[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
REVIEW OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT AND FEDERAL HOUSING
FINANCE BOARD
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
AND THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE AND
GOVERNMENT SPONSORED ENTEREPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 13, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-100
U.S. GOVERNMENT PRINTING OFFICE
96-547 WASHINGTON : 2004
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
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 MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
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
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Texas, Vice Chairman LUIS V. GUTIERREZ, Illinois
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
MARK GREEN, Wisconsin DENNIS MOORE, Kansas
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
VITO FOSSELLA, New York CAROLYN B. MALONEY, New York
JEB HENSARLING, Texas JIM MATHESON, Utah
SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts
TIM MURPHY, Pennsylvania ARTUR DAVIS, Alabama
GINNY BROWN-WAITE, Florida CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
Subcommittee on Capital Markets, Insurance and Government Sponsored
Enterprises
RICHARD H. BAKER, Louisiana, Chairman
DOUG OSE, California, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York
PETER T. KING, New York JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas
EDWARD R. ROYCE, California MICHAEL E. CAPUANO, Massachusetts
DONALD A. MANZULLO, Illinois HAROLD E. FORD, Jr., Tennessee
SUE W. KELLY, New York RUBEN HINOJOSA, Texas
ROBERT W. NEY, Ohio KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona JOSEPH CROWLEY, New York
JIM RYUN, Kansas STEVE ISRAEL, New York
VITO FOSSELLA, New York, MIKE ROSS, Arkansas
JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri
MARK GREEN, Wisconsin CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
PATRICK J. TOOMEY, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
MELISSA A. HART, Pennsylvania BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
PATRICK J. TIBERI, Ohio DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida NYDIA M. VELAZQUEZ, New York
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
C O N T E N T S
----------
Page
Hearing held on:
July 13, 2004................................................ 1
Appendix:
July 13, 2004................................................ 37
WITNESSES
Tuesday, July 13, 2004
Castaneda, Hon. Alicia R., Chairman, Federal Housing Finance
Board.......................................................... 11
Falcon, Hon. Armando Jr., Director, Office of Federal Housing
Enterprise Oversight........................................... 8
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 38
Oxley, Hon. Michael G........................................ 40
Gillmor, Hon. Paul E......................................... 42
Kanjorski, Hon. Paul E....................................... 44
Castaneda, Hon. Alicia R..................................... 46
Falcon, Hon. Armando Jr...................................... 50
REVIEW OF THE OFFICE OF
FEDERAL HOUSING ENTERPRISE
OVERSIGHT AND FEDERAL HOUSING
FINANCE BOARD
----------
Tuesday, July 13, 2004
U.S. House of Representatives,
Subcommittee on Oversight and Investigations
Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises
Committee on Financial Services,
Washington, D.C.
The subcommittees met, pursuant to call, at 2:59 p.m., in
Room 2128, Rayburn House Office Building, Hon. Sue Kelly
[chairwoman of the Oversight and Investigations subcommittee]
presiding.
Present: Representatives Baker, Royce, Kelly, Paul, Capito,
Hensarling, Garrett, Murphy, Brown-Waite, Frank, Kanjorski,
Gutierrez, Inslee, Ford, Hinojosa, Lucas of Kentucky, Clay,
Scott and Bell.
Chairwoman Kelly. [Presiding.] This hearing of the
Subcommittee on Oversight and Investigations will come to
order. I welcome Chairman Baker, and we are actually holding a
joint hearing here.
This afternoon, the Financial Services Committee continues
its series of oversight hearings on the federal agencies within
the committee's jurisdiction by conducting a review of the
Office of Federal Housing Oversight, the OFHEO, and the Federal
Housing Finance Board, the FHFB.
OFHEO is an independent agency and the primary regulator
for Fannie Mae and Freddie Mac, two of the world's largest
financial institutions. The agency's primary mission is to
ensure the capital adequacy and financial safety and soundness
of the government-sponsored enterprises.
The Federal Housing Finance Board is an independent agency
that regulates the 12 federal home loans banks and also ensures
that they operate in a safe and sound manner. Their roles are
critically important to American taxpayers, homeowners and
investors. Fannie Mae, Freddie Mac and the federal home loan
banks provide valuable services to homeowners by increasing
liquidity in the home mortgage markets. Their significance to
and impact on our economy cannot be overstated, spanning across
the entire scope of the financial services sector from the bond
markets, mutual funds, and pension funds, to relationships with
financial institutions, insurance companies, individual
investors, central banks and other institutions in foreign
countries. We must ensure that they are functioning well and
serving the needs that Congress intended.
Over the last few years, the government-sponsored
enterprises have been the focus of increased attention. This
committee has a strong interest in overseeing their regulation.
As we face a growing economy that has been fueled by the
housing sector, Congress must ensure that these entities have
effective and efficient oversight. Since the housing sector
continues to be the engine that drives our economy currently,
our government must ensure that we do not disrupt the steady
flow of low-cost funds to homebuyers, while protecting the
taxpayers.
Today, the committee welcomes the Director of the Office of
Federal Housing Enterprise Oversight, Mr. Armando Falcon. We
are very interested in OFHEO's annual report to Congress, as
well as the agency's recent 2004 budget request for $59.2
million. While this figure represents a significant increase
for the agency, it is important that the OFHEO be well funded
and well staffed to oversee these extremely complicated
institutions. The committee supports OFHEO's request and would
like to hear more about how it plans to use these funds,
including the creation of a new Office of Compliance and an
Office of Chief Accountant.
The committee is also pleased to welcome the Chairman of
the Federal Housing Finance Board, Mrs. Alicia Castaneda. Today
marks Chairman Castaneda's first appearance before the
Financial Services Committee, and we welcome you. We welcome
your testimony on the state of the Financial Board and the 12
federal home loan banks. We look forward to hearing your vision
for the future of your agency.
While we are pleased with the tremendous strides that OFHEO
and the Finance Board have taken to strengthen their oversight
role, the two agencies really remain ill-equipped to handle the
oversight of the GSEs. In order to protect taxpayers,
investors, and homebuyers and restore confidence in the GSEs,
we believe that these entities need a single world-class
regulator to oversee their operations and financial well-being.
I am hopeful that Congress and the Administration can reach
a consensus for reform that strengthens the oversight of the
GSEs and continues to encourage homeownership. In the meantime,
OFHEO and the Finance Board have been very active with a number
of proposals aimed at strengthening the oversight and
operations of the GSEs. The committee is very interested in
learning more about these reforms today, in addition to the
nature and status of the accounting restatements and other
supervisory actions. Specifically, OFHEO and the Finance Board
have been very active in the area of corporate governance.
OFHEO recently circulated a rule that would, among other
things, separate the CEO and chairman functions and require
periodic audit partner and audit firm rotation.
Since its work on Sarbanes-Oxley, this committee has taken
a great interest in pursuing the highest levels of integrity in
corporate governance, and we would like to hear your views on
these issues. As you know, the General Accounting Office has
found that mandatory audit firm rotation for publicly traded
companies may be inefficient and potentially is disruptive.
Given the consolidation in the accounting industry and the
highly complex nature of the GSEs, the committee would like to
hear more about this proposal and what precedent it sets for
publicly traded companies.
Similarly, the Finance Board just voted unanimously to
require the 12 home loan banks to register with the SEC. While
the increased disclosure is generally preferable, we would like
to know more about the significance of this requirement, since
the stock of the home loan banks is not publicly traded like
the other GSE stocks. In the absence of reform legislation, the
committee is also interested in how the regulators intend to
handle other issues such as receivership.
During the debate over regulatory restructuring, there was
considerable discussion about whether a new regulator should be
vested with receivership powers similar to those held by other
financial regulators. The committee would like to know whether
OFHEO plans to address this issue. The issue of multi-district
membership is also significant, considering the recent
acquisitions that several large federal home loan bank members,
which have spurred petitions to the Finance Board to allow
members of the system to maintain membership in more than one
federal home loan bank. Since the issue has an impact on the
way affordable housing contributions are measured among the
federal home loan banks, it is important that we know how the
Finance Board plans to address the multi-district membership.
Finally, the Department of Housing and Urban Development
has recently proposed increasing the housing goals of Fannie
Mae and Freddie Mac. The proposal requires the firms to
increase the percentage of mortgage loans they finance for low-
and moderate-income borrowers, from 50 percent to 57 percent by
the year 2008. While this is neither the role of OFHEO nor the
focus of today's hearing, the committee does have an interest
in determining the impact that this proposal could have on the
safety and soundness of these entities. I hope you can address
this issue today.
I would like to thank my colleague and co-chair of today's
hearing, Representative Richard Baker. Chairman Baker's work on
these issues has been crucial to the reform efforts and has
greatly benefited the American people. The subcommittees thank
the witnesses for their testimony. The American people will
undoubtedly benefit from your views and this important
oversight.
Without objection, all members's opening statements will be
made part of the record. We turn now to Mr. Gutierrez.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 38 in the appendix.]
Mr. Gutierrez. Good afternoon, and thank you, Chairwoman
Kelly, for this hearing, the latest in a series of oversight
hearings on financial services regulators. On this particular
occasion, we are pleased to be joined by Chairman Baker and
Ranking Member Kanjorski of the Capital Markets Subcommittee,
where the witnesses before us usually testify. So let me start
by extending a warm welcome to Director Armando Falcon and
Chairwoman Alicia Castaneda. They actually wrote this out
phonetically for me.
[Laughter.]
Chairwoman Kelly. Maybe they think you have become too
anglicized.
Mr. Gutierrez. Maybe so. It is the first time I have needed
it. They know I am bad with names.
Later this week, the Oversight Subcommittee will be having
a hearing regarding the need for diversity at executive levels
in the financial services industry. I wish that today's panel
were a more typical sight in this hearing room. I hope and
trust that one day that will be the case across America.
Many of my colleagues have expressed a great deal of
concern about the appropriate level of authority that should be
exercised over GSEs by Fannie Mae and Freddie Mac and the
Federal Home Loan Bank. Most of the legislative focus has been
on Fannie and Freddie and OFHEO. However, I want to focus for a
moment on the Federal Housing Finance Board, which just
recently entered into a written agreement with the Federal Home
Loan Bank of Chicago in my hometown. For those of you less
familiar with the federal home loan bank system, each of the 12
home loan banks serves the member institutions in its
districts. The Chicago bank services financial institutions in
Illinois and Wisconsin, but that is not all. The Chicago bank
pioneered a program known as mortgage partnership finance, or
MPF, which provides financial institutions with a source of
liquidity and risk management, and an alternative to the
secondary market.
The Chicago bank started the MPF program in 1997 and now
administers the back-office functions for eight other home loan
banks participating in the program. The three remaining banks
have started similar versions. The Chicago bank is necessarily
engaged in a more sophisticated and complex transaction than
some of the other regional banks, due to its commitment to
success. The MPF program has been good for Chicago and good for
the federal home loan bank system. I think the program will
continue to benefit banks and consumers for many years to come.
Last month, the Chicago bank entered into a written
agreement with its regulator. This agreement requires that the
Chicago bank present the Finance Board with a detailed business
and capital plan and how they are going to manage that
business, taking into consideration not merely regulatory
minimums in the setting of capital standards, but factors such
as interest rate movement. As many of you are aware, I am
deeply concerned about the potential effects that the rising of
interest rates will have, but my focus has generally been on
the consumers who are struggling to pay their mortgage or
credit card bills at the current rates, and will have a much
harder time as rates increase.
While these consumers have little flexibility and often no
alternatives, it is certainly reasonable to expect institutions
to have plans in place to hedge against inflation-rate
fluctuations. What this written agreement between the Finance
Board and the Chicago bank illustrates is the power that the
regulator has in the federal home loan bank system. In this
case, it was a reasonable and appropriate exercise of that
power. However, the Finance Board's predecessor was not always
so judicious. As we know, the federal home loan bank system and
its regulator, the Finance Board, has huge power over them. In
fact, back when there was a Federal Home Loan Bank of Los
Angeles, at one point the Federal Home Loan Bank Commissioner
decided that there should not be one, and it merged the bank
with another.
You know, the Finance Board could do that today if they
wanted to. They could merge or move the banks. When the Los
Angeles bank sued, they lost because the court found that even
if the orders to liquidate the bank, transfer its assets and
readjust the bank district had been motivated by malice of the
Federal Home Loan Bank Commissioner, if the auditors were
otherwise justified by legal purpose, they were not otherwise
illegal or subject to attack on their validity. That is pretty
broad-based power.
That is power. The Finance Board clearly has it and seems
to be using it appropriately at the moment, keeping in mind its
obligation to serve the public good. I only wish that some
agencies like the OCC would have similar power, and did not
seem so afraid to use their power and fulfill their duty to the
public when it requires them to act against the desires of
their regulated institutions.
I want to thank you, Chairwoman Kelly and Mr. Baker and Mr.
Kanjorski, for calling this hearing. I look forward to the
testimony of our witnesses at this hearing.
Chairwoman Kelly. Thank you very much, Mr. Gutierrez.
Mr. Baker?
Mr. Baker. Thank you, Chairwoman Kelly. I certainly
appreciate your courtesy and cooperation in conducting this
hearing. It is highly appropriate from an Oversight and from a
Capital Markets perspective that the two committees focus on
this particular responsibility. I appreciate the opportunity to
work with you and Mr. Gutierrez.
As to Mr. Kanjorski's and my responsibility, there is no
question that the committee has spent considerable time and
effort in first attempting to understand functions of GSEs, and
secondly examining the regulatory adequacy of the current
structure.
To both the Director and the Chairwoman today, I extend my
appreciation for all your efforts over the past months,
particularly Mr. Falcon, over many years of difficulty. I
appreciate your commitment to bring about accountability. I
will be very brief in my opening statement, as I have a fair
number of questions I would like to move to, and certainly
would want to hear the testimony of both our witnesses and move
the hearing along.
With that, I would yield back the balance of my time.
Chairwoman Kelly. Thank you very much.
Mr. Kanjorski?
Mr. Kanjorski. Thank you, Madam Chairman.
We meet today to examine the recent actions and pending
proposals at the Office of Federal Housing Enterprise Oversight
and the Federal Housing Finance Board. These two regulatory
bodies help to ensure that Fannie Mae, Freddie Mac and the
federal home loan banks continue to fulfill their public
mission of advancing homeownership.
Our nation's system of housing finance is not only
extremely successful, but it is also the envy of the world.
More than 68 percent of Americans presently own the homes in
which they live. Government-sponsored enterprises have
contributed greatly to this accomplishment.
This success, however, should not stop us from asking
whether and how we can do a better job with respect to
regulating the housing government-sponsored enterprises and
conducting congressional oversight regarding these matters. We
should always examine ways by which we can improve regulatory
efficiency and lower mortgage rates.
As you know, Madam Chairman, I am also one of the few
remaining members of this committee who participated in the
entire congressional battle to resolve the savings and loan
crisis. I am therefore acutely aware of the need to protect
taxpayers from risk. It is in the public's interest that we
ensure that the housing government-sponsored enterprises
continue to operate safely and soundly. We must further ensure
that these public-private entities achieve their public
responsibilities for advancing homeownership opportunities.
As we proceed today, I hope that our distinguished
witnesses will share their views on corporate governance. I
know that the Federal Housing Finance Board has carefully
studied these issues in recent years and has worked to improve
the performance and accountability of federal home loan bank
executives and board directors.
Nevertheless, I have heard concerns about the need to
improve the expertise on the boards, such as requiring at least
one director to have experience with derivatives. I have also
previously proposed extending the terms of directors from 3
years to 4 years to increase institutional memory at the
federal home loan banks. I am additionally aware that one
federal home loan bank may soon have no representative on its
board with more than 3 years of experience, assuming that none
of its current directors are reappointed later this year.
In recent months, the Office of Federal Housing Enterprise
Oversight has also released its proposed minimum standards for
corporate governance. These standards have sparked considerable
debate, particularly regarding the decisions to separate the
CEO and chairman functions and to mandate the rotation of
external auditors. In addition, I am very concerned about the
failure of the Bush Administration to appoint directors to
serve on Fannie Mae's and Freddie Mac's boards. As a result of
this decision, each board has five fewer individuals to serve
than they usually had.
The failure to appoint presidential representatives on
these boards has increased the burden that each of the
remaining directors must carry. Moreover, it is important to
note that three of the five presidential appointees on each of
these boards had to represent particular concerns or have
specific backgrounds, such as experience in the housing
industry. Unfortunately and counter to congressional intent,
neither Fannie Mae nor Freddie Mac is now benefiting from
receiving these diverse viewpoints.
In closing, Madam Chairman, as I said at our very first
hearing on GSE regulations 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, ensure against
systemic risk, and expand housing opportunities for all
Americans. I therefore look forward today to hearing from the
leaders of the two regulatory entities overseeing the safety
and soundness of the housing government-sponsored enterprises,
and yield back the remainder of my time.
[The prepared statement of Hon. Paul E. Kanjorski can be
found on page 44 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Kanjorski.
Mr. Garrett, do you have an opening statement?
Mr. Garrett. Just to thank you for holding the hearings. I
will defer my opening statement because there are three areas
that I will be interested to see whether they are touched upon
with regard to the comments we receive today. First of all, I
am just coming from another meeting with regard to the money we
are spending, and that is budgetary issues and the amount of
money being requested. Secondly is GSEs involvement in foreign
nations; and finally, with regard to the status of special
examinations ongoing at Fannie Mae.
So I will be interested to hear your testimony on that, and
probably will have follow-up questions at the conclusion.
Again, thank you to the Chairs for holding the hearing.
Chairwoman Kelly. Thank you.
Mr. Hinojosa?
Mr. Hinojosa. Thank you, Chairwoman Kelly.
I want to thank you for calling this hearing. It gives us
an opportunity to hear form both witnesses. I look forward to
your remarks. Thank you.
With that, I yield back the balance of my time.
Chairwoman Kelly. Thank you.
Mr. Scott?
Mr. Scott. Yes, just a couple of opening remarks, Ms.
Chairlady.
Chairwoman Kelly. That is okay. We know what you mean.
[Laughter.]
Mr. Scott. Certainly in view of the fact that OFHEO is the
primary regulator of Fannie Mae and Freddie Mac, and that your
mission is to ensure the capital adequacy and financial safety
and soundness of these two entities, last year Freddie Mac had
one of the largest corporate financial restatements of earnings
and saw the ouster of its top executives. The Office of Federal
Housing Enterprise Oversight followed with an examination of
Freddie Mac's accounting and management practices and a
forensic audit is currently being conducted at Fannie Mae.
This committee has heard testimony that OFHEO was basically
asleep at the switch and did not catch these accounting schemes
early enough. There is general agreement that OFHEO needs to be
strengthened in order to ensure the safety and soundness of
these GSEs as they expand rapidly and rely on complicated
accounting methods.
As we know, legislation has stalled which would consolidate
the functions of OFHEO and the Federal Housing Finance Board at
the direction of the Administration. I believe that several of
the issues that will be discussed today, including
appropriations to fund the regulators and the authority to
issue regulations, would be addressed if Congress were able to
pass GSE legislation. If I understand right, you are asking for
perhaps 50 percent more in funding, an increase of over $20
million from what you asked for last year.
So with that being said, I look forward to hearing the
panel's testimony on the current safety and soundness of the
GSE, and their current commitment to affordable housing goals.
I yield back the balance of my time.
Chairwoman Kelly. Thank you, Mr. Scott.
Ms. Capito?
Mrs. Capito. I have no questions, Madam Chairwoman. I look
forward to the testimony.
Chairwoman Kelly. Thank you.
We now turn to our panel. The subcommittees are pleased to
have with us the Director of the Office of Federal Housing
Enterprise Oversight, Mr. Armando Falcon, and the Chairman of
the Federal Housing Finance Board, Ms. Alicia Castaneda.
Director Falcon was confirmed as the head of the Office of
Federal Housing Enterprise Oversight in 1999. As Director, he
heads the federal agency responsible for ensuring the financial
health of Fannie Mae and Freddie Mac. Mr. Falcon leads a
diverse staff of examiners, financial analysts, IT
professionals, attorneys and external affairs experts. Prior to
this appointment, Mr. Falcon served for 8 years on the legal
staff of the House Banking Committee.
Chairman Castaneda was confirmed by the Senate in December
2003. Ms. Castaneda brings more than 28 years of commercial
banking experience to the Federal Housing Finance Board, most
recently as senior vice president at Bank of America. Chairman
Castaneda is the first Hispanic to be appointed to the Federal
Housing Finance Board and is the first woman to serve as a
director since the Finance Board became full-time in 1990. For
that, madam, I certainly congratulate you heartily.
The committee thanks both witnesses for their appearance
and testimony. Without objection, your written statements will
be made part of the record. You will each be recognized for a
5-minute summary of your testimony. If you have done this
before, you know that the box on the table has green, yellow
and red lights. The green light means you have a full 5
minutes. The yellow light means you have 1 minute, and please
start to summarize. The red light means your time is up.
Let us go to our first witness, Mr. Falcon.
STATEMENT OF HON. ARMANDO FALCON, JR., DIRECTOR, THE OFFICE OF
FEDERAL HOUSING ENTERPRISE OVERSIGHT
Mr. Falcon. Madam Chairwoman, Mr. Chairman, and Ranking
Members Gutierrez and Kanjorski, thank you for the opportunity
to testify at today's oversight hearing. You mentioned my time
working here at the committee. It is always a pleasure to be
back in this hearing room, sometimes more pleasurable than
others, but I do appreciate the opportunity to be here.
My testimony will discuss the financial condition of the
enterprises as reported in OFHEO's 2004 annual report, the
importance of additional resources to strengthen the regulatory
supervision and my efforts to reshape OFHEO to meet the demands
of the future.
OFHEO is required to report annually on the financial
safety and soundness of each enterprise, including the results
and conclusions of the annual examinations of the enterprises.
OFHEO fulfills this requirement through the annual report to
Congress submitted each June 15. This year, OFHEO has adopted a
CAMELS approach in the report on the condition of the
enterprises. The federal banking regulators employ the CAMELS
methodology as a summary for an institution's financial
condition. CAMELS is an acronym for six areas of evaluation:
capital adequacy, asset quality, management, earnings,
liquidity and sensitivity. I will briefly review OFHEO's
assessment in each category.
First, capital. Capital provides the means by which the
enterprises withstand adverse economic conditions or
situations. OFHEO monitors and assesses the capital position of
Fannie Mae and Freddie Mac on an ongoing basis. Both
enterprises exceeded their minimum and risk-based capital
requirements for all quarters in 2003 and were classified as
adequately capitalized.
Second, asset quality. OFHEO evaluates the credit risk
management practices of each enterprise for both single-family
and multi-family lines of business. As part of that evaluation,
OFHEO conducts selected sampling and targeted reviews. Those
reviews evaluate whether the practices of the enterprises meet
safety and soundness standards and adequately protect the
enterprise from the risk of loss associated with counter-party
default. Based upon examination activities to date, it is the
overall conclusion of OFHEO that Fannie Mae and Freddie Mac
have strong asset quality and prudent credit risk management
practices.
Third is management. OFHEO evaluates management of the
enterprises in accordance with OFHEO's regulation, guidances
and prudential standards applied in the course of an
examination. Regarding Freddie Mac, OFHEO conducted a special
examination of the events leading to the enterprise's
restatement and replacement of senior management. Late last
year, I submitted a report on the special examination of
Freddie Mac. The report details a pattern of inappropriate
conduct and improper management of earnings that led to the
restatement and management restructuring of the company. As a
result of the findings of the special examination, Freddie Mac
agreed to implement corrective measures and pay civil money
penalties of $125 million as part of a consent order with
OFHEO. During the period of the consent order, the board of
directors at Freddie Mac has elected a new chairman and has
hired a number of senior executives as its management team. The
company is making good progress on its remediation obligations
and we will provide a full assessment on management in our next
annual report.
Regarding Fannie Mae, OFHEO concluded that the overall
management of operational risk at Fannie Mae comports with
applicable safety and soundness standards, but that judgment
may be subject to change as a result of a special examination.
OFHEO has initiated a special examination of the accounting
policies and practices at Fannie Mae. The scope of this review
includes accounting policies and controls at the enterprise,
including the identification of any control weaknesses or
unusual transactions. Pending completion of that examination, a
definitive assessment of Fannie Mae management must be
deferred.
Fourth, earnings. OFHEO assesses enterprise earnings by
analyzing the magnitude, trends, sources and quality of
earnings, with particular attention to factors that may cause
earnings to change in the future. Earnings in 2003 were strong
for both Fannie Mae and Freddie Mac, amounting to $7.9 billion
and $4.9 billion respectively. Fannie Mae's reported income
represented a 71 percent increase from 2002, while Freddie
Mac's was down 52 percent. However, the underlying economics of
both enterprises was relatively stable.
Their two principal lines of business, credit guarantee and
portfolio investment, continue to perform well at each
enterprise, without deterioration in their risk
characteristics. Credit losses remain exceptionally low, while
spreads between interest rates earned on assets and interest
rates paid on debt remain more than ample. OFHEO has been
monitoring Freddie Mac's progress in compiling and issuing
already delayed quarterly financial statements for 2004. We
will continue to work with the company to resolve problems so
that investors receive accurate and full disclosure of
financial information on a timely basis.
Fifth, liquidity. We found that both companies demonstrated
reliable access to sufficient sources of funds on cost-
effective terms to remain liquid and meet their obligations
throughout 2003.
Sixth is sensitivity. This describes the exposure and
vulnerability of a company's earnings and capital movement in
interest rates. I will summarize this point. We basically found
that both companies have adequately managed their exposure to
sensitivity risk.
Let me move to our budget now. OFHEO is seeking a total
budget of $59 million to more fully staff a reorganized
supervisory program. This budget supports 237 positions,
compared to the 178 supported in our 2004 budget. It is an
increase of 59 new positions, fully 85 percent of which are
directly allocated to supervision of the two enterprises. These
new examination and capital analyst positions will enhance and
strengthen OFHEO's regulatory efforts by adding very necessary
depth and breadth in our supervisory staff. I want to thank the
leadership of the Financial Services Committee for their
support for OFHEO's 2005 budget. Your support has been and
continues to be critical to our success.
Also, as you mentioned Madam Chairwoman, we have
reorganized OFHEO by doing basically three things: creating a
new Office of Chief Accountant, a new Office of Compliance, and
we have restructured the examination program to create two
teams, one assigned to each enterprise led by an examiner-in-
charge. We think these changes will help us best prepare OFHEO
for any challenges that might arise in the future and make our
program a more effective and strengthened supervisory program.
My written testimony has more about the rationale underlying
those actions.
Finally, we continue to flesh out our regulatory
infrastructure project. The main rule we have pending right now
are amendments to an already existing corporate governance
rule. Some of the major changes in this rule have been
mentioned by the committee, namely the separation of the
chairman and CEO function, requiring auditor firm rotation,
limiting the term of service on the board, and requiring higher
standards for board independence. The comment period is closing
on that rule, and we will take all comments into consideration
and then promulgate a final rule as soon as possible.
Thank you, Madam Chairwoman and members of the
subcommittees for your time. I appreciate it, and I will answer
any questions at the right time.
[The prepared statement of Hon. Armando Falcon Jr. can be
found on page 50 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Falcon.
Just to remind both of you, your full written statements
will be made part of the record and have been read by a number
of us.
Now, we turn to you, Ms. Castaneda. Please push the button
and pull the microphone as close to you as you can so we can
pick up your voice.
STATEMENT OF ALICIA CASTANEDA, CHAIRMAN, THE FEDERAL HOUSING
FINANCE BOARD
Ms. Castaneda. Thank you, Chairwoman Kelly and Ranking
Member Gutierrez. Thank you as well, Chairman Baker and Ranking
Member Kanjorski.
This is my first appearance before Congress since I joined
the Federal Housing Finance Board and became its Chairman in
April. I am honored to appear before your two subcommittees to
discuss the Federal Housing Finance Board and its oversight of
the federal home loan bank system. I am speaking today as
Chairman and my remarks do not necessarily represent the view
of my board colleagues.
I came to the Finance Board after 28 years in commercial
banking, experience that is proving very valuable in my new
role as Chairman of the independent regulatory agency charged
with oversight of the 12 federal home loan banks and the Office
of Finance. As you know, the banks are government-sponsored
enterprises and their members comprise more than 8,000
commercial banks, savings and loans, insurance companies and
federally insured credit unions.
Today I can say with full confidence that the Finance Board
is fulfilling the duties Congress gave it in the Federal Home
Loan Bank Act: to ensure that the federal home loan banks
operate in a financially safe and sound manner, carry out their
housing finance mission, and remain adequately capitalized and
able to raise funds in the capital markets.
Over the past 2 years, the Finance Board has made great
strides in enhancing our capabilities to carry out these
duties. The clearest evidence can be seen in the tripling of
our examination staff. However, bank supervision is more than
just examinations. We have also hired highly qualified mortgage
specialists, bank analysts, community development specialists,
accountants and economists. We are upgrading our technology and
systems. These all contribute significantly to our oversight
and supervision of the federal home loan banks.
While the agency has indeed come a long way, there is still
more to do. I can assure this committee that, as Chairman, I am
committed to a course of constant improvement. My intention is
to continue building our staff, adding necessary resources, and
fostering a world-class regulatory culture at the Finance
Board.
As a regulator, the Finance Board's job is to do what needs
to be done, when it needs to be done. That has been my approach
since I joined the Board in January, and it will be as long as
I remain on the Board, which leads me to several recent
developments that I think reflect our regulatory approach.
First, the Finance Board last month voted unanimously to
require the home loan banks to register with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
The federal home loan banks are among the biggest debt issuers
in the country, issuing roughly $500 billion in bonds annually
in recent years. The home loans banks collectively had $765
billion in debt outstanding as of March 31, 2004.
Given these facts, the Finance Board called for consistent,
enhanced and transparent disclosures from the individual banks
to help achieve market discipline. Because investors in that
market, as well as the banks' members and the public should and
will know more about the risks faced by these financial
institutions.
Registration will also ensure that home loan bank
disclosure standards are fully comparable to those of the other
housing GSEs and large private financial institutions. Based on
my experience as a banker and fixed-income trader, I believe
this will help ensure that the banks are not disadvantaged in
their access to capital markets. For all these reasons, we
adopted the regulation, and the registration process is now
under way. Each bank will be required to first file with the
SEC by no later than June 30, 2005 and to have their
registrations effective by no later than August 29, 2005.
A second recent development occurred on the supervisory
front. On June 30, the Finance Board and the Federal Home Loan
Bank of Chicago entered into a written agreement to address
certain shortcomings in the bank's risk management, internal
audit, capital management, and accounting and financial
recordkeeping practices.
These shortcomings were identified in recent Finance Board
examinations of the bank. After a series of incremental steps
dating back several years, my colleagues and I on the Finance
Board determined that a formal written agreement was the
necessary and appropriate next step to improve the bank's
management and oversight of these issues.
Third, and finally, let me describe what the Finance Board
is doing with respect to the affordable housing program.
Beginning in 1990, Congress required the federal home loan
banks to set aside 10 percent of their profits for low-income
housing. Since its inception, the AHP program has provided some
$2 billion in grants and subsidies for affordable housing.
The Finance Board is committed to ensuring that these
programs operate in a safe and sound manner and help fulfill
the home loan banks' housing finance mission. We are currently
conducting a system-wide review of the home loan banks' AHP
programs to help evaluate what they are doing in this area. We
are also building a corps of examiners to focus solely on the
affordable housing program, and have added new community
development specialists to further assist in examinations.
Mr. Chairman, Madam Chairman, members of the subcommittees,
thank you for allowing me this opportunity today to outline our
activities at the Federal Housing Finance Board. I believe we
have attained a level of expertise, experience and capabilities
that makes the Finance Board an accomplished, effective
financial regulatory agency, one that serves the public in the
way Congress intended, through rigorous oversight of the
federal home loan banks and their housing finance and
affordable housing missions.
Thank you, and I will delighted to answer any questions.
[The prepared statement of Hon. Alicia R. Castaneda can be
found on page 46 in the appendix.]
Chairwoman Kelly. Thank you very much, Ms. Castaneda.
Director Falcon, I understand that Fannie and Freddie have
a policy which is just now being enforced that requires
deductibles for wind damage insurance coverage to be less than
2 percent. In New York, comprehensive homeowners coverage has
not been readily available or affordable, so a special advisory
panel in New York strongly recommended deductibles as high as 5
percent to increase the availability of insurance coverage in
certain areas. These recommendations were approved by the State
of New York as a result of a series of special reports
commissioned by the State legislature.
I want to know if you are aware of the problem and of the
costly impact it is having on the homeowners in New York, and
if you will consult with New York's State Insurance
Commissioner to try to resolve this.
Mr. Falcon. Madam Chairwoman, I was not aware prior to your
mentioning this, but I will absolutely go back and take a look
at it. As we look at the risk to the enterprises of different
mortgage programs, we look at not just the risk, but the
ability to manage the risk of the mortgages. They mitigate
risks through the use of credit enhancements and other
techniques. Certainly, we will look into the rationale
underlying this policy judgment and report back to you on
whether or not there is some way that possibly the risk of
this, if they are excessive, can be mitigated through certain
means.
Chairwoman Kelly. I wish you would, sir, because your
policy flies in the face of what the State legislature in New
York passed, so it is important that we make these two laws
congruent in any way possible. If you would get back to me on
that, I would greatly appreciate it.
Chairman Castaneda, the Administration has indicated it
will not make any presidential appointments to Fannie Mae and
Freddie Mac's boards of directors. Is it their intent to also
not appoint directors of the federal home loans banks, the 12
federal home loan banks? What is going to happen if the Finance
Board's appointment process, what is going to happen to it
actually, for this coming round of vacancies?
Ms. Castaneda. I have not heard anything from the White
House regarding that issue. By statute, the Finance Board has
to appoint some of the directors at each one of the banks. But
to answer your question, I have not heard anything from the
White House.
Chairwoman Kelly. I wonder, ma'am, if you would be willing
to make an inquiry?
Ms. Castaneda. I certainly will.
Chairwoman Kelly. So that perhaps you would better answer
that question. I think that is an important point that we need
to clarify. You heard Mr. Kanjorski in his opening comments
mention that also. There is some concern about how this is all
going to work, and we would be very interested if you could
help us understand that, please.
Ms. Castaneda. I will make sure that the Finance Board
staff will come back with an answer to you.
Chairwoman Kelly. Thank you.
I want to ask you both, the Financial Services Committee
spearheaded corporate governance reforms in the Sarbanes-Oxley
rules. I would like to ask you about some of the new corporate
governance proposals your agencies are considering, which our
committees are still reviewing. How closely have your agencies
worked with the SEC on these issues, like the accounting
restatements, the SEC registration, auditor rotation,
separation of the CEO and the chairman? These are areas where
we are all interested in hearing what you have to say about
whether you have been closely working with the SEC on resolving
issues there.
I am asking both of you. Take your pick.
Mr. Falcon. I will go ahead and go first. We do consult
with the SEC on various issues. We did consult with the SEC on
our current corporate governance rule. I am not suggesting that
they endorse it or oppose it, but we did consult with them
during the drafting process of the amendment that we have
issued.
In addition, we work closely with the SEC on a variety of
other matters. We work closely with them in preparation for
Fannie Mae's and Freddie Mac's announcement to voluntarily
register with the SEC. I think we consult as necessary, and
certainly the SEC, I feel from their standpoint, recognizes our
responsibility at OFHEO to do our job as a matter of safety and
soundness, while they do their job as a matter of investor
protection.
Chairwoman Kelly. The reason I am asking this is that the
primary role of your agencies is to protect the taxpayers
through safety and soundness oversight on the GSEs. The SEC's
primary responsibility is to protect investors. These are two
very different goals. Because of that, that is the genesis of
my question. Basically, we took a very serious look for
instance at the audit firm rotation during the Sarbanes-Oxley
debate. Some of these other things I really would like to hear
more about from you.
I do not understand how, given the consolidation of the
accounting industry that we are in, we are looking now at the
final four firms. I do not see how this is going to get
structure to avoid conflicts of interest. Deloitte is doing a
forensic audit of OFHEO. PWC audits Freddie Mac. KPMG audits
Fannie. Ernst and Young is working with Fannie Mae's law firm
on the special audit. I am not sure how this is all working. I
am not sure that this committee is clear on that, and I would
really appreciate hearing back from you.
I am out of time. I am going to turn now to Mr. Gutierrez.
Mr. Gutierrez. Thank you.
I want to welcome you both here once again, and to say to
Director Falcon, you are always welcome to come back. I enjoyed
serving together with you on the Banking Committee. It was the
Banking Committee before they changed its name mysteriously.
I have a question for Chairwoman Castaneda. The financial
services industry has evolved as the barriers to interstate
banking have been removed. Consolidation in the financial
services industry continues as large-and mid-size banks from
different parts of our country merge or acquire one another.
One of the most recent examples of this trend is the merger of
Bank One in Chicago with J.P. Morgan Chase in New York. Under
the current finance board rules, individual bank members of the
FHLB system are not permitted to belong to more than one FHLB.
If two members merge or one acquires the other, the surviving
bank must withdraw from membership in one of the home loan
banks districts.
The concern I and other members have is the impact that
such a rule has on the distribution of affordable housing
program funds, which are linked to business and profits of each
of the FHLBs. While a new merged bank continues to do retail
business in both of the eight FHLB districts, all advances and
mortgage purchases must be conducted only through one of the
FHLBs, where it retains its membership. When the Finance Board
asked for comments on this issue some time ago, the Chicago
Home Loan Bank proposed a compromise that would apply in the
limited circumstances in which a bank belonging to one home
loan bank is acquired or merged with a bank belonging to a
different one.
In this case, the surviving bank retains its membership.
The surviving bank emerged, Bank One, J.P. Morgan, the
survivors unfortunately for Chicago is J.P. Morgan Chase. It
gets to retain them. The advantages of this proposal is that it
helps better ensure that funds supporting affordable housing
are retained and distributed in the district where they were
generated. Can I just have your thoughts on this compromise and
your thoughts in general on this issue?
Ms. Castaneda. Thank you, Congressman Gutierrez, and thank
you very much for pronouncing my last name so well. I give you
a 10.
[Laughter.]
Finance Board rules do not prevent a federal home loan bank
from funding projects from outside their districts. As a matter
of fact, the Finance Board rules approve and most of the banks
now do allow funding from out-of-district projects. So when a
merger occurs, it is very likely that all the funding for a
particular community be comprised of in-district and out-of-
district funding. That said, I cannot forecast whether the
total funding of the bank district that loses a member could
have less funding for particular projects.
The data that the Finance Board has collected shows that it
is very common for a federal home loan bank that loses members
in one year to gain new members in the following year. The
overall impact of merger and acquisitions on affordable housing
funding has generally balanced out through the time and across
the system. In other words, the data shows that there has not
been any significant impact because of the mergers and
acquisitions.
I would be more than happy to have the Finance Board staff
share some of this data with your staff.
Mr. Gutierrez. I would appreciate it, because I guess when
you are the loser, I mean in one of these situations, we have
New York, we have Chicago and we have the home loan bank. We
have raised issues outside of your concern when banks do those
kinds of things. In Chicago, we are wondering where are the
jobs going to go; where is the corporate giving of the
institution. It has a harmful impact. We would just like to get
that information from you to see that we do not lose,
specifically around housing programs, which we have seen. I
have friends at Freddie and Fannie that are not too crazy about
what the federal home loan bank does, but I think more
competition is good competition. I want to make sure that
competition does not get somehow sidetracked.
Thank you very much, Chairwoman Castaneda, and welcome once
again Director Falcon.
Mr. Falcon. Thank you, Congressman.
Ms. Castaneda. Thank you.
Chairwoman Kelly. Thank you.
Chairman Baker?
Mr. Baker. Thank you, Chairwoman Kelly.
Mr. Falcon, it has been some time since we visited. I
appreciate your participation here today.
I have a series of questions that I would just like to give
to you, and then as time permits have you respond today or as
you are comfortable in writing at a later time. I understand
that you are moving forward with finalization of your proposed
corporate governance reforms. Both GSEs have filed statements
of some objection to a number of the provisions. Have you set a
deadline for completion of this corporate governance reform? If
so, could you at the appropriate time inform the committee as
to how you intend to achieve that end conclusion?
Number two, I continue to be very interested in the ongoing
forensic accounting review now under way at Fannie Mae. It is
my opinion, based on other revelations in public operating
companies over the past several years, that if the corporation
is not cooperative in disclosure that an accounting overview of
some effectiveness may be questionable in its outcome.
Therefore, do you believe the enterprise is making information,
documents, access to personnel available in a timely and
appropriate manner to meet your concerns and those of the
auditor?
Number three, in response to your specific corporate
governance reform relative to reasonable and appropriate
executive compensation, Mr. William McDonough, Chairman of the
Public Corporation Accountability Oversight Board, appeared
before the committee recently and said something to the effect
that executive compensation is an area where congressional
review would be highly appropriate, and if either the
compensation committees or shareholders cannot bring about
appropriate reform, that Congress should act.
To that end, I note in the response, particularly by
Fannie, to that specific recommendation, and I am relying on an
American Banker article that states that the term
``appropriate'' is not defined by your proposal and therefore
does not allow companies to determine what standards will apply
when determining compliance. The law prohibits executive
compensation that is not reasonable and comparable, that is the
1992 law which Fannie is suggesting as appropriate language.
``Comparability'' would therefore mean disclosure of executive
compensation levels. There has been some controversy
surrounding disclosure of the top 20 executives's compensation
for either or both enterprises.
I will follow this discussion with a specific letter asking
that in order to achieve Fannie's suggested comparability
standard that you make available to the committee Fannie,
Freddie, at whatever level, 10 or 20, it does not matter to me,
and in addition some single line of financial service industry
comparable. For example, a sophisticated S&L, if there is
nobody of asset size comparable, but who has a single line of
business principally. I will follow this hearing up with a
letter on that matter.
In the time remaining, I want to plow new ground which we
have not previously talked about, relative to what are known as
guarantee fees, fees which the enterprises charge originators
when purchasing loans. A cursory review of data I have been
able to obtain, and I certainly do not have access that you
would have, indicates that the GSEs credit loss ratios have
declined due to improvements in their underwriting and risk
management, meaning they are not taking as many poor people as
they used to take, apparently, while loan loss reserves in the
same period of review have declined principally attributable to
reduced losses.
However, it appears that the guarantee fees that mitigate
potential losses have remained constant in the historic decline
of losses, and at the same time declining loan loss reserves.
Where is the money going? If it is not going to build up loan
loss reserves, and by way of disclosure it is my understanding,
let's just pick the year 1995, that the average G rate was 22
basis points, with a credit loss ratio of 5 basis points.
Today, it is down to a .6 basis point CLR with a G fee rate of
20.2. The difference being in 1995 there was a return on equity
of 21 percent; today in the case of this GSE, it is 50 percent.
At the same time from 1995 to 2003, loan loss reserves as a
percentage of assets have declined from .25 basis points down
to .08. The public policy concern I have is that the money is
not flowing the loan loss reserve account to insulate against
the three-fold increase in asset value on Fannie's side, a six-
fold increase on the Freddie side. At the same time, the loss
ratios have dropped, meaning the risk to the enterprises has
for some reason been mitigated, but yet the income flow net to
the corporation would appear on its surface to have been
increased rather dramatically.
I do not have access to the cash-flow numbers to indicate
to me what this means to the corporation in terms of gross or
net returns on equity, but I would very much appreciate some
detailed analysis of this area of business and again a report
back to the committee, not in any urgency, but the first of the
year, after the first of the year. My time has expired. I will
wrap both of those requests into a single letter. If you have a
chance to just touch on the corporate governance reform issues
and the compliance with forensic accounting requests, and with
the Chairwoman's diligence, maybe with those two you can jump
in. Thank you.
I appreciate the Chairlady's tolerance.
Chairwoman Kelly. Thank you, Mr. Baker.
Mr. Frank?
Mr. Frank. Thank you, Madam Chair.
We are probably guilty. Part of my frustration in dealing
with these issues is that we have before us two entities which
are very important with regard to affordable housing, a crisis
in this country. But our own committee structure fails to fully
take account of that. We had a very important hearing today on
homelessness and housing for the Housing Subcommittee. Now we
have two other subcommittees, and the Housing Subcommittee is
not part of it. I regret that. The media that cover these
institutions, particularly the GSEs, tend to be more in the
financial area than the housing area, and I really hope we can
increase attention to that.
To Chairwoman Castaneda, let me say that Mr. Gutierrez's
question is my question. I understand your argument that it
sort of balances out, but I do not want to rely on that. The
affordable housing program of the federal home loan bank is one
of the best things we have. Director Falcon in fact was here
under the leadership of Chairman Gonzalez when we enacted that.
It was hard-fought and it is an excellent program. But it
follows the CRA principle, which is money raised by the banks
in an area which then contributes to FHLB profits are to be
spent in the area. That is very important. I was here when we
did that under Mr. Gonzalez's leadership.
At that point, bank mergers were not a big deal,
particularly with thrifts. Now, mergers are a big deal. Back
then, we were called the Committee on Banking. If we ever
change the name again, I think we are going to change the name
to the Committee on the Bank, because there will probably only
be one.
[Laughter.]
But what this has meant is that there is a consolidation,
and we are losing the principle that money generated in one
place should be in another. I know there are people who are
worried about domination by some large entities. I do not see
any problem. I want to continue to pursue this with you. I am
just saying that particularly where there has been a merger, an
entity that was bought up, that had been a member of a federal
home loan bank, that that portion of what it earned should be
credited to its regional bank and not elsewhere. I intend to
keep pursuing that.
The second point I want to make to both of you, and it
touches both, but more to Director Falcon, is one of the
tensions we have had. There are tensions involved in the way we
do things. We were talking just as an example, but touching on
some of what you do, in predatory lending, there is a tension
between doing away with predatory lending and redlining. We did
not used to have predatory lending. We had redlining. You go
too far in one direction here you can lose things.
Here, the tension is between safety and soundness on the
one hand, financial stability, and on the other hand getting
into housing. I must say to Director Falcon, as he knows, one
of the concerns some of us have with some of the legislative
proposals that come from the Administration is the fear that,
and I think the Administration has been somewhat inconsistent.
On the one hand, they talk about the need to do more affordable
housing, where I am supportive; but on the other, to put so
much emphasis administratively and elsewhere on safety and
soundness, that we would lose that.
I have one specific example relevant to both of you. It is
relevant to Fannie and somewhat to Freddie. It is relevant to
the New York Federal Home Loan Bank, and that is the issue of
manufactured housing. Without manufactured housing, you will
not get significant homeownership among moderate-income people.
It is a very important resource. It has been historically
underutilized. It has been ridiculed. We are coming to an
understanding of the importance of manufactured housing.
It is not either/or. I am very proud of my relationship
with the homebuilders. We need both. But clearly, manufactured
housing is improving in quality, and we have not in a
regulatory way quite caught up with that, I mean in terms of
property laws, et cetera. But here is the problem: Your New
York regional bank was downgraded by one of the rating agencies
because of its manufactured housing. Director Falcon, you have
raised questions about manufactured housing. I understand that
manufactured housing has a problematic past, but the quality of
the housing has significantly increased; our understanding of
it has increased.
What I would urge both of you is, I need you both to
reassure me, that we are going forward and are going to find a
way to encourage the entities under your various supervisions
to go forward in manufactured housing. What I am afraid of is
that a focus only on the problems with the past financial
inventory is going to drive them out of it. I must say I think
that that has been one of my concerns about OFHEO. I need
people to reassure me, for me to feel comfortable about this,
that we are going to recognize it.
Let's put it this way. There has got to be a way to deal
with whatever problem that used to be there with manufactured
housing, and that we will not let the hangover from some of the
bad practices be a deterrent to them going aggressively forward
in the future. I think that is a very important test, frankly,
for both regulators, of your ability to preserve financial
soundness without impinging on the affordable housing issue,
which we all say we are for.
Let me start with Director Falcon.
Mr. Falcon. Thank you, Congressman.
Like you, I believe very much in the mission of the two
companies that we regulate. I believe in their housing mission,
including this area with manufactured housing. Our concern
about it was related to the accounting for these assets, not so
much just these, but impairments in general. They apply
primarily to the portfolio of manufactured housing loans. What
we have sought to do is put in place the proper accounting for
those assets if and when they did deteriorate. In the case of
these, they did.
I will pledge to you that we do seek to strike the balance
between safety and soundness, cognizant of the mission of these
two companies. I believe the mission of my agency is in some
regards also a housing mission, not just a safety and soundness
mission. So we are very aware of that. I think all the
employees of the agency feel that way.
Mr. Frank. If I might just make a specific suggestion,
which is, if you feel the need for some reason to talk about
the manufactured housing, nothing stops you from saying, and we
say this in the context of believing that going forward they
should remain an important part of the portfolio and encourage
them to do that. When all people hear are the negatives, it
drives away the enterprises; it drives away lenders; it
accumulates.
Mr. Falcon. That is right. It is just a matter of going
forward and making sure there are adequate risk management
practices in place, so that if this type of asset does
experience higher than normal defaults or losses, that there
are adequate enhancements in place so that the losses are not
excessive.
Mr. Frank. Can I say this, I also believe, and my own view
with regard to the GSEs, particularly Fannie and Freddie, they
are given certain government advantages. I do not think every
individual product line has to be profitable. We want a
cumulative profit, so I hope we would also say, look, if there
is a danger of things not going too well in the one area in the
affordable housing area, that can be made up for elsewhere.
This is not a case where every individual line has to show this
kind of profit.
Mr. Falcon. In the case of Fannie and Freddie, that
provision is specific in their charters, that for affordable
housing-type of mortgages, they could expect a lower rate of
return than they would on other types of assets. So that is
specifically contemplated in their charters.
Mr. Frank. Okay. I just hope that when we do the
supervision, we keep reminding people of that, because that
tends to get lost.
Chairman Castaneda?
Ms. Castaneda. Thank you, Congressman Frank. It is good to
see you again.
I also have to say, like Director Falcon, our mission is
not only to ensure that the banks operate in a safe and sound
manner, but to promote housing finance. I can tell you at the
Finance Board, we very much encourage the banks to promote
manufactured loans. We do it three ways. Federal home loans
banks can accept manufactured loans as collateral for their
advances. Two, the federal home loan banks can buy manufactured
loans. And number three, they can also buy mortgage-backed
securities guaranteed by manufactured loans. So we do promote
the manufactured loans business.
Mr. Frank. Thank you.
Chairwoman Kelly. Thank you very much, Mr. Frank.
Mr. Paul?
Mr. Paul. Thank you, Madam Chairman.
I appreciate the opportunity for these hearings and your
emphasis on this very important matter. I also want to point
out that Chairman Baker, I think has been talking about this,
maybe for years or a decade. So he was on to something, and I
think his warnings were very important and are very important.
It also points out that Congress moves awfully slow.
So if we were developing a problem, and I truly believe we
have been developing a problem that is now much worse, I would
say that if we have been concerned, especially Chairman Baker,
for 10 years, I imagine during that period of time it has
gotten much, much worse.
I see it as a financial time bomb, to tell you the truth.
The only discouraging thing about our discussions that we have
here in the committee is for the most part we talk about the
technical solutions, the job you have as regulators, and
believing that it is a technical problem. I think it is much,
much more fundamental. We rarely deal with the fundamentals. I
would like to emphasize a little bit about the fundamentals.
As a matter of fact, I would not want your jobs for
anything. If we are facing a problem, which many people in this
country think we are, your responsibility is to provide safety
and soundness, I mean, I see it as practically an impossible
task if this things starts to unwind, and I believe it is going
to unwind. It involves trillions of dollars and derivatives. It
is just a huge monstrosity.
And yet, it seems like we are not even working in that
direction. We did early on talk a little bit about how the $2
billion line of credit distorts the interest rates and you get
a benefit, and it is estimated by CBO that that is probably a
$15 billion a year benefit. Even that in itself is minor,
because the other part that we do not talk about is the
willingness of the Federal Reserve in these past several years
to buy GSE debt. Oh, they do not hold it. They are there. That
is a message to the world and to the country that the Federal
Reserve, although they talk about cleaning up the mess, they
themselves contribute to the bubble mentality that, you know,
if Congress does not bail us out quickly enough, the Federal
Reserve is there because they have done it in the past. They
certainly did it at the time of Y2K.
Also, the Federal Reserve has expressed concern about what
is happening. They talk about their daylight overdrafts that
you have. They have proposed that we get rid of that. That is
important, but that too is minor and I think technical. But
overall, I think the housing bubble comes from easy credit,
which is totally out of your control. That is what we live
with. Artificially low interest rates at 1 percent create the
bubble mentality, whether it is in the stock market or the
housing market. This is where the real fault is. I do not know
how we will ever address that as regulators.
Then we sort of add onto it through these special deals,
which nobody can be opposed to because it is helping the poor
people. So we ask you to make 10 percent of your loans to
people that are the least creditworthy, who are the most likely
to default if there is a correction, putting more pressure on
your job as well as on the taxpayer. So the whole thing is, as
far as I can see, total distortion of the marketplace. I am a
believer in the market, and that we should try to get back to
that.
So my question basically is, how do you see the
fundamentals compared to the technical approach to this? And do
you think there is a possibility of a puncture of a bubble? To
me, the most vulnerable thing that we are facing is when the
foreign governments and foreign entities stop buying our debt,
and you have no control of that, and we do not have control of
it. They bought $10 billion last week of GSEs, and the dollar
is going down. When it goes down precipitously, and they quit
buying or they dump dollars, what in the world are we going to
do to contain the collapsing bubble?
Mr. Falcon. Congressman, we track home price appreciation
quarterly through our house price index, which we do release to
the public. Our economists do track it and are aware of the
historical trends and causes of price bubbles. My economists
who have looked at this with lots of experience, believe that
we do not currently have a price bubble in home prices. If
anything, if there was a change in interest rates in an adverse
way, it might lead to some regional depreciations. As far as an
overall price bubble, they do not see it. Because of our strong
housing finance system, which is I think the envy of the world,
there are many other countries that are trying to replicate
what we have done here in the United States.
There is strong support for homeownership and the ability
of individuals to obtain credit. Whether or not it is too easy
or not, I do not have an opinion on that. But we do see that in
the current environment, with the ability of individuals to
purchase homes, which does not in turn support home prices,
that we are not in a situation where there could be a large
deflation in home values or a price bubble, as you pointed out.
That is our experience at this point in time. We continue to
monitor it going forward as we put out more house price
indices.
Ms. Castaneda. I think you have a very good point,
Congressman. That is true not only for GSE debt, but for a lot
of the debt issued in the United States. We do depend a lot on
foreigners to buy a lot of these instruments. My job as a
regulator is to make sure that the federal home loan banks will
continue to operate in a safe and sound manner. Your remark,
then, how do we do that? Well, that is my job. As long as I am
the Chairman of the Housing Finance Board, that is what I am
going to do. If I can ensure that the Finance Board ensures
then that the banks are operating in a safe and sound manner,
we will not give any reasons for these foreign investors to
stop buying the federal home loan bank debt.
Mr. Paul. Thank you.
Chairwoman Kelly. Thank you, Mr. Paul.
Mr. Kanjorski?
Mr. Kanjorski. Thank you, Madam Chairman.
Madam Chairwoman, the past practices of the appointments of
boards of directors of the federal home loans banks has been by
your board. It has generally had a bipartisan structure to it.
Recently in this Administration, almost overwhelmingly all the
vacancies have been appointed to one party, your party. It is
something that troubled me. I understand politics, but I
understood that the congressional authority for the appointment
of the members of the board of the various banks was vested in
the Finance Board. You said, well, I will have to talk to the
White House. Did I misunderstand the structure of the law that
the Congress appointed? I thought that authority rested with
the Finance Board.
Ms. Castaneda. That is correct, Congressman.
Mr. Kanjorski. Do you abdicate your role as the Finance
Board and pass that on to the White House, contrary to
congressional intent?
Ms. Castaneda. No. By statute, the Finance Board elects the
public interest directors. It is the Finance Board
responsibility to elect these directors. I can also tell you
that this will be an issue that I am going to working with my
other colleagues in the next few weeks.
Mr. Kanjorski. But in response to one of the member's
questions, you said you are going to be talking to the White
House about this, indicating that the names of the appointees
come from the White House, and that the clearance is through
the White House. Did I understand you to say that?
Ms. Castaneda. No, I did not say that today. Again, we have
by statute to appoint the public interest directors. This is an
issue that I am going to be addressing with the other board
members.
Mr. Kanjorski. Do you think there is any reason to have
public interest directors on the federal home loan bank system?
Ms. Castaneda. I think the public has to be represented at
the board of directors of the federal home loan banks.
Mr. Kanjorski. Do you think those appointments should be
partisan or nonpartisan?
Ms. Castaneda. I think those appointments should be based
on the qualifications and the skills of the individuals.
Mr. Kanjorski. Is it peculiar in your mind that maybe out
of 60 or 70 appointments, that 97 percent come from one party
and only about 3 percent from the other party? Is that just by
chance, do you think? Or do you think that is by political
decision?
Ms. Castaneda. Congressman, I was not aware of the specific
numbers that you are talking about.
Mr. Kanjorski. In the last 3 years, I am aware of only one
director of my party that was reappointed to a board. It is not
so much I am worried about Republican or Democrat, although
that tends to indicate that we are losing the intent of
Congress to have real independent directors. We are having
political directors, and I think that is the worst of all
worlds, but you do believe we should maintain that policy of
having independent outside directors on that board.
Would you state an opinion that Fannie Mae and Freddie Mac,
whether they derive some benefit from being government-
sponsored enterprises where it may be of value to have outside
independent directors appointed by the President or some other
appointing authority, as opposed to all internally elected?
Ms. Castaneda. Again, I can see some advantages why perhaps
the regulators should not be appointing members to the boards
of the institutions it regulates. On the other hand, I do
believe it is very important in the case of the federal home
loan banks to have board members that represent the public
interest.
Mr. Kanjorski. And you would agree that the public interest
in the United States is pretty much represented by two
political parties, so that it would not be unusual to have,
say, three Republicans when the majority of the country or the
Congress is in that party, and maybe two Democrats when they
are in the minority, and then vice-versa when the pendulum
changes, that we try and balance it that way.
How would you go about defending the policy of this
Administration to be so partisan in the appointments?
Ms. Castaneda. I believe the board of directors should be
elected based on their qualifications.
Mr. Kanjorski. We are talking about the appointments now.
Ms. Castaneda. The appointments, regardless of whether they
are appointed by----
Mr. Kanjorski. Do you think on the basis of, say the last 3
and a half years under this Administration is peculiar and not
followed by prior Administrations that tried to balance the
appointments, that the Congress should take some action and
require that there be a balance of appointments, so many
Republicans and so many Democrats, depending on the makeup or
persuasion of the White House?
Ms. Castaneda. Well, obviously Congressman, if the Congress
decided and this is the right thing to do, Congress could do
it. As far as the numbers, and you are referring to the last 3
years, I am not aware of that, sir. I was not at the Finance
Board.
Mr. Kanjorski. One of the greatest criticisms, I have a
tendency to meet with a lot of directors from across the
country of the 12 banks when they are in Washington, and one of
the crying needs, they say, is institutional memory and
experience. Some of them, and in my opening statement I
indicated there is one federal home loan bank that will not
have anyone with more than 3 years experience sitting on its
board of directors. Is that healthy or unhealthy?
Ms. Castaneda. I think that is one of the issue, and my
understanding it is included in the House relief bill, the
number of years that each board of director will serve on the
board, as well as the compensation. I can tell you that last
year the Finance Board did a system-wide review on corporate
governance, and a lot of these issues were raised. I do believe
that in both issues, the compensation and increasing the number
of years----
Mr. Kanjorski. Do you think perhaps the Congress should
commission a study or establish a commission to start looking
at the corporate governance of your organization and the
various federal home loan banks to see whether or not we should
update some of the problems that we have out there?
Ms. Castaneda. Obviously, Congressman, if that is something
that you do feel like that is the right thing to do.
Mr. Kanjorski. Well, as a matter of good corporate
governance, would you say we are adhering in these GSEs to the
same stringent conditions we are imposing on other
institutions, private institutions, like separating the
chairman and the CEO in the mutual fund? It would seem to me
here is a direct group of institutions that have a quasi-public
involvement and the Congress is not exercising its influence.
Chairwoman Kelly. Actually, you have gone longer than
anyone else has spoken. If you want to answer that question,
ma'am?
Did you ask that question to your satisfaction? We will let
her answer and then that is it.
Mr. Kanjorski. On that individual question. I was going to
get the Director on something.
Chairwoman Kelly. If you want to wait, if we have the time,
we will try to go back on a second round.
Thank you very much, Mr. Kanjorski.
Mr. Hensarling?
Mr. Hensarling. Thank you, Madam Chair.
Mr. Falcon, recently there was a press article about one of
the GSEs. I believe it was Fannie Mae, engaging in a joint
venture to try to set up a secondary mortgage market in Egypt,
I believe. I was curious if you had seen the press clip or are
you familiar with the matter, and whether or not the article
was accurate? If so, is that something that you view as an
activity that is within the scope of their charter? Is this a
matter of concern or not of concern to your office?
Mr. Falcon. I think it would be a very serious concern if a
company was contemplating investing the mortgages in any other
country. However, as far as this international activity is
essential to their core mission, which is the provision of
liquidity to the U.S. mortgage market, the answer is no. Does
that mean is it not permissible under the terms of their
charters? I think that is a question that HUD will have to
answer. I cannot. It is HUD's prerogative to opine on whether
or not is it appropriate under the terms of the charter.
Mr. Hensarling. Speaking of HUD, there has been a proposal
to raise the low-and moderate-income affordable housing goal
targets for Fannie and Freddie. I think it ratchets up from 50
percent to 57 percent in 2008. I would be curious about your
opinion as to the impact on the primary mortgage market and the
secondary mortgage market. Essentially, what are going to be
the costs and the benefits to the system should this all go
through?
Mr. Falcon. The increases in the affordable housing goals,
our review of this is limited to questions of safety and
soundness. On that point, we would look at the activities that
both companies would engage in as they tried to meet new goals.
Now, these goals are certainly very ambitious, and whether or
not the companies can meet these new goals will remain to be
seen, if they do in fact get implemented as final goals for the
two companies over the next 4 years. We will look at the
companies closely to make sure that they do not engage in
excessive risk in order to meet the goals.
As far as the merits of the goals, that is for HUD to
decide when they decide what to go final with. My own opinion
is basically I do support the affordable housing mission of
these two enterprises very much so. While these are ambitious
goals, I do not think it would be a stretch for the companies
to embrace these goals, but not engage in excessively risky
activities or limit their activity in non-affordable housing
areas just in order to meet these goals.
There are provisions in statute that if it turns out that
it is not feasible to meet these goals, that the secretary can
find so and then they are excused from meeting the goals, or
they can work out a plan down the road on how they can work
towards meeting them. So I view these as goals and not
mandates. They are certainly ambitious, but they are worth
trying to achieve.
Mr. Hensarling. Let's move the conversation to corporate
governance for a moment. OFHEO has proposed a number of
corporate governance changes for the GSEs. Fannie already is a
publicly traded entity, so they are having to comply with
Sarbanes-Oxley. I believe that Freddie has asserted that it
will register with the SEC soon, so assumingly they will be
under Sarbanes-Oxley as well. So can you explain in greater
detail the need to go beyond the corporate governance
provisions in Sarbanes-Oxley?
Mr. Falcon. What we have done is we have taken our
experience derived from the Freddie Mac accounting problems and
the management issues which we found gave rise to those
accounting and earnings management problems. We have released a
very detailed report on what happened, and what we thought the
remedies were to try to minimize the likelihood of that
happening in the future. The corporate governance rule simply
embodies what, based on that experience, we think is the best
practice for these two companies. If it goes beyond Sarbanes-
Oxley in some regard, then so be it.
My responsibility is to ensure the safety and soundness of
these two companies. Sarbanes-Oxley was designed corporate-wide
to try to raise the standards in corporate governance. I have
to determine what is necessary for me to ensure that these two
companies can remain safe and sound.
I am not suggesting that what we have in our corporate
governance rule should be applied corporate-wide. I am simply
saying that based on our experience, with these two companies
at this point in time, that this is the best approach to safety
and soundness, and that is why we have proposed this.
I am not saying that we have closed the door on the outcome
on these issues, because we are in the rulemaking process, but
we will take all comments into account in determining what the
best policy is.
Mr. Hensarling. Thank you. I appear to be out of time.
Chairwoman Kelly. Thank you, Mr. Hensarling.
Mr. Hinojosa?
Mr. Hinojosa. Thank you.
I want to address my question to Director Falcon. I am very
pleased that you have been reorganizing OFHEO so as to be able
to carry out your mission. I want to ask you some questions
about that reorganization, because in looking at your statement
I see that you say that you have reorganized into two fully
staffed units. How many examiners and accountants make up each
of those two units?
Mr. Falcon. When they are fully staffed, they will probably
approach about 40 or 45 per unit.
Mr. Hinojosa. Okay. Then you go on to say that in that
reorganization you plan to possibly rotate that group of staff
members. What does that mean? How many years, 2, 5, 10 ?
Mr. Falcon. We have not worked out the details on that yet.
We are still implementing this transition to this new format.
But it may be as short as 3 years. It may be as long as 5 years
perhaps.
Mr. Hinojosa. How will you ensure that there is continuity
and institutional memory of what you have learned about Fannie
Mae and Freddie Mac?
Mr. Falcon. Let's take for example the area of credit risk.
We will have a team of people examining the credit risk of each
company. The team may be anywhere from five to ten examiners by
the time we are done. We would not just lift them all and
switch them at the same time. What we would do is maybe move
one or two into the other company's credit risk area, and move
the others over, so that you always have a core group that
maintains the institutional memory. This allows us to ensure
that the examiners can continue to increase their skills and
knowledge by looking at the other company, and not necessarily
stay within that area, but possibly move to interest rate risk,
operational risk or some other aspect of the examination
program.
I think this is the best way of making sure that our
examiners continue to grow as examiners, and at the same time
limit any possibility that there could be personal
relationships that develop between examiners and anyone that
they deal with continually at the companies.
Mr. Hinojosa. I commend you for that. I commend you because
there needs to be continuity. There needs to be that
understanding of each of the organizations. We are interested
in increasing homeownership. We are not interested in being so
conservative that we are not willing to take some risk, because
Fannie Mae and Freddie Mac are businesses. Rather, these GSEs
are businesses and they have to have risk. We have risk in all
other areas where we lend money to our businesses, small,
medium or large. If we are going to increase homeownership, we
are just going to have to find a way in which to do it
efficiently, adequately and in a way that we are indeed
encouraging homeownership, especially from working families
that have been paying rent for years and years and years, and
built up no equity whatsoever.
So I am pleased to hear that that is your mindset, and know
that I do not want to be negative, as I heard from one of the
members of the other side of the aisle, because in business you
have to take risks. You just have to be well-organized.
For Chairwoman Castaneda, talking about your finance board
and building a corps of examiners, do we give you enough money
in the budget that you have to work with to be able to have
staff, and to be able to train these members, directors of your
board to adequately oversee and get the job done that they have
to carry out?
Ms. Castaneda. Thank you for the question, Congressman. The
Finance Board is different than OFHEO. We do control our own
budget. We do not depend on taxpayers' money. What we do is we
assess all the federal home loan banks, the 12 federal home
loan banks, for our expenses.
As far as whether we have enough budget, enough money, yes
we do. One of the things we have been doing in the past few
years is increasing not only our staff, but also our
infrastructure. I can tell you that right now we have 70 very
highly qualified, skilled individuals, hard at work in the
supervision and the examination of the 12 federal home loan
banks and the office of finance.
Mr. Hinojosa. Thank you for that explanation. I am pleased
that we do not have to give you money to run that board. If
that is the case, then I would like to echo some of the
comments that were made by Mr. Kanjorski. That is that there
needs to be representation of the public in ways that you would
have people who are of both parties or more parties, simply
because I was concerned to hear that over 95 percent or 97
percent are of one party. That lack of inclusivity is a
weakness of representation of the public.
I believe that your responsibility of making affordable
housing programs successful needs the input of women, of
minorities, Democrats and Republicans. We certainly have a long
way to go to be able to get minorities into the 60 percent and
70 percent of homeownership. I think that you have the
responsibility as Chairwoman of that board to move in that
direction and get courageous and make the changes necessary so
that it is reflecting the makeup of our country.
Chairwoman Kelly. Thank you very much.
Mr. Hinojosa. I commend all of you for the work you are
doing.
Chairwoman Kelly. Thank you very much.
Ms. Capito?
Mrs. Capito. Thank you, Madam Chairwoman.
I would like to ask Chairwoman Castaneda a question. I want
to go back to the issue of the multi-district membership. I
represent the state of West Virginia. We are covered by the
Federal Home Loan Bank of Pittsburgh, and 35 percent of our
market share financial institutions fall within the other
jurisdictions of other federal home loan banks, the largest one
being BB&T Bank, which is chartered in North Carolina.
It has come to my attention that while this bank has been
able to have access to the affordable housing program, there
has been no access to the first-time homebuyers downpayment
assistance program or the economic development growth
enhancement program. We are concerned about the availability of
those funds and the ability for that large institution in our
State to be able to work with the federal home loan bank.
You mentioned in your previous statement that they are
allowed to offer all products in all services areas of the
banks they are chartered in. Is that correct?
Ms. Castaneda. What I said is that Finance Board rules do
not prevent the federal home loan bank from funding projects
outside the districts.
Mrs. Capito. Do you have any plans to look at this issue in
any more depth? Because in a State like West Virginia, you
said, well, it is all going to even out. Well, I do not think
that the consolidations are going to occur. They are not going
to be consolidating in West Virginia, unfortunately. They are
going to be consolidating in New York and other places. How is
that going to balance out?
Ms. Castaneda. Again, I would also be delighted to share
the data that I was preparing earlier. As far as we can tell,
the mergers and acquisitions impact on affordable housing
funding has not been very significant.
Mrs. Capito. Let me ask just another follow-up then. For
instance, let's take BB&T for an example, if BB&T as an
institution gets the same amount of money under the affordable
housing program, do they then decide which areas of their
service area it goes to? Or does the federal home loan bank
have some jurisdiction over whether some of that funding gets
to West Virginia or not?
Ms. Castaneda. They can request that the federal home loan
bank, in this case of Pittsburgh, to forward the funds to a
place outside the Pittsburgh district.
Mrs. Capito. Okay. Has there been any investigation into
letting larger and consolidated entities have membership in
different banks, instead of just single membership?
Ms. Castaneda. The multi-district issue has not been before
the board since I cam in January, so I have not had the
opportunity to study the issue very closely. My understanding
is the issue is really whether the Finance Board has the
authority to change multi-district rules, at least without
there being any specific concern regarding the safety and
soundness of the federal home loan bank system of any
particular bank, or for that matter the housing finance
mission.
Again, multi-district rules are determined by statute.
Congress could certainly make any changes it believed
appropriate. What I can tell you also is that the Finance Board
staff will be available to assist you on this issue either for
reviewing the multi-district issue or coming up with any
different plans. We are available.
Mrs. Capito. Thank you. I look forward to your sharing the
data with my office so we can work together on this issue.
Thank you.
Ms. Castaneda. I will make sure that that happens.
Mrs. Capito. Thank you.
Chairwoman Kelly. Thank you very much.
Mr. Scott?
Mr. Scott. Yes, thank you, Madam Chairwoman.
Mr. Falcon, first let me ask you about funding. You are
currently asking for $20 million and increasing your funding
for staffing purposes. Your budget goes through what looks to
me like a tangled web. You have to get the appropriations
process through Congress, but your funds are derived from
having semiannual assessments placed upon Fannie Mae and
Freddie Mac, two entities that you regulate. All of this is
going on at the same time that the Administration is working
feverishly to remove you completely from the appropriations
process.
I would like to have your comments on how it is to operate
within such a tangled web of your finances, and detail for us
if you will how you can meet these needs while you continually
have to rely on this rather haphazard means of financing?
Mr. Falcon. Thank you, Congressman. That is a very good
question, because this I think goes to the heart of the ability
of the agency to fulfill its mission over the long term. I
think the fact that the agency, unlike every other safety and
soundness regulator, has to go through the appropriations
process has hindered the agency in the past from fully
fulfilling its mission. It hinders long-term planning. It
hinders the ability to respond quickly to certain budgetary
needs. As we saw with the need to quickly staff-up to deal with
the Freddie Mac problem, we did not have adequate funds to do
so, so we had to get additional appropriations for that. The
same thing arose with Fannie Mae where we needed a separate
appropriation for that activity.
It hinders our ability to staff-up, because we cannot plan
on hiring anyone this year until we are certain that we will
have the funds next year in order to continue hiring those
individuals, even if we find the funds in the current year. In
addition, when there is a continuing resolution, especially a
long-term one as there was in the 2004 fiscal year, even though
we are planning for growth, hiring and doing additional testing
and reviews of the two companies, a CR keeps us operating at
last year's level, which prevents us from taking on the
additional responsibilities and activities that we would like
to. In the case of 2004, that went on for a 4-month period.
I very much hope that we are not forced into that situation
again this year. I think it would very dramatically affect some
of the ongoing activities that OFHEO has, including the Fannie
Mae review, as well as our effort to staff-up on a timely basis
in key areas like examinations and capital analysis.
Mr. Scott. Thank you. Let me talk for a moment also about
the Fannie Mae review. I happen to believe that Fannie Mae and
Freddie Mac are performing an extraordinarily important mission
in providing access to housing for lower-and middle-income
Americans. Earlier this year, you instituted an examination of
accounting policies and programs of Fannie Mae to see if you
could identify any control weaknesses or unusual transactions,
to take a look at internal controls, to look at the role of
management, and the board of directors and its implementation
of its relevant policies and procedures.
Could you share with this committee your findings thus far?
Mr. Falcon. Congressman, like you I support very much the
mission of Fannie Mae and Freddie Mac. However, that very
important public mission does not give them license to violate
accounting rules or engage in this conduct. If we find any type
of violation of accounting rules or misconduct, we will take
appropriate action to correct and prevent that misconduct from
happening going forward. I am not in a position, however, to
give you any updates other than in one area where we were
prepared to take action as soon as we came to a conclusion
about it. It was the area of impairments and how they account
for impairments.
This primarily affected their manufactured housing
portfolio and their portfolio of aircraft leases. It will
result going forward in the write-down of those assets of
approximately $300 million or so, but we have not determined
the final numbers yet.
If you would allow me, I would like to withhold any comment
on other findings until I am in a better position to be able to
do so.
Mr. Scott. I will certainly do that, but please make note
that I am very interested in moving forthrightly to remove any
cloud on Fannie Mae's or Freddie Mac's operations in view of a
public who is in great need of the implementation of their
mission. I only hope that you and others and your board of
examinations would take that in mind so that we realize that
the longer we dally with this, there is a great need that is
not being fulfilled as much as it should. I would be very
interested if, off the record or at anytime while in private,
that I might be able to receive some information that could
allay some of our concerns, I would be glad to receive those.
Chairwoman Kelly. Thank you very much, Mr. Scott. I am
sorry, your time is up, sir.
Mr. Scott. Okay.
Chairwoman Kelly. If we get into a second round, you are
welcome to stay and do that.
Mr. Murphy?
Mr. Murphy. I thank you, Madam Chairwoman.
Chairman Castaneda, I have a question I want to ask you. It
is really related to high-profile scandals that have
highlighted our need for government reform. Congress has taken
some meaningful steps, most notably the Sarbanes-Oxley
legislation, to ensure that sort of accountability in America's
boardrooms and corporations.
When we look specifically at the federal home loan banks,
we see a lot of extensive board turnover, where I think there
is a real need to build continuity in these boards. To address
this issue, there are a number of legislative initiatives that
have been proposed to improve this governance of the federal
home loan bank system. One of these includes extending the
members's terms from 3 years to 4 years, and lifting a
statutory limit on compensation. Can you tell me your thoughts,
if you support these provisions? If so, why and what do you
believe they would do?
Ms. Castaneda. Thank you for the question, Congressman.
As I have mentioned before, that was one of the issues that
was raise during the system-wide corporate governance review
that the Finance Board did last year. I am very much aware that
it is included in the House bill, and I do believe that
extending the term of service from 3 to 4 years would allow the
board member to be able to a much better job.
The federal home loans banks are very unique institutions.
I do believe it takes time for any member, even if you have a
lot of banking and financial background, to get enough
information and knowledge to serve. So I do believe then that a
4-year term is much more reasonable.
Mr. Murphy. So you are saying that is based upon the time
it takes to ramp-up to that level of knowledge. Do you think
that also puts people in a position of helping them make wise
judgments in the long term as well, rather than trying to rush,
if they are dealing with that 3-year term here, to try and do
things? I am thinking of this in light of some comments made
before that perhaps some of these appointments may be
politically based, but I am wondering if when people have long-
term positions, does that work positively or negatively towards
some of those accusations about political actions?
Ms. Castaneda. I think the more time you have with the
board, the more familiar you will be with all the issues, the
better you will be able to understand what you are trying to
accomplish. In that sense, yes I do believe that then extending
the term of service, it makes sense.
Mr. Murphy. I just wanted that comment.
Thank you very much, Madam Chairwoman.
Chairwoman Kelly. Thank you, Mr. Murphy.
Mr. Bell?
Mr. Bell. Thank you very much, Madam Chair, and my thanks
to both of you for your testimony here today.
Ms. Castaneda, a recent issue, as you are well aware, is
simultaneous membership of one financial institution in
multiple FHLB districts. As has already been pointed out today,
today's economy trends toward mergers and consolidation,
particularly in the financial sector.
I am wondering how much has this environment contributed to
the push for multi-district memberships, and how will multi-
district membership affect access to low-cost mortgages and
housing? And if you have any information that is particular to
Texas, I would very much appreciate your sharing that, too.
Ms. Castaneda. Again, Congressman, the multi-district issue
has not been before the board since I came in January, so I
have not had the opportunity to study the issue very closely.
What I would like to tell you again, like I have expressed it
to some of the other members here this afternoon, is that the
Finance Board will be available to assist you in any way
regarding this issue. We have also collected some data
regarding the affect of mergers and acquisitions, and the
affordable housing program funding which I will be delighted to
have the Finance Board staff to get in touch with your staff
and share that information.
Mr. Bell. Thank you.
Earlier, one of my colleagues painted a rather nightmarish
and doomsday scenario for what could happen in this area, and
one of the reasons offered for that doomsday scenario was
programs that have been offered for the least creditworthy
individuals who were most likely to default. That statement
contrasts with some of the information I have been provided in
my district regarding the success of some of those programs
designed for the last creditworthy individuals or other low-
income individuals. Since you all really did not have an
opportunity to comment on the entire doomsday scenario which
was offered, I would like to give you that opportunity now and
see if you share any of those opinions or what your response
would be.
Mr. Falcon?
Mr. Falcon. Relative to home price appreciation?
Mr. Bell. That, and any of the other comments that were
made as to the looming disaster in this area. Do you agree with
that?
Mr. Falcon. We have studied the issues related to a system
at risk, and we discussed earlier issues related to home price
appreciation. I would never come here and say to you that there
will never be a failure of either of these companies. You never
know if an event could happen or if you must miss something.
But what you have to do is to try to make sure that you have
put adequate resources, adequate staffing, adequate expertise
and adequate authorities in the hands of the right leaders to
make sure that we are doing everything possible to make sure
that doomsday scenarios do not in fact happen.
I think with the growth of OFHEO's budget, with the
additional staffing, with the way we are restructuring our
regulatory program, I think we have taken great strides in
trying to strengthen the oversight of these two companies to
very much reduce the likelihood that there will be any kind of
systemic event arising from these two companies.
A healthy Fannie Mae and Freddie Mac in fact can have
stabilizing effects on our economy. So we need to make sure
that there are not problems with these two companies that could
possibly have a destabilizing affect externally. That is why I
continue to press for the need for adequate resources and for
every authority necessary at OFHEO, similar to what every other
safety and soundness program has to ensure that we do have all
the tools and resources necessary to make sure that we can
reduce the likelihood, and come as close as possible to
eliminating the likelihood, that there could be a systemic
crisis in the housing sector of the economy or otherwise.
Mr. Bell. Ms. Castaneda?
Ms. Castaneda. Congressman, I do not have enough
information for me to make a comment. I would like to come back
to you on that issue, if I may.
Mr. Bell. Ms. Castaneda, opponents of FHLB's SEC disclosure
rule have been vocal in decrying its authority to enact those
changes. I was wondering if you could comment specifically on
the Finance Board's jurisdiction in this matter?
Ms. Castaneda. You are right, Congressman. I have heard a
lot of comments after our board resolution. The finance board
looked at all of the issues raised by the banks and the other
commenters. We made a decision that the best thing to do was to
ask the banks to register with the SEC. Congress has given the
mandate to the Finance Board to ensure that the banks operate
in a safe and sound manner. The Finance Board ensures then the
banks can raise money in the capital markets. Registering with
SEC will reassure investors that there are no differences
between the standard disclosures followed by the other two GSEs
that could hamper the ability of the federal home loan banks to
raise funds in the capital markets.
Additional disclosure would also enhance safety and
soundness. It would provide more information to the analysts,
to the member banks, and that would add market discipline to
the banks and to the system.
Mr. Bell. Thank you, Madam Chair.
Chairwoman Kelly. Thank you, Mr. Bell.
Mr. Royce?
Mr. Royce. Thank you, Madam Chair.
Over the past year or so, this committee has spent a great
deal of its time looking at the 14 housing government-sponsored
enterprises. Last year, I authored legislation to create one
regulator for Fannie Mae and Freddie Mac and the federal home
loan banks. I felt such legislation was needed because the GSEs
are too large and too important to our nation's housing and
financial markets not to have world-class regulation.
Now, in the interim, I believe Congress needs to recognize
that both the Finance Board and OFHEO are not operating under
the most optimal statutory constraints, and only congressional
action can make the necessary fixes. The bottom line is that
until Congress acts, we are the ones that would and frankly
should be held responsible, should be held accountable if a
crisis were to occur in one of the GSEs. Let me be clear in
saying that I do not know of any looming financial crisis, but
the fact of the matter is that this committee should take
prudent steps to ensure that such an event could not occur.
I would like to see this committee take the bill reported
out of the Senate Banking Committee and mark it up over here. I
am sure there would be amendments, and the American people
would then have a record as to who supports what and why. So I
respectfully suggest that the committee take up the bill passed
in the Senate Banking Committee this past spring, because I
think Congress needs to act.
In the meantime, the regulatory agencies must continue to
perform their duties and for some time I have been very
concerned about the federal home loan bank system's entry into
the retained mortgage business. The MPF and MPP programs I
think expose the federal home loan bank system to interest rate
risk which can be very, very complex to manage. So I was very
pleased to see the Finance Board recently demand that the
Chicago bank have robust risk management systems and procedures
in place. I just wanted to tell you, Chairwoman Castaneda, that
I think that is a job well done.
I want to ask you a follow-up question to that, and that
is, is the Finance Board going to be demanding the same level
of risk management at the other 11 home loan banks?
Ms. Castaneda. Thank you, Congressman, an excellent
question. I can assure you that at the Finance Board we are
very vigilant in the oversight of all the federal home loan
banks. We will take any necessary steps as we just did with the
Chicago bank if we think it is necessary to do it.
Mr. Royce. Let me ask you this. What is the comfort level
at the Finance Board with the internal risk-based capital test
at each of the 12 federal home loan banks?
Ms. Castaneda. Capital requirements is one of the most
important issues for the Finance Board. It is at the top of our
supervisory agenda. As you know, after the GLB Act, all of the
banks have to have a new capital structure. Most of the banks
have implemented that new capital structure. As I said before,
it is at the top of our supervisory agenda. We are monitoring
not only the level, but also the composition of the capital of
each one of the federal home loan banks.
Mr. Royce. Let me ask you about how the bank systems are
approaching this. Are the banks measuring their exposure to
mortgage assets in a consistent way across the system? Is there
a consistency in this? Are there different approaches being
applied in these different federal home loan banks?
Ms. Castaneda. Obviously, each federal home loan bank is
different. They have their own structures as far as, you were
talking about the mortgage loans.
Mr. Royce. Right.
Ms. Castaneda. For some of the banks, the mortgage loan
portfolio is a much larger portion of their asset base, as in
the case of Chicago, for example. But as far as how do we
measure the interest rates at each one of the federal home loan
banks, our supervisory effort is the same for each bank.
Mr. Royce. Thank you, Chairwoman.
Thank you for this hearing.
Chairwoman Kelly. Thank you, Mr. Royce.
Mr. Falcon, I wanted to just go back for a minute. Chairman
Baker asked you for a response, to report back to the
committee. I just simply need to do a bit of business here,
with unanimous consent so moved.
Chairman Baker, if you would like to have a second round
here, please feel free.
Mr. Baker. Just a brief follow-up. I would ask a couple of
questions of the Director that he did not have an opportunity
to answer in the earlier round. First was with regard to the
ongoing forensic accounting audit of Fannie Mae, and as to your
opinion whether the agency is providing access to documents,
personnel or other matters as may be deemed appropriate to the
accounting firm or to your own inspectors as appropriate, given
the circumstance they find themselves in. Are they being
cooperative in your view?
Mr. Falcon. I think the cooperation has been spotty, but
there are many demands we have placed on them for documents and
to employees for scheduled interviews. Given that we find that
cooperation has been less than adequate, whether it is
deadlines being met or data submissions not being complete, we
have taken steps to address those problems and will continue to
be as forceful as necessary to make sure we do get full
cooperation.
Mr. Baker. Let me ask further that as significant events
occur which you feel are not helpful to the audits and
conclusion, if you would take this as a formal request to let
us know. We certainly want to be helpful to you in encouraging
a cooperative environment to get to an appropriate assessment
of financial condition.
Secondly, given the stated objection of both GSEs to your
corporate governance reforms, do you have a date certain, or
how do you intend to proceed as to the implementation of your
recommendations?
Mr. Falcon. Right now, we are analyzing the comments we
have received, and we will decide whether or not to make
changes to the proposed rule in light of comments that we
received, and then draft the final rule which will then be
submitted to OMB. If they determine it is a major rule that
needs to be cleared by OMB, then we will have to wait for their
review of it.
Mr. Baker. As to your part, as to your date of submission
to OMB, is that a year-end goal?
Mr. Falcon. Absolutely. I am hopeful we can get our part of
it done within 1 or 2 months.
Mr. Baker. Terrific.
I have one other element that we have not previously talked
about, or at least not recently. Some on the committee have
expressed support for the enterprises's efforts with regard to
facilitating access to credit for first-time, low-income
minority women. In looking at the portfolio of housing assets
held, what percent, if you know, exceed 95 percent LTV? My
expectation would be that first-time, low-income homebuyers are
not likely to have $3,000 cash for a 97 percent loan for
downpayment, plus another $2,500 or $2,800 in closing costs or
$5,000 or $6,000 available in cash to make that acquisition,
which means to me that most first-time homebuyers are going to
be that 97, 98, 100 percent LTV first-time home acquisition.
My suspicion, having looked at these numbers some time ago,
is that the bulk of assets held by the enterprises are a
typical $250,000 home, two wage-earners, 25 or 30 percent down,
people who have gone to their second, maybe third homes. That
is where the bulk of the enterprises's assets are invested, as
opposed to that description of that low-income first-time
homebuyer. Is that characterization still close to accurate, or
can you respond to it there? Do you need to take time to look
at it?
Mr. Falcon. I think I will need some time to look at it,
rather than give you some numbers off the top of my head which
might not be accurate. I would prefer to defer, if I can.
Mr. Baker. Let me refer you to Freddie Mac's annual
financial report to shareholders about 3 years ago, in which
they broke it out by percentage of housing investment held. I
specifically asked the Freddie person at that time, who
appeared before the committee, why there was such a small
amount held in 95 percent excess of LTV. The explanation at
that point, some years ago, was that the portfolio has not
seasoned. I asked if it needed Tabasco or pork fat, or what we
needed to get it over the top. I never got a response. I just
thought it might be appropriate for you to return to that. Many
members of the committee assume that the principal line of
business for these enterprises is to help low-income
individuals. My suspicion is that it is not the case.
I thank you very much for your leadership and hard work in
this area. I yield back, Madam Chair.
Chairwoman Kelly. Thank you very much.
I want to thank this panel very much for their patience
with this hearing this afternoon. The Chair notes that some
members may have additional questions for this panel, which
they may wish to submit in writing. So without objection, the
hearing record will remain open for 30 days for the members to
submit written questions to these witnesses and place their
responses in the record.
I really thank you for your patience. With that, this
hearing is adjourned.
[Whereupon, at 5:07 p.m., the subcommittees adjourned.]
A P P E N D I X
July 13, 2004
[GRAPHIC] [TIFF OMITTED] T6547.001
[GRAPHIC] [TIFF OMITTED] T6547.002
[GRAPHIC] [TIFF OMITTED] T6547.003
[GRAPHIC] [TIFF OMITTED] T6547.004
[GRAPHIC] [TIFF OMITTED] T6547.005
[GRAPHIC] [TIFF OMITTED] T6547.006
[GRAPHIC] [TIFF OMITTED] T6547.007
[GRAPHIC] [TIFF OMITTED] T6547.008
[GRAPHIC] [TIFF OMITTED] T6547.009
[GRAPHIC] [TIFF OMITTED] T6547.010
[GRAPHIC] [TIFF OMITTED] T6547.011
[GRAPHIC] [TIFF OMITTED] T6547.012
[GRAPHIC] [TIFF OMITTED] T6547.013
[GRAPHIC] [TIFF OMITTED] T6547.014
[GRAPHIC] [TIFF OMITTED] T6547.015
[GRAPHIC] [TIFF OMITTED] T6547.016
[GRAPHIC] [TIFF OMITTED] T6547.017
[GRAPHIC] [TIFF OMITTED] T6547.018
[GRAPHIC] [TIFF OMITTED] T6547.019
[GRAPHIC] [TIFF OMITTED] T6547.020
[GRAPHIC] [TIFF OMITTED] T6547.021
[GRAPHIC] [TIFF OMITTED] T6547.022
[GRAPHIC] [TIFF OMITTED] T6547.023
[GRAPHIC] [TIFF OMITTED] T6547.024
[GRAPHIC] [TIFF OMITTED] T6547.025
[GRAPHIC] [TIFF OMITTED] T6547.026