more reason they should be on the table, it seems to me.
The CHAIRMAN. The gentleman from Connecticut.
Mr. SHAYS. I want to thank you both for being here.
As someone who is tremendously concerned about the GSEs, I think this Office of Housing Finance Supervision is a step in the right direction. When I hear some of my colleagues talk about the present system working so well, in my judgment OFHEO is a joke. Congress gives them about one-third the money to regulate, and you all are asking that this office of supervision have no more power than the OCC, the FDIC, the Federal Reserve, and OTS, Office of Thrift Savings. So you are asking that they have no more power, but people in this committee do not think that the 20th and 40th largest companies or the second and fourth largest financial institutions should have the same kind of regulation. It blows me away.
Now, I have to say to you, Secretary Snow, you blew me away when you said this, that you didn't think they should come under any security regulation in the 1933 Act because you said there is no evidence of fraud or corruption within any of the GSEs, which I think is about as an irrelevant a comment as you can think of.
Page 66 PREV PAGE TOP OF DOC That is like saying the S&Ls, no problem here, but it blew up in our face. The auditors doing consulting, this committee came and said, no, we don't mind auditors doing consulting. That blew up in our face.
Enron, the directors didn't direct, the managers didn't manage, the employees didn't speak out, the lawyers didn't do their job, the auditors didn't do their job, the bankers didn't do their job, the investors didn't do due diligence, the rating agencies didn't do their job, but we saw no problem with Enron.
But when we saw the problem with Enron, we then said we are going to have Sarbanes-Oxley. And, Secretary Snow, when we did Sarbanes-Oxley, the GSEs didn't come under it because they didn't come under the '33 and 1934 Act. So then what did we do? We voluntarily got them to comply to the 1934 Act.
I don't understand how we can say that trillions of dollars of transactions shouldn't be looked at. And could you explain to me why your position would be diametrically opposite to Allen Greenspan who didn't say we haven't seen corruption? He said, of course they should be under it. They are a Fortune 500 company. Please explain to me why.
Secretary SNOW. Well, Congressman, as you I think know, we have been in the forefront of urging both Fannie, Freddie and the home loan banks to go under the 1934 Act.
Mr. SHAYS. Why urge? Why is it their decision? And Freddie hasn't even done it yet. And let me ask you this: With all due respect, isn't it true that Freddie is in a little problem right now?
Secretary SNOW. If I could just complete the answer, because I think you will get the full picture then.
Mr. SHAYS. I am sorry.
Secretary SNOW. We don't have the authority to mandate they go under the '34
Page 67 PREV PAGE TOP OF DOC Mr. SHAYS. You can recommend.
Secretary SNOW. Well, that is what I am saying.
Mr. SHAYS. But you recommended they may not.
Secretary SNOW. No. Let me just finish the answer, and then I think you will get the full story.
We have urged them to go under the 1934 Act. Now, you know the 1934 Act. The 1934 Act deals with corporate disclosures. It is the act which is the subject of Sarbanes-Oxley, and it is the fundamental act to oversee the regulation of the securities markets. We think it is essential that those entities all be under the 1934 Act.
Mr. SHAYS. What about the 1933 Act?
Secretary SNOW. Now let me move to the 1933 Act and make a distinction. The 1933 Act deals with a different subject. It deals with registration of securities, which is a separate subject, related but separate.
Mr. SHAYS. You don't think that is important?
Secretary SNOW. If you will let me, I will finish and tell you what I do think. I think that there is no need demonstrated for those entities to go under the 1933 Act. And maybe you weren't here when I addressed this earlier, but what I said earlier is
Mr. SHAYS. I just don't want to take my time. You have said there is no need, and I understand. We just have a dispute.
Secretary SNOW. But I am trying to explain why there is no need. There is no evidence of any fraud in the issuance of securities.
Now, what the 1933 Act deals with
Mr. SHAYS. I need to interrupt you because you have just repeated your statement. But the bottom line is it has a lot to do with their reserve requirements, and we know that these institutions have half the reserves set aside, and I just want to get to the second point. You, to Mr. Baker, said that this new authority can exchange reserve requirements, correct?
Page 68 PREV PAGE TOP OF DOC Secretary SNOW. Yes. We
Mr. SHAYS. But you said
Secretary SNOW.are proposing a broad expansion in the authority with respect to risk-based reserves.
Mr. SHAYS. But not minimum?
The CHAIRMAN. The gentleman's time has expired.
Mr. SHAYS. Can he answer that question? Not the minimum?
The CHAIRMAN. The gentleman's time has expired. The Secretary could answer
Mr. SHAYS. The gentleman was allowed to answer the question
The CHAIRMAN. The Secretary may respond.
Secretary SNOW. We see no need to change the minimum standards now. What we are proposing, though, is that the agency have all the authority it needs to deal with capital standards, and my comments I think were misconstrued by you when you said I was making some observations with respect to general practices at these agencies. I was simply talking about the 1933 Act, and there we see no need for inclusion. In fact, as I said earlier, I think the SEC has observed that they don't want to see that happen because the issuances are so vast that they would overwhelm the process. Congressman, as you probably know, today, the Treasury has authority with respect to the issuance of debt instruments by those entities, and we have seen no necessity to exercise that jurisdiction.
The CHAIRMAN. The gentleman from New York, Mr. Crowley.
Mr. CROWLEY. I thank the Chairman.
I sat here through two and a half hours of testimony, and I appreciate it, and I know both of you gentlemen have as well. Both Secretaries have givenit is interesting to me in sitting here listening to the discussion and your testimony earlier that two Secretaries woke up one morning and decided that one would transfer part of their jurisdiction to the other without considerable amount of discussion and including discussion I am assuming with the apolitical wing of the White House in drafting just how that would come about, and I am sure there was considerable discussion, Secretary Martinez, within your agency as to whether or not this should happen in the first place.
Page 69 PREV PAGE TOP OF DOC Obviously, transferring jurisdiction means responsibility shifting and a failure to some degree of HUD, not speaking specifically of your reign during this time but certainly throughout the history of HUD to properly investigate and to oversee these entities and now shifting them to Secretary Snow's division.
I know back in 2002 there was an amendment of VA HUD that was proposed I believe by Mr. Hinchey to increase the funding for OFHEO to help them in terms of their needs to properly regulate Freddie Mac and Fannie Mae, and I will just note that that amendment was defeated. If it was even allowed to be brought up on the floor I believe it was defeated by this Congress.
I think it is interesting that back in 2002 there was an attempt made to try to bolster the oversight capabilities of HUD, that it was defeated by this Congress and now the result is that we see that the answer is to shift responsibility from the entity that we did not properly in my opinion give resources to enough to do the job, and we all have had problems with the oversight, to properly do the job, so the answer is let us not try to fix it within HUD, let us transfer responsibility, in fact creating more bureaucracy. I think it is interesting under this Administration of a Republican presidency and Republican government both in the House and the Senate they are actually creating more bureaucracy, is rather interesting from my point of view as a Democrat.
Secretary Snow, I can't help but have you here in front of me as well at this time to just comment on the overall issue that really I think is the heart of what Americans are concerned about right now. Some of it relates to what we are talking about. You mentioned earlier that there is no apparent immediate need to do this. I am concerned somewhat about what effect this may have on the overall market, the secondary market but also the market in general.
We know that jobs continue to be lost in this country. I just note for August alone 93,000 jobs were lost in this country. That was after the $350 billion tax cut. The President's package went into effect, and we were told we were going to see an increase in job creation. In fact, we continue to lose jobs. At this rate, the President will not see the 1.4 million jobs that he has promised through the end of 2004 if this continues, and I believe it probably will continue.
Page 70 PREV PAGE TOP OF DOC My question really is, what is happening in this economy? I asked the same question of Chairman Greenspan and got a roundabout answer. And where are the jobs that this country needs in order to get us back on our feet?
Secretary SNOW. Jobs depend upon growth and getting a strong recovery. The recovery is beginning to get under way. In fact, it is accelerating; and with the recovery I am confident we will see jobs expand and unemployment come down. But employment is a lagging indicator, and one of the things that is remarkable, Congressman, about the American economy today is the intensity with which companies and businesses are pursuing productivity.
The last 3 years have been a period of relatively weak demand following periods of ebullient demand, very strong demand, and now without that strong demand, companies have looked at their cost structures and they have taken out an extraordinary amount of costs. They have learned to do more with less. They have gotten more productive, as revealed by those productivity numbers that came out for the last quarter. While that is good in the long run because it make the pie bigger and creates more overall wealth, it is complicating in some ways this jobs picture. But with the strong growth we are going to see, I am confident, in the quarters ahead as growth is now forecast at over 4 percent by many outside forecasters for the second half and over 4 for '04. We will see those jobs come back.
Mr. CROWLEY. Do you want to change the President's anticipation of job growth of 1.4 million?
The CHAIRMAN. The gentleman's time has expired.
Before I recognize the gentleman from Texas, I know, Mr. Secretary, you have a very important appointment at the White House at one o'clock; is that correct?
Secretary SNOW. Yes, Mr. Chairman.
The CHAIRMAN. We will be recognizing Mr. Hensarling for the last round of questioning, and the Chair would indicate that members have 30 days in which to submit written questions to either you or to Mr. Martinez. The gentleman from Texas.
Page 71 PREV PAGE TOP OF DOC Mr. HENSARLING. Thank you, Mr. Chairman. Not wanting to hold up the President of the United States, I shall be brief.
Not long ago, the Administration nominated Mark Brickell to head up OFHEO. Should Congress pass legislation transferring OFHEO's responsibilities to a new agency, is it the Administration's intention to nominate Mr. Brickell to head that agency? Do either of you gentlemen have insight into that?
Secretary MARTINEZ. I don't believe I have any information about that that I can share with you.
Mr. HENSARLING. Secretary Snow?
Secretary SNOW. Neither do I, except to say we have a high regard and support the pending nomination of Mr. Brickell.
Mr. HENSARLING. There was an article in the Wall Street Journal today alluding to a study floating around in the other body indicating that a failure of the GSEs could cost the taxpayers hundreds of billions of dollars. I am curious, are you familiar with the study and, if so, do you consider it unduly alarmist? What opinion might you have on potential taxpayer exposure?
Secretary SNOW. I have not seen that study. I just saw the newspaper reference to it, Congressman. We look forward to getting into that, but, no, I have not seen it.
Mr. HENSARLING. Finally, in the discussion of including the Federal Home Loan Banks into the ambit of potential legislation, do you consider the safety and soundness issues to be similar, or to be identical? Also, given that the Federal Home Loan Banks are not publicly traded companies, should they be under the same regulatory burden and financial disclosure of publicly traded companies?
Secretary SNOW. As you know, some of them have sought to get under, to make the same disclosures as publicly traded companies and probably will move in that direction in the future. Yes, I think for reasons I went over earlier that they present the same sorts of issues. They are in the same fundamental markets, and their soundness and safety regulation ought to be comparable to the other GSEs.
Page 72 PREV PAGE TOP OF DOC Mr. HENSARLING. Mr. Chairman, I yield the balance of my time to Mr. Baker.
The CHAIRMAN. I thank the gentleman.
Mr. BAKER. Mr. Chairman, I believe the gentleman is going to yield to me.
The CHAIRMAN. I am sorry.
Mr. BAKER. I will make it real quick.
Just for points of clarification, Mr. Secretary, on the capital issue, I understand the position currently is we do not seek nor do we expect to change any capital standard immediately on establishing whatever this new regulatory body would look like. But coupled with that is the statement that we do not, however, wish to limit our authority to change capital standards as we see fit both with regard to minimum or risk-based, based on a staff analysis of the risk assessment of the institutions or leverage or whatever standards professionals may choose to use. You do not want to have a regulatory system that constrains your ability to act in the public interest.
Secretary SNOW. That is right. That ought to be the decision of the new regulator.
Mr. BAKER. Thank you. I thank the gentleman for yielding.
The CHAIRMAN. The gentleman's time has expired.
On behalf of the entire committee, let me thank both of you gentlemen for what was an extraordinary hearing. We have covered a lot of ground. We appreciate both your strong leadership on this issue, and the committee now stands adjourned.
[Whereupon, at 12:45 p.m., the committee was adjourned.]