Segment 3 Of 3     Previous 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, pursuant to call, at 10:12 a.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker, [chairman of the subcommittee], presiding.

    Present: Chairman Baker; Representatives Lucas, Ryan, Sweeney, Biggert, Terry, Toomey, Roukema, Royce, Cook, Kanjorski, Bentsen, Waters, C. Maloney of New York, J. Maloney of Connecticut, Mascara, and Jones.

    Chairman BAKER. I would like to call this hearing of the Capital Markets Subcommittee to order and welcome all those in attendance.

    The purpose of the hearing this morning is to receive testimony of those engaged as market participants in the delivery of home financing products to consumers.

    When I began the review of the Government-sponsored enterprises a few years ago, my principal area of concern was then what would happen if market conditions changed dramatically and one of the GSEs became insolvent. Well, I was assured that that simply would not happen. After all, such circumstances would necessitate that every financial institution in the world would be in extreme duress. There would be regional economic dislocations of enormous proportions. The description sounded to me like Louisiana in the late 1980's.
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    Then I was reminded that Fannie Mae, frankly, was insolvent from 1979 to 1984, if you remember. Until after creative regulatory oversight and forbearance of taxes due, Fannie was allowed to grow its way out of its insolvency. This was a convenience not afforded to any S&L that I am aware of, at least not in Louisiana.

    And so here we are in the year 2000 being told that the GSEs are above reproach, and that with such smart and capable people running the show we should not even examine the financial condition of these enterprises. Smart people who have operated a highly profitable enterprise, at least in the near term, should never be questioned. That certainly was the accepted view just before LTCM failed.

    Afterwards, many said, ''Why weren't the tough questions asked?'' Some even suggested it was not critically analyzed because of LTCM's unprecedented record of profitability until the market turned unexpectedly, but the market did turn. Smart people went bankrupt. Taxpayers barely escaped.

    The only goal of this effort today and over the past months is to take whatever action is proper and necessary to ensure taxpayers will never again be called on to pay for ill-advised risk taken by any financial institution. The enormity of the GSEs, their scope in enterprise activity is, frankly, very hard to comprehend. They are literally everywhere in the financial marketplace domestically and internationally. If there was a misstep, the adverse consequences would extend far beyond the 24 percent rate of return shareholders currently enjoy.

    On the other hand, other than the U.S. Treasury, no other financial instrument has benefited from such broad market acceptance, and all of this flows from the perceived Governmental guarantees.
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    Let me again state what I have said throughout this process. Today the GSEs are very well managed, profitable, and a significant contributor to facilitating home ownership for many people. But that does not obviate the requirement for appropriate regulatory oversight.

    Like any business enterprise, they are not immune to business reversals. It is our responsibility, as Members of Congress, to examine the regulatory system and the consequences of failing to govern the current dominance of these activities.

    To that end, we will hear today from significant market participants, those who may have direct financial relationships with the enterprises. Take realtors, for example. They have no direct adverse consequences if an enterprise would get into difficulty; however, as long as the GSEs facilitate access to low-cost mortgages, it is significant in earning next month's 6, 7, or 8 percent commission. The same is true for home builders. A product is more readily sold if there is a stable liquid mortgage finance industry.

    Now, I can say these things because I am a home builder, developer, and a former member of the realtors. I say ''former member.'' I think your enrollment numbers are inaccurate this morning. You want to reduce it at least by one. But I suggest, as a Congressman, that we have a higher obligation, that is to do no harm.

    We should not, through neglect, allow pursuit of profit to turn into tragedy for taxpayers. Some have suggested that because there is even an inquiry into this subject matter that interest rates have gone up and potential home buyers have been locked out by the thousands. That is simply a lie. Let us examine the facts.
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    In June of 1999 Chairman Greenspan began his inflation-fighting battle, and to date he is solely responsible for raising interest rates 1.75 percent. I have not heard anyone suggest that he is irresponsible or unprofessional in his conduct.

    According to Fannie Mae, or the realtors' testimony calculation, such an interest rate increase of 1.75 percent would lock out 311,000 home owners from potential home ownership. That is amazing.

    Where is the outrage? I would be happy to facilitate a meeting to take up this tragic home ownership fact with Chairman Greenspan should the realtors, home owners, or GSEs have any difficulty in making such arrangements.

    But let us not ignore the U.S. Treasury, which has expressed significant concerns about the GSE activities and endorsed significant portions of H.R. 3703. To date I have not yet said it, but I would like to commend them for their bravery. I find their analysis to be professional and responsible, given the obvious consequences of GSE failure.

    As to the testimony today, anyone who suggests the proposal will result in ill-advised consequences will be asked to explain their reasoning for such a conclusion, as well as to suggest a more-appropriate remedy for the underlying concerns. Please remember that you are not responding to me on these matters of public policy, as offeror of the proposal, but rather you should meet the standards of the CBO, the GAO, the U.S. Treasury, and perhaps the Federal Reserve. And any response that is predicated first on maintenance of an industry sector's profits as opposed to protection of the taxpayers will not be necessarily received well.
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    After a brief review of the written testimony, please know that your constructive criticisms will be helpful in crafting an improved product, a modified H.R. 3703, and it is to that end that the conclusion of this process will work. Legislation to protect taxpayers and nothing less will be the end product of this process.

    Mr. Kanjorski.

    Chairman KANJORSKI. Thank you, Mr. Chairman. I think we can keep that membership in the National Association of Realtors, because if you leave, I will join.

    Chairman BAKER. Better check the price. It is pretty pricey.

    Mr. KANJORSKI. Mr. Chairman, thank you for the opportunity to speak at our fifth day of proceedings on H.R. 3703, the Housing Finance Regulatory Improvement Act.

    In my opening comments today, I would like to examine where we have been since our last hearing, where we are now at this hearing, and where we are going in considering the many complex issues related to Government-sponsored enterprises.

    At our last hearing, I questioned several of our witnesses about the need to provide the Office of Federal Housing Enterprise Oversight with the money it needs to regulate the safety and soundness of Fannie Mae and Freddie Mac. There is nothing more important than effective regulation so that we can prevent improper activities from occurring.
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    Each of the taxpayers' groups support providing OFHEO with the money that it needs as it works to implement its risk-based capital standard and improve its ongoing examination of GSEs.

    Immediately after our last hearing we voted on the House floor on an amendment offered by Congressman Hinchey to the VA/HUD appropriations bill to restore $4.7 million in additional funds that the OFHEO director had requested for oversight. Unfortunately, the amendment failed by a vote of 207 to 211. All the Democrats on this subcommittee supported the amendment, which would have passed if just a few more subcommittee Members on the other side of the aisle had supported the measure.

    From this vote, I must conclude that not only has the House not reached consensus on the need to strengthen the GSEs' regulations, but also our subcommittee has not reached consensus on these matters, even though we have carefully studied them for many months.

    At our previous hearings I have also noted that, in order for our oversight of GSEs to be fair and effective, we must work to ensure that our proceedings are well-crafted. Accordingly, I have requested that we convene roundtable discussions with representatives of all interested parties. A roundtable would promote fair, free, and vigorous deliberation by forcing the participants to challenge each other's assumptions and assertions. If we pursue any further action on H.R. 3703 in the 106th Congress, I hope that we will finally organize a roundtable to understand more completely the need for and implications of this proposal.

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    Moreover, in conducting any hearings on this matter I have said at past meetings that we must ensure that our panels are balanced, containing a multiplicity of interest viewpoints and a broad representation of individuals. I am, therefore, pleased that the representatives of the National Association of Home Builders and the National Association of Realtors, which I requested, are joining us today. I commend the Chairman for inviting them.

    In addition to the knowledgeable market participants with us today, I would have liked to have heard from others on this matter. For example, the Independent Community Bankers of America has detailed for us an important perspective of the implications of H.R. 3703 on small banks, small towns, and the Federal Home Loan Bank System. In a letter that I received from its president yesterday, he indicates that his group believes the legislation would ''result in higher mortgage rates and other loan rates to consumers, businesses, and farms across the country.''

    I have also received a letter on H.R. 3703 from the president of the National Association of Federal Credit Unions earlier this week. That letter encourages us to preserve the existing regulatory framework.

    In order to improve the quality of today's proceedings, Mr. Chairman, I would request unanimous consent to submit for the record these and other letters that I have recently received from the national trade associations, State organizations, housing and finance companies, and other market participants.

    Chairman BAKER. Mr. Kanjorski, all those documents will be included in the record without objection. I have my own unsolicited letters which I would also include in the record.
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    Mr. KANJORSKI. Finally, Mr. Chairman, because we are in the waning days of this Congress with fewer than 30 legislative days remaining, I must ask where we are going in our deliberations over H.R. 3703.

    During my opening remarks of each of our previous hearings, I have stated that we must move forward cautiously and carefully in our consideration of this legislation. We must not pursue a course of haste where wise men fear to tread.

    Just as we have not reached consensus in our subcommittee on OFHEO's funding level, we have not reached consensus on any of the issues contained in H.R. 3703. I believe we should not create uncertainty for markets and regulators. I believe we should not accidentally raise home ownership rates. I believe that we should not mark up this bill this year.

    In closing, Mr. Chairman, improving the efficiency and effectiveness of our Nation's successful housing finance system while protecting taxpayers from unnecessary risks are matters that require extensive study before our subcommittee contemplates any legislative action. A truncated process could lead to countless unintended consequences.

    I look forward to continuing to work with you in examining this issue and hearing from our panelists today.

    Chairman BAKER. Thank you, Mr. Kanjorski.

    Just for the record, I do have my letter to Mr. Gunther at the ICBA dated June 29th. Unfortunately, I didn't get a response to my letter, which, interestingly, on my copy is dated July 19th, but we have not been able to communicate timely with the ICBA. Certainly, we have no intent to keep any party from being heard on the subject. That only speaks to the need for more hearings.
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    Mr. Lucas.

    Mr. LUCAS. No statement, Mr. Chairman.

    Chairman BAKER. Mr. Ryan.

    Mr. RYAN. I thank you, Mr. Chairman.

    Let me just come off of what Mr. Kanjorski said. I think that OFHEO does need help and I think that what we are dealing with here is constructive. These hearings are constructive. To suggest otherwise I think would be to suggest that we are being irresponsible in our stewardship of taxpayer dollars.

    It is not that the GSEs are bad actors in the marketplace. That is just not the case. I think that the structure is one where you have contradictory mandates, contradictory missions, A shareholder mandate and a Government, congressionally-chartered mandate, which many times can be contradictory toward each other. That is what we are trying to ferret out here.

    The question that should be concerning the subcommittee is: are we doing a good job of providing liquidity in the housing market? Are we securitizing secondary market? And are we doing so without needlessly putting taxpayer dollars at risk?

    That is the issue that we are trying to get to, in my opinion. I think that we can come together on issues of a regulator, whether it is OFHEO or something else, and hopefully we will be able to reach consensus on that issue so that we are adequately protected and assured that taxpayer dollars are not needlessly being placed at risk.
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    At this time, Mr. Chairman, I would like to ask unanimous consent to include in the record a letter and a submission from the Mayor of Milwaukee, John Norquist.

    Chairman BAKER. That is John Norquist, the Democrat?

    Mr. RYAN. Yes.

    Chairman BAKER. OK.

    Mr. RYAN. John Norquist, provocative Democrat, Mayor of Milwaukee, sent Members of the subcommittee here a letter and a chapter from his book, and I would like to ask unanimous consent to have that included in the record.

    Chairman BAKER. Without objection, certainly. Yes, sir.

    Mr. RYAN. With that, I will yield my time.

    Chairman BAKER. Thank you, Mr. Ryan.

    Mrs. Biggert.

    Mrs. BIGGERT. No statement, Mr. Chairman.

    Chairman BAKER. Does any other Member have an opening statement?
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    [No response.]

    Chairman BAKER. If not, then we would proceed to receive comment from our witnesses this morning.

    First, we welcome back to the committee room a former Member, Congressman Steve Bartlett, who is now serving in the capacity as President of the Financial Services Roundtable.

    Welcome. We are glad to have you back.


    Mr. BARTLETT. Thank you, Mr. Chairman. It is good to be here. I am here as President of the Financial Services Roundtable. Our Roundtable represents 100 of the largest financial services providers in the country. In addition to that, Mr. Chairman, I might note, while serving as Mayor of Dallas and, prior to that, as a Member of the Congress and on this committee, I have been quite active in the GSE issues. I, in fact, was quite active in the development of the legislation, the Enhanced Secondary Mortgage Market Act, in 1983 and 1984.

    In that sense, I would say that, in my view, H.R. 3703 is in many ways an extension and improvement on the underlying lieutenant that we did with the Enhanced Secondary Mortgage Market Act back in the early 1980's. Indeed, I can say, both as Mayor and as President of the Roundtable as well as a Member of Congress, Fannie and Freddie provide a great deal of positive benefits to home ownership, and those benefits within the mission of providing liquidity to the residential secondary mortgage market are benefits that we ought to continue to promote and to encourage.
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    My sense is that this legislation, H.R. 3703, speaks to the non-mission activities, as well as to safety and soundness.

    In that sense, Mr. Chairman, the Roundtable supports H.R. 3703. There are some areas of the bill that we would like to work with the subcommittee to improve, but we think that H.R. 3703 establishes a framework that will allow the regulatory agencies the proper authority to control mission expansion by the Government-sponsored enterprises.

    Mr. Chairman, much of what I will say will be related to mission expansion. Our member companies in the marketplace believe that mission expansion, both today and projected into the future, is quite significant and, in fact, is and will become a quite significant problem that this subcommittee has, I think, the obligation and responsibility to address.

    I do appreciate your leadership, Mr. Chairman, and the leadership of Ranking Member Kanjorski. I do believe that the role and mission and activities of GSEs deserve periodic reviews, and I commend this subcommittee for conducting that review.

    Mr. Chairman, as an aside, I notice in your statement that no one had been calling for oversight hearings or reviews on the Federal Reserve raising interest rates. Should they choose to raise interest rates much further, you may want to reconsider that.

    Chairman BAKER. I couldn't help that. I am sorry.

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    Mr. BARTLETT. Mr. Chairman, the Roundtable and our member companies are not opposed to all of the activities of the GSEs. As I said, Fannie and Freddie have played a key and extremely significant and positive role for several decades in providing liquidity to the mortgage markets.

    Also, the Federal Home Loan Bank System should be commended. In particular, I would note—not the subject of this hearing, but the mortgage partnership program that the Federal Home Loan Banks have launched as a pilot, and now in rolling out, are positive. They improve the market and they ought to be encouraged and supported.

    Mr. Chairman, the specifics are in H.R. 3703. First, establishing a sole regulator for both safety and soundness and mission containment, we see that as a positive, as a strength of this bill. It combines safety and soundness and mission regulatory authority into one agency.

    Second, the bill would change the manner in which regulators are funded. It is a governance issue, but it is absolutely critical. OFHEO is subject to a highly politicized and quite unusual appropriations process as a regulatory agency, so we support H.R. 3703's establishing financial independence. We think that is critical to the stability of any regulatory agency.

    Mr. Chairman, for the record, OFHEO is the only Federal financial safety and soundness regulatory that is currently subject to the appropriations process. That should be changed immediately by the Congress and as quickly as you can.

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    Third, mission containment. This legislation would put into place a process long overdue for regulatory authority—in this case OFHEO—for new activities the GSEs wish to undertake. The approach proposed in the bill—candidly, Mr. Chairman, the details of it may be overly restricted or overly complicated, but we do very strongly agree with your intent and we would like to work with you on ways to perhaps simplify the approach.

    I could give you examples. Two examples come to mind, examples of activities that Fannie and Freddie have undertaken that go beyond the original intended mission. Fannie, for example, has a program to buy home equity loans. One specifically that I think you have cited is Home Depot stores. Home equity loans, in fact, are used for all kinds of things other than buying homes. We think the role of the GSEs should be in home ownership and home purchases, liquidity in the residential secondary mortgage market.

    Home equity loans are good things. They are used for good things of consumer credit, debt consolidation, college loans, purchasing new automobiles, or boats, or other goods, or windows and doors at Home Depot stores. We think those are good things, but those good things should not be financed by GSEs.

    Second mortgages were explicitly permitted in the mission statement, and home equity loans one could argue fall into that category. My belief, Mr. Chairman—and I was there—is that second mortgages back in 1983 and 1984 were generally thought of as things to help someone buy a home. Second mortgages now are for all other purposes, and we think that is an area that the subcommittee should focus on.

    Another example, Freddie Mac has what is called a ''Home Steps Buying Center,'' a storefront in a California strip mall where consumers can arrange to visit homes, receive financing, and close the loan. The program is promoted as a new way to buy a home—way beyond the mission of the residential mortgage market.
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    Fourth, Mr. Chairman, H.R. 3703 places limits on non-mission assets and it creates a framework for regulatory containment of the mission. Mr. Chairman, I would suggest, as you consider this legislation, the subcommittee may also want to look at the precise language of the statutory mission statement to try to bring the mission in the statute back to something that is much more current and closely mirrors what Congressional intent is in the current economy.

    Fifth, safety and soundness. The Roundtable supports those provisions that require the GSEs to be rated by two nationally recognized rating agencies. GSEs do have an implicit Government guarantee beyond the explicit benefits afforded that are in the statute. Requiring this analysis will help to quantify for policymakers that implicit guarantee and promote greater transparency in the debt market.

    Finally, Mr. Chairman, we support the changes to the statutory requirements, a simplification of the statutory requirements for risk-based capital. Mr. Chairman, an eight-year delay after the statute was written in promulgating final regulations essentially means that there is something wrong with the statute. It doesn't take a regulatory agency eight years to promulgate regulations for safety and soundness, so I think it is a per se case that that section of the statute is broken and needs to be fixed.

    So, Mr. Chairman, in conclusion, one, the Roundtable supports Fannie Mae and Freddie Mac and the Federal Home Loan Banks in their core mission of providing a liquidity in the secondary residential mortgage market.

    Two, we believe that Fannie and Freddie specifically are going way beyond their core mission and in an accelerated way that will only make the situation worse in coming years.
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    Third, we support H.R. 3703 in its mission containment and safety and soundness.

    And, last, we will work with the subcommittee for specific improvements in the language of the bill that we think will make it work better.

    Thank you, Mr. Chairman. I yield back.

    Chairman BAKER. Thank you very much for your attendance and your contribution.

    Our next witness is Mr. Dennis Cronk, a partner in the real estate group domiciled in Roanoke, Virginia, and who appears here today in his capacity as President of the National Association of Realtors. Welcome.


    Mr. CRONK. Thank you, Mr. Chairman and Members of this subcommittee. I am Dennis Cronk, a realtor from Roanoke, Virginia, and President of the National Association of Realtors. I represent 760,000 realtors from around the country. It is, indeed, an honor to be here this morning to offer some views on H.R. 3703.

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    H.R. 3703 addresses many issues surrounding GSEs, but realtors focus really on one primary issue: is this legislation, as it is presently written, in the best interest of America's homeowners.

    Let us begin with some facts.

    Today, two out of every three American households own their homes, more than any time in history, and 42 percent of the buyers in 1999 were first-time home buyers.

    Not only does this mean millions more Americans are realizing the American dream of home ownership, but their purchases help drive U.S. economy and the housing market, making it possible for existing owners to trade up to a new home.

    Last year, more homes were purchased in America than ever before. One out of every nine American families either bought or sold a home last year. Yesterday, I returned from a meeting with real estate leaders in Japan, Hong Kong, and Beijing, and we as an association are working with partners in forty nations around the world to help build an orderly real estate market in their economies.

    From my personal experience and discussions with all these real estate experts in the various countries around the world, we are, indeed, the envy of the world when it comes to the mortgage finance system. This really is due in no small part to the mortgage investment activities of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In establishing Fannie Mae and Freddie Mac, Congress charged these enterprises, as a matter of public policy, to facilitate a secondary mortgage market with full knowledge of the risk associated with tying up capital and long-term fixed rate instruments. I commend Congress for that back in the early 1980's, as you can imagine what it has done to our market today.
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    This financial innovation created and maintains efficiency and liquidity in an otherwise inefficient and illiquid mortgage investment market.

    In the nearly thirty years of their existence, Fannie Mae and Freddie Mac have fulfilled that Congressionally chartered mission in good economic times and bad. Realtors know from experience that current long economic expansion that we enjoy today will ultimately slow down, and when it does we also know that Fannie Mae and Freddie Mac, unlike the primary market lenders out there, will be there for us and for home buyers as they have been in the past.

    The GSEs were created to do what no fully private company could do or was willing to attempt in return for their Government charters and other benefits. Congress limited the GSEs to a single line of business. Today, we hear these other financial institutions out there who are seeking to change radically the role of the GSEs, even to the point of stripping away their federally-chartered benefits. They argue that Fannie Mae and Freddie Mac have an unfair advantage because of their federally-chartered ties. Yet, I ask you, are any of these critics willing or capable of taking on the risks associated with making the secondary mortgage market work? Are they willing to be limited to a single line of business? Are they focused on making the home buying process more efficient and affordable for homeowners? Or are they focused on enhancing their own bottom lines at the expense of American homeowners?

    Of the many provisions in H.R. 3703, we agree that the current regulatory framework in overseeing the GSEs should be revised to create a single, strong, independent regulatory authority.

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    The reform under consideration would effectively hamstring the GSEs, leaving them vulnerable to some strong oversight requirements that would stifle competition between them and reduce their effectiveness as mortgage investors. Any regulatory reform, we hope, that is developed must preserve innovation for the mortgage delivery system.

    Despite realtors' general support for the GSEs, we have had our disagreements with Fannie Mae and Freddie Mac. We strongly disagreed with them two years ago when they opposed the increase in FHA mortgage limits. We did resolve that issue.

    Today, we do disagree with some of their current efforts to expand foreclosed property disposition activities to include bidding on properties foreclosed by third parties.

    There is no doubt in the future we will have differences with the GSEs, but I trust that we never lose sight of the goal we share together in bringing home ownership within the reach of all Americans.

    For that reason, the National Association of Realtors urges this Congress not to risk derailing a system with a twenty-year record of delivering real value to American people.

    Mr. Chairman, realtors have vivid and painful memories of how a well-meaning reform can have unintended consequences. The 1986 Tax Reform Act nearly destroyed the real estate market and our economy. My fellow Virginian, Thomas Jefferson, once said, ''The hole and the patch should be commensurate.'' This legislation, as it presently is written, is extremely complex, addressing a variety of issues, each of which could be a single bill. Let us find a patch for the one hole that may need mending, assuring that there is a strong independent regulator for the GSEs and leave the other patches in the sewing kit, because they just simply aren't needed.
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    Thank you.

    Chairman BAKER. Thank you, Mr. Cronk.

    Our next witness this morning is Mr. Christopher Sumner, who is the CEO of a mortgage company in Salt Lake City, but appears today in his capacity as President of the Mortgage Bankers Association of America.

    Welcome, sir.


    Mr. SUMNER. Thank you, Mr. Chairman, Congressman Kanjorski, Members of the subcommittee. My name is Christopher Sumner, and I am President of the Mortgage Bankers Association of America and also the Chief Executive Officer of CrossLand Mortgage in Salt Lake City, Utah.

    Mr. Chairman, let me first commend you and the subcommittee for tackling the issues before you during this time of calm economic seas. In the area of GSE safety and soundness, there is today no crisis upon us, but by acting now you are clearly demonstrating tremendous foresight in leadership.

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    The MBA—the Mortgage Bankers Association—appreciates the opportunity to be represented today. The MBA is an industry association with approximately 3,000 members of the real estate finance community, and our primary market lenders work to put families in homes and apartments and play a critical role in facilitating home ownership and rental housing.

    Mr. Chairman, we believe that the reason Fannie and Freddie were established is as valid as ever: to ensure dependable liquidity for a stable secondary market, particularly for single-family, long-term, fixed-rate mortgages.

    The GSEs have not outlived their original purpose. At the same time, it is essential to ensure that they do not outgrow it by entering primary markets already characterized by robust private sector competition.

    The two markets, primary and secondary, depend on each other. In fact, for a viable secondary mortgage market to exist, a robust and competitive primary market is essential. Competition is the key to development of innovative products and to achieve the most efficient delivery of the lowest-cost residential mortgage credit.

    Last year the primary market generated almost $1.3 trillion in home loans and $40 billion in loans for multi-family developments. Our members have a strong commitment to the present mortgage finance system, but we are concerned that the essential stability of this system could be undermined if the unprecedented growth of Fannie Mae and Freddie Mac results in an expansion of their activities beyond the mandate intended by Congress.

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    By expanding beyond the intended boundaries of their charter, the GSEs could upset the equilibrium between the primary and secondary markets. The immediate casualties might be existing mortgage providers, but consumers would be the ultimate losers. Less competition means higher borrowing costs, fewer financing options, and less responsiveness to consumer needs.

    The MBA believes that a well-funded, independent regulator of the GSEs is necessary to maintain this delicate balance designed by Congress. We believe that the statutory guidance is required to ensure a clear separation between the roles of mortgage lenders and the GSEs and to prohibit the GSEs from engaging in primary mortgage activities.

    We believe that oversight must also be structured so as not to interfere with the smooth operation and efficiency of today's market.

    The MBA wants to be a constructive partner with this subcommittee in its review of GSE oversight, and toward that end, Mr. Chairman, I am pleased to advise you that the MBA has convened a blue ribbon task force of mortgage company executives to examine the boundaries of secondary market activity. We aim to develop an appropriate definition that preserves the equilibrium between the markets which have served the American consumer so well.

    In a model of cooperation with the mortgage industry, both Fannie Mae and Freddie Mac have agreed to participate with us in this dialogue about the boundaries of the secondary market, and our goal is to produce a report with the MBA's view for review by you this fall.

    Lenders, consumers, and the GSEs all share a mutual interest in maintaining the balance of the primary and secondary markets. Working together with this subcommittee and the GSEs, we have a unique opportunity to clarify Fannie Mae's and Freddie Mac's role as supporters of the primary market, but not competitors in it. This will ensure the continuation of robust competition that keeps borrowing costs down and home ownership up.
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    Mr. Chairman, my written statement provides additional detail on all of these issues and comments on the specific provisions of H.R. 3703. We hope to be a continuing resource for this subcommittee and your work in this important matter as it moves forward.

    Once again, Mr. Chairman, thank you very much for the opportunity to talk before you today.

    Chairman BAKER. Thank you, Mr. Sumner.

    Our next witness this morning is Mr. Bruce Smith, who is President of Smith Quality Homes, Walnut Creek, California, who is here today, however, in his role as First Vice President of the National Association of Home Builders.

    Welcome, sir.


    Mr. SMITH. Thank you.

    Chairman Baker, Mr. Kanjorski, my name is Bruce C. Smith. I am a home builder from California and President of Smith Quality Homes, a family owned business that my brother and I run that my father started in 1934 in Berkeley, California. I am also the First Vice President of the National Association of Home Builders, whose 200,000 members are proud of their contribution to housing Americans and housing millions of citizens who are renters in our country.
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    Through these hearings, NAHB supports your desires to ensure a strong, independent, effective regulatory structure for the housing-related Government-sponsored enterprises, GSEs—Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.

    The National Association of Home Builders believes that the current regulatory structure is accomplishing these objectives. America's housing finance system works incredibly well, and, as mentioned before by Dennis, indeed is the envy of the world.

    Much of this success is due to the public/private partnership established by Congress more than half a century ago and to the reforms enacted in the Federal Housing Enterprise Safety and Soundness Act of 1992, the GSE Act, and, as well, the Graham-Leach-Bliley Act passed just last year.

    I will confine my comments to three provisions in the bill.

    First, the bill would consolidate the regulation of housing GSEs into a new, independent agency. The National Association of Home Builders has no quarrel with the concept of a single, more-efficient mission and safety/soundness regulator, but we question whether the structure envisioned by the legislation would be an improvement over the existing structure.

    As stated before, we are certainly willing to participate in efforts to examine changes to improve the current system, but in the process we ask that great care should be taken not to impair important regulatory efforts underway or the ability of GSEs to attract capital to the housing finance system.
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    For example, there could be an unnecessary delay in the publications of final risk-based capital regulations for GSEs, a rule which NAHB and the entire community have been working for so long. Likewise, in the case of the Federal Home Loan Banks, work has just begun on revisions to the system's capital structure mandated by last year's modernization act.

    Our second concern focuses on revisions to the current approval process for the new GSE activities. This provision is well intentioned and presumably would address such charter issues. The National Association of Home Builders certainly agrees that GSEs should operate within their Congressional charters. We believe that the current regulatory approval process is adequate to address those concerns. Specifically, the HUD secretary has already the authority to disapprove programs consistent with the GSE's charter or not in the public interest.

    The National Association of Home Builders believes that the GSEs have demonstrated a particular expertise in identifying market needs and responding efficiently. We fear this provision would subject the GSEs to an unnecessarily cumbersome approval process that could have a chilling effect on the market innovation and impede the flow of new products and programs to meet the new demands of housing in our country. Ultimately, we believe that this provision could hurt the housing consumer.

    Finally, the bill proposes to repeal Treasury's discretionary authority to purchase $2.25 billion of Freddie Mac and Fannie Mae securities and $4 billion cumulative of obligations to the Federal Home Loan Banks. This authority, which has never been used, is an integral feature of GSE status that provides Fannie Mae, Freddie Mac, and the Federal Home Loan Banks with their key benefit—the ability to raise capital at rates that benefit homeowners and renters throughout our Nation.
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    All of us are aware of what happened in the financial markets following the March hearing and the lingering effects that we have here today. These events are a clear demonstration of the importance of Treasury's security purchase authority to the financial market participation of GSEs and the potential for unintentional damage from possible changes.

    We urge Congress to carefully consider the consequences that the elimination of this key pillar of GSE agency status could have on housing finance systems and the cost of home ownership.

    As I said at the outset of my remarks, we believe that the housing finance system works incredibly well, due largely to the critical support provided by the housing Government-sponsored enterprises; however, we appreciate the subcommittee's efforts to assess and seek to improve to the regulatory framework of GSEs, and we are most interested in continuing to participate in this process as you move forward through your hearings and deliberations.

    Thank you.

    Chairman BAKER. Thank you, Mr. Smith.

    For the record, I am the initiating founding President of the Central Area Home Builders Association a few years back, so I have enjoyed my relationship with the home builders over the years. I am not a member, but that has nothing to do with the current legislative determinations.

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    I would announce for the benefit of the Members that we will recess briefly for the pending vote. In fairness to you, Mr. Bochnowski, for your appropriate presentation of your testimony, we will return as soon as possible. And notify Members that I will reconvene the hearing as promptly as I can return in order to facilitate our progress.

    We stand in recess.


    Chairman BAKER. Additional Members will be returning as business is concluded on the floor.

    When we recessed, I was about to welcome Mr. David Bochnowski, who is Chairman, President, and CEO of Peoples Bank in Munster, Indiana, appearing here today as the First Vice Chairman of America's Community Bankers.

    Welcome, sir.


    Mr. BOCHNOWSKI. Mr. Chairman and Members of the subcommittee, I am David Bochnowski, Chairman and CEO of Peoples Bank of Munster, Indiana. I appreciate this opportunity to testify on behalf of America's Community Bankers.
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    The GSEs raise issues that are of great interest to our members. Virtually all of ACB members view residential mortgage finance as a core business activity. We commend you for taking on these challenges and important issues.

    The GSEs are an important part of the housing finance system. ACB supports Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and the role they have played. We also support a public policy review of Fannie Mae's and Freddie Mac's activities and role.

    Legislative proposals must effectively authorize and require the regulators of the GSEs to engage in appropriate mission and safety and soundness and supervision. GSE activities should not subsume or discourage competition between current private sector participants. Regulation of the Federal Home Loan Bank System should not be consolidated with that of Fannie Mae and Freddie Mac. The Federal Home Loan Bank System is a cooperative system, while Fannie Mae and Freddie Mac are publicly traded companies. They require separate and different regulation.

    America's housing and finance system is a mixture of private sector and Government-supported organizations and initiatives. This unique synergy has helped put a record number of Americans in homes. This should not be changed. The private sector community lenders must continue to bring people to the table as the lenders tied to the community, and the GSEs should continue to assure that a vibrant secondary market exists. It is the possible change in the balance of these activities that concerns ACB.

    As important as the GSE roles are, they do not, in themselves, put a single borrower into a home. It is the primary market lenders like ACB members that deal directly with home buyer and borrower.
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    Fannie Mae and Freddie Mac provide elements of both cooperation and competition to the typical ACB member. The term ''coopetition'' that is sometimes used to describe this system of shifting alliances in a high-tech, new economy may aptly express these mixed emotions.

    The Congress and the regulator for Fannie Mae and Freddie Mac must exercise vigilant oversight to be sure that the subtle balance between the GSEs and private market lenders is not upset. This requires an ongoing process, not occasional attention.

    It is the evolution of Fannie Mae and Freddie Mac that is ACB's primary concern. In addition to meeting their mission as publicly traded companies, the two GSEs must also focus on shareholder returns. As a result, we are concerned about mission creep that can discourage or subsume the roles of other mortgage market participants.

    ACB opposes any expansion of Fannie Mae and Freddie Mac into the home equity line of credit market. It is not consistent with promoting home ownership. Borrowers seeking to tap home equity have already achieved home ownership.

    Activities that diminish the roles of other participants in the mortgage market should be prevented. The cooperative structure of the Federal Home Loan Bank System serves as a built-in safeguard against this. Fannie Mae and Freddie Mac, on the other hand, owe a fiduciary duty to their wide shareholder base and may be compelled to look for new markets to serve the interests of their shareholders.

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    ACB members have always been innovative, and the GSEs have been innovative, as well. Legislative and regulatory review must ensure that GSEs' innovation does not create exclusive relationships. A better program review process might have prevented some of these concerns that have arisen from the HTI joint venture with Freddie Mac, Microsoft, and a limited number of large lenders.

    ACB has had a number of discussions and has exchanged letters with Freddie Mac about HTI. We have also sent letters to OFHEO and HUD asking for a detailed program review. ACB is concerned that the venture does not have an open architecture, allowing any lender willing to pay a commercially reasonable price for the system to use it. No GSEs should be engaged in a venture that prefers one group of lenders over another group of lenders.

    On another issue, ACB believes the risks associated with GSEs level of debt currently in the marketplace are appropriate. Still, Congress and regulators should be concerned with possible systemic risks and should be prepared to deal with potential problems if they arise.

    ACB believes that legislative and regulatory diligence in maintaining appropriate capital adequacy and mission focus can address the issues of exposure to the taxpayer.

    ACB supports Chairman Baker's introduction of H.R. 3703. Our written testimony goes into greater detail, but let me give you a brief overview of our views.

    ACB supports the consolidation of both mission and safety and soundness oversight in a single regulator for Fannie Mae and Freddie Mac.
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    ACB is opposed to consolidating Federal oversight of the Federal Home Loan Bank System with the regulation of Fannie Mae and Freddie Mac. The Federal Home Loan Banks and the other two GSEs have vastly different natures and necessarily different risk-based capital requirements.

    ACB is strongly supportive of providing the regulator of the GSEs with strong supervisory authority. We strongly support requiring new program activity review and approval. The manner in which a new program approval process is crafted, however, is complicated. The GSEs do have a legitimate concern about their need to maintain confidentiality for proprietary information and the need to move quickly in today's fast-moving markets.

    The concept of modest initial holdings or of pilot program status may be a way to address these difficult issues. This would allow some interim status short of full approval. Such a process might have helped prevent the concerns that now exist regarding the HTI issues discussed earlier.

    ACB believes that a clearer definition of Fannie Mae's and Freddie Mac's mission would be helpful. Unlike the Federal Home Loan Bank System, whose cooperative structure effectively creates checks and balances on the activities of the banks, Fannie Mae and Freddie Mac have an incentive to seek out new activities and markets to maintain or improve returns to shareholders.

    ACB opposes creating uniform capital standards. It is important to recognize the differences between the cooperative structure of the Federal Home Loan Bank System and the publicly-traded corporate structure of Fannie Mae and Freddie Mac. Risk-based capital standards must be based on the GSEs' different missions or business approaches.
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    ACB does not support repeal of the Treasury line of credit. Eliminating the Treasury line of credit would be expected to increase residential mortgage costs.

    ACB strongly opposes the repeal of the Federal Home Loan Banks' superlien authority.

    ACB supports the sense of Congress calling for the approval of proposed rules issued jointly by the Federal Reserve, FDIC, OCC, and OTS to address the treatment of privately issued mortgage-backed securities under risk-based capital requirements.

    I would like to take a few minutes to discuss some important Federal Home Loan Bank System issues.

    ACB greatly appreciates and supports the leadership you, Mr. Chairman, and Ranking Member Kanjorski have taken in this area. Congress required the Federal Housing Finance Board to have capital regulations completed by November 12th. Development of the new capital structure has proven to be very complicated and many questions remain unanswered. To ensure that the Federal Home Loan Banks and the current and prospective stakeholders of the system have all of the necessary information available to develop and submit informed comments on the proposed rule, ACB and approximately twenty State trade associations sent a letter to you and a number of your colleagues requesting an extension of the date that the Federal Housing Finance Board has to complete the capital regulations. We hope the Banking Committee will direct the Federal Housing Finance Board to extend the process until the outstanding questions can be answered.

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    On June 29th, the Federal Housing Finance Board adopted a regulation that defines core mission activities and removes the cap and pilot status of the mortgage partnership type programs. ACB opposed the core mission definition because it suggests future investment or activity quotas. We believe that the mission of the system is clear in the statute and that the Federal Home Loan Banks and their members are in the best position to determine how to achieve that mission.

    ACB supported removal of the caps and pilot status of the mortgage partnership programs. These programs should be allowed to earn their way into the balance sheets of the Federal Home Loan Banks. Recently we have learned that on the Senate side an amendment may be offered that would, in effect, put retroactive caps on these programs.

    We believe it would be wrong for the Finance Board to mandate specific minimum levels for mortgage partnership or other programs at each Federal Home Loan Bank, and it would be equally wrong to impose legislative limits on the mortgage partnership programs.

    Mr. Chairman, ACB believes that H.R. 3703 is an important and timely legislative initiative and raises public policy issues that must be addressed. The size and scope of the GSEs raise fundamental questions both for the structure of housing finance in America and for the safety of the marketplace.

    The consumer deserves competitive opportunities in a secure marketplace and the taxpayer demands that risk to the Government be managed and minimized.

    Thank you for this opportunity to testify.
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    Chairman BAKER. Thank you very much, sir, for your constructive testimony.

    Mr. Cronk, are you familiar with an organization called ''Corey Savings Bank''? Does that ring a bell?

    Mr. CRONK. Corey Savings Bank?

    Chairman BAKER. Yes.

    Mr. CRONK. Yes. They had a branch in Roanoke, Virginia.

    Chairman BAKER. On West Church Street. You know what happened to them?

    Mr. CRONK. They went under.

    Chairman BAKER. That is right, in the 1980's, my point being the fact that it can happen in your own home town, it can happen anywhere. Do you believe that these GSEs are above financial reversals?

    Mr. CRONK. Absolutely not.

    Chairman BAKER. OK. Thank you.
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    In your written testimony—I know these are not necessarily your particular work product but that of the organization—the realtors make reference to systemic risk management, and the point being that OFHEO stress test would be the appropriate remedy to analysis of systemic risk potential.

    Do you know if any of the experts who may have provided your information have looked at either their default models that are contained in that stress test calculation, counter-party risk analysis, or interest rate modeling requirements, specifically the weighting of risk of derivatives versus debt instruments, for example? Has that been something the realtors have engaged in a discussion on?

    Mr. CRONK. We met with OFHEO and we have provided comments relative to those risk-based capital standards.

    Chairman BAKER. But you have not been familiar with those particular provisions of the stress test?

    Mr. CRONK. Our staff has studied them, but we haven't got into them in complete depth.

    Chairman BAKER. I would think not.

    In your meeting with Mr. Kinsey, did you talk about the test being a predictor of probability of failure rather than being a predictor of severity of the risk?
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    The reason why I ask that question to help you. In speaking with Mr. Kinsey yesterday and asking what is the effect of the stress test from your regulator's perspective, it is to determine the probability of failure, not to determine whether systemic risk potential exists, which goes to the extent or severity of the financial reversal, the point being the regulator has told me that that stress model is not a calculator nor a predictor of systemic risk to our economy. It is, rather, a predictor of whether the enterprise is likely to have difficulty, the point being the organization has recommended that is an appropriate step to take for insulation against systemic risks. The regulator is telling me it won't work.

    I would hope those who provided you with this information would perhaps review it again.

    From the standpoint of probability of failure, Mr. Smith, I understand the home builders have taken the view that there is not likely to be a business cycle in which housing demand softens and interest rates go up?

    Mr. SMITH. No, they have not taken that view.

    Chairman BAKER. But you believe that if that were to occur the world would be OK and we need not evaluate the underlying fundamentals of the GSE?

    Mr. SMITH. I think you always need to evaluate the underlying fundamentals of GSE. It is critically important that they remain sound. There will be different markets. We know there will be. History has provided that and in the future we will see it again.
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    Chairman BAKER. My point being my whole motivation in this process has been to insulate against systemic risk. If you are acknowledging the potential for reversals of business cycles would occur, what recommendations are the home builders making in order to insulate us against a systemic risk potential from the GSEs?

    Mr. SMITH. Well, we think that there are in place the OFHEO, their risk analysis, their recent report to the Congress. And when you use—when we discussed stress tests as part of a risk analysis, we have watched the performance of the GSEs under the ultimate stress test, which was the reversals in the economy in the late 1980's and early 1990's. They did quite well, much better than other parts of the financial system.

    When I say the GSEs, I mean Fannie Mae and Freddie Mac.

    So, combined with understanding the history of a live stress test along with the ongoing work of OFHEO, we believe they are sound.

    Chairman BAKER. I would expect you would say the experience from 1979 to 1984 when Fannie Mae was insolvent was just an aberrant activity that would never occur again?

    Mr. SMITH. I believe that they have now—Congress, your Congress, has put into place the necessary oversight to be able to see that that does not occur.

    Chairman BAKER. With a stress test which is not yet implemented.
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    Mr. SMITH. Yes, but it is there with OFHEO, and if they are able to enact and act on what the consensus of the Congress when they put OFHEO in in 1992 and the most recent changes, we believe it is there.

    Chairman BAKER. The point is it was required in 1992. As we sit as participants in the hearing today it is not in effect. There is considerable debate among the market participants, the GSEs, as to the construct that is being put together and its appropriateness. We do not have a safety and soundness regulator today. This Congress debated at length increasing the funding of the OFHEO enterprise from $18.6 to $21 million just a few weeks ago—an effort which I supported, even taking to $25 million. If the enterprises were OCC regulated financial institutions based on asset size, their regulatory charge would be $67 million. There is a regulatory mismatch which is absolutely clear, without dispute. There is no regulatory oversight in effect as a result of the stress test, and the idea that the stress test could be used as an insulator of systemic risk is very difficult for me to accept.

    I have exhausted my time.

    Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Let me ask an open question. Do any of you have an opinion that either Freddie Mac or Fannie Mae is now bordering on a risk in our society where essential action must be taken immediately to prevent systemic risk from occurring?
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    Mr. Bartlett.

    Mr. BARTLETT. No. We think action is essential. We don't think it is—it is not something that has to happen tomorrow. We don't see any kind of imminent failure or anything like that.

    Our main focus is on the mission, Congressman. We think that the mission is way beyond what Congress had intended, and we think that is what you ought to focus on.

    Mr. KANJORSKI. So, in accordance with Mr. Baker's previous questions, you are not worried about a safety and soundness problem. You think our system is rather secure, it is just a question that you represent an interest group that feels there is a little bit of trespassing may be occurring?

    Mr. BARTLETT. Congressman, that isn't the way I would put it. I believe that the consumers are being misserved and would be more misserved in the future. I also think there is an underlying safety and soundness issue. You asked whether it was imminent. I don't think there is an imminent crisis.

    I think over the long term a financial institution needs a regulator, and I don't believe that Fannie Mae and Freddie Mac have a regulator right now—a regulator that is empowered to regulate them.

    Mr. KANJORSKI. Does anybody else have an opinion as to whether we have any real systemic risk at this point in time?
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    Mr. CRONK. From the realtors' perspective, obviously we have not seen and cannot see any evidence that there is a risk factor in place now, but I can appreciate and admire the subcommittee for their study of the process, because obviously we do not want a return of what has happened in our economy before in the savings and loan that somebody has referred to, but I think that we all—everybody would concur that Fannie Mae is about as solid today as we had all hoped for them to be and strong in the marketplace, and there is no reason not to prepare for the future, but things do happen. But I think we need to have a strong independent regulator in place and uniform risk-based capital standards I feel—and I think others feel—will be in place by the end of this year. Unfortunately, it has taken eight years to get them in place, but they are at the point right now that we hope that that will be successful and be sufficient to cover any potential risk that the Government may have in front of them.

    Mr. KANJORSKI. Does anybody else want to comment?

    Mr. BOCHNOWSKI. Mr. Kanjorski, this might be the time when we do not have pressure on the system to actually implement the study that would relieve pressures that exist somewhere down the road.

    Mr. KANJORSKI. I absolutely agree we should study the issue, but we are talking about legislation right now. We are talking about potentially imminent legislation.

    Mr. BOCHNOWSKI. I do not think that there is an imminent risk that exists at the moment, but the pressures might come that if they are evident at some point in the future.
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    Mr. KANJORSKI. So, as I understand it, your indication is we have the time to study this issue and we should take the time to study it and the subcommittee is taking the right action.

    Mr. BOCHNOWSKI. And act, and provide a strong regulator.

    Mr. KANJORSKI. Yes. Very good.

    We had a hearing yesterday on the reauthorization of the Commodities Exchange Act, where we discussed the growth and potential risk of the derivatives market, which is now about an $80 trillion market. Interestingly enough, commodities exchanges are regulated by the Commodities Exchange Act which comes out of the Agriculture Committee, which is an interesting take on things.

    But the question was whether or not we are capable of defining futures and distinguishing what futures and swaps are, and a working panel concluded that it was beyond the realm of humankind to define what these products are.

    Relating that back now to products in real estate, I am a little disturbed that we are trying to define future products. I would like your opinion as to whether or not it is a mistake to set parameters. Do you see an evolutionary or revolutionary process occurring in the real estate market, where new products are being conceived of and implemented to the advantage of the market? Should we try and define exactly what these entities can deal with, whether that will be too constrictive, and should we give a lot of discretion to whomever we select as the regulator to have discretionary authority to watch the system and allow products to evolve?
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    Mr. SMITH. It is a revolution. There was no question, as my children often say to me, ''Dad, this country and this entire financial system is going at warp speed.''

    The needs are definitely there. We are existing in an obviously extraordinarily successful environment financially, and yet 40 to 50 percent home ownership rate for blacks and other minorities and Hispanics is just not acceptable.

    You have to allow a market to be able to move quickly in this world and move fast in order to satisfy the needs. An overburden of a regulatory effort on the natural market forces has never, ever worked. You need, obviously, to have regulation to keep GSEs and other financial institutions within their charters and to be safe and to be sound, but if they cannot move in a market and you try and overlay a marketplace, it will create great disinformation and we will stifle the very thing that has made this the greatest housing country in the world.

    Mr. KANJORSKI. Anyone else?

    Mr. BARTLETT. Congressman, quickly, greater competition—that is, competition from hundreds of providers instead of just two—will create better innovation, more innovation, more products, and better products for consumers, and that is the underlying purpose of this bill is to allow greater competition rather than less competition.

    Mr. KANJORSKI. Do you think we should have a licensing process for other secondary private market participants?
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    Mr. BARTLETT. The two GSEs, or the GSEs have a Federal charter, and that Federal charter provides implicit guarantees and benefits. We think that those benefits ought to accrue only for the purpose of home ownership or residential home mortgage market, which is a stated policy of the Congress, and not for all the other things, and we think even that needs a regulator.

    So this bill does safety and soundness with a regulator and also says that the purpose of the Federal implicit guarantee is for home ownership and not for other purposes.

    We think then that opens the rest of the market up for much greater innovation because it will have greater competition.

    Mr. KANJORSKI. My time has expired, Mr. Chairman.

    Chairman BAKER. Thank you, Ms. Kanjorski.

    Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Mr. Chairman.

    Mr. Bartlett, regarding the new activities, you suggested that the bill's approach should be simplified. Do you have any suggestions?

    Mr. BARTLETT. Congresswoman, we do, and we will work with the staff on specifics.
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    We like the approach, and that is to have a sole regulator that does both safety and soundness as well as mission. The GSEs and—I would have put this in the bill in 1983, had we realized the explosion of the mission—the GSEs have no one to go to right now effectively. There is no arbitrator, so we think this—I am sorry, HUD tries to be an arbitrator. We think this strengthens the arbitration by determining what is in the mission and what is outside the mission.

    We think it can be simplified. We think that it doesn't have to be every tweak of the original product, but we think that a sole regulator with both mission and safety and soundness can create that bright line.

    So we will work with you on some ways to simplify it, but we think that a determination of that mission by the regulator is overdue.

    Mrs. BIGGERT. OK.

    Mr. Cronk, in your testimony you mentioned the realtors' objection to the GSEs' expansion into property disposition activities, including bidding on third-party foreclosures.

    Mr. CRONK. Yes.

    Mrs. BIGGERT. Do you believe that this bill's provisions regarding new activities might have helped in this regard, the way that the bill is written now?
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    Mr. CRONK. It may, as was written, but it is not necessary because we have been able to sit down and have dialogue and work through these issues that we disagree on, and we have been successful in the past and feel confident we will be successful on this one.

    Mrs. BIGGERT. OK. Thanks.

    And then, Mr. Bochnowski, you talked about repeal of the Treasury line of credit and you don't agree with that. Could you expand a little bit more, since this has never been used by anyone, and yet it is there?

    Mr. BOCHNOWSKI. The line of credit, while it has never been used, is a symbol, and the symbolism is one that suggests that Fannie Mae and Freddie Mac have access to low-cost funds. That assists in driving down the price of housing as far as the affordability of housing and affordability of loans. And so I think our concern would be the unintended consequences that was raised a little earlier.

    If that is removed it might be disruptive in the marketplace as far as Fannie Mae and Freddie Mac stock is concerned. I think it would be far more disruptive perhaps for the ordinary borrower and it would drive up their cost to finance.

    Mrs. BIGGERT. We seem to have, where there is the policy, or what is public policy is: what are the GSEs to do at the behest of Congress? Are they really to provide housing as a major policy for—home ownership seems to be a major policy. Is there a balance between those two? And does this line of credit help with that or does it hinder it?
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    Mr. BOCHNOWSKI. It doesn't appear to be hurting it. It appears to be assisting it, simply because the availability creates, at least in the mind of the marketplace, the idea that funds are available, and should there be any difficulty, any stress within the system, that those stresses would be equalized by the line of credit.

    Mrs. BIGGERT. Thank you.

    And thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mrs. Biggert.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    I was just getting some clarification from staff.

    It seems to me the dilemma that we face with this bill is, on the one hand, I think everybody endorses greater regulation or oversight of the GSEs. It is hard for anybody to be against that. We, of course, have OFHEO, which is working its way through a regulatory process, a rule-making process, and hopefully by the end of the year we will have risk policy rules for the GSEs and we will have an opportunity to look at that. Mr. Baker attempts to address part of that in his bill.

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    On the other hand, it seems to me that we have a situation where, as the marketplace has matured, other competitors are concerned that the GSEs—in particular, Fannie Mae and Freddie Mac—are much too powerful and, in particular, because of their ties to the Federal Treasury, and that somehow they ought to be reined in.

    It seems to me—and I don't want to sound too much like a libertarian or anything like that, but it seems to me that that is an unworkable prospect, and I note with some interest an article that was in the Wall Street Journal on June 30th, which is similar to a line of questioning that I have raised in some earlier hearings that we have had—not quite similar, but it is along the same track—that a proposal apparently was floated out there, immediately denied by one of the GSEs, that perhaps they would at least spin off part of the GSE into a completely private, separate corporation from their structure now.

    I raise this again for this panel, because I have tried to ask other panels about this. What would be your position if Congress said, rather than trying to just put a tight leash on the GSEs, which I think some would like us to do in order to artificially level the playing field, if that is what they are trying to accomplish, instead we said it has worked so well that we have accomplished so much through a federally-sponsored secondary mortgage market that now has come the time for the children to go out on their own? And obviously we would have to pass some bills to do that, but what would be the position of your groups if we were to propose to do that?


    Mr. BARTLETT. Well, Congressman, at this point it is a brainstorm of Lou Renarian, and I have generally found Lou Renarian's brainstorms to be quite brilliant, but we would have to look at it a lot more carefully.
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    A couple of comments on it, though, and that is that one possibility for Congress at some point in the future, either with or without this splitting up, would be to create an open entrance charter—that is to say, the difficulty with this charter is not that it is a bad thing, but that it allows other activities, and the process of reining the other activities in, one could envision allowing other charters, just as with other kinds of financial services institutions, to obtain a GSE-like charter with sufficient regulation, and then you would create maximum competition, and that would sort of fit in nicely with the idea of the ''split up.''

    I think it is way too early. I do think that, while one could make an argument that this is too large a problem in the current context, that for this subcommittee and then Congress to redefine and take a careful look at the mission, at the statutory mission, and then to create a sole regulator for both safety and soundness and mission definition would be a good first step. Whether that leads to other steps such as an open charter or multiple GSEs or not I think time will tell.

    Mr. BENTSEN. If I can just follow up quickly—and I want to hear from the others—your point, Mr. Bartlett, is that we go part of the way on the regulatory side, but perhaps not go so far as looking at issues like line of credit and things like that. Let us get a handle on the oversight.

    I think that is something that this subcommittee might be receptive to. I also think we have to look closely at this issue of, in effect, putting Fannie and Freddie under the Administrative Procedures Act or some hybrid thereof. I am not sure that we would want to go that far, but perhaps more oversight in the new product.
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    I don't know if anyone else has a comment or not.

    Mr. SUMNER. I have a more simplistic approach. I think that the regulatory oversight issue is one that, as you have heard today, is of concern because I think the regulatory process really—I mean, for an entity that was created eight years ago to come up with capital standards and still doesn't have it, something is dramatically wrong. I mean, it is not that complicated.

    Congressman Kanjorski, you mentioned the derivatives market and the complexity of that. We clearly are in a marketplace that has dramatically changed from where it was ten years ago, but I think it really asks the question of a stronger regulatory oversight here, and I think that the public deserves that sort of a response.

    So I think, in one sense, H.R. 3703 is right on target in that regard, I think the repeal of the line of credit that they have would really—I mean, we have a system that is working. The secondary market and the purpose for which Fannie and Freddie were created is working in providing liquidity for the secondary market.

    I don't think anyone will dispute that, but I think that there are other elements here at work that go beyond what that is, but it doesn't make sense to—I think if something is not broken, to try to go and fix it and get into issues of, like, privatization or whatever, that is going to take a lot of study, and there have been a lot of people, as we all know, who have opined on what that may or may not bring to home ownership.

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    But I think home ownership is working with the liquidity that the GSEs provide, but the competitive area on the primary side is something that needs to be looked at, as well, and this blue ribbon panel that we have convened, with Fannie Mae and Freddie Mac, hopefully will result in a real definition of what is primary and secondary that would help, I think, respond to your question.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    Chairman BAKER. Thank you, Mr. Bentsen.

    And should it be necessary, although I don't think it will be, if anyone accuses you of being a libertarian I will come immediately to your defense.


    Chairman BAKER. Mr. Cook, you were next by arrival time.

    Mr. COOK. Thank you, Mr. Chairman.

    I want to commend this panel. I have learned from your testimony and I particularly want to acknowledge Kit Sumner from my home town, who is CEO of the CrossLand Mortgage Corporation there in Salt Lake City, and President of the Mortgage Bankers Association of America.

    I would like to start by just asking you, Mr. Sumner, if you think H.R. 3703, in just overall terms, is in the best interest of the American homeowner or not?
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    Mr. SUMNER. I think the Mortgage Bankers Association is certainly supportive of H.R. 3703, with the exception of this line of credit issue. I think that there are some huge ramifications to a change of what that really means without a lot of thoughtful study. I think, again, the secondary market, as I just mentioned, works as far as the GSEs providing liquidity for that marketplace, and that is what their role is and that is what they have done an excellent job in doing.

    But, as far as the regulatory side of this, you know, again I think it is—I don't think—I think if something were to happen, as has been stated, I think we would all certainly suffer the consequences of the fact that there really hasn't been any regulatory review here, and that needs to be done without question.

    Mr. COOK. I wanted to ask Mr. Cronk, I noticed in your written testimony that you oppose repealing the Treasury line of credit for the GSEs, but you didn't say that in your oral testimony. I just wanted to make sure or clarify that is your position, that you oppose the provisions of H.R. 3703 that would repeal the line of credit; is that correct?

    Mr. CRONK. Yes. I tried to make it clear. There was really only one part of it that we really feel we could support at that time, and that is, of course, the strong independent regulator.

    If I may just expand upon that?

    Mr. COOK. Sure.
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    Mr. CRONK. We are very much concerned about tampering with something that just has worked so well and American home owners have benefited so greatly from, and there are four things that I attribute to the bill, to the GSEs that they are giving to this marketplace, and the charters allow that—stability, liquidity, efficiency, and, above all, affordability for American home owners.

    Mr. COOK. OK. I think I am clear on what each of the witnesses are saying, I think, in terms of the regulator and in terms of the line of credit, but I would like to just explore any of your feelings on revisions of the appeals process and new products and so forth. I would like to—maybe with Mr. Bartlett, I want to be sure I understand exactly what you are saying in terms of that.

    I take it you think that is probably as big an issue as even the regulator issue?

    Mr. BARTLETT. It is equal, Congressman. We support the review of the new products. We think that it could be simplified, the review could be simplified and streamlined, and we think that the review should have some kind of a safe harbor so that if a lender comes out with a new product or with a slight tweak on the old product that it wouldn't require cumbersome review. We think all of that is easily workable in the legislative language.

    But a review of the new products and new activities is essential by the sole regulator, who is also doing safety and soundness. We think that is a key part of this bill.

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    Mr. COOK. And then finally, Mr. Sumner, I take it you sort of agree with that. Is there anything you would like to add or not agree on?

    Mr. SUMNER. I agree with Mr. Bartlett. I think time to market is important, and how that can be done appropriately should also be factored in, but I think product review is certainly important, so long as, again, it is the role of the regulator in ensuring that the secondary market activity is followed through on the part of the GSEs.

    Mr. COOK. Thank you.

    Chairman BAKER. Thank you, Mr. Cook.

    Ms. Waters.

    Ms. WATERS. Thank you very much, Mr. Chairman. I was just trying to do an assessment of all of these hearings we have had, these five hearings or so, to see what we have learned and to see if there is any consensus that is forming, and I am not so sure there is.

    I want to just recap something to make sure I understand where some of our witnesses are today as it relates to the repeal of the so-called ''Treasury lines of credit'' available, even those that have not been used by Fannie Mae and Freddie Mac.

    Am I to understand that there is opposition to this from several of those who are here today? Let me just find out.
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    Home builders, Mr. Smith, am I to understand that you oppose the provision that would repeal the Treasury line of credit?

    Mr. SMITH. Yes.

    Ms. WATERS. Mr. Cronk with the realtors, do you also oppose Mr. Baker's proposal to repeal the Treasury line of credit?

    Mr. CRONK. Yes.

    Ms. WATERS. Mr. Sumner with the Mortgage Bankers—I think I just heard you, and you sounded as if you definitely oppose the proposal to repeal the Treasury line of credit; is that true?

    Mr. SUMNER. Yes.

    Ms. WATERS. OK. And Mr. Bochnowski, America's Community Builders.

    Mr. BOCHNOWSKI. America's Community Bankers, yes, we do.

    Ms. WATERS. Do you also oppose Mr. Baker's proposal to repeal the Treasury line of credit?

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    Mr. BOCHNOWSKI. Yes, we do.

    Ms. WATERS. So I guess we almost do have a consensus on something here.

    Now, I also understand that, Mr. Chairman, we have had some representation from the National Bankers Association, the American League of Financial Institutions, and the National Association of Real Estate Brokers, who may not be represented here today, but they also oppose your bill as it relates to the repeal of the Treasury lines of credit.

    Is that your understanding, Mr. Chairman?

    Chairman BAKER. I think the only group you left out is the Treasury Department, which does support it. Thank you.

    Ms. WATERS. Well, I want to make sure that we are all on the same track here. I do have some communication from those groups that I just mentioned, and I would like unanimous consent to put that into the record.

    Chairman BAKER. Without objection.

    Ms. WATERS. Without objection, is that OK? All right. Thank you very much.

    I would like to apologize for not being able to be here earlier to hear some of the testimony, and I don't think I have any questions beyond those that I have asked except for you, Mr. Chairman. How many more of these hearings are we going to have?
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    Chairman BAKER. Well, there seems to be a deep need for additional information to make this important decision, and I certainly don't want to disappoint Members of the subcommittee and cut off the debate and have a vote before we are all fully informed, so I would expect this would go on for quite some time.

    Thank you, Ms. Waters.

    Ms. WATERS. All right. Mr. Chairman, let me just say that I think that my colleague indicated that not only is he opposed to perhaps additional hearings, but asked of you if you planned on trying to take this up for markup this year. May I inquire also?

    Chairman BAKER. Certainly. Yes, ma'am. It would be my intent, once we have reached consensus, which you have aptly described we are getting close to, that we would certainly consider markup.

    Ms. WATERS. You would consider markup this year?

    Chairman BAKER. If we are able to reach consensus. Yes.

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

    Chairman BAKER. Thank you, Ms. Waters.

    Mr. Royce.
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    Mr. ROYCE. Thank you, Mr. Chairman. I want to begin by thanking Mr. Cronk and Mr. Smith and the other panelists for their testimony today. I want to just make the observation that in my view the best policy would be to completely privatize all three of the housing GSEs—Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System—and by ''completely privatize'' I mean eliminate any tie to the Federal Government such as the line of credit and any form of housing goals or mandates from Washington.

    I think, while many of my colleagues would agree with eliminating the advantages that the GSE enjoy as a result their quasi-governmental status, very few support eliminating the housing mandates that the GSEs are subject to as a result of that status.

    One of the observations I would make—and I would like your comment on it—is that I do think we have had a number of constructive points that have come out as a result of these hearings.

    I am concerned that an entity I consider problematic, the Federal Home Loan Bank System and the Mortgage Partnership Finance Program, seems to have been dropped from the focus of this bill and from the focus of this subcommittee.

    I would like to just quote from an article in Baron's not long ago—and I have written a number of letters to the Chairman and I have written a number of letters to the Federal Home Loan Bank System on this—but, just to quote from that article: ''The Home Loan Banks have a new program dubbed 'mortgage partnerships finance,' which enables them to offer lenders a far better price for the loans than almost anyone else. The Home Loan Banks have exploited every tax funding and capital advantage they possess by virtue of their Congressional charter.''
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    But it goes on to explain that the purchases have been kept in check by a cap. Now that cap has been lifted. And here is the down side—the down side is the risk.

    The risk is, according to the article, that the loan is never on the balance sheet of the lender, which means that all of the interest rate and prepayment risk belongs to the Federal Home Loan Bank. Indirectly, that risk belongs to the taxpayer.

    The banks are skimping on interest rate hedges on their loans to fatten their bottom lines. Each bank decides how much risk it wants to take. Critics say the banks are leaving two-thirds of the loans unhedged on the assumption that they will be paid off in five to ten years, and they don't mark their portfolios to market. That is another observation.

    So the risk there of a program where the cap has been lifted is, in my view, going to be borne by the taxpayers. As I say, in this debate this issue is being side-stepped, in my view.

    One of the questions I have is, as we talk about building consensus, do you believe, Mr. Cronk or Mr. Smith, that consensus has been reached on this legislation? And do you support moving forward to a markup of this legislation?

    Mr. CRONK. I don't think we can support moving it up in its present form. I think there are some things that are positive about it. I think it needs additional work.

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    When you relate the Federal Home Loan Bank Board, it is difficult for us to relate to it, because their activities really in the home mortgage business has been somewhat limited, and Fannie Mae and Freddie Mac have really been the stronghold in the secondary mortgage market.

    But in its present form we would have difficulty supporting it in a markup; however, I am sure there are good parts of it that maybe we can find a way to support.

    Mr. SMITH. No, I don't believe there is consensus, and we do not believe that it should move to markup. We believe that it should move to additional dialogue for constructive dialogue and discussions on all facets of the bill where we can cooperate and hopefully be able to add to the debate, but at this point shortcutting that and going straight to markup I don't think would serve either the purpose of the bill or the housing community in America.

    Mr. ROYCE. Thank you.

    Thank you, Mr. Chairman.

    Chairman BAKER. Thank you very much, Mr. Royce.

    To respond briefly to the comments concerning the Federal Home Loan Bank System, it is not off the radar screen. Some merely have suggested that the turmoil I created last year in that arena might need to subside before more turmoil is created, but I share your views with regard to appropriate regulatory oversight, mitigating taxpayer exposure, and absolutely commit to be responsive to those concerns.
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    Mr. Cronk, you indicated that, in response to a question from Ms. Biggert, that the Southern California Realtors' problem had been resolved?

    Mr. CRONK. No. I said that we are having dialogue now and we feel confident that we will resolve it.

    Chairman BAKER. Well, just for the record, these are unsolicited. I would like to give you copies of the Southern California Realtors letters we have gotten over the past few days since they finally found our subcommittee. They appear to have a slightly differing view on the matter.

    Mr. Smith, I believe you said that there might be some elements—or maybe it was Mr. Cronk, as well—there were some elements of the bill you might be able to support. Could you illuminate the subcommittee? What is it that you found in the mark that is something worthy of support? I missed that in your testimony. Is it the line ''Baker-Kanjorski''?


    Mr. SMITH. As I have stated before, the objective of going toward a single regulator, creating greater efficiencies in the system is to be applauded, and we do support that.

    Chairman BAKER. Do you have a suggested regulator?

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    Mr. SMITH. No, I do not have a suggestion. That was part of the dialogue at this time, because we haven't been asked if there is a different regulator other than what has been suggested in the bill. We think that the regulator format that is suggested in the bill is cumbersome and overlapping in many agencies and probably wouldn't serve the process best, but we would like to engage in the dialogue of that and come back to you with our suggestions.

    Chairman BAKER. Let me suggest, if you could, Mr. Cronk, Mr. Smith, before we reconvene in September, if you could give me your written recommendations it would be most helpful. Today I understand your criticisms very thoroughly, but sometimes light is more important than thunder, if you know what I mean.

    Mr. Cronk.

    Mr. CRONK. Thank you, and I appreciate that, and we most definitely will. We do believe in a strong, independent regulator, and, you know, privatizing Fannie Mae gives us cold chills. We don't want that to happen, because we think the success today is because you guys created them and they are what they are.

    So a strong independent regulator, we would be more than happy to work with you on that. We don't think that the methodology that is developed in the bill right now is one that will work, because we do want them to allow them to be efficient and creative and create that stability in the marketplace.

    Chairman BAKER. With regard to one other point in your testimony, you indicated grave concern what the market would appear like if there were no GSEs in existence, so let me make it clear for the record. I have not even said the word ''private'' much less ''privatization.'' This is about seeking to mitigate systemic risk potential.
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    The construct of the regulatory panel is based upon discussions with regulators. It is a logical place to go if you are trying to build a model to ask people who do it. However, having said that, nothing in this bill is in concrete and final form. The purpose of the hearings is to receive constructive recommendations about how to improve it. I would note for the record we have not received those helpful comments from the GSEs yet, either.

    With regard to the debate on the CEA reauthorization yesterday, Mr. Kanjorski makes a very good point. The markets are moving rather rapidly. For example, Mr. Kanjorski, just last month there was a new futures product created on the Fannie and Freddie ten-year note. Under the rule as it currently is constructed, since they are on exchange traded securities, they will be regulated by the CFTC. Just for the record, I make a point, our regulatory structure is not adequately prepared to deal with the diversity of these GSEs and their scope of business enterprise. I think it highly important that this subcommittee, in our consideration of that issue in the coming days, discuss the consequences of the current regulatory structure on the development of financial product.

    Let me not be remiss in saying to Mr. Bartlett, Mr. Sumner, and Mr. Bochnowski I have somewhat been focused on the other participants' remarks. I do appreciate your constructive criticisms of the bill and would like to point out the line of credit question has been subject to some discussion. I would like to get your concept about this proposal.

    Currently Freddie Mac engages a rating agency annually and makes the determination based upon that rating whether or not employees should receive bonuses. I found that interesting.
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    I have also discussed with Mr. Rains the idea of a conditional line of credit being available, the idea being we want to backstop before credit quality erodes from AA, AAA, whatever they claim they are today—I am sure it is wonderful—before you get to the taxpayers' front door—early intervention by market discipline, to make investors market utilizers of the product that there is potentially a problem. That is it.

    Now, what I suggested was, subsequent to an annual rating—and we set a floor, and if you fall below that the Treasury ability to buy securities is suspended until you return your credit quality to an appropriate level, far before insolvency.

    This is very similar in concept to what we do with the early intervention statute now for national banks.

    Do you still have the same feelings about that approach to a line of credit? I would be happy to hear anybody who wants to talk about it.

    Mr. BARTLETT. Congressman, we didn't take a position in the formal testimony on the $2.5 billion direct line with the Treasury. We would support its removal at the appropriate time, but we didn't take a position, because—and I only say it now because it is probably the least-important of all the things here. The $2.5 billion line is a trip-wire against $3 trillion of mortgage-backed securities, so if you ever get to that line then you are going to go way over it, so it is only a trip-wire.

    I think that your proposal in this bill of the sole regulator but also of the two rating agencies is a far better trip-wire, at which point the line—we don't believe that the line of credit is needed today. It helps to strengthen that implicit guarantee, and I think that is what Congress wants to get away from, so in that sense——
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    Chairman BAKER. Even the GSEs have admitted it is a marketing tool.

    Mr. BARTLETT. It is part of the implicit guarantee. I think Congress probably wants to get away from the implicit guarantee, so removing it would help you in that. But it is not important. If you have to use that credit, then the party is over. Using these two rating agencies is a far better way to do it and would make a line of credit totally irrelevant.

    Chairman BAKER. Any other comment?

    Mr. SUMNER. My concern with the concept of a trip-wire would be to look at the banking side and draw an analogy to how they are regulated and the CAMEL ratings that banks have, and if a bank has a poor rating then that has regulatory consequences.

    I think a process such as that would make a lot of sense, as opposed to maybe something that the market may, in fact, discount right out of the box by knowing that, in a worst-case scenario or in a bad case scenario, that that line would not be there, and therefore it would be tantamount to a revocation of that line when, in fact, that really wasn't what was intended.

    Chairman BAKER. That is something else we have looked at is a regulatory requirement to have something similar in concept to a CAMELS rating, so when you move to a two to a three bells and whistles start going off.
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    I am just looking for a solution to the problem, and if anybody has got one I would be happy to hear it.

    Mr. BOCHNOWSKI. I think our concern—it is worthy of study and we would be happy to work with you on it, Mr. Chairman, but our concern is that, in difficult times if the line of credit is pulled then that might create the very disruptions that we are trying to avoid.

    Chairman BAKER. But a $2.5 billion line of credit is absolutely nothing. Foreign central banks hold $68 billion of this security. What are we thinking?

    Mr. BOCHNOWSKI. I would agree with you.

    Chairman BAKER. Anybody else have a comment? I am a bit over my time, but does anybody else wish to make a comment on that?

    Mr. BOCHNOWSKI. Both agencies have probably issued $2.5 billion while you were asking this question.

    Chairman BAKER. About a week. It is not even a week's worth of trading.

    Mr. Kanjorski.

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    Mr. KANJORSKI. Mr. Chairman, let me try and reconstruct where we are, as I talked about in my opening statement, and where we are going.

    First of all, and to use a phrase that is very common in the political structure today, I think you have a good heart and in your heart you want to do good.

    Chairman BAKER. Oh, I needed that more than you know. Thank you, Paul.


    Mr. KANJORSKI. And I would like to compliment the panel. I think this has probably been one of the most productive panels insofar as they have not come with an extreme personal interest here to defend or attack the secondary market. I think that is very helpful.

    I think we have a common understanding here that we all would like to look at the best type of regulation and what the strength of the regulator has to be to make sure that in good times we anticipate what could happen if the economy turns sour and we need support systems.

    I would like to voice some of my opinions on these issues. The line of credit is not a huge factor, but it is a signal to the marketplace. It is dangerous, extremely dangerous to tinker with it and send a message out there to the marketplace that we do not have to send. But I just want to call everybody's attention to the peso default in Mexico a number of years ago and the need for fast intervention. Some of us in Congress, including myself, questioned whether the way the intervention was made and the tools that were used were proper, and whether it should have been taken.
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    I think that we had a consensus that Congress was incapable of acting at that point in the emergency. What would have happened if prevention and support systems were not taken by the Federal Reserve, the Treasury Department and other elements of the United States Government to support the peso and straighten out the Mexican disaster? I think that is what that line of credit does. It gives you the assurance that when everything else is gone you can still keep things afloat to have time to put a response together. I do not know that we want to send a message that we are going to strangle that potential. I do not know why it is healthy to do that. Certainly $2.25 billion is not a big risk to the Federal Treasury if it were put to good use, or if it were spent unwisely. That is not going to be our problem.

    I guess this panel has been informative to me, anyway, and Mr. Baker and I have been discussing now over a matter of months this whole idea.

    The expertise on these questions does not reside on this side of the bar. I will be the first to admit that. Sometimes the people in the financial world and the complicated transactions they engage in absolutely mystify me. But I think we probably have to look further and this is a good time to look further.

    Mr. Sumner, you mentioned that you have a task force or a working group put together. That is admirable. That is very helpful to us. I am just wondering whether or not we should encourage a little further down that path, either in a formal or informal method, of using that as a basis as the beginning of a roundtable.

    We have not seen the attack process on this panel today as we have seen on other panels. There are some people that really want to vent against these entities, and I understand that. But, it is not very fruitful to us. Whereas if we were to put ourselves in a room and have some honest dialogue about what is necessary, we could go far by finding out why some institutions think we should not go there or why they need some flexibility or discretion. I think, Mr. Chairman, in our discussion going over the vote we both admitted it would be very helpful. This may be an opportunity to take September, October, November, and January to talk about these issues and to have task forces come back with what should that regulator look like, how would we expect that regulator to act, and what kind of discretionary authority the regulator should have.
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    You and I probably agree on keeping Government regulators as far out of the private market and products as possible. If we try and define OSEs too tightly, we are going to strain the securities market in real estate. I think that would be an unintended consequence of gigantic negative proportions to the American economy.

    I understand where the opposition is coming from and they have a right to say, ''Hey, we want to know where the goalposts are and where the in- and out-of-bounds lines are.'' We have an opportunity to structure a regulator that can have discretionary authority to approach that issue for the protection of safety and soundness and for maintaining a fair and level playing field, which we all want to have. But I do not think we can do it from just this side of the table. I think we have to get into the industries. We need to make sure that we listen to the testimony of people who are out there every day that are causing this great economy to go on and not put a poison pill—an unintended poison pill out there in a piece of legislation or even the fainting of a poison pill. That could be very disruptive to the market.

    So again, Mr. Chairman——

    Chairman BAKER. Let me follow on to your remarks, Mr. Kanjorski.

    Mr. KANJORSKI. Sure.

    Chairman BAKER. First, for your kind comment, but second I would suggest we proceed accordingly: let's formally ask all the participants here today—this is July 20th—to have for our mutual subcommittee Members' benefit by August 20, during the recess, a report back to this subcommittee on each element of H.R. 3703, where you have differences suggest alternative recommendations, whatever they might be. The world is wide open. If you want to write back and say ''Everything is just ducky, do not touch it,'' that is fine, too, but let's have a formal response from each of the program participants.
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    And I would like to include in this request, Mr. Kanjorski, as I think as a measure of good faith, Fannie Mae and Freddie Mac and the Home Loan Bank. I am sure there is somebody in this audience that might have an interest in those organizations who could relay this message, if they are not directly available. Have all of them and then I will commit to you that, upon our return in September, we will engage in a small meeting, a policy discussion of the recommendations that are formulated and sent back to us. I have no objection to a real policy discussion on the issues and doing it in a manner which I think might be productive.

    Please respond.

    Mr. KANJORSKI. My response would be that I think we have heard several people comment that perhaps what is included in H.R. 3703 is enough to be in three bills. Maybe we ought to take it out of the context of the bill, itself, and break it into the issues.

    I think we are going to come to a relatively good conclusion on the regulator.

    Chairman BAKER. I just say use that as a framework. If you want to deviate from it, deviate from it.

    Mr. KANJORSKI. If we could break those issues out and have them address those issues so that if we see no convergence of good feeling on any parts we can just lay those aside, because they are just going to take too long. But we may find that we have some consensus in the regulatory area that we could really work on and get some productivity out of it.
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    Second, I am struggling with the problem. I have called for the roundtable discussions and I am struggling with the idea of ''Star Chambers.'' I think daylight on a public issue of this proportion is important, yet I know it has impact on the market when people can hear it, but I think we have to do it in the nature of a roundtable.

    I know it is easier in Government to operate without the press and the public available, but it is their legislation, it is not ours.

    Chairman BAKER. What I am not suggesting is a cloakroom get-together late one evening. What I am talking about is a thorough reading of everyone's interest. This is an open invitation, anybody in the office. If you are with Krispy Kreme and you have got an opinion, fine, send it. We want anybody who wants to comment get it to us by August 20th. We will review it carefully, privately. We will convene some sort of mechanism to then discuss what is contained in the information.

    I think we ought to have a working meeting to enable Members to ask real questions and then have a public meeting.

    Mr. KANJORSKI. I agree. Let me do this. Let us make it August 30th, because that gives us another week for us to review these responses, and we are certainly not going to have a hearing before September 15th.

    Mr. BENTSEN. Will my wise colleague from Pennsylvania yield?

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    Mr. KANJORSKI. All the time.

    Chairman BAKER. Your slow partner from Louisiana will get in here, too.

    Mr. BENTSEN. I suggest we have two additional minutes. I just want to make three comments.

    First of all, in your last comment, I would certainly hope that the Chairman and the Ranking Member would not mean that the panel would reconvene either on August 20th or August 30th.

    Second of all, for the benefit of our constituency out here, second of all, I would hope that my colleague from Pennsylvania, when talking about the Mexican peso default, was not in any way inferring that this panel might look at the exchange stabilization fund as a potential line of credit for the GSEs.


    Mr. BENTSEN. Third, I just want to remind my fellow Texan and dear friend, Mr. Bartlett, with respect to the line of credit and the fact that it may be small, I want to remind him of the many discussions we had with Chairman Greenspan on the question of operating subsidies versus a holding company model and the idea of an explicit versus implicit subsidy. Of course, Mr. Greenspan believes there are subsidies throughout the economy, and, while the $2.25 billion line of credit may seem small, it does, in fact, I think, provide quite a—the market interprets it as quite an implicit guarantee and subsidy, and I think, based upon the hearing that we had, the initial hearing we had with Assistant Secretary of Treasury Gensler, that we saw some market reaction, some not-nominal market reaction, because of comments regarding the line of credit.
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    So I think, from this Member's view, I think it is a bigger item than that, and we certainly should look at it, but I do not think we should dismiss it out of hand based upon its size. I think it has much more leverage to its dollar amount.

    I thank the gentleman for yielding.

    Chairman BAKER. Certainly.

    Mr. Maloney.

    Mr. MALONEY. No questions.

    Chairman BAKER. Mrs. Jones.

    Mrs. JONES. I would like to apologize to the panel. I was here and then I had to go testify before the Judiciary Committee, and I thought I would be five minutes and ended up being an hour-and-a-half. Maybe it was because I was interesting or something. I am not sure what caused the questioning to be so long.

    I would have liked to have asked you a number of questions. Unfortunately, time will not allow it. But what I would say is I am very much a supporter of GSEs, and I think it is very important that we understand the impact that they have had in the housing market in our country, and when something is wrong I suggest that we—I mean, when you have a dilemma about an agency or a department or whatever, you do not blow it up and then try and fix it.
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    I am pleased to hear that Mr. Kanjorski, who was here, heard that this was one of the panels where people were reasonable and reasoned and had basis in fact for the statements that they made.

    I look forward to the roundtable. I hope that somebody else will not ask me to testify, that I will have an opportunity to be here.

    But, seeing how I do have five minutes, I want to plant something else on each of your laps as we are talking about housing in our communities, that is the whole issue of predatory lending. I know you are not here to discuss that today, but it is a significant issue that is draining the wealth of low-income and minority communities across this country, and because you are in a position to be heard and to talk about issues and to have an impact on what happens in the financial community, I would ask you to do what you can to see that we relieve ourselves, even if we never get a piece of legislation passed. Morally it is appropriate that those of us that have the opportunity to be in this area need to do something about predatory lending.

    I yield back the balance of my time.

    Chairman BAKER. Mrs. Jones, I also made earlier comment on that subject in another hearing and share your view and have no reluctance to bring that matter into discussions of this issue.

    Mr. Mascara.
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    Mr. MASCARA. Thank you Chairman Baker and Ranking Member Kanjorski for providing a continued examination into the role that the GSEs play in the housing market.

    As I have stated in previous hearings, I am very appreciative of the contributions that Fannie Mae and Freddie Mac and the Federal Home Loan Bank System have made in providing liquidity in the mortgage market.

    We are enjoying record rates of home ownership nationwide because of increased opportunities and lower cost to home buyers.

    I have reviewed some of the testimony provided by our panelists today, and I am curious about the many concerns expressed about mission creep.

    First, some of you—Mr. Bochnowski and Mr. Bartlett, in particular—have argued that the home equity loans now being offered by Fannie Mae and Freddie Mac exceed their mission; yet, they have been offering these loans since its inception.

    What has changed in the marketplace that has prompted your opposition to this activity? And what remedies do you recommend?

    Mr. BARTLETT. Congressman, I appreciate the question because, in fact, the home equity loan market has changed dramatically in the marketplace. I was in your seat, or at least on this panel, in the early 1980's when the Secondary Mortgage Market Act was written, which included second mortgages.
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    At that point, Congressman, I have to say that second mortgages were sort of well understood by those involved in drafting the legislation to assist someone to buy a home, a down payment, the extra 5 percent to make a down payment or that kind of thing, perhaps some repairs.

    The home equity market today is a whole different animal. It has little to do, if anything, with home or with home ownership. It has a lot to do with other good things—college loans, debt consolidation, credit card loans—Fannie Mae at one point considered issuing credit cards tied to a universal account with home equity loans—new kitchens, other kinds of very good things. But those other things should not contain the Federal implicit guarantee.

    I agree with the Congressman from Texas, Mr. Bentsen, when he said that that implicit guarantee is quite large and quite significant and it is quite powerful. It should not be used for other things other than home ownership.

    So what has changed is that back then the second mortgage was a creature of home ownership and now it is not.

    Mr. MASCARA. Ostensibly, then, those second mortgages were for remodeling of homes and other things other than buying boats and financing——

    Mr. BARTLETT. At least at the time that we wrote the legislation. Of course, it is all mixed up and used for a lot of things, but by and large those were second mortgages and not what we now think of as the 1–800 call for a home equity loan, which is a new market, good market, but should not have an implicit guarantee.
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    Mr. BOCHNOWSKI. Congressman, the home equity lines are open-ended lines, and I would agree that what we are seeing is that this is financing of something other than housing finance, other than the purpose of getting into a home. The very fact that we are dealing with a second loan suggests that the borrower is already in the home.

    Mr. MASCARA. My second question I have pertains to the GSE sales of foreclosed properties. Mr. Bartlett, I am particularly interested in your testimony in which you refer to a Freddie Mac store at a strip mall at which consumers may apply and pre-qualify for a loan, visit homes with their Freddie Mac counselor, have the home inspected, then purchase and close on the home.

    Is this part of a joint venture, or is this exclusively a Freddie Mac operation? Is this loan origination?

    Mr. BARTLETT. Congressman, I do not believe it is loan origination. I do not believe that loan origination is being offered by Freddie and Fannie. That is explicitly prohibited.

    What this is is a home buying or sales and service without limitation. And we do not know where it is going. Most large national corporations do not put up one storefront except as a pilot program to go somewhere else.

    I will be happy to make available to you the advertising information. What the advertising information says is it is a congressionally-chartered United States corporation, Home Steps; it is a real estate sales unit of Freddie Mac; it then says ''Most home purchases require visiting several locations in different parts of town, a real estate office, a lending institution, an escrow company. At Home Steps, each of those things happen at our location.''
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    It goes on to say, ''You can preview all the homes''—all the homes, not Freddie Mac homes—''in your price range and their features.''

    It is an example of a clear expansion of the mission beyond providing liquidity in the secondary mortgage market.

    Mr. MASCARA. I have run out of time, but I just wanted to state how dismayed I was and surprised to hear, after attending other subcommittee meetings about even the question of the solvency of Freddie Mac and Fannie Mae. Is there something changed since earlier this year when they stated unequivocally that they were in good financial shape, in fact made it through the 1980's and were a lot more solvent than some of the banks that were loaning the money?

    Chairman BAKER. Would the gentleman yield?

    Mr. MASCARA. Yes.

    Chairman BAKER. I think something has changed. They were insolvent from 1979 to 1984 and now they are not. I think that is the big change. And we do not want to have that occur again.

    Mr. MASCARA. But they are not solvent?

    Chairman BAKER. Let me restate it. From 1979 to 1984, for a five-year period, Fannie Mae was insolvent. There was forbearance of income taxes due, there was regulatory forbearance, and they were allowed to grow their way out of the problem. No other savings and loan in the country had that opportunity.
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    My point is that they are well managed, well run, well financed. Heck, they had a 24 percent rate of return on equity. No corporation matches that. They are highly profitable. We just do not want to have a return of the prior unfortunate circumstance without adequate regulatory oversight, which we do not have, in my humble opinion.

    Mrs. JONES. Mr. Chairman, if you would just allow me two minutes, I would ask unanimous consent for two minutes just to bring up the same issue, to follow on the same issue as my colleague.

    Chairman BAKER. Go for it.

    Mrs. JONES. I want to reference each of you who raised the issue of mission creep with regard to Fannie Mae and Freddie Mac to their charters, specifically Section 302.B.3, which says, ''The corporation is authorized to purchase, service, sell, lend on the security of, or otherwise deal in loans or advances of credit for the purchase and installation of home improvements.''

    It also, in Section 302.B.5.a of the charter, says, ''It is authorized to purchase, service, sell, lend on the security of, or otherwise deal in: one, conventional mortgages that are secured by a subordinate lien against a one-to-one for a family residence that is the principal residence of the mortgager.''

    And, as we talk about mission creep, it would just be good to go back to the charter. I think that these two sections specifically show that you can—Fannie Mae and Freddie Mac are authorized by charter to do home improvement loans.
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    Mr. BARTLETT. Congresswoman, if I could respond briefly.

    Mrs. JONES. Please.

    Mr. BARTLETT. Freddie and Fannie can make good legal or statutory arguments based on the statute, and they do make these arguments that each of their expansion of their activities is allowed by statute. Our response is two-fold. First of all, we ought to give the sole regulator, OFHEO, a clear and uncomplicated way to review that and to have that process so it is examined.

    But second, and I think more importantly, is conceptually, Congresswoman, when you see ads in the paper that advertise—I believe from Ohio, actually: ''Jennifer Crook was able to buy a new home because of Fannie Mae.'' Well, that is good, although she actually got the loan from a lender and then Fannie Mae bought the mortgage, but whatever it was, that was good, but that is not what you just described in those other sections of the mission.

    So I think this subcommittee and Congress should reexamine the mission and determine whether, in fact, we want home equity loans, debt consolidation, new kitchens, and all of those other things included in the implicit guarantee.

    I do not believe most Members of Congress and most members of the public can see that that is what they are after, but that is what is happening.

    Mrs. JONES. I look forward to the roundtable discussion with you. We can further discuss it. Thank you.
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    Chairman BAKER. I just want to wrap up, if I may.

    First, let me thank all the panelists and make a couple of observations.

    One, I would encourage those who have not been to look at what is offered there. You can upgrade your carpet, your vinyl flooring. You can get a deal with Whirlpool Appliances. As a matter of fact, you might want to look under the asset management home page part of this, Mrs. Jones. Under the asset management part they even offer eviction services, which is kind of neat for somebody facilitating home ownership.

    I just think there is a lot more than mission creep. I would call it ''lurch.''

    And the closing line on one home page is ''Coming soon, window shades.'' You know, I do not want to get off on that.

    Congressman Hoekstra, subcommittee Chair of the Budget Committee, has announced hearings next week in the Budget Committee on related subjects relative to GSEs. I want to make it clear to Members that that will be occurring.

    I am not sure I have got your date right, Mr. Kanjorski, but I would like to have an August 20th submission date from participants back to us to give us time to review the material before we return. Was that——

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    Mr. KANJORSKI. I just thought that was short.

    Mrs. JONES. I think so, too.

    Chairman BAKER. OK. August 30. We will give them ten more days. No excuse for anybody not making the deadline.

    Number four, just an announcement. During the August recess—the Members may be aware that I asked Chairman Greenspan certain questions about GSE performance. He responded with an indication that it should be reevaluated in light of the $10 billion subsidy distorting the market. I will engage in a discussion with him over the recess to seek his counsel as to the best mechanism to prohibit that distortion from being a market factor. We will have a roundtable after receiving documents. We will have additional hearings when we return in September.

    Everybody have a nice summer. See you soon.

    [Whereupon, at 12:32 p.m., the hearing was adjourned.]