Segment 1 Of 3     Next Hearing Segment(2)

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U.S. House of Representatives
Subcommittee on Capital Markets, Securities, and Government Sponsored Enterprises
Committee on Banking and Financial Services
Washington, DC.

    The subcommittee met at 10:08 a.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Manzullo, Royce, Ryan, Sweeney, Biggert, Terry, Roukema, Riley, Kanjorski, Bensten, Waters, C. Maloney of New York, Hooley, Jones, Watt, and Capuano.

    Chairman BAKER. I would like to call this hearing of the Capital Markets Subcommittee of the House Committee on Banking to order.

    The Committee meets today for its third time on a series of meetings relating to the appropriate regulatory structure and market discipline of the housing Government sponsored enterprises.

    To date, we have heard from the principal regulators and the GSEs themselves. It is the intention of the hearing this morning to receive comment from consumer interests as well as taxpayer watchdog organizations, as they are characterized.
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    I have been informed that the fourth member of our first panel this morning, Mr. Nader, is going to be detained from arriving on time, and it is my intention to proceed with the first panel and perhaps have Mr. Nader testify as an ad hoc second panel and then move on to the remainder of our witnesses later in the hearing so as to not unreasonably delay our proceedings.

    I certainly want to express my appreciation to all the witnesses who are participating here this morning and certainly appreciate the effort they have exhibited in getting testimony to us in advance of their appearance here this morning.

    At this time I would ask Mr. Kanjorski, the Ranking Member, if he would choose to make an opening statement at this time.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Mr. Chairman, the opportunity to speak today at this third hearing on H.R. 3703, the Housing Finance Regulatory Improvement Act, is appreciated.

    At our last hearings in March and May on this legislation, we heard from the present regulators of the housing Government-sponsored enterprises or GSEs, the U.S. Department of the Treasury, and the GSEs affected by this bill.

    During my opening remarks at those hearings, I noted that we should move forward cautiously in considering this bill so as to ensure that we maintain the delicate balance that has led to 67 percent of U.S. families owning their own homes.
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    I want to reiterate that viewpoint today. As we proceed in future weeks and months, we must renew our efforts to ensure that we do not accidentally raise home ownership costs.

    Although some have suggested that we should mark up H.R. 3703 later this year, from my perspective, we should not move precipitously by attempting to legislate in the 106th Congress on this complex and important set of policy issues. We should, however, continue to use H.R. 3703 as a focus of our subcommittee's oversight activities.

    In order for our oversight to be effective, instructive, and objective, we must ensure that our hearings are well crafted. Comprehensive hearings will help us to methodically debate the costs and benefits of H.R. 3703. In addition, it will allow us to more thoroughly examine the many public policy issues related to the mission compliance achievement and the safety and soundness regulations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

    During my opening remarks at the last two hearings, I suggested that we convene a public roundtable discussion with representatives of all the interested parties. I believe that this forum is the most appropriate way for us to consider these issues. A roundtable would promote a free, fair, and vigorous deliberation by forcing the participants to challenge each other's assumptions and assertions in an open environment. It would also provide us with greater insights than would testimony that has been vetted and sterilized through the clearance process.

    A roundtable would further allow us to more fully educate Members of our subcommittee about the substantive issues involved in this debate and the real effects the bill would have on our complex and successful housing finance system. I remain hopeful that as we proceed in the future with our oversight of the GSEs, our subcommittee will host a roundtable to discuss more completely the need for and the implications of this legislation.
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    Absent conducting such a roundtable today, we need to ensure that at each hearing our witness panels are balanced, containing a multiplicity of interest viewpoints, and a broad representation of individuals.

    To improve the quality of today's proceedings, I would therefore request unanimous consent to submit for the record letters that I have recently received from a number of community advocates and affordable housing groups.

    Chairman BAKER. Without objection.

    Mr. KANJORSKI. In closing, Mr. Chairman, I look forward to hearing from each of our witnesses today. As we move forward with our oversight, I additionally hope we will not only make a greater effort to consult one another about the structure of, witnesses for, and content of future hearings, but that we will also work together to lower home ownership costs for all Americans.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    For Members on our side of the aisle, I intend to follow our established practice of recognizing Members by the time of their arrival this morning. And accordingly, Ms. Roukema would be recognized for her opening statement.

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    Mrs. ROUKEMA. I thank you, Mr. Chairman, and I do appreciate these hearings today.

    These are very serious oversight hearings and are extremely important. I would say that Mr. Baker has raised several issues which we need to explore very carefully.

    Namely, potential systemic risk due to the size of the housing GSEs, appropriate capital requirements, bank ownership of agency securities, and possible concentration problems.

    At the last hearing I made it clear that I am very concerned about the allegations of mission creep. Congress created these GSEs to address a specific problem, which the private sector could not address.

    They should not get into activities like real estate brokerage, mortgage insurance and consumer lending, which is beyond their specific charters. And I want to thank Mr. Baker for undertaking this very serious subject.

    However, he has embarked on what will probably be an extended process—at least it is my opinion that it should be an extended process—and we should not take precipitous action.

    I want to make it clear, however, that while I endorse these hearings, moving the legislation is another matter. I believe, Mr. Chairman, you will remember when you and I had the colloquy on the question of how quickly this would be moved, and I had thought that at that second hearing that we had agreed that quick action would be ill-advised, but that is evidently still an open question.
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    But I want to stress that all of us are for the American dream of home ownership. And based on this, we must look at and understand all the potential effects, including unintended consequences of precipitous action on H.R. 3703. None of us want to increase the cost of home ownership, even if inadvertently.

    So I would say that we should look at Fannie and Freddie in all kinds of ways and support the continuation of the credit line if Fannie and Freddie meet their housing goals.

    Another example of changes that should be looked at is whether or not there should be one regulator. Some would want it to be HUD, others would want the Federal Reserve to undertake the function, and I do not think it is at all clear to any of us what would be the appropriate way.

    There is no consensus on this, and I think that it is a good example of why we should be very thoughtful and extended in looking at whether or not there are unintended consequences.

    I just might say out of context of my statement—that it is extraordinary that we have these two groups, these groups that are before us, the left and the right meeting around the middle. That may tell us something about how carefully we should be looking at all of the consequences of this legislation.

    I do think, as has already been clearly stated, that home ownership is at an all time high, and the bottom line is that the GSEs have done a great job. Without going into a lot of other details, I would like to say every year, Freddie and Fannie have exceeded the goals which HUD has set out for them, and they have adopted guidelines which prohibit the purchase of predatory loans.
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    I would like to put these guidelines in the record, and I think I did put them in the record at the last hearing. And I think that we should be reminded of that action today.

    I also would further note that I was involved in the 1992 conference where the new capital standards for Freddie and Fannie were established.

    The S&L crisis was fresh in our minds at that time, and I think we did a good job on the capital requirements for Freddie and Fannie.

    They have the ten-year stress testing requirement in addition to the capital standards, which is extremely rigorous. Very few banks or savings and loans could meet the requirements which Fannie and Freddie meet, and they are in good shape financially.

    That is not again to say that we should not have these oversight hearings and that some changes might be in order, but we should not be taking precipitous action, and we should be carefully evaluating this.

    And I thank you, Mr. Chairman, for this opportunity in this hearing. It will again refocus our minds on American home ownership.

    Chairman BAKER. Thank you, Mrs. Roukema.

    Mr. Capuano.
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    Mr. CAPUANO. No.

    Chairman BAKER. No statement.

    Mr. Watt, would you care to have an opening statement?

    Mr. WATT. [Nods in the negative.]

    Chairman BAKER. Let's see, Mr. Ryan, you would be next.

    Mr. RYAN. Thank you, Mr. Chairman.

    Mr. Chairman, as we found out at the last hearing, it is difficult to obtain an admission from the GSEs that they enjoy an implicit subsidy from their Government-sponsored enterprise status.

    However, I firmly believe, as does the Congressional Budget Office, the GAO, the Treasury, the Federal Reserve, and Wall Street that there is an implicit subsidy.

    As a result, Fannie and Freddie are able to use their GSE status to grow and profit by issuing debt at near Treasury rates while making money by taking on greater risk, such as repurchasing the mortgage-backed securities.

    In a statement last September, Franklin Raines, the Chairman of Fannie Mae, said that they would achieve an annual earnings growth of 15 percent over the next four years, which is commendable.
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    The problem I see with this is that in order to maintain a double-digit earnings growth as they have over the last decade, Fannie Mae will have to take on more and more risk.

    Taking into consideration that Fannie and Freddie have already guaranteed practically three-quarters of the conventional and conforming mortgage market, I do not see any other way to continue the prodigious growth without breaking their congressionally mandated charters or by repurchasing greater amounts of mortgage-backed securities and thus concentrating their risk.

    To this end, I am concerned about taxpayer liability as Fannie and Freddie take on greater risk to increase profitability to shareholders, something that is clearly within their realm, which is their prerogative as a private company, but not the mission as a function of public policy.

    I still remain convinced that the retaining of mortgage-backed securities at this rapid pace is not the core to the GSE mission and is merely taking on more of an unnecessary interest rate risk for greater return on equity regardless of the new hedging devices that may be employed to offset the possible losses.

    Further, I would like to point out that an important statement from Chairman Greenspan in his May 19th letter to you, Mr. Chairman, is noteworthy. It is a point that is often taken for granted in this debate.

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    But Greenspan writes, quote: ''The Federal Government guarantees, implicit or explicit, are one way, along with Government outlays and mandates in the private sector, that the Federal Government makes claims on the real resources of the private sector. Subsidies accorded to GSEs are of necessity at the expense of other Federal or private-sector initiatives and hence are ultimately financed by households either through taxes or through reduced accumulation of wealth.''

    We often hear about the outright benefits that the GSEs get that accrue to Americans to lower mortgage rates, but in many ways we rarely discuss the hidden costs. And that is why I am pleased that we are having these hearings and we are going into these issues.

    I am also concerned that Fannie and Freddie may seek to expand into areas outside of the conventional conforming housing market, things we just heard from Ms. Roukema.

    Aside from moving into Jumble loans and sub-prime loans, Fannie and Freddie could use their special status and cheap bonds to move into general financial services such as home equity loans or other consumer credit markets.

    Unfortunately, this implicit Government subsidy would give them an unfair advantage over their would-be competitors.

    I believe that Fannie and Freddie have played a very important role. They are playing a very important role in securitizing the secondary market, and I do not think anybody here is really rejecting that.

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    The point is, this relationship is an odd one. It is an odd relationship where there are two mandates or two bosses, so to speak.

    There is a shareholder mandate, and there is a Government mission mandate. And in many ways, those two mandates are contradictory toward one another.

    That is why I think it is important that we in this Committee reveal and look into these conflicting mandates to see if we are moving beyond the best interests of the taxpayer or whether we are still within those confines.

    And that is why I am pleased that we are having these hearings, and I look forward to hearing the witness testimony later on today.

    Chairman BAKER. Thank you, Mr. Ryan.

    I am advised that we have one vote pending now on the House floor. I would suggest that we recess our proceedings and reconvene as quickly as possible.

    Thank you. We will be back momentarily.


    Chairman BAKER. If I could ask everyone to take their seats, we will reconvene our hearing this morning.

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    The last Member to give an opening statement was Mr. Ryan, so at this time I turn to the Democrat side, Ms. Hooley.

    Ms. HOOLEY. Thank you. I have probably more questions than an opening statement today. This is an issue I think we need to all understand how it affects our consumers, and I am looking forward to the hearing today.

    Thank you.

    Chairman BAKER. Thank you very much.

    I do not know if we have other Members to return quickly or not. What I would suggest we do in order to facilitate our hearing is just to proceed. If other Members choose to enter their opening statement into the record, certainly that will be done without objection.

    I am pleased to see that Mr. Nader has been able to join us. I thank you for your courtesy in getting here as close as you could to schedule this morning. As I said earlier, we have a very distinguished panel of witnesses representing various consumer perspectives this morning, and I do not know that Mr. Nader needs a particularly lengthy introduction.

    I would be shocked if anyone in the room does not know the credentials and history of Mr. Nader's profuse activities on behalf of consumers on a number of issues, and I am particularly pleased that, Mr. Nader, you had time to join the subcommittee this morning and give us your perspectives on Government-sponsored enterprises and any remarks you might choose to make about the pending legislation, H.R. 3703. Welcome to the Committee, Mr. Nader.
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    Mr. NADER. Thank you very much, Chairman Baker and Members of the Subcommittee:

     I am quite pleased that you are holding this hearing, especially to receive comment on your legislative effort to upgrade the oversight regulation of the three Government-sponsored enterprises which dominate the housing finance markets.

    While there are clear differences between the thrift industry and GSEs, H.R. 3703 is a reminder of what Congress failed to do to protect the taxpayers and the savings and loans a quarter of a century ago.

    For years, this Committee and its companion Banking Committee in the Senate handled the savings and loan industry with soft kid gloves.

    The Federal Home Loan Bank Board was allowed to carry out its functions more as a cheerleader than a regulator of financial institutions.

    And so when the savings and loan industry began to fall apart in the 1980's, it was politically difficult to impose stringent regulations and higher capital standards on this industry.

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    Only after the failures caused staggering multi-billion dollar losses to deposit insurance funds and taxpayer funds did the Congress reform the regulatory machinery, raise examination standards, and establish mandatory criteria to trigger an early warning system and require prompt corrective action.

    Looking back at this episode, Mr. Chairman, historians will wonder how the Congress could have failed to establish these protections long before the disasters of the 1980's.

    And of course, others honestly viewed the savings and loans as a primary source of funds critical to the production of badly needed housing in their districts, while other Members of Congress were very chummy with the industry and too willing to look the other way when the speculators and quick buck artists moved into the industry.

    As a result, tough oversight and strong regulation was not imposed on this industry. Of course, the savings and loans people were quite happy to use this line as a defense against what few reformers ventured forth in the Congress.

    In the end, this ''see-no-evil/hear-no-evil/speak-no-evil'' approach to oversight and regulation left the thrift industry a near wasteland and the taxpayers an estimated half a trillion dollars poorer in principle and interest over a thirty-year period.

    Today, the housing GSEs and their supporters are borrowing pages from the old savings and loan manuals on how to slow reforms.

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    Any suggestion for change in the high flying lifestyle of Fannie Mae, Freddie Mac or the Federal Home Loan Banks invariably elicits an immediate bombardment of charges from the GSEs that proponents of reform are destroying the great American dream of home ownership.

    Quote: ''It is a tax on home ownership,'' is a favorite cliche of Fannie Mae in response to even the mildest proposal for reform.

    I once said to a Fannie Mae executive: ''I guess your higher and higher salaries are also a tax on home ownership.'' Congress needs to look behind such facile, anemic defenses.

    For too long, Congress has played the role of an indulgent parent to the GSEs, with few exceptions, such as yourself.

    The GSEs have long since grown beyond adolescence. It is time for the GSEs to give up ties to the Federal Government that have made them poster children for corporate welfare.

    Most of all, Congress needs to look more to the protection of taxpayers and less to the hyperbole of the GSE lobbyists that form a standing army on Capitol Hill, some of whom are right in this room.

    The housing-finance GSEs were born as creatures of the Federal Government and have evolved as hybrid enterprises where much of the risk remains with the Government and the taxpayers while the profits flow to private shareholders.
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    Chairman Baker, your bill, H.R. 3703, takes a big step toward providing a more rational and stronger regulatory system and removing some of the more obvious subsidies to the GSEs.

    H.R. 3703 creates a five-member, full-time, presidentially-appointed Housing Finance Oversight Board as an independent agency and consolidates all regulatory authority for the GSEs under that Board.

    This will eliminate three separate agencies.

    One, the Office of Federal Housing Oversight, known as OFHEO; the Federal Housing Finance Board; and the Secretary of Housing and Urban Development, which currently share supervision of the housing GSEs.

    The establishment of a single regulator for the housing GSEs tracks the 1997 recommendations of the General Accounting Office—whose budget needs to be restored, by the way, to its former self. It will provide greater focus and consistency on oversight and safety and soundness of the housing GSEs than is possible in the present scattered system. The Board will include the Secretary of the Treasury, Secretary of HUD, and three citizen members.

    When this Committee was considering the so-called financial modernization legislation during the last three Congresses, I urged the same type of consolidation of the separate agencies that regulate depository institutions. That proposal got nowhere. I hope the future of supervision of the GSEs fares better.
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    There is one modification, however, I would urge for the single-agency approach to the housing GSEs. I strongly recommend that the Department of Housing and Urban Development continue to analyze and establish housing goals and transmit them to the independent board established under this legislation for enforcement.

    At a recent conference, a high official in HUD made the following statement, and I will paraphrase it. He said, ''Yes''—this was William Apgar, Assistant Secretary of Housing and Urban Development. Here is what he said:

    Quote: ''There are two clear and indisputable facts. One, the number of Americans in need of affordable housing stands at an all-time high. Two, Fannie and Freddie are making record profits.''

    I could add, three, Fannie and Freddie executives are making record compensation pay packages.

    HUD remains the Federal Government's expert on housing needs and this expertise should be utilized beyond the provision that the HUD Secretary be a member of the new board.

    Just as important, the legislation clearly focuses the board's attention on safety and soundness, and this focus needs to be maintained while HUD continues to provide the expertise on housing goals.

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    The legislation should also include provisions that will require ongoing disclosure of data by the housing GSEs that will provide specific information to enable the board and the public to track the geographical location, race, gender, and income levels of the homeowners whose mortgages are purchased by the GSEs. This should be disclosed by census tract.

    In addition, the board should be subject explicitly to the Freedom of Information Act and Sunshine Act requiring open meetings. That really needs to be made explicit.

    In an obvious effort to overcome the money problems that have hampered the operations of OFHEO, the bill provides for the board to be financed through assessments on the GSEs for, quote: ''reasonable costs and expenses'', without being subject to the appropriations process. I have misgivings about any Federal agency escaping the appropriations process—to wit, the Federal Reserve Board—but I recognize that OFHEO has special problems with the current process, problems that affect its ability to carry out its responsibilities.

    OFHEO, as the safety and soundness regulator of Fannie Mae and Freddie Mac, is forced to continually battle to hang onto its meager budget. Earlier this month, an appropriations subcommittee whacked nearly $5 million off of OFHEO's request for $26.7 million. This means fewer examiners and financial experts to track Fannie and Freddie's far-flung empires.

    In pleading for his budget, Armando Falcon, the Director of OFHEO, pointed out that his agency is trying to examine enterprises that own or guarantee $2 trillion of residential mortgages.

    To cut the budget of an agency trying to cope with these mammoth financial institutions is an outrage; a slap at the taxpayers who unfortunately bear the ultimate risk. Where are the investigative reporters who should be trying to find out what is going on in the House Appropriations Committee? There they are. They are over there at the table.
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    Is this the result of more of the ham-handed lobbying by Fannie and Freddie to limit scrutiny of their operations?

    OFHEO's budget problems are a prime example of why the reforms in the Baker bill are badly needed now. Not only do the GSEs dominate the mortgage markets, but they have a huge share of the U.S. debt market.

    As Chairman Baker has pointed out in these very hearings, the GSE debt of $1.4 trillion combined with GSE-guaranteed mortgage-backed securities of $1.2 trillion nearly total the $2.7 trillion of outstanding privately-held marketable Treasury debt. The Treasury Department estimates that the GSE debt may double to $3 trillion by 2005 and surpass the Treasury debt in three years.

    We are obviously not talking about GSEs interested only in providing the American dream of home ownership, as their national advertising campaigns suggests. They have a big appetite that grows bigger as they saturate the mortgage market. They will reach out more to maintain their high levels of profits and shareholder dividends.

    H.R. 3703 wisely gives the Oversight Board the duty of reviewing and limiting activities that go outside the GSEs mandate.

    A lot of Fannie and Freddie's profits come from their links with the Federal Government, which they retained after becoming a ''private'' shareholder corporation. These ties to the Government have given the GSEs great benefits in the marketplace, and as a result of these benefits, the GSEs are able to borrow in the market at interest rates very close to that enjoyed by the Federal Government itself.
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    A study by the Congressional Budget Office estimated that 40 percent of the earnings of Fannie and Freddie in some years could be traced to the benefits of their Government-sponsored status.

    Mr. Raines disputes that. He may be asked about his basis for that. Even Alan Greenspan, Chairman of the Federal Reserve Board, has chimed in with criticisms of the subsidies that pad the GSEs bottom line.

    The GSEs defend this largesse with the claim that the subsidy is passed on to home buyers. CBO's studies debunk the claim. It says that a third of the subsidy at least is pocketed by private shareholders, the corporations' executives, and lobbyists.

    Now, H.R. 3703 eliminates one of the most egregious forms of corporate welfare—a standby line of credit that could be drawn from the Treasury if the GSEs fell on bad times. Fannie and Freddie each have a $2.25 billion contingency fund at Treasury, and the Federal Home Loan Banks a $4 billion line of credit.

    Other benefits remain, including the exemption from local and State income taxes. Even when the District of Columbia was struggling on the edge of bankruptcy, Fannie Mae refused to cough up a dollar in lieu of the $300 million in taxes they escape annually through the exemption from District income taxes.

    And of course, they always imply that if they are ever required to pay District income taxes, they will move out to another jurisdiction that will be more permissive in inviting this tax escapee from the District of Columbia.
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    In addition, the securities of Fannie and Freddie are Government securities for the purposes of the SEC Act of 1934 and are exempt from registration. Their securities serve as eligible collateral for Federal Reserve Bank discount loans, and the Federal Reserve serves as fiscal agent for these issues. In addition, the Secretary of the Treasury approves the issues.

    The obligations are also eligible for unlimited investments by national banks and State bank members of the Federal Reserve as well as federally-insured thrifts.

    All these links are evidence in the eyes of the market that the Federal Government would rush to bail out the GSEs if they were in serious financial trouble. The market looks on these entities as fail-safe organizations.

    Chairman Baker has expressed concern about the fact that GSE debt has become a significant part of the assets of the banking system—an estimated $210 billion at mid-year 1999. National banks may invest no more than 10 percent of their capital in corporate bonds of one issuer. But, because of the special GSE provision that I noted earlier, bank investments in GSE debt securities are not limited.

    H.R. 3703 calls for a study by the FDIC of the impact that a GSE failure would have on the solvency of the banks. It is important that this study goes forward.

    Clearly, the special status of the GSEs has provided lucrative benefits for its executives. The National Mortgage News in an article headlined ''Who Wants to be a GSE Millionaire?'' recently came up with the figures on the top executives for 1999 and they are in the prepared testimony.
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    I will just point out, however, in a bizarre display of self-restraint, which I commend, the Chairman of Freddie Mac, Leland Brendsel, is making only $1,405,000, which is less than Fannie Mae's Vice Chair, Jamie Gorelick, recently of the Clinton Administration. She is making $1,443,978. I hope that if Mr. Brendsel hears these remarks he will not ask for a raise.

    While the executives may be doing well, there are important questions about the adequacy of GSEs' support for housing in low- and moderate-income and minority neighborhoods.

    An analysis of 1998 data conducted by Jonathan Brown of Essential Information indicates that in many MSAs, the GSE market share of 1 to 4 family mortgage loans in low- and moderate-income and minority neighborhoods was only one-half the GSE market share of such loans in upscale, non-minority neighborhoods.

    Now Mr. Brown has very, very detailed information on this and specific maps covering most of the United States, and I would urge Members of the Committee and the Committee's staff to contact Mr. Brown for further information.

    Another study conducted by the National Community Reinvestment Coalition says that Fannie and Freddie lag behind banks in financing single-family mortgages for minorities and low- and moderate-income home buyers.

    That study, based on 1995 and 1996 data, found that only 32 percent of Freddie's and 33 percent of Fannie's loan purchases involved single-family mortgages for low- and moderate-income home buyers. In contrast, the study said 41 percent of banks' single-family loans went to such borrowers.
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    The emphasis in H.R. 3703 is on safety and soundness, and that is important. But this Committee also needs to do more to examine the adequacy of the housing goals and the performance of the GSEs on affordable housing in low- and moderate-income minority neighborhoods, and that is Jonathan Brown's specialty.

    The regulatory improvements mandated by H.R. 3703 should be adopted by the Congress in this session. They are long overdue, and there is no reason to delay these taxpayer protections any longer.

    As this Committee proved in the enactment of reforms in the wake of the savings and loan debacle, bipartisan coalitions can be formed successfully on safety and soundness issues in the oversight of Federal regulation. This should happen now while the GSEs are prosperous, not when the fortunes of these institutions are sagging.

    Some Members may feel these institutions are so strong and so wealthy there is no need for the protections incorporated in H.R. 3703. They see no possibilities of downturns in their fortunes. But this ignores history.

    Few foresaw the collapse of the savings and loan industry. Even fewer believed tax money would be used to bail out insured institutions. But it happened, and the regulators, and for that matter the whole Nation, were poorly prepared for the disaster.

    Fannie Mae has had its own downsides. In the early 1980's, for example, Fannie was technically insolvent on a market-to-market basis and was losing money at the rate of $1 million a day.
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    Congress should act on this legislation while the sun is shining.

    Thank you.

    Chairman BAKER. Thank you very much, Mr. Nader. I really do appreciate your willingness to be here today and your forthright testimony. Thank you very much.

    Mr. NADER. Thank you.

    Chaiman BAKER. Our next witness is Mr. John Taylor, who is President and Chief Executive Officer of the National Community Reinvestment Coalition.

    I would like to point out for the record that previously you have served on the Consumer Advisory Council of the Federal Reserve Board. You have been on Fannie Mae's Housing Impact Advisory Council, and also on Freddie Mac's Affordable Housing Council. And I think it important for Members to know of your prior relationships with these organizations.

    Welcome, Mr. Taylor.


    Mr. TAYLOR. Thank you, Chairman Baker. Thank you for asking the National Community Reinvestment Coalition to testify this morning on the question of consolidating oversight of the Government-sponsored enterprises.
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    I do want to say that the mission of the National Community Reinvestment Coalition is to increase access to credit and capital for underserved neighborhoods, including inner city and rural communities.

    Toward that end, access to home ownership is an incredibly important part of our mission. And so I would like to associate myself with the remarks of Mr. Kanjorski and Mrs. Roukema on being leery and careful about any unintended consequences from any precipitous action.

    Nonetheless, we do support the effort to consolidate oversight of the GSEs by replacing the three regulatory agencies with one.

    A report by the GAO correctly suggests that a single regulator will enhance the compliance of the GSEs with their mission of providing financing of affordable housing in a safe and sound manner.

    A single regulator will be more efficient, we believe. One agency will find it much easier to coordinate regulation over safety and soundness and regulation over the mission of financing affordable housing. A single regulatory agency will also be more prominent and influential, in our opinion.

    A regulatory agency must be strong enough politically in order to enforce robust standards in affordable housing finance. HUD has done a commendable job implementing affordable housing goals for Fannie Mae and Freddie Mac, particularly I might say under Secretary Cuomo's leadership. But more needs to be done.
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    The two GSEs have significantly increased their purchases of mortgages made to minority and low- and moderate-income populations.

    In a report published for HUD, however, we found that Fannie and Freddie trail the banks, as Mr. Nader mentioned in his testimony, in the percentage of mortgages financed that were issued to minorities and low- and moderate-income populations.

    We also mentioned that while NCRC believes that our research was careful and our conclusions sound, we agree with Fannie and Freddie that the data on secondary market activity needs to be improved.

    Again, this is where a strong regulatory agency can ensure that complete and accurate data are gathered so as to better measure GSE compliance with their missions.

    The Federal Housing Finance Board is in the middle of a rulemaking exercise that will make permanent the pilot secondary market programs of the Federal Home Loan Banks.

    The FHFB, however, did not propose any affordable housing goals. NCRC disagreed with this. We believe that the regulatory agencies must implement such goals for any new secondary market program. This would ensure that all GSEs do their part in financing affordable mortgages.

    A word now on safety and soundness as it relates to predatory lending.
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    A strong regulatory agency takes bold steps to curb predatory lending practices that harm consumers and also threaten the safety and soundness of the GSEs.

    The leadership of Fannie and Freddie realized that they must not finance unsound predatory practices. And to their credit, Freddie Mac's CEO Leland Brendsel and Fannie Mae's CEO Franklin Raines have announced that they will not purchase loans with prepaid credit insurance.

    They have stated that they will not finance loans featuring usurious interest rates and steep fees.

    These are important steps, Mr. Chairman, but it is also important to recognize that Mr. Brendsel and Mr. Raines will not have control of the reins at Freddie Mac and Fannie Mae forever.

    Also, and probably more importantly, there are many other predatory mechanisms in addition to credit insurance and high fees that strip wealth that are not addressed in the GSEs' commitment to not be involved in predatory lending practices.

    To ensure comprehensive protection against predatory lending, the Federal Reserve should use its regulatory authority under HOEPA to lower the interest rate and fee thresholds for high cost loans.

    The Federal Reserve should also limit and prohibit abusive practices such as high balloon payments, steep prepayment penalties, and lending without regard to the borrower's ability to repay.
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    H.R. 3703 should empower a new regulatory agency that will prohibit the purchase of predatory loans with abusive terms and conditions.

    Predatory lending threatens the progress that has been made in reinvesting in minority and working class neighborhoods.

    Part of a comprehensive solution to eliminating predatory lending is aggressive oversight and regulation of GSE involvement in the subprime market.

    A word if I could on data disclosure, Mr. Chairman. Section 103 of H.R. 3703 requires that the GSEs publicly disclose financial and other information that is in the public interest.

    We commend you, Mr. Chairman, for including this provision in the bill. Publicly accessible data is the key to holding the GSEs accountable for efficient and equitable financing of mortgages.

    NCRC also asks the Chairman to consider enhancements to HMDA data and other databases on GSE activity that would provide more information on loan terms and conditions.

    Recently in their request for public comment, the Federal Housing Finance Board asked if a database on Home Loan Bank secondary market activity should include information on prepayment penalties, FICO scores and other characteristics of mortgages and borrowers.

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    NCRC strongly supported the inclusion of this information in the Federal Housing Finance Board database and urged that this data be public.

    NCRC supports this type of information being publicly available in HMDA and the public use database as well. All of the databases should also have information on the annual percentage rate.

    Mr. Chairman, consumers, regulatory agencies, and financial institutions have a right and a responsibility to understand how credit scoring systems judge the ability of consumers to pay their loans.

    Greater transparency of the credit-scoring system would enhance the safety and soundness of the financial industry by allowing all parties to question and debate the soundness of the credit-scoring criteria.

    Greater transparency also helps additional minority and low- and moderate-income borrowers prepare themselves for home ownership.

    NCRC believes that the borrower has a right to know his or her specific credit scores and the factors that went into that score.

    Fair Isaac and Company has just announced that it will start providing borrowers their credit scores. Likewise, the GSEs should disclose the credit scores and the factors behind those scores for any scoring system they develop.

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    H.R. 3703 should require disclosure of any GSE credit scores. The regulatory oversight agency must also continue conducting fair lending testing of the GSE underwriting systems as HUD has just started to do.

    Some brief comments about the structural and jurisdictional issues:

    As stated above, NCRC agrees with the GAO that a single regulatory agency would be more efficient. We are not convinced, however, that the regulatory agency needs to have a board representing many different interests.

    HUD is a logical choice, because it carries the prominence of a cabinet-level department and has been the regulator for both safety and soundness and mission compliance for Fannie Mae and Freddie Mac.

    Perhaps a new oversight agency within HUD can be on a semi-independent basis like OFHEO is now. To bolster its position of independence and prominence, the new agency should be funded by assessments on the GSEs instead of through the appropriations process.

    H.R. 3703 wisely adopts such assessments as the funding mechanism.

    H.R. 3703 has generated some controversy regarding Section 110, which grants the new regulatory agencies the authority to approve new actions undertaken by the GSEs. NCRC agrees that prior approval authority and public comment periods are necessary.

    Currently, HUD has approval authority over new programs of Fannie Mae and Freddie Mac. The regulatory agency must have prior approval authority in cases in which they think the products go beyond the GSE charters.
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    In the event that Fannie Mae and Freddie Mac and the Home Loan Banks do not meet the affordable housing goals, the oversight body should be in the position to prohibit new products that do not have the capacity to serve substantial numbers of minority and low-income borrowers or consumers.

    NCRC believes that the GSEs should continue to have access to the lines of credit with the Department of the Treasury if the GSEs continue to meet their affordable housing goals. NCRC proposes that the line of credit be cut off if a GSE does not meet its affordable housing goals for two consecutive years.

    I request that my written remarks be entered into the record, and I thank you for the opportunity to testify.

    Chairman BAKER. Thank you very much, Mr. Taylor. Without objection, all witnesses' written statements will be included in the record. Thank you.

    Our next participant is Mr. Peter Skillern, who I point out for the record is a member of HUD's Treasury Task Force on Predatory Lending and also a member of the HUD Government Sponsored Enterprise Oversight Committee, but appears here today in his capacity as the Executive Director of the Community Reinvestment Association of North Carolina, where he has been engaged for fifteen years in community redevelopment activities.


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    Mr. SKILLERN. Thank you, Mr. Chairman.

    CRA-NC's mission is to promote and protect community wealth, and we have done that by promoting investments into low-income communities. We have tried to protect them by being at the forefront of the anti-predatory lending initiative in North Carolina.

    My comments today address directly three questions that your bill raises.

    Is there a need for regulatory reform regarding the GSEs? And I would say, yes, there is, to the extent that we need to improve their performance. The structure of that seems to be less important to me as the political will to be able to actually implement what the guidance levels are.

    Product review. I think that HUD already has some of the important tools to be able to implement the review process. The question is whether it will be actually implemented to guard against those products which are harmful rather than helpful to promote home ownership.

    And is there a need for Government-sponsored enterprises in their role in the secondary market where they do receive Government benefits?

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    I would say, yes, there is. Conditional on the fact that they fulfill those missions and exceed the market in promoting affordable home ownership for our constituencies.

    These hearings play a really important role in highlighting the GSEs charter and their mission. It highlights the fact that this charter is not a right, it is a privilege and must be continually earned.

    I would like to recognize that Fannie Mae and Freddie Mac have done many good things for affordable housing communities, and Fannie Mae in particular can be noted for its partnership offices and its foundations contributions. And I hope that that hopes to ease some of the criticisms that may come following this.

    One, communities. Fannie Mae and Freddie Mac need to improve their lending to minority communities.

    In my testimony I highlight the discrepancies between the minority purchase loans, between Fannie and Freddie, and the standard market.

    I have also included a highlight of an article from the News and Observer which shows the level of participation in my hometown of Raleigh-Durham.

    The GSEs have questioned these numbers. They have done many good initiatives, but fortunately they have agreed that, yes, more can be done.

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    The effect of not having a strong, active presence of GSEs in these minority communities is that banks will not make loans where they cannot sell them to the secondary market. They cannot take on the risks and the expense, and so loans are not made.

    When loans are not made, it creates a credit gap, and the credit gap is where subprime lenders step into the market to fill.

    According to HUD's April 2000 report, ''Unequal Burden: Income and Racial Disparities in Subprime Lending in America'', subprime loans are five times more concentrated in black neighborhoods than in white neighborhoods.

    We would say that there is a correlation between the banking activities of providing prime market and the GSEs support of those activities and then the rise of subprime lending, and it would end that credit gap that is created.

    Subprime lending can be a very powerful and beneficial tool to credit building for people with impaired credit. It can be a great tool for democratizing credit to allow more people access to it. But there are some severe problems in the marketplace that we are concerned about.

    One is a pricing problem.

    How much should people be charged with impaired credit? According to a report by Freddie Mac, 10 to 35 percent of borrowers who obtain mortgages in the subprime market were actually eligible for conventional loans.
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    And according to Fannie Mae, half of all subprime borrowers could have qualified for lower cost conventional loans.

    Clearly, the subprime market is not simply serving those with impaired credit, but a significant portion who should have been getting credit from prime lenders in the banking market.

    Two, there are different and unfavorable terms and conditions within the subprime market.

    While subprime lending is predatory through outright deception and fraud, and it is easy to point to and say this is wrong and illegal, there is a wide range of practices that cumulatively, as they act together, serve to strip wealth and income from lower income individuals.

    While no individual one consumer lending practice may be bad, as a whole they end up having the effect of being wealth depleting, not wealth creating.

    Our third major concern with the subprime market is that it is unregulated.

    Depository mortgage institutions are regulated by the FDIC, the Federal Reserve, the Office of Thrift Supervision, and the Office of the Comptroller. The same cannot be said of mortgage brokers and nondepository mortgage lenders and warehouse lenders.
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    They are regulated only on a complaint-driven basis by HUD and the Federal Trade Commission. They are not evaluated on a regular basis for compliance.

    These three things—pricing, different terms and conditions, and not being regulated—create a market which the GSEs have both indicated that they are entering into. To date, Fannie Mae has not significantly and Freddie Mac has.

    Freddie Mac at the end of 1999 had purchased approximately $8 billion worth of wraps—guarantees on the mortgage securities for subprime lenders—and according to Inside B and C Lending, plan to do another $8 billion worth of wraps in the coming year. That is an increase of almost 50 percent of their last year's activities.

    Is this good or is this bad?

    Well, let me give you an example of a loan from one of their partners, Option One.

    Mary and Tom Smith needed to consolidate some debt, and they got their loan from Option One, one of Freddie Mac's prime partners. The Smiths are retired. They borrowed recently to help one child through college and one child with a bout of cancer. Their payment history is good, and they are African American.

    Armada Mortgage of Raleigh told the Smiths they could reduce their monthly payments by consolidating their debt. The interest rate would be 8 percent. This was a year ago. At closing, they found that the interest rate was actually 9.75 to 10.75 percent APR.
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    The monthly payments would not be $1,450 as promised, but over $1,700. The Smiths were charged $7,400 to originate the loan of $172,000—$7,400; that is over 4 percent. Their existing mortgage of approximately $123,000 was refinanced from a lower interest rate to a higher interest rate.

    Now at closing, the Smiths realized that some of these loan terms were different. In fact, there was also a balloon payment of $150,000 on a total $182,000 loan due in fifteen years.

    They said, ''This is not what we wanted,'' and the broker assured them that they could refinance in two months. Being too polite to walk out of the deal, which is a common experience in my interviews of people with subprime loans, too polite to walk out and say ''no,'' they signed.

    When they were not able to refinance with that same broker and that promise did not come through, they went to another lender to refinance and found that, in fact, they had an $8,500 prepayment penalty locking them into those onerous terms and conditions.

    The prepayment penalty by itself may not be bad, but it became the glue for these higher interest rates loans.

    This loan demonstrates our concerns about the GSEs entering into the subprime market. The Smiths have good credit history, but were charged a high interest rate and abusive fees on their subprime loans.
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    It is industry practice to pay a yield spread premium to place borrowers in higher rate loans so that everyone downstream gets to make more money off of that loan, and the prepayment penalty locks them into it.

    While Fannie Mae and Freddie Mac have both agreed to limited—Fannie Mae has adopted more of our principles that we are recommending, Freddie Mac has adopted fewer, and there are not adequate self-guiding guidelines for them to prevent buying these types of loans, in fact Armada Mortgage sold it to Option One and Option One then partners with Freddie Mac to wrap the loans.

    Here is the real kicker for us.

    We are concerned that this is a fair housing issue. If on one hand you are not making adequate loans, below market loans to minorities on this hand, but on this hand are purchasing or wrapping subprime loans with higher interest rates and higher fees in a disproportional representation to minority markets, there is a fairness issue here.

    This hand should be higher than what the market is providing prime product. This hand may not need to be here. If we are going to do subprime markets, terms and conditions cannot have such a disparate difference between the two.

    And in our testimony you will see graphs representing the proportional purchasing of Option One versus Freddie Mac.

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    Safety and soundness:

    The Smiths will have a hard time making this loan. If they default, will that hurt Freddie Mac and the wraps? No. Given their current level of size, the danger of subprime lending is not a current threat. But with the increased purchases of subprime lending, we are very concerned that it becomes a safety and soundness issue. But we are primarily concerned about that family and that neighborhood, and neighborhoods across America who will have higher default delinquency rates because of these high-cost lending loans.


    One, I would argue that corporate responsibility is an important one. One is for the GSEs to adopt the guidelines that we have provided in the back.

    Another recommendation is to commit more financial and human resources to the task of community lending to increase this side of the equation.

    Again, I want to recognize the good efforts that both institutions have done, particularly Fannie Mae. Freddie Mac is beginning to invest more with the establishment of a new community development lending office in North Carolina, but we certainly look forward to more.

    And for Freddie Mac, there is a list of recommendations in the testimony for what can be done.

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    Regulatory reform.

    We think HUD already has the authority to define the entry into the subprime lending as a new program and to exercise its oversight to draw the boundaries of what should and should not be allowed.

    Specifically, the new affordable housing goals, the GSEs should not be allowed to receive credit for affordable housing goals that are not monitored for compliance with fair housing, that have prepayment penalties, origination fees over 3 percent, or single-premium credit life insurance.

    HUD does need to be given authority to have an on-site presence at the GSEs to monitor, and they need the adequate resources to do the job. And so we are very supportive of the idea of an assessment fee on the institutions to pay for both OFHEO and HUD's costs.

    Additionally, we think OFHEO should be given the authority to evaluate for consumer compliance issues, not only safety and soundness, as this stream of loans that they are now entering into, as I have demonstrated, are not regulated. And OFHEO needs to be looking at that issue as well.

    A new regulatory framework may, as you recommend, may have been needed. But I think more important than that is for all of us today to exercise our moral and legal authority to make sure that this equation of fairness of more loans for minority and low-income communities, and healthy, safe loans in the subprime market, are the call of the day.

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    Thank you very much.

    Chairman BAKER. Thank you very much, Mr. Skillern. We appreciate your testimony.

    Our final witness on this panel is Mr. William Cunningham, whom we welcome this morning. Although testifying today as an independent investment analyst, in your professional life you are employed by the Board of Pensions of the Evangelical Lutheran Church, and we certainly welcome your presence here today.


    Mr. CUNNINGHAM. Thank you, Mr. Chairman. Thank you, Representative Kanjorski, Members of the Subcommittee also for giving me this opportunity to testify on the supervision and regulation of Government-sponsored enterprises or GSEs.

    Your bill, H.R. 3703, the Housing Finance Regulatory Improvement Act, comes at a critical time. The bill proposes a new regulatory structure for the three Government-sponsored enterprises.

    Given the importance of the legislation, I am honored to have this opportunity to comment. It is appropriate to note, as you did, Mr. Chairman, however, that my comments represent my own views and are not meant to represent the views of my employer, the Board of Pensions of the Evangelical Lutheran Church in America. Nor do my views represent the opinions of the GSEs or Wall Street. I come before this subcommittee as an independent analyst.
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    I would also like to take a minute and point out or mention one person I brought with me, my mother, Marie Cunningham Brown, who worked on Capitol Hill for twenty years as a staff member and put together many of these types of hearings. Her last posting on the Hill was with the great and good Representative Claude Pepper. So if I know anything about testifying on Capitol Hill, it is because I watched her put together many of these hearings.

    Now let me move on to my remarks. I will divide my remarks into five parts.

    First, a general discussion of social investing.
    Second, a description of the GSEs role in social investing.

    Third, background information on my activities in both social investing and the secondary mortgage markets.

    And fourth, I will outline my concerns with the GSE performance in fulfilling their public purpose mission.

    I will end with my views on certain aspects of the Baker bill.

    So if we could, let us take a look at social investing really quickly. Social investing describes a style of investing combining a desire to maximize financial return with an attempt to maximize social good.

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    Many believe social investing began with the Religious Society of Friends, better known as the Quakers. In 1758, the Quaker Philadelphia Yearly Meeting prohibited members from participating in the business of buying and selling humans. Religious institutions have been at the forefront of social investing ever since. And in the interest of full disclosure, I will note that I am a Quaker.

    In general, social investors favor environmentally responsible corporate practices, corporate practices that support workforce diversity, and corporate practices that result in increased product safety and quality.

    Social investing preferences are broad, however. Certain social investors prefer not to invest in companies involved in the production of medical equipment used in performing abortions, for example.

    Now the field has actually grown quite steadily over the course of the last decade. According to a study released by the Social Investment Forum, a nonprofit professional association dedicated to promoting socially responsible investing, more than $2 trillion is now invested in a socially responsible manner in the U.S.

    Now I am going to talk real quickly about social investing strategies and tie that to the GSEs. Social investors tend to use three basic strategies.

    The first is screening, and we are all familiar with screening investments. That is basically eliminating certain securities from a portfolio based on social criteria. Many social investors actively screen out tobacco company investments, for example.
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    The second strategy that social investors use is shareholder activism. Shareholder activism efforts attempt to positively influence corporate behavior. They basically include things like initiating conversations with corporate managers, dialoguing on issues of concern, and submitting and voting proxy resolutions.

    The final social investing strategy is positive investing. And positive investing involves making investments in activities and companies believed to have high and positive social impact. Positive investing activities tend to target underserved communities. These efforts support activities designed to provide mortgage and small business credit to minority and low-income communities. It is in this area that Freddie and Fannie are most active.

    Now if we look at social investing in the secondary mortgage markets, I am going to talk a little bit about activities that I have undertaken in this area, starting back in 1992, and tie that in again with the GSEs.

    Going back to a 1996 article in The Washington Post, I commented that, quote: ''It seems Freddie and Fannie's primary mission has been completed and completed successfully. Now it is time to look for a different mission, which could include finding mortgage money for low-income parts of the District and housing the homeless.''

    Others have recently echoed this sentiment. Federal Reserve Board Chairman Alan Greenspan noted in a letter to you, Mr. Chairman, dated May 19th, 2000, quote: ''The GSEs were chartered with the purpose of smoothing out regional imbalances in mortgage supply and integrating regional mortgage markets into the National capital markets. Much to their credit, they succeeded in accomplishing this goal many years ago.''
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    Mr. Chairman, I believe it is time to renew, refocus, and broaden the mission of the GSEs. I believe the first step in doing so requires the adoption of a new regulatory framework as outlined in your bill.

    With respect to their mission, I would like to see the GSEs become much more active in the low end of the housing market. And it is really surprising how all members of this panel have agreed with that part of the GSE mission.

    Now that might involve lowering the current Freddie/Fannie maximum loan limit from its current level of $227,000 to perhaps something like $127,000. That would really force them to focus on the low- and moderate-income sector of the market.

    As Mr. Nader mentioned, needs in the affordable housing area are very, very great. I will just quote one line from a recent HUD study:

    ''The housing affordability crisis facing very low-income renters continues to worsen as 5.4 million renter households, a record high, are experiencing worst case needs for housing assistance.'' Clearly, there is work to be done there.

    And also, in looking for a new, broader public mission for the GSEs, I suggest that this Committee think about having them focus their attention on housing markets populated by minorities and women.

    Devoting even a small percentage of GSE mortgage financing activity to markets populated by persons of low- to moderate-income, minorities and women, will help even the distribution of income and wealth, contribute to domestic, political, and economic stability, and will earn its investors competitive returns.
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    It is again my belief that investors, women, and minorities and the country in general, are well served by these types of targeted investing efforts.

    Further, I believe it is possible to create targeted mortgage investments and portfolios that perform well financially and address social concerns. I have personally uncovered many investment opportunities of this type.

    Let me take a second now and describe one such investment opportunity. Prior to joining the Board of Pensions of the ELCA in 1999, I served as CEO of Creative Investment Research, an independent investment research and management firm that I founded in 1989.

    The firm specialized in socially responsible investing. My background in finance and investing led me to develop several socially responsible community investment products.

    One of these was a set of mortgage-backed securities originated by financial institutions that were owned by minorities and women, serving areas of high social need. As noted in The American Banker Newspaper, I was the first investment advisor to create such a pool of mortgage-backed securities, comprised entirely of loans from minority and women-owned financial institutions.

    Working with G.E. Capital, I identified minority-owned lenders willing to participate in the program, arranged G.E. Capital's participation as the aggregator of the loans originated by these minority financial institutions, and worked to place the MBS pools with a socially responsible institutional pension fund.
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    Now let me turn to some of my social investing concerns, to some of the concerns that I have with the GSEs. Given their public purpose and mission, social investors have long believed Freddie and Fannie to be positive investors and good corporate citizens.

    In the main and for the most part, they are. But I have been troubled by certain aspects of GSE corporate behavior.

    I am deeply concerned with the recently issued report on GSE home lending to minorities. The report issued by HUD showed that in 1998, quote:

    ''The share of GSE mortgages going to minorities trailed the National average of 15.3 percent. Fannie Mae lent only 14 percent, and Freddie Mac lent only 12.2 percent to minorities. The disparity is even more pronounced in mortgage-lending activities to African Americans. While the total market for mortgages to blacks is 5 percent, Fannie Mae only lent 3.2 percent and Freddie Mac only lent 3.0 percent.''

    Now I believe I can explain this data. A history of discrimination has created a lack of data on black borrowers, making it harder to predict which factors affect repayment performance. Cultural and community factors may also affect loan performance.

    It is unlikely that the GSEs have an ethnically neutral set of evaluation criteria. Lacking an ethnically neutral set of loan evaluation tools, both Freddie and Fannie lent relatively fewer dollars to African Americans than others did.

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    In essence, the GSEs may have incorrectly assessed home mortgage lending risk in minority markets and communities. By reducing the flow of mortgages to minorities, the GSEs may have ignored profitable lending opportunities.

    This behavior in and of itself reduces GSE income and stifles the flow of mortgage credit. I think we can all agree that this is contrary to their congressionally-chartered mission.

    You know, we have seen other financial institutions repeat this type of behavior. On October 22nd, 1998, Freddie Mac board member and economist Henry Kaufman, speaking of the Russian financial crisis noted in The Washington Post that, quote: ''All of the problems pervading Wall Street just cannot be blamed on outside forces. Institutions have incorrectly assessed risk. If they had one their due diligence, a lot of this''—and he was speaking of the Russian financial crisis—''mess would not have happened.''

    Likewise, all of the uncertainty that Freddie and Fannie now face cannot be blamed on outside forces like Congress, HUD, or incorrectly interpreted statistics.

    I agree with Fed Chairman Greenspan when he says, quote: ''The history of financial involvement in increasing home ownership is one of taking risks, of designing new financial instruments and financial products to make financial resources available so that more people can realize the goal of home ownership. Taking prudent risks in lending so that others may attain an objective is the essential role of a financial intermediary.''

    I suggest that the GSEs renew their involvement in the home ownership process by designing new financial products tailored to the needs of home buyers in the low end of the market, enabling and facilitating others as they take the prudent lending risks outlined above.
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    Again, both Freddie and Fannie dispute the HUD numbers. I expect the debate concerning GSE performance in this area to be a lively one.

    However one views the statistics, however, we can all agree that much remains to be done.

    Some of my other concerns surrounding the GSEs and their public mission basically revolve around their seeming reluctance to acknowledge that Congress, in fact, has a legitimate role in reviewing their activities, both from the standpoint of financial safety and soundness and with respect to the performance of the GSEs in carrying out the public mission for which they were chartered.

    I note that, Mr. Chairman, you really have been examining GSE activities since at least 1996, and I think they have become a little better behaved in their approach and attitude toward Congress, so I want to thank you for that.

    Now, Mr. Chairman, I would like to turn to your legislative proposal.

    Number one, in terms of promoting market discipline I support repealing the GSEs' conditional line of credit to the Treasury.

    I agree with Treasury Undersecretary Gary Gensler when he stated in testimony before this Committee on March 22nd of this year that ''repeal of the line of credit would be consistent with the congressional requirement that all GSE securities carry a disclaimer that they are not obligations of the U.S. Government.''
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    Let me turn to increasing transparency. I also support the provisions of the bill that increase transparency. I support requiring that the GSEs receive an annual credit rating from a nationally recognized statistical rating organization.

    Such an examination would significantly improve transparency by providing an independent and objective opinion concerning the GSEs' financial condition.

    One proposal I would like to make, however, is I would like to suggest that the GSEs be subject to a social audit. A social audit is an examination of the performance of an enterprise relative to certain social objectives.

    The GSEs are currently subject to a limited social audit. Central city and minority lending goals have been established, and progress that the GSEs make in meeting those goals is reviewed on an annual basis.

    I am suggesting, however that the GSEs be subject to a much more detailed and rigorous social audit covering all aspects of their operations.

    Congress may want to specify—this Committee in fact may want to specify in detail which social objectives could be measured. But that is certainly a tool that we are seeing in the social investment field that is becoming more and more of a standard tool. And that is where corporations are subject to a social audit.

    For the GSEs, the major benefits of a social audit are:
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    One, improved accountability with respect to social and community investment activities.

    Two, increased social efficiency and effectiveness.

    Three, increased ability to effectively monitor and steer social performance;

    And finally, social achievements of the GSEs can be reported in an unbiased manner.

    Finally, I support the provisions——

    Chairman BAKER. Mr. Cunningham, if I might just suggest. I have given all the witnesses pretty good liberty in the length of their testimony. If you can begin to move toward summary, that would be great.

    Mr. CUNNINGHAM. Certainly. I appreciate that, Mr. Chairman. Basically, I certainly support provisions of the bill to encourage market competition.

    Lastly, let me conclude by saying, in an interdependent financial world with capital and information flows often determining the short-term fate of nations, it is entirely appropriate for this Committee to review the proper role and function of the GSEs.

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    Given the speed with which capital market destabilizations can occur, as shown during the Long-Term Capital Management incident, the creation of a strong, unbiased, and politically independent GSE regulator is essential.

    As many who have come before this Committee have noted, domestic housing and finance markets are currently broad and well functioning.

    These markets have been the beneficiaries of an unprecedented increase in financial market activity and asset values.

    GSE shareholders have profited greatly as a result. Now is the time to review GSE financial and social performance.

    By doing so, we are likely to ensure that GSE shareholders continue to prosper and to ensure that the Nation continues to enjoy the world's best housing finance markets.

    This Committee has done the country a great service by focusing public attention on the GSEs. In this way, the Committee continues to meet its obligation to enhance the long-term stability of the U.S. financial system. I applaud you all for doing so in a balanced and thoughtful manner.

    Thank you, Mr. Chairman and Committee Members.

    Chairman BAKER. Thank you very much, Mr. Cunningham, for your appearance and your thoughtful testimony. It is clear your Mom's hand was evident in your performance and she is to be highly commended.
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    Mr. CUNNINGHAM. Well, thank you, sir.

    Ms. JONES. Mr. Chairman, before you proceed with questioning, we have seated in our audience today a former Member of Congress who served on this Committee for twenty years who has sought to testify in this hearing today.

    I would request that former Congressman Walter Fauntroy be permitted to testify today with regard to this particular issue. I think he has a lot of experience and ought to be permitted to testify this afternoon.

    Chairman BAKER. I thank you, Mr. Fauntroy. Welcome to the hearing room today. Having served with you on this Committee for some time, I certainly appreciate your knowledge and insight.

    What I might suggest, Ms. Jones, if it is acceptable to your side, is that we proceed with our panels as scheduled and at the conclusion of those panels if former Member Fauntroy wishes to come forward and make some remarks, I have no objection to that.

    Ms. WATERS. Mr. Chairman, I would agree with my colleague. And while you are very generous in offering that he be able to do that at the end of this, I would ask unanimous consent that you allow him to not have to sit through the entire hearing, because I know that he is scheduled for some other appointments later on. So I would ask you to continue your generosity and let him come a little bit sooner than that if it is——
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    Chairman BAKER. I will tell you what I will do. I will give the gentleman a couple of a minutes now, and then I will offer him a full opportunity to be heard in entirety. We are not going to be here much longer unless Members choose to drag the hearing out. We have a very short panel that follows. And everybody in the room has obligations.

    But, Mr. Fauntroy, if you would like to come up, I will give you two minutes to make some comments at this point, and then we would recognize you for a full panel opportunity later in the hearing as well.

    Ms. WATERS. Mr. Fauntroy—if I may, Mr. Chairman—my staff will assist you with your appointments that you have later on if you would like them to make some calls for you if you would like to stay.


    Mr. FAUNTROY. Thank you, Ms. Waters and Mr. Chairman.

    I do want to thank you for this opportunity to appear before the subcommittee, and I will briefly summarize at this point. But I do want the opportunity to present the full weight of my testimony. As you know, that testimony——

    Chairman BAKER. If you have a written statement, it will be included in the record.
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    Mr. FAUNTROY. And I would like to elaborate upon it beyond the summary I am about to give you.

    And that summary begins with the fact that, as you know, I spent twenty years on this committee shaping in the decades of the 1970's and 1980's much of the legislation that has been of great benefit to people in low- and moderate-income range of our country.

    I came to this committee against the background of a tremendously effective bipartisan effort to demonstrate in the District of Columbia how all available Federal and local programs might be coordinated and concentrated to deal with the crisis we had in this city and in the country thirty years ago.

    It was a crisis of a disappearing stock of housing for low- and moderate-income people.

    I had the great privilege of being sponsored by President Johnson and then President Nixon in fashioning the Shaw Urban Renewal Area, which delivered to church or faith-based organizations in cooperation with the local and Federal Government an opportunity to provide, in fact, literally thousands of units for low- and moderate-income people, many of them, most of them, home ownership opportunities.

    I wanted an opportunity to share some views with this subcommittee on the basis of the fact that the crisis which we experienced thirty years ago is even more severe now.

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    Mr. Cunningham has just mentioned the report of HUD to the Congress on the worsening crisis by which some 5.4 million families are going without access to affordable housing now, and that problem is reflected most acutely right here in the District of Columbia, where we have a waiting list for opportunities for Section 8 housing, for example, that is about 10 times that of the average in the Nation.

    And I simply wanted to make some suggestions as to what we need to do, not simply to see to it that the GSEs carry out the mission for which you passed a very effective Act in 1992, but that we fashion in the District of Columbia an instructive example of the kind of bipartisan coordinated and concentrated effort necessary around the country to deal with this crisis about which I am sure you are all familiar.

    May I simply add in closing these summary remarks that certainly there are things which the GSEs need to do better.

    I am so delighted at what happened in 1992 here, shortly after I left the Congress. I was more pleased about what happened in 1998 when you passed the Asset Control Areas Partnership Act, which has created a number of opportunities that I think need to be seized upon now by the kind of bipartisan concentrated effort that had President Nixon praising what we were doing even after President Johnson had left the scene.

    With that, Mr. Chairman, let me again thank you for this opportunity and the congressional courtesy afforded a former Member of the Congress who worked so closely with so many of you at very critical points in your effort on this Committee who must lead the Nation in shaping effective policies.
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    Chairman BAKER. Thank you very much. And I will extend the open door policy as well. If you would like to come by and visit with me on your concerns, that certainly would be a welcome opportunity. I look forward to visiting with you.

    To that end, I observe that all of the witnesses' remarks today—I, of course, reviewed the written testimony—but your oral presentations were frankly exceptional, and I want to commend each of you for your willingness to appear here.

    This is not an easy political subject for discussion. I would suspect that most Members of this Committee at some point during recent months would have wished the number 3703 would just disappear. But your remarks have been most constructive, and I wish to commend you for your willingness to stand up and make the respective observations.

    Further, in response to the comments of the former Member that we reach out and try to do more in addressing the needs of housing in this country, H.R. 3703 I hope will not be viewed simply as a tool for enhanced taxpayer protection, which it clearly is, in my view, but also a tool for enhanced opportunities for housing. And I would observe that those two goals are not mutually exclusive.

    In fact, I took note of—well, Ms. Roukema has stepped out. In her opening remark, she made some indication that mission compliance in the line of credit might have an interesting relationship. Some of you have made similar observations.

    Particularly you, Mr. Taylor, when looking at whether the line of credit should be made available, whether it be Mr. Raines, Mr. Brendsel, whoever the participant might be, all have commented from a business perspective, the line of credit is purely symbiotic.
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    It does not equal one week's worth of trading. It is used to market the securities on favorable terms to investors. That is it.

    If we are to discuss discipline, I had suggested, pursuant to the introduction of H.R. 3703, that the repeal of the line of credit be tied to an S&P rating. Again, coming at it from a capital adequacy concern.

    I would be willing to consider modification of the legislation, perhaps to the amazement of some of my friends, to do exactly what you suggest, Mr. Taylor, but tighten it up a bit.

    Where you suggested we look at their mission compliance over a two-year clock based on HUD goals, let us call this thing the way it is.

    There will be testimony later this morning that the updated value of the subsidy in today's market is at least $10 billion. That is a pretty expensive program.

    Imagine what some folks could do with $10 billion in communities in the work you do. How about we talk about the fact that a third of that subsidy, by some estimates, flows through to shareholders, two-thirds does get to homeowners, but then we look at where the loans are actually made, as Mr. Skillern pointed out, it does not always result in the low-income individual being the beneficiary of the lending activity.

    H.R. 3703 is not in concrete. It is a work in progress.
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    I would be willing to incorporate every recommendation that you made, Mr. Taylor, perhaps with the discussion of organizational structure of the regulator from a safety and soundness perspective, leave mission compliance in HUD, and add one additional thing to modify your proposal. In other words, I am seeing you and raising you one.

    And that is, we should not expect an organization which benefits from a governmentally-granted charter, which is so enormously expensive to follow the market.

    All of your data indicates that the GSEs do not match the performance of commercial financial institutions in your respective neighborhoods. I think they have the obligation to lead the market.

    They are innovative. If they can figure out how to finance aluminum siding at Home Depot, they ought to be able to figure out a way to finance low-income home purchasing availability better than the folks who are not getting the subsidy.

    My point is—and I would like to get your reaction across the board—what if we tied mission compliance to the line of credit, which is only used for marketing purposes, has no effect on safety and soundness, and to say ''if you do not lead the market by whatever that number is''—we will argue about the HUD numbers, whether they are high or low—''and if you do not do what the Congress has said you must do in mission compliance, there goes your marketing tool.''

    Mr. Taylor.
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    Mr. TAYLOR. Well first off, Mr. Chairman, thank you. I do want to thank you for considering our recommendations and that they might find their way into your bill.

    I do not want you to assume, however, that the current recommendations, that all the recommendations in your bill are necessarily supported by the National Community Reinvestment Coalition.

    We are, I think, in concert here on this panel that we would like to see Fannie Mae and Freddie Mac do a lot more in lending to underserved communities and underserved populations. That is the common bond, I think, of the panel up here.

    To the extent that H.R. 3703 can have the influence of forcing the GSEs to do more, this would be a good thing from our perspective.

    The idea of tying the line of credit to the performance, I think, is a good one in the absence of any other leverage, it seems, other than these goals.

    We set these goals, and the fact of the matter is that Freddie Mac finished second in a two-man race for the last six years in a row. And some of the time they did not even achieve the goals that we thought were fairly reasonable goals put out by HUD, by Secretary Cisneros and then Secretary Cuomo. They did not even achieve those goals. And the penalty is? Nothing.

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    Chairman BAKER. Well, I think the point is clear. Many Members of this Committee are strong advocates for housing opportunities for low-income individuals.

    I consider myself to be modestly on that side of the ledger. And we seem to have created an enterprise that is supposed to facilitate that.

    It would seem clear that after thirteen years of back-to-back double-digit rates of return to shareholders when interest rates have gone up or down, and when you look at the performance that each of you have indicated from your various perspectives has not even kept up with traditional private market participants, this to me seems like an opportunity worth great exploration.

    Now, I understand you may have other problems with H.R. 3703 on this or that.

    Mr. TAYLOR. Yes.

    Chairman BAKER. But let us focus this hearing on mission compliance and how we make it work. And I think the leverage within the board rooms of these organizations to find creative ways to meet needs in local communities would be accelerated at a rather stellar rate if the marketing tool associated with their advantage in the marketplace would be put in jeopardy if they simply do not meet what is a reasonable standard.

    Mr. TAYLOR. Mr. Chairman, if I may, I testified before you a few weeks back at the Financial Institutions Subcommittee hearing on predatory lending that Chairman Leach held. And at the time you made a comment that you did not see what the problem was with subprime and predatory lending.
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    I think for us, at least from my perspective, to move forward, we need to work closer with you to understand the depth of the problem of predatory lending in your State and every State in this country, and how subprime is becoming the loan of choice, and oftentimes, the only available choice for people, as you heard from Mr. Skillern, in his example, not only A-quality borrowers, but disproportionally, people of color.

    We have got to reach some consensus that that is a real problem, because the GSEs play a major role in that and will increase their role in the coming years.

    When I served on the Freddie Mac Housing Council, they presented a report to us that showed that nearly 50 percent of the subprime loans that they purchased were from people who should have gotten A-quality paper.

    So in effect, we have the Government-sponsored enterprises creating a pipeline for a more expensive, unfair, possibly jeopardizing kinds of loan products for the people who can least afford to pay for it, the low- and moderate-income people.

    We would like to see you perhaps reconsider some of your positions that you took at the previous Committee hearing, and I mean that—I do not mean any disrespect.

    Chairman BAKER. No, and I agree with you that my comment actually at the prior hearing was.

    Define predatory lending for me, and tell me where it is occurring, and I will sign the bill that cleans it up.
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    I am still of that position today. And if we can define the problem areas, I have no problem in providing those cures in H.R. 3703 if the Committee chooses to adopt them.

    What I am saying to you is our directions are not as diverse as some outside observers might choose to indicate. There is a marriage of principles that will yield benefit to the taxpayer and to the low-income home buyer, and I think we can get there.

    Ms. Roukema, I might just point out, I referenced you earlier because of your comment relative to mission compliance and line of credit, and that is what I was exploring with the gentleman in your absence.

    Ms. ROUKEMA. Thank you. I was going to say that I did not have any further questions, because you had really pursued my line of questioning.

    Chairman BAKER. Terrific. Thank you.

    Ms. ROUKEMA. Thank you.

    Chairman BAKER. Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Mr. Taylor, touche.

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    It seems to me that we are about to legislate the cure for cancer. It seems to me that all we have to do is pass some law and we are going to cure this housing problem. In listening to all your testimony, and in particular to your testimony, Mr. Taylor, it is a process problem.

    A person who has an ''A'' credit rating either has the capacity, should have the capacity, or should get the representation to get into the proper channel. I do not think the Congress is going to be able to do it. I do not think HUD is going to do it. I do not think a new regulator is necessarily going to do it either.

    I am not sure what the outreach of a significantly sized organization like Freddie Mac and Fannie Mae can do in the marginal areas of 5 or 10 percent of home buyers that are abused. There is no question we should not have abuse.

    But it is most interesting for me to listen to the testimony today from the panel criticizing the people that are performing a mission, perhaps not satisfactory to all. Certainly to legislators they never will be satisfactory.

    But so often, home ownership and economic opportunity run together. And for us to sit up here and take positions that seem to be enlightened in fostering home ownership, positions that do not recognize economic opportunity as a challenged area in our society, is just wrong.

    I think we have an opportunity with some of these organizations to increase their mission in the economic development area.
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    I, for one, recognize that there are many areas of this country that cannot take advantage of all the housing programs we construct from now until doomsday unless we create the required earning capacity in certain elements of the American population. This Congress for several years has ignored this need, and, to some extent, has continued to limit it.

    On the other hand, we are attempting to say that we are all for home ownership and that all we need to do is pass one piece of legislation to fix this problem. I say nonsense. Shame on us for trying to mislead the American people that way.

    I have been asking, Mr. Chairman, for a number of months now, that we use these hearings as an opportunity to open up a major issue that should be discussed not only before this Committee, but in the context of the Presidential and Congressional elections this year. That way, the American people can participate in the broad process of national policymaking.

    Clearly, one of the ways of doing that is not to have these panels appear before us periodically with vetted, and sometimes slanted, testimony.

    And quite frankly, some charges have been made here by this panel against Fannie Mae and Freddie Mac that may or may not be true. I do not know. But, I would sure like to have them sitting at the same table with you responding to the allegations.

    I have asked that we have roundtable discussions. I think we have to bring this issue to joinder, and we are not doing that. We are sitting here having one group present what their position is and how they analyze the market.
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    Quite frankly, something that really annoyed me at the hearing today is, that the free marketeers here today are saying that we have got to put out securities that are sound and that meet the criteria of the free market.

    On the other hand, we are saying that we are not serving the underserved. Well, quite frankly, we are not serving the underserved, because the free market does not operate to serve the underserved. There is a need for a subsidy there.

    Subsidies for housing aside, why do we not go back and honestly answer what the problem in America is?

    We have an unequal opportunity for a large portion of American citizens that have been left behind for the last seven years in the prosperity that has developed in America.

    Why does Congress not stand up to that and at least have those issues acted on? Now I know Mr. Nader would not be castigating the feeble attempts of the Democratic Congress in the creation of these institutions to give fair housing if he could castigate the present Congress' limited recognition of an economic opportunity.

    But, if you were to take his testimony today and listen to it, you would think that he has joined another party.

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    Mr. KANJORSKI. I do not think that is the intention of his remarks today. I do not think that is the intention of anybody on this panel.

    I think what I heard today is that a lot of the institutions created over the last twenty or thirty years have operated successfully, but now we are dealing with the extreme problems with economic opportunity, both in the minority and in the disadvantaged communities of America.

    No matter how much we subsidize housing, if you do not give fair jobs, if you do not give fair income, and if you do not provide for investment in distressed communities, all the subsidized housing and all the sophisticated products that these GSEs produce are not going to solve the dream of American ownership within the confines of a market-driven security organization.

    It is time that we put aside just talking about housing, and predatory lending, and all the other things, and determine where the problems come from and why they are there.

    They are there because there is an unequal distribution of opportunity, particularly economic opportunity, for a large segment of the American people. It is time for Congress to establish a vehicle where we can sit around a table and have you make your charges or your propositions and ask the other side to respond to it.

    I do not care whether it is the salary of an executive involved. I do not care whether there is an unfair opportunity of subsidy occurring. We must not address this matter with the idea that we have some magic silver bullet here encompassed in a piece of legislation that is going to cure America's need for housing opportunity for the disadvantaged of this country. That is a darn joke.
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    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Ms. Roukema, you——

    Mr. NADER. May I reply to that, please? Can I reply to that?

    Chairman BAKER. I think it appropriate to give the gentleman a minute.

    Mr. KANJORSKI. Oh, surely.

    Mr. NADER. Well, the Congressman is always very good about broadening frames of reference. We could have talked about livable wage and repealing Taft-Hartley and progressive taxation on corporations without tax shelters, and all these other things that help to redistribute wealth.

    In accordance with all the hard work people are engaging in in this country, 47 million workers make less than $10 an hour, some of them $5.25, $6, $7, $8. They can't buy much housing with that.

    But one other thing I would like to add to the Congressman's broadening of our frame of reference is, when I was growing up in Connecticut, a relatively modestly paid textile worker could afford a six-room house and a second-hand car on a very modest wage, because the mortgage rates were 3 percent, a 3 percent, thirty-year mortgage. Now they are 8.25. And of course that has a lot to do with it.
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    Mr. KANJORSKI. Right. But let me extend that.

    Mr. NADER. Yes.

    Mr. KANJORSKI. When you were growing up, if that textile worker were getting the type of income today relative to what they were earning then, it would be considerably higher than it is today.

    Chairman BAKER. If I may, because we have Members who have been patiently waiting to ask their questions. I do not want to cut you off. But let me say, on the other side of the coin, Mr. Nader, although Mr. Kanjorski's remarks were fully understood and appreciated, there are others on the Committee who would have a hard time questioning your commitment to consumers, just for the record.

    Mr. NADER. OK.


    Chairman BAKER. Ms. Roukema, would you choose to——

    Ms. ROUKEMA. No, Mr. Chairman. I am going to pass. You really focused on the question that I had in mind, and I think given the numbers of people here and the second panel.

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    Chairman BAKER. Thank you, Ms. Roukema.

    Mr. Ryan, you would be next.

    Mr. RYAN. I look forward to the next panel.

    Chairman BAKER. Let's see.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    A number of you endorsed provisions of the Baker bill. I know Mr. Cunningham talked about the idea of repealing the line of credit which Fannie Mae and Freddie Mac enjoy with the Treasury.

    While the Chairman has been correct in stating that this is not in any way a full faith and credit guarantee, I think if you read any prospectus from Freddie or Fannie, they go to great pains to say ''this is not a full faith and credit guarantee,'' and every broker or underwriter you talk to on Wall Street will tell you that it is not a full faith and credit guarantee, but the market treats it as something just less of a full faith and credit guarantee.

    I think even if it would not cover one day, or one week, if there were a complete collapse of a GSE, I assume the market considers it that once the spigot is open at the Treasury, it would be rather difficult to turn it off.
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    I guess the question I have for this panel is, it seems to me Mr. Baker's bill and Treasury's position, quite frankly, of doing away with the line of credit and doing away with maybe some of the benefits that Congress has given to the GSEs over the years to foster their development, while at the same time putting a stronger yoke on them in terms of what they can and cannot do is a conflicting approach.

    Perhaps the time has come to revisit what was done in, I guess, the 1970's. That is to say, instead of creating a privately held or publicly held private corporation that is Government sponsored, to just completely cut them off and send them on their way and eliminate any benefit they get and just say, ''You are now completely on your own and you can do whatever you want to do. You are well capitalized. The Government is not going to stand behind you in any way, nor are we going to dictate as to what your mission is.''

    Would you find that acceptable? And then we would be through with this problem. The market would treat its debt accordingly.

    They probably would downgrade it a little bit, as the Chairman mentioned. But they would be out on their own and Congress could say ''We have washed our hands of this problem. The kids have graduated from college and we have sent them on their way to make it as they may in the world, and we have given them a little stipend to help them along, a good education. Hopefully they will become productive citizens of the corporate community as a result of that.''

    Would you all agree with that, or is it better to keep them under some form of lock and key or at least on a tight leash?
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    Mr. CUNNINGHAM. If I could respond to that really quickly. I think the issue here is one of balance. Undersecretary Gensler came in here on what, March 22nd? Made noises about repealing the Treasury line. And you saw what happened. You saw the turmoil that you had in the market, and that was just from the mere suggestion that Treasury might actually support this legislation in a way that Wall Street had not anticipated.

    Now I worked on Wall Street for a number of years, so I would say that probably if you did that, if you made that a provision of the bill, the response in Wall Street would be immediate and negative.

    I think that what is probably more appropriate from the standpoint of maintaining the long-term stability of the financial system is to basically make things plain.

    Let us give Wall Street a schedule that says that in five years we will turn these institutions loose and they will be completely private institutions, or in ten years.

    But, I think to basically do it overnight would cause some turmoil, mainly because of the level of guarantee that is out there, the level of the debt that these institutions have, depending upon whose numbers you use.

    Mr. BENTSEN. And I am eager to hear the others.

    But, Mr. Cunningham, it would seem to me that you would agree with that just on a phased schedule. But that would be contrary to what I think my good friend from Louisiana is doing in his bill. I think he is going halfway.
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    The concern I have got is you are taking a llama and turning it into what I remember from Dr. Doolittle is sort of a ''push me-pull me'' animal, and I am not sure of that sort of social engineering or economic engineering by Congress. And actually, you all are supposed to be saying that and not my side.


    Mr. BENTSEN. But that is what appears to be happening. I would be eager to hear what the others have to say.

    Mr. SKILLERN. I think housing advocates are concerned by that argument in that we would lose a tool that has been productive in creating affordable housing and opportunities and playing a corporate sponsorship with our nonprofits.

    Our argument is not so much to lose that, but to build upon it. I think the concern of stripping away any type of Government accountability would mean that the market would just be more of the market; that I would be here testifying on what is not being done at all.

    Second, Mr. Chairman, I liked your idea actually about exceeding the market as the benchmark. And I agree that I have sat around and negotiated with institutions, and I think that as an example, Freddie Mac has released CreditWorks, which is essentially a subprime product that is clean and is priced competitively.

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    But that is only $100 million worth of credit out there, and that just does not go far enough. If they were incentivized to be able to capture this market at a higher rate, that product would get a lot more than a $100 million line.

    The other concern I had about your argument, though, was this idea of $10 billion in subsidy. Couldn't we do a lot with that in our communities?

    And the answer of course is yes. But would we actually see that if you took away the charter? I am afraid what would happen is that that subsidy would just disappear.

    So I will one-up you on your proposal, and say that the subsidy, if lost, is then set into a home ownership trust fund, which will then subsidize or make affordable second mortgages for Americans across the country.

    We are really concerned that this argument against the GSEs are going to be used against.

    Mr. BENTSEN. Mr. Skillern, I understand what you are saying. But if the effect of the Chairman's bill—and none of us know this; we only hypothesize this—but if the effect of the Chairman's bill is to raise the cost of capital to the institution, if it has that effect, would that not be counterproductive?

    Mr. SKILLERN. I think that would be one impact, yes, sir.

    Mr. BENTSEN. I do not know, Mr. Taylor, Mr. Nader, I do not know if you all have comments?
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    Mr. FAUNTROY. Mr. Bentsen, let me just if I may respond to your question as well, because I would be horrified if the scenario you laid out there became a fact.

    It would leave the commercial banks as the only ones being subsidized in the area of housing construction and provision in this country.

    I served for six years as Chair of the Subcommittee of this full Committee on Domestic Monetary Policy. And Paul Volker, who was then Chair of the Fed, taught me something that Alan Greenspan has confirmed to this Committee recently when he said that the commercial banks and thrifts have a 13-basis point subsidy from the Federal Government.

    I understand that and I think he is an appropriate authority on this. But to take away the mission that we have sharpened, particularly in the last decade, that we gave to these GSEs would be a disaster.

    Chairman BAKER. If I might, Mr. Bentsen, we have run on a bit over our time.

    Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman.

    I appreciate the opportunity, and I know we are rushed for time, because we have a vote. As you know—and I also have to leave, and I apologize for that; I have another hearing that I have got to get to—as you know I, like Mrs. Roukema and Mr. Kanjorski, really began this process, and others, began this process with a more cautious approach, because I was concerned about the unintended consequences.
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    And really, I think, the first hearing said that if we operate from the principle of ''if ain't broke, don't fix it,'' we are probably better off here.

    However, I want to congratulate you for conducting these hearings, because I think they have served a great purpose in helping us to define and try to improve the GSE process in the market.

    I really do, while some may not appreciate the value of these, I do. I also appreciate the differences we might have in sharing opportunities to all Americans that exist economically and certainly as it relates to the mission of providing affordable housing for all.

    With that, I simply want to submit a statement to the record, if there is no objection to that.

    Mr. SWEENEY. Your line of questioning on mission compliance intrigues me, and Mr. Nader's testimony as well as Mr. Taylor. We spoke about the role that HUD may or may not provide or perform, and I would like if we could have a very brief discussion from any of the panelists, but more particularly, from Mr. Nader and Mr. Taylor about that.

    Is it your suggestion that in providing an expanded role for HUD that the role be an advisory role or, more precisely, a role of direction to the Board?

    And how would you envision the sort of ongoing enhancement of mission compliance and HUD's role in that?
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    Mr. TAYLOR. Mr. Sweeney, obviously HUD has a role now. They have approval authority. I think what we are here to argue, and I would associate myself with the comments of Mr. Fauntroy and Mr. Skillern as it related to Mr. Bentsen's question.

    We are here not to weaken Fannie or Freddie, but to strengthen their efforts in lending in underserved areas. I think to privatize would remove the leverage that we otherwise would have in that area.

    At the same time, I think we need to—and part of moving forward for us is strengthening the oversight that HUD has, that that be a stronger body, that there be some tie, some penalty, some way to influence these institutions so that at least, you know, from our perspective—and unfortunately, I am not sitting up there—but from my perspective, that they do more in underserved communities.

    I am concerned that we are having this great economic prosperity in this country, and now is the time where we can bring a lot more homeowners on board into the affordable home ownership market. But, we need some of these things, these levers, in place to help us.

    Clearly, increased data disclosure is important in absolutely prohibiting their participation in any way, shape, or form in the predatory market, and seeing to it that HUD or whoever the oversight body is, looked at those items and looked at their commitment and compared them to the market and really had the ability to take action if, in fact, they were not performing at a level that reasonable people would agree it should be at.

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    Mr. NADER. In answer to your question, I would like to submit for the record a statement by Jonathan Brown on reform of GSE housing goals that was submitted at a conference here in Washington on May 23rd of this year.

    In that testimony, he has a table based on GSE loan purchase data and HMDA loan origination data from the nine-county Chicago PMSA.

    He shows that GSE market data by census tract racial category shows a decline in GSE market share from 75 percent in predominately non-minority census tracts to only 33 percent in census tracts in which minorities comprise 75 percent or more of the census tract population.

    And in the Chicago PMSA, these two census tract categories represent almost 60 percent of the PMSA's total of 1,776 census tracts.

    So the whole Federal chartering of Fannie Mae and Freddie Mac was to advance the housing goals for all Americans.

    HUD, in spite of some nice statements by Secretary Cuomo, and the Congress, has not sufficiently supported a more rigorous public evaluation and enforcement of the purposes of those charters for Fannie Mae and Freddie Mac.

    We are at such a primitive level that the executives of Freddie Mac and Fannie Mae will even dispute these figures. They have got their own map makers.

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    Mr. NADER. Now I think Congressman Kanjorski is absolutely right. We should have someone from Freddie Mac and Fannie Mae and Jonathan Brown, who worked sixteen hours a day on these maps for years, right up here so that never again do we hear the constant denial of what we believe is factual reality by executives of those two federally-chartered organizations.

    I mean, if we cannot, you know, establish a factual reality, we cannot go forward on policy and we cannot go forward on enforcement.

    Mr. SWEENEY. But the devil is in the details of how we are going to monitor the ongoing mission requirements. And it seems to me that the Chairman's suggestion of tying it to market standards and improving upon those market standards has great merit.

    Where I began this process believing we ought not to tinker on the edges, I am coming quickly to the notion that maybe we have something here that we can reach some consensus on that can improve those mission statements and at the same time balance risks.

    So, I thank you for your testimony. The information is very valuable, and the presentations were terrific.

    I thank the Chairman.

    Mr. CUNNINGHAM. If I can follow with one quick point on that.

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    Chairman BAKER. Very briefly. We have a vote pending.

    Mr. CUNNINGHAM. Part of what we will be able to use going forward as we have seen on the social investment side is the technology that allows us to track large data sets very quickly these days.

    I mean commonly, you know, people talk about the impact of the internet. Well this is one thing that we can use the internet to do. We can use it to monitor the performance of the GSEs in meeting their social mission. I just wanted to make that point.

    Thank you, Mr. Chairman.

    Chairman BAKER. I thank you.

    Gentlemen, we have a vote pending. We are about five minutes left in the vote. I know several Members still have questions for the panel. I ask your patience in remaining with us a bit longer.

    We stand in recess pending the vote.


    Chairman BAKER. I would like to call our hearing back to order.

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    As I recall, Mr. Sweeney was the last Member to be recognized for questions.

    Ms. Waters, in that case you would be up next.

    Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman.

    I do have a question I am going to ask of our panelists, but before I do that, I really need to make a few observations so that I can try and help everybody to understand where I am coming from.

    I thank all of the panelists for being here today, and I thank you for the work that you do.

    I am particularly delighted that Mr. Ralph Nader is here. He is always a breath of fresh air. And, you know, I have known him over the years, and he is on the cutting edge and very tough about it all. But let me just say this so that the panelists will understand.

    I am trying desperately not to be used by anybody. There is this battle going on between FM Watch and the GSEs. It is all about market share, in my estimation.

    Now I must qualify that so that my Chairman will not think I am casting any aspersions on him. I respect you, Mr. Chairman, and I sincerely believe that you are indeed acting on your sincere beliefs about problems that exist that need to be taken care of.
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    But, I believe that there is a battle going on and all of us should be careful not to get caught up in this battle about market share.

    Some of the very words that are being used that I hear about, ''mission creep,'' about likening what is going on with the GSEs to the S&L scandal, and so forth, are words that are in the internal documents of FM Watch as it developed its strategy about how it was going to attack the GSEs.

    So I am very aware of that, and I have taken a look at the press releases that have been sent out by some of the groups that are challenging the GSEs and they use the very words that are used in the internal documents in its approach to attacking the GSEs.

    Now having said that, in this battle I really am on nobody's side. I am, you know, a pox on everybody's house as far as I am concerned. And let me tell you why.

    When you come here and you talk about whether or not the banks and the mortgage companies are doing better than the GSEs and you cite these slight percentage points, and you kind of tell me that the financial institutions are doing better, because they include in that assessment the predatory loans, and, because the GSEs have not really gotten into them yet that somehow the financial institutions are doing better, you have to understand—and I understand what you said, sir, and you made the picture very, very clear as it relates to predatory lending and what the GSEs are doing and what they could be doing, and so forth—you have to understand that I do not think that lending and the availability of mortgages to poor people should be done regardless of the price.
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    I mean, some price is too high. And, as you said, it robs the poorest of the poor of the opportunity to use their dollars wisely and to have a better quality of life.

    So unless we are talking about what we are going to do to deal with predatory lending and how we are going to get rid of some of the exorbitant fees that are charged, the unconscionable interest rates and the defaults as a result of this predatory lending, I do not want to hear the figures about the financial institutions doing better than the GSEs, because you have not told me that you excluded the predatory loans from the percentages that you gave me about how much better they are doing than the GSEs. Do you understand what I am saying?

    Now having said all of that, I think there is room for some regulation, and I do not have any problems with trying to make sure that the financial institutions and the GSEs do a better job in low-income communities and minority communities.

    That is why I am such a fierce defender of CRA. The regulators do not do a good enough job, and so we have something in law for these non-profits and CRAs to do a watch over them and to help us to identify what we can do better. All of what we are doing, these policies are kind of being turned on their head.

    My Chairman, for example, is not a supporter of CRA. My Chairman, who is interested in making sure that there are more loans given in minority communities and in low-income communities, does not support the work of CRA to make sure that that happens.

    It is interesting when I see the CRA groups here talking to my Chairman and the people who are advancing this cause of FM Watch about what they think is wrong.
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    I do not want you to get caught up in this market share battle between FM Watch and the GSEs. I want you to say the same thing that I am saying: ''A pox on all your houses.'' I am not going to be used. What I think you ought to be doing is, just let the chips fall where they may.

    Now having said that, did you give me in the percentages of the lending from the banks and the financial institutions, did you include their predatory loans in that information that you gave me, Mr. Taylor?

    Mr. TAYLOR. Yes.

    Ms. WATERS. Or did you separate it out?

    Mr. TAYLOR. Thank you, Ms. Waters.

    First off, I want to let you know that I in no way identify with FM Watch, nor do I desire to be caught up in the battle for market share, and it is not for lack of their trying to contact us.

    Similarly, I have a lot of contact with Fannie and Freddie, and I guess I have a lot more faith, because I have more experience with them. But they understand where we are coming from as an organization, and that we will continue to push them, and push them hard in any way we can, to purchase more mortgages going to low-income, minority, and other underserved populations.
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    And toward that end, we did our own study, which in fact looked at home purchase lending in neighborhoods in different areas of the country. But in Pittsburgh, for example, banks' purchase of loans made up—just using Pittsburgh as an example—16 percent of all the low- and moderate-income mortgages made in that area.

    Now remember, most of the predatory stuff happens in the refinance area. What we looked at—and why Fannie was critical of us—was because we looked at originations. Who is really going out there and making loans available? Not buying seasoned loans off the shelf that are already approved to be creditworthy and that sort of thing, but rather, who is making these originations.

    And in that area, in Pittsburgh for example, the banks made 16 percent of their loans to low- and moderate-income people, while the GSEs did 3 percent. It is possible that some of those originations could have been predatory. One of the problems we have, and that is why——

    Ms. WATERS. Excuse me, I am going to interrupt you for a moment.

    Mr. TAYLOR. Yes.

    Ms. WATERS. Because one thing that is very clear to us on this subcommittee is this, Mr. Taylor. That is that minorities and poor people are forced into signing off on predatory lending when they qualify for traditional loans.
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    It has been said here today, and it has been said over and over again, you get people who qualify, who you know whatever the income requirements are, whatever the credit records are, they qualify. But these same banks are pushing them into this predatory lending.

    Mr. TAYLOR. Subprime. I think you are saying, and predatory.

    Ms. WATERS. Subprime lending and predatory lending.

    Mr. TAYLOR. You are absolutely right. And we, of course, testified to that effect. And one of the things that would be very helpful, and I think your point is well taken, is if we had more data.

    I came here last time, and Chairman Leach lambasted the Federal Reserve and the other regulators for not coming forth with real solutions, and you, too, as well, Ms. Waters, and others from the Banking Committee.

    The truth is, they have the access to the data. We do not. The general public does not.

    Ms. WATERS. Did you make a recommendation that this be a part of this legislation?

    Mr. TAYLOR. I certainly did, as strongly and as forcefully as possible.
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    Ms. WATERS. As part of this legislation?

    Mr. TAYLOR. I did it at that hearing.

    Ms. WATERS. Well, let me just tell you, and this is——

    Mr. TAYLOR. But let me make a suggestion.

    Ms. WATERS. No, no. Reclaiming my time. Reclaiming my time.

    Mr. TAYLOR. OK.

    Ms. WATERS. And this is what I am talking about when I say do not get caught up in this battle for market share. If you come here——

    Mr. TAYLOR. I am sorry. I have to correct my comments.

    Ms. WATERS. That is OK. Reclaiming my time.

    Mr. TAYLOR. I did make a recommendation in my statement, and I apologize.

    Ms. WATERS. Reclaiming my time. Reclaiming my time. I want you to come with recommendations regardless of the GSEs, regardless of FM Watch, about how to get at the problems and how to deal with getting more loans to low-income people and minorities.
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    Having said that, I cannot see your last name very well.

    Mr. CUNNINGHAM. Cunningham.

    Ms. WATERS. But I would like you to respond to that question.

    Chairman BAKER. If I may, Ms. Waters, maybe we will come back to you on another round. You have gone over ten minutes, and I do have other Members.

    Ms. WATERS. I appreciate that. Thank you very much, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Waters.

    Mr. Riley.

    Mr. RILEY. Thank you, Mr. Chairman. And Mr. Chairman, I want to compliment you on the group that we have here today. It has been very enlightening. However, I have some real reservations about the way this testimony has gone today.

    I think all of us want the GSEs to be a full participant and do more low-income loans, but I guess my biggest problem is who is going to be the final determinant to make those type decisions?

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    How do you judge the difference between the subprime and the predatory loan?

    Where do we draw the line where we say that one is subprime and is something the GSEs should participate in, but another is a predatory loan that all of us seem to think should not even be available in the first place?

    I do not know that I want HUD to be the one that makes that determination. And if HUD does not, who would?

    Mr. Taylor.

    Mr. TAYLOR. Yes, well, I think there are some obvious things, Mr. Riley, that are predatory that almost all reasonable people would agree upon—that there are loans that are designed to absolutely strip wealth, that on their face are designed to see to it that the person fails and that the broker or the person making that loan is going to own that property in a very short period of time.

    Even listening to some of the subprime lenders talk to the Mortgage Bankers Association and others, they would agree that certain things done in the subprime field are really predatory and ought to be things that should be outlawed. Mandatory credit life insurance prepaid up front, things like that.

    Where it gets gray, there are a lot of other areas, but there ought to be the ability for someone to assess and take a list and make a determination, a reasonable, intelligent person who is unbiased, to say these characteristics added up are, in fact, predatory. They are beyond subprime.
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    I do not think that is rocket science, and I do not think it is a difficult thing to do. But the will and the spirit has to be there.

    And right now, there is not even the data for us. And that is why I have proposed in my remarks that we expand the data so we can take a look at this kind of thing.

    Mr. RILEY. Well back to the original question, though.

    Mr. TAYLOR. Yes.

    Mr. RILEY. Once you have the data, once you have the ability to make that determination, who is going to be the final person that makes that determination on whether this is subprime or whether this is a predatory loan?

    Mr. TAYLOR. OK. Good question. I would say it happens on a lot of levels.

    Certainly CRA-regulated institutions should not be in the business of securitizing or making predatory loans. And the Federal bank regulatory agencies ought to come down on them with a big old heavy foot if they find cases where they are using the taxpayer's benefit of FDIC insurance and other benefits to be able to do this kind of unscrupulous activity.

    Fannie Mae and Freddie Mac?

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    Mr. RILEY. And I think you are absolutely right on that point. But again, I think one of the reasons that you see banks participate more in low-income loans than probably a GSE is, because they do have other profit centers where they can offset some of the losses that they might have, and they also have the CRA language.

    Mr. TAYLOR. I would not agree with that, sir. The record shows that mortgages made to low- and moderate-income people, whether you are looking at Fannie's or Freddie's or the Woodstock Institute's or almost any study, that the performance of low- and moderate-income people in the mortgage market is as good or better than other parts of the market.

    Mr. RILEY. Then give me a reason why they do not have more——

    Mr. TAYLOR. Fair Isaac and Company, the ones who are the gurus of credit scoring, for example, give negative credit for higher income in their credit scoring system, because they have found, through regression analysis, that lower-income people actually default less, and if they default, they have more of an ability—an empire does not collapse. If their mortgage collapses, they have more of an ability to go out and find another job and replicate the income needed to pay their mortgage.

    So I would not go along with your assumption. And I think this is why, by the way, folks like Bear Stearns and the private, outside of Fannie and Freddie, secondary market entities are jumping to buy these CRA loans now, because they are highly profitable, not to mention a lot of low-income people, because of financial illiteracy, do not refinance and take advantage of the institutions and the systems that would actually help them.
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    Instead, it helps Wall Street and others make greater profits, and therefore, they love these loans. So I am not going down that road with you.

    Mr. CUNNINGHAM. Well, let me, if I could really quickly jump in here, because I actually did some of the original work that looked at this issue with respect to mortgage-backed securities, loans originated by minority financial institutions including Family Savings and Loan in Los Angeles and Founders National Bank, Carlton Jenkins out there. Basically, what we found, again—and this predates John's work; this was back in 1990—what we found was that for exactly the reasons he stated, basically, low- and moderate- income people, when they got the loan, worked twice as hard to maintain the loan.

    Therefore, the prepayment rates on those loans—that is, paying that loan early—were lower than the prepayment rates on generic loans.

    If the prepayment rates on a certain set of mortgage loans, a mortgage pool, is lower than the generic, that is worth a lot of money to Wall Street, because they can tailor and target the cashflows. They know with a greater degree of certainty what cashflows are coming in.

    What happens, what has happened is what I talked about in my testimony earlier, and that is that the risks have simply been inaccurately categorized.

    Mr. RILEY. Then based on those assumptions, I would assume that the GSEs are making a financial mistake not to go out and actively pursue this more on an economic basis and a monetary basis than on any other.
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    So can you give me a reason why they are at 3 percent and the banks are at 16? If this is a financial boon for——

    Mr. CUNNINGHAM. Again, part of what happens is the GSEs use these very complicated models to determine what the probability of default is for certain individuals as the loans come in, and they build those models into their underwriting guidelines that they give to the banks to say, ''OK, look, this guy, when he comes in and takes out a loan application is going to be an A credit, this is going to be a B credit, this is going to be a C credit.''

    Part of what happens is that the lending criteria that the GSEs have developed are not ethnically neutral. They are not neutral with respect to income and ethnicity of the borrower.

    Now they would claim that that is not the case, but basically what I think John and I are saying and what the experience in the market has shown us is that there is a profitable sector that is being ignored.

    Therefore, the only way to explain that unwillingness of the GSEs to go into that sector is to suggest that their underwriting criteria are somehow off. That is, that they do not correctly account for certain——

    Mr. RILEY. And I guess that points up the real dilemma here when you have these hybrid organizations that are partly Government and partly private.
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    I am not too sure that this subcommittee has the expertise, and I am not too sure when there is a difference in the modeling between what you say and what the GSEs say, and it is a privately held company, that we should hold them to a standard that they do not believe that they can live with.

    Chairman BAKER. Mr. Riley, if I can, we have been generous on time, but you are well over. Do you want to make a concluding remark?

    Mr. NADER. May I just answer it very quickly? You asked a couple of questions, how do you determine predatory market and subprime lending?

    I suggest one way is too look at the past when there were usury laws. Companies now are engaging in behavior, which before the 1970's would be considered criminal. But now the usury laws to States have pretty much been repealed, and there is a long history about what the usury law assumptions of fairness are. So that is one.

    The second is, the National Consumer Law Center in Boston has done a lot of good work in this, and you might want to contact them.

    And the third is, talk to the neighborhood groups who are working in the housing area. Like here in the District, the Neighborhood Assistance Project, whose director is Reverend Hagler, who is in this audience, has an extremely sophisticated analysis to answer your question as to why the Fannies and the Freddies and the banks have been veering away from low- and moderate-income neighborhoods, and what solutions this Neighborhood Assistance Project has already engaged in in showing what can be done, in showing how it can be done in giving people affordable housing.
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    So, you know, whenever you look at a problem, it is good to see what solutions there are around. And you might want to contact that group.

    Mr. RILEY. And I appreciate that, Mr. Nader. The only problem that I have with that is, again, who is going to determine which model is correct?

    Mr. NADER. Well, remember, there are a lot of standards, and the states should do more prosecutions in this area. I mean, the rapacity of some of these exploitive mechanisms which have been on page one of the Wall Street Journal are so extreme.

    There is almost no comparison in the 20th century. And yet the prosecution, willpower, and the budgets of the states are just not up to it. It is almost as if it is terra incognito to local prosecutors. But they have a responsibility.

    Mr. RILEY. But as with most situations, you have extremes. And the example that you pointed out today was an egregious attempt. And no one has a problem with that.

    But somewhere in the middle range between what is a subprime loan and what is a predatory loan, someone has to make a determination of where you cross that line, and that is my problem.

    I do not know who is going to make that. If the GSEs do not make it, then does HUD make that determination? Does this Committee make that determination?
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    Mr. MANZULLO. Mr. Chairman, I hate to do this, but I want to make a point of order that we should keep the questioning to five minutes. This has gone on for three hours now. We are not even on the second panel.

    Chairman BAKER. The gentleman's point is well taken. As best we can, Members have been patient who are still here.

    Mr. RILEY. I thank the Chairman.

    Mr. BAKER. Ms. Hooley, you are to be recognized next.

    Ms. HOOLEY. Thank you, Mr. Chair. I have a question for several of the members of the panel.

    Thank you very much for being here. This has been very helpful.

    Mr. Nader, what do you think is the most egregious benefit that the GSEs receive?

    How does that negatively affect the consumer and home buyer?

    And what would be the benefit of eliminating whatever benefit you think is the most egregious?

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    Mr. NADER. Well I mentioned them in the testimony. I do not want to take the time up just to repeat them. But there are two ways to look at the benefits.

    One is, what is the quid pro quo? If the Government is going to in indirect and direct ways subsidize these corporations, what are we getting in return? What is the taxpayer getting in return?

    And the second is whether these subsidies can be reduced or eliminated and still, given the fact that Fannie Mae and Freddie Mac have a lot of public subsidy built into their net worth over the years, still hold them to fulfilling certain housing goals, as the witnesses have described. That is the way I would frame it.

    I think now they are so rich and so powerful that they can be held to these housing goals without basically having an implied bailout potential.

    There is a fellow named Stanton who wrote a book about fifteen years ago on the really risk levels of Fannie Mae and Freddie Mac, and do we want to go through that route again?

    I mean, do they operate in a way where they say ''Uncle Sam will bail us out? We can have low ratios in terms of our capital,'' and so forth.

    You know, that is what you have to ask yourself. I mean, are you ready for it if something happens? And if that is going to be the case, then you have got to hold them to a much higher standard than private corporations are held.
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    Ms. HOOLEY. But the question is, how will the consumers benefit if you eliminate those benefits? I mean, that is what I am interested in is how are we going to benefit the consumers?

    Mr. NADER. Apart from the taxpayers, you mean? How are you going to benefit the consumers?

    Ms. HOOLEY. How are we going to benefit the consumers?

    Mr. NADER. Well if you withhold the subsidy, you benefit the taxpayers. The consumers relate to the housing goals of HUD and how that relates to Fannie Mae. Those are two different subjects.

    Although you may have an additional point to make?

    Mr. TAYLOR. I would not eliminate. I would use those benefits to leverage greater commitments and involvement in low-income and minority neighborhoods. That is my position.

    Ms. HOOLEY. And how would you do that, Mr. Taylor?

    Mr. TAYLOR. OK. I would do it in several ways. One way is to expand the amount of data that is available so we, the public, could really take a look at what is going on, as I stated in my testimony.
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    Ms. HOOLEY. OK.

    Mr. TAYLOR. Second, I would make a stronger oversight body that really had some teeth. Not until Mr. Cuomo arrived did we really, in my opinion—and I have expressed this to the GSEs, I am not the enemy of GSEs—that it was not until he arrived that we really finally saw what we perceived in the community as—how do I express it, stronger oversight or leadership from HUD indicating to us that there was a new sheriff in town and HUD was paying attention to these goals, and the goals indeed were raised.

    To Fannie's credit, they adhered to them, and said ''we will reach those goals, we are supportive of them.''

    But, its impetus within HUD is giving them—I think the idea of tying benefits if you do not perform is key. I do not care how many middle-income loans they buy, obviously it is important from a profit standpoint, and that creates some ability there. I care from that standpoint, but what I care about is if you are going to get benefits from the American public and from the laws on the books now, I want to be sure that the folks who are benefiting the most are the ones who have been most locked out and continue to be locked out of the housing system.

    And so leveraging those benefits into higher goals, increased data, keep them totally out of the predatory market is imperative. I still have problems, and we do not have the time to get into it, about how much they are going to get into subprime market and how much Freddie is into it now and how they are enabling these subprimers to give what Ms. Waters was talking about, B and C quality paper to A quality borrowers. I mean, they should not be participating in that.
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    Those are the kinds of things that ought to happen as a result of these benefits.

    Ms. HOOLEY. Well as you look at different kinds of regulation or different kinds of control, I mean, one of the suggestions in this bill is now we have one regulator.

    And yet I look at the dynamic tension that can happen between two regulators, one very specifically for soundness and safety and the others very specifically for housing, and it reminds me of FAA where you had Federal Aviation, you know, trying to regulate an industry and trying to promote an industry at the same time, which made for a huge conflict of interest.

    Do you see as a governing board if we do something different, how do you deal with that conflict of interest of the goals of a board, of a single board?

    Mr. TAYLOR. Well, I do not think safety and soundness is in conflict with—whoever the Member was that said earlier, I think again it was Ms. Waters. No one is asking them to open the vault and throw the money into the street and give these mortgages away to people who are not going to pay.

    Ms. HOOLEY. I understand that.

    Mr. TAYLOR. So, I do not think affordable lending—and I think there is constantly a presumption from both sides of the aisle that when you loan to someone who is working class or poorer that somehow that is a less-safe loan, and I do not adhere to that. And I think you have heard testimony that that is just not supported by anything but people's imaginations. And so I do not think they are in conflict.
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    And look, we have the bank regulatory agencies. The Fed, the OCC, the FDIC and the OTS.

    Ms. HOOLEY. Right.

    Mr. TAYLOR. They all have not just safety and soundness, but CRA oversight and several other things that they are supposed to do.

    You know, presumably the leverage between all those involvements in those institutions in those various areas should give each individual responsibility that they have in oversight more leverage with that institution.

    So I do not know. I mean, my crystal ball is no clearer than yours. But we definitely would like stronger oversight. And I think what I am hearing is people agreeing with the notion of wanting more done. How that occurs, what the body—we did not agree with a proposed body that looks like the Federal Housing Finance Board, or the specific proposal in the bill—we did not agree with those models. But we do agree with the structure of a single stronger agency.

    Mr. FAUNTROY. May I suggest that one of the reasons this is the first time in ten years—in nine years, that I have troubled the Committee with a request to speak, is that I believe that there is time now for our making the District of Columbia a laboratory in which we work these things out.

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    I recall, as I said, thirty years ago, when people with good intentions put together urban renewal. And it turned out to be the urban removal of low- and moderate-income people from valuable downtown land all over the country.

    Ms. HOOLEY. I have seen it happen all over.

    Mr. FAUNTROY. And what we did was to say we will fashion an instructive example in the Nation's Capital where it is being most acutely experienced. And I cannot tell you, having been born here and having grown up in this city, the difference between Southwest now and what it was when I was a child, and to the extent to which those tools were used to deny low- and moderate-income people opportunity for affordable housing.

    We worked out something here, and it was a wonderful laboratory in which Members of the Congress, the agencies looked at what is necessary. We got at that time such simple things as relocation services worked out because of that kind of experiment.

    I want to see us, rather than debate and discuss the niceties of the problems in all of these agencies, to see if we can built on 1992, on your Act of 1992, which said, ''HUD, you get in there and regulate this and put Fannie Mae and Freddie Mac and the District Government and Federal Government into a laboratory where it is most acutely reflected right now.''

    This is a crisis for low- and moderate-income people in gaining access to affordable housing anywhere in this country.

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    So, I would like to see us do it here first and together work on it. Then two years from now, let us have a hearing and see how it worked out right here where we can all see it. That is the burden of my recommendation pursuant to the question that you have raised and which I have placed in my testimony.

    Ms. HOOLEY. Thank you. Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Hooley.

    Ms. HOOLEY. Let me just make one suggestion, and it follows along with Mr. Kanjorski's. And that is that it would have been nice—and I think this panel has been terrific—but it would have been nice to have a mixed panel so that you can have that back-and-forth dialogue that I think is important when you discuss this issue.

    Chairman BAKER. Well, I do not dispute your observation. I have thought about engaging—I was involved with a group, some Members were, the Bank Study Group where you do sit down and have people across the table.

    But I would merely point out in some small defense of what we have done here today, this panel has now gone on over three hours.

    No Member has been constrained. I think we have had excellent testimony. You may not all agree with the perspectives here represented, but I hardly think we can question the motivation and credentials of this panel.

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    As a matter of fact, I do not know if we have been able to resolve it yet, in deference to the gentlemen who have been waiting for the second panel, and in fairness to them and attendance of Members, we might well try to arrange for a subsequent hearing next week for the second panel and not continue on today.

    Because I know Ms. Jones and perhaps others still have questions. But there is no rush, no intent to shield anybody out. I guarantee you, before we finish this process, everybody is going to be heard.


    Mr. BAKER. Ms. Jones.

    Ms. JONES. That is what happens when you are the least senior Member on this Committee. But I am diligent and I am going to hang in here.

    Let me first of all ask: Mr. Nader, how many loans does a GSE originate?

    Mr. NADER. How many loans?

    Ms. JONES. Do they originate, yes.

    Mr. NADER. None.

    Ms. JONES. They do not originate any loans at all, and yet you accuse them of not giving loans to minority and low-income people?
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    Mr. NADER. Yes, but, I mean they are the precondition for the market working. If you ask them, they say that more mortgage funds are liberated from the banks around the corner, because there is a secondary market that they can lay these mortgages to.

    Ms. JONES. What year was Fannie Mae and Freddie Mac created?

    Mr. NADER. I think it was in 1937.

    Ms. JONES. OK. And predating Freddie Mae or—I always get them confused, Fannie Mae, Freddie Mac—and to this date, they do not originate a loan, so the policy of lending to communities was not set by these two GSEs, it was set by the banking industry.

    Is that a fair statement?

    Mr. NADER. Of course. Because they were not existent at that time.

    Ms. JONES. OK. And historically, if you follow through on that, because we deal with precedents in this country, the rules and regulations with regard to lending are not the policies of the GSEs, they are the banking policies. And much of what you want to lay on them originates with the banks who have no Government regulation as compared to the GSEs or no Government subsidy, right?

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    Mr. NADER. Well, you should hear our testimony on the banks. This was not a hearing on the banks. This was a hearing on how to regulate Freddie Mac and Fannie Mae. But we have testified about——

    Ms. JONES. I am asking the questions. Just answer my question.

    Mr. NADER. Right.

    Ms. JONES. The answer to my question is?


    I was here for the banking hearing, but my question is, in fact loans are originated by banks from—the loans are originated by banks and so Freddie Mac and Fannie Mae do not have any control over that portion of it, correct?

    Mr. NADER. Sure they do. They have incredible leverage.

    Ms. JONES. OK.

    Mr. NADER. In fact, they admit it.

    Ms. JONES. I see you do not want to answer that question. Let me——

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    Mr. NADER. No. They admit it. They try to say they are going to do some good things to reduce subprime lending and predatory lending. So obviously they admit they have enormous leverage.

    Mr. TAYLOR. Mrs. Jones.

    Ms. JONES. Mr. Taylor, I have another question for you, sir.

    Mr. TAYLOR. Do you want me to comment on that one?

    Ms. JONES. No. I do not have enough time for you to do that.

    Mr. TAYLOR. All right. Sorry.

    Ms. JONES. OK. What I wanted to ask of you is, and I want to follow back on something that one of my colleagues, Mr. Bentsen, talked about. You said that you do not want to move to there being no Government subsidy of GSEs. Is that correct?

    Mr. TAYLOR. That is not correct.

    Ms. JONES. You want to move where there is no Government subsidies of GSEs. Is that——

    Mr. TAYLOR. No, I do not want——

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    Ms. JONES. I said you do not.

    Mr. TAYLOR. Right. I do not. Sorry.

    Ms. JONES. It is the cross-examination lawyer in me that kind of gets witnesses confused I guess, but I do not know.

    Mr. TAYLOR. That is OK. I am an attorney, too.

    Ms. JONES. OK.

    Mr. TAYLOR. But, I am for the subsidies as long as it continues to leverage increased purchasing of affordable mortgages in underserved communities. So I am for it.

    Ms. JONES. And so in order to do that, what do you propose be done?

    Mr. TAYLOR. OK. I propose——

    Ms. JONES. Short answers.

    Mr. TAYLOR. Sure. I propose stronger oversight, increased——

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    Ms. JONES. By?

    Mr. TAYLOR. By HUD.

    Ms. JONES. OK.

    Mr. TAYLOR. Or a single agency.

    Ms. JONES. OK.

    Mr. TAYLOR. With power. I propose——

    Ms. JONES. Power. What would that power——

    Mr. TAYLOR. Influence, that they can influence—can I give the sort of the things, then I can go through each one so I can answer your question fully before you run out of time?

    Ms. JONES. You have one minute.

    Mr. TAYLOR. OK. So increased oversight authority.

    Absolute forbearance from any involvement in the predatory lending market.

    And then closer oversight of what they are doing in the subprime.
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    Increased data disclosure so we can see what they are doing, the folks that they are buying from, what those loans look like.

    So those are the major points that we have put forward here.

    Ms. JONES. Now some of what you want to lay on the GSEs, for example, allows them to be competitive, because we do not require private industry to be so open in disclosing some of the things that they do in the banking area.

    Is that a fair statement?

    Mr. TAYLOR. We are trying for that as well, Ms. Jones, in the other hearings and other testimony we have been asking for increased disclosure. That is where we are coming from.

    Ms. JONES. I know what you are trying for, but the question is, we do not require it currently, right?

    Mr. TAYLOR. Well——

    Ms. JONES. And would that not put these GSEs at a disadvantage in the market?

    Mr. TAYLOR. Well, would it put them at a disadvantage to disclose more of the data? Not necessarily.
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    But, we would argue that the private industry is also supported by the American taxpayer in the form of FDIC insurance, and that they, too, ought to be required to do the same.

    So, as Ralph said, this is a GSE hearing. If we were here talking about banks, we would be saying the same thing, because we want real sunshine on what is going on in America's lending institutions.

    In this case, we are talking about the Government-sponsored enterprises.

    Ms. JONES. But, on the one hand, you want to argue that the Government-sponsored enterprises operate independently, but on the other hand, you want to argue that this is a whole operation of banking and Government-sponsored enterprises that allows affordable housing to proceed.

    Mr. TAYLOR. You are like a prosecuting attorney.

    Ms. JONES. I am a prosecutor.

    Mr. TAYLOR. No. I would argue that, yes and yes. I think that the industry needs to be held accountable. But, because we are talking about the GSEs today, I am very focused on the GSEs.

    Ms. JONES. I am, too, but you cannot operate in a vacuum. The discussion cannot happen in a vacuum——
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    Mr. TAYLOR. Here is the answer. You are asking——

    Ms. JONES. ——Because we are not allowing—we are not imposing the same restrictions on the banking institutions. And when we talk about Mr. Cunningham, Mr. Cunningham, I think this is a heck of an idea to have social banking, but let's put it on all the banking institutions to require of them to do what you are talking about.

    Mr. CUNNINGHAM. If I can follow up on that really quickly, because I have been involved in this debate ever since I worked for a guy named Andrew Brimmer, who was the first black Federal Reserve Board Governor. Basically, what I would like to see is a CRA standard that is applied across the board to all pension funds, insurance companies, banks.

    Basically, the issue that we are dealing——

    Ms. JONES. And how many people do you think would be at a hearing where we were going to propose that in a piece of legislation?

    Mr. CUNNINGHAM. Well, I am not sure that I would want to be at a table if we were going to propose that.


    Mr. CUNNINGHAM. And I am not sure I would want to start my car up if I was at a table where you were proposing that piece of legislation.
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    Mr. CUNNINGHAM. But basically, the way that the financial markets are going is that form does not really matter anymore, it is function.

    I mean, it does not matter whether you are a bank or a thrift or a brokerage firm or an S&L or an insurance company. So basically, we have got to get—it is like they said, you follow the money; we have got to follow the money trail and make sure that those dollars—yes, ma'am.

    Ms. JONES. Mr. Fauntroy, finally, what would you propose would happen in this area to make sure that affordable housing is available to communities throughout the United States?

    Chairman BAKER. And if you can begin to summarize, but briefly.

    Ms. JONES. That is my last question.

    Chairman BAKER. Thank you.

    Mr. FAUNTROY. As I said, I think this is such a complex question that what we need to do is something that I have been working with the Ranking Member, Mr. Kanjorski, on, together with some people at HUD and people in our faith-based community who are faced with severe consequences of the lack of focus by the GSEs, by the HUD itself on addressing this problem in the District of Columbia.
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    And if you will think of nothing more from my contribution to this, it is that you ought to look very carefully at a demonstration, a national demonstration project we want to implement right here in the District of Columbia, which is now on the desk of the Secretary and that has had the benefit of consultation not only with Fannie Mae and Freddie Mac, but the Federal Home Loan Bank Board and with Bank of America and others in the commercial banking areas in this area who recognize the time to talk about this is really beyond this. We have got to really do something about it soon in the District of Columbia in particular, but certainly among those 5.4 million families that are being left out that the report suggests is bringing this to crisis levels in the Nation.

    Ms. JONES. Mr. Chairman, I would like to associate myself with the comments of my colleague, Mr. Kanjorski, and encourage us to have an opportunity to have all of the interested parties at a table to have this discussion.

    Because really all we do in having a group of GSEs here one day and this group here another day is go back and forth and actually waste our time when we could really get somewhere if we were all at the table and used the power of the Congress to push this along.

    Mr. NADER. I would be delighted to do that. We have always wanted to do that with Fannie Mae and Freddie Mac.

    Chairman BAKER. I appreciate your recommendation.

    I would just add in small response, I hopefully think some of the Members think these three hearings we have had to date have been somewhat educational and productive.
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    At least we ought to do our homework before we start taking the examination. And I think these hearings are the background for Members to become comfortable with the issues no matter what your perspective.

    Certainly I have suggested a bank study group forum might be appropriate. But I will tell you that the room is going to have to be awfully big, and it is going to look a lot like a town meeting as opposed to a productive work session.

    But I am not averse to any approach if it winds up with consumers being better served and taxpayers' risks being protected. Sign me up.

    Mrs. Maloney.

    Mrs. MALONEY. Mr. Chairman, I had to go to another meeting. I hope I am not going to repeat questions that were asked earlier, but I was struck by the conversation earlier on the statistics allegedly that Fannie and Freddie's loans are not going to minority low-income communities, because certainly one of the intents was to increase home ownership, which they have been very successful at. We are at an astonishing 70 percent of home ownership. But certainly to target people who truly need it.

    And I think one of the problems that was pointed out was that we are not tracking the data appropriately; that there's two different—do any of you have any ideas of how we could track the data better so it is clearer?

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    Do you have any ideas on that so that we could really know what is going on?

    Mr. SKILLERN. Part of the discrepancy between the GSEs and advocates in HUD has been the availability of data. The GSEs have their own set of what they are purchasing.

    Advocates can only use the Home Mortgage Disclosure Act data. And we know that the HMDA data does not report all of the loans. We did a study that showed 26 percent of loans were not being reported underneath HMDA.

    Therefore the GSE says, see, we bought loans that were not reported underneath HMDA. Our numbers are higher. And what we have argued is that, well, proportionately, the HMDA numbers are too low, too. There this portionality.

    So we really need fuller disclosure and better sharing around the GSE data so we can do these better analyses. And I think Ms. Waters has a very good point also about trying to determine what is it that we are measuring as well: Prime, FHA, subprime, and where that gradation along that spectrum happens.

    Mrs. MALONEY. Well I think that we should really come out with some guidelines so that we can get better data so that we know what is going on, but one of the things that came out at one of the earlier hearings that Mr. Baker had was the statement I believe by one of the GSE representatives that they are somewhat limited, because they can only purchase loans that the banks will sell them.
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    So if the banks are not—they do not give loans themselves. So if the banks are only selling certain types of loans, then they are limited in what they can purchase.

    Would anyone like to comment on that?

    Mr. SKILLERN. There is a correlation between the origination and what the GSEs are able to buy. Fair housing advocates argue that there is discrimination in steering right up front in the application process.

    CRA advocates are concerned about location of branches and whether they are accessible to low-income people.

    On the other hand, there is a correlation about what the underwriting standards are that banks are able to meet to be able to sell those loans to Freddie and Fannie.

    If those underwriting criteria are prohibitive to making loans, then you are right. They cannot make the loans. So there is an interaction between the two both on the origination and then on the selling as far as its impact on low-income——

    Mrs. MALONEY. So we need to look at what the program is or the criteria of what they will buy is what you are saying?

    Mr. SKILLERN. That is correct.

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    Mrs. MALONEY. OK.

    Mr. Nader—pardon me?

    Mr. SKILLERN. I am sorry. We can expand that market of what Fannie and Freddie would be willing to buy with different underwriting and risk taking assumptions.

    Mrs. MALONEY. OK.

    And Mr. Nader, you cited census tract statistics on GSE mortgage purchases comparing minority and nonminority areas.

    Aren't two reasons that the GSEs' purchases are lower is that these tracts, that many of these tracts are in areas where there are a high number of VA and FHA loans, and therefore they are where the loans are coming from?

    And then also the fact that they apparently are limited by what the banks will sell of their loans. But the gentleman, Mr. Stillern, was stating that they package the program of what the loan's criteria are.

    So could you comment on your reaction to those two areas that may have an impact on it?

    Mr. NADER. Well the proper comparisons take those variables into account. And I can just refer you to the source of that data, who is Jonathan Brown, for elaboration.
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    Mrs. MALONEY. OK. And earlier also you referred to corporate welfare when you described the Government guarantee, the tax advantages, and a line of credit with the Treasury.

    But banks also, those that are federally-chartered, have a guarantee of their deposits by the full faith and credit of the U.S. Government, and they have access to billions of dollars in the Federal Reserve's payment system.

    Would you classify the benefits that we are giving to banks likewise as corporate welfare?

    Mr. NADER. Yes. And you could have gone on with other examples. Yes. There is equal opportunity corporate welfare for these corporations from top to bottom.

    The banks have had a very privileged position historically. And not only that, there is an implied assurance by the U.S. Government that if banks are big enough, they are going to be too big to be allowed to fail.

    Mrs. MALONEY. I think that that is true of the GSEs too.

    Mr. NADER. Oh yes.

    Mrs. MALONEY. They are much bigger than banks, most of them.

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    Mr. NADER. Yes. Yes. No doubt.

    Mrs. MALONEY. And I also would like to get back to the comments on predatory lending, which is probably one of the most important issues that is before this whole Banking Committee.

    This increase in housing costs that we know that one of cited earlier that is really growing quite dramatically, will that not have an impact on the GSEs' announced predatory lending guidelines? The fact that housing is becoming more and more expensive?


    Mr. SKILLERN. I am afraid I do not make the exact connection between housing cost and the impact on the guidelines. Could you clarify that?

    Mrs. MALONEY. Well just it is just going to be harder and harder and harder to really get loans out to these communities to buy their own homes.

    Mr. SKILLERN. I think that higher costs in the markets do affect demand, just like interest rates go up or the price goes up. Fewer people can afford to buy them.

    The interaction with the GSEs, going back to Mr. Riley's comments earlier, the loan that I gave actually is not against the law, and it actually fits within the guidelines that the institutions have announced.
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    And so while he is concerned about the egregiousness of it, my point is is that we have to better define subprime lending as a useful tool, a tool that enables people to buy these higher cost loans that does not take wealth away from them.

    I think there is an important role for the GSEs to play in the subprime market to expand home ownership opportunities through it, but the guidelines have got to be tighter and stronger before I am supportive of them actually doing it.

    Chairman BAKER. Mrs. Maloney, if you can wrap up.

    Mrs. MALONEY. Just finally, one last question. I will be very, very, very brief.

    One thing about Fannie and Freddie that no one disputes is that they have been successful. They are tremendously successful.

    One of the statements by Bruce Morrison from the Home Loan Bank at one of hearings earlier, he stated that people are coming from all these foreign countries to study what we are doing with the secondary mortgage market, because it has been so tremendously successful in providing home ownership.

    But many of you have raised a point that some of the statistics are disputed; that it is not being directed to low and minority communities.

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    What if the guidelines or the programming which dictates whether or not they will buy the secondary mortgages were rewritten to direct it more to low-income families who are in tremendous need? What is your response to that?

    Mr. TAYLOR. I think that is a good idea. Mrs. Maloney, I cannot speak for every panelist, but speaking for the National Community Reinvestment Coalition, we do think the GSEs have done a better job.

    Part of it has been a booming economy, and part of it has been increased oversight by HUD, increased changes in laws from this Congress that have made a difference in inspiring them to do more.

    But, the fact of the matter is, I am trying to avoid getting caught up in this FM Watch versus GSE problem.

    I mean each side wants you to take a side. I am trying to be fairly pure in where we are coming from. But I work with a lot of banks who are not necessarily involved with FM Watch. When I say I work with them, I represent a trade association of community groups.

    But, this is about trying to partner and collaborate and do things in underserved neighborhoods. And toward that extent, you try to work with lending institutions and try to get them to understand why this is a viable market and how to get into that market.

    And if you were to listen to a lot of them, they will tell you in private that what Fannie and Freddie say in terms of their willingness to buy product is not exactly what the experience is with the lending institutions.
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    So, we go to Fannie and Freddie and say, ''Hey, these lending institutions—we are not going to tell you their names—but they are telling us you will not buy this stuff.''

    And so finally, calling the bluff of both sides, we went to these financial institutions and we said, ''Give us what is on your shelf, your portfolio of loans.'' And they were some of the largest financial institutions in this country.

    We said, ''Give us your portfolio of loans that Fannie and Freddie would not buy from you. We want to take those, and we are going to bring them to TransUnion and we are going to have them credit scored. And then we are going to go to Fannie and Freddie with that information.''

    And you know what they gave us? They gave us the tapes for $4 billion worth of mortgages that were primarily low-income, CRA loans sitting on the shelves of banks that Fannie and Freddie did not buy.

    And we went to Fannie and Freddie and said, ''Why aren't you buying these?'' They turned around and they started buying them, which was good.

    But, it was that incentive and encouragement that pushes them to do more. And why I am here, that is all I am here for, is to strengthen——

    Chairman BAKER. Mrs. Maloney.
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    Mr. TAYLOR. I am sorry.

    Chairman BAKER. I was just going to suggest, I know Mr. Kanjorski has additional follow-up questions. Can we move on?

    Mr. Kanjorski.

    Mr. KANJORSKI. I did not want to cut into Mrs. Maloney's time, but I wanted to make an observation.

    This panel is in full agreement with the Majority side of this Committee that CRA should be extended to all financial institutions, the GSEs, the insurance companies, the pension funds, and so forth. Is that correct?

    Mr. TAYLOR. Absolutely.

    Mr. KANJORSKI. So that is a remarkable occurrence.


    Mr. KANJORSKI. Look, some of us have been critical of CRA, but not because we are against the principle or the objective of it. In many instances it turns out to be dressing and nothing more than that.

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    This subcommittee cannot reach into that and neither can the Executive Branch without getting so fundamentally involved in private sector operations that we would freeze the marketplace.

    I know the Chairman wants to come up with some constructive mechanism to help the process. I hope that is what it is. And certainly I favor that, too.

    I somewhat castigated the panel in some of my earlier statements, because I think we are addressing a very small segment of a problem here, and not recognizing the total problem in the country. Sometimes it puts some of you that have been supported by some of us in what appears to be contrary positions.

    All I want to do is make sure the record is correct. I would like the panel to be more cooperative, if you will, in approaching that broader spectrum Mr. Nader talked about.

    We are going to go all around here, and people are going to be taking bows in an election year, and I know this is not done for political purposes.

    Chairman BAKER. That is a sure bet.

    Mr. KANJORSKI. But we are really not going to get an opportunity to get direction from the American electorate to change national policy.

    If we just concentrate on the failures of some of the existing institutions, already created by Government in a very big way, to accomplish and fill vacuums that for years existed in this country and continue to exist, we are going to be at cross purposes for good public policy.
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    It seems to me that I understand when one is asked to testify on a particular piece of legislation that one comes forward with that type of myopic view, but it sometimes sends a signal to the American people that we contend that if we just pass this one bill, we have solved all the problems.

    Quite frankly, I tell you, I do not think this goes anywhere near doing that in your housing market or in the general opportunity field of the economy.

    I hope that in the future Members of this panel will participate and that the Chairman will consider the opportunity. You know, maybe I will make an offer that we will try and see if the Minority side of the House has sufficient resources to rent a large facility, maybe the Kennedy Center, to put everyone concerned in there and have a discussion. Maybe we should lock us all in the room for eight or ten hours, and rather than posturing in some instances—particularly on this side of the bar—to really get at it and go at it and get some of the answers.

    I am sure if we do that in a roundtable cross X debate, we will not have people asserting that one study says this when the other side says it did not.

    Let them go at it and see the defects in the study or at least for our benefit to understand exactly what you referred to, Mr. Nader. Let us get to the real facts.

    If we do not get the facts understood, if we do not get the sufficient data that my colleagues to my right have talked about, then we are going to be on this and give a false impression to the American people of how we solve this problem. We are going to end up getting the wrong directions from the electorate this November that will set the policies for the Executive Branch and for this Congress for years to come, policies to solve not only the housing problem, but some of the broader economic questions in our society.
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    Thank you very much, Mr. Chairman.

    Chairman BAKER. Yes, sir, Mr. Kanjorski.

    I want to make an announcement first before I make a concluding remark, and I am acknowledging I am going to make a few remarks, so I do not know if you want to hang around or not.

    First I want to express my appreciation to the members of this panel for your extreme courtesy and tolerance in staying for such a lengthy set of questions. But I think it is evident that Members of both sides, all perspectives, have legitimate interest in hearing your views, and for that I am appreciative.

    To the members of the second panel, Mr. Schatz from the Citizens Against Government Waste, Mr. Sepp of the National Taxpayers Union, Mr. Smith from the Competitive Enterprise Institute, I am understanding my staff has made contact with you with regard to the continuance of the hearing today, given the length of it and the fact that we want to make sure your testimony is heard by as many Members of Committee as possible, I have suggested in consultation with Mr. Kanjorski that we will simply recess this hearing until next Wednesday at 10:00 a.m. at which time representatives from each of those three agencies would be given the opportunity to spend the entire day with us as we have with this panel.

    I think it is best for the Members of the subcommittee, in light of the fact we do expect to be interrupted by votes in the near term, it would probably mean that your testimony would receive full attention. And so I appreciate your courtesy in allowing us to do that.
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    Ms. WATERS. Mr. Chairman.

    Chairman BAKER. Yes, Ms. Waters.

    Ms. WATERS. Unanimous consent to enter into the record Congressman Fauntroy's testimony.

    Chairman BAKER. Without objection, certainly.

    Ms. WATERS. Thank you.

    Mrs. JONES. Mr. Chairman.

    Chairman BAKER. Yes.

    Mrs. JONES. Before you make your closing comments, can I request of Mr. Skillern, Mr. Cunningham, Mr. Taylor. You have suggested in this record that you have information or, what is the word I want, policies that you would think would be appropriate for banking institutions and GSEs to use in determining whether a loan should be made or not. I would like to have you send that information. Maybe other Members of the subcommittee would like it as well, but I personally would like it, and I would invite you to stop by my office and talk to me sometime. I am really a nice woman, OK?

    Thank you very much. Mr. Nader, I am sorry, you, too.
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    Chairman BAKER. I would simply say in conclusion, the purpose of this hearing was an attempt to get consumer advocates, those involved in community redevelopment, to give us their perspectives with regard to the provisions of H.R. 3703 and any other suggestions you might think appropriate for this Committee to consider.

    As I have said repeatedly and often, both Fannie Mae and Freddie Mac are well managed. They are well capitalized. There is no doubt they are highly profitable.

    This hearing and series of hearings is not about criticism of any existing management decision nor any officer of either of those enterprises, but to recognize that we as Members of Congress do have an obligation to ensure that in the unwarranted, hope-never-to-occur event when they face financial difficulty that we have taken all appropriate action to protect taxpayers from unwarranted loss. That was a goal.

    Second, in the course of these hearings, I think it has been clearly established, for me at least, that the enterprises could do an exceptionally better job of providing resources to consumers for which they were chartered and directed to serve.

    I do not think there is any dispute that they have done a reasonably good job, but they certainly can do better.

    I have come to the conclusion that those two goals are not mutually exclusive. We can have safe and well-run enterprises, properly regulated, that meet the mission statement as required by their charter.
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    And to the end that we can accomplish that goal by additional discussions and hearings, as long as I am able, I intend to proceed on that course.

    I will suggest, Mr. Kanjorski, that if we have the study group and we rent the Kennedy Center, that probably would be required just to get the lobbyists in from the two GSEs much less Fannie Watch.


    Chairman BAKER. There is extraordinary interest in this. And I fully intend to be cooperative and facilitate that meeting in any way we can, but I would suggest that we not have a meeting. That if we are going to do it, just like we are doing the hearings, we could complement our hearings and have a series of them.

    And if Members evidence their interest in participating, I am certainly not going to avoid that. I would welcome it. Because I am of the opinion, the more you learn, the more you are going to find that H.R. 3703 is not off the range of responsible conduct for the Congress to consider.

    Ms. WATERS. Will the gentleman yield?

    Chairman BAKER. Certainly.

    Ms. WATERS. Mr. Baker, I do not mind how ever you approach this, but we need good, solid information. It is very difficult for me to talk about the benefits of the GSEs and the subsidies without talking about the benefits and the subsidies that the banks receive and to measure them and to look at them.
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    I mean, we are sitting here, you know, guaranteeing that we will bail out the banks. We do not guarantee any bailout for the GSEs.

    Chairman BAKER. Oh, I think we do.

    Ms. WATERS. It is implied. And if people think that, that is one thing. But we guarantee that we are going to protect the banks, and we have these mortgage companies that run amok, who are not regulated, who in fact make the most unconscionable oftentimes loans with interest rates that I mean are just unimaginable.

    So if we are going to do some comparisons and some measurement, let us have all of the information before us.

    Chairman BAKER. I absolutely agree, and I am willing to do that in any forum that is productive.

    All I am suggesting is that for the conduct of the hearings, we are pretty much constrained, as are all other committees of the Congress on any subject, to follow this format.

    But in addition thereto, I think it would be helpful to have background available information from whoever chooses to participate. I welcome Mr. Kanjorski's suggested list of participants. And then we are going to have to figure out how we stitch it together and over what period of time we do this.
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    But ultimately, I am convinced more than ever after listening to this morning's panel that there is sufficient justification to take modest steps.

    Ms. WATERS. Will the gentlemen yield one more time?

    Chairman BAKER. No, I do not think this is—just one moment. I do not think this is the cure for cancer. I do not think every person who desires home ownership will get it tomorrow morning if we were to pass the bill, but I modestly say, I think it moves us in that direction. And failure to act I think would not be appropriate.

    Ms. Waters.

    Ms. WATERS. And again, Mr. Chairman, in considering everything that needs to be considered to make sure that we are doing everything we can for our consumers and our would-be homeowners, if this panel has that much validity and you appreciate them so much, then let's expand the role of CRA so that they can indeed do the kind of monitoring that is so very necessary to make sure that both GSEs and the banks and the mortgage companies and everybody are working better.

    And I am going to tell you something. You said something earlier about I would be surprised that you would be willing to modify. You would be surprised. I would be willing to modify mine, too, if you join with me in support of CRA.

    Chairman BAKER. Well, I think if we could get the GSEs up to what the banks do, we might have a deal.
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    Mr. TAYLOR. Mr. Chairman, just a point of information.

    Chairman BAKER. Yes.

    Mr. TAYLOR. There is a bill, the CRA Modernization bill, that has been signed onto by 25 Members of Congress. Your name on that bill would go a long way toward I think what Ms. Waters would——


    Chairman BAKER. I am of the opinion that my name on anything goes a long way in the current environment.

    Mr. TAYLOR. It does, sir.


    Chairman BAKER. I will be happy to consider all approaches. As I have said to those who are concerned about safety and soundness, H.R. 3703 is not constructed permanently.

    At least I have made a suggestion. Now you might not like it, but what I would like to hear are some suggestions in writing about how we make it better.

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    We can work together. Our goals are not mutually exclusive. There are benefits to both sides of the ledger if we do it right. But it is important that we do it.

    If there are no further comments, I thank all of you for your tolerance. The meeting is recessed until Wednesday, 10:00 a.m., June 21st.

    [Whereupon, at 1:40 p.m., Thursday, June 15, 2000, the hearing was recessed, to reconvene at 10:00 a.m., Wednesday, June 21, 2000.]

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