[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
REFORMING FANNIE MAE AND FREDDIE MAC
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JULY 11, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-32
U.S. GOVERNMENT PRINTING OFFICE
74-101 WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice Chair BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio KEN BENTSEN, Texas
BOB BARR, Georgia JAMES H. MALONEY, Connecticut
SUE W. KELLY, New York DARLENE HOOLEY, Oregon
RON PAUL, Texas JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio BRAD SHERMAN, California
CHRISTOPHER COX, California MAX SANDLIN, Texas
DAVE WELDON, Florida GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
BOB RILEY, Alabama FRANK MASCARA, Pennsylvania
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois JANICE D. SCHAKOWSKY, Illinois
WALTER B. JONES, North Carolina DENNIS MOORE, Kansas
DOUG OSE, California CHARLES A. GONZALEZ, Texas
JUDY BIGGERT, Illinois STEPHANIE TUBBS JONES, Ohio
MARK GREEN, Wisconsin MICHAEL E. CAPUANO, Massachusetts
PATRICK J. TOOMEY, Pennsylvania HAROLD E. FORD, Jr., Tennessee
CHRISTOPHER SHAYS, Connecticut RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona KEN LUCAS, Kentucky
VITO FOSELLA, New York RONNIE SHOWS, Mississippi
GARY G. MILLER, California JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missiouri
FELIX J. GRUCCI, Jr., New York STEVE ISRAEL, New York
MELISSA A. HART, Pennsylvania MIKE ROSS, Arizona
SHELLEY MOORE CAPITO, West Virginia
MIKE FERGUSON, New Jersey BERNARD SANDERS, Vermont
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
ROBERT W. NEY, Ohio, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
CHRISTOPHER COX, California NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio KEN BENTSEN, Texas
RON PAUL, Texas MAX SANDLIN, Texas
SPENCER BACHUS, Alabama JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona JAY INSLEE, Washington
DAVE WELDON, Florida DENNIS MOORE, Kansas
JIM RYUN, Kansas CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
GARY G. MILLER, California RONNIE SHOWS, Mississippi
DOUG OSE, California JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
C O N T E N T S
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Page
Hearing held on:
July 11, 2001................................................ 1
Appendix:
July 11, 2001................................................ 73
WITNESSES
Wednesday, July 11, 2001
Carnell, Richard S., Associate Professor of Law, Fordham
University School of Law....................................... 30
Delk, Mitchell, Senior Vice President, Freddie Mac............... 12
Edwards, Martin, Jr., Partner, Wilkinson & Snowden, Inc.;
President-Elect, National Association of Realtors, on behalf of
the National Association of Realtors........................... 33
Howard, J. Timothy, Executive Vice President and Chief Financial
Officer, Fannie Mae............................................ 9
Miller, James C. III, Director, LECG Economics-Finance; former
Director, Office of Management and Budget, former Chairman,
Federal Trade Commission....................................... 35
Paige, Leslie K., Vice President, Citizens Against Government
Waste, on behalf of the Homeowners Education Coalition......... 38
Rothschild, Edwin S., Principal, Podesta Mattoon, on behalf of FM
Watch.......................................................... 40
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 74
Ford, Hon. Harold E. Jr...................................... 76
Hinojosa, Hon. Ruben......................................... 83
Jones, Hon. Stephanie T...................................... 85
Kanjorski, Hon. Paul E....................................... 87
Carnell, Richard S........................................... 127
Delk, Mitchell............................................... 112
Edwards, Martin, Jr.......................................... 148
Howard, J. Timothy........................................... 101
Miller, James C. III......................................... 157
Paige, Leslie K.............................................. 211
Rothschild, Edwin S. (with attachments)...................... 220
Additional Material Submitted for the Record
Page
Ford, Hon. Harold E. Jr.:
Letter to Fannie Mae Chairman and CEO Franklin D. Raines,
July 30, 2001, with response............................... 80
National Black Caucus of State Legislators, Opportunities
Industrialization Centers of America, World Conference of
Mayors, joint press
release with attachment.................................... 78
Kanjorski, Hon. Paul E.:
AARP letter, May 22, 2001.................................... 89
City of Birmingham, AL Mayor Bernard Kincaid letter, April 5,
2001....................................................... 93
City of Charlotte, NC Mayor Patrick McCrory letter, April 9,
2001....................................................... 95
City of Columbus, OH Mayor Michael B. Coleman letter, April
23, 2001................................................... 96
City of Los Angeles, CA Mayor Richard J. Riordan letter,
April 6, 2001.............................................. 97
Congresswoman Barbara Lee letter, May 1, 2001................ 91
Navy Federal Credit Union letter, April 18, 2001............. 98
Howard, J. Timothy:
Written response to questions from Hon. Richard H. Baker..... 110
Miller, James C. III:
Freddie Mac and Fannie Mae: Their Funding Advantage and
Benefits to Consumers...................................... 163
Council of FHLBanks, prepared statement.......................... 232
National Association of Home Builders, prepared statement........ 238
REFORMING FANNIE MAE AND FREDDIE MAC
----------
WEDNESDAY, JULY 11, 2001
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 1:30 p.m., in
room 2128, Rayburn House Office Building, Hon. Richard H.
Baker, [chairman of the subcommittee], presiding.
Present: Chairman Baker; Representatives Cox, Castle,
Royce, Barr, Weldon, Biggert, Hart, Kanjorski, Ackerman,
Velazquez, Bentsen, J. Maloney of Connecticut, Hooley, Jones,
Sherman, Meeks, Inslee, Ford, Moore, Hinojosa, Lucas, Shows and
Israel.
Chairman Baker. This hearing of the Capital Markets
Subcommittee will come to order. The purpose of our hearing, of
course, today is to receive comment from the two principal
Government-sponsored enterprises with regard to the report
issued by the Congressional Budget Office analyzing the effect,
amount and utilization of the subsidy created by the charter
authority of the Government-sponsored enterprises.
Additionally, we will hear comments from other interested
parties as to their views of this matter, as well as comments
with regard to H.R.1409, the matter now pending before the
Committee with regard to the creation of a new regulatory
structure for the enterprises.
And further, we will solicit opinion as to what, if any,
additional modifications to the current regulatory model should
be considered.
As everyone knows, this has been a subject of long-standing
interest to the Committee and one in which we are moving very
slowly and cautiously to ensure that all perspectives are heard
and understood.
It would not be the intent as a result of our hearing today
to reach any final disposition in this matter. And in fact, I
would intend to convene additional hearings before the year is
out on any approach which might be deemed advisable.
To that end, I am certainly appreciative of all who have
expressed interest in this matter. It has received significant
attention. And I think, as market conditions continue to
change, the need for continued review and consideration of all
perspectives is particularly important public policy
responsibility.
With that, I'd like to recognize Mr. Kanjorski for any
opening statement he may choose to make.
[The prepared statement of Hon. Richard H. Baker can be
found on page 74 in the appendix.]
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Chairman, since we began our extensive examinations
into GSEs 16 months ago, we have met nine times to discuss
these matters.
I suspect that very few other entities have received such
scrutiny in either the 106th Congress or the 107th Congress,
particularly without corresponding legislative action.
During our numerous hearings, although I have consistently
sought to identify the problems posed by GSE performance and
regulation, I have so far concluded that no compelling reason
exists for pursuing any legislation affecting them at this
time.
Nevertheless, our inquiry today will focus on two issues.
First, we will again discuss the study compiled by the
experts at the Congressional Budget Office on GSE subsidies. As
we learned in May, Fannie Mae and Freddie Mac pass on about
two-thirds of their Federal subsidies to homeowners in the form
of lower mortgage prices, and this report confirms that GSEs
are performing a function that Congress wants them to perform.
Namely, they are working to help lower home ownership costs
without Government funding.
In return, the GSEs' stakeholders receive a share of the
Federal subsidy to provide a financial reward for their
efforts.
Our second topic concerns H.R.1409, the Secondary Mortgage
Market Enterprises and Regulatory Improvement Act. This bill
would dramatically restructure the current regulatory system
for Fannie Mae and Freddie Mac.
In my opinion, it also represents a solution in search of a
problem.
Nearly a decade ago, Congress created a rational,
reasonable and responsive system for supervising GSE
activities. That system, with two regulators, is operating
increasingly effectively.
H.R. 1409 would unfortunately interrupt this continual
progress.
Yet, some have continued to suggest that in order to avert
another S&L crisis, we must act now to change the GSEs'
regulatory structure.
In studying H.R. 1409, we should therefore review the
lessons learned from that debacle. This examination will help
to ensure that we do not create another troubling situation
requiring bail-out legislation.
Before FIRREA, we had a Federal board which is currently
serving as a chartering authority for some depository
institutions and as their regulator. This same board also
served as the operating head of a depository insurance program
and supervised the activities of some housing GSEs.
During our extensive deliberations over FIRREA, we
determined that this concentration of powers contributed
significantly to the S&L crisis. Consequently, we separated
these overlapping regulatory functions when restructuring the
industry.
However, by moving the supervisory responsibility over the
GSEs to the Federal Reserve, H.R. 1409 would again concentrate
regulatory power in one entity and ignore an important lesson
learned in the thrift crisis.
After all, the Federal Reserve, like the old Bank Board,
already has chartering and regulatory authority over depository
institutions.
In addition, it develops and oversees many of our Nation's
consumer laws and it received significant new responsibilities
in the financial modernization law.
Further, although it does not oversee deposit insurance,
the central bank does manage our Nation's monetary policy. As a
result, in times of hardship, the Federal Reserve might turn to
GSE securities to help to manage interest rates and the money
supply. That combination of conflicting duties could prove very
dangerous and Congress should avoid creating it.
In other words, we should not follow the same legal recipe
that led to the thrift crisis.
That said, Mr. Chairman, I am pleased that we worked
together to put forward a balanced panel for today's hearing.
Fannie Mae and Freddie Mac will have an opportunity to educate
us about their concerns related to the CBO study and H.R. 1409.
We will also--for the first time--finally hear from an
individual representing FM Watch, which was noticeably absent
from last year's GSE roundtable.
I additionally look forward to hearing the opinions of
Martin Edwards with the National Association of Realtors, and
James Miller, who headed OMB during the Reagan Administration.
Several others also wanted to participate in today's
hearing but could not do so. The National Association of
Homebuilders, for example, supports a strong GSE regulatory
system that balances safety and soundness concerns with mission
fulfillment.
Like me, it believes that the separation of powers among
two regulators in the current system meets these objectives.
The homeowners expressed additional dismay that H.R. 1409
``ignores the extensive hearing record of the past year,'' and
that it ``exacerbates'' the concerns that the group articulated
about H.R. 3703 in the 106th Congress.
AARP, a number of mayors, and others, have also contacted
me to express their apprehensions about H.R. 1409. To ensure
that our hearing reflects these views, I ask unanimous request,
Mr. Chairman, to submit these materials into the record.
In closing, Mr. Chairman, I share your desire to conduct
effective oversight over the housing GSEs and to ensure that we
maintain an appropriate and sufficiently strong supervisory
system.
If we decide to continue to pursue GSE reform in the 107th
Congress, I also hope that we will follow a prudent course.
Perhaps we could again use a roundtable discussion to identify
the problems among the affected parties, reach consensus about
a suitable course of action, and then, only if necessary, work
to write legislation.
Mr. Chairman, I have the unanimous consent request for the
materials.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 87 in the appendix.]
Chairman Baker. Without objection.
I thank the gentleman.
Ms. Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
I would like to begin by thanking Chairman Baker and
Ranking Member Kanjorski for holding this hearing and allowing
the Members of this subcommittee the chance to hear the
response of representatives of our housing GSEs to the CBO
study recently released.
Of late, it has become fashionable to question the
continuing value of our housing GSEs, particularly Fannie Mae
and Freddie Mac. Arguments abound as to whether these two
entities are overstepping their bounds or, conversely, not
doing enough.
Is it mission creep that we must be aware of? Or are we
concerned that the GSEs are not doing enough for the very
people that they are designed to help?
We have looked at this issue, at the issue of safety and
soundness, and we have reviewed the merit of the implied
Government backing caused by the line of credit at the
Treasury. We have pondered the question of whether these
institutions are too-big-to-fail.
The issue of the day is the size and scope of the so-called
Government subsidy provided to the GSEs, as calculated by the
CBO, and whether or not the subsidy is being passed on to
homebuyers.
At the last hearing on this topic, a number of my
colleagues raised concerns about the methodology used by CBO to
calculate its latest estimate of $10.6 billion annual subsidy.
While I acknowledge the validity of these concerns, I would
also like to point out that when we get bogged down in the
details of how this figure was reached, we obscured a larger
point--that we need to be focused on ensuring that our rising
home ownership rates survive the softening economy. And more
importantly, that we continue to make strides in reaching our
goals for increased home ownership rates among minorities.
Last year, then-HUD Secretary Cuomo announced a new policy
initiative to bring Afro-American and Latino home ownership up
to 50 percent within 3 years. We are one-third of the way to
that deadline.
How are we doing? What steps have the GSEs taken to ensure
that we get there? What can we in Congress do to encourage
greater innovation to these entities in this process?
These are the questions that we should be asking and issues
that should be concerning us.
Yesterday, the Appropriations Subcommittee on VA/HUD marked
up a bill that, by all accounts, will be disastrous for
housing. Earlier this year, the Republican leadership passed a
tax cut that will place very serious limitations on spending
for social programs.
The result is that now, more than ever, we need to
encourage the activities of the housing GSEs. Their mission has
become more important than ever.
I look forward to hearing the testimony of Fannie Mae and
Freddie Mac and to working with my colleagues on this
subcommittee to ensure that we move toward an environment in
which the housing GSEs can continue to make strides in
increasing home ownership opportunities for all Americans.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Velazquez.
Mr. Bentsen, do you have an opening statement?
Mr. Bentsen. [Nods in the negative.]
Chairman Baker. Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chairman, and Ranking Member,
for holding these hearings today.
I couldn't agree with you more that Congress needs to
continue working to increase home ownership for all Americans.
While over two-thirds of American families presently own their
own homes, overall, that's only 3.6 percent increase in the
last decade. And you have to keep in mind that this last decade
was the best decade we've ever had, an economic boom.
But we still have a third not being able to share in the
American dream.
Mr. Chairman, it's no secret who the majority of these
citizens are who can't afford their own home. The census
clearly indicates that Americans who classify themselves as
minorities are far less likely than white Americans to own a
home.
In the part of Oregon which I represent, these Americans
tend to be of Hispanic origin, and although I know I'm hardly
unique or special in that regard, Hispanics are the fastest-
growing minority in the United States, and ignoring their
problems, including the ability to purchase a home, will only
erode the quality of life for all of our citizens.
As such, I don't believe that the stated goals of today's
hearing genuinely addresses this problem. Clearly, our reliance
on the GSEs to increase home ownership have helped get us where
we are today.
I'm hoping they can do more. I'm not sure that doing away
with their charter or subsidies or enacting H.R. 1409 would
ultimately lead to lower mortgage rates for our constituents,
or grow the mortgage money available for minority and low-
income homebuyers.
Moreover, I'm equally doubtful that any of these options is
necessarily going to increase home-buying opportunities for
minority Americans.
That said, I'm sure that some of our witnesses will
disagree and, in the interest of fairness, I look forward to
hearing their views and I look forward to learning how we are
going to increase home ownership for all Americans,
particularly our minorities.
Thank you.
Chairman Baker. Thank you, Ms. Hooley.
By time of arrival, Mr. Lucas, you're next for a statement.
Do you have an opening statement, sir?
Mr. Lucas. [Nods in the negative].
Chairman Baker. Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
I want to thank you for the opportunity to be able to read
a statement into the record. I welcome the opportunity to
address the subcommittee on the important topic of housing and
role played in housing finance by Fannie Mae and Freddie Mac.
I take particular interest in today's hearing because of
the far-reaching ramifications of this subcommittee's action.
There are a handful of issues that most profoundly affect the
quality of all of our lives. Housing is certainly high among
that list.
Home ownership and affordable housing is central to the
fabric of a community and to building wealth and security among
our constituents. Real people with real hopes, dreams and
needs, people seeking to fulfill their desire for a piece of
the American dream.
The question is how and who is getting it done?
In that vein, I thought it would be helpful to share my
experience with Fannie Mae and the work they have been doing in
my congressional district. After all, we can talk about
affordable housing and getting people in homes. But the real
goal for all of us is to make it happen.
Last fall, Fannie Mae and the National Association of
Hispanic Real Estate Professionals launched a close-the-gap
campaign. That campaign is intended to address the home
ownership gap between the United States population at large and
Hispanic and African-Americans.
The Anglo home ownership rate is currently estimated to be
at 73.9 percent, outpacing the Hispanic and African-American
home ownership rates by as much as 26.4 percent to 26.1
percent, respectively.
To diminish that gap in my district alone, Fannie Mae this
spring provided $29.4 million in mortgage financing to 352
families to help ensure that home mortgage money was available
at the lowest price.
As of March, 2001, Fannie Mae has bought or guaranteed
$606.9 million in mortgage loans with 10,443 families served.
Mr. Chairman, as a former business owner, I know that our
Fannie Mae housing is good business. Its charter as drafted by
Congress was designed to give it specific competitive
advantages as well as restrictions.
As an elected representative, I know that my constituents'
housing needs are being addressed by the diligent work of
Fannie Mae and Freddie Mac.
Can GSEs do more?
Certainly. And I will continue to call on them to do so.
Likewise, as a purchaser of mortgages, Fannie Mae and Freddie
Mac need the primary market to generate those loans. I will,
therefore, look to lenders to keep pace with changing
demographics and the credit needs of our communities.
Mr. Chairman, I know that the time has run out. But I would
like to ask that the entire statement that I have prepared be
read into the minutes.
[The prepared statement of Hon. Ruben Hinojosa can be found
on page 83 in the appendix.]
Chairman Baker. Without objection.
Mr. Hinojosa. Thank you.
Chairman Baker. Thank you, Mr. Hinojosa.
Ms. Jones, do you have an opening statement?
Ms. Jones. Thank you, Mr. Chairman, I sure do.
I'd like to say good morning to my Chairperson, Mr. Baker,
Ranking Member Kanjorski, and Members of the subcommittee. I
seek unanimous consent that my full statement be included in
the record.
Chairman Baker. Without objection.
Ms. Jones. We're here this morning to review another bill,
H.R. 1409, that seeks to strengthen Federal regulation,
supervision of Fannie Mae and Freddie Mac.
Many of us have been here before. We started with safety
and soundness, then to transparency, mission creep, validation
of subsidies, to strengthening Federal regulation.
I want to note at the onset that I feel that it's imprudent
to offer new regulatory regimes when we've not allowed the
existing schemes and processes to work.
On what basis do we abandon the ship on HUD and fail to set
sail in new, untested waters with the Federal Reserve Board?
Mr. Chairman, I do not support efforts to increase the
regulatory burden placed on GSEs, although I fully respect your
decision to do so, burdens that will ultimately be passed on to
customers.
If the information suggests that the GSEs have not done
what they are required to do, let's fix it and move on. If the
GSEs, however, are on track and accomplishing their mission
again, let us move on.
My concerns relative to this legislation are many.
Primarily, I fail to see the need to transfer housing policy to
the Federal Reserve Board. I believe the Fed has enough
responsibilities in simply handling monetary policy and working
with banking institutions relative to improving CRA.
Moreover, this bill grants HUD authority over GSE housing
goals, while yet basically transfers all housing powers to the
Federal Reserve. One or the other ought to be in the same
house.
It provides bank regulatory extensive powers over housing
and approving new GSE business activities. These new powers do
not mesh with me.
What historical knowledge does the Fed possess that will
make it more effective in addressing housing issues of low- to
moderate-income persons and minorities?
In essence, the Fed is an inappropriate regulator in this
area.
Many of us on this Committee remember and sat through eight
previous GSE hearings in which we examined with great detail
Fannie Mae and Freddie Mac. From those hearings we examined
safety and soundness to an exhaustive degree.
Afterwards, Fannie and Freddie Mac made pledges themselves
to six voluntary commitments. For every one of these
commitments, they have either completed or will complete. These
commitments put them at the forefront of financial
organizations.
I fear that H.R. 1409 does little to help or improve upon
the GSEs' ability to fulfill their housing mission. Their
mission is an important one and I'm not concerned about market
share wars, but I'm concerned about affordable housing in my
district and across this country, particularly special housing
needs of the elderly, home ownership for those who seek the
American dream.
I know I've run out of time, Mr. Chairman. I submit the
rest of my statement for the record and would hope by the time
we complete this hearing and the other ten or so hearings we've
had, that we will get back to allowing Freddie Mac and Fannie
Mae to meet the mission that they were originally set in place
to do.
[The prepared statement of Hon. Stephanie T. Jones can be
found on page 85 in the appendix.]
Chairman Baker. The statement will be inserted in the
record, without objection, as will all Members' statements.
Ms. Jones. Thanks, Mr. Chairman.
Chairman Baker. Mr. Israel, did you have a statement?
Mr. Israel. Thank you, Mr. Chairman.
Let me state again that I have enjoyed the opportunity to
learn about your concerns for this issue. At the same time, I
believe that Fannie Mae and Freddie Mac are true American
success stories, created by Congress to ensure that Americans
have access to low-cost mortgage funds. Fannie Mae and Freddie
Mac help millions of Americans, including many in my district,
achieve the dream of home ownership.
At each and every hearing of this subcommittee, I have
commented that, while we ought to explore these concerns, and
while there is always room for improvement, we should not
hinder Fannie Mae and Freddie Mac's ability to perform their
core competency of creating affordable housing opportunities.
Mr. Chairman, I wish to repeat that refrain this afternoon.
I'm pleased that former OMB director James Miller will be
here to testify today and I look forward to that testimony. In
fact, I have noted that Dr. Miller's study estimated total
interest rate savings to America's families to be between $8
billion and $23 billion a year, compared to an annual funding
advantage held by the GSEs of between $2.3 billion to $7
billion.
He concludes in this study, and I quote: ``Even using the
lowest estimate of consumer benefits and the highest estimate
of the funding advantage in our range of estimates, the value
of the consumer interest cost savings resulting from Freddie
Mac and Fannie Mae's activities significantly exceeds the
highest estimates of their funding advantage.''
I also believe it's important to note that on calculating
the benefits that the GSEs receive, our own CBO may have failed
to calculate the value Fannie Mae and Freddie Mac provide to
American homeowners.
In its calculations, CBO measures all of the costs, but
only a portion of the benefits provided to consumers. For
example, CBO concedes that it did not attempt to measure
important benefits the GSEs provide, including their
fulfillment of their statutory affordable housing goals, their
investment in new mortgage products and technology innovations,
and their continued commitment to increase minority home
ownership.
In conclusion, we should be mindful of the important place
Fannie Mae and Freddie Mac hold in the mortgage finance market
before passing legislation or subjecting them to further
unnecessary scrutiny which will only serve to make it more
difficult for them to continue fulfilling their mission.
Again, we should always be mindful of various concerns. We
should always seek improvements. But we should not inhibit
these important GSEs from performing their core competency of
creating affordable housing for my constituents and for all of
our constituents.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, sir.
Mr. Shows, do you have an opening statement?
Mr. Shows. [Nods in the negative.]
Chairman Baker. Mr. Moore.
Mr. Moore. [Nods in the negative.]
Chairman Baker. If no other Member has an opening
statement, we'll proceed to our first panel.
I'd like to welcome here today individuals who are
certainly no stranger to the issue.
We have representing Fannie Mae, the Vice President and
Chief Financial Officer, Mr. Timothy Howard, as well as the
Senior Vice President for Government Relations from Freddie
Mac, Mr. Mitch Delk.
Mr. Howard, please proceed at your tempo.
STATEMENT OF TIMOTHY HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER, FANNIE MAE
Mr. Howard. Thank you. Thank you, Chairman Baker, Ranking
Member Kanjorski, and Members of the subcommittee. My name is
Timothy Howard. I'm Executive Vice President and Chief
Financial Officer of Fannie Mae and a member of Fannie Mae's
office of the chairman.
I appreciate this opportunity to continue our dialogue.
I've submitted written testimony, including our perspective
on the recent CBO study regarding Freddie Mac and Fannie Mae,
with an appendix providing our detailed response to the study.
To sum up my testimony, I'll briefly make three points this
afternoon.
First, housing is a bulwark of our economy. The housing and
mortgage market today is the strongest, most stable sector of
the economy. It appears to be keeping the entire economy from
falling into recession.
The recent strong appreciation in home values has boosted
the average homeowner's net worth. In addition, we estimate
that homeowners refinancing their mortgages to benefit from
falling interest rates or to take some equity out of their
homes is pumping an additional $40 billion of consumer spending
into the economy.
Given the success of the American housing system and record
home ownership, some theorists have begun to question whether
this country is over-housed.
We would forcefully assert the contrary.
Housing is a powerful force in the economy precisely
because the demand for housing continues to be so strong.
Recent census data indicates that, if anything, we are heading
toward a housing shortage, as demand outstrips supply.
So the most important issue is not whether the country is
over-housed, but how to keep us from being under-housed. Which
leads to my second point.
The housing sector depends on a strong, effective Fannie
Mae.
Under our congressional charter, Fannie Mae's job is to
ensure a steady flow of low-cost mortgage funds to communities
at all times under all economic conditions, even when other
financial institutions choose to withdraw from the market.
This was never more apparent than during the credit crunch
of 1998, when Fannie Mae and Freddie Mac greatly increased
their mortgage purchases, making sure that homebuyers had
access to the lowest rates in a generation, at a time when many
borrowers had no access to credit at all.
Today, the housing sector is counting on us for another
reason--our unique focus on providing low-cost financing to
historically under-served families, including minorities,
families of modest means, women-headed households, new
Americans, and other groups.
The home ownership rate for these Americans is still around
17 percent lower than the national rate. And according to the
new census, a key driver in the potential housing shortage is a
projected boom in immigration and minority household formation.
These families are Fannie Mae's bread and butter. Indeed,
no company in America provides more home-buying funds for
minority, lower income, and other historically under-served
families than we do.
In 1994, we pledged to provide $1 trillion by the end of
the year 2000 to help 10 million under-served families own or
rent a home.
Last year, we met that pledge early and immediately
launched our $2 trillion American dream commitment to help 18
million under-served families during this decade.
Within that plan, we will provide $420 billion specifically
to help 3 million minority families. These commitments have
transformed our business, making Fannie Mae the largest
affordable housing company in America.
Today, more than three-quarters of our business goes to
families targeted under these commitments. We would be proud to
compare our record of expanding equal housing opportunity with
any other financial institution in America.
And that leads to my third and final point today.
Fannie Mae's net benefit to consumers can be measured every
day. From our point of view, the best measures of the public
benefit of Fannie Mae are the spread between jumbo and
conventional mortgage rates, currently worth up to $21,000 over
the full life of the loan, how many consumers benefit from our
low-cost financing and what those benefits cost the Government,
which, in fact, is zero.
Our housing finance system is operating at peak
performance. It's the envy of the world. The economy and
millions of families depend on it. This means that any measure
of our public benefit, or any proposed change to the housing
finance system, must be based on indisputable, irrefutable
analysis.
By that standard, we believe it is fully justifiable to
closely examine both the approach and the results of the most
recent CBO study.
Now let me preface my comments on that study by emphasizing
our great respect for the Congressional Budget Office, its
leadership, its public service in providing Congress with
timely and non-partisan analysis.
In attempting to calculate a GSE subsidy, which, by
definition, can only be theoretical, the CBO has tried to do
something that is unique and extremely difficult. We believe,
quite candidly, that the CBO came up short in this effort.
Let me mention just five points that capture the bulk of
our concerns with the study.
First, we think its fundamental premise is flawed. CBO has
attempted to quantify the value of a subsidy that does not
explicitly exist. That's problematic by definition. Fannie Mae
does not receive a dollar of Federal funds. Put another way, if
the Government were to revoke Fannie Mae's charter, it would
not recover a single subsidy dollar. But homebuyers would
certainly face higher mortgage rates.
Second, the Government's methodology for valuing express
Government guarantees is detailed in the Federal Credit Reform
Act of 1990, which can be used as a point of comparison.
When Price Waterhouse did a study using the Federal credit
reform approach, it found that the cost to the Government if
Fannie Mae mortgage-backed securities had an explicit guarantee
would be zero.
Third, the study used the wrong data to calculate our
funding benefits. It compared the yields on Fannie Mae and
Freddie Mac debt to those of both A-rated and AA-rated
financial companies, even though S&P has rated both Fannie Mae
and Freddie Mac AA-minus on a risk to the Government basis.
CBO also misstated the amount of short-term debt the two
companies issue. Correcting these two errors reduces the
funding subsidy in 2000 from $6 billion to between $3 billion
and $3.6 billion, and reduces the retained subsidy to virtually
zero.
Fourth, the study overstated the benefits from our
mortgage-backed securities business. It concluded that Fannie
Mae and Freddie Mac receive a $3.6 billion benefit from our
MBS. But later in the report, conceded that most of this
benefit goes directly to mortgage lenders and not to us.
Correcting this error would reduce the gross subsidy by $3
billion.
And fifth, the study understates our benefits to consumers.
It takes the benefit to homebuyers of lower mortgage rates and
applies that only to mortgages that Fannie Mae and Freddie Mac
owner-securitize. Because of market competition, however, every
borrower eligible for a conforming mortgage enjoys lower rates,
regardless of whether their mortgage is part of a transaction
that involves Fannie Mae or Freddie Mac directly.
Correcting all of these assumptions reverses the conclusion
of the CBO study, erasing any net subsidy to Fannie Mae and
Freddie Mac and taking our net benefit to consumers even
higher.
But let me make one final point.
Even if one fully accepts the CBO's methodology and
results, a benefit pass-through rate of 63 percent, which is
the CBO's gross subsidy less the 37 percent retained subsidy,
still would be quite high for any direct Government subsidy.
This discussion, then, is really about whether we pass on
two-thirds of the benefits we receive, as CBO asserts, or a
higher percentage, as we would claim.
Arguably, in either case, we are doing what Congress
intended us to do. We are delivering billions of dollars in
public benefits without using a penny of public funds.
The American housing finance system is the best in history
and the best in the world, in large part because of the wise
decision Congress made in 1968 to charter Fannie Mae as a
private company.
We look forward to doing whatever we can to help make this
great system even better. And I thank you once again for the
opportunity to be here today.
[The prepared statement of Timothy J. Howard can be found
on page 101 in the appendix.]
Chairman Baker. Thank you, Mr. Howard.
Mr. Delk, welcome.
STATEMENT OF MITCHELL DELK, SENIOR VICE PRESIDENT, GOVERNMENT
RELATIONS, FREDDIE MAC
Mr. Delk. Thank you, Chairman Baker, Mr. Kanjorski, and
other Members of the subcommittee.
I am Mitchell Delk, Senior Vice President of Government
Relations at Freddie Mac.
It's a pleasure to be here with you today.
Freddie Mac is in a great business--financing homes in
America. Over the past 6 years, the home ownership rate has
risen across all income, racial and ethnic groups. Minority
families have experienced the fastest rate of growth.
For most families, their home is their most valuable asset
and greatest source of financial security.
Chairman Baker. Mr. Delk, if you could pull the mike a
little closer. It's not real sensitive and we can't hear well.
Mr. Delk. Home ownership also plays a critical role in
stabilizing our economy. Throughout 2001, the Nation's robust
housing market has defied the softening evident in other parts
of the economy.
Our system works so well, we often take it for granted.
With Freddie Mac and Fannie Mae operating at the heart of the
Nation's housing finance system, there is never a shortage of
mortgage money. America's homebuyers enjoy the lowest possible
rates. And they choose from an array of products.
Former Office of Management and Budget Director Jim Miller
and economist Jim Pearce estimate that our activities save
families up to $23 billion a year in mortgage interest--at no
cost to the Government, I might add. They conclude that the
benefits we bring consumers far outweigh the value derived from
our charters.
This is not the conclusion reached by CBO. Nor, however, is
it the first time CBO has been wrong.
Recently, CBO conceded having made errors totaling $2.1
billion when it first studied the issue in 1996. This is the
exact amount CBO accused Freddie Mac and Fannie Mae of failing
to pass on to homebuyers.
Unfortunately, CBO's latest report is another contrived
academic exercise. CBO's casual use of the term, ``subsidy,''
suggests that Freddie Mac receives a direct outlay of Federal
funds.
In fact, the corporation has never received a cent of
Federal money and is one of the Nation's largest taxpayers.
CBO's new report is based on wrong assumptions and flawed
analysis. Simply correcting four of the largest errors would
completely reverse the conclusion CBO appears determined to
reach.
First, CBO unfairly compares our funding costs to companies
with lower credit ratings. Of the 70 firms considered, only
eight had ratings comparable to Freddie Mac's S&P risk-to-the-
government rating of AA-minus.
Let me repeat this, please:
Of the 70 firms considered, only eight had ratings
comparable to Freddie Mac's S&P risk-to-the-government rating
of AA-minus.
Second, CBO grossly over-estimates our share of long-term
debt, further inflating our funding advantage.
Third, CBO uses an arbitrarily low estimate of the
difference between the conforming and jumbo mortgage rates.
CBO's estimate of 22 basis points is well below the range
documented in numerous studies. CBO itself used 35 basis points
in 1996.
Fourth, CBO credits Freddie Mac and Fannie Mae with
reducing mortgage rates only on loans we actually purchase.
In fact, thanks to our activities, all conforming market
borrowers enjoy lower rates, whether we buy the loan or it's
held in a bank portfolio.
These errors and omissions disqualify CBO's report from
serious consideration. Not surprisingly, however, our critics
have seized on it in an attempt to impugn us. Their latest
collection of half-truths and distortions shamefully
misrepresents our service to low-income and minority families.
Apparently, our critics haven't read Freddie Mac's annual
report to Congress, which documents our outstanding support for
affordable lending. I'd like to submit our report for the
record.
Last year, 58 percent of Freddie Mac's business financed
housing for one million families with low incomes or living in
under-served neighborhoods. And nearly 14 percent of our
business financed homes for minority families.
In addition, Freddie Mac is the unquestioned leader in
combatting predatory lending. Our critics cannot begin to match
such a strong track record.
Mr. Chairman, today you and Members of the subcommittee
have a unique opportunity to question and assess the record of
the subprime lenders, mega-banks and mortgage insurers
criticizing us.
Everyone knows they are good at manufacturing sensational
reports every time you hold a hearing. But how good is their
service to low-income and minority borrowers and their efforts
to combat predatory lending?
I predict their spin is more potent than their performance.
Now I'd like to say a few words about Freddie Mac's
financial condition and regulatory oversight.
Freddie Mac is unquestionably safe and sound. The six
voluntary commitments we announced last October with Members of
the subcommittee, and which were fully implemented this spring,
put Freddie Mac at the vanguard of world financial practices.
Effective regulatory oversight is an essential complement
to our strong financial position.
We believe that the regulatory structure set forth in the
GSE Act is fundamentally sound.
The regulatory structure ties capital to risk. It
establishes a comprehensive set of enforcement authorities. And
it provides substantive oversight without unnecessary
intrusion. This enables Freddie Mac to respond aggressively to
market developments with innovations to meet our mission.
Mr. Chairman, in H.R. 1409, you propose changing the
location of Freddie Mac's safety-and-soundness regulation.
Given the gravity of this issue, any proposal to change the
regulator should meet the following criteria:
First, the proposed entity must be highly competent and
credible. It must have the confidence of Congress, the public,
and the markets.
Second, it should support housing as an important public
policy objective.
And finally, the entity should enjoy bipartisan support.
Mr. Chairman, Members of the subcommittee, I appreciate the
opportunity to appear before you today. I look forward to
working with you to secure the future of America's housing
finance system and, with it, the dreams of millions of
America's families.
Thank you.
[The prepared statement of Mitchell Delk can be found on
page 112 in the appendix.]
Chairman Baker. Thank you, Mr. Delk and Mr. Howard.
Last fall, we agreed, voluntarily or otherwise, to the
terms for certain disclosures. And as part of that press
conference, there was general agreement to proceed with the,
quote ``regulatory piece.''
H.R. 1409 represents my take at it, which it's pretty
clear, neither of the organizations seems to be enthusiastic
about.
But I would wonder, since the date of that agreement and
the public statement that we want to work on a regulatory
reform that we would both like to have appropriate regulatory
oversight, do either of you intend to forward any
recommendation to me with regard to modifications to the
current regulatory structure?
Mr. Delk. Mr. Chairman, we'll be glad to submit to you in
writing comments on H.R. 1409, and our views on the current
regulatory structure.
As I indicated in the oral testimony, we believe that the
existing structure is a credible structure. Notwithstanding
that, as I indicated also, we'd like to work with you and other
Members of the subcommittee to address the concerns of the
subcommittee.
Chairman Baker. Well, I don't think I need additional
comment on H.R. 1409. I believe I've read enough about that.
But my real question is, do you think the status quo is
sufficient, or will you recommend any modification at all?
Mr. Delk. We think the status quo is sufficient.
Chairman Baker. OK. Contrary to the statement of last fall
when we all agreed that we needed to have a stronger regulator.
Is that correct, Mr. Howard?
Mr. Howard. Well, let me first say that we would be pleased
to continue discussions with you, Ranking Member Kanjorski, and
others, on ideas for improving still further the efficiency of
the housing finance system.
We think, though, that given the high level of efficiency
in the system, proposals for change face a high hurdle of
clearance.
Chairman Baker. Let me move on because I will enforce the
5-minute rule today given the number of Members here today.
Would that mean, then, that when OFHEO's OMB stress test is
finally promulgated, you will agree to whatever the outcome of
that test is because you believe OFHEO to be a good regulator?
Mr. Howard. We have been engaged in discussions with a
number of parties about the goals of the risk-based capital
standard.
And we believe that OFHEO believes that it should attempt
to, as closely as possible in the model, capture the risks as
they exist in our business.
Chairman Baker. But what I'm getting at is, if you believe
OFHEO is a competent regulator and no change is required at
all, and they finally, after a decade-long struggle, produce
the long-awaited stress test--let me rephrase.
Have either of your organizations written the letter to OMB
asking for an extension of the promulgation period from the
current July 16th, which is a delay from the initial date, to
any subsequent date?
Mr. Howard. We have urged OMB to take the time necessary to
make sure that the risk-based capital test that OFHEO is
working on is workable and properly reflects the risks that we
take.
Chairman Baker. Did that communication include an extension
of the date?
Mr. Howard. We did send OMB a letter several weeks ago
requesting an extension.
Chairman Baker. Mr. Delk, did Freddie Mac do the same?
Mr. Delk. We did. Let me, if I can, follow up. I know time
is of the essence.
I think you know, Mr. Chairman, for years, Freddie Mac has
embraced the concept of risk-based capital. We have managed our
company by a risk-based capital stress test for over 15 years.
We supported the concept in the 1992 legislation and we're
anxiously awaiting the completion of the risk-based capital
rule.
Having said that, I think all concerned parties want to
make sure, in fact, that the rule, in fact, does capture risk
relative to the amount of capital we have.
Or said another way, that in fact, the capital requirement
is, in fact, aligned with the risk we take. And it's certainly
going to take some time for OMB to make this assessment. We all
want to make sure that there are not unintended consequences.
But I don't think that that in any way undermines our support
for the proposal.
Chairman Baker. Well, I was only making the point that if
we are defending OFHEO here today as the premier regulator of
the most sophisticated financial institutions in the modern
world, and they finally come up with a decade-long weighted
stress test to adequately assess risk, after the review by OMB,
that there would be resistance to either enterprise in adopting
whatever that regulatory structure might be.
That's my hope.
I would formally request copies of the correspondence sent
to OMB requesting the extension of date.
One last question before I run out of time. Mr. Howard, I
understand that Fannie is now engaged in the distribution and
sale of debt securities in thousand-dollar denominational
amounts.
I have concerns about that because of the impact of
liquidity potentially on community and independent banks.
Does Fannie intend to sell those thousand-dollar
denominational notes directly to investors?
Mr. Howard. Congressman, all of our debt, both debt that
goes to retail investors and debt that goes to institutional
investors, is available at denominations as low as a thousand
dollars.
It's been true for retail investors since late 1996. We
have made no change in the denomination of the investment
product since that time.
What you may be referring to is, a few months ago, we took
some steps to make the pricing of our retail securities more
transparent to investors by posting visible rates that retail
investors could compare with alternative fixed income
instruments on a screen available to brokers and to retail
investors.
So they had a better way of assessing the quality of
securities that we've been selling since the early 1980s.
Chairman Baker. But the distinction between having a note
in thousand-dollar denominations and the total book value of a
sale, that's a distinction of some significance.
For example, can I purchase directly from Fannie Mae a
thousand-dollar denominational debt security today?
Mr. Howard. You could not.
Chairman Baker. And why would that be?
Chairman Howard. We do not sell directly to individual
investors.
Mr. Baker. Well, that's what troubles me because on page 46
of your offering circular, sales directly to investors.
We may also sell debt securities directly to investors on
our own behalf. We will not pay a commission to any dealer on
direct sales.
I'm at the end of my time. I don't want to take any more
time today to get into this exchange. Please just forward at
your leisure an explanation of what appears to be a conflict in
the issuing circular and your understanding of the matter.
Thank you very much.
Chairman Howard. I would be pleased to do that.
[The information referred to can be found on page 110 in
the appendix.]
Mr. Baker. Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Howard, what is your experience with OFHEO as a
regulator? Do you think that finally, they have matured to the
point where they are starting to perform in accordance with the
mission that the Congress gave them?
Mr. Howard. Let me break that into two parts, Congressman.
First of all, I have been very impressed with the quality
and thoroughness of the work done by the examination staff. I
find them to be very well informed, highly professional, and
committed to the work they do.
On the risk-based capital standard, the agency has set
itself an extremely difficult task, which is creating a
detailed model itself of two businesses engaged in enterprises
that are complex.
We are on record as saying that we thought the initial
choice that was made by the regulator to do its own model
rather than to use models developed by the enterprises as other
banking regulators said they would do, was problematic.
And I think that that has contributed to the delay in
completing the risk-based capital standard.
Having said that, it now appears as if the OFHEO capital
standards group is making progress on using what's inherently a
cumbersome and difficult process to produce a standard that we
hope will be workable.
And when we met with OMB, we wanted to make all parties
aware of the benefit to be gained by making sure that this
approach did properly model our risk, because it will affect
our behavior and will affect the availability of credit
throughout the mortgage system.
Mr. Kanjorski. How soon do you think that the standards and
the models established by the regulator are going to be
complied with and arrived at?
Or does Congress have to take some action?
Mr. Howard. Based on what I have currently heard, my belief
is that a regulation could be put out within a 90-day period,
having been subjected to sufficient testing to let OFHEO and
OMB know whether there are, in fact, any unintended
consequences from putting this rule in effect.
Mr. Kanjorski. Would that have been vetted by both Fannie
Mae and Freddie Mac?
Mr. Howard. Vetted may not be the correct term. It would be
useful for us to be able to compare the results of the OFHEO
model with our own internal model to make sure that we are
treating risk in a way that is consistent.
Mr. Kanjorski. You're not in that process right now, but
you will be as soon as the----
Mr. Howard. We are not in that process directly at the
moment.
Mr. Kanjorski. Mr. Delk, do you have anything to add in
regard to the regulations being promulgated by the regulator?
Mr. Delk. Not much more than I said earlier, Mr. Kanjorski,
other than to say that our conversations with OMB have been
intended to ensure that there are no unintended consequences.
This is a very complex rule. It's the first of its kind.
But, clearly, it is the way to assess and to determine capital
adequacy based on the risk you take.
And so, I concur with Mr. Howard. I think that this will be
completed imminently. I think everyone wants to complete it.
But, again, I think no one wants unintended consequences
because it will be a model for other financial institutions.
Mr. Kanjorski. Do you concur with Mr. Howard's expressed
evaluation of the regulators?
Mr. Delk. Yes. I would emphasize, I think, their
examination staff is probably unparalleled. They have an
individual heading the examination staff who has years of
experience at the comptroller of the currency.
I think they recently announced that they are bringing in a
deputy director who is an individual who had extensive
experience, in fact, retired from the OCC.
So I think what they have done is put together a very good
staff and I think Mr. Falcon deserves to be complimented for
the staff he's put together.
Mr. Kanjorski. In my opening statement, you heard me
indicate my dissatisfaction with the Federal Reserve as a
prospective regulator as established under H.R. 1409.
I wonder if in the 30 seconds remaining, either one or both
of you could tell me, do you feel that we should look at a new
regulator in the nature of the Federal Reserve, or should we
stay with the existing regulator and just proceed?
Mr. Delk. Let me preface any comment on that question by
saying that the Federal Reserve is the most august body
regulating financial institutions in the world.
Having said that, I laid out in my opening statement three
criteria that we would suggest that the Committee or
subcommittee look at in considering whether a new regulator is
warranted.
The first was that it be highly competent and credible.
Unquestionably, the Federal Reserve is highly competent and
credible.
The second was, does it support housing as an important
public policy objective?
I think issues can be raised on whether, in fact, the
Federal Reserve does support housing as a public policy
objective. In fact, many economists at the Federal Reserve have
raised the issue of whether we have too much investment in
housing now.
That clearly is not Freddie Mac's view, but I think that
has been a concern. So I think that would raise at least issues
on whether they would be a regulator of choice. And finally, I
said the regulators should enjoy bipartisan support.
We've heard today through opening statements a number of
concerns through Members on the subcommittee about the Federal
Reserve. So I'm not in a position to say whether they would or
wouldn't. But at least under this criteria, at least two of the
criteria, we raise serious concerns on whether that would be an
appropriate policy choice.
Mr. Kanjorski. Thank you, Mr. Delk.
Mr. Howard.
Mr. Howard. We have similar criteria to what Mr. Delk
outlined and believe it is at Congress' discretion to assess a
regulatory structure and make sure that it's satisfied.
Mr. Kanjorski. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Castle.
Mr. Castle. Thank you very much, Mr. Chairman.
I was just checking, but I wanted to ask questions about
your legislation. That is part of this hearing, as I understand
it.
First of all, gentlemen, I have a great deal of respect for
both of your organizations. I think you do a tremendous amount
to aid with the financing of housing across this country and
have helped in many ways.
That doesn't mean it's perfect, however. That doesn't mean
that there couldn't be things that could be done better.
I'd be interested in your comments on the legislation of
Chairman Baker with respect to the regulation, the possible
change from the Office of Federal Housing Oversight to the
Federal Reserve Board.
I assume you're both adamantly opposed to that. Is that
correct? Or your organizations are adamantly opposed to it, I
should say.
Not you personally.
Mr. Howard. I think it is incorrect to say that we are
adamantly opposed to it.
Mr. Castle. Can you do me a favor? Can both of you hold the
microphones a little bit closer, or bring them closer to you?
Thank you.
Mr. Howard. I think it would be incorrect to characterize
our position as adamant opposition to the Federal Reserve as a
regulator.
We do, as Mr. Delk mentioned, have some concerns about
their commitment to our housing mission. Assuming that an
adequate division of responsibilities can be worked out between
a mission regulator and the Federal Reserve as a potential
safety and soundness regulator, the Fed has enormous
credibility and respect on the safety and soundness front.
Mr. Castle. OK.
Mr. Delk.
Mr. Delk. I don't think I could add much more, Mr. Castle.
I went through the criteria which we, in fact, think or would
recommend that the subcommittee go through. And I do think that
there are concerns regarding the Fed's interest in and
commitment to housing.
Again, having said that, they are clearly the world's
premier financial institution regulator. Anyone you canvassed
worldwide would agree with that assessment.
So I think it makes it a difficult call. But the balance I
think swings to the point that it would raise serious policy
concerns on whether they would be a regulator of choice.
But having said that, again, we're not adamantly against
it. But it does raise policy issues and we think that they are
very serious policy issues.
Mr. Castle. I don't have a particular opinion, either, at
this point. Nor do I have anywhere near the knowledge to be
able to form an opinion.
But it just seems to me that this is a very significant
question of very significant players in this field and it's
something that we should all be paying attention to to see if
we can come up with the right solution.
Mr. Howard. And we believe that given the importance of the
role that we play in the housing finance system, it is
absolutely critical that our oversight committee be totally
confident in the regulator that oversees our activities.
Mr. Castle. Let me change subjects for a moment. And,
again, I'm not that familiar with all of this, but I'm looking
at the CBO testimony of May 23rd on the Federal subsidies for
the housing GSEs.
My staff prepared a report which summarizes some of the
things which reveals the value of Government subsidies to
Fannie and Freddie as $10.6 billion a year with $3.9 billion,
or 37 percent of that, being passed through to its shareholders
instead of to mortgage borrowers.
We all know--I mean, there are arguments about whether
you're a Government agency at all or not. There are arguments
about whether there is truly a subsidy or not, which you pretty
much made here in your statements in answering the questions so
far.
And again, I'm not an expert on every word that's in here.
But I assume that you disagree entirely with the underlying
premise of what the CBO has said. You're not arguing about the
numbers or anything of that nature. You disagree, because there
are no direct subsidies, you disagree that there's anything
that should be able to be encapsulated in terms of numbers one
way or another.
Am I saying that correctly?
Mr. Howard. Let me attempt to be as clear as I can on this.
The CBO method, because Fannie Mae does not receive direct
Federal outlays, the method is inherently theoretical. They
build a construct and attempt to evaluate in dollars the
benefits that the charter conveys.
Mr. Castle. What you said in your opening.
Mr. Howard. Because it's a theoretical approach, it is
critically dependent on the assumptions that are made. And
those assumptions can be made in a number of different ways
which are reasonable, but which, if made in different ways,
produce very different results.
So I do think it's incorrect to lock into one particular
set of assumptions and say this is the right number and
furthermore, that this number, which is done in a theoretical
construct, has policy implications, because by changing those
assumptions, we think that the CBO made the assumptions
incorrectly in cases having to do with our debt cost.
Mr. Castle. But you're not saying, because it's a
theoretical construct, it does not mean that it's completely
invalid.
You're suggesting that the numbers may be invalid because
you don't agree with them. But you're not suggesting that the
whole idea of doing a theoretical construct because of your
long-standing history with the Federal Government is
necessarily completely wrong.
Or am I misstating? I want to make sure that I'm stating it
correctly.
Mr. Howard. I think you are stating it correctly. We
completely agree that the charter that Congress gave Fannie Mae
and Freddie Mac has value and does convey a benefit to us.
We believe that that benefit flows very directly through
our two businesses to the intended recipients, which are
homebuyers. And we think that the CBO construct is one way, but
not the only way, and we don't think the best way, of
quantifying that flow of benefits.
Mr. Castle. I think I used up my time, Mr. Chairman. I
meant to yield you some time, but I apologize.
Chairman Baker. Mr. Bentsen, do you have questions?
Mr. Bentsen. Thank you, Mr. Chairman.
In his testimony before this subcommittee a month or so
ago, Mr. Crippen, I think, made clear--and I apologize. I was
reading through the transcript--made clear that you could
believe CBO's subsidy arguments if you agreed with the
assumptions that are in there.
But, obviously, you all disagree with those set of
assumptions. And I think that you make a very good point as
well that--and I think we got Mr. Crippen to agree to this--
that in fact, there's not one dollar of outlay from the Federal
Government or from the taxpayers that goes to do this.
And furthermore, I think we got the agreement that even if
you agreed with the assumptions on the ratings and the spreads
and the like, that if you agreed with the $3.9 billion in the
year 2000, that $1.2 billion of that could be associated with
fees and taxes that are paid.
And yet, Mr. Crippen also said at that time in the
testimony that he probably did not believe that were the
Federal Government to just go ahead and appropriate $1.2
billion through some form of program, that we would be able to
achieve the leverage that they otherwise found had been
achieved.
And I think that's important for the record here.
I want to turn for a second to H.R. 1409 and ask you about
a couple of provisions of it. And I don't want to focus on the
question of whether the Federal Reserve is the appropriate
regulator or not. There are some issues there and I'll wait for
other witnesses to ask that.
But what I'm curious about, in your review of H.R. 1409,
particularly as it relates to regulation and enforcement, how
does it comport to the Bank Holding Company Act or the Gramm-
Leach-Bliley Act?
Does it treat, would the bill treat the GSEs in the same
way in terms of things like cease and desist, receivership, and
the like, as it would treat holding companies under the Bank
Holding Company Act or Gramm-Leach-Bliley?
Or does it give greater enforcement authority, comparably
speaking, as it relates to the GSEs?
Mr. Delk. Mr. Bentsen, let me not draw on my knowledge of
the issue, but refer you to the GAO report that was
commissioned by Chairman Baker.
He requested GAO to look at this specific issue. And I
think what GAO came back with, and I read this many, many
times, nothing in that report suggests that there is a problem
with the statutory enforcement structure that needs to be
corrected.
In fact, that GAO found, and let me quote from the report:
``Based on each regulator's powers and authorities, it appears
that each regulator has statutory tools available to address
significant safety and soundness concerns.''
So while there might be some differences, at the end of the
day, and I think that I would argue that this is substantiated
by the GAO study, OFHEO has the functional equivalent
authorities or tools that it needs to ensure that we operate
safely and soundly.
Mr. Bentsen. But as you look at H.R. 1409, would you see
H.R. 1409 as increasing the amount of regulation over the
operations of Fannie Mae or Freddie Mac? And how would you
compare that to the existing regulatory authority they have
over other financial holding companies?
Would you view it as more excessive, as going beyond what
the Bank Holding Company Act provides for, or what Gramm-Leach-
Bliley provides for as it relates to other financial holding
companies?
Mr. Delk. I would argue that it, in fact, adds a lot of
additional structure and oversight and involvement of the
regulator that is, in fact, gratuitous.
It's interesting also, if you think about the 1992 statute
and the way it was structured, it was structured only 3 years
after FIRREA and only 1 year after FIDICIA.
And so, for anyone to argue, in fact, that Congress
developed this in a vacuum I think is a little bit ludicrous.
They had the value of those two statutes, the value of the
experience of those two statutes, and I think that was, in
fact, the model that was used.
However, the structure was, in fact, created to, in fact,
oversee two companies that are, in fact, quite different from
financial institutions for many, many reasons.
Mr. Bentsen. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Bentsen.
Mr. Barr, did you have questions?
Mr. Barr. Thank you, Mr. Chairman.
Mr. Howard, if you could, I know people use this term
subsidy a great deal in talking about Fannie Mae and Freddie
Mac.
What exactly does that term mean? What is the subsidy? I
was looking here recently at an article from the Wall Street
Journal, a very complimentary article and I think a very nice
article. And all of a sudden, in the middle of the article,
they all of a sudden launch into the use of the term, subsidy.
What exactly is the subsidy that people talk about in terms
of your agencies?
Mr. Howard. As I indicated in my opening statement, the
term subsidy is used somewhat loosely in referring to the
benefits that flow from our charter.
Webster's definition of subsidy----
Mr. Barr. Is any benefit that flows from a charter a
subsidy?
Mr. Howard. I would not call it a subsidy. But I wouldn't
quibble with people who use that word to describe it. I just
think using the term subsidy confuses the issue because,
normally, a subsidy is a monetary outlay.
And in this case, our benefit is not a direct transfer of
funds that we can then direct at will.
The benefit that we have is observable in the lower
interest rates that attach themselves to loans that we can buy
or guarantee versus loans that we can't.
Mr. Barr. And you're not doing anything improper in that.
Mr. Howard. I don't believe we are.
Mr. Barr. Is it similar--I know a couple of years ago,
particularly here in our work in this Committee, there was
legislation that dealt with credit unions. And there was a lot
of talk at that time that the credit unions receive a subsidy
because of the way the tax laws work.
Is that a subsidy in the same sense that people apply the
term to Fannie Mae?
Mr. Howard. I'm not sufficiently familiar with the credit
union structure to be able to opine on that.
Mitch, can you?
Mr. Delk. Mr. Barr, I think it's a very complicated subject
matter when you talk about subsidies. I'm not an economist, and
so I really am not familiar with what they are referring to.
And therefore, I use kind of the commoner's definition of
subsidy, as was articulated by Mr. Howard.
So, not being familiar with the credit union model, I don't
know that I can opine on that.
Mr. Barr. The point I'm trying to make, I tend to agree
with what I think you're saying, that people bandy this term
about. And I'm not sure that either people that bandy it about
really understand it. Perhaps they use it in a way to try and
draw some negative implication from it. I don't know.
But I was just curious as to whether or not there really is
something that you can grab onto and sink your teeth into.
Mr. Delk. Let me add one thing to what I said.
Mr. Barr. And I'm not sure there is.
Mr. Delk. Let me add one point, if I can. I don't want to
be disingenuous and insinuate that there are not benefits that
accrue from the charter.
Mr. Barr. No, I understand that, certainly. I understand
that. And I think you all have been very forthcoming in that
regard.
Mr. Chairman, I'd yield whatever time I have remaining. I
think you might have some additional areas of inquiry.
Chairman Baker. Thank you, Mr. Barr.
On the question of subsidy, that is a benefit of operation
in the market place which others do not enjoy which result in
an enhanced profitability or a lower cost of product.
In this case, currency is the product which, because of the
implicit guarantee of the United States Government, and bond-
holders making the assumption that the debt will be paid off by
the United States Treasury in case of default, is a clear
market advantage and therefore, defined as a subsidy.
If we were to look at the current operation of Fannie and
Freddie, a large wave of prepayments potentially could be the
largest exposure.
And I'm bringing this up to the Committee only because of
the observations made by the S&L crisis in the 1980s. The
United States Government paid no dollar into any S&L prior to
their foreclosure. The S&Ls put premiums into an FSLIC fund
which was used to pay off losses.
Unfortunately, the losses were far more widespread than
anticipated. Therefore, the losses that needed to be covered
exceeded the premiums' reserve by the industry, therefore
calling on the United States taxpayer to pay off the losses.
This is no different. There is no outlay by the United
States Government, nor exposure by the United States taxpayer,
until such time as there would be an untoward economic reversal
resulting in a dollar loss to the institutions which could not
be covered by their capital adequacy.
Hence, the concern about leverage and capital adequacy is
very important. Do we have a regulator who can tell us that
it's adequate?
Well, it's only taken them a decade and now we're being
told that we want a 90-day extension from July 16th to take
another quick look.
In the meantime, pre-payment penalty I think is the largest
potential exposure that they could have, as high-interest
mortgage holders want to pay off those notes and refinance them
at a lower rate.
Fannie and Freddie have to make very sure that they hedge
against those downturns in interest cost because it has direct
impact on their spread.
Said another way--can they make money?
They do this by using derivatives. Also issuing callable
bonds that can be bought back before maturity, thus allowing
them to pay, freeing them from the higher interest rate
exposure and allowing them to issue replacement debt at the
lower market rate.
However, this means that they have to get their derivatives
distribution exactly right. Too little callable debt means the
profit spread gets squeezed and in 1998, when mortgage pre-
payments were rampant, Fannie's interest costs went up more
quickly than interest income and therefore, they had a net 4-
percent revenue increase from its retained mortgages.
That's not a good rate of return based on their history.
So the point is I think I understand this. There is a
subsidy. It is handed off to the corporations in the term of
benefits guaranteed by the taxpayer and it's all just ducky as
long as we remain profitable.
Get a business reversal, a Jimmy Carter 21-percent interest
rate, and hang onto your hat.
I thank the gentleman for yielding.
Ms. Velazquez. Ms. Velazquez is not here. I'm sorry.
Mr. Hinojosa.
Mr. Hinojosa. Yes, thank you.
Mr. Howard, can you please tell me what you estimate the
cost of Fannie Mae's restrictions to the housing market to be,
and how the CBO estimate would change if those restrictions
were factored in, in addition to your economic participation in
the larger housing market?
Mr. Howard. The same complications that present themselves
in attempting to quantify our benefits also present themselves
in attempting to quantify the restrictions that come with our
charter.
I could create a theoretical structure that would do that.
But it wouldn't be particularly reliable.
So, put another way, I don't know how to quantify the
restrictions. But you make an important point, that there are
restrictions. And our charter, which gives us benefits, comes
with obligations to meet certain housing goals, to direct all
of our activities into a single line of business.
It comes with restrictions, loan limits, risk-based capital
standards. All of those could be subject to some type of
quantification.
We have chosen not to do it because it is inherently
speculative. But that's the same basis on which I think one
needs to be careful in interpreting the results of a study such
as the CBO study.
It suffers the same challenge.
Mr. Hinojosa. Let me ask another question, and I'll direct
this one to Mr. Delk.
One of the main reasons for the creation of your
organization was to increase home ownership across the Nation
and to create a fair and accessible housing market for
minorities, minorities in search of purchasing homes.
With that said, how is your enterprise helping increase
home ownership and what have you done for the Hispanic
community?
Mr. Delk. Well, by the creation of Freddie Mac, what you
have done is create a uniform national mortgage market.
Whereas, prior to 1970, you saw various rates in various
sectors of the country, geographic areas of the country, in
large part depending upon the supply and demand of deposits.
So by creating a secondary market, whereby there is a
continuous flow of money into the country, what you have seen
is the elimination of these pockets where money was plentiful
and where there was a dearth of mortgage money.
So we've evened out that flow of mortgage funds across the
country.
While we have done that, we have in fact, as we stated
earlier in the oral statement, we've lowered the interest cost
for all mortgages that we could buy by 25 to 50 basis points,
which translates into a $10 to $15 billion savings to
homebuyers every year.
So by lowering the cost, we're making mortgages more
accessible.
Having said that, Freddie Mac is engaged in a number of
initiatives to expand the home ownership for Hispanic-
Americans.
We have recently announced an exciting initiative with the
National Council of LaRaza and the National Association of
Hispanic Real Estate Professionals to use an Internet-based
program to reach out and educate Latino families about credit
and home ownership through Latino real estate professionals.
And we believe this is an exciting initiative that will
bring education to these families and present them with
opportunities to, in fact, be part of the American dream.
Mr. Hinojosa. Fannie Mae mentioned that they had a $1
trillion initiative and they met it. Then they started a new $2
trillion initiative.
What size is yours?
Mr. Delk. Well, we don't have a commitment of that nature.
We, in fact, are subject to the same affordable housing goals
they are. But we haven't announced any initiatives that are
dollar-related.
Ours are more programmatic, including programs with various
communities and various sectors within the economy and
different groups.
Mr. Hinojosa. Well, is there another goal besides, say, a
dollar figure like Fannie Mae announced?
Mr. Delk. I'm sorry?
Mr. Hinojosa. I said, if you don't have a dollar amount in
this new announcement that you made, is there a goal in the
number of homes?
How can I----
Mr. Delk. How can you judge whether we're being successful?
Mr. Hinojosa. Yes, how can I judge how aggressive you're
going to be?
Mr. Delk. OK. Well, let me say, if you look over the last
half-decade, our numbers for minority purchases have increased
every year and therein lies our objective, is to continue that
increase of minority purchases.
Last year, as I indicated in the opening statement, our
minority purchases were 14 percent. And it's our objective to
keep that going up in order to bridge the gap that exists
between white ownership and minority ownership.
Mr. Hinojosa. Well, don't misunderstand my question. I
really want to be supportive of you and Fannie Mae. But I do
want you to get up on your tiptoes like they're doing and
constantly be moving those targets further up so that we can
close that gap amongst the minorities who want to own their own
home.
So I'd like to work with you on that.
Mr. Delk. We would like to work with you. We share your
objective of bridging that gap between white home ownership
rates and minorities and, again, would be willing to work with
you to ensure that, in fact, every year we're increasing our
purchases by minorities, generally, but Hispanic loans in
particular.
Chairman Baker. If I may, Mr. Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman.
Chairman Baker. Thank you, sir. I'd like to get Dr. Weldon
in before the break.
Dr. Weldon.
Mr. Weldon. Thank you, Mr. Chairman.
I'll direct my question to both witnesses. In criticizing
the CBO study, you note that CBO ignores the extent to which
the GSEs must bear the costs of increasing home ownership for
those with low incomes.
What is your estimate of the contribution of Fannie Mae and
Freddie Mac to increased home ownership for individuals with
low incomes?
Mr. Howard. Congressman, last year, over 49 percent of the
business Fannie Mae did, was to individuals with incomes at or
below the area median in which they live.
That was an all-time high that exceeded the statutory goal
that was set for us by the Department of Housing and Urban
Development.
It's something that we take very seriously. We have a whole
host of programs that are designed to achieve very high results
in that regard and we are proud of our record.
Mr. Weldon. You can't estimate the cost of actually doing
that, reaching out to low income?
Mr. Howard. It's hard to do that. We have not attempted a
dollar assessment.
Mr. Weldon. Mr. Delk, did you have anything to add to that
at all?
Mr. Delk. I do not. We have not gone back and looked at and
tried to quantify the benefits that were not included in the
CBO study.
Having said that, one of the criticisms of the study are
there are many, many benefits that we bring, in fact, that are
not taken into account by CBO.
Certainly one you've cited would be a good example.
Another would be, for example, the cost of originating a
mortgage which has substantially gone down over the last few
years because of a number of the innovations that have been
pioneered by Freddie Mac and Fannie Mae.
But these additional benefits to the consumer have not been
attempted to be quantified.
Mr. Weldon. There was a study done by FM Watch called
``Shuttered Dreams.''
Are either of you familiar with that?
Mr. Howard. I am now.
Mr. Weldon. Do you want to respond at all?
Mr. Howard. To what?
Mr. Weldon. Their conclusions in that study.
Mr. Howard. If you have a specific question about it, I
might be able to. But I'm not that familiar with it.
Mr. Weldon. Well, they made some conclusions about where
exactly the part of the subsidy that you pass through actually
goes.
Mr. Delk. Dr. Weldon, let me attempt to address that, if I
could, very briefly.
Mr. Weldon. Sure.
Mr. Delk. My first comment would be, consider the source
who issued that.
I think Freddie Mac and Fannie Mae have done more to
finance low-income and minority households than any financial
institutions in the country.
And I'm a little bit shocked that they would try to bring
this subject matter up, given this coalition consists of sub-
prime lenders and the mega-banks and the mortgage insurers.
Having said that, this paper is really a series of half-
truths and distortions.
For example, the whole premise of the paper is based on the
CBO study and it makes the assumption that the CBO study is
flawless.
I think we've demonstrated, and I think others have
demonstrated, that the CBO study is tremendously flawed and
that the benefits we receive from the Federal charter that we
have, in fact, are dwarfed by the benefits that go to
consumers.
And so, I think the original premise that the CBO study is
correct, the whole study put out by FM Watch falls on its face.
if that were not the case, it still would be a flawed study
because it uses artificial and contrived methodologies to get
to its desired results.
For example, they totally take out the benefit that
refinancing mortgages to minorities in fact, and low-income
people, would produce.
And so, they're really trying to crop the picture to, in
fact, produce a subset of purchases and activities to, in fact,
exaggerate the benefit we bring to minority and low-income
borrowers.
Again, I would say that our record is outstanding on this
and I would hope that during the second panel, you would take
the opportunity to ask the witness from FM Watch what, in fact,
the members of that organization are doing to aid low-income
families and minorities, as well as what they're doing to
combat predatory lending.
I think you'll be surprised at the answer.
Mr. Howard. I would add one thing to that. And that's that
my quick read of the study suggests that these are contrived
and made-up numbers.
What we report annually or more frequently are real numbers
in detail to real regulators on our service to targeted
communities. And if you want to know what we are doing, look at
the real data, not data made up and misanalyzed by a lobbying
group.
Mr. Weldon. I believe my time is expired. Thank you, Mr.
Chairman.
Chairman Baker. Thank you, Doctor.
Mr. Ford and Mr. Royce, you both have waived?
Mr. Ford. I just want to make sure that I can submit my
statement for the record, Mr. Chairman, if you don't mind.
Mr. Baker. Absolutely.
Mr. Ford. I want to raise the question that Mr. Delk raised
regarding what are the FM Watch members doing to increase home
ownership opportunities specifically as it relates to some of
the communities in which Fannie Mae and Freddie Mac are both
heavily involved, including mine in Memphis.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Ford. I'd like to support
that request in that the Freddie Mac information statement of
March 30, 2001, page 18, for the record, states that those
conforming loans above 95 percent of LTV--which means poor
people buying houses--the percentage of loans in the portfolio
represented is 4 percent, which means for folks who are paying,
who have an LTV below 70 percent, meaning folks who are putting
down $10,000 to $20,000, you would be interested to know that
in the year 2000, constituted 65 percent of the agency's
portfolio.
So I appreciate the gentleman bringing that issueup.
Mr. Delk. Mr. Chairman, can I make one point?
Chairman Baker. Certainly.
Mr. Delk. That statistic is in our circular. I will say,
though, that that particular statement ignores seasoning of the
portfolio.
Chairman Baker. Certainly.
Mr. Delk. I just want to make sure that the record is
clear, if you don't mind.
Chairman Baker. I think what we'll do, if you don't mind,
is we'll explore this down the road and we'll have an exchange
on the details to fully understand it, without prejudice.
We will give you the opportunity.
I want to make one other statement because I don't want to
detain you. We have three votes in a row.
Mr. Ford.
Mr. Ford. Mr. Chairman, I think it's only fair that you let
him make the statement for the record.
Chairman Baker. I'd like, if I can, Mr. Ford, to get it in
writing. I've had discussions with folks before in the past
that haven't proved fruitful, and I think we need to put this
on a correspondence basis.
I'll follow this up, and I'll share it with you.
Mr. Ford. I mean, you put it on the record, these numbers.
And if he has something that is different than that that speaks
to something more current----
Chairman Baker. Mr. Ford, I'd point out, this is the
Freddie Mac information statement. This is not the CBO, the
irresponsible party. This is the company's own sheet.
Now, if there's explanations to help us better understand
what this data represents, that should be given to us in
writing and that's what I'm asking the gentleman to provide.
Is that fair?
Mr. Ford. Fair enough, Mr. Chairman.
Chairman Baker. Thank you, sir. I would make one other
comment because I think I know your opinion on the matter. We
are really down short of time. I don't want to hold you up for
the votes. We'll go on to the second panel. But I wish to make
you aware that I do intend to put on the record Mr. Crippen's
response as I requested to your testimony and make that
available to you.
And in that response, he responded to my question on the
matter of increasing competition among GSEs would have on the
subsidy pass-throughs.
CBO's analysis, which I understand you will fault,
attributes the GSEs' ability to retain a portion of the subsidy
to the fact that their GSE status limits competition from other
financial institutions in the conforming mortgage market.
If the number of companies granted a GSE charter were
increased, the secondary market would become more competitive
resulting in a larger portion of the subsidy being passed
through to borrowers.
That is a very interesting idea which I do intend to fully
explore and wanted to put it in the record for both
enterprises' awareness, and then would welcome your comments at
a later time, and we'll provide a copy of this letter to you,
as well as fleshing out in more detail what that means.
My assumption is that you don't want additional
competition. My assumption is that creating another enterprise
with the same standards and responsibilities, capital adequacy,
same regulator, somebody who plays by the same rules, is
something else that we perhaps should explore.
I don't want to hold you. You're welcome to stay if you
choose to stay and respond. We're going to go run and vote. We
will put the Committee temporarily in recess, and I leave it to
you gentlemen. If you'd like to stay, you're welcome. If you
choose to leave, we'll go on to the second panel.
Is that fair?
Mr. Howard. Yes.
Chairman Baker. Thank you very much. We'll stand in recess.
[Recess.]
Chairman Baker. We're back. If the witnesses and the
audience would take their seats. Members are on their way to
return.
I'd like to reconvene our hearing.
Let me welcome each of our panelists here this afternoon
for our second panel. Members will be returning from the floor
momentarily.
We'll proceed in what is our customary order, left to
right, and welcome today our first witness on the panel, Mr.
Richard Carnell, Associate Professor of Law, Fordham University
School of Law.
We'd certainly welcome you back from your prior capacity in
the former Administration. We enjoyed working with you then and
it's a pleasure to have you back, sir.
STATEMENT OF RICHARD S. CARNELL, ASSOCIATE PROFESSOR OF LAW,
FORDHAM UNIVERSITY SCHOOL OF LAW
Mr. Carnell. Thank you, Mr. Chairman.
I'm pleased to have this opportunity to discuss Fannie Mae,
Freddie Mac, and H.R. 1409.
I'll begin by briefly discussing some key provisions of the
bill and I'll then touch on four broader themes that I develop
more fully in my written statement.
These themes are:
First, Fannie and Freddie play a double-game over whether
they do or don't have a Federal guarantee;
Second, Fannie and Freddie falsely argue that banks get a
much bigger Federal subsidy than Fannie and Freddie;
Third, people often say Fannie and Freddie are too-big-to-
fail. I'll explain why that doesn't have to be true; and
Fourth, regulators can act now to correct defects in the
regulation of Fannie and Freddie.
Turning to the bill itself I believe the bill would take
important steps to remedy weaknesses in current law.
Right now, OFHEO, a bureau of HUD, is responsible for
keeping Fannie and Freddie safe and sound. The bill would
abolish OFHEO and have the Federal Reserve Board regulate
Fannie and Freddie.
I support moving GSE safety and soundness regulation out of
HUD. Having OFHEO part of HUD creates two types of problems.
First, HUD lacks the will and the institutional credibility
to stand up to Fannie and Freddie.
Second, and more subtly, having OFHEO in HUD encourages the
White House in any Administration to regard the OFHEO
director's job as a housing appointment and not a safety and
soundness appointment.
Nonetheless, I have several concerns about having the Fed
regulate GSEs. Regulating GSEs could conflict with the Fed's
responsibility for setting interest rates, since so much of the
GSEs' business involves managing the risk of changes in
interest rates.
Regulating GSEs could also conflict with the Fed's role in
making emergency loans to banks through the discount window. In
particular, it could be seen as giving Fannie and Freddie a
fast track to a Fed bail-out if they ever got into trouble.
I recommending keeping GSE safety and soundness regulation
in OFHEO, but making OFHEO an autonomous bureau of the Treasury
Department.
Another key provision of the bill would require Fannie and
Freddie to comply with the public disclosure requirements of
the securities laws, the same requirements as apply to all
other large corporations.
This provision makes good sense. Fannie and Freddie say
they already comply with those disclosure requirements. But if
that's true, why do they object to having the disclosure
requirements apply?
It's not enough for Fannie and Freddie to say they comply
with the securities laws. All large corporations say that, but
the SEC still finds violations.
Investors in Fannie and Freddie deserve the protection of
the disclosure requirements.
Finally, the bill would rightly correct some glaring
defects in the safety and soundness statutes governing Fannie
and Freddie, statutes that certainly are not functionally
equivalent to those governing FDIC-insured depository
institutions.
The bill would strengthen regulators' authority to set
capital standards, take prompt corrective action, and take
enforcement action.
It would also give regulators the authority they need to
deal with a GSE in an orderly way if it became insolvent or
critically under-capitalized. This would fill a dangerous gap
in current law.
Now to the first of my four broader themes.
Fannie and Freddie play an extraordinarily successful
double-game in dealing with their relationship to the Federal
Government. The double-game has two parts.
Fannie and Freddie emphatically deny that they have any
formal, legally enforceable Government backing. So far, so
good. But they do this in a way that leaves the impression that
they have no Government backing at all. And yet, they then work
to reinforce the market perception that the Government
implicitly backs them.
Here's one example from Fannie Mae.
Fannie Mae emphasizes, quote, ``the implied Government
backing of Fannie Mae.'' That's Fannie's own words. And they
then go on to say that that backing makes Fannie Mae
securities, quote, ``near-proxies for Treasuries.''
Now think about that. Fannie says its implied Government
backing is so strong, that its securities are almost as good as
U.S. Treasury securities.
This double-game lets the GSEs have it both ways. It's sort
of like telling Congress and the press--``Don't worry, the
Government is not on the hook,'' and then turning around and
telling Wall Street--``Don't worry, the Government really is on
the hook.''
It's amazing how they get away with this year after year,
but they do.
My second broad theme involves how Fannie and Freddie
mistakenly argue that the Government gives FDIC-insured banks
more generous subsidies than it gives Fannie and Freddie.
Contrary to what you might expect, Fannie and Freddie get a
greater net subsidy from their Government sponsorship than
banks get from Federal deposit insurance. And there are six
reasons for this which I detail in my written statement.
First, the market perception of implicit Government
backing applies to all GSE obligations. It isn't limited to
deposits and there is no $100,000 limit like there is with
deposit insurance.
Second, if Fannie and Freddie were to become bankrupt,
there's no legal mechanism to handle their bankruptcy, a defect
that your bill would correct, Mr. Chairman.
The absence of this legal mechanism encourages the GSEs'
creditors to believe that the Government would have to bail
them out.
Third, unlike banks, Fannie and Freddie don't have to make
payments into an insurance fund. They're not even responsible
for each other. So if there were a Government bail-out, the
taxpayers would be left holding the bag.
Fourth, Fannie and Freddie have their own special statutes.
They're often exempt from having to comply with the same rules
as other businesses.
Fifth, Fannie and Freddie get such a sweet deal from the
Government, that it's hard for anyone except another GSE to
compete with them effectively. This lack of effective
competition lets Fannie and Freddie keep a large part of their
Government benefits, instead of being forced to pass those
benefits through to their customers.
Sixth, Fannie and Freddie do not have to provide public
benefits that impose significant costs on their shareholders.
Considering the great value of the benefits Fannie and
Freddie receive from the Government, they should be doing far
more to increase home ownership at the margins, such as by the
lower-middle class, the working poor, and members of
historically disadvantaged minority groups.
My third broad theme involved systemic risk.
Fannie and Freddie are often called too-big-to-fail,
meaning that if they ever got into trouble, the Government
would have to bail them out to avoid unleashing systemic risk
that would harm the financial system and the economy.
But systemic risk is not inevitable. It results from human
decisions. And if investors expect the Government to rescue
troubled GSEs, investors will tend to let GSEs take greater
risks. This in turn will increase the chances of the GSEs
getting into trouble.
But the Government, by acting in a timely way, can correct
too-big-to-fail expectations. Congress did just that in the
FDIC Improvement Act of 1991, which curtailed too-big-to-fail
treatment of banks.
It worked.
My fourth and final theme involves opportunities for
administrative action. Regulators can and should act now to
improve the regulation of Fannie and Freddie. I suggest six
ways they can do so without legislation.
First, bank regulators should obtain accurate data on FDIC-
insured banks' investments in GSE securities.
Second, if banks have excessive concentrations of GSE risk,
bank regulators should limit and correct those concentrations.
And let me emphasize--bank regulators can take care of both
of those points right now. And in my opinion, they have no
business running to this Committee and saying, give us more
authority.
They have the authority they need right now.
Third, the SEC should end the mislabelling of mutual funds
as, quote, ``Government,'' or, quote, ``U.S. Treasury funds
when they actually contain large amounts of GSE securities.''
Fourth, the Fed should review the current safeguards on the
GSEs overdrawing their accounts at the Fed.
Fifth, HUD should tighten its scrutiny of the GSEs'
activities and mission.
Mr. Chairman, you've taken on an admirable but unenviable
challenge, seeking to fix problems before the crisis hits and
before the scandal breaks.
Your bill would make significant improvements in the
regulation of Fannie and Freddie. More broadly, the bill and
this hearing are important in continuing to focus the spotlight
on the GSEs, their valuable Government benefits, and the
question whether they give the American people a return
commensurate with those benefits.
Thank you, and I'll be glad to respond to questions at the
appropriate time.
[The prepared statement of Richard S. Carnell can be found
on page 127 in the appendix.]
Chairman Baker. Thank you. I was going to interrupt your
remarks and ask you to wind up a bit. But you got to the really
good part and I wanted to make sure you got that in.
[Laughter.]
If you can, and I know that each of you has prepared
testimony, we will have other Members participating. We're
going to give flexibility here. If you need to go over 5
minutes, that's fine. But as best you can, try to keep it
within the constraints.
Thank you.
Our next witness is Mr. Martin Edwards, Jr., Partner,
Wilkinson & Snowden, Incorporated, who appears today here on
behalf of the National Association of Realtors.
Welcome, Mr. Edwards.
STATEMENT OF MARTIN EDWARDS, JR., PARTNER, WILKINSON & SNOWDEN,
INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS
Mr. Edwards. Thank you, Mr. Baker.
Good afternoon, Members of the subcommittee. My name is
Martin Edwards from Memphis, and I am President-elect of the
National Association of Realtors.
As Chairman Baker mentioned, I'm a partner in Wilkinson &
Snowden, a commercial industrial real estate firm in Memphis.
I'm taught real estate finance for a number of years at the
University of Memphis, the National Association of Realtors,
and the Mortgage Bankers Association.
Let me also introduce to you America's realtors, the nearly
780,000 members of the National Association of Realtors.
For the most part, realtors are small, independent
contractors, successful to the extent of their own initiative.
Nearly 77 percent of realtors work in firms with fewer than ten
employees.
Together, we are the largest group of business
entrepreneurs in America; realtors are extremely proud of our
role in helping nearly 72 million people buy homes.
Almost 68 percent of Americans own homes, as you've heard
today, with the highest home ownership rate in the Nation's
history.
We are very proud that the Nation's housing industry is one
of the only sectors of the economy that is standing tall as the
U.S. economy struggles. The housing sector contributes 14
percent of gross domestic product.
For nearly 30 years, Fannie Mae, Freddie Mac, and the
Federal Home Loan Banks have used benefits of the Federal
charters that Congress granted them to help build a housing
finance system that is the envy of the world.
Today's home ownership costs are lower and access to
mortgage credit, even for borrowers with blemished credit, is
easier and more equitable than ever before, due in no small
part to the mortgage investment activities of Freddie Mac and
Fannie Mae.
Realtors across this country know from painful experience
that booming mortgage lending and real estate cycles inevitably
will slow. But Fannie Mae and Freddie Mac, unlike primary
market lenders, remain in the the markets during downturns.
In exchange for the advantages inherent in their Federal
charters, the GSEs fulfill their charter obligations to benefit
millions of America's homeowners and thousands of lenders.
Despite realtors' general support of the GSEs, we do have
our differences. We disagreed when the GSEs opposed increasing
the FHA mortgage limits 2 years ago. In the future, it is
likely that we will clash again on this and other issues.
We've also had differences with the GSEs' disposition
activities, but we are hopeful we can resolve these.
Realtors firmly believe that GSE regulatory reform should
not be a vehicle to alter significantly the critical roles that
Fannie and Freddie play in the American system of home
ownership.
Transferring significant regulatory authority from HUD and
OFHEO to the Federal Reserve, as proposed by H.R. 1409, would
effectively hamstring the GSEs. It would reduce their
effectiveness as mortgage investors, make them more vulnerable
to attempts by the mega-banks to control the secondary market,
and limit customers' financial choices and home ownership
opportunities.
Mr. Chairman, the Federal Reserve has little experience
regulating housing and real estate-related entities. We believe
the central bank may have a natural conflict of interest in
that the Fed's primary mission is to control the Nation's money
supply by regulating the commercial banking system,
particularly the bank holding companies, which are increasingly
competing against the GSEs in the secondary mortgage market.
Furthermore, the Federal Reserve has generated its own
share of controversy by raising the prospect of classifying
real estate brokerage and property management as a financial
activity under the Gramm-Leach-Bliley Act.
Realtors urge this subcommittee to consider the following
questions before embarking on sweeping changes that affect the
GSEs:
What would housing finance be like without strong GSEs?
Would this Nation be as well housed? Would as many families
have access to the American dream? Would housing be as strong a
sector of the economy as it is today?
Chairman Baker, we share your concerns about improving the
regulatory environment. However, we believe that the current
GSE regulatory structure best serves the Nation's interests in
housing.
We believe that the secondary market system works to the
benefit of the mortgage lending industry, homeowners, and the
Nation's housing policy.
Realtors believe that without strong and vital housing
GSEs, the Nation would not be as well housed, nor would the
dream of American home ownership be reached by as many American
families as it is today.
Let me just close by making a comment regarding affordable
housing and housing parity.
The National Association of Realtors, in partnership with
five minority real estate professional associations, have
embarked on a major program to promote parity among white and
minority homeowners.
The Home Ownership Participation for Everyone, or HOPE
awards, will recognize unsung heroes across the country who are
helping to break down the barriers of minority home ownership.
As we go forward with this and other projects, we want to
make sure that the mortgage market remains accessible to
minorities. Two of the very strongest voices for minority home
ownership have been Freddie Mac and Fannie Mae.
And I thank you for the opportunity to participate,
Chairman Baker, and will stand for your questions.
[The prepared statement of Martin Edwards Jr. can be found
on page 148 in the appendix.]
Chairman Baker. Thank you, Mr. Edwards.
Our next witness is Mr. James C. Miller, III, the Director
of LECG Economics-Finance.
Welcome, Mr. Miller.
STATEMENT OF JAMES C. MILLER III, DIRECTOR, LECG ECONOMICS-
FINANCE
Mr. Miller. Thank you, Mr. Chairman, congressmen. Thank you
for holding this hearing and thank you for inviting me to
participate.
As you probably know, I served as President Reagan's budget
director, and before that, chairman of the Federal Trade
Commission.
As you may not know, I was trained as an academic and have
published over a hundred articles in journals and such, and
have published nine books.
I have done some work in the GSEs, stretching back almost a
decade, and have authored a series of reports over the past
year or so.
In my experience, the decisions made by Government
affecting private institutions or commercial institutions or
market-based institutions tend to be more difficult than the
decisions those institutions make themselves.
Why?
Because sometimes the decision rules are unclear. Sometimes
the information tends to be wholly inadequate for making an
informed decision.
Often, the incentives to make the right decision, the
correct decision, aren't the best.
Now this doesn't mean that you shouldn't make reforms. But
what I think it does is urge caution when you're going to
restructure an industry that's working palpably well because
there may be unintended consequences.
So I think it's important that you do have such hearings
and look at these things with great care and in great detail.
Two issues before this Committee, I understand, from your
letter, Mr. Chairman.
One is the CBO report recently issued, and the other is
H.R. 1409. Let me comment on them seriatim.
In anticipation of the issuance of the new report, back
last fall, Freddie Mac asked Dr. James Pearce, an economist at
Welch Consulting in College Station, Texas, and me, to evaluate
the 1996 CBO report and comment on it. And we did.
And they asked us also to provide our own assessment of the
GSEs, the benefits and costs.
Briefly, we found that the 1996 report systematically
overstated the benefits to the GSEs--they call them subsidies--
and understated the benefits to consumers.
When we made technical corrections in the CBO numbers
because of some mistakes we believe they made, it wiped out
this difference. The characterization that the GSEs are a,
quote: ``spongy conduit,'' disappears.
Now I have a copy of the report that we submitted, and I
have submitted that for the record and I would appreciate it,
Mr. Chairman, if you would include that with my prepared
statement and that report as an attachment.
Chairman Baker. Without objection.
[The information referred to can be found on page 163 in
the appendix.]
Mr. Miller. We concluded independently that the benefits to
consumers ranged between $8.4 billion and $23.5 billion
annually, and that the benefits to the GSEs ranged between $2.3
billion $7 billion annually.
Now we did get an advanced copy of the 2001 CBO draft, and
it's a draft that we guarded very carefully and it's confidence
that we respected, and we responded to it.
We were very pleased that the CBO made certain changes in
their methodology, certain corrections. And I think this
improved the quality of their analysis.
However, they compounded their mistakes in some areas, in
our judgment. They also changed the methodology for counting
the ``subsidy,'' from a flow method to a capitalized method, so
they basically scored the subsidy when it happened, when the
transaction took place, rather than over a period of time. And
for reasons that I go into in the report, I think that's
inappropriate.
But it seems to me the major problem with the CBO
methodology is very simple.
In the minds of the CBO, in the model they adopt, and in
the rhetoric that has been discussed so often about this, it's
as if you, Mr. Chairman, and other Members of Congress lay on a
subsidy, whether it's implicit or explicit, lay on a subsidy to
the GSEs which they then parcel out to consumers, and they keep
back a service charge.
And CBO says that that service charge is one dollar for
every three they get.
This is totally incorrect. The institutional arrangement
that you have put in place generates far more benefits than the
funding advantage that is CBOs measure of the degree of the so-
called subsidy.
I put the word ``subsidy'' in quotes every time I use it. I
think Mr. Barr raised that question. I think that is an
inappropriate way of looking at it.
Suppose that there were property rights in some area in the
economy that were not defined and not enforced. And you, Mr.
Chairman, and other Members of Congress were to pass a law
identifying, assigning property rights and enforcing the
property rights.
Well, we know that commerce then would flourish and the
benefits generated from that would be far in excess of any kind
of imputation of some subsidy to the firms, because you had put
that law in place.
So it's the whole institutional arrangement that has to be
analyzed. And that includes all of the effects that the GSEs
have on the mortgage market in bringing about additional
competition and lowering mortgage rates all across the board.
That was done in a limited way by CBO, but not in a
thorough way.
Let me comment briefly on H.R. 1409.
I haven't gone through the regulatory morass facing the
GSEs in great detail. It's very complicated, as you know. You
know this far better than I do.
But I've had a lot of experience in regulation. I've
written books about regulation. And if I understand your bill,
and I read the bill at one time and one of your staff members
was kind enough to send me a section by section, what it says
is you're going to place in the hands of the Federal Reserve
Board the authority to be the regulatory czar for the GSEs.
They cannot engage in additional kinds of activities
without board approval. Under certain circumstances, the board
could even fire members of the board of directors, can cap pay,
can do a number of other things.
They have to make a finding that it's in the public
interest. This is old public convenience and necessity
regulation of the sort that we threw out, you threw out, with
respect to the Interstate Commerce Commission, you threw out
with respect to the Civil Aeronautics Board, and others.
Surely, one thing we've learned is this old economic
regulation, whether it's maximum interest rates in financial
institutions or it's regulation of transportation: it just
doesn't work.
And surely, there would seem to be more cost-effective,
less intrusive, more market-based ways of accomplishing the
goals I think you want to achieve, and I want to achieve. And
that is assuring safety and soundness.
So, to sum up, I think any public policy initiative based
on CBO's report today would be an error. And second, I think
that H.R. 1409 is premature, at best. I would strongly urge you
wait and see what OFHEO is going to come up with in their risk-
based capital standards and if they get them right.
Thank you, Mr. Chairman. I'd be glad to respond to
questions.
[The prepared statement of James C. Miller III can be found
on page 157 in the appendix.]
Chairman Baker. Thank you, Mr. Miller.
Our next witness is Ms. Leslie Paige, Vice President,
Citizens Against Government Waste, appearing today on behalf of
the Homeowners Education Coalition. Welcome, Ms. Paige.
STATEMENT OF LESLIE K. PAIGE, VICE PRESIDENT, CITIZENS AGAINST
GOVERNMENT WASTE, ON BEHALF OF THE HOMEOWNERS EDUCATION
COALITION
Ms. Paige. Thank you, Mr. Chairman, Members of the
subcommittee. Thank you for the opportunity to testify today.
My name is Leslie Paige. I'm the Vice President at Citizens
Against Government Waste. We are a non-partisan, non-profit
taxpayer watchdog group with more than one million members and
supporters nationwide.
I'm also here today on behalf of Homeowners Education
Coalition, which is a small ad hoc coalition of taxpayer
groups, including the National Taxpayers Union, the Competitive
Enterprise Institute, 60 Plus, the Free Congress Foundation,
Capital Watch, the Small Business Survival Committee, and the
American Association of Small Property Owners.
Home EC's mission in this issue is to raise questions about
the Nation's largest housing GSEs, and to participate in this
public dialogue about their activities and the impact of those
activities on taxpayers and the economy as a whole.
The time to address the concerns of taxpayers regarding the
GSEs is not at some future date when the GSEs might be facing a
financial crisis.
Been there, done that.
We experienced exactly that same type of scenario in the
1980s with the savings and loan crisis, which cost taxpayers
hundreds of billions of dollars. And that bail-out basically
occurred because Government officials created an oversubsidized
environment and then were ill-prepared to deal with the
unforeseen consequences of its actions.
That sounds rather uncomfortably familiar to us.
With the release of the CBO update, it's no longer tenable
in our opinion to continue to argue that there is no subsidy.
And it's a little surreal, I have to say, with all due respect
to the gentleman sitting to my right, to be arguing about what
a subsidy is. We all know that a subsidy is the value of a
benefit conferred by the Government, in this case.
And I appreciate, by the way, I wanted to tell you that I
appreciated, Mr. Chairman, your earlier description of that.
There are as many ways of handing out Government benefits
as there are Members of Congress who have an idea of how to do
it. But at the other end of that subsidy is a taxpayer waiting
to bail it out if it goes bad.
And the GSEs continue to try and tell us that there is no
subsidy and it's tying them in rhetorical knots. They argue
simultaneously that there is no subsidy, and then they go on to
say that this non-existent subsidy isn't worth as much as the
CBO says it is.
And that, furthermore, the benefits they convey far
outweigh the value of this non-existent subsidy.
There are subsidies. The value is substantial. And 37
percent of the subsidies are soaked up by the GSEs, according
to the CBO.
It's clear that they've converted their charters into very
highly efficient profit-delivery systems. And we have nothing
against the pursuit of profits, Mr. Chairman. But when this
pursuit could result in another taxpayer bail-out of an out-of-
control financial institution, we tend to take notice.
There are very real reasons to believe that Government
would bail-out the GSEs, in spite of official disclaimers to
the contrary. Actions speak louder than disclaimers.
The Federal Government has stepped in to bail out the farm
credit system and Fannie Mae itself was afforded regulatory
forbearance in the 1980s when it was in trouble.
This is not just an academic exercise. The GSEs, in fact,
are too-big-to-fail and as such, they merit the scrutiny of
this Congress.
Together, they either own or guarantee $2.4 trillion in
mortgages and mortgage-backed securities. By 2003, they will
have more debt and guarantees outstanding than the U.S.
Treasury debt held by the public.
But more importantly, these mortgage giants now control 71
percent of the conventional conforming mortgage market,
according to a recent analysis by the American Enterprise
Institute, which I'd like to attach for the record. They will
own or guarantee 91 percent of that market within 3 years at
their current growth rate.
They are purchasing more and more of their own mortgage-
backed securities, which is an inherently riskier practice and
which has been described by the Congressional Research Service
as the repatriation of debt with no discernible mission-related
purpose.
In fact, we would submit that profit is the purpose and
that motive is also the driving force behind their purchase of
home equity loans, even though 70 percent of home equity loans
are used for consumer purchases.
Fannie Mae is securitizing Home Depot loans, loans which
will be used for remodeling or consumer purchases.
We'd like to know how this kind of financial activity gets
low-income people into affordable housing. There are
indications that they would like to get an increase in the
conforming loan limit. That limit is already too high, in our
opinion.
Those who can afford a mortgage of $275,000 are not low-
income borrowers. Congress should block any attempts to raise
the conforming loan limits.
The GSEs should not be subsidizing consumer loans, eyeing
the jumbo market, getting into retail investment banking, or
dabbling in e-commerce at a time when they are lagging in their
mission to provide low-income people with affordable housing.
The affordable housing goal, by the way, has become nothing
more than a politically convenient fig leaf, in our opinion.
What is or is not a secondary market is very vague. We
believe that mission creep is a problem and it's an inevitable
problem for several reasons.
The GSE charters are vague. Subsequent legislation hasn't
done enough to clarify what the parameters are of the secondary
mortgage market or what is an appropriate activity for a GSE to
be engaging in.
As a result, they tend to just interpret their charters as
more of a set of a loose guidelines where anything that make
them a hefty profit can be construed as helping low-income
people.
Strong supervision of the GSEs is a very advisable interim
measure. But it is no substitute for market discipline, true
market discipline.
The optimum, long-term reform that we favor, and that is
Citizens Against Government Waste, as well as the other members
of our group, is full privatization of the GSEs. Taxpayers no
longer need to subsidize mature businesses engaging in normal
business practices which could achieve success on their own.
Subsidy programs, whether they are implicit or explicit,
they breed inefficiency, they breed waste, and they breed
abuse. And they tend to hang on long after their mission has
been accomplished and they put taxpayers at increased risk.
We've seen this in a lot of other Government programs, from
agriculture to transportation to energy.
If Congress wants to promote home ownership among low-
income people, which I believe is the intent of the charters,
the real question they should be asking is, is this the most
efficient way to do that?
The fact is that what we have now is that taxpayers are
subsidizing mortgage debt and increasingly, consumer debt, and
they are boosting the profits of the GSEs themselves.
We believe that this is the least efficient, least
transparent, and least accountable subsidy delivery system.
On behalf of our one million members and supporters, we
thank you, Mr. Chairman, for the opportunity to speak with you
today and we are available to answer any of your questions.
[The prepared statement of Leslie K. Paige can be found on
page 211 in the appendix.]
Chairman Baker. Thank you, Ms. Paige.
Our next witness is Mr. Edwin Rothschild, Principal,
Podesta Mattoon, here today on behalf of FM Watch.
Mr. Rothschild.
STATEMENT OF EDWIN ROTHSCHILD, PRINCIPAL, PODESTA MATTOON, ON
BEHALF OF FM WATCH
Mr. Rothschild. Thank you, Mr. Chairman, Members of the
subcommittee.
I am the Chair of the FM Watch affordable housing task
force and I'm accompanied here today by my colleagues on that
task force, Mr. David Tornquist, who has the distinction of
having worked for both Mr. Miller and Mr. Raines, as a policy
and budget analyst at OMB for 15 years, and Lottie Shackelford,
who is the former Mayor of Little Rock, Arkansas and with the
firm of Global USA, and is the current Deputy Chair of the
Democratic National Committee and has a long interest in
housing issues.
I'd like to, if I can, Mr. Chairman, just go through the
study that was referred to in the earlier panel that we have
just completed, called ``Shuttered Dreams,'' and go through how
we see the subsidy being allocated----
Chairman Baker. If you would, that's fine. But pull that
mike a little closer because if you turn away, we lose you.
Mr. Rothschild. All right. Is that better, Mr. Chairman?
Chairman Baker. Yes.
Mr. Rothschild. OK. We have taken a look at the subsidy
using the latest CBO study. We began this study prior to it
using the 1996 study as a basis for that. But when you, Mr.
Chairman, asked for an update, we decided to wait and issue our
study with the most recent data.
The rest of the data that underlies this report is the data
that the GSEs report, the GSE public use database that the GSes
report to HUD, plus the HMDA database.
So all of this is the official----
Mr. Bentsen. Mr. Rothschild, are these data in your
appendices of your statement or not?
Mr. Rothschild. Yes, they are in the statement.
Mr. Bentsen. Because I can't read that far away, but others
may be able to.
Mr. Rothschild. OK. Well, Figure 1 would be on page 3 of my
statement.
And if you look at that, I'm happy to go through what it
details.
First, as the CBO calculated, 37 percent of the $10.6
billion subsidy is retained by stockholders. So that's the far
right quadrant.
Then you have 29 percent of the subsidy that's passed
through is in refinance loans. So basically, you have 66
percent of the subsidy not going to the home purchase market,
which is 30 percent of the loans. And there's 4 percent in the
other category which includes non-owner-occupied and multi-
family homebuyers.
So that's the general distribution of the subsidy by those
specific categories.
The next figure I'd like to refer to is Figure 2, where we
looked at it on the basis of income distribution, the amount of
the loans, the value of the loans going to home purchases.
Again, we're just looking at the home purchase category,
the amount of the subsidy that actually goes to help put people
into homes. Refinances are very, very useful because they help
people pay less. But refinances don't put people into homes.
So you have, looking at the median household income of
$40,000, that's half the people in the country. Less than 5
percent of the subsidy goes to those homebuyers.
We're talking about $500 million out of the $10.6 billion,
while $3.9 billion goes to stockholders.
Purchasers above the median income receive 26 percent of
that subsidy.
The next figure on page 5, Figure 3, we again divided the
subsidy that goes to benefit home purchases by race, again
using data submitted to HUD, HMDA data. And you can see there
in terms of minority benefit, African-Americans, Hispanics,
Asians, all received approximately 1 percent of the subsidy.
That's about $100 million each, while the stockholders got
$3.9 billion.
One other category, unknown race, that's a problem with the
data. There are reports that don't contain that information so
we don't know the racial category of that grouping.
The last figure that we have here, we have more tables in
our full report, but I think these summarize it adequately, you
see the percent of the U.S. population. And this again refers
to that quadrant of home purchases. And we divided that up to
look at it in terms of percentage of the population versus the
percentage of people who got the subsidy.
And you can see that, with respect to African-Americans and
Hispanics in particular, in terms of the percentage of the
population, a very small amount, much less than their
percentage of the population went to those groups.
Now one thing we need to point out, and I think it has been
mentioned from time to time, is that FM Watch is not coming up
with this information.
The fact is that Fannie Mae and Freddie Mac are not
fulfilling their mission of assisting and supporting low-income
and minority, particularly African-American and Hispanic,
homebuyers.
They have lagged the market. The private sector has done a
far better job in supporting minority home purchases and low-
income home purchases than Fannie Mae and Freddie Mac. That's
been reported by HUD, by GAO, by the National Community
Reinvestment Coalition and others.
I have a report here that was done by a very well respected
housing analyst. It was done by the Public Justice Center, by
Calvin Bradford, who looked at Baltimore, who said that the
GSEs are lagging the market. They are not doing their job.
They could be. And our argument is that the 37 percent
that's being retained by the stockholders of Fannie Mae and
Freddie Mac, that portion could be used so that the
institutions, the GSEs, could do more for the very groups that
they were chartered by Congress to do. And the usual argument,
for example, one of the suggestions that's been made by housing
groups is that Fannie Mae and Freddie Mac could be buying more
CRA loans from banks that make them, the banks that subsidize
those loans with other loans.
But Fannie Mae, and we point out a statement by Fannie
Mae's chairman, Mr. Raines, last year, in a question and answer
session when he was asked by a housing advocate from Delaware
whether or not he would use the resources of Fannie Mae to buy
those loans, he basically said, no, we choose not to do that.
We choose not to subsidize what the banks have subsidized.
But they could. And I want to just reinforce what the
Congress chartered them to do. And this is ``to provide ongoing
assistance to the secondary market for residential mortgages,
including activities relating to mortgages and housing for low-
and moderate-income families involving a reasonable economic
return that may be less than the return earned on other
activities by increasing liquidity of mortgage investments and
improving the distribution of investment capital available for
home mortgage financing.''
In other words, they could earn less.
Finally, I would like to point out that having listened to
the testimony of the two witnesses from Fannie Mae and Freddie
Mac, I am astounded because I think every time someone comes
out with a report, no matter who it is, that is critical of
these institutions, it's like they never met a report that they
didn't like unless it was written by themselves.
It doesn't matter whether it's the CBO, whether it's HUD,
whether it's the Fed, whether you, Mr. Chairman, hold a hearing
on a particular date.
All of it seems to be something that they can't possibly
have done or agree with.
And I would like to put into the record something that
happened last year after The Washington Post reported on HUD's
finding that Fannie Mae and Freddie Mac were lagging in loans
to African-Americans.
Fannie Mae circulated charts here on Capitol Hill,
particularly to the Congressional Black Caucus, showing how
they were not lagging the market. That was one that they did in
May, 2000.
In February, 2001, they showed, in fact, that they were
doing better than the market in some years, from 1996 to 1999.
But I have also attached HUD's data, where Fannie Mae has
continually decreased its support of homebuyers, African-
American homebuyers. Freddie Mac has about stayed the same, a
slight increase. But the market is much greater.
In other words, the private sector, when it comes to
originating loans, is doing far better.
Mr. Chairman, I see my time is up. It was up before. So
I'll stop and be happy to answer questions.
[The prepared statement of Edwin Rothschild can be found on
page 220 in the appendix.]
Chairman Baker. Thank you, Mr. Rothschild.
Mr. Miller, let me start with you. In meeting with the GSEs
last year, we reached an agreement. Whether they call it
voluntary or I call it involuntary, we got together. And as a
consequence of that, we announced that we would like to do the
regulatory piece, as it was called this year, and suggest that
for the interest of the GSEs themselves, as well as
stakeholders and taxpayers, it would be good to assure that we
had strong regulatory oversight.
I wore out a good mailbox going back and forth every day,
looking to see what they were going to send me. And it's still
empty and I've got a new box, still waiting.
So I came up with H.R. 1409. And I'm not suggesting that
that's the end-all. Even Mr. Carnell has suggested that there
might be a more appropriate regulator.
Do you have any recommendations to change the status quo to
assure taxpayers that what the GSEs tell us can be verified by
a third party?
To date, every regulator who has issued an opinion,
regardless of what they said, has been challenged by the GSEs.
Where can we get a credible regulator? What should it look
like? And what do we do to get there?
Mr. Miller. Well, Mr. Chairman, you need to establish the
regulator and have oversight of the regulator's activities. And
I think the regulator needs to establish the least intrusive
means of assuring that the two enterprises are adequately
capitalized, that they cover their risks.
Chairman Baker. On that point, OFHEO has taken now a
decade.
Mr. Miller. Yes, I'm well aware of that, and I can
understand your frustration. And I think you're quite justified
in being upset about that.
I think it's important for them to come forward with a set
of standards.
I do know enough about the standards that they propose to
have a judgment about that. And that is that I think that
they're not quite ripe and I think that it would be useful for
them to withhold making them final for a few months in order to
make sure that they work.
It's almost like debugging software. If they make the
program final, then they can't do any debugging. And so I think
that that is important to do.
It's in the interest of the taxpayer, as Ms. Paige is
suggesting. It's in the interest of markets generally. It's in
the interest of homeowners or prospective homeowners to have
the GSEs in solid financial shape and to have very well
understood, transparent standards and that their activities and
that their capital be very transparent.
Chairman Baker. So you feel that the work we're engaged in
is appropriate. We may not have the right answer, but we
shouldn't give up yet.
Mr. Miller. I think what you're looking for, the objective,
is in fact, the appropriate one.
As I indicated, I have significant, serious questions about
the proposal to make the Federal Reserve essentially a
regulatory czar.
I think there are less intrusive, more market-based ways of
assuring that capital standard than the provision in H.R. 1409.
Chairman Baker. Well, let me point out that OFHEO is the
capital czar today and HUD is the product czar. And in the
entirety of the application process that the GSEs have made to
HUD, HUD has never to date denied one request for new product.
Now I'm not suggesting that there's anything wrong with
that. Perhaps every submission has been perfect. But I do find
it over the life of any enterprise a bit irregular.
If I may, let me jump to Mr. Carnell before I expire on my
time.
The question of subsidy has come about repeatedly. And I
recall, Mr. Carnell, I believe you were a member of the
Administration when Under Secretary Gensler testified before
the committee and made the reckless and unprofessional comment,
as it was characterized by many, that the line of credit to the
GSEs should be repealed.
Concurrent with that, almost to the minute, after the
hearing was over, I found that the market volatility was rather
dramatic.
Analysts, apparently, and shareholders, began to express
some concerns with their pocketbook about the potential of your
administration repealing that line of credit.
Is my recollection of history correct? And do markets
perceive that that line of credit is an essential component of
the value of the GSE charter?
Mr. Carnell. Your recollection of history is exactly
correct, except in one inessential detail, which is that I had
left the Administration at that point, even though I fully
concurred in what they said.
And it's worth noting that Mr. Howard, who sat in this seat
at the first hearing, called Under Secretary Gensler's
testimony irresponsible and unprofessional.
Now Mr. Gensler said that the Government did not guarantee
Fannie Mae and Freddie Mac. What is irresponsible about that?
I can tell you as a law professor, that's the truth, the
Government does not guarantee Fannie Mae and Freddie Mac.
Chairman Baker. But when you read the face of the security,
it's got it in type big enough I can read it without my
glasses--not guaranteed by the full faith and credit.
Mr. Carnell. That's right.
Chairman Baker. I don't know how much more clear we can
make it.
So why would the market react that adversely when we talked
about repealing something that's not there?
Mr. Carnell. Well, I think there is a problem in the
disclosures so far, Mr. Chairman, which is that Fannie Mae and
Freddie Mac have been allowed to go around and tell people that
the Government implicitly backs them.
Implicitly backs is not a guarantee. That's why Under
Secretary Gensler's testimony is not correct. But this comes
back to the double-game that I talked about, where Fannie and
Freddie say one thing to Members of Congress in this room and
elsewhere, and they say something else on Wall Street.
It's like a sailor who has wives in two ports and they
never come together.
Fannie and Freddie get to say different stories to
different people and get away with it year after year. But the
fact is that there is no Government guarantee here.
Essentially, what the capital markets are doing is pricing
the political risk of whether the Government would or would not
bail Fannie and Freddie out in the future.
If they feel that the Government is developing a backbone,
then the risk is going to go up.
Chairman Baker. I've exhausted my time.
Mr. Kanjorski.
Mr. Miller. Mr. Chairman, could I offer an alternative
explanation, I think?
Chairman Baker. Sure. Yes, sir.
Mr. Miller. And that is as follows. A lot of things can
impact upon a company's price or the price of their stock.
If there's a perception that a movement by this Committee
or others in Congress would disrupt the markets in whatever
ways beyond the question of this line of credit, that could
have a significant adverse effect on the price of Fannie Mae,
Freddie Mac stock.
And that, I suspect, was the concern expressed.
They have never used that line of credit, I understand. It
probably doesn't matter very much. They make it very plain, as
you point out, in big type.
The people that make markets with Freddie Mac and Fannie
Mae are very sophisticated people. They are not likely to have
the wool pulled over their eyes about that issue and whether
they might be misrepresented.
Chairman Baker. No, I'm not alleging that at all. What I'm
suggesting to you is, when I asked Fannie and Freddie directly,
CEOs, since you don't use it, since you're so well capitalized,
since you're so highly profitable, since it wouldn't equal a
couple of weeks of your debt issuance, why don't we just get
rid of it and clear it up?
After oxygen is applied, they usually say that that doesn't
make sense.
Mr. Kanjorski.
Ms. Paige. May I also interrupt, or am I going to be
impinging on your time, Mr. Chairman?
I want to address something that was said earlier about
HUD.
Chairman Baker. If you'll be brief, yes.
Ms. Paige. Very briefly. Thank you. HUD is not known to be
one of the best managed agencies in the United States
Government. In fact, it's very high-risk and it's been on our
high-risk list and it's been the subject of lots of inquiries
by Citizens Against Government Waste, as well as other members
of HomeEC.
And when you mentioned earlier that they've never turned
down a particular product request, I just wanted to mention the
fact that the most recent thing that they did, that Freddie
did, was the Lending Tree dot.com investment that they made in
March, which was $2.5 million.
Admittedly, that's a very small amount of money by their
standards. But the question I think that we should be asking,
we should be asking HUD, who has not yet ruled on whether
that's a permissible investment, is what are they doing
investing in any kind of a dot.com startup company in a
volatile e-commerce market?
Now HUD says that they're still waiting for data to make a
decision. And I would humbly request that somebody ask HUD to
finish up on a rule that they started last year which would
start to define what kind of investments Fannie and Freddie are
allowed to do that are supposed to be mortgage-related and non-
mortgage-related.
Draw a bright line so that we know where that is as
taxpayers.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Ms. Paige.
Mr. Kanjorski.
Mr. Kanjorski. Listening to all the witnesses and their
various positions, I'm somewhat astounded. I'm not sure whether
I'm in the world of Oz.
My friends on this side of the aisle are for regulation,
more strict regulation, control of product. And my friends on
this side of the aisle seem to be reporting something
different.
And then when I look down there and see the different
groups you come from--let me start off first, Mr. Edwards.
From my observation of the present state of the American
economy, manufacturing, for all intents and purposes, would be
classified as being in recession.
The agricultural economy of the United States would be
classified as being in recession.
The dot.com economy of the United States would be
classified as depression.
There seems to be two fundamental industries that are still
doing quite well, and that's home building and real estate. And
perhaps the automobile industry if it still holds up, that are
supportive of our present status of the economy.
Would it be that way if we were to do away with Freddie Mac
and Fannie Mae?
Mr. Edwards. Thank you, Mr. Kanjorski.
As I said in my statement, we'll put together the home
building and the real estate brokerage business into one
industry and call it the housing industry.
The housing industry now is probably your strongest sector
of the Nation's economy, and it's remained that way despite the
slowdown. Perhaps is that the American public believes that the
home is, first of all, shelter, and then a safe investment, or
you wouldn't have 68 percent of ownership.
They--the American public--also believe that it is the
right investment to get started in their financial future.
And so, I think those are some of the factors that have
kept the home ownership rate growing. Among others, certainly a
big part of that is that we've got a mortgage interest
environment which is healthy as far as acquisition because, as
those interest rates come down, the present value of the loan
amounts go up. And so, people are able to buy a home and obtain
mortgage financing.
Someone mentioned refinancing. Refinancing actually is
healthy for the market because it keeps the markets and the
neighborhoods stable. It keeps people in homes that might lose
them otherwise.
So I think a lot of these factors, Mr. Kanjorski, have come
together. But I truly believe that Americans believe that home
ownership is, first of all shelter, then a good investment in
their future and their children's future.
Mr. Kanjorski. Thank you.
Mr. Miller.
Ms. Paige. Mr. Kanjorski, can I add something to that,
please? I'm sorry, sir.
Mr. Kanjorski. Very quickly, if you want.
Ms. Paige. Thank you. It's just that Mrs. Hooley made a
comment earlier today about the modest increase in home
ownership and I think that should be re-emphasized, that
there's been a 4-percent increase in kind of a long period of
time. And there could be other attributable factors to that,
including low rates of interest rates and lots of other things.
Mr. Kanjorski. Mr. Miller, you've had an opportunity to
study this whole financing vehicle of real estate in the
country.
Do you have an opinion as to whether or not it is, one, a
very efficient system of delivery from the market place? And
two, whether these are well-managed and operated companies as
opposed to, say, 15, 20, 25 years ago?
Mr. Miller. I have a reasonable degree of confidence that
this institutional arrangement is working well. There are
things that could be done to improve it. I'm not suggesting
it's perfect.
I think these firms are managed well, from all that I've
seen. And also, they're very competitive.
I don't see any--I said in my testimony that I'm not one of
these people who say, ``if it ain't broke, don't fix it,''
because that's the refuge of people that don't have much to say
on their side.
But I don't see any reason for alarm that would cause
precipitous action.
Mr. Kanjorski. So you're talking about fixing around the
edges, but not fundamentally changing the core of the product
or the operations.
Mr. Miller. I think you need to make sure that these GSEs
do meet standards for risk-based capital and whether you accept
what OFHEO is doing here or not, I think you need to see what
they're going to do.
They're at the precipice of doing something rather
substantial in the regulatory area. See what they do and then
make a decision.
Mr. Rothschild. Mr. Kanjorski, can I just make one quick
comment?
Mr. Kanjorski. I just want to make an observation. I
welcome you because we had a roundtable discussion and I don't
think FM appeared at that when we had an opportunity for all
these different interest groups to talk to each other.
I wish you had been part of that interchange because it
would have helped us. I guess I want to make an observation
with you.
You do not represent anyone who has conflicting interests
with these two organizations in any way. You are coming here
strictly out of the interest of national policy and home
ownership for minorities.
You really do not have a financial interest, anybody that
you represent in your organization.
Is that correct?
Mr. Rothschild. I think I would only comment that I think
it's important for Congress to look at three elements. They've
all been discussed. I'll answer that question if I can just get
this one point out.
That, on the one hand, GSEs are not accomplishing the
mission they were designed to do with respect to----
Mr. Kanjorski. I'm going to stop you there. I listened to
you before on that. And I know you represent a lot of the free
enterprise sector of the community. I'm glad they're here. I'm
glad they're active.
But where were they when we needed a secondary market?
It seems to me all these people show up to cast aspersions
on organizations that the Congress created to create a viable
market. It's rather successful. Certainly, when I first came to
Congress Fannie Mae and Freddie Mac were not nearly as
economically sound as they appear to be today.
And this is not to say--I agree with Mr. Miller. That's not
to say that there's nothing we shouldn't be looking at.
But where were you all when the private sector could have
developed the secondary market? Hell, we didn't have to do it
in Government. It's just that you didn't step up.
Now I want to move to Mr. Carnell. I understand your
philosophical position on GSEs. But it would be remiss for any
of us to sit here and say that there isn't an implicit
guarantee that the Federal Government in catastrophic economic
circumstances wouldn't have to, for systemic risk, shore up
these organizations.
We would shore up Mr. Rothschild's organizations. There are
banks that are just too-large-to-fail.
Not too many years ago, we shored up Mexico because the
catastrophic result of the domino effect would have been that
the world economy could not afford a failure to step in.
So to make this argument that, I don't care whether they
print it. It's not supportive. We know that anything that is
dealing in trillions of dollars in a depressionary economy is
going to have to be shored up, or we're going to have to give
up the entire system, that I think we would do anything before
we come to that situation.
Or do you really believe that the Congress, the American
people, don't believe in the concept of too-large-to-fail?
Mr. Carnell. I do not believe in the concept of too-big-to-
fail. And as I said in my testimony, Mr. Kanjorski, whether or
not too-big-to-fail is a reality is a matter of what you, other
Members of Congress, and financial regulators do.
If during good times you say to yourself, there's not a
problem, or, in fact, you reaffirm too-big-to-fail, you and
others are creating too-big-to-fail in doing that.
One of my basic points is that there's a circularity with
too-big-to-fail. Too-big-to-fail comes from expectations.
If you stoke too-big-to-fail expectations, you reduce
market discipline and you increase the chances of problems, and
you also increase the shock to the financial markets if you
disappoint them.
In 1991, in the FDIC Improvement Act of 1991, which this
Committee passed and was enacted, Congress made a major step
back from the practice of treating banks as too-big-to-fail.
If you looked back in 1990, you would see that the FDIC was
protecting all depositors at banks as small as $500 million.
And in fact, a senior official of the OCC, echoing
sentiments a little bit like what you said earlier, said to 200
London financial market people in my presence in 1990, that the
FDIC's practice meant that you did not have to worry about
losing a cent, no matter how much money you had on deposit at a
U.S. bank, if the bank had more than $500 million in assets.
Now go forward 2 years.
On October 30th, 1992--this is less than 2 years after that
statement by the number-three person at the OCC, and just 4
days before the Presidential election. The OCC closed a group
of banks in Texas that had almost $9 billion. So that's 18
times the size that was described as being too-big-to-fail.
And the financial markets took it in stride. The financial
markets took it in stride because this Committee and other
concerned Members of Congress had gone about changing market
expectations.
So the markets made adjustments. They weren't shocked. And
it was possible to deal with things in stride.
So what I'm saying, Mr. Kanjorski, is that too-big-to-fail
expectations are not like hurricanes or earthquakes. They're
something that we as human beings, they're something that you
and other policymakers create by your decisions about how to
act or not act.
And they're something that financial market participants
create by their decisions about risk-taking.
Mr. Kanjorski. So it's your opinion that the Congress
should have penalized the Federal Reserve when they went to the
rescue of Capital Management.
Mr. Carnell. I think the Federal Reserve's action was
irresponsible. I think it was and I said so privately at the
time.
As a Treasury official, I was not free to say so publicly
at the time.
Mr. Kanjorski. How about the Mexican bail-out?
Mr. Carnell. That's a tougher issue. Let me emphasize that
the U.S. had no legal obligation to go to the aid of the
Mexican government.
The issue is, were we better off tiding Mexico over that
time, using an arrangement that, in fact, posed almost no risk
to the U.S. Treasury because we got a complete claim on their
stream of foreign oil.
Mr. Kanjorski. If you're having a hard time making that
decision that that was a successful bail-out, then we have a
difficult time communicating.
Now I was not in favor of it at the time and if it had come
to the Congress of the United States, it would have failed.
I think the Administration took probably one of the best
acts at that time that significantly saved the world economy.
Mr. Carnell. I'm not criticizing the Mexican bail-out. What
I am saying is----
Mr. Kanjorski. You were there. Looking with your hindsight,
did you make a mistake or didn't you?
That's a simple answer.
Mr. Carnell. There are two parts to it. I think that----
Mr. Kanjorski. You are definitely now in a classroom
situation. Put yourself back in Treasury. You've got to make a
decision one way or the other.
I mean, don't try to carry water on both sides. Condemn the
man you served as president and the Federal Reserve for the
acts they did when they bailed out Mexico. Or agree that it was
a wise decision.
I'm going to go you one further, Mr. Carnell. I've served
on this Committee long enough to know that in 1989, George H.
Bush took the office of the President and in 7 days, he came up
here with the RTC bail-out for the S&Ls.
I thought that was one of the most politically courageous
acts anyone had done. And I'm a Democrat. I can say that about
a Republican President.
And I will tell you about a second great act he did in
1991. He went against his pledge for no new taxes and raised
taxes, and I think participated to a large extent in the 8
years of the fantastic economy that we have just gone through.
Now, I don't find that difficult as a Democrat to pay
attention and pay respect to I think two courageous chapters in
the profiles in courage. Lost his presidency because of it.
No question in my mind.
Mr. Carnell. I agree that both of those actions by the
first President Bush were courageous and right. I think you put
very well the case for them.
Let me emphasize that what the Government was doing in
1989, was not bailing out the thrift institutions themselves,
but making sure that the Government could honor its own
guarantee to their depositors.
So it can be true that actions like this can be
responsible. It can be true that they can be courageous. But I
think we would be very mistaken to say that bail-outs in
general are right and heroic and responsible.
Mr. Kanjorski. I'm not saying bail-outs in general. I'm
saying that if any of us are sitting in this room and we are
delusional enough to think that there aren't institutions in
this system that are too-large-to-fail, because of the
ramifications that would be caused both in the domestic and the
international market, I think we're being intellectually
dishonest with ourselves.
Chairman Baker. Would the gentleman yield?
Mr. Kanjorski. Yes.
Chairman Baker. I would just trying to join in, Mr.
Kanjorski, to steer it just a little bit in the conversation.
The purpose of all of this is not to decide what we shall
do in the vent of failure. The purpose of this is to determine
how we can preclude the conditions for failure.
And I am not confident, given the enormous amount of
information the Committee has reviewed over the many months
that we have been back and forth, that we are in a position to
be able to say without question of conscience that we know for
certain the status of these enterprises.
That's all. However we get there is of no difference to me.
I will take any game plan anyone chooses to put forward.
But I don't think we have that assurance.
Mr. Kanjorski. Mr. Chairman, I agree with you. The only
thing I'm disturbed about is that I think the next 3 to 6
months in the American economy is probably the most crucial
period of time that we will experience in our lifetime.
And, for either the Congress or this Committee or the
Administration or the leaders of industry and the economy of
this country to further jeopardize this very delicate moment, I
think is very dangerous.
Chairman Baker. Correct.
Mr. Kanjorski. So that's the reason I asked Mr. Miller, if
these organizations are not being well run, or if he feels that
they are at economic risk, then we do not have any alternative
because of how large they are, we may have to bail them out.
But we are not pressed with that time. For us to be
attacking a fundamental pillar that's holding our economy up at
this time, for whatever reason, because it doesn't
philosophically, politically, or otherwise, appeal to us, I
think perhaps it may be a misspent opportunity on our part.
Chairman Baker. Well, I would only respond this way.
It's a very large ship on which all the future of every
homeowner and every taxpayer and every economic interest, not
only in the United States, but internationally, rely to a great
extent.
There are now 74 foreign central bankers, Alan Greenspans
around the world, who hold billions of dollars on deposit at
the New York Fed.
This is of no mere incident, that this is of enormous
significance.
And whether that ship stays on course, I'm not suggesting
that we take a crew down to the basement of the ship and start
cutting a hole in the hull.
What I'm suggesting is there may be a few rusty spots that
we need to examine or to go take a look at before we run
aground and find ourselves in a circumstance from which we
cannot extricate ourselves.
I am indeed worried about it.
Mr. Kanjorski. I think you're looking at the ship as a
cruise ship and I'm looking at it as a lifeboat.
Chairman Baker. Well, whether it's life or cruise, if it
sinks, we all go down.
Mr. Cox.
Mr. Cox. Thank you, Mr. Chairman, and I thank our
witnesses. I think we've had a great discussion.
I was just remarking privately up here that our witnesses
are very aggressive advocates for their respective points of
view.
Chairman Baker. Welcome to Financial Services.
[Laughter.]
Mr. Cox. If I might just put a question to Mr. Edwards
because I think your testimony is crystal clear. You certainly
don't want to throw out the baby with the bathwater here. You
want us to be cautious, and I hope that we will be.
I want to ask a question on a very discrete subject. I hope
it's also a discrete question.
And that is, SEC registration of publicly traded securities
issued by GSEs.
The GSEs take the view that they essentially conform to
existing Federal norms of disclosure. Would the realtors
support, oppose or be neutral on making sure that those
disclosures were exactly what is required of all other issuers?
Mr. Edwards. Mr. Cox, I think I'd have to have a little bit
more information to comment on that. I would be happy to get
back to you. But I really don't know that we've considered it
or what have you.
Mr. Cox. And actually, that tells me something, that at
least that's not at the core of your concerns.
Mr. Edwards. Right. I would like to make one other comment.
There's been several questions, and maybe this will help on
the issue of home ownership. Ms. Paige and others have made a
comment about there's only been a certain increase in the
percentage of home ownership in a number of years.
I would remind the Committee that the two GSEs are not only
involved in home ownership. They're very much involved in
rental housing.
I have been involved in rental housing in my city and I
have seen the help and--I'll call it the foundation--the
support that we've gotten out of the GSEs as far as rental
housing.
That is to me one of the real large problems in this
country, is the disappearance of rental housing.
And so, it's not just home ownership we're talking about.
It is the support of the rental housing community which is a
lot of the lower income housing that you're talking about.
This is a very serious issue in this country and I think we
can't walk away without remembering that this support of not
just home ownership, but good, quality housing.
Mr. Cox. I appreciate that. Mr. Miller, I wonder if I could
ask you as the representative on the panel, the only one
speaking, in your case, indirectly, for the GSEs, what your
view would be on the question that I just put to Mr. Edwards.
Would repeal of the exemption from the securities laws be
material to your concerns?
Mr. Miller. It strikes me, Congressman Cox, that the system
today with the exemption is working well, lowers cost. I don't
see any abuse of the sort that SEC registration----
Mr. Cox. Do you think that SEC regulation--that is to say,
just the registration requirements imposes on new costs, that
aren't already being borne by the GSEs in their disclosure?
Mr. Miller. Just the process of registration requirements,
other regulations.
Mr. Cox. Because it strikes me that if the smallest
business in my district has to register its securities, that,
surely, somebody with a multi-trillion-dollar portfolio could
afford to do it.
And markets since the 1930s have become accustomed to a
certain style and form of disclosure. And I think we're this
close anyway.
I just want to make sure that we're not going further than
necessary in granting Government exemptions to people if it
doesn't do any good and certainly, there's no investor
protection involved.
Mr. Miller. The logical implication is that maybe some of
the firms in your district might well be exempt. Rather than
not exempting anyone, maybe there should be selective
additional exemptions, or the regulations should be less
onerous.
Mr. Cox. Since I practiced securities law for a decade, I
don't consider the registration requirements to be all that
burdensome and unlike other laws and regulations, they don't
change very often.
Furthermore, the investing community is used to seeing this
style and format of disclosure.
And furthermore, I think the GSEs would tell us that
they're pretty much there already anyway, that they attempt to
do this even though they're exempt.
So I don't know what we're buying by fighting it.
Mr. Miller. And the market-makers there are very
sophisticated. I'm not speaking on behalf of the GSEs. Let me
just make that clear, in any of my comments today.
Mr. Cox. I'm just going to you because you're as close as I
can get on this panel. So I'm going to put that burden on you
one more time and ask you, on the subject of encroachment,
which has been raised by some of the panelists, you remember
that President Reagan issued an executive order that
essentially said that the Government should not compete with
the private sector if the private sector could do the job.
Do you think that same thing should be true for Government-
sponsored enterprises?
Mr. Miller. No, I think that basic philosophy ought to
apply here for reasons that I outline in the attachment, the
second attachment.
I looked at this, and because basically the financial
institutions, the other financial institutions have an upward-
sloping supply curve for loanable funds, whereas the GSEs
supply curve is very elastic, that to take away from the GSEs
the same kinds of advantages that are now given to the other
financial institutions would result in an inefficient mix of
financial institutions, accounting for loanable funds.
We're in the world of the second best. If we could start
all over and clear out all the undergrowth of the Government,
and so forth, and streamline everything, you would probably not
have any special arrangement for GSEs.
The problem is, as my mentor, Jim Buchanan, says, where you
go from here depends on how you got here.
And I think we have to work with where we are. I don't see
Congress making dramatic changes in the financial institutions
and the nexus between Government and the financial
institutions.
And therefore, I don't see good reason to make fundamental
changes in the charters--let me put it a different way.
I see reason not to.
Mr. Cox. Across the hall, I've spent some time worrying
about Internet taxes. In fact, we're going to be dealing with
that when the moratorium expires in October, dealing with it,
hopefully, before that time.
And of course, in connection with passing the Internet Tax
Freedom Act in the first place, I spent an awful lot of time,
several years, talking to the Nation's Governors before winning
the endorsement of the National Governors Association and the
mayors and the county executives and so on because they are
worried about their tax base.
And I think the realtors actually share that concern.
They're worried about making sure that we don't short-change
State and local tax bases.
Do you think that, given the financial success of the GSEs,
that they should continue with an exemption from all State and
local income taxes?
Mr. Miller. Mr. Cox, you know that my position on taxes is
that whenever you can eliminate a tax, do it.
There is a tendency for governments to reach too far and to
tax too much. You can make a case for non-differential tax
rates or not exempting some from taxes, whereas you do exempt
others.
But this would not be a high priority for me.
Mr. Cox. Well, I think the Chairman is probably indicating
my time is up. But I've got----
Ms. Paige. Congressman Cox, could I respond to that for
just one second? Or not?
Mr. Cox. In fact, I won't ask any more questions. And if
the Chairman will just permit the panelist to answer the
questions.
Ms. Paige. Thank you, Mr. Chairman. I couldn't disagree
with Mr. Miller more on the charters and the taxation issue.
The charters are possibly where the problem resides.
They're very vague and the subsequent legislation doesn't do
enough to clarify where secondary mortgage market parameters
are.
We are not kind of advocating some wholesale privatization
that's going to happen tomorrow. I think that's politically
untenable and everyone knows that it's not going to work that
way.
But I think a continuing dialogue lays some groundwork for
some future enactment of some reforms that would be helpful to
taxpayers without harming homeowners or the economy or the
GSEs.
And we would hope we would ramp up to an idea where we
could discuss privatization. We're not going to be doing it
tomorrow.
And if they are as successful as they say they are, and we
all say that they are supremely well managed, they can pay
their taxes, and there are other things. They could probably
pay their SEC fees as well.
And it isn't even the fees that they're objecting to. It's
just registering. It's having somebody look at their
investments to be sure that they're safe and sound. They're
objecting to that as well, besides the fees.
So there are a lot of things that I think that they could
be doing. And every time we suggest something, they say, well,
we'll have to pass that on to the consumer.
I'd like to see them maybe look at some other options, like
taking less of a profit, since their mission requires them to
look at affordable housing. And that's what they're supposed to
be doing.
Chairman Baker. Thank you.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Just for clarification, I think, if I understand this
correctly, and for sort of full disclosure for the Members that
are here, I think they is us because Fannie Mae and Freddie Mac
are in existence only because Congress created them and they
did not choose to not pay taxes somewhere. They did not choose
to not file SEC registration.
Congress chose that.
Now there is a strong case that could be made that Congress
has made mistakes along the way during the last 200-plus years.
[Laughter.]
Again, that's a judgment call. We'll let everybody decide.
To my knowledge, they haven't made many mistakes in the
last 7 years on anything that I've voted for.
But, in any event, I think we need to clarify that.
Now, I also, and I'm sorry that Mr. Cox has left, but he
raises an interesting point which is worth some review because
with respect to the registration issue, it may be that the
concern is not so much the registration as it is that it brings
the Securities and Exchange Commission into the picture as a
regulatory entity that they otherwise would not be.
It's something to think about. Moreso than the cost
question.
But I have a number of questions that I'd like to go over.
Mr. Carnell, you talked about the implicit guarantee
question. I think this is correct, that we also provide for a
perceived implicit guarantee as it relates to FICOs and
REVCORPs.
They're backed by the funds or by the assessments. But the
market has always treated them as having an implicit guarantee.
And in fact, for legal purposes, many escrows are allowed to
hold those, including public escrows, in the same way that
they're allowed to hold a Treasury.
So I don't think that we can say that the GSE debts are
unique in that respect, that there have been subsequent times
when we have allowed this.
Mr. Carnell. Just as an aside, Mr. Bentsen, I would note
that FICO and REVCORP were created as sham GSEs. That is, FICO
was created as a way to provide money, a little bit of money,
to protect thrift depositors without it going on budget.
And so what they did was they used the GSE model as a
precedent for it.
Mr. Bentsen. I understand that. But nonetheless, they were
created.
And second of all, and I don't have all criticism for your
statement. But second of all, I think we have to be careful
when we make a direct comparison between the savings and loan
industry prior to FIRREA or FIDICIA and the GSEs today because
I think the savings and loan industry was a much different
animal. I think the structure was much different. I think the
markets were much more different.
And while you had funds to protect that, we all know that
the taxpayers ended up spending a considerable amount of money
in doing that.
Now I do want to say that you were on point in your
discussion of the regulator. And you hit the points exactly
right when it comes to the inherent conflict of the Federal
Reserve.
I would add one other point.
The way I read H.R. 1409 is the Federal Reserve would have
veto power over the Treasury in allowing the GSEs to hit the
line of credit which raises another conflict at the same time
that the Fed may be conducting open market operations using GSE
debt, which I think they are in the process of doing or, if
not, strongly considering doing.
But I think you're on target there, that if we were to
consider a new regulator, that we would move in that direction.
And I'm going to run out of time, although I would ask for
the Chairman's indulgence because we had this long discussion
about the relationship between the GSEs and the bail-out of the
peso. And so, I'm going to get there.
[Laughter.]
And you can do this for the record, if you will, because
the individuals from the GSE really didn't get to this point.
The Chairman's bill, in providing for the GSEs to be under
the regulatory authority of the Federal Reserve, provides for a
number of new regulatory oversight and enforcement mechanisms.
And what I want to know is where those comport or conform
with other financial institutions as per the Bank Holding
Company Act or Gramm-Leach-Bliley.
Chairman Baker. If the gentleman would yield.
Mr. Bentsen. Sure.
Chairman Baker. I can maybe help cut that sort.
We requested the GAO, pursuant to last session, to go
through and do an analysis of current bank regulatory authority
and GSE authority. And where there was a disparity in the
enforcement action given to the regulator, we move to the bank
standard for enforcement.
For example, if the GSE gets to a condition of insolvency,
you can't put them into a receivership. You can only move them
to a conservatorship.
The distinction between the two is that in a receivership,
stakeholders, creditors, shareholders, can take a haircut. In a
conservatorship, they do not.
So it's a very distinct difference in consequence to
markets. Therefore, there's confidence that the GSE's debts
will be honored.
That's just one. But there were a litany of things.
So anything that the gentleman sees in the bill that
appears to be new regulatory authority, are only those
provisions identified in current bank regulatory authority made
applicable to the GSEs.
Thank you.
Mr. Bentsen. Well, I appreciate that.
But I would appreciate for the record if you would----
Mr. Carnell. I would be glad to do that, Mr. Bentsen. And
if I could just very quickly respond to your three points just
for now.
The first is that the Chairman's bill moves in the
direction of making GSE safety and soundness regulation, for
example, enforcement authority and prompt corrective action,
more comparable to bank enforcement authority.
But we're not talking about something here, despite the
moaning and groaning from the previous panel, we're not talking
about regulatory overkill.
The fact is that OFHEO's authority right now in many
respects is much weaker than that of the Federal banking
agencies.
And the Chairman's bill reduces some of that weakness.
Second, I would note that in making the GSE line of credit
at the Fed contingent on the regulator recommending it, I think
that's a good move in the Chairman's bill because it means that
the step of the GSE going to the Treasury and borrowing that
money has the regulator complicit in it.
In other words, that increases the political risk to the
regulator of the GSE going on the public dole through borrowing
from the Treasury.
I think, institutionally, that's helpful. It puts a little
bit more backbone.
Mr. Bentsen. But the current law, if I understand it,
allows--it's up to the Treasury Secretary to make that
determination.
Mr. Carnell. Correct.
Mr. Bentsen. And so this would be a belts and suspenders
effect, that you would have two regulators, one a political
appointee and one theoretically not a political appointee.
Mr. Carnell. Yes. But I think the concept, as you suffer my
testimony, I don't favor making the Fed the GSE regulator.
Mr. Bentsen. Right.
Mr. Carnell. But if they were, I think the Chairman's bill
is right on this point. And I think that if it stays at OFHEO,
it would be right to enact a comparable provision saying that
OFHEO needs to recommend it to the Treasury.
Mr. Bentsen. With the Chairman's indulgence, let me move
on.
Mr. Rothschild, in your statement, you talk a lot about
refinances as a percentage of--I think you were just talking
about the year 2000 in those numbers.
And I would ask you or Mr. Edwards, since he's speaking for
the realtors, just in the general market, not just the GSE
market, what percentage of mortgages originated in 2000 were
refinances versus actual new mortgages?
Mr. Edwards. Mr. Bentsen, I don't know that I have an
answer to your question. We can certainly try to find an answer
to your question.
Mr. Bentsen. If you could find out because I know in
various years, depending upon interest rate comparisons, refis
have been a large portion of the mortgage.
Chairman Baker. Let me add on to your question. I'm not
trying to cut you off.
Mr. Bentsen. Yes.
Chairman Baker. If whoever is going to prepare the answer
to that one, also needs to know how much of it was cash out
because a lot of that refi stuff, people took money out and
went and bought boats and stuff, just if we have that data.
Mr. Bentsen. Right.
Mr. Rothschild. Just a clarification. Our data for refis
and the home purchase, it was all based on 1999 HMDA and GSE
data.
Mr. Bentsen. OK. Well, then, for 1999, so we're talking
apples and apples.
And then, Mr. Miler, you actually hit on a point that I
thought about, which I thought is very interesting in this last
exchange, or one of the prior exchanges.
I don't disagree with the argument of the subsidy. And I'm
not particularly afraid of the subsidy. I think what we're
doing here is we're leveraging credit of the United States. And
we do that in various instances.
And there are groups like Ms. Paige's group and the
Libertarians and others who think that that's an awful thing
that we ought to do, and there are others who believe it's a
good idea.
But we do it in the municipal bond market. We do it all
over the place.
Nonetheless, you raise the issue of the supply curve for
loanable funds. And I haven't read your report, but I'll take a
look at it.
The argument has been made, not today, but made before,
that the fear--and it was referenced with the rising amount of
debt--the fear that the GSEs have access in effect to cheap
money because of the subsidy and the lower borrowing rate that
that creates.
And as such, when an entity has access to more and more
cheap money, then they will be chasing cheaper and cheaper
credit along the way.
And I'd like you to comment on that because it seems to me,
at least under their initial structure, they are somewhat
limited in where they can put their dollars, which is in
mortgages in some form or fashion.
And if you look at where mortgages are written, they are
written pretty much from the top of the income scale down and
they come down to a certain point to where people basically
can't afford to buy a house or don't know that they can afford
to buy a house. And there's a small percentage in there of
people who voluntarily choose not to own a house or whatever,
and there's a small percentage who pay cash.
But I'm curious whether or not we're being contradictory
where we say, on the one hand, they're borrowing too much to
make too many loans and on the other hand, they're not making
enough loans down the income scale because down the income
scale, the credit risk does increase.
Chairman Baker. And to whom is that directed? Which witness
is that?
Mr. Bentsen. Well, to Mr. Miller and Mr. Rothschild can
answer it.
And that's it.
Chairman Baker. I need to get two more Members in before we
get called for a vote. And whoever would choose to respond.
Mr. Rothschild. In our report, page 11 that we published,
you can see the percentage of loans purchased by income group
by Fannie and Freddie.
And what you find is that although, and this is not on the
basis of 100 percent of the loans that are out there that they
can buy in the conventional conforming market.
So those who are making between zero and $40,000 a year,
they're buying 26 percent of those making between zero and
$20,000, 39 percent between $21,000 and $40,000.
And yet, for the upper income categories, they're buying
much more. Between $61,000 and $100,000, they're buying 52
percent of all the loans that are out there.
You find a similar pattern of their purchases when you look
at it by race.
For whites and Asians----
Mr. Bentsen. Of course, we realize that Ginnie Mae is in
that market, in that lower end market as well, where they're
created to buy those loans.
And I guess the point I'm trying to make is that FM Watch
and other groups have come back and said that they're issuing
too much debt, they're chasing too much credit and creating the
systemic risk in the market.
And I think we do know that even though all of us want to
see them go down the income scale, that there is greater risk
the more you go down the income scale.
Mr. Rothschild. Well, in a lot of those loans, there isn't
greater risk. There may be lower cost, lower money to be made
on those loans because they're smaller loans.
So if you spend your time going after larger loans, you're
going to make more money for every larger loan you buy versus
the smaller loans.
Mr. Bentsen. The Chairman is about to step on me here, but
I just don't agree with that statement at all. I think that
statement is illogical.
I don't know if anyone else wants to comment on this.
Chairman Baker. For the gentleman's perspective, I believe
there's academic study which indicates a review--it's more a
question of the amount of downpayment as opposed to income
levels.
And as long as someone has their own equity at risk, the
relative risk ratio between lower income and higher income is
not statistically significant in my view.
But that's something that we can explore. Somebody jump in
and then I've got to get to Mr. Meeks.
Mr. Miller. I will give back the balance of my time.
Chairman Baker. Thank you.
Mr. Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
Real briefly, and I apologize. There's been a lot going on
today, for not being here to hear all the testimony. But let me
just ask a couple of questions.
You may know that I represent a district that's
predominantly minority homeowners.
And so, my first question goes out to Mr. Rothschild.
Besides having GSEs purchase CRA loans, and I know that they're
doing that and pushing that and that's good, despite when I
initially got here, we found when we were doing the banking
bill that there was a lot of opposition from banks that wanted
to do CRA or continue CRA.
But I'm interesting in making sure that more minority
homeowners exist.
Let me just ask, what is your organization doing to help
increase minority home ownership?
Mr. Rothschild. First of all, Congressman Meeks, our
organization represents a number of trade associations.
So, first of all, we don't do that as an organization. But
I think if you look at the data, which is what we analyze, that
is, the private sector in terms of its origination of loans to
low-income, to moderate-income, to minorities, is doing as a
percentage of their business, of all of the business that they
do, is doing a far better job of doing those kinds of loans,
making those kinds of loans, than the GSEs are at purchasing
them.
Mr. Meeks. Some data that I have seen and that we still see
with a lot of the financial institutions, still in the year
2001, minorities with equivalent financial status as their
white counterparts, are still being turned down.
And just indicating, what I'm trying to find out, I believe
in your study, Shattered Dreams, you also indicated that the
GSEs have not done as much as they should to support minority
home ownership, when I know also that, at least in my
community, it seems as though a lot of individuals, a lot of
minorities are being pushed toward the sub-prime lending market
and/or for whatever the reason, advertisements or not feeling
comfortable, being pushed toward the sub-primes.
And so, I know, therefore, you object to the GSEs moving
into, if I understand right, moving into the sub-prime market.
But if they are to increase their support of minority home
ownership, wouldn't it then be a logical extension to go into
the sub-prime market so that you're going after where African-
Americans and minorities are going because of what the trend
has been thus far?
And they've been paying much too much money in the sub-
prime market now at any rate.
Mr. Rothschild. The fact is that HUD looked at this. They
took out the sub-prime loans out of the analysis of the data
that they analyzed, the HMDA data.
And they found that, in fact, taking out the sub-prime
loans, the GSEs are still not doing as well as the private
sector in making the loans to minorities, to African-Americans,
to Hispanics and to low-income.
There are studies done just this past December by HUD that
document that.
This study that was done on the City of Baltimore, and it's
fairly thick, shows that really what takes place is that when
the GSEs come into a community, they are sort of the
bellwether.
They announce that if they're going to come into the
community, the lenders follow and make those loans.
So you have to consider the role of the GSEs. They're two
institutions. They buy most of the loans. They are the
organizations, they're a duopoly that buy the bulk of the loans
in the conventional conforming market.
That's the market they buy in.
Mr. Meeks. Is that a good thing?
Mr. Rothschild. Is it a good thing that they buy loans?
Well, of course it's a good thing.
Mr. Meeks. And the market follows.
Mr. Rothschild. FM Watch supports the fact that the GSEs
are important to provide liquidity.
Go back to the CRA loans. If the GSEs bought more CRA
loans, which everyone that I know from the housing community
says is a good idea, then the banks would have more money to
make more loans.
That's liquidity. That makes a lot of sense.
But they're not doing it. They're very, very limited in the
amount of CRA loans they want to buy. They don't want to use
their subsidy to basically buy the loans that the banks have
subsidized in making CRA loans.
I think that's a very, very important issue. I'll give you
another issue.
There are different definitions for CRA that define low-
and moderate-income. They are lower than they are for the
housing goals.
If the housing goals definition conformed to CRA, it would
direct the GSEs to buy far more low-income loans, which would
make a big difference in the amount of low-income loans they
buy.
Mr. Meeks. I want to follow up but I know that we're
limited. I know that there's a vote coming up. But I want to
just ask Ms. Paige a question also, real quickly, because I
know that your organization says that it supports reasonable
spending by the Government on behalf of the taxpayer.
And I've not been too long elected to Congress. But since
I've been here, and you tell me whether I'm wrong or right.
Ms. Paige. You're right. You're right. Whatever it is,
you're right.
Mr. Meeks. It seems to me that GSEs have brought private-
sector liquidity to the secondary mortgage market and a sound
investment for its investors and industry leading management
practices without the need for Congress to appropriate a dime
for these organizations, which seems to be based upon what your
organization stands for, a good thing.
So I was wondering, would your organization support such an
innovation by Congress?
Ms. Paige. Thank you for the question, Mr. Meeks. And let
me say that, without being too blunt about it, the GSEs are not
private.
The last time I checked, private organizations don't have a
$200 billion line of credit with the Treasury. They don't have
board members who are appointed by the President. They don't
get to borrow at preferred rates. They don't get tax exemption.
Most banks and financial institutions, mortgage bankers,
they pay taxes.
There's a raft of benefits that the GSEs get that put them
in a hybrid situation. They're half and half. They've got a
charter that gives them special benefits that are worth a lot
of money, whether you agree with Mr. Miller's analysis or the
CBO's analysis.
It's a lot of money. It's billions of dollars.
As they do that, they put the taxpayers at risk. We're what
stands behind them, basically, us taxpayers and the Congress of
the United States.
So it isn't fully private. And so, we would want it to be
fully private. And we're not suggesting that they would
suddenly go away. What we're saying is that they would become
players in the private market along with other players in the
private market and there would be increased competition.
This is not as if--our suggestion would not suddenly make
the GSEs disappear. They would become private organizations.
They would compete with other private organizations.
We don't know what that environment would be like. But I
would dare say that it would be more competitive than it is
even now because right now they compete with each other and
that's it.
Thank you, Mr. Chairman. I hope I answered your question.
Chairman Baker. Mr. Meeks, if I may, let me get Mr. Ford's
question on the record. And if you don't have to dash off, I
want to engage with you. You make some excellent points and I
want to provide a little explanation, if I may.
Mr. Ford.
Mr. Ford. Thank you, Chairman. Before I start, I see so
many friends in the audience, the distinguished Mayor from
Arkansas, from Little Rock, Ms. Shakelsford, my dear friend.
And certainly, all of the panelists are wonderful people. But
there's really a wonderful person on the panel from Memphis.
Chairman Baker. Mr. Ford, since you're being so nice,
please pull that mike close so that we can all hear you.
Mr. Ford. It's always good to see people from Memphis, Mr.
Chairman, the President of the National Association of
Realtors, my friend. We're delighted to have you here.
If I could, Mr. Chairman, I know that a lot of things have
been said about minority home ownership.
FM Watch sounds so sinister, but those members of this
organization who are here today to express their opposition to
the GSE subsidy, FM Watch sounds a little--I think the people
who make up the organization are good people. I disagree with
them. I think you're wrong on this issue. But I hate to refer
to you as FM Watch. But for lack of a better term. There's been
a lot of talk about how minorities perceive, or blacks or
Hispanics, perceive and there's been a lot of talk here about
it.
I do hope that this subcommittee at some point will take up
an issue that appeared on the front page of the New York Times
over the 4th of July holiday, squeezing out some other news
about a particular congressman here in the House that dealt
with how Nissan might be charging higher finance rates to
African American car buyers.
I hope it's an issue that the oversight investigations arm
of our Committee will take up at some point.
In relation to that, I know that the National Black Caucus
of State Legislators, as well as the chairlady of the
Congressional Black Caucus, both issued statements regarding
this hearing and the impact that the GSEs have had on minority
home ownership rates over the past years.
And if I could submit them to the record I would appreciate
it, Mr. Chairman.
Chairman Baker. Without objection.
[The information referred to can be found on page 78 in the
appendix.]
Mr. Ford. I guess my question, or my thoughts, I hope home
ownership rates increase for everybody, not just black folks. I
happen to be African-American, but I think it's a good thing
when people own homes.
And as much as this debate may create a greater appetite
for those in the financial services industry to provide
opportunities for home ownership, it's a good thing.
Now for both sides to dual back and forth about who is
doing more in the low-income and middle-income housing markets
is a good thing because you both could be doing a lot better.
But to suggest that the GSEs have not provided enhanced
opportunities for particularly black home ownership and home
ownership in areas that have been overlooked by this market, I
think is a little misleading.
I understand what my friend, Mr. Rothschild, who comes from
a great organization himself that he's a part of, but I think
it's important to recognize that Fannie Mae, as well as Freddie
Mac, and I know the distinguished professor made some points
with my good friend, Mr. Bentsen, who is far smarter than me
talking about all these financial terms and all.
But I think his larger point is that I think it's hard to
measure this in a zero-sum game, or hard to analyze or assess
this from a zero-sum approach.
My great Chairman of this Committee, who understands these
issues as well as anyone, whom I also disagree with, I think
would also have to agree that, in large part, the GSEs have
performed some good things for the economy and made possible
home ownership opportunities for a lot of people who had been
left out of the market and shut out of some of these
opportunities.
It's important to note that the realtors, the homebuilders
and a whole array of organizations who sometimes agree,
sometimes don't agree, all agree that the GSEs have indeed
provided a valuable part and an important part of home
ownership growth across this Nation.
I guess my question would be directed to the professor and
to Mr. Rothschild in particular.
FY Watch uses HUD studies to compare Fannie Mae to the
primary mortgage market.
And forgive me for reading this. I'm not smart enough to
understand this without being able to read this, Mr.
Rothschild, so just bear with me:
``But there are serious issues with respect to HUD's
methodology, including questions about the appropriate use of
HMDA data, the importance of missing race data, and the
treatment of sub-prime and manufactured housing lending.
``The correct comparisons show that probably over time,
Fannie Mae has led or met the market in lending to low- and
moderate-income households and to minorities.''
Perhaps you can respond to that or correct me or correct
the record as it relates to that issue. And I would love to
open it up to the professor as well, if he would be so kind.
Mr. Carnell. And since you mentioned FM Watch, let me just
mention that there's somebody here representing FM Watch, and
that's not me.
I have no ties to them.
Mr. Ford. They're not a bad group of folks to be associated
with, but I appreciate your correcting the record.
Chairman Baker. If you can withhold to say a couple of
minutes, because I want to make sure that we wrap this up
before the next vote occurs.
Mr. Rothschild. Sure. I would like to give my colleague
here, who has been dying to make a comment, and it's a perfect
segue because he did all the data work and can talk about the
HMDA data.
Chairman Baker. And please identify yourself for the
record, sir.
Mr. Tornquist. My name is David Tornquist. I'm also a
principal at Podesta Mattoon. I worked on the FM Watch study.
The criticism that you raise about the HMDA data has, of
course, been raised by Fannie and Freddie in response to every
study that has come out that criticizes their performance in
the market.
HUD has looked at the criticisms that Fannie and Freddie
have made of the HMDA data and they have issued a report back,
I think it was 2 years ago, where they have said that Fannie
and Freddie exaggerate the problems with the HMDA data.
And I would point out that they say that the HMDA data is
acceptable to use to make assessments of the market shares of
the GSEs' activities in the mortgage market, as well as the
fact that HMDA is what HUD uses to enforce the affordable
housing goals.
But also, I would like to point out that we did not just
simply rely on the HMDA data. We also relied on the GSEs' own
data. From the GSEs' own data, we got the same results that we
got from the HMDA data.
So there shouldn't be a question of the accuracy of the
numbers. You can argue about what you want to do about the
numbers, but the numbers still show that Fannie and Freddie buy
fewer loans from low-income people than from wealthier-income
people and fewer loans from minority borrowers than they do
from white borrowers.
Chairman Baker. Anyone on the other side want to respond,
or defense the data?
Mr. Carnell. I would just note that the general point
that's being made there about Fannie and Freddie doing
proportionately less is consistent with the Federal Reserve's
study by Canter & Passmore. It's consistent with the 1996
Treasury study, as well as with the HUD report.
One of the issues here is how much of the credit risk is
being borne by Fannie and Freddie, as opposed to how much is
borne by banks and thrifts.
And the conclusion of all of these three studies that I
mentioned is that banks and thrifts were doing more to extend
home ownership in the groups we're talking about here than
Fannie and Freddie were.
And I want to note that that's all the more remarkable
because Fannie and Freddie don't pay for their Government
benefits, whereas banks do.
The net subsidy to Fannie and Freddie is significantly
greater than the net subsidy to banks, if indeed there is a net
subsidy to banks.
Mr. Ford. Mr. Chairman, I know that Mr. Miller addressed
some of that in his remarks as well.
If the president would speak.
Chairman Baker. We'll give a couple of minutes to both Mr.
Edwards and Mr. Miller.
Mr. Edwards.
Mr. Edwards. Well, I think I'd like to comment back on what
I mentioned a while ago. We continue focusing on just home
ownership and buying loans and not buying loans and home
ownership.
I've got to re-emphasize that Fannie Mae and Freddie Mac
are also involved in rental housing. And that housing supplies
housing for a lot of people that are not buying a home or are
never going to buy a home.
Chairman Baker. Do you know what the percentage of their
business is represented by what?
Mr. Edwards. I do not know the percentage, but I will get
it for you.
I do know in our market place, Mr. Chairman, that they have
been very successful and a very big part of assisting us in
rental housing renovation and what have you.
And so, I will get those numbers for you. But I think it's
important for this group to know that we're not talking about
just home ownership. We're talking about where people live in
total housing.
Mr. Rothschild. And it's a very small percentage of their
overall business, Mr. Chairman. And when they do get into
multi-family type of housing, it's usually at the upper end
rather than at the lower end.
Chairman Baker. Mr. Miller.
Mr. Miller. Let me say that, I won't take time now, but I
might want to respond if you would allow, Mr. Chairman, in
writing to the question of this vertical lending practice.
Chairman Baker. Absolutely.
Mr. Miller. Also, I want to take issue with Professor
Carnell on the issue of to what extent the financial
institutions, other financial institutions receive a similar
benefit as bestowed upon the GSEs.
Chairman Baker. Without question.
Mr. Ford. Would you summarize--I just think it's important,
Mr. Chairman, that he be given one minute because that was at
least part of your testimony that I had the opportunity to
read.
You touched on that a little bit. And since I relish the
opportunity to agree with you on something, Mr. Miller, I'd
appreciate it if you would just give us a little, maybe a
minute summary of what it is that you talked about in your
remarks.
Mr. Miller. It's worth noting our agreement, isn't it, Mr.
Ford?
Mr. Ford. Absolutely.
[Laughter.]
Mr. Miller. In my judgment, while the other financial
institutions do pay fees for some insurance, they have other
benefits bestowed on them.
If you will look in the second attachment to my testimony,
there will be identification of some of those. I'd be glad to
respond to you in writing about them.
But there are similar benefits that are received by the
other financial institutions. And it goes to the point that I
think you raised a while ago that I was going to respond to
when I conceded back my time. Dr. Pearce and I believe that
there is a similar benefit at each level of loanable funds that
goes to the other financial institutions. They have an upward
sloping supply curve, the GSEs have essentially a horizontal
supply curve.
And for that reason, if you took away the so-called benefit
from the GSEs, you would essentially have the financial
institutions granting too many loans and the GSEs too few, and
you would have an inefficient outcome in that case.
There is something that Mr. Bentsen, raised, and the
argument that because of the support of the mortgage market,
too much money, too many loanable funds are going into the
mortgage market.
That is a very valid argument.
But I don't take issue with that in my analysis. It is a
policy determination of the Congress whether to promote home
ownership or not promote home ownership.
Chairman Baker. Thank you, Mr. Miller.
Mr. Ford. Mr. Chairman, I think this is such a wonderful
thing, regardless of what happens with the Committee. I do have
my opinion on this.
But for poor people and low-income people and moderate-
income people to force the attention of you incredible minds on
this issue and to have the GSEs engage, and FM Watch engage.
When you pay attention to people in any market, good things
can happen.
So on behalf of all the poor people in my district, I say,
thank you, Mr. Chairman, and I thank those of you who are here
because, in the end, those who want to own homes and who are
willing to make the commitment, will indeed have that
opportunity.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Ford. I just want to respond
to the gentleman's observation, and that of Mr. Meeks as well.
I have concerns about the affordability for homes for
working people. And I don't believe that any sector of the
current financial system is doing enough.
On average, when you look at the portfolio of Fannie,
Freddie, and a commercial bank, Fannie and Freddie will be
somewhere below 5 percent of their portfolio fits the criteria
of concerns you're looking at.
A similar analysis using the same standards through a
commercial bank portfolio will be roughly 13 percent.
I don't think the argument today should be they're doing
bad things, we're doing good things, regardless of the team. I
think they both need to be doing better.
Let's take an example.
I'm a former realtor. Let's assume that a person wants to
buy a $60,000 house.
To have a conforming loan means you've got to have a 20-
percent downpayment, unless you want to have private mortgage
insurance. A $60,000 house, you've got to have $12,000 cash for
a $48,000 conforming loan balance.
Now I haven't in my real estate experience--you've got to
add on 3 percent closing costs on average. The lawyers have got
to get their cut.
So you're up to $15,000.
How many working families do you know who are buying a
$60,000 house are going to put 15 grand into it? Well, they
don't. They have to have special programs.
97 percent loan-to-value is a customary kind of program
that Fannie has. It's a great program. They even have interest
rate buy-downs. You also have downpayment help programs.
If you live there long enough, you get credit each year for
having lived there. You've got to go through a home ownership
school.
Those are wonderful programs.
But Fannie and Freddie don't originate the loans. They buy
the loans.
You go to your hometown banker. He fills out the mortgage
application. He services it, takes your credit, all that, and
then he cranks it into this mystical box that Fannie and
Freddie have called an underwriting system.
All that means is you put the application in and if you
don't come back looking right, you don't get approved. If you
happen to have a septic tank on the property line, that's a
non-conforming loan because it doesn't fit the secondary market
criteria.
So there is a cookie cutter that stamps your loan. And if
it fits, you get access to credit. If you don't, you're out.
So a lot of the independent community bankers who are
portfolio lenders, they extend the credit because they know
you. And they hold it 15, 20 years, and they manage the entire
risk of that mortgage inside their bank, are relatively few.
On the other hand, when you go to Freddie Mac's own
information sheet, which I found to be quite troubling, and I
mentioned to the gentleman earlier in the day I wanted to get
the response from Freddie, which they indicated it needed to be
seasoned.
It would take 12 pounds of cayenne pepper to get this in
good shape.
[Laughter.]
But I'm going to be looking at that response very carefully
and I invite both gentlemen to sit down with me in a non-biased
discussion of what these folks are really doing.
Let me tell you, if you get close to five, you're going to
know you had something.
Now, in looking at this data, in describing the people I
was just talking about, the ones you and I both think ought to
get a better shake out of all of this, the loans according to
their loan-to-value ratio range that are above 95 percent in
loan-to-value, so that individuals putting 5 percent or less
down, 3 percent closing close, that's somewhere manageable for
a $65,000, $70,000 house.
Two percent of the portfolio. Two percent.
Now where is the rest of it going? Folks are getting loans
below 70 percent of LTV. Or let's go to 80. 80 and down. That's
the folks putting up the $12,000 on the $60,000 house and,
frankly, that's not where it's happening. It's in the big-
ticket houses.
You could come to Baton Rouge today, buy a $342,000 house,
make that downpayment and have a $275,000 mortgage. That's a
mortgage that Fannie and Freddie can buy. That's a conforming
loan under the current rules.
73 percent of the portfolio, according to the Freddie Mac
information statement, not CBO, not Treasury, not any
irresponsible party, of their portfolio is made up in those
loans.
That's my problem, guys.
We are paying a lot of money in a subsidy to provide a
housing opportunity for low-income individuals and it ain't
working.
Now on top of that, I'm not convinced that the safety and
soundness questions are properly supervised. I'm willing to
take anybody's deal on any front. If we can get the low-income
portfolio percentages up to ten percent, sign me on. You all
figure out what you want, I'm with you.
At the same time, we can figure out that the safety and
soundness is there, so we have a secondary mortgage market
security act, the worst thing in the world, for your interest,
my interest, taxpayer interest, is to make the presumption that
they are operating in a safe and sound fashion, don't do the
due-diligence, and wake up one morning in a high-interest rate
environment when they can't find a counter-party to hedge their
risk, and we're all in the tank.
That's what it's about.
Now I appreciate you gentlemen staying for that
explanation, because I've had frustration in trying to get
folks to understand this is not all that I think it should be.
And it's a very expensive delivery mechanism to provide a
limited amount of benefit to the targeted community.
And I don't like it. I just knocked over my ice.
Mr. Meeks. Let me----
Chairman Baker. Yes, sir.
Mr. Meeks. I haven't studied the report, but I don't know
how much of that is bumped up by a city like New York City or
Chicago or San Francisco.
Chairman Baker. I think we ought to find out.
Mr. Meeks. Where you can't buy a $60,000 house.
Chairman Baker. Right.
Mr. Meeks. And if you're going to buy a house generally in
New York, even poor people, it has to be $200,000, $250,000.
Many times, it's a two-family home and so, therefore, they
try to do what they have to do with the income from the two-
family home, but that will bump up that price.
Chairman Baker. I'm saying to the gentleman, let's find
out.
Mr. Meeks. In New York, that's what we're looking at doing.
Chairman Baker. I'm saying, you may be right, I may be
wrong, the old song.
I may be crazy, that's the next line.
But I think we owe it to ourselves to sit down, find some
folks--if we don't trust HUD and we don't trust CBO, you tell
me where we can find somebody we can talk to who's got real
numbers and find out.
We owe it to ourselves to determine that.
Mr. Ford.
Mr. Ford. I couldn't agree with you more, Chairman. But one
probably objective way, if we can use that term, and we've used
it somewhat loosely here, is if we see home ownership rates
increasing, isn't that somewhat of an objective indicator that
maybe some of these efforts on behalf of the GSEs, as well as
those in the FM Watch and all of the competitors of the GSEs,
isn't it some indicator that perhaps the system is working?
I do think that Mr. Meeks' point is a valid one when you
look at the price of the housing market in Washington.
Chairman Baker. I won't dispute the gentleman. And I'm not
saying that they are without merit or that they don't provide a
service.
What I'm suggesting is that the service we get for what we
pay may be not in balance, and that the percentages of
resources that flow through to low-income families are not what
they should be.
And I'll say it on the private side as well. I don't think
either team is getting where they need to be in light of what
we are saying as a congressional chartering operation, this is
what you're in business to do.
Are you in business to make 22 percent rate of return on
equity, one of the highest rates of return--always in the top
20 of the Fortune 500 and now the third and sixth largest
assets corporations in the world.
I don't know what compensations look like over there. I'm
sure they're probably all right.
But the point is that there may be a way to squeeze money
out of that operation toward the intended purpose, as opposed
to saying, we don't need to change anything. This thing's
great.
Mr. Ford. But if they weren't making money, we'd probably
hold hearings to bring them to task on that.
I hear you. I just think that at some point, that home
ownership rates and whether they're going up or down has to be
considered or weighed in a far heavier way than perhaps some of
the things that----
Chairman Baker. And the gentleman makes a great point. If
this was 1979, we'd be having hearings because Fannie's
insolvent.
It's happened. They were insolvent for 5 years.
So it's not something that can't happen. All we need to do
is two things. Make sure we understand the risk, have a
regulator we can blame so Congress isn't at fault, and
encourage them to do the right thing by low-income individuals,
and I go away.
[Laughter.]
But right now, we've got the worst of both worlds. They
make a bunch of money. They don't help low-income folks. And we
can't say for sure that it's not our responsibility.
I don't see how any Member of Congress could just take that
pill.
Mr. Ford. Greg Meeks and I will sign on right away to the
Richard Baker Immunity Act and GSE Failure right away to make
sure that you're not responsible.
Chairman Baker. Let me tell you, I'm going to sleep better
tonight just because of that.
[Laughter.]
I want to cover one more thing before we call this thing to
an end.
Mr. Miller, let's come at this horse from a different end.
I'm going to suggest that they're well-managed, that they're
highly profitable, no potential of risk, a model of business
excellence that ought to be held up to the world, envied by
all, showing the path to home ownership with floodlights on
every corner.
It is an extraordinary model of business perfection in
which I am in awe.
I would suggest that, however, there might be one group of
four or five people--let's just say the homebuilders and the
realtors get together, and they want to make application for a
GSE charter.
Knowing that you are a Reagan Republican who believes
fiercely in competition, what would be wrong with that?
Mr. Miller. I would have no objection to that.
Chairman Baker. Wonderful.
Mr. Miller. But let me just say this. The problem that you
have to address is the one that we talked about earlier
briefly.
And that is, what signals you're giving to the market. To
the extent that the market might interpret action by this
Committee, whether it is to propose, for example, withdrawing
the line of credit, which they don't use, anyway, or some other
initiative as taking Draconian action with respect to the GSEs,
that would harm markets, harm their ability to carry out their
mission of increasing liquidity in the mortgage markets.
To the extent that the markets might view such an action
that you just described as being the precursor of Draconian
measures, that would harm markets and so, that would need to be
avoided.
But in the abstract, as a thought experiment, I don't have
any problems with that.
Chairman Baker. Well, while I'm thinking about it, we do it
all on the same terms and conditions, no special privilege.
Whatever capital adequacy requirements, whatever regulatory
oversight that appears to be so capable and efficient that we
currently now have would be applied to the new applicants.
We could have Treasury review it, have the Fed review it,
have everybody review it. But at the end of the day, having
more competitive housing GSEs would drive the intended subsidy
to the targeted groups and perhaps result in a more efficient
and less costly and less risk exposure to the taxpayer.
And I want to explore that.
Mr. Miller. That's where we would disagree. I do not
believe that numbers are a necessary condition for competitive
outcomes.
My view based on observations, some testing, is that these
GSEs are quite competitive. There are 12 other home loan banks
around engaged in similar kinds of activities. There are
private entrepreneurs engaged in similar kinds of activities.
I don't think the addition of, as you characterize, another
GSE or two GSEs or three GSEs, would change the behavior of the
market very much.
Chairman Baker. Well, let's look at it this way. If we only
had two banks instead of 8500, somebody would call that a
concentration risk.
If you had 12 GSEs instead of two, some folks might say
that that might diminish risk. We wouldn't be creating new
mortgage product because, as we all know, we have 70 percent
home ownership only because of Fannie and Freddie. That can't
possibly be improved on.
So what it might mean is that if a GSE offered a lower
rate, there would be a little refinancing going on.
But let me ask--and I do have regard for your intellect on
this matter. And any member of the panel who would choose to
respond, or anybody else out there who wants to speak----
Mr. Miller. Could I just clarify again, though?
I think the question of the signal you send to markets
would be important. We're going to set that aside.
I don't have any reservation about your doing this as a
thought experiment. But I would just caution--in my judgment,
you would not change the behavior of the market. You would not,
in the model that the CBO adopted and you implicitly seemed to
be affirming, get more of this, ``subsidy'' passed along to
consumers.
As you know, I have a very different perspective of how all
of that works.
I don't think there would be improvements in the
performance of that industry if you were to add another GSE.
Chairman Baker. I'd just come at this very simply. If I'm
in the suit-making business and I'm the only one in town and
everybody's required to wear a suit, I figure I can charge what
I want.
If some yahoo moves in down the street and makes a good-
looking suit for about $20 less, I might have to start looking
at my prices.
I may be wrong. But I'd like to request participants'
recommendations, analysis of the concept. There are some
academic papers of history out there on the subject.
I just want to thank everybody for their long-standing
tolerance. No one would have expected that you would have been
here, including myself, at this hour of the day on this
subject.
I do appreciate very much your contribution and the two
Members--yes, Mr. Meeks.
Mr. Meeks. Mr. Chairman, Mr. Ford and I were just talking.
We thought it would maybe a good idea for the CBO to do a study
where you maybe take out the five largest markets and the five
smallest markets and see then where we come with the median
income, with reference to the cost of housing that Fannie Mae
and Freddie Mac had.
Chairman Baker. I don't have any problem with the
gentleman's suggestion in getting a study. I suggest, based on
reactions to the current study, we may want to get somebody
else other than CBO or--and I'm serious.
Let's try to get folks that at the end of the day, there's
not going to be people looking over their shoulder saying, this
one doesn't make sense.
We'll talk. Let's try to come up with a way of putting this
together. I didn't think Mr. Kanjorski's idea of a roundtable
last summer was going to be that productive and I was wrong. It
turned out to be real good.
This might be something where we might want to do a
roundtable kind of thing later in the fall.
I think we owe ourselves an honest discussion about the
benefits that accrue and where they might be going sideways.
And if I'm wrong, I'll say so. I've been wrong before. I've got
H.R. 1409.
I know I'm wrong.
[Laughter.]
I have two statements that I would like to introduce for
the record. One is by Chairman Mike Oxley and the other is a
statement by the Council of Federal Home Loan Banks regarding
the subject matter of today's hearing.
Unless any Member has further comment--I've been reminded
to announce that we will have, much to the dismay of many,
another hearing on this matter later in the year, perhaps
centered around the competitiveness concept, depending on the
interim studies that may be engaged in.
But thank you for your--oh, yes. And we are very much
interested in the Administration's position, once formulated,
on the whole matter.
Hearing adjourned.
[Whereupon, at 5:37 p.m., the hearing was adjourned.]
A P P E N D I X
July 11, 2001
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