[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
THE TREASURY DEPARTMENT'S
VIEWS ON THE REGULATION OF
GOVERNMENT SPONSORED ENTERPRISES
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 10, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-51
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WASHINGTON : 2004
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa 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 DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
September 10, 2003........................................... 1
Appendix:
September 10, 2003........................................... 49
WITNESSES
Wednesday, September 10, 2003
Martinez, Hon. Mel, Secretary, Department of Housing and Urban
Development.................................................... 13
Snow, Hon. John W., Secretary, Department of the Treasury........ 10
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 50
Baca, Hon. Joe (with attachments)............................ 52
Baker, Hon. Richard H........................................ 59
Davis, Hon. Artur............................................ 61
Feeney, Hon. Tom............................................. 62
Gillmor, Hon. Paul E......................................... 63
Gutierrez, Hon. Luis V....................................... 64
Hinojosa, Hon. Ruben......................................... 65
Kanjorski, Hon. Paul E....................................... 66
Miller, Hon. Gary G.......................................... 67
Royce, Hon. Edward R......................................... 68
Martinez, Hon. Mel........................................... 69
Snow, Hon. John W............................................ 73
Additional Material Submitted for the Record
Snow, Hon. John W.:
Written response to questions from Hon. Joe Baca............. 86
Written response to questions from Hon. Ginny Brown-Waite.... 82
Written response to questions from Hon. Katherine Harris..... 82
Written response to questions from Hon. Barbara Lee.......... 80
Written response to questions from Hon. Brad Sherman......... 85
Written response to questions from Hon. Nydia M. Velazquez... 83
THE TREASURY DEPARTMENT'S
VIEWS ON THE REGULATION OF
GOVERNMENT SPONSORED ENTERPRISES
----------
Wednesday, September 10, 2003
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to call, at 10:06 a.m., in Room
2128, Rayburn House Office Building, Hon. Michael G. Oxley
[chairman of the committee] presiding.
Present: Representatives Oxley, Leach, Baker, Bachus,
Castle, Royce, Lucas, Ney, Kelly, Paul, Gillmor, Manzullo, Ose,
Biggert, Toomey, Shays, Shadegg, Miller, Hart, Capito, Tiberi,
Kennedy, Feeney, Hensarling, Garrett, Murphy, Brown-Waite,
Barrett, Harris, Renzi, Frank, Kanjorski, Waters, Sanders,
Maloney, Gutierrez, Velazquez, Watt, Hooley, Carson, Sherman,
Meeks, Lee, Inslee, Moore, Gonzalez, Ford, Hinojosa, Lucas,
Crowley, Israel, Ross, McCarthy, Baca, Matheson, Miller, and
Scott.
The Chairman. The committee will come to order.
The committee is meeting today to hear from the Secretary
of Treasury and the Secretary of Housing and Urban Development
regarding their views on the regulation of government sponsored
enterprises. Pursuant to rule 3(f)(2) of the rules of the
Committee on Financial Services for the 108th Congress, the
Chair announces he will limit recognition for opening
statements to the Chair and ranking minority member of the full
committee and the Chair and ranking minority member of the
Subcommittee on Capital Markets, Insurance and Government
Sponsored Enterprises, and the Subcommittee on Housing and
Community Opportunity, or their respective designees, for a
period not to exceed 22 minutes, evenly divided between the
majority and the minority.
Prepared statements of all members will be included in the
record, and the Chair now recognizes himself for an opening
statement.
I want to first welcome Secretary Snow and Secretary
Martinez back to the Financial Services Committee this morning
to discuss the regulation of the housing government sponsored
enterprises, or GSEs, and thank you both for joining us today.
It is my understanding the Treasury Department and the
Department of Housing and Urban Development have been working
closely together with the President to develop a proposal to
reform GSE regulation. I am looking forward to hearing your
insights and recommendations.
The U.S. Housing market has been the engine of growth for
the domestic economy over the past several quarters. Despite a
slowdown in nearly every economic sector, the housing market
has remained vibrant. Now that an economic recovery seems to be
on the horizon, it is important that we act in a reasonable
manner to improve the regulation of the GSEs while at the same
time ensuring that we do not have an adverse impact on housing
or the equity markets.
Ultimately, it is the U.S. Taxpayers and homeowners we must
keep in mind as we seek to improve the current state of
regulation. I hope to work in a bipartisan manner to ensure
that any action this committee undertakes has broad support as
well as input for the Administration.
The housing GSEs were established to provide liquidity to
the housing market and to facilitate access to affordable
homes. These entities have been extremely successful in this
role and have enabled millions of Americans to achieve
homeownership. Their operations have been the model for housing
finance around the world.
However, the GSEs have developed over the years into much
more sophisticated entities than originally envisioned. They
have become highly complex financial institutions with
obligations in the trillions of dollars. As such, it is
important that the GSEs have a robust and sophisticated
regulator to ensure that they continue to operate in a safe and
sound manner.
A strong regulator will send a signal to the markets that
these entities have solid management practices. Confidence will
be restored in the GSEs, and they will be able to get back to
their important work without the distractions that have been
plaguing them over the past several months.
This is not to say that this committee will not continue to
actively oversee their operations. If there is a change in the
regulatory structure of the GSEs, this committee will have to
closely monitor the development and actions of the regulator.
In my opinion, the current regulators do not have the tools
or the mandate to adequately regulate these enterprises. We
have seen in recent months that mismanagement and questionable
accounting practices went largely unnoticed by the Office of
Federal Housing Enterprise Oversight. These problems only came
to light when the company announced them on their own accord.
It is encouraging to know that the boards of these companies
are active and engaged, seeking to operate in the best interest
of their shareholders. However, these irregularities which have
been going on for several years should have been detected
earlier by the regulator.
I would like to thank subcommittee Chairman Baker for his
hard work in reviewing the GSEs and highlighting for the
committee the need for increased regulatory oversight of these
entities. He has demonstrated true leadership on this important
subject matter. As we move forward, I expect to draw on his
expertise in this area.
Secretary Snow and Secretary Martinez, I do indeed look
forward to your testimony and welcome you back.
And I now recognize the ranking member, the gentleman from
Massachusetts, Mr. Frank.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 50 in the appendix.]
Mr. Frank. Thank you, Mr. Chairman.
I appreciate hearing from the two Cabinet secretaries, but
I would say at the outset that before we move on any
legislation, I would hope we would have some additional
hearings. And, in particular, I think it is important that the
variety of groups in our country who care about housing be
invited, because that is my major focus here, as it has been
during my service on this committee.
I want to begin by saying that I am glad to consider the
legislation, but I do not think we are facing any kind of a
crisis. That is, in my view, the two government sponsored
enterprises we are talking about here, Fannie Mae and Freddie
Mac, are not in a crisis. We have recently had an accounting
problem with Freddie Mac that has led to people being
dismissed, as appears to be appropriate. I do not think at this
point there is a problem with a threat to the Treasury.
I must say we have an interesting example of self-
fulfilling prophecy. Some of the critics of Fannie Mae and
Freddie Mac say that the problem is that the Federal Government
is obligated to bail out people who might lose money in
connection with them. I do not believe that we have any such
obligation. And as I said, it is a self-fulfilling prophecy by
some people.
So let me make it clear, I am a strong supporter of the
role that Fannie Mae and Freddie Mac play in housing, but
nobody who invests in them should come looking to me for a
nickel--nor anybody else in the Federal Government. And if
investors take some comfort and want to lend them a little
money and less interest rates, because they like this set of
affiliations, good, because housing will benefit. But there is
no guarantee, there is no explicit guarantee, there is no
implicit guarantee, there is no wink-and-nod guarantee. Invest,
and you are on your own.
Now, we have got a system that I think has worked very well
to help housing. The high cost of housing is one of the great
social bombs of this country. I would rank it second to the
inadequacy of our health delivery system as a problem that
afflicts many, many Americans. We have gotten recent reports
about the difficulty here.
Fannie Mae and Freddie Mac have played a very useful role
in helping make housing more affordable, both in general
through leveraging the mortgage market, and in particular, they
have a mission that this Congress has given them in return for
some of the arrangements which are of some benefit to them to
focus on affordable housing, and that is what I am concerned
about here. I believe that we, as the Federal Government, have
probably done too little rather than too much to push them to
meet the goals of affordable housing and to set reasonable
goals. I worry frankly that there is a tension here.
The more people, in my judgment, exaggerate a threat of
safety and soundness, the more people conjure up the
possibility of serious financial losses to the Treasury, which
I do not see. I think we see entities that are fundamentally
sound financially and withstand some of the disastrous
scenarios. And even if there were a problem, the Federal
Government doesn't bail them out. But the more pressure there
is there, then the less I think we see in terms of affordable
housing.
I want Fannie Mae and Freddie Mac to continue as government
sponsored enterprises with some beneficial arrangement with the
Federal Government in return for which we get both the general
lowering of housing costs and some specific attention to low-
income housing. In particular, I am concerned right now that
there has been--and it has been raised by Fannie Mae, it has
been raised by one of the rating agencies that have been
critical of the Federal Home Loan Bank--manufactured housing.
Manufactured housing is a very important housing resource
for low- and moderate-income people. You talk about increasing
homeownership among low- and moderate-income people, and
disproportionately, if you look at the increases in
homeownership, it has come with their ability to get
manufactured housing; and I do not want to see Fannie and
Freddie pushed in the direction of being tougher on
manufactured housing. And many of us will be in touch with
Secretary Martinez to see how we can improve this.
I have talked to my colleagues in the Congressional Black
Caucus, and the Blue Dogs. This is a very important and, I
think, somewhat underrated form of housing. I think we now see
pressure on it that is generated in part by exaggerated fears
of a financial crisis.
So I am prepared to look at possibilities here, but in
particular--and this is the major point I want to make; I saw
this in the letter from the homebuilders--I do not want to see
any lessening of our commitment to getting low-income housing.
And here is my concern: If you move the regulator to
Treasury and you leave HUD with the mission, I am not sure that
it isn't ``mission impossible,'' or at least implausible. What
is HUD going to do, yell at them? I mean, if all the regulatory
authority and all the clout is over in Treasury, what is left
in HUD? And I noticed that the homebuilders raised that.
So my threshold question is, if you move this regulator to
Treasury, if you bifurcate in terms of the Cabinet departments
the responsibility for the low-income housing mission,
including manufactured housing--very important to me, as I
said--and other forms of housing, if you bifurcate that, what
real strength is there left behind the mission if most of the
regulation and most of the teeth--I guess if you put all the
teeth from Treasury, having HUD gum them into doing more low-
income housing doesn't strike me as the ideal situation.
And that is why I say, Mr. Chairman, in closing, that as we
proceed on this, I would hope we would have a day when groups,
a range of groups that are concerned with housing, could
specifically address that. Thank you.
The Chairman. I think the gentleman makes a good point, and
we certainly will address that.
The gentleman from Louisiana, the chairman of the Capital
Markets, Insurance and GSEs Subcommittee.
Mr. Baker. Thank you, Mr. Chairman. I want to express my
appreciation to you for your continuing leadership on this most
difficult issue. Without your commitment, I am fairly confident
we would not be in a hearing room today to discuss potential
regulatory reform. So my deep appreciation to you for this.
To Secretary Martinez and Secretary Snow, your willingness
to participate here today is very warmly received. And let me
just make a personal observation. Having worked with various
folks over time, I have not enjoyed the professional leadership
and responsiveness to what is a very difficult and
controversial issue with more capability than you two gentlemen
have exhibited.
There was a prior occasion, Under Secretary Gensler, during
the Clinton administration, testified and took a very brave
stand on issues that led unfortunately to significant market
disruption the following day. It is my opinion that given the
way in which you have come at this issue, working now for many
months to come to the best study positions that you could
offer, that much of what you have in the testimony today
reflects prior legislative approaches. Much of what is in 2575
is addressed in the testimony, and I just want to publicly
commend both of you as public servants for the demonstrated
leadership you have exhibited.
I want to briefly and very briefly just characterize why we
are here in light of the ranking member's comments as to the
necessity for this hearing today. Because many members would
not want to sit down and read the history of Fannie or Freddie
as light reading one evening, it was first created, Fannie, by
the FHA Administrator back in 1938, but only authorized at that
time to acquire FHA-insured mortgage loans. It was years later
they were then expanded to acquire VA-insured mortgage loans.
It wasn't until 1970, 1970, that Freddie Mac was created
and that Fannie and Freddie were both given the ability to
acquire conventional mortgages before they were really on the
road to the big time.
There is one other additional historic period important to
reflect on because of the view--what are we worried about--
there is no problem, nothing bad can happen. It goes to the
period when David Maxwell assumed the role as CEO of Fannie Mae
in 1981. It is just instructive.
On that day, Fannie was losing a million dollars a day.
They had $56 billion of home mortgages that were under water.
Now, it wasn't of their own making. There were national
economic circumstances no one could have predicted, but the
fact is, they were in trouble. Had it not been for creative
government accounting and the leadership of David Maxwell,
Fannie Mae might not be with us today.
More recent history has given us another unexpected and
unfortunate lesson. If I had to construct a list of the
potential concerns, managerial risk at Freddie Mac would have
probably been 99 on a list of 100. Needless to say, we were all
shocked to see the disclosure of these events of corporate
governance mismanagement. These institutions had always been
held up as the model for others to emulate, and appropriately
so.
The point to be made about these two brief scenarios of
history is that the GSEs are just corporations. It is difficult
to believe they are just like every other American corporation,
but they are shareholder owned, good old American corporations,
built in pursuit of profit, subject to the same earnings
pressures as any other corporation. They are not infallible,
although they have enjoyed acknowledged success.
Given the environment and the concerns of the committee and
this Congress about the reform of corporate governance, how
appropriate is it for us in this environment to reflect upon
these enterprises and determine how we can enhance safety and
soundness? In recognizing there may be a potential for loss, we
must also recognize that these individual institutions are
unusual in that they have a direct responsibility between the
losses of the enterprises and the taxpayer. Do not forget that
a GSE model is unique. If they make a profit, they get to keep
it. If they lose money, the taxpayer gets the right to pay it
off.
As of the last quarter of 2002, the combined outstanding
debt of Fannie and Freddie was $1.99 trillion, not an
insignificant number; and to appreciate it in the current
context, consider the following remarks issued yesterday by the
International Monetary Fund from its semiannual global
financial stability report, released just yesterday: Recent
developments have highlighted the extremely large, highly
leveraged nature of these enterprises and the risks they are
managing.
Now, inappropriate or not, I find the IMF's concern about
capital adequacy rather unique, but if they now have this
concern, certainly the Congress should share it. To provide any
level of assurance to taxpayer protection, we must have world-
class regulatory capability.
Let me say in defense of OFHEO, it has been dramatically
underfunded since its creation in 1992, and this lack of
support translates into lack of resources and capabilities to
analyze the world's most sophisticated financial institutions.
The regulator has not only been outmanned, it has been
outlobbied. But those observations are not sufficient to
explain why OFHEO has taken 10 years to develop a capital
stress test and being underfunded does not explain how a
glowing report of Freddie's operations was released only hours
before the managerial upheaval that followed.
This is not world-class regulatory work. There are too many
unanswered questions, the stakes, too high. It is up to the
committee to take action needed to get appropriate answers.
Taxpayers need to be assured. Potential homeowners need to have
access to affordable homeownership opportunities. And contrary
to the view of many, this effort will lead to enhanced mission
compliance and opportunities for low-income and affordable
housing.
I am of the opinion, and have been of the opinion, these
enterprises do not meet the satisfactory minimum level in
providing homeownership opportunities to minorities and low-
income individuals. We cannot let protest in the past keep us
from doing what is right in the present. It is time we create a
strong, independent regulator, independently funded with all
the powers necessary to take on the task.
I believe the Secretaries' testimony is pivotal in setting
out the initial step the committee must take. It is not time
for additional reflection. I have been criticized in the past
for having too many hearings and recommended legislative
approaches. Now it is time to act and put this chapter behind
us and move on to doing what is right for our American economy.
Thank you, Mr. Chairman, for your courtesy.
The Chairman. The gentleman's time has expired.
The gentleman from Pennsylvania, ranking member of the
subcommittee.
Mr. Kanjorski. Mr. Chairman, before we hear from the
Administration on the need to alter the current regulatory
system for government sponsored enterprises, I feel it is very
important to outline my views on these matters for our two
distinguished witnesses who are appearing before us today.
As I said in our very first hearing on GSE regulation in
March 2000, we need to have strong, independent regulators that
have the resources they need to get the job done. I continue to
support strong GSE regulation. A strong regulator, in my view,
will protect the continued viability of our capital markets,
promote confidence in Fannie Mae and Freddie Mac, insure
taxpayers against systemic risk, and expand housing
opportunities for all Americans.
To ensure that we have strong GSE regulation, I further
believe that any further legislative reform efforts should
adhere to several principles. First, a strong regulator must
have a single leader for a set term with sole responsibility
for making decisions. In order to conduct robust supervision, a
strong regulator must also have a funding stream separate and
apart from the annual appropriations process and without
improper administrative interference. Moreover, a strong
regulator must have robust supervisory and enforcement powers.
Accordingly, some have suggested that we should model GSE
regulatory authority after those of other financial regulators.
While these proposals have merit, we must determine the
applicability and appropriateness of providing these banking
standards to GSE before proceeding.
In order to maintain credibility, a strong regulator must
additionally have genuine independence. Unless I am convinced
otherwise, such independence must consist of complete autonomy
from the enterprises. It must also include sufficient
protection from outside special interest groups. It must
further have substantial freedom from political interference.
The last point is especially important. As a result of my
experience during the savings and loan bailout, I will approach
any proposal to assert general oversight or supervisory
controls by the Administration or the Congress over any GSE
regulator with great skepticism. We must not allow politics to
again cause systemic implications to our economy. Because our
housing marketplace is one of the most important sectors in our
struggling economy, we must also tread carefully on our
forthcoming congressional examinations.
In short, we have a delicate balancing act ahead of us as
we work to develop any legislation to modify the regulation of
GSEs. We must focus our work on regulatory proposals and not
make fundamental changes in ways in which GSEs operate to their
charter or to their mission. It is also my hope that we will
develop a balanced bipartisan plan of action for addressing
these issues.
In closing, Mr. Chairman, I commend you for your leadership
in these matters. I also look forward to working with you in a
judicious and objective manner in order to ensure that we do
not upset our securities markets or raise homeownership costs
in the weeks ahead.
The Chairman. The gentleman yields back.
The Chair is now pleased to recognize the chairman of the
Housing and Community Opportunity Subcommittee, the gentleman
from Ohio, Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman. I want to thank you, Mr.
Chairman, for the hearing. I appreciate the opportunity. I will
make this a brief opening statement because I know you want to
go on with the witnesses.
I also want to start by thanking Secretary Martinez and
Secretary Snow for being here. I know you have busy schedules,
and as you know, this is an important issue.
As chairman of the subcommittee, I have a keen interest in
the strength of our Nation's mortgage market as our members do
on both sides of the aisle.
GSE regulation is an incredibly important issue for all
Americans. The United States mortgage and credit markets are
the envy of the world. The mortgage market has single-handedly
kept the economy afloat during the recent economic times. I
know we are also aware of that. I think that a consensus has
emerged that it is time to create a new safety and soundness
regulator for Fannie Mae and Freddie Mac at the Treasury
Department.
The important role that GSEs play in the capital markets
and the possible risks they could pose to the financial system,
reconstituting a safety and soundness regulatory scheme,
mechanism, under Treasury I believe is a prudent and necessary
step. Such a move would send an important signal that we
understand the importance of GSEs in the secondary mortgage
markets in maintaining a stable economy and providing
affordable housing to all Americans.
While there is a consensus regarding the safety and
soundness regulator, I am anxious to hear from our witnesses
today on what they believe should be done with HUD's oversight
responsibilities for the important housing mission of the
enterprises, including approval authority for any new program
and enforcement of compliance with affordable housing goals. I
want to commend HUD for all their diligence on this issue since
I have been involved with working with HUD.
I will be asking some specific questions on the issues, but
I would like to make one personal observation. I think it is
important to permit the housing GSEs to have sufficient
flexibility to adapt to a changing mortgage market. We know
today how things change quickly in the United States. The
liquidity that Fannie Mae and Freddie Mac provide to the market
should not be compromised by unnecessary government regulation.
First, I believe that there are several important
components that are integral to providing enhanced regulations
for GSEs while not impeding their ability to support affordable
housing in America. For example, I think it is imperative for
HUD to continue to have an important role as it relates to the
mission's charter and affordable housing goals of Fannie Mae
and Freddie Mac; that role of oversight will be good for
consumers, good for the Nation, and good for housing.
I also have no doubt that the Treasury Department is
unparalleled in its ability to manage safety and soundness for
these corporations. However, Congress has traditionally charged
HUD with the job of supervising affordable and minority housing
in our country, and I believe that these goals can be reached
amicably. I believe the White House is going in the right
direction, as are the committee and the members, and they will
be able to express their views on the intricate details of how
this bill gels through.
I am also interested to hear what our witnesses think
should be done regarding the capital requirements for Freddie
Mac and Fannie Mae, if anything at all. Personally, I believe
the minimum requirements Congress has mandated for GSEs have
done a good job of setting a strong safety and soundness
standard. I think it would be a mistake for this committee to
change those requirements into a regulatory reform, massive
bill. Likewise, I think we should allow the newly required
risk-based capital requirement to take hold before we begin
questioning it. I know there are many critics of OFHEO,
obviously, and its risk-based capital regulation; however, we
should allow a decent amount of time to evaluate its effects
before we begin to completely dismantle it.
The Department of Housing and Urban Development must
maintain its role of leadership in promoting housing, as it has
so effectively done under Secretary Martinez. This agency has
an important role in ensuring that our Nation is focused on
providing decent, affordable housing for all Americans. We must
respect that mission.
Mr. Chairman, I believe you are on the right track. I give
you credit for this hearing, and I know that we need to do the
job right versus just doing the job fast. Thank you.
The Chairman. The gentleman yields back.
The gentlelady from California, the ranking member of the
subcommittee.
Ms. Waters. Thank you very much, Mr. Chairman.
Secretary Martinez, I am pleased that you are here, and I
think that this is a most important hearing. I am told that
there are some other members who have been talking about having
more hearings on this subject and not rushing to judgment in
any way about these proposed changes.
Secretary Martinez, I oppose the transfer of program
approval from HUD to Treasury and I oppose any expansion of new
approval to include so-called ``new activities.'' it is
important that the mission of affordable housing for low- and
moderate-income people stay with HUD, without giving the
Secretary any additional authority over the program activity
business process of Fannie Mae and Freddie Mac.
Under current law the GSEs must submit a new program
approval request to HUD if the initiative is significantly
different from a program that has been previously approved or
it is an activity in which the GSEs have not previously
engaged. Section 108 of H.R. 2575, Mr. Baker's bill, would give
HUD the ability to micromanage the GSEs. The process can only
be intended to slow down the ability of the enterprises to
partner with lenders to bring new mortgage products to market,
including products that assist the disabled, provide needed
housing rehabilitation and provide down payment assistance.
Banks are not subject to such burdensome processes.
Fannie Mae has worked with lenders to expand access to low
down payment mortgages and to extend financing to those with
imperfect credit. These innovations are possible because they
are not stifled by an additional layer of government approval.
This morning we have the opportunity to establish the
framework of how the government sponsored enterprises, the
Federal National Mortgage Association, Fannie Mae, and the
Federal Home Loan Mortgage Corporation, Freddie Mac, will be
regulated. Fannie Mae, as the number one provider of mortgage
funds to low-income families, has been a strong and consistent
partner in providing homeownership. Last year they served 2.9
million families in their affordable housing goals, and 1.8
million families were served in their underserved areas,
geographically targeted goals.
Nothing has happened with Freddie Mac that has raised any
questions about the mission or charters of the two companies.
Given housing's importance to the economy and the importance of
homeownership to America's families and communities, there
should be no interest in changing the GSE's mission.
Mr. Chairman, thank you. I yield back.
The Chairman. The gentlelady yields back.
We now turn to our distinguished panel and let me say at
the outset, it is rare that any committee has two distinguished
Secretaries from the Cabinet testify, and we are honored to
have both of you here today. And also I think you can tell by
the attendance by the members that we have a great deal of
interest in this entire issue, and for that I am personally
thankful to the members.
And, Secretary Snow, we will begin with your testimony.
Once again welcome back to the committee. You need to turn your
mike on.
STATEMENT OF HONORABLE JOHN W. SNOW, SECRETARY, U.S. DEPARTMENT
OF THE TREASURY
Secretary Snow. See, HUD and Treasury are already working
in a full state of cooperation.
Thank you very much, Mr. Chairman, Ranking Member Frank,
and members of the committee for this invitation to Secretary
Martinez and me to appear before you today.
This committee has demonstrated a strong record of interest
in effective supervision of and regulation of the government
sponsored entities, as well as in affordable housing and a
strong, healthy housing market. There is general recognition
that the supervision, the supervisory system for housing-
related government sponsored entities, neither has the tools
nor the stature today to deal effectively with the current
size, complexity and importance of these entities which over
the last decade or so have become among the largest and most
far-reaching entities on the American financial scene.
As we attempt to remedy this situation, we must be mindful
that we have two corresponding objectives that should guide us:
first, a sound and resilient financial system; and second,
increased homeownership opportunities for less-advantaged
Americans.
I am here today to outline the Administration's
recommendation for important improvements that we think can be
made to the oversight of our housing finance system. Secretary
Martinez will discuss in particular the measures that the
Administration would like to see implemented to reinforce and
strengthen the focus on the objective of increasing ownership
opportunities.
First, let me outline the proposal itself, our
recommendation. What is the Administration recommending? Well,
we recommend that Congress enact legislation to create a new
Federal agency to regulate and supervise the financial
activities of our housing-related GSEs. Housing finance is so
important, it is so far reaching, has such significance to the
national economy that we need a strong, world-class regulatory
agency to oversee the prudential operations of the GSEs and the
safety and the soundness of their financial activities--
consistent, however, with maintaining healthy national markets
for housing finance, which always has to be a priority.
Such legislation should fulfill this underlying purpose and
not merely be an exercise in moving existing agencies from one
part of the government to another part of the government. In
other words, we are looking for a value-added proposal here
that enables the new entity to be located within a Cabinet
agency which will give it more heft, more significance and more
expertise and better policy guidance.
We should keep our eye on the crucial task of getting the
regulatory organization right. We think that is the key thing
here. In addition to the housing goals, which Secretary
Martinez will discuss, the legislative objective should be to
create a strong, credible and well-resourced supervisor with
all the powers needed to do the job.
Let me turn now to the issue of what those powers of the
new agency should be. As we see it, this new agency's power
should be comparable in scope and in force and in effectiveness
to those of other world-class financial supervisors, fully
sufficient to carry out the agency's mandate. What does this
mean? Well, as we see it, it means that the agency should have
broad, general, regulatory, supervisory and enforcement
authority with respect to the enterprises. In my written
testimony I give a detailed description of those powers.
Another key issue with respect to financial regulation of
the GSEs is capital and how capital will be treated. Capital,
of course, is the fundamental element of the financial
condition of an enterprise and the capital standards should not
become the subject of frequent change.
But having said this, I am in no way proposing a moratorium
on making any adjustments to the risk-based capital standards.
The existing statutes place a clear responsibility on GSE
supervisors to ensure that each GSE retains adequate capital to
support its risks and to give supervisors the power and the
duty to require capital changes as risks change. We would fully
expect the supervisors to make full and proper use of this
authority as any need arises.
At the same time, we feel that there is a need for the new
agency to have even greater flexibility, even more authority to
adjust risk-based capital standards for the GSEs than is
provided under current law. Broad authority over capital
standards and the ability to change them as appropriate are of
vital importance to a credible, world-class financial
regulator. Capital standards need to be flexible enough to
employ the best regulatory thinking, conscious of the
enterprise' own measures of risk, and adequate to ensure that
the enterprises operate in a safe and sound manner with capital
and reserves sufficient to support the risks that arise in
their business. We believe the legislation should provide the
new agency with this more ample and more flexible authority.
Where should the new agency be located? The administration
is prepared to consider putting the new agency within a Cabinet
department if, Congress considers the additional benefits of
the stature and the policy support that can come with that to
be valuable. Any such arrangement would need to protect the
independence of the agency over specific matters of
supervision, enforcement and access to the Federal courts.
But it is our view that if real value is to be provided by
the Cabinet agency by placing the new regulator within a
Cabinet department, then we need to be able to draw upon the
resources of that department for policy guidance and for
expertise. At a minimum, the new agency should be required to
clear new regulations and congressional testimony through the
department. If that combination of operational independence and
policy oversight is provided in the legislation, the
Administration would be willing to support putting that new
agency in the Department of the Treasury.
Another subject of enormous importance with respect to the
GSEs, of course, is corporate governance. Corporate governance,
good corporate governance, as we have come to recognize,
requires that there be great clarity that the people running
large companies are there to serve the interests of the
stockholders and that their incentives and loyalties be aligned
with those of the stockholders. The principle here, of course,
is that one man cannot serve two masters simultaneously.
Freddie Mac and Fannie Mae are large, experienced publicly
traded enterprises that have grown significantly and taken
important places in our capital markets. Reflecting on that
fact, we would recommend that the Congress consider whether the
statutory requirement for Presidential appointment of members
to these publicly traded GSE boards of directors serves a
useful purpose anymore; and if you are so disposed, we would
support that--that is, the Administration would support their
elimination, as well.
The question arises, how broadly should these new
regulatory powers be applied to the GSEs? Is it all GSEs or is
it just Fannie Mae and Freddie Mac?
I want to make it clear that I have not limited myself in
my remarks to one group of housing GSEs. The importance of our
housing finance markets requires that all of the housing GSEs
be included in a system of world-class supervision. Therefore,
we see the need for and the desirability of the Federal Home
Loan Banks' being under such a regime, just as we see it
desirable for Freddie Mac and for Fannie Mae. However, we
recognize that while broad-based support appears to exist for
action on how to provide that supervisory system for Fannie and
Freddie, a similar consensus may not exist with respect to the
Federal Home Loan Banks. We would, however, be willing to and
would look forward to working with Congress, the Home Loan
Banks and other interested parties to see if a resolution can
be achieved on this issue as well.
So, in conclusion, where are we? Let me review once again
our main purpose in being here this morning. It is to discuss
how best to promote the strength and the resilience of our
housing finance markets in order to increase, make further
progress in advancing homeownership throughout the Nation.
The housing-related GSEs were created by Congress to assist
in that very mission. Our aim must be to give them the caliber
of supervisor that the importance of their mission requires. In
so doing, I am confident we will promote greater confidence in
the marketplace among investors in these entities and thus, in
that way, we would advance the larger goal of homeownership.
Thank you very much.
The Chairman. Thank you, Mr. Secretary.
[The prepared statement of Hon. John W. Snow can be found
on page 73 in the appendix.]
The Chairman. Secretary Martinez.
STATEMENT OF HONORABLE MEL MARTINEZ, SECRETARY, DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
Secretary Martinez. Chairman Oxley, it is a real pleasure
to be with you today, and Ranking Member Frank and other
members of the committee; and I really am delighted to have an
opportunity to join my colleague, John Snow, Secretary of the
Treasury, to discuss these important matters relating to GSE
oversight and regulation.
Secretary Snow has outlined the principles and priorities
the Administration supports. He and I are in full agreement.
Congress and the Administration have an opportunity and an
obligation to strengthen the regulatory structure of the GSEs.
A strong regulator is in everyone's best interest: the
Administration, the Congress, Wall Street, investors worldwide
and, most importantly, the American taxpayer.
The administration has a dual goal. We must ensure that
through the GSEs financing is available for low- and moderate-
income families, and we must ensure that the GSEs are subject
to rigorous oversight so that they are serving their public
purpose. The housing sector directly accounts for about 14
percent of the Nation's total gross domestic product and the
housing market actively drives closely related components of
the economy as well.
The GSEs play an integral role in our Nation's housing
finance system by expanding the availability of mortgage
credit. The liquidity and stability they provide have helped
buoy the Nation's economy. Because of the housing GSEs' impact
on the economy, it is critical that we ensure their safety and
their soundness.
The Office of Federal Housing Enterprise Oversight was
established following the thrift crisis as an independent
safety and soundness regulator. It was placed within HUD, and
it was essentially to regulate Fannie and Freddie Mac. There is
a misconception that HUD controls and has direct authority over
OFHEO in the exercise of safety and soundness and duties. HUD
does not. By statute, Congress has mandated that OFHEO's safety
and soundness determinations must be made independently of HUD.
To ensure that the GSEs have appropriate financial
oversight and are held accountable to their public mission, the
Administration supports strengthening the power of the GSEs'
regulator. Doing so would make the regulator more comparable to
the stature, powers, authority, and resources of other
financial regulators charged with safety and soundness
oversight. Such a concept has worked well for financial
regulators in other instances, including the Comptroller of the
Currency and the Office of Thrift Supervision.
Currently, safety and soundness regulation is divided, with
new program approvals at HUD and financial oversight at OFHEO.
It is the position of the Administration that both elements of
safety and soundness regulation need to be consolidated in a
single regulator. As Secretary Snow noted, the Administration
considers it appropriate to transfer authority over new program
approval from HUD to a new, strengthened regulator. HUD
supports transferring and strengthening such authority to
include review of all activities, new and ongoing; and such
changes will consolidate and enhance the regulator's oversight
responsibility and increase investor confidence in the GSEs.
As part of this transfer, the Administration is also
proposing that the HUD Secretary continue to be consulted on
new activities requested by the GSEs. Many new activities
directly impact the mortgage and housing markets where HUD has
substantial expertise. This makes it essential that such
consultation take place.
While safety and soundness regulation should be exercised
by a single independent regulator, the Administration strongly
supports retaining another core element of the GSEs' charter,
the housing goals, at HUD.
Congress established Fannie Mae and Freddie Mac to provide
market liquidity and to facilitate the financing of affordable
housing for low- and moderate-income families. Congress also
mandated that the HUD Secretary set housing goals to ensure
that those needs are met. The affordable housing goals were
created to ensure the GSEs are serving individuals in those
communities that are most in need. These goals direct the GSEs
to serve low- and moderate-income families and provide funding
in underserved areas such as the central cities and rural
areas.
A third goal directs the GSEs to finance housing for very
low- and low-income families.
Today, the low- and moderate-income housing goals require
that at least half of all of Fannie Mae and Freddie Mac's
mortgage purchases benefit families in those income brackets.
But as the President's budget noted in February, numerous HUD
studies and independent analyses have shown that the GSEs have
historically lagged the primary market, instead of led it, with
respect to funding mortgages loans for low-income and minority
households. The GSEs have also accounted for a relatively small
share of first-time minority homebuyers.
HUD is the appropriate agency to develop and enforce the
housing goals. Institutionally our mission is devoted to
furthering the goal of affordable housing and homeownership,
and HUD has the most expertise in this area. Furthermore, the
housing industry looks to HUD as the agency in which this
authority should reside. Therefore, to strengthen HUD's housing
goal authority, the Administration considers it appropriate to:
Number one, create a new GSE housing office within HUD,
independently funded by the GSEs to establish, maintain and
enforce the housing goals;
Number two, grant HUD new administrative authority to
enforce its housing goals;
Thirdly, to institute enhanced civil penalties for failure
to meet the housing goals. Explicitly provide that the GSEs act
to increase homeownership; and expand authority to set housing
goals and subgoals beyond the three currently established for
moderate-income, geographic area, and special affordable
housing.
Let me stress that we believe such a comprehensive change
to the regulatory structure will strengthen the confidence of
all GSE stakeholders. Investors will be better protected under
a regulatory system that empowers the regulator to do the job
we expect of them, and the American taxpayers will ultimately
benefit.
Secretary Snow and I look forward to working with the
committee members to strengthen oversight of the housing GSEs,
to ensure that they are in every way meeting their public
purpose and that homeownership continues to be an affordable
option for American families.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Secretary.
[The prepared statement of Hon. Mel Martinez can be found
on page 69 in the appendix.]
The Chairman. And to both of you, we thank you for your
excellent testimony and your continued cooperation in this
endeavor. And, indeed, it is an endeavor that will be
successful only if we have an opportunity to work together to
craft bipartisan legislation that deals with the goals, I think
that all of us share, in terms of a world-class regulator for
the GSEs, as well as a continued commitment on the part of HUD
towards low-income housing.
And I suspect that the turnout today from the members
indicates that strong interest, and you both will be focal
points moving forward to get legislation passed.
I was reading a recent brokerage firm report that indicated
that Congress' efforts to strengthen the regulator for the GSEs
will ultimately be looked on favorably by the capital markets,
and I think both of you mentioned that a first-class regulatory
structure is in the best interest of both the GSEs in this case
and the markets, and that ultimately it would appear, based on
this study, that that is the case. And that is clearly our
effort.
Secretary Martinez, you mentioned you were talking about
housing goals within HUD. How much of that can be achieved
through the regulatory structure and how much has to be
achieved by legislation?
Secretary Martinez. I believe it is necessary for
legislation to enhance the effectiveness of a regulator as it
relates to goals. Right now, we can set goals, but we really
need enhanced authority to enforce those goals, to enforce
broader civil penalties so that, really, there will be teeth
behind the goals that we set.
We also want to make sure that we create a set of subgoals
because, right now, the goals are a bit broad, and we want to
make sure that by setting subgoals, we then can create the
right regulatory framework to give some targets and also to
have the enhanced oversight authority which would really have
to come through legislation.
The Chairman. So Congress would have to set up the overall
structure of what you anticipate and then allow you to work
within that framework?
Secretary Martinez. Correct. And then we can have
regulations to follow.
The Chairman. Secretary Snow, you mentioned the potential
of including all GSEs in the regulatory change, specifically
the Federal Home Loan Banks.
It has been my observation, at least at the current time,
that there is a divided opinion among the Federal Home Loan
Banks, in a general sense of regional difference, I guess. It
appears that the West Coast entities appear to be a lot more
enthusiastic about being included. In my area, in the Midwest
and, I suspect, the South, there is far less enthusiasm.
Is it possible during a relatively short time period of
passing legislation that we would be able to include the
Federal Home Loan Banks without a consensus within that
community?
Secretary Snow. Mr. Chairman, I doubt it. I think unless a
consensus develops fairly quickly that we would get bogged down
in lots and lots of time-consuming efforts that would
jeopardize the larger objective here of putting in place that
world-class regulator I talked about for Fannie Mae and Freddie
Mac. So I would not personally want to see that issue get in
the way of moving forward on legislation for which there seems
to be pretty much broad-based support today.
I would hope, though, that the Federal Home Loan Banks
would caucus and would review the situation and meet with us
and meet with Members of Congress and see if there could not be
some resolution on that within the time frame to get this
legislation done this year.
The Chairman. Thank you, Mr. Secretary.
Mr. Secretary--both of you actually--I would like you to
indicate at least some general positions on the special
exemptions that the GSEs currently now enjoy. Specifically, I
think our members, and I certainly, would be interested in the
tax status of GSEs and their exemption from registration under
the 1933 Act.
How does that play into what your testimony has stated and
in terms of our trying to pass legislation?
Secretary Snow?
Secretary Snow. Mr. Chairman, we do not propose addressing
those issues in this legislation. And I think the important
focus for this legislation is that strong, effective, world-
class regulator. So it would be our view that those issues do
not need to be addressed now.
Some of those issues, like the 1933 Securities Act, we
actually come down saying they should not be addressed on
substantive grounds because we don't see the need for Freddie
or Fannie to be put under the 1933 Act.
The 1933 Act basically deals with fraud in the issuance of
securities. There is no evidence of that. The SEC itself has
indicated, I understand, that they would not want to see that
happen because given the volume of issuances by the two major
GSEs, they would swamp the resource base of the SEC; and there
is no evidence of any need to deal with the fraud issue.
So we would actually oppose putting them under the 1933
Act.
The Chairman. Secretary Martinez.
Secretary Martinez. I believe Secretary Snow and I have
concluded that the most important thing we can accomplish
through these hearings and with the proposed legislation we
presented today is a strengthened regulator.
There are many other issues that could arise, and we would
be happy to continue to see the development of legislation. But
today, our proposal is the focus of what we recommend, and I
think it solely focuses on a strong regulator, a combined
regulator for all of safety and soundness, and then the
strengthened aspects of regulation at HUD to give us the real
tool box that we need to enforce the parts of it that would
remain at HUD.
The Chairman. Thank you. My time has expired.
The gentleman from Massachusetts.
Mr. Frank. Secretary Martinez, I was glad to hear you say
that, and on page 3 you make some very strong statements about
the need to enhance the Federal executive ability to impose the
housing goals.
Are you going to be developing specifics that give us
these?
Secretary Martinez. Yes, sir. We would have very specific
recommendations----
Mr. Frank. I think that is very important.
Secretary Martinez. Yes.
Mr. Frank. The problem you have is, there could be a
tension between the Treasury worrying about safety and
soundness and HUD worrying about affordable housing; and there
is a tension there. One way is that if affordable housing was
as safe and sound as everything else, we wouldn't need a
government mandate to do it. There is a certain amount of
greater risk. You want to minimize it. How does HUD stay equal
in this tug-of-war?
Secretary Martinez. Those tensions exist today, but the
problem today is that we don't have--HUD doesn't have the
ability to really impact the regulatory framework within OFHEO,
while at the same time there is this perception that there is
some oversight that the Secretary of HUD may exercise.
Mr. Frank. I just want to tell you, I agree with the goals
you spelled out. I am skeptical of what is going to happen to
the housing mission if most of the regulation is in Treasury--
--
Secretary Martinez. We still have a consulting role. I
mean, in other words, as it relates to the mission, as it
relates to new program approval, the proposal is going to
continue to come to HUD for consultation before product
approval of new products would happen.
Mr. Frank. I am unimpressed by the right to consult. By
virtue of my job, I have got the right to consult with a lot of
people who ignore the hell out of me, so that reinforces my
fears.
If Treasury regulates and HUD consults, Treasury wins. And
you talk about more than consulting here in terms of the goals.
Secretary Martinez. Well, on the other part of it, see, the
problem is that safety and soundness should all be in one
place, and we believe that not only the ongoing mission of the
GSEs and current programs, but potential new programs should
come under close scrutiny and regulation.
Beyond that, we at HUD would then have the real enhanced
type of regulation that would enable us to assist you as you
are seeking to make sure that these entities are really meeting
their housing goals.
Mr. Frank. Well, I am skeptical again if all the regulatory
authority is there, they approve new programs. You set out some
goals--new administrative authority went out, enforced housing
goals, et cetera; and you have to show me that there is not
going to be a situation where Treasury is pushing in one
direction and affordable housing in the other. I will need to
see specifics here to believe that----
Secretary Martinez. We will give you some specifics. But
the truth of the matter is, there is going to always be some
tension between insisting on a certain set of goals and then
also----
Mr. Frank. I agree, Mr. Secretary, but here is my point. I
think Treasury is going to be the big brother here, and if one
set of goals is in Treasury and the other set is in HUD, I
worry about an institutional disadvantage for the set of goals
that are important to me.
Let me, with that, turn to the Secretary of the Treasury,
because what I am struck by here is what is not in here; and I
am glad it is not in here. We have heard descriptions of the
situation regarding GSEs as a great crisis and an imminent
threat to financial stability. This does not change the
essential relationship of the GSEs legally.
I am not for changing that, but I think we ought to note
that this is not a document put forth by people who think that
the sky is about to fall or that we are going to have serious
damage; and I am struck by that moderate quality.
Let me ask you, Mr. Secretary--and again I appreciate that
there is not a lot of rhetoric in here about how terrible these
are. I appreciate that you think we should enhance the
regulation, but I get the impression that you were talking more
about guarding against potential future problems developing,
rather than feeling that there is an urgent need to stave off
some crisis.
Are we in a crisis now with these entities?
Secretary Snow. No, that is a fair characterization,
Congressman Frank, of our position. We are not putting this
proposal before you because of some concern over some imminent
danger to the financial system for housing; far from it. Rather
what we are saying is, since 1992, or whenever it was that
OFHEO was established by statute, over a decade ago, these
housing markets have developed.
Mr. Frank. Getting bigger.
Secretary Snow. Huge. Hugely. And those entities have grown
and become now very large players on the whole financial
landscape of the United States. We just feel it is time to----
Mr. Frank. Good. I think it is important to have that, to
make it clear that that is the context.
Let me just close by saying, I look forward to this, and I
have given you my skepticism. Housing has been my primary
issue, affordable housing has been my prime issue, and I need
to be convinced. We haven't done as good a job as we should in
enforcing those goals, but I will have to be convinced that
they won't be at an institutional disadvantage.
Secretary Snow. I don't think I will convince you by this,
but as I view this institutional arrangement that we are
proposing, Secretary Martinez and HUD would have the clear
primacy on the question of what is the mission.
Mr. Frank. And what happens if they don't meet the mission?
Secretary Snow. If they don't meet the mission, the
Secretary is asking for enhanced authority to have disciplinary
powers to strengthen his hand in seeing that the entities do
meet that.
Mr. Frank. I just worry that we are going to get them in a
situation where the most important question for Fannie Mae and
Freddie Mac to answer is who do you like better, your mother or
your father?
Secretary Snow. Well, as Secretary of the Treasury, if this
authority comes to Treasury, I would view our responsibility as
soundness and safety within the larger parameter of the goals
that are given to the GSEs by----
Mr. Frank. I appreciate that. Ten more seconds. But
obviously if we can find some way to write that sort of thing
into the law, because personalities change, I would feel maybe
a little less skeptical.
The Chairman. The gentleman's time has expired.
The gentleman from Louisiana Mr. Baker.
Mr. Baker. I obviously have a number of subjects I would
like to cover, but I am going to focus in this first 5-minute
opportunity on two different approaches. One is just a
clarification, as I understand, the explanations of intent. And
two are--with regard to enhancements I see in your approach
over H.R. 2575.
With regard to capital, Secretary Snow, I was very pleased
to hear your comments so forthrightly with regard to the
moratoria issue. There has been much discussion that there
would be some 5-year artificial prohibition on regulatory
action. And I want to go just a bit further in understanding
the broad authority for supervision of capital adequacy.
My question goes to the point that although you preface it
by saying, we do not intend in any way to adversely impact the
risk-based capital standard recently promulgated by OFHEO, you
do wish for the new regulator to have unbridled authority to
adjust minimum risk-based capital adequacy based on an
assessment of risk and the leverage ratios of either
enterprise. Is that a fair characterization?
Secretary Snow. Yes, that is.
Mr. Baker. Secondly, that with regard--and this is perhaps
something for both gentlemen. With regard to product approval,
as I read the testimony, it appears that the broad authority
again granted or requested in that instance is not only to
prospective, but to currently authorized products that you may
wish to review for whatever reason. In other words, you are
looking for a broad grant of authority with regard to product
approval. Is that a fair characterization?
Secretary Snow. Yes, sir.
Mr. Baker. Then there are two points that I find very
important that are beyond what has been proposed in 2575. One
is with regard to the importance of the Presidential
appointment of board members. Some have expressed concern that
if the agency is located within the Treasury, that that will
politicize the environment in which managerial decisions may be
made. This sends an extraordinary message, in my opinion, to
the broader market that you want the management of this
enterprise to be separate and distinct from political
appointment, which is a--the first time this proposal has been
proffered. Is that correct?
Secretary Snow. Yes. Very much so, Mr. Baker. We view these
as large, substantial and important private enterprises, and
private enterprises don't have their board membership
determined by a political process involving the President of
the United States. They have it through a nominating committee.
And we think that normal corporate governance processes
that apply to other major companies and other financial
institutions, and which is now recognized as the right way to
do things, that is the nominating committee taking the lead on
board membership, should apply as well to Freddie and Fannie.
Mr. Baker. Terrific.
The next is, with regard to--I had recommended at one time
consideration of a receivership process in the unlikely--
acknowledged unlikely event there would be adverse economic
developments, and it would be a necessity to act. In lieu of
granting the regulator customary receivership authority, what I
understand is an enhanced conservatorship, fairly unlimited,
where the regulator could make appropriate decisions on behalf
of the taxpayer, liquidate assets as required, satisfy creditor
claims, whatever is necessary up to the very last chapter of
the process, which would be included in a receivership, but not
in your plan, and that would call for the revocation of the
charter, which would now, under this view, be left for
congressional determination; that you view it appropriate for
something of that magnitude to be determined as a matter of
public policy, not as an executive responsibility to close out.
Is that a fair description?
Secretary Snow. That is precisely what we are suggesting.
Mr. Baker. Well, let me say on both of those last two
points, these are significant improvements over proposals in
the past, and I think you are to be credited.
I have a significant list of other things, but I will defer
for other Members. Thank you very much, sir, for your
leadership.
The Chairman. The gentleman yields back.
The gentleman from Pennsylvania Mr. Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
Mr. Secretary, let me get this straight. You did answer Mr.
Frank's testimony that there is nothing occurring of high risk.
And since we are talking about reforming some of the largest
financial institutions and their regulatory mechanism, what is
the pressure to do this in the next 6 weeks? Congress is
anticipated to adjourn sometime late October, early November,
and this proposal comes to us timely in terms of we are glad to
have the Administration make a proposal. But I think to put a
6-, 8-week time frame on it raises some interesting questions.
Secretary Snow. Well, Congressman, obviously you will have
to decide what priority to give it and whether to deal----
Mr. Kanjorski. So there is nothing essential that we move
through and have daily hearings here and move a piece of
legislation because there is no high risk to the system?
Secretary Snow. No. We are not before you, as I answered
Congressman Frank, because of an imminent risk that we perceive
of any kind. Rather there seems to be a coming together of the
parties who take an interest in this subject behind a set of
proposals that I think are pretty close to what I have outlined
here, maybe not precisely, but pretty close, that gives us an
opportunity to use that momentum to move forward, if the
Congress chooses to do so, and we would urge you to do so.
Mr. Kanjorski. I am impressed with the work you have done,
but I worry about some of your definitions. I agree that we
should have a strong, independent, world-class regulator. Now,
my question to you is can you name any world-class regulator or
financial institutions of the United States that has their
policy set and their testimony reviewed by Treasury?
Secretary Snow. No. We don't review the----
Mr. Kanjorski. So are you using the terminology ``world-
class,'' but you are not talking about making the type of
regulator here that regulates the banking system or other
entities in this government? You are talking about a usurpation
of authority over the regulator by Treasury.
The idea--let me put it very succinctly. The idea that
Treasury on behalf of the Administration would be reviewing
testimony that is going to be made to this Congress is most
offensive for a very simple reason. The World Trade Center
disaster, the EPA's Administrator was going to release notice
to the American people of hazardous materials in New York. It
was this Administration that put a clamp on the release of that
information.
Why should we as the Congress in representing the American
people assume that if there were real dire information that was
going to be released or disclosed by the Administrator at a
time that was not propitious to the Administration, politically
or otherwise, that they wouldn't put a clamp on that testimony?
Secretary Snow. Congressman, as I am sure you are aware
that Treasury has that very authority today with respect to the
IRS.
Mr. Kanjorski. Well, the IRS----
Secretary Snow. The IRS is an institution of great
sensitivity.
Mr. Kanjorski. I am not sure that quite frankly we should
brag about the IRS. Didn't we just recently have to pass a
Taxpayers' Bill of Rights?
Secretary Snow. You asked me whether or--Congressman,
whether or not there was any entity in Treasury which would
serve as a predicate for this. I am saying the IRS is a
predicate.
Mr. Kanjorski. Well, if that is the best example you can
give as a world-class regulator, the IRS, I don't think the
American people----
Secretary Snow. You asked for review of testimony, and I
said Treasury does review IRS.
Mr. Kanjorski. I asked for an example of a world-class,
strong regulator.
Secretary Snow. Until I think it is the mid-1990s, that
Treasury did have that--did review the testimony of the OCC.
Mr. Kanjorski. And thank heavens we put that aside. What I
am suggesting is, look, I am one of the few members of this
committee who was here in the S&L crisis, and I think if we are
going to attach anything, it was a conference committee that
adopted a piece of legislation in 1982 that almost destroyed
the financial--the S&L industry in this country and caused a
catastrophe 10 years later that we are still paying to bail out
in this country.
And I don't think that, one, we should rush to judgment.
Two, I certainly don't want political influence, whether it be
the Administration or this Congress, getting involved with an
independent, strong, world-class regulator.
The day that the Federal Reserve wants to concede that the
Secretary of the Treasury and the White House should pass on
its testimony, that is when we should allow the regulator of
these entities to have their testimony passed on by the White
House and Treasury, and not until that day, if we are going to
use the term world-class, and I believe we should.
And I think that using that term ``world-class'' sets a
standard now for Treasury and for Housing to really work with
this committee and the Congress to establish a world-class,
independent, strong regulator, which doesn't mean that they
have to carry their testimony and have it filtered by the
Administration or Secretary of Treasury.
Secretary Snow. Congressman, can I just respond to put
this--to give you our perspective on it and why we are
recommending it as we are?
The Treasury's role would be limited basically to policy.
The regulatory functions, the day-to-day supervision, the day-
to-day oversight, the enforcement actions, the litigation and
so on would be fully and completely under the control of the
new regulator.
Mr. Kanjorski. The housekeeping would be under the
regulator?
Secretary Snow. I would not call litigation and enforcement
housekeeping. That is the guts of what regulators do.
Mr. Kanjorski. Regulators have a responsibility to come to
this Congress and the American people and, without a filtering
process, to tell us what the status is of the bodies they
regulate, what they are in, what is the problem. They don't
have the responsibility of coming up here and giving us
filtered information that meets the considerations and the
interests of the Administration at any given time.
I am not just suggesting this Administration, but the
policy we are talking about establishing here and the world-
class regulator is going to be in place for the next 10, 20, 30
years, and I would not be very impressed with Mr. Greenspan
coming up here and talking for an hour or two to tell us how
the economy is if I knew that the Administration and the
Treasury just spent the last 2 weeks filtering his testimony.
The Chairman. The gentleman's time has expired.
The gentleman from Iowa Mr. Leach.
Mr. Leach. Let me just begin by thanking Chairman Baker and
Chairman Oxley for an extraordinary job of bringing us to this
point, and also the two Secretaries for moving their
departments as far as they have. But, the big picture is, and I
think it has to be emphasized, that these are two private
sector enterprises, but they have public powers, and one of the
great questions is should they be regulated at a different
level than all other private sector organizations? And up to
this point in time, regulation of these GSEs has been largely
written by the GSEs, and that should be understood. And now the
question becomes where do we go from here?
And I think the Secretary is exactly right, that these
should come under the executive branch. And clearly he was
being a little understated when he said an executive branch
department. It must be the Treasury.
And here then the question becomes, what about the Federal
Home Loan Bank System? It is absolutely imperative that they be
regulated the same way, and there shouldn't be a compromise on
this. It is just definitive that OFHEO is an inadequate
regulator, well-meaning but inadequate. The Finance Board is
grossly inadequate, and its inadequacy is so stunning that not
to insist that it be brought under Treasury in the same kind of
way at this time would be a massive mistake.
Now, in the initial organization that we set up between
OFHEO and Treasury and HUD, there is an effort by the GSEs to
bifurcate responsibility and, for example, have the mission
with HUD, and frankly, it is a mission that HUD has never
looked at very seriously. I am not relating to any particular
Secretary, it is just not a mission that HUD has taken
seriously. I think it is clearcut that mission should go with
the regulator. It should be at Treasury as well.
Now, finally, there is a little bit in the background of
this that I am uncomfortable with. And Chairman Baker was quite
thoughtful in his delineation and questioning of you, Secretary
Snow, but the press has reported that kind of in a compromised
way that there have been quiet understandings that have been
developed between Treasury and the GSEs about no change in some
sort of regulatory framework that exists for a 5-year period. I
will tell you that that is nonsense.
The notion that a publicly empowered, private sector
enterprise should have lower capital standards than a private
sector enterprise is really defiant of common sense, and I
think that you ought to have a full understanding that a
regulator should respond to the public interests and to the
competitive interests of the American enterprise in as
equitable a way as possible, and that no new regulator should
be shackled by any understandings prior to its establishment.
And that doesn't mean that the current framework isn't--is
all bad, because it certainly isn't. There are aspects that are
quite thoughtful. But to shackle a new regulator with any
implicit understandings to begin with, I think, would be
defiant of the idea of the independence of that regulator and
also defiant of common sense.
Here, America is a little bit embarrassed. I mean, the IMF
this week, of all things, and I am amazed that they have
entered into this fray, but it suggested that the GSEs are
undercapitalized. Whether they are right or not is not so much
the question as it is--it is very interesting that you are
getting both world and national attention to American
regulatory oversight. And I think it is something we can't take
lightly.
And so I would be very, very concerned that there be
implicit agreements made in advance that don't fit the
circumstance, and I would also be very concerned if we don't do
it in a profoundly correct direction rather than in a slightly
correct direction at the very beginning.
And, Mr. Secretary, I would like you to comment on that, if
you would.
Secretary Snow. Well, I am in very broad agreement with
what you just said and don't take exception to it, to any of
it.
The legislation, in my mind, would be much better, as I
suggested, if it could include the Federal Home Loan Banks. I
think it--if it doesn't, then one big piece of this integrated
set of relationships is left out, and I think will eventually
be picked up, but the sooner it can be picked up, the more
coherent the regulatory framework would be. I agree with you.
On the issue of implicit understandings, there can't be
any. There aren't any. There was some newspaper article to the
effect of some 5-year moratorium. That is why I explicitly
dealt with that in my comments. Where that came from I have no
idea, but there can't be any shackles or any restrictions of
that sort on the new regulator.
At the same time, I make the point that things like these
risk-based capital standards probably should not be changed
willy-nilly. There is some logic in a regulator having some
precedental value of rules that have been entered into. But
what we are asking for here is that the current statutory
restrictions on the regulator in the construct of those risk-
based standards be removed. That is the--that all of those
restrictions, all of those definitions of how the regulator
should do it be removed.
So I am in broad agreement. There are no understandings,
implicit or otherwise, that would restrict the new regulator.
The new regulator, though, will enter the fray working with a
set of arrangements that it will want to review, but which are
in place, and which will set the rules of the road for some
interim period of time as the new regulator begins to review
and think through what, if any, more appropriate sets of
arrangements should be established.
The Chairman. The gentleman's time has expired.
Secretary Martinez. May I just quickly comment, Mr.
Chairman? Mr. Leach--and I don't take any personal offense
about the comment about the seriousness with which HUD has
approached its purpose, and I won't comment on prior HUD
Secretaries, but I do want you to know that as I have looked at
my responsibilities and tried to exercise them, that I have
also found the resources that HUD has had available to exercise
that mission seriously are not there, which is why I have
insisted--and this proposal includes a number of things that I
think are vitally important to us being able to fulfill that
mission.
One of them, for instance, which I think is tremendously
important, is the assessment authority, to give us the teeth
necessary to really enforce the goals that Fannie and Freddie--
which, by the way, I should also state they have always made
and met the goals that HUD has set for them.
But I still believe having an enhanced opportunity to do
that type of mission would really be the kind of seriousness of
purpose that would allow us to fulfill it.
The Chairman. The gentleman's time has expired.
The gentleman from Vermont Mr. Sanders.
Mr. Sanders. Thank you very much, Mr. Chairman.
And thank you both, Mr. Martinez and Mr. Snow, for being
with us today.
Let me begin, very briefly, by concurring with the
statement that Mr. Frank made a few moments ago. Clearly there
is a major housing crisis in this country. Barbara Lee and I
and others are working on a national affordable housing trust
fund concept, which has over 200 cosponsors.
Mr. Chairman, I hope that this committee would be able to
work with Mr. Martinez, putting on a major conference which
gives us the opportunity to hear from housing advocates all
over this country as to how we can solve the housing crisis.
And I hope that that is something that we could do.
But let me for a moment change directions and ask Secretary
Snow a few questions. Mr. Secretary, let me begin by thanking
you very much for the meeting that we held in your office last
July with some Members of Congress, the AFL-CIO, the AARP and
other groups who were very concerned about the proposed cash
balance pension regulations that were drawn up by the Treasury
Department.
As you know, it is our view that these proposed regulations
would not only be a disaster for older American workers, but
that, in fact, they would be illegal and are in violation of
Federal age discrimination law. Now, since that meeting that
you graciously hosted, several positive developments have taken
place for workers who have seen their pensions slashed by up to
50 percent as a result of cash balance pension schemes.
Number one, on July 31st, the Southern Illinois Federal
District Court ruled that IBM's cash balance pension conversion
violated the pension age discrimination laws that are on the
books. They are illegal.
Number two, just last night an amendment that I offered to
the Treasury/Transportation appropriations bill to prohibit the
Federal Government from using any taxpayer dollars to assist in
overturning this pro-employee Federal court ruling won with
overwhelming support, bipartisan support, 258 to 160.
So what I would like to ask the Secretary are two
questions. First, Mr. Secretary, given the IBM court decision
and last night's overwhelming vote against cash balance plans,
will you commit today to either withdraw the proposed
regulations on cash balance plans or at least commit to not
moving forward to finalize them?
Second question, Mr. Secretary, I want to ask you about a
very serious related issue. According to an article in today's
Wall Street Journal, quote, ``in an unexpected move that
involved doctored Treasury documents, the House passed an
amendment that could prevent the Treasury from issuing
controversial pension regulations.'' From the Wall Street
Journal.
On Monday, an IBM lobbyist, Susan M. Semantakowski, sent a
document she called the, quote, ``Treasury Statement of
Opposition,'' end of quote, to various lawmakers' staffs,
including Mr. Gutknecht. The Treasury document on official
Treasury letterhead, and I have that document here, noted,
quote, ``Treasury strongly oppose the Sanders amendment,'' end
quote, and advised lawmakers to oppose the amendment, which it
said will weaken the defined benefit plan.
Tara Bradshaw, a spokeswoman for the Treasury Department,
said, ``the agency didn't issue the document. It is a Treasury-
generated fact sheet, stating our position on a set of past
documents that were never offered.''
However, they were not sent in the format that you
provided, and therefore appear to have been doctored. We were
not aware the document had been circulated beyond a very
limited number of select staff.
Mr. Secretary, my question to you, second question, is did
the Treasury Department authorize sending out these talking
points against this amendment? Your spokesperson indicates that
it was not the case? Number two--well, can you tell me that,
sir?
Secretary Snow. I am not aware of any authorization for any
talking points of the sort you are commenting on.
Mr. Sanders. Do you agree with your spokeswoman, Tara
Bradshaw, that the agency didn't issue this document?
Secretary Snow. Yes. Certainly I am not aware of it. If she
said it, then she would know, and I would agree with her.
Mr. Sanders. If that is the case, would you agree with me
that this is a very serious fraud? If IBM or any other company
was sending around doctored Treasury documents using the
letterhead of the U.S. Department of Treasury, is this a
potentially very serious violation of Federal law?
Secretary Snow. Congressman, I better not comment, because
I really don't know the facts on this, but it is certainly
something that I intend to look into, now that you have brought
it to my attention. This is really the first I have heard of
this.
Mr. Sanders. Well, this was in the Wall Street Journal
today.
Sir, if your spokesperson is correct, and if a private
corporation was using the letterhead of the Department of
Treasury to fight against an amendment which, in fact, won
overwhelmingly, I would hope that you would agree with me that
is a hugely serious issue warranting an investigation by your
Department and the Department of Justice. Can I have your
commitment to go forward on that?
Secretary Snow. I will certainly look into this and try and
get at the base of what the facts are and take whatever steps
are appropriate in response.
Mr. Sanders. Can I expect to hear from you----
The Chairman. The gentleman's time has expired.
The gentleman from Ohio Mr. Ney.
Mr. Ney. Thank you, Mr. Chairman. I want to ask a question
of Secretary Snow.
I am aware, as you are, of the strength of the housing
market in the United States and how that has supported our
Nation's economy, which, as I stated earlier during a recent
economic downturn. The market, as you know, relies on a
constant flow of liquidity provided by the secondary mortgage
markets, and the strong capital base among the regulated
companies. I think we can all agree that the stability of a
strong capital regime is important not only for safety and
soundness, but also to signal the strength of this sector of
our economy.
Now, it is my understanding that you are recommending no
change to minimum capital standards for Fannie Mae and Freddie
Mac and no current change to the newly adopted risk-based
capital standards. I state this because it is important to have
stability in the capital markets. Is that correct?
Secretary Snow. Yes. That is right. What we are recommend--
no, we are not recommending any change in the current standards
as part of this legislation. That is correct.
Mr. Ney. Mr. Chairman, the second question, we all
recognize the issue of GSE regulations as vital to our Nation's
housing markets, and as Chairman of the housing subcommittee, I
believe that your comments about the need to strengthen the
safety and soundness are critical to the stability of the U.S.
Housing markets. I commend you on that.
As we move forward, I just want to make sure that we are
all taking from the same page. So to be clear, what we are
talking about today is moving safety and soundness regulation
of Fannie Mae and Freddie Mac to the Treasury Department?
Secretary Snow. Yes.
Mr. Ney. We are not really talking about any adverse change
to the housing mission, nor are we talking about any changing
to the GSE charter or status in the marketplace. Is that
correct?
Secretary Snow. That is basically correct, although, as
Secretary Martinez has said, the Administration is recommending
strengthening the hand that HUD has on that side. And we are
recommending one change, and that is that the President no
longer have responsibility for appointing some number of
directors to the two entities. Other than that, no.
And we would, of course, want to see the strong regulator
put in place, and then the strong regulator would deal with
subsequently the issues you raise, like what are the
appropriate risk-based capital standards. But we are not
changing those in the legislation.
Mr. Ney. Thank you, Mr. Secretary. Thank you.
The Chairman. The gentleman's time has expired.
The gentleman from Illinois Mr. Gutierrez.
Mr. Gutierrez. I want to thank you. I want to thank
Treasury Secretary Snow and HUD Secretary Martinez for
appearing before us today. It is clear, after having read their
statements and listening to their testimony, that they
understand the vital role of GSEs in making home ownership a
reality for low-income and minority families. And I want to
tell them both that I look forward to working with them in this
process to improve the financial regulation of the companies
and allowing their important role to continue.
You know, we have the best housing finance system in the
world, but it is not for everyone. Home ownership rates are at
historic highs, 68 percent, but it is only at 47 percent for
African Americans and 46 percent for Hispanics. The GSEs have a
congressionally chartered mission to make home ownership more
affordable and more available.
I want to make sure that in this legislative process, these
companies are able to continue their work to reach potential
homeowners in underserved populations and underserved areas of
our Nation. HUD establishes clear goals that companies must
meet in lending to low- and moderate-income Americans in
underserved areas, and special needs populations, and I was
delighted to hear from Secretary Martinez that they have always
met the expectations of HUD.
And I know the Secretary wants more resources in order to
make those housing opportunities available to more. I know that
many of us work with both Freddie Mac, and I particularly with
Fannie Mae in my congressional district, and I understand they
have pledged $700 million in housing capital to several--4.6
million minority Americans by the end of the decade. I want to
applaud those efforts.
In whatever final regulatory structure is determined for
housing GSEs, we should be careful to preserve the ability of
all housing GSEs to improve the secondary mortgage market by
developing innovative new products which are consistent with
their mission. And they have many. Parents can help now. We
have got it down to 5 percent. There is all kinds of things
taken into consideration so that people can get into it, and I
think that is what makes Fannie Mae and Freddie Mac unique.
So I support strengthening. And I would just like to ask
Secretary Martinez and Secretary Snow if they can just assure
us today that the new structure that is being proposed will not
disrupt the important mission these companies play for
potential homeowners in underserved populations and in
underserved areas of our Nation?
Secretary Martinez.
Secretary Martinez. Sir, I believe that it is important for
us to keep in mind that the GSEs and Fannie and Freddie,
specifically, play a vital role in the housing market in our
country; that they have had a tremendous impact in the booming
housing market that we have enjoyed over the last several
years.
In addition to that, I just also want to make sure that we
state that President Bush is committed to increasing minority
home ownership. We have had that as a focus in our Department.
And Freddie Mac and Fannie Mae have been part of the
Administration's American dream--Blueprint for the American
dream, commitment partners in that effort. They do good work.
We want to ensure that also is the case into the future. By
providing us with some additional tools for us to fine-tune the
housing goals, I think it would only enhance our ability to
enforce the housing goals, but also their ability to meet them.
I also believe, Congressman Gutierrez, that as we look to
expand the role of homeowners, as you expressed and as we are
working together to do, that creating more investor confidence
in the GSEs, that giving the financial markets that confidence
of a strong, world-class regulator will invite more investors
to come into the housing market to invest, therefore providing
more liquidity and hopefully lower mortgage rates, and that at
the end of the day is the real key to increasing home ownership
for low- and moderate-income people.
Mr. Gutierrez. I thank you, Mr. Secretary, for that
response. I look forward to working with you and Secretary Snow
in achieving what we need to achieve to put confidence that is
necessary into it, but allowing them the ability to be
innovative, to be creative, and to put the products out there.
I would like to yield the rest of my time to the gentleman
from Vermont Mr. Sanders.
Mr. Sanders. I thank my friend very much.
Mr. Snow, you didn't get a chance to answer the question,
the first question. That is, given the IBM decision from the
Southern District of Illinois and last night's vote on cash
balance plans, will you commit today to either withdrawing the
proposed regulations, or at least commit to not moving forward
to finalize them?
Secretary Snow. Congressman, I want to review that
legislation that carried last night. In the process of
reviewing those court decisions, I have not yet fully digested
the three major decisions that have come down since our good
meeting over at Treasury, but let me say this to you. We take
seriously these concerns that you, among others, have been in
the forefront of raising. I think I expressed to you my
commitment to deal with this issue with the utmost seriousness
that it deserves. And let me say, without making the commitment
you are asking me to make, that I will commit to work with you
toward finding a satisfactory resolution to what now is a very,
I will grant you, tangled situation.
The Chairman. The gentleman's time has expired.
The gentleman from the first State Mr. Castle.
Mr. Castle. Thank you, Mr. Chairman.
I would just like to thank the distinguished Cabinet
Secretaries for being here, for making real proposals before
this committee. We are used to attacking and defending. We
often don't get red meat such as this to deal with. I for one
have enjoyed this morning and enjoyed what you have done.
I just would like to clarify a couple of things. Let me
start with you, Secretary Snow. On page 6 of your written
testimony, you stated in the context of this accommodation of
operational independence and policy oversight, the
Administration, quote, would be willing to support proposals to
establish a new agency at the Bureau of the Treasury.
That is not quite as strong as, we are proposing, or we
absolutely agree with. Is there a reason why that is not quite
as solid?
Secretary Snow. Yes. I will tell you, Congressman Castle,
what the hesitancy there is. We don't see a lot of merit in
simply putting OFHEO in Treasury. If you want to do that, you
might as well just leave it where it is. What we are talking
about--and I understand this sensitivity on politicization, but
what we are talking about is putting it in Treasury so that the
policy resources of Treasury, the expertise of Treasury can be
brought to bear on the new regulator not in a way that is
politicized. I want to make that clear, but in a way that
brings this--the range of expertise that Treasury has, dealing
with all financial markets--to bear on the question of these
important housing markets which also impinge on all of those.
Mr. Castle. But it is not a hesitancy to have this
regulatory agency in Treasury, it is more of what you just
stated.
Secretary Snow. No. If we got it on those terms, we would
strongly recommend it.
Mr. Castle. What about funding sources? You stated on page
2, inadequate resources. Would the funding sources be dedicated
sources or subject to appropriations? Have you given any
thought to that?
Secretary Snow. We feel that, again, it would be best and
we would strongly recommend that it not go through the
appropriations process. We think the strong, independent
regulator concept is enhanced by the self-funding rather than
being dependent on Congress, which opens it up to
politicization.
Mr. Castle. Thank you.
Tell me the rationale--and honestly I don't understand the
technical differences in some of these things as perhaps I
should, but the inclusion of the Federal Home Loan Banks. Most
of the concern here has been aimed at Fannie Mae, Freddie Mac,
and you don't hear as much about the Federal Home Loan Banks.
And I see in these proposals that they are included, probably
rightfully so, but I would like to hear the rationale.
Secretary Snow. The rationale is that the Federal Home Loan
Banks, in the aggregate, have a very large impact on financial
markets and raise similar sorts of soundness and safety issues,
and are very similar in nature in many ways to the other
government-sponsored entities, to Fannie and Freddie, and,
therefore, we feel logically there is a fit. They are doing
basically the same thing with the same sort of Federal
involvement, and the same sort of soundness and safety issues.
That is the rationale.
Mr. Castle. Secretary Martinez, you sort of have been
answering this through this morning, but just in sort of a
general sense, it is your conclusion that if this restructuring
took place pretty much as outlined by the two of you here this
morning, either by legislation or fiat of the executive branch
or whatever it may be, that the focus on housing that you speak
about, particularly low-income and middle-income-type housing,
is a mission that you could carry out better than you do today?
Is the bottom line, is the scale--this would be an
improvement in terms of the delivery of your services?
Secretary Martinez. I think it would be a tremendous
improvement because the real importance to our mission is in
the housing goal--in the--is not in the new product approval,
in which we would only have that consultation role. But it is
in the other part, which is in the housing goals, and the
setting of the goals, and the enforcing of these housing goals.
I think that in that instance that we will have a tremendously
enhanced ability to do the job.
I believe also, dovetailing into the answer that Secretary
Snow gave to you with respect to the location of the regulator,
I believe it is tremendously important that we have a world-
class, fine regulator with all of the tools needed in that tool
box to be an effective regulator. That is far more important
than the location of the regulator. And in the way we have
described it here, safety and soundness, including current and
new program approval, should be under one roof with one
regulator, not bifurcated, not divided.
And then the second part, the housing goals would remain at
HUD. And also very important, the fair lending--observance of
fair lending would also remain at HUD. But with the scheme we
are proposing, it will enhance our ability to meet the desired
goals of why the GSEs were created, which is providing mortgage
money to low- and moderate-income families, to first-time home
buyers and minority home buyers.
Mr. Castle. Thank you, gentlemen. I agree with what you are
trying to do. I hope we can work together to make sure we do it
correctly.
I yield back.
The Chairman. The gentleman yields back.
The gentlelady from California Ms. Waters.
Ms. Waters. Thank you very much.
First of all, let my say to Secretary Snow that when I
rushed in this morning and gave my opening statement, I failed
to acknowledge you, and let me apologize for that. I am
certainly pleased that you are here and have enjoined working
with you, and appreciate the assistance that you gave to us on
the Haiti issue. So welcome.
Secretary Snow. Thank you very much.
Ms. Waters. We are glad that you are here.
My question is directed to toward Secretary Martinez. In
your testimony, you described how you would like to strengthen
HUD's housing goal authority by way of creating a new GSE
housing office within HUD, independently funded by the GSEs to
establish, maintain and enforce the housing goals.
You also go on to describe that it would grant HUD new
administrative authority to enforce its housing goals,
institute and enhance civil penalties for failure to meet
housing goals, explicitly provide that the GSEs act to increase
home ownership and expand authority to set housing goals, set
goals beyond the three currently established for moderate-
income, geographic area and special affordable housing.
Mr. Martinez, I am very much aware of Fannie Mae's
contribution to affordable housing. Fannie Mae provides the
most affordable housing capital for low- and moderate-income
and minority households of any company in the Nation. In 2002,
Fannie Mae financed over $136 billion in loans to nearly
985,000 minority families.
Fannie Mae also, I am told, must achieve specific
affordable housing goals set for the company by you, the
Department of Housing and Urban Development. And the company
has surpassed every goal since HUD first began setting goals in
1994.
Above and beyond the HUD goals, Fannie Mae leads the market
in providing home financing, of course, to minorities.
Secretary Martinez, if it ain't broke, why do you want to
fix it? Have the GSEs ever missed their housing goals?
Secretary Martinez. The housing goals as formulated
currently have always been met by the GSEs, but what we are
talking about here is to enhance those goals, because while I
am not here to suggest to you that GSEs are not valuable and
have not played a tremendously important role, and that they
are a tremendous asset to the housing market, I also must point
out to you that our studies show, and other independent studies
also show, that they have historically lagged the primary
market instead of led it with respect to funding mortgage loans
for low-income and minority home buyers.
So they have also accounted for a relatively small share of
first-time minority home buyers as compared to the market at
large, without the advantages of being a government-sponsored
enterprise.
Ms. Waters. As compared to the market at large?
Secretary Martinez. Correct.
Ms. Waters. Meaning all of the banks and financial
institutions and the mortgage companies, they have lagged in
first-time home buyers?
Secretary Martinez. Correct.
Ms. Waters. I would like to see that study.
Secretary Martinez. Well, my point in that is not to
suggest that we don't value their contribution. We tremendously
value it. But at the same time we also believe that in order
for us to fulfill our mission like you expect us to do, that we
have got to have the tools to do it. We need to have an office
that is devoted to GSE oversight and regulation, those parts of
it that we will keep at HUD.
In addition to that, we need to have the financial ability
for assessment, just like other regulators of financial
institutions do, so that it is depoliticized and it is handled
as a regulatory matter. We believe that those things being done
in the way we are proposing here will enhance what you and I
are both trying to do, which is get more home ownership
opportunities into minority households and into low- and
moderate-income people so they can taste the dream of owning a
home.
Ms. Waters. Well, certainly, Mr. Secretary, we certainly do
have the same goals. What I don't want to see is an expanded
bureaucracy. You are talking about setting up a whole new
office, and you are talking about having them pay for it. As
you know, many communities depend on these GSEs for all kinds
of new activity that will lead to home ownership. And they
support this in many different ways, and sometimes some very
constructive ways. I don't want that stifled. I don't want
another layer of bureaucracy to prevent that kind of
flexibility. And I am really worried about them, if they have
met all of their goals, and you think that they need to have
new goals set because they are good at what they do, why don't
you just set new goals and let them continue to do what they
do, rather than setting up a whole new bureaucracy to do it?
Secretary Martinez. Because right now we don't have the
ability to fine-tune the goals, to set them the way that we
want to set them. That is why we are asking for the additional
power through this legislation. In addition to that, I truly
believe----
Ms. Waters. And you are saying that you have to have a
whole new office to do that?
Secretary Martinez. Here is what I want you to understand.
I don't want to juxtapose your appreciation for GSEs and mine.
We are on the same boat. We agree that they have been good and
valuable, they do a lot of good in neighborhoods. They have
created liquidity in the mortgage markets.
What I am looking to do is to enhance that opportunity, to
give the markets more confidence in the GSEs, and then give us
the ability to live up to the responsibility we are given by
Congress, which is to oversight appropriately.
In order for us to get it done and get it done right, I
believe that we need these enhanced opportunities and these
enhanced powers, and that really is as a result of having been
in HUD for a couple of years, having had an opportunity to look
at issues that have come up, and not always felt like we had--
we had the expectations that we would carry it out, but not
always the ability to carry out our mandate.
Ms. Waters. We may not have--is my time up? Okay. Thank
you.
Mr. Baker. [Presiding.] Mr. Royce.
Mr. Ross. Thank you, Mr. Chairman.
Secretary Snow and Secretary Martinez, we thank you both
for your testimony. And I want to share with you, I have
proposed to create an independent regulator in the Treasury
Department with greater enforcement powers to oversee the three
housing GSEs, Fannie, Freddie and the Federal Home Loan Banks.
And I think this proposal is important not only because it
creates a new agency in Treasury, but also because it includes
regulation of all three housing GSEs, and it mandates the new
agency Director to work with other financial institution
regulators through FFEIC. This country needs a world-class
regulator of the housing finance sector, and I think we all
know that Treasury has the expertise to create one.
Experts believe that all three GSEs need to be in the mix
if we want to achieve effective safety and soundness oversight.
These are the largest derivative players in the world. We are
talking in each case about portfolios that are in excess of
half a trillion dollars in interest rate derivatives. So the
new regulator needs to see the whole market to ensure the best
practices of risk management.
There is another argument for including all three GSEs in
regulatory reform. The bond market experts that I have talked
to have told me that if Fannie and Freddie receive a new
regulator under Treasury, and if the home loans remain under
the finance board, then on a relative basis, Fannie and Freddie
would have a competitive advantage in the bond market, and thus
a lower cost of capital.
We should not enact legislation that favors one group of
GSEs over the other. I know some of my colleagues are concerned
that while right on the merits, inclusion of the Home Loan
Banks could derail regulatory restructuring for Fannie and
Freddie, and others have suggested that we should not include
the home loans in any legislative effort because it is
politically difficult.
Well, I disagree with both of those views. Over the last 2
months, I have sensed momentum building for this proposal to
include the three GSEs. Some of the most significant players in
the bank system have endorsed this concept. These are not just
west coast players. I know this as a fact. I have had
conversations with them. I believe support is much broader than
the Chairman indicated. And as the others understand they are
going to be at a cost of capital disadvantage, they will come
around as well.
So, Secretary Snow, we have an historic opportunity here to
create the optimal world-class regulatory framework to protect
the financial system and the taxpayer, and I think this is the
time for us to show leadership. We heard from Federal Reserve
Chairman Greenspan. He said we need all three GSEs included, to
view GSEs in total. You have said all three should be in. We
know it is the right thing to do. We know momentum is building
for it. Why don't we just do it?
Secretary Snow. Well, Congressman, I am in broad agreement
with everything you have said. And I, of course, reviewed,
before coming up here today, H.R. 2803, your legislation, and
see, as you know, broad complementarity between your
legislation and what we are proposing as a set of concepts.
No, for the reasons you state, this is one market. They are
part of this market, and they ought to be included. And the
reason I suggested earlier that I thought that, despite some
holding back on their part now, there was a good prospect that
they could come aboard, is the very cost of capital discrepancy
which would be created, which I think there is a growing
recognition of. And that will compel their entry into this
regulatory system, or else they will be at a terrible
competitive disadvantage. So I think, at least I am hopeful,
that as they see this legislation moving, they are going to
want to be aboard.
Mr. Royce. Well, I think we should include--you know, as we
move forward, I think for all of the reasons that you have
indicated, Secretary Martinez has indicated, we should put
forward this legislation in the optimal version and see if we
cannot gather political support for it as we mark up the
legislation. That is what I am proposing.
Secretary Snow. Congressman, I would very much agree with
you and hope that we can do that. I do want to make this point
clear, though, that from the Administration's point of view,
from Treasury's point of view in particular, just changing the
geography creates no rationale to put it in Treasury.
The rationale for putting it in Treasury is this broader
market knowledge which can be brought to bear on these issues
because these markets integrate with lots of other markets.
Mr. Royce. And the expertise and managing those and so
forth. Thank you, Mr. Chairman.
Mr. Baker. The gentleman's time has expired.
Mrs. Maloney.
Mrs. Maloney. Thank you, Mr. Chairman.
I thank you, Secretary Snow and Martinez, for your
testimony, and I am pleased that the Administration has joined
the debate on reform of the GSE regulators. I personally have
long believed that the GSE regulators should be strong and
independent and not subject to the yearly appropriations
process to preserve safety and soundness, and I have
cosponsored legislation in the past, advocating this position.
I believe the current situation where OFHEO's resources appear
to be stretched thin as it deals with the Freddie Mac
restatement is an example of why this reform is needed.
But before I get into specific questioning, I also want to
say that I am very concerned with the developments at the
Federal Housing Finance Board on the issue of multidistrict
bank membership. If we are going to have a 21st century Federal
Home Loan Bank system, I believe it needs to reflect the
reality of today's financial services industry where company
operations are no longer confined by region or state lines. And
I want to let you know that I want to work with you to resolve
this issue, if it is determined that legislation is needed to
make multidistrict membership possible.
My first question deals with GSE loan limits. Currently the
GSE loan limit is well below the cost of the average moderate
family home in the district that I represent, and many others
across the nation. And I would like to know, is there any
inclination on behalf of the Administration to further reduce
that limit in any legislation, and do you favor keeping the
process the same for setting the loan limits?
Secretary Martinez. Congresswoman Maloney, if I might try
to answer that. I would say that we have reviewed that at HUD
from time to time, and have concluded that under the various
suggestions that have been made, the limits would probably
remain the same, given a different way of analyzing it from
what currently is done.
And at this time we would be willing to discuss this
further with Members if this is your desire, but we do not have
a proposal to alter the current way in which the loan limits
are set. It is not part of what we are proposing today, but we
would be open to discussing it further.
Mrs. Maloney. Thank you.
And, Mr. Snow, you mentioned the wider range of knowledge
of Treasury, and I would like to really question how GSEs would
fit into Treasury's role as a participant in the capital
markets. And as you know, the Federal deficit will well exceed
a record half trillion dollars in fiscal year 2004, and are you
concerned that there could be a potential conflict between
Treasury's role as a participant in the capital markets
actively working to finance the U.S. debt, which now will be
with us for many years, and the role as a regulator of GSEs,
who are massive participants in the markets in their own right,
and would--do you see a conflict, or would you favor specific
measures to prevent conflicts?
Secretary Snow. Congresswoman, today, recognizing that both
Treasury and the GSEs are large participants in the debt
markets of the United States, we have a process for very close
coordination. And before the GSEs go into the market with their
debt instruments, they coordinate with Treasury so as to make
sure that we know what they are doing, and we aren't acting in
some way which exacerbates some market condition.
I don't see any reason why that would change. And whether
we go forward with--whether you go forward with legislation to
create this new entity, or whether that entity is in or out of
the Treasury, that coordination, which is a well-established
practice, would continue.
Mrs. Maloney. So you don't think there would ever be a
situation where Treasury would threaten GSEs because of how
their debt issuances could increase competition with the U.S.
government and the debt market?
Secretary Snow. No, ``threaten'' is the wrong word. There
is an interesting coordination, though, and that coordination
goes on today where we regularly are in conversations with the
GSEs about their debt issuances. That is I think an important
practice, to continue to preserve orderly markets, but it is
not a matter of threatening. It is a matter of maintaining
orderly markets.
Mrs. Maloney. My time is up. Thank you very much.
Mr. Baker. I thank the gentlewoman for yielding.
Mrs. Kelly.
Mrs. Kelly. Secretary Martinez and Secretary Snow, thank
you very much for your patience with our questions.
Secretary Snow, I want to congratulate you on the structure
of what I perceive to be an attempt to remove politics from a
regulating system. The independent funding that you have asked
for the new agency is one step. The other step is the fact that
you would remove all presidential appointments from the boards.
I think that limiting those two political possibilities with
regard to this new agency really goes a long step toward
removing politics, and I congratulate you on that because I
think the American public really does not want a political
situation. This is a financial situation and should be not
involved in political structures, but if you are asking for no
presidential appointments on the Fannie and Freddie boards,
would you also call for no presidential boards on the boards of
the Federal Home Loan Banks?
Secretary Snow. That is an issue that I have not addressed
in my testimony and for some reason have not had a chance to
give much thought to. Let me think about that and get back to
you because I have not. Maybe Secretary Martinez----
Secretary Martinez. I believe that currently board members
of the home loan bank boards are not Presidential appointments.
Secretary Snow. The Federal Housing----
Mr. Martinez. That is right. There are no Presidential
appointments.
Mrs. Kelly. So what you are saying then, there would be no
Presidential appointments to the boards of Fannie, Freddie, any
of the GSEs, including the Federal Home Loan Banks, if the
Federal Home Loan Banks were to be a part of this agency; is
that correct?
Secretary Snow. That is my understanding. Because they are
currently appointed by their----
Secretary Martinez. Members of the Federal Housing Finance
Board.
Secretary Snow. By their board members, yes.
Mrs. Kelly. I wanted to ask one more question, and that is,
in your testimony, you talk about timely corrective action.
Would you be willing, both of you, to talk about what you
consider to be timely corrective action? What do you envision
in terms of some kind of an absolute stringent action and a
strong fine? What are we talking about here?
Secretary Martinez. Well, I would say--and, by the way, I
also want to point out that our request is also that those
parts of HUD's oversight over the GSEs that remain would also
be independently funded, just as the Treasury would be. But I
would say that, for instance, if we were to find a deficiency
in meeting housing goals that we would immediately have the
opportunity for enhanced civil penalties that could accrue or
to take other administrative actions to enforce our housing
goals so that we could direct the GSEs to take certain actions
to enforce the housing goals. Right now, while they have always
met them in the past, I think the goal setting as well as our
enforcing of the failure to meet them would be a little up in
the air.
Mrs. Kelly. Secretary Snow, do you want to answer that?
Secretary Snow. With respect to the soundness and safety
and that whole range of the regulatory jurisdictions, the
timing would depend on the regulator's determination of what is
needed. I wouldn't put any strictures or constraints on the
regulator.
Mrs. Kelly. So you would leave it up to the regulators?
Secretary Snow. To act as needed, yes.
Mrs. Kelly. I would like to explore that with both of you a
little bit more, but I am going to yield my time. Thank you
very much for being here.
Mr. Baker. [Presiding.] I thank the gentlelady for yielding
back.
Mr. Gonzalez.
Mr. Gonzalez. Thank you, Mr. Chairman.
I am going to make some general observations which will be
the backdrop for the questions.
You have heard a lot about consensus. My understanding of
the consensus that has been reached among members is that OFHEO
did not do a great job, and we can improve on it, and we should
improve on it. That is our responsibility and duty. But I
haven't heard the consensus that we are going to change the
character or the purpose of a GSE. Because I would challenge
everyone to say if you don't have them in the present capacity
in what they do, then who would fill that void? And there is
room for everyone out there. I truly believe that. I believe in
the competition and I believe in the products being out there,
whether it is the private sector or GSE. It is a combination.
But there is a demonstrated need for the GSE. That is why they
were created and why they continue to be viable today.
There should be constant, effective oversight. How are we
going to do that? We can do it better than OFHEO. My fear,
though, which you all have outlined, and my understanding is
that you all are in agreement, there is a meeting of the minds
that you understand GSE's role, how pivotal and important they
are, and you want to maintain that. So I am hoping that I am
reading that correctly.
Secretary Martinez. Let me leave no doubt about that. You
are reading that totally correctly. There is no
misunderstanding there.
Mr. Gonzalez. I appreciate that because then we are all on
the same page when it comes to that. Let us just see when we
get to the last chapter it remains in that form.
My question to you is, my fear is--which you have
outlined--really it does contemplate indirectly or de facto
changing the charter, changing the mission, changing the
status, and even micromanaging GSEs if you think about what you
all are proposing. Because if you go over just your statements,
which are general in nature, I know, but the powers are going
to be so broad that this world-class regulatory agency is going
to have that they could affect it, and I can say de facto or
even directly with some of the powers that you would have.
So the first question, and it will address it and will
allow you to elaborate on it, let us say Secretary Martinez is
in sync with the GSEs as to the goals, the mission, the product
that gets them there, the means to the end. But you are only
consulting. They only consult you, this world-class regulatory
agency that may be within Treasury or I don't know where.
Which--my second question is world-class regulators require
world-class expenditures and finances, but that is the second
part of the question. The first one is the Secretary is in sync
with GSE and such, they know the products that will get them
there but wouldn't Treasury, if the regulator was in Treasury,
have the final say? Don't they trump you? Don't they trump the
GSE, which goes back to micromanagement?
Secretary Martinez. What I view as a more important
function of HUD's role as the housing-oriented department is
the housing goals. I believe that as to safety and soundness,
where now we have absolutely no oversight over the GSEs because
it is done by OFHEO which by statute is independent of HUD and
the only change would be that also the current and new programs
would then be reviewed by Treasury or by the new regulator, the
fact of the matter is that new program approval is not as vital
a function towards the housing goals of the GSEs as the goals
themselves. So we believe that under this regulatory scheme it
will not lead to necessary conflict but it also will enhance
our ability to enforce the goals and set the goals more
appropriately, while giving Treasury the ability to do
appropriate oversight over safety and soundness.
Don't forget that we are looking now at entities that are
in the neighborhood of $1.5 trillion. These are very vital
entities to the American economy, and I believe that by
definition HUD is not a financial regulator. Some of these
other regulations that you might define as micromanaging are
really no different than the regulations that today any
commercial bank has to live by in terms of bank examiners and
other bank regulators.
So I don't believe that we are really looking to
micromanage the entities. In fact, they are successful, and
they are vital. What we are looking to do is enhance the
confidence that the investor community would have in this
regulatory scheme that would then give them an enhanced ability
to continue to attract more and more market from around the
world into the housing market for the American taxpayer.
Mr. Gonzalez. But the new regulator has the final say as to
how you get from A to B?
Secretary Martinez. It has the final say as to safety,
soundness and current and new product approval, but it does not
have the final say as to what the housing goals should be. And
even today we have that current tension.
Mr. Gonzalez. I understand that, but how you achieve those
goals is pretty important, isn't it?
Secretary Martinez. Yes. But the regulator doesn't tell
Freddie and Fannie--HUD doesn't tell Fannie Mae and Freddie how
to achieve those goals. We tell them here are the housing
goals----
Mr. Gonzalez. The Treasury, would because they would have
final say over a particular product at any given point in time.
Mr. Baker. That has to be the gentleman's last question
because he has expired his time. But would you care to respond?
Mr. Gonzalez. If Secretary Snow or Secretary Martinez would
answer.
Secretary Martinez. I think since I have been in the line
of questioning maybe I should finish what I started, but I do
believe that at the end of the day with consultation from HUD
that we would achieve the kind of joint decision that is
necessary and that responsibly we should come to it. I mean, it
is not an either/or. I think we can work together to get this
done; and, frankly, I would be greatly relieved not to have the
appearance of authority without the actual authority that
currently HUD enjoys.
Secretary Snow. Could I just respond as well that we think
of this new regulator--the GSEs take their mission and their
goals from HUD and, within those set of parameters, the new
regulator would regulate with respect to safety and soundness.
On this issue of micromanagement, the powers that we are
seeking to give the new regulator are the powers that first-
class bank regulators have, that the OCC has or Federal Reserve
has, and I do not think anybody says that the Federal Reserve
or the OCC is micromanaging the Nation's banks and neither by
using these powers will the new regulator be involved in
micromanaging these financial institutions.
Mr. Baker. The gentleman's time has expired.
Mr. Paul.
Mr. Paul. Thank you, Mr. Chairman.
I first want to compliment Mr. Baker for having pursued
this issue. He has been looking at it for quite a few years and
has kept it alive, trying to point out some of the problems
that the GSEs face with the excess of debt and some of the
problems that we face. But I think that, from the conversation
I have heard today, the consensus is that we just do not have
enough regulations and all we need is a world-class regulator
and everything is going to be okay.
I think we are failing to look at the real problem and the
cause of our crisis we face. I am concerned that we are going
to have a world-class adjustment to the distortions that we,
the Congress, the Fed, and the Treasury have created over these
last several decades; and it seems like there is essentially no
concern about that.
These programs were originally set up to help poor people
get affordable housing; today we have a program that helps
people buy a house for over $300,000 and get subsidy for their
mortgage payment. At the same time, the administrators of these
programs make millions of dollars. So I think we have lost our
way on this.
But the biggest concern I have is that Congress is not
looking at the real problem, and to me it has been this implied
credit and implied guarantee of this credit, are we going to
get rid of this line of credit? Not likely, because that would
cause a bit of chaos. But that is what has really blown these
markets up, and they are distorted.
Also, we have the Fed very much involved in this. They
probably wouldn't admit it, but the Fed on occasion will buy
GSE securities. Foreign central banks buy these securities
because it is implied that the Fed is going to come to the
rescue.
Right now, overseas foreigners are buying less of these
securities, and the dollar is a little weaker, and what is
going to happen when they quit buying them or selling them and
what is going to happen to our investors who buy Ginnie Mae and
Freddie Mac? When the dollar weakens, interest rates go up.
Already the interest rates are rising long term. Could a world
class regulator deal with that? Not likely. I mean, I am
concerned that there is going to be a panic out of these
things. As the dollar goes down, interest rates go up. And we
still haven't looked at the problem and that is this allocation
of credit, taking money out of the market, excess of credit to
begin with because the Fed is pumping it up just like they
pumped up the credit into the NASDAQ and you had to have a
burst in that bubble.
Some people think there could be a bubble here. Who knows,
though? It might be a great bit of distortion, but there will
be a correction.
I am concerned, and I would like Secretary Snow to comment
on this. Do you have a concern yourself about what could happen
here? This is a huge amount of debt, a lot of investors, a lot
at stake. What happens if mortgage rates go up three points in
the next year and the dollar keeps weakening? We have a huge
current account deficit, and the currency always goes down when
you run an account deficit like this.
So I would say that we are missing the whole point here
thinking that all we need to do is come up with a new agency
and a world-class regulator and we are going to do some good if
we don't address the subject of the dollar and interest rates.
Secretary Snow. Congressman, as you know, the dollar and
the interest rates are largely a function of monetary policy,
right? And, no, we are not proposing to put the Fed under this
new regulator. What we are proposing to do is to put these
housing entities that have such impact on financial markets
under this new regulator and give that new regulator the
complete authority that would be needed to deal with the
soundness and safety of the financial system that it oversees.
That would be helpful.
Some of the issues you deal with are properly approached
through a sophisticated, risk-based set of capital standards
with a sophisticated regulator applying those risk-based
capital standards and adjusting the capital requirements to the
risks; and those risks include the ones you have outlined, the
risks of interest rates going up 300 basis points or falling
300 basis points. That is what that sophisticated new regulator
would be required to look at.
We are saying, remove the current statutory restrictions on
how you look at risk-based capital. Let the regulator free to
apply the most sophisticated and current and modern approaches
to the question of appropriate capital structure for these
entities.
So, no, we do not go the whole way here in dealing with
some of the external factors that drive these markets, but
taking those external factors is something we cannot control
through this entity. We give the entity the ability to set the
capital standards in a way to take those factors into account.
The Chairman. [Presiding.] The gentleman's time has
expired.
The gentleman from North Carolina, Mr. Watt. Do you want to
try the other mike? This is not a conspiracy. It is like
pitching from the stretch.
Mr. Watt. Nice to know that my baseball coach is not
conspiring against me.
The Chairman. Only once a year.
Mr. Watt. Thank you, Mr. Chairman.
I thank Secretary Martinez and Secretary Snow for being
with us. It has been interesting.
I guess I have the capacity intellectually to differentiate
between regulation of safety and soundness on one hand and the
mission of the GSEs on the other hand as a practical matter.
However, there are some real concerns that I have and I guess I
need to put them out not necessarily for an answer today but to
try to talk through publicly what my attitude might be unless
some of these questions can get answered.
It is a very powerful statement in your testimony,
Secretary Snow, and that you have reinforced, that this
Administration views the GSEs as, quote, ``private
enterprises.'' private enterprises really have not done very
well in achieving things other than making money. Most them do
not really give much of a damn about poor people and whether
they have housing or not, and it seems to me that an
overemphasis in that direction can only make matters worse.
Secretary Martinez was absolutely right in his response to
an earlier question when he said that the problem is that HUD
has never had the resources to meet the mission that it has
been given, and I wonder whether this further bifurcation
doesn't exacerbate that.
I also wonder whether this may be a massive shell game,
much on the order of what we did with the INS when this
Administration decided we didn't need something called an INS
anymore. Let us transfer the responsibilities over to the
Attorney General and let the Attorney General deal with this.
There seems to be a growing first and second team, first
and second class of departments and the importance of
departments in this Administration. Those that control the
financial aspects of what is going on in the world and the
security aspects of what is going on in the world seem to be
getting bigger and bigger and bigger, and the ones that have
some involvement with the human aspects of what is going on in
our domestic environment seem to be getting smaller and smaller
and smaller with less emphasis. So I am worried about that.
I do not know how transferring oversight from OFHEO to the
Treasury does anything other than move a shell. It is kind of
enlightening to me that there is nobody here at this table to
testify on behalf of OFHEO. Where are they? What do they think
about this? Are they so second class now in this hierarchy that
we are not even going to regard their opinion? They have been
the regulators. They are the regulators currently.
So there are some bigger issues going on here that I have
trouble dealing with, and I will keep trying to grapple with
them. I am trying to keep an open mind about this. I am not
adverse to what is being proposed. I just don't see much other
than a shell game going on here, moving something from one
agency to another and in the process weakening the bargaining
power of poor people and lower income and middle income people
who need housing, when it is quite obvious to me that the
private enterprise mentality of the GSEs and this
Administration is directly at odds with the public mission of
providing more housing to lower income people.
The Chairman. The gentleman's time has expired. You may
respond.
Secretary Martinez. If I may comment on a couple of issues
that Mr. Watt has raised.
First of all, Mr. Watt, let me say that I don't believe we
are intrinsically changing the mission of the GSEs, because we
are not touching the charter, and their mission is really given
by their charter, not by what we are talking about here, which
is the regulations of their safety/soundness, new program
approval, and their housing goals.
Secondly, sir, I hope you will support this proposal that
we have, because we are not going to create a smaller HUD. We
are going to strengthen HUD. You are going to give me by this
legislation a new GSE housing office within HUD. You are going
to give me the ability to have that office independently funded
so I do not have to have that office be only funded through the
political process, and that is the way other financial
regulators are funded. You are going to also give me the
ability to have enhanced administrative authority to ensure
those housing goals that we set are being followed. I am going
to have enhanced civil penalties to enforce those housing
goals, and the housing goals essentially are what you and I----
Mr. Watt. Until the Treasury tells you, you can't do it.
Secretary Martinez. That is not correct. That aspect of
what I do will not in any way be under Treasury. The part that
is less important to what we do but that is more connected to
safety and soundness has to do with new and current program
approval. Those things are more closely connected to safety and
soundness. They should be under one regulator, not divided
under two regulators.
The Chairman. The gentleman's time has expired again.
Secretary Martinez. One last thing, if I may say, if in
fact there is an inference that right now because OFHEO somehow
is under HUD that OFHEO and I are working together in oversight
of GSEs, that is a misperception.
Mr. Watt. All the more reason they should be on the table,
it seems to me.
The Chairman. The gentleman from Connecticut.
Mr. Shays. I want to thank you both for being here.
As someone who is tremendously concerned about the GSEs, I
think this Office of Housing Finance Supervision is a step in
the right direction. When I hear some of my colleagues talk
about the present system working so well, in my judgment OFHEO
is a joke. Congress gives them about one-third the money to
regulate, and you all are asking that this office of
supervision have no more power than the OCC, the FDIC, the
Federal Reserve, and OTS, Office of Thrift Savings. So you are
asking that they have no more power, but people in this
committee do not think that the 20th and 40th largest companies
or the second and fourth largest financial institutions should
have the same kind of regulation. It blows me away.
Now, I have to say to you, Secretary Snow, you blew me away
when you said this, that you didn't think they should come
under any security regulation in the 1933 Act because you said
there is no evidence of fraud or corruption within any of the
GSEs, which I think is about as an irrelevant a comment as you
can think of.
That is like saying the S&Ls, no problem here, but it blew
up in our face. The auditors doing consulting, this committee
came and said, no, we don't mind auditors doing consulting.
That blew up in our face.
Enron, the directors didn't direct, the managers didn't
manage, the employees didn't speak out, the lawyers didn't do
their job, the auditors didn't do their job, the bankers didn't
do their job, the investors didn't do due diligence, the rating
agencies didn't do their job, but we saw no problem with Enron.
But when we saw the problem with Enron, we then said we are
going to have Sarbanes-Oxley. And, Secretary Snow, when we did
Sarbanes-Oxley, the GSEs didn't come under it because they
didn't come under the '33 and 1934 Act. So then what did we do?
We voluntarily got them to comply to the 1934 Act.
I don't understand how we can say that trillions of dollars
of transactions shouldn't be looked at. And could you explain
to me why your position would be diametrically opposite to
Allen Greenspan who didn't say we haven't seen corruption? He
said, of course they should be under it. They are a Fortune 500
company. Please explain to me why.
Secretary Snow. Well, Congressman, as you I think know, we
have been in the forefront of urging both Fannie, Freddie and
the home loan banks to go under the 1934 Act.
Mr. Shays. Why urge? Why is it their decision? And Freddie
hasn't even done it yet. And let me ask you this: With all due
respect, isn't it true that Freddie is in a little problem
right now?
Secretary Snow. If I could just complete the answer,
because I think you will get the full picture then.
Mr. Shays. I am sorry.
Secretary Snow. We don't have the authority to mandate they
go under the '34----
Mr. Shays. You can recommend.
Secretary Snow. Well, that is what I am saying.
Mr. Shays. But you recommended they may not.
Secretary Snow. No. Let me just finish the answer, and then
I think you will get the full story.
We have urged them to go under the 1934 Act. Now, you know
the 1934 Act. The 1934 Act deals with corporate disclosures. It
is the act which is the subject of Sarbanes-Oxley, and it is
the fundamental act to oversee the regulation of the securities
markets. We think it is essential that those entities all be
under the 1934 Act.
Mr. Shays. What about the 1933 Act?
Secretary Snow. Now let me move to the 1933 Act and make a
distinction. The 1933 Act deals with a different subject. It
deals with registration of securities, which is a separate
subject, related but separate.
Mr. Shays. You don't think that is important?
Secretary Snow. If you will let me, I will finish and tell
you what I do think. I think that there is no need demonstrated
for those entities to go under the 1933 Act. And maybe you
weren't here when I addressed this earlier, but what I said
earlier is----
Mr. Shays. I just don't want to take my time. You have said
there is no need, and I understand. We just have a dispute.
Secretary Snow. But I am trying to explain why there is no
need. There is no evidence of any fraud in the issuance of
securities.
Now, what the 1933 Act deals with----
Mr. Shays. I need to interrupt you because you have just
repeated your statement. But the bottom line is it has a lot to
do with their reserve requirements, and we know that these
institutions have half the reserves set aside, and I just want
to get to the second point. You, to Mr. Baker, said that this
new authority can exchange reserve requirements, correct?
Secretary Snow. Yes. We----
Mr. Shays. But you said----
Secretary Snow.----are proposing a broad expansion in the
authority with respect to risk-based reserves.
Mr. Shays. But not minimum?
The Chairman. The gentleman's time has expired.
Mr. Shays. Can he answer that question? Not the minimum?
The Chairman. The gentleman's time has expired. The
Secretary could answer----
Mr. Shays. The gentleman was allowed to answer the
question----
The Chairman. The Secretary may respond.
Secretary Snow. We see no need to change the minimum
standards now. What we are proposing, though, is that the
agency have all the authority it needs to deal with capital
standards, and my comments I think were misconstrued by you
when you said I was making some observations with respect to
general practices at these agencies. I was simply talking about
the 1933 Act, and there we see no need for inclusion. In fact,
as I said earlier, I think the SEC has observed that they don't
want to see that happen because the issuances are so vast that
they would overwhelm the process. Congressman, as you probably
know, today, the Treasury has authority with respect to the
issuance of debt instruments by those entities, and we have
seen no necessity to exercise that jurisdiction.
The Chairman. The gentleman from New York, Mr. Crowley.
Mr. Crowley. I thank the Chairman.
I sat here through two and a half hours of testimony, and I
appreciate it, and I know both of you gentlemen have as well.
Both Secretaries have given--it is interesting to me in sitting
here listening to the discussion and your testimony earlier
that two Secretaries woke up one morning and decided that one
would transfer part of their jurisdiction to the other without
considerable amount of discussion and including discussion I am
assuming with the apolitical wing of the White House in
drafting just how that would come about, and I am sure there
was considerable discussion, Secretary Martinez, within your
agency as to whether or not this should happen in the first
place.
Obviously, transferring jurisdiction means responsibility
shifting and a failure to some degree of HUD, not speaking
specifically of your reign during this time but certainly
throughout the history of HUD to properly investigate and to
oversee these entities and now shifting them to Secretary
Snow's division.
I know back in 2002 there was an amendment of VA HUD that
was proposed I believe by Mr. Hinchey to increase the funding
for OFHEO to help them in terms of their needs to properly
regulate Freddie Mac and Fannie Mae, and I will just note that
that amendment was defeated. If it was even allowed to be
brought up on the floor I believe it was defeated by this
Congress.
I think it is interesting that back in 2002 there was an
attempt made to try to bolster the oversight capabilities of
HUD, that it was defeated by this Congress and now the result
is that we see that the answer is to shift responsibility from
the entity that we did not properly in my opinion give
resources to enough to do the job, and we all have had problems
with the oversight, to properly do the job, so the answer is
let us not try to fix it within HUD, let us transfer
responsibility, in fact creating more bureaucracy. I think it
is interesting under this Administration of a Republican
presidency and Republican government both in the House and the
Senate they are actually creating more bureaucracy, is rather
interesting from my point of view as a Democrat.
Secretary Snow, I can't help but have you here in front of
me as well at this time to just comment on the overall issue
that really I think is the heart of what Americans are
concerned about right now. Some of it relates to what we are
talking about. You mentioned earlier that there is no apparent
immediate need to do this. I am concerned somewhat about what
effect this may have on the overall market, the secondary
market but also the market in general.
We know that jobs continue to be lost in this country. I
just note for August alone 93,000 jobs were lost in this
country. That was after the $350 billion tax cut. The
President's package went into effect, and we were told we were
going to see an increase in job creation. In fact, we continue
to lose jobs. At this rate, the President will not see the 1.4
million jobs that he has promised through the end of 2004 if
this continues, and I believe it probably will continue.
My question really is, what is happening in this economy? I
asked the same question of Chairman Greenspan and got a
roundabout answer. And where are the jobs that this country
needs in order to get us back on our feet?
Secretary Snow. Jobs depend upon growth and getting a
strong recovery. The recovery is beginning to get under way. In
fact, it is accelerating; and with the recovery I am confident
we will see jobs expand and unemployment come down. But
employment is a lagging indicator, and one of the things that
is remarkable, Congressman, about the American economy today is
the intensity with which companies and businesses are pursuing
productivity.
The last 3 years have been a period of relatively weak
demand following periods of ebullient demand, very strong
demand, and now without that strong demand, companies have
looked at their cost structures and they have taken out an
extraordinary amount of costs. They have learned to do more
with less. They have gotten more productive, as revealed by
those productivity numbers that came out for the last quarter.
While that is good in the long run because it make the pie
bigger and creates more overall wealth, it is complicating in
some ways this jobs picture. But with the strong growth we are
going to see, I am confident, in the quarters ahead as growth
is now forecast at over 4 percent by many outside forecasters
for the second half and over 4 for '04. We will see those jobs
come back.
Mr. Crowley. Do you want to change the President's
anticipation of job growth of 1.4 million?
The Chairman. The gentleman's time has expired.
Before I recognize the gentleman from Texas, I know, Mr.
Secretary, you have a very important appointment at the White
House at one o'clock; is that correct?
Secretary Snow. Yes, Mr. Chairman.
The Chairman. We will be recognizing Mr. Hensarling for the
last round of questioning, and the Chair would indicate that
members have 30 days in which to submit written questions to
either you or to Mr. Martinez. The gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman. Not wanting to
hold up the President of the United States, I shall be brief.
Not long ago, the Administration nominated Mark Brickell to
head up OFHEO. Should Congress pass legislation transferring
OFHEO's responsibilities to a new agency, is it the
Administration's intention to nominate Mr. Brickell to head
that agency? Do either of you gentlemen have insight into that?
Secretary Martinez. I don't believe I have any information
about that that I can share with you.
Mr. Hensarling. Secretary Snow?
Secretary Snow. Neither do I, except to say we have a high
regard and support the pending nomination of Mr. Brickell.
Mr. Hensarling. There was an article in the Wall Street
Journal today alluding to a study floating around in the other
body indicating that a failure of the GSEs could cost the
taxpayers hundreds of billions of dollars. I am curious, are
you familiar with the study and, if so, do you consider it
unduly alarmist? What opinion might you have on potential
taxpayer exposure?
Secretary Snow. I have not seen that study. I just saw the
newspaper reference to it, Congressman. We look forward to
getting into that, but, no, I have not seen it.
Mr. Hensarling. Finally, in the discussion of including the
Federal Home Loan Banks into the ambit of potential
legislation, do you consider the safety and soundness issues to
be similar, or to be identical? Also, given that the Federal
Home Loan Banks are not publicly traded companies, should they
be under the same regulatory burden and financial disclosure of
publicly traded companies?
Secretary Snow. As you know, some of them have sought to
get under, to make the same disclosures as publicly traded
companies and probably will move in that direction in the
future. Yes, I think for reasons I went over earlier that they
present the same sorts of issues. They are in the same
fundamental markets, and their soundness and safety regulation
ought to be comparable to the other GSEs.
Mr. Hensarling. Mr. Chairman, I yield the balance of my
time to Mr. Baker.
The Chairman. I thank the gentleman.
Mr. Baker. Mr. Chairman, I believe the gentleman is going
to yield to me.
The Chairman. I am sorry.
Mr. Baker. I will make it real quick.
Just for points of clarification, Mr. Secretary, on the
capital issue, I understand the position currently is we do not
seek nor do we expect to change any capital standard
immediately on establishing whatever this new regulatory body
would look like. But coupled with that is the statement that we
do not, however, wish to limit our authority to change capital
standards as we see fit both with regard to minimum or risk-
based, based on a staff analysis of the risk assessment of the
institutions or leverage or whatever standards professionals
may choose to use. You do not want to have a regulatory system
that constrains your ability to act in the public interest.
Secretary Snow. That is right. That ought to be the
decision of the new regulator.
Mr. Baker. Thank you. I thank the gentleman for yielding.
The Chairman. The gentleman's time has expired.
On behalf of the entire committee, let me thank both of you
gentlemen for what was an extraordinary hearing. We have
covered a lot of ground. We appreciate both your strong
leadership on this issue, and the committee now stands
adjourned.
[Whereupon, at 12:45 p.m., the committee was adjourned.]
A P P E N D I X
September 10, 2003
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