U.S. GOVERNMENT PRINTING OFFICE

71–631 PS WASHINGTON : 2001

REVIEW OF THE VOLUNTARY AGREEMENT

BY FANNIE MAE AND FREDDIE MAC

HEARING

BEFORE THE

SUBCOMMITTEE ON

CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

OF THE

COMMITTEE ON

FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 27, 2001

Printed for the use of the Committee on Financial Services

Serial No. 107–7

(

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2550

Mail: Stop SSOP, Washington DC 20402–0001
(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa

MARGE ROUKEMA, New Jersey, Vice Chair

DOUG BEREUTER, Nebraska

RICHARD H. BAKER, Louisiana

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

PETER T. KING, New York

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

ROBERT W. NEY, Ohio

BOB BARR, Georgia

SUE W. KELLY, New York

RON PAUL, Texas

PAUL E. GILLMOR, Ohio

CHRISTOPHER COX, California

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

STEVEN C. LATOURETTE, Ohio

DONALD A. MANZULLO, Illinois

WALTER B. JONES, North Carolina

DOUG OSE, California

JUDY BIGGERT, Illinois

MARK GREEN, Wisconsin

PATRICK J. TOOMEY, Pennsylvania

CHRISTOPHER SHAYS, Connecticut

JOHN B. SHADEGG, Arizona

VITO FOSELLA, New York

GARY G. MILLER, California

ERIC CANTOR, Virginia

FELIX J. GRUCCI, JR., New York

MELISSA A. HART, Pennsylvania

SHELLEY MOORE CAPITO, West Virginia

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

PATRICK J. TIBERI, Ohio

JOHN J. LAFALCE, New York

BARNEY FRANK, Massachusetts

PAUL E. KANJORSKI, Pennsylvania

MAXINE WATERS, California

CAROLYN B. MALONEY, New York

LUIS V. GUTIERREZ, Illinois

NYDIA M. VELA ́ ZQUEZ, New York

MELVIN L. WATT, North Carolina

GARY L. ACKERMAN, New York

KEN BENTSEN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

JULIA CARSON, Indiana

BRAD SHERMAN, California

MAX SANDLIN, Texas

GREGORY W. MEEKS, New York

BARBARA LEE, California

FRANK MASCARA, Pennsylvania

JAY INSLEE, Washington

JANICE D. SCHAKOWSKY, Illinois

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

WILLIAM LACY CLAY, Missiouri

STEVE ISRAEL, New York

MIKE ROSS, Arizona

BERNARD SANDERS, Vermont

Terry Haines, Chief Counsel and Staff Director
(III)

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND

GOVERNMENT SPONSORED ENTERPRISES

RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman

CHRISTOPHER SHAYS, Connecticut

CHRISTOPHER COX, California

PAUL E. GILLMOR, Ohio

RON PAUL, Texas

SPENCER BACHUS, Alabama

MICHAEL N. CASTLE, Delaware

EDWARD R. ROYCE, California

FRANK D. LUCAS, Oklahoma

BOB BARR, Georgia

WALTER B. JONES, North Carolina

STEVEN C. LATOURETTE, Ohio

JOHN B. SHADEGG, Arizona

DAVE WELDON, Florida

JIM RYUN, Kansas

BOB RILEY, Alabama

VITO FOSSELLA, New York

JUDY BIGGERT, Illinois

GARY G. MILLER, California

DOUG OSE, California

PATRICK J. TOOMEY, Pennsylvania

MIKE FERGUSON, New Jersey

MELISSA A. HART, Pennsylvania

MIKE ROGERS, Michigan

PAUL E. KANJORSKI, Pennsylvania

GARY L. ACKERMAN, New York

NYDIA M. VELA ́ ZQUEZ, New York

KEN BENTSEN, Texas

MAX SANDLIN, Texas

JAMES H. MALONEY, Connecticut

DARLENE HOOLEY, Oregon

FRANK MASCARA, Pennsylvania

STEPHANIE TUBBS JONES, Ohio

MICHAEL E. CAPUANO, Massachusetts

BRAD SHERMAN, California

GREGORY W. MEEKS, New York

JAY INSLEE, Washington

DENNIS MOORE, Kansas

CHARLES A. GONZALEZ, Texas

HAROLD E. FORD, JR., Tennessee

RUBE ́ N HINOJOSA, Texas

KEN LUCAS, Kentucky

RONNIE SHOWS, Mississippi

JOSEPH CROWLEY, New York

STEVE ISRAEL, New York

MIKE ROSS, Arizona

(V)

C O N T E N T S

Page

Hearing held on:

March 27, 2001 ................................................................................................. 1

Appendix:

March 27, 2001 ................................................................................................. 43

WITNESSES

TUESDAY, MARCH 27, 2001

Brendsel, Leland C., Chairman and Chief Executive Officer, Freddie Mac ....... 10

Howard, J. Timothy, Executive Vice President and Chief Financial Officer,

Fannie Mae ........................................................................................................... 13

APPENDIX

Prepared statements:

Baker, Hon. Richard H. ................................................................................... 44

Oxley, Hon. Michael G. .................................................................................... 60

Bentsen, Hon. Ken ............................................................................................ 47

Crowley, Hon. Joseph ....................................................................................... 48

Jones, Hon. Stephanie Tubbs .......................................................................... 49

Kanjorski, Hon. Paul E. ................................................................................... 52

Miller, Hon. Gary ............................................................................................. 59

Brendsel, Leland C. (with attachment) .......................................................... 61

Howard, J. Timothy .......................................................................................... 151

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.:

OFHEO written response ................................................................................ 54

Brendsel, Leland C.:

Freddie Mac and Fannie Mae: Their Funding Advantage and Benefits

to Consumers ................................................................................................. 103

‘‘GSE Creep into Subprime Could Hurt Margin,’’ American Banker, March

26, 2001 .......................................................................................................... 144

J. William Seidman letter, Dec. 13, 2000 ....................................................... 145

Howard, J. Timothy:

Written response to questions from Hon. Richard H. Baker ........................ 162

(1)

REVIEW OF THE VOLUNTARY AGREEMENT

BY FANNIE MAE AND FREDDIE MAC

TUESDAY, MARCH 27, 2001

U.S. HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE,

AND GOVERNMENT SPONSORED ENTERPRISES

COMMITTEE ON FINANCIAL SERVICES

Washington, DC.

The subcommittee met, pursuant to call, at 2:05 p.m., in room

2128, Rayburn House Office Building, Hon. Richard H. Baker,

[chairman of the subcommittee], presiding.

Present: Chairman Baker; Representatives Oxley, Ney, Shays,

Bachus, Jones, Weldon, Biggert, Ose, Hart, Kanjorski, S. Jones,

Sherman, Meeks, Ford, Hinojosa, Lucas, Shows, Crowley, Israel

and Ross.

Chairman BAKER. I’d like to call this hearing of the Capital Markets Subcommittee to order and welcome our witnesses to the

table. And I would like to note that there were Members present

before the Chairman, who was 5 minutes late because an unnamed

airline was 3 hours late leaving my fine city this morning. But I

did make it. We can take a look at that maybe later.

I do welcome my participants to the hearing this morning. This

hearing is pursuant to an agreement reached last October with the

Government sponsored enterprises of Fannie Mae and Freddie

Mac, both of whom had been the subject of study over the course

of the last year with a series of hearings and meetings with Members concerning the accuracy of current regulatory oversight and

appropriate overview of their business operations, given the relationship between their business success and the United States taxpayers.

Last fall, there was an important six-point plan publicly agreed

to in which the CEOs of both Fannie Mae and Freddie Mac appeared and expressed support for this initiative, and second, a willingness to work with the committee this session on the construction of a new regulatory oversight body.

The purpose of the hearing today is to receive testimony from

representatives of both enterprises regarding the compliance success with the terms of that agreement since last October.

I certainly am pleased to have read their published reports of the

success of implementation to date. I’m looking forward to a more

detailed discussion and feel that this is an extraordinarily important first step that we have taken to ensure the safety and soundness of these two very important business enterprises.
2

For Members of the subcommittee who have not been engaged in

this topic previously, these institutions are the third and the seventh largest corporations in America by SSIs, are extremely important in providing liquidity in the home ownership market, and

have for many decades been the reason for facilitating access to

home ownership to many individuals otherwise without such opportunity.

So they perform excellent work. They are today, as I said in all

prior meetings on this subject, well managed, highly profitable,

successful enterprises. But our mission on this subcommittee must

be to have the long-term view and to ensure that appropriate oversight is in place and remains in place in the unfortunate circumstance of a downturn in our economy and spiraling interest

rates and a softening of loan demand, we want to ensure that the

adequacy of these financial enterprises is sufficient to withstand

such troubling times.

Hence, the reason for the agreement of last fall, the hearing

today, and the work ahead of the subcommittee for the next several

months with regard to the regulatory structure.

At this time I would like to recognize Mr. Kanjorski for an opening statement.

[The prepared statement of Hon. Richard H. Baker can be found

on page 44 in the appendix.]

Mr. KANJORSKI. Mr. Chairman, before commenting further on today’s proceedings, I must commend you for your continuing leadership on Government sponsored enterprise issues. In the 106th Congress, in addition to passing legislation to modernize the Federal

Home Loan Bank system, we held hearings over 5 days and roundtable discussions on legislation designed to reform the regulation of

housing GSEs and eliminate some of their statutory benefits. Although that bill did not become law, it did help lead to the development of six voluntary commitments by Fannie Mae and Freddie

Mac, the subject of today’s hearing. You deserve congratulations for

playing an important role in raising public awareness about these

issues.

During our lengthy hearings last year on GSE regulation, I believe we reached consensus on several points.

First, we agreed that we have the world’s most successful housing finance system and we gained an appreciation of the important

role that GSEs play in that system.

Second, we agreed that Fannie Mae and Freddie Mac have grown

significantly in recent years.

Finally, we agreed that we must have strong, independent regulators for the housing GSEs. These regulators must also have the

resources they need to get the job done.

As one of the few remaining committee Members who participated in the entire Congressional dialogue to resolve the savings

and loan crisis, I am acutely aware of the need to protect taxpayers

from risk.

It is in the public’s interest to ensure that Fannie Mae and

Freddie Mac continue to operate safely and soundly. We can best

achieve this goal by pursuing a three-pronged supervisory approach

that includes regular Congressional oversight, continued effective
3

Government regulation, and increased market discipline for the

two GSEs.

Through our extensive studies last year and our hearings today,

we are fulfilling our obligations in Congress to conduct regular

oversight of the GSEs.

In addition, from my perspective, OFHEO operates with increasing effectivness as the safety and soundness regulator for Fannie

Mae and Freddie Mac.

The agency has, for example, developed and implemented a robust, comprehensive and continuous examination program that

works. And it will soon publish its long-awaited risk-based capital

standard rounding out the existing capital standards.

The voluntary commitments recently developed by Fannie Mae

and Freddie Mac promoting market discipline completes the third

leg of my supervisory tripod.

By strengthening capital adequacy and increasing transparency,

the overall package, in my view, constitutes a sound set of measures to supplement OFHEO’s formal regulatory regime and augment Congressional oversight.

The voluntary commitments are also consistent with the prevailing thinking of leading risk management specialists.

At our October press conference on the voluntary commitments,

I noted that the initiatives, when implemented, would hopefully become a complement to and not a substitute for OFHEO’s already

strong safety and soundness examination program and capital requirements.

In that vein, I asked OFHEO to review the regulatory environment surrounding the voluntary measures in advance of today’s

hearing. In response, Director Falcon notes that these enhanced

disclosures improve the public’s awareness of Fannie Mae and

Freddie Mac’s financial condition and risk management practices.

I agree and would ask, Mr. Chairman, unanimous consent to

submit this letter for the record.

Chairman BAKER. Without objection.

[The material referred to can be found on page 54 in the

appendix.]

Mr. KANJORSKI. If we once again decide to pursue legislative action affecting the GSEs in the 107th Congress, we must be sure not

to diminish their ability to work efficiently.

In my view, we should also explore modernizing their mission.

For example, the GSEs could work to improve economic development in our Nation’s distressed areas or to create a secondary market for investments made pursuant to the Community Reinvestment Act. These worthy ideas merit our prudent consideration.

Finally, throughout last year’s deliberations on GSEs, I consistently noted that we must move forward cautiously in this area so

as to ensure we maintain the delicate balance that has lead to

more than 67 percent of all American families owning their homes.

On at least one occasion last year, however, our committee’s actions discouraged investors and raised home ownership costs. As

we proceed today, we must renew our efforts to ensure that we do

not repeat that mistake.
4

Mr. Chairman, I therefore look forward once again to carefully,

deliberately and objectively examining the many issues relating to

housing GSEs in the 107th Congress.

[The prepared statement of Hon. Paul E. Kanjorski can be found

on page 52 in the appendix.]

Chairman BAKER. Chairman Oxley.

Mr. OXLEY. Thank you, Mr. Chairman. Many Members of our

subcommittee are taking on an important issue for the first time.

Government sponsored enterprises, better known as GSEs, is one

of those issues, and I’m pleased that we are having this hearing

today so that Members have an opportunity to learn about the vital

role the GSEs play in our housing finance system and overall economy.

Expanded home ownership is a top priority for all of us. Congress

created Fannie Mae and Freddie Mac to broaden consumer access

to mortgage credit. Fannie and Freddie developed a secondary market for conventional mortgages, and then a wider market for mortgage securities.

Fannie and Freddie have greatly advanced their housing mission

and are a real success story. In order to continue benefiting America’s families, Fannie Mae and Freddie Mac must operate according

to the highest standards. They are two of the leading financial institutions in this country, and they occupy a central role in the

mortgage and capital markets.

Fannie and Freddie are well managed, highly sophisticated businesses. However, in light of their size and growth, a number of concerns have been raised. These include the adequacy of their supervision, the nature of their mission, and the risk they could pose to

the financial system in the event of a downturn.

The voluntary agreement reached last October addresses many of

these concerns. And I congratulate you, Mr. Chairman, for your

leadership, as well as Ranking Member Kanjorski, on this meaningful and timely agreement.

The commitments to meet higher capital, risk management, and

disclosure standards are impressive and commendable, and I look

forward to hearing from the witnesses about the specifics of those

commitments, the progress they have made in implementing them,

and their future plans.

In addition, we should take a look at the existing framework for

regulating Fannie Mae and Freddie Mac. We should consider

whether the current division of regulation between OFHEO and

HUD ought to be streamlined, and whether the regulators have the

powers they need to be effective.

More effective regulation, along with improved market discipline

resulting from the voluntary agreement, could give Congress and

the markets even greater confidence in Fannie and Freddie.

Mr. Chairman, I look forward to this subcommittee’s responsible

oversight of the GSEs, and I yield back.

[The prepared statement of Hon. Michael G. Oxley can be found

on page 60 in the appendix.]

Chairman BAKER. Thank you very much, Mr. Chairman, for your

interest and participation today. Are there other Members with

opening statements?

Mr. Ney.
5

Mr. NEY. Thank you, Mr. Chairman.

Chairman BAKER. I’m sorry. I should go to the other side.

Ms. Jones, did you care to make an opening statement?

Ms. JONES. Thank you, Mr. Chairman. Good afternoon, Mr.

Chairman and Ranking Member Kanjorski and Members of this

subcommittee. I ask unanimous consent that my full statement be

included in the record.

Chairman BAKER. Without objection, as will all Members’ statements be included in the record.

Ms. JONES. We are here again this afternoon to review voluntary

agreements that were established to improve capitalization information disclosure and market discipline.

Many of us on this subcommittee remember and sat through six

GSE hearings and then to examine in great detail Fannie Mae and

Freddie Mac.

From those hearings, we examined their safety and soundness to

an exhaustive length, and I must note, at no time did we find there

to be any safety and soundness issues.

Both Fannie Mae and Freddie Mac pledged themselves to six voluntary commitments, which we will review today and I won’t go

through them. I’m proud to hear of their progress made by both,

and in stepping up to the challenge and demonstrating that they’re

both solid and sound institutions. Their success is America’s success.

I hope our review this afternoon will allow Fannie Mae and

Freddie Mac to continue to fulfill their housing mission and do

what they do best. Their mission is an important mission, and I am

not as concerned about market share, but I am concerned about affordable housing in the 11th Congressional District, home ownership for those still seeking a piece of the American Dream, and also

special housing needs of the elderly.

Housing is still a key public policy concern for all of us.

GSEs were established to address many of these problems, and

all I say is, let them do their job. Again, if it ain’t broke, why fix

it? Let Fannie Mae and Freddie Mac continue to lead the mortgage

finance industry in making credit available for low- and moderateincome families.

I want to skip on just to the closing of my opening statement,

Mr. Chairman, to say that I hope that our review this afternoon

serves to clear the record about GSEs’ safety and soundness. I realize that there is much more to be done by these organizations.

While home ownership rate sits at around 67 percent, and some

say is close to being saturated, there is still room for improvement

for those who are left out of this Nation’s prosperity.

For example, African Americans are still under 50 percent—47.8

percent in home ownership. And the Hispanic community is also

under 50 percent—some 47.5 percent. That’s not saturation, Mr.

Chairman.

I thank you for the opportunity to present my remarks, and I

look forward to an opportunity to be heard in this hearing.

Thank you.

[The prepared statement of Hon. Stephanie T. Jones can be

found on page 49 in the appendix.]

Chairman BAKER. Thank you.
6

Mr. Ney.

Mr. NEY. Thank you, Mr. Chairman and Ranking Member Kanjorski for calling this hearing this afternoon. I didn’t serve on the

Capital Markets Subcommittee during the 106th, but I did take

note of the good work that you did.

You are being commended for your thorough oversight of Fannie

Mae and Freddie Mac. There can be no doubt of the important role

that these two companies play in helping to provide affordable

housing for all Americans.

In the 18th District that I represent, Freddie Mac has provided hundreds of millions of dollars of loans averaging $78,200 as the

average loan. Fannie Mae has invested a total of $759 million over

its lifespan. This has made home ownership dream a reality for

many of my constituents in Appalachia.

In light of these questions, however, that were raised in the 1992

GSE reforms that were passed following the savings and loan disaster, Fannie and Freddie made six voluntary agreements with

Congressman Baker, our Chairman, last year designed to strengthen safety and soundness of GSEs by increasing the market transparency.

These agreements brought new levels of transparency to the operations of these companies and exceed standards to which almost

all the private companies are held.

This hearing, of course, is designed to follow up on these agreements and see if they have served the purpose of showing that

market disclosure can give us the assurances we need to trust that

Fannie Mae and Freddie Mac continue to fulfill their role of providing affordable housing to all Americans while remaining the Nation’s stable institutions in which we place our trust and faith.

So far, both Fannie and Freddie have been diligent in following

both the spirit and tenor of the voluntary agreements. The lengths

to which they have gone to meet these six voluntary agreements

is commendable, and I look forward to hearing the details of the

implementation of the six voluntary agreements.

I also look forward to the discussion on the impact of market discipline on safety and soundness.

Again, thank you, Mr. Chairman and Ranking Member for this

hearing.

Chairman BAKER. Thank you very much, Mr. Ney. Are there are

other opening statements?

Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman and Ranking Member

Kanjorski.

Home ownership is a key factor in asset and wealth creation for

individuals all over the world. For many Americans, a home is the

most significant purchase and/or investment they will ever make.

Increasing home ownership opportunities for my constituents is a

major component to my economic development initiatives.

In fact, we go around the district urging the constituency to rent

the car, but own the house, and we teach them that owning the

house is an appreciating asset, while owning the car is just a depreciating asset.

This is one of the reasons why I’m organizing a Congressional

Black Caucus housing summit in my district in May.
7

Of all the bills and all of the questionable legislation that Congress has passed, the creation of GSEs—Fannie Mae, Freddie Mac

and the Federal Home Loan Bank—was one of its wisest and most

effective laws. By creating a secondary market for the mortgage industry, they have increased the supply of cash available to their

banking partners while at the same time decreasing the credit risk

to banks, making them more willing to extend credit to many individuals and families seeking inclusion in the American Dream.

The creation and work of the GSEs are critical factors in American’s nearly reaching a 70 percent rate of home ownership. Fannie

Mae and Freddie Mac have also had a significant impact on ownership in minority communities.

In the year 2000, Fannie Mae and Freddie Mac assisted over 500,000 minority families with nearly $60 billion in financing. Yet

for all the good that has been done, including a nearly 5 percent

increase in minority home ownership since 1994, minority home

ownership is still lagging the national rate by some 20 percent.

I expect the GSEs, their lending partners and the Members of

this subcommittee to work together on rectifying this inequity.

I have reviewed the voluntary initiatives that Freddie and

Fannie Mae agreed to last year as well as the progress they have

made toward implementing them. By meeting each of the six initiatives, Fannie and Freddie will provide increased public confidence

in their already well managed and financially profitable companies

and hopefully allay most of the concerns some of my colleagues

have about their role in the home mortgage industry.

Many of these initiatives exceed the best practices of any of the

Nation’s most successful financial institutions. Perhaps these initiatives will set a new national and international standard for risk

management and disclosure to help us to avoid any future S&Ltype debacles.

I look forward to learning more about Fannie Mae and Freddie

Mac’s progress in achieving the initiatives and working with them

to maximize the success of their mission.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Meeks.

Mr. Bachus.

Mr. BACHUS. Thank you, Mr. Chairman. First of all, I want to

commend you, not so much for having this hearing, but for fashioning the voluntary agreement last year, which—we’re here to

look at the progress of that agreement.

So had it not been for your leadership, we wouldn’t be here today

talking about the progress that’s been made.

Chairman BAKER. You’re kind in describing it in those terms.

Others have different opinions.

Mr. BACHUS. And I think all our goal, oversight goal, is to see

that Fannie and Freddie and the other GSEs are properly, adequately capitalized; that there is market discipline and there is

transparency in disclosure. That helps the consumer. It helps the

taxpayer. It helps the GSE, and it is good for the country.

I would add that over the last several decades, Fannie Mae and

Freddie Mac have really shaped the secondary mortgage market by

providing adequate liquidity. They have done a great job in improving the distribution of investment capital for residential mortgage
8

financing, and we really have the best financing system in the

world for residential mortgages.

If you went to Europe, you couldn’t even get a 30-year mortgage.

They are not available. So they have done a commendable job.

We’ve got the highest rate of home ownership in the world, the

highest rate ever in this country. And individual consumers I believe saved several thousand dollars a year because of what was

initially a Congressionally chartered effort.

I do know that there has been some criticism of the GSEs because of their Government sponsorship. But I would think to a

great extent, these advantages are offset with serious regulatory

restrictions and affordable housing mandates that we have put on

these GSEs that other ‘‘private sector’’ entities don’t have. And I

think we ought to keep that in mind.

Although Freddie and Fannie did have a 30-year record of managing the secondary mortgage activity successfully, as I said, we all

welcome any additional efforts by the two GSEs working with Congress and the oversight agencies to ensure that the safety and

soundness of their institutions are maintained and improved.

And I think the voluntary initiatives announced last year were

a good approach to take. I look forward to hearing the testimony

of our two witnesses.

I once again commend the Chairman and would note that both

the GSEs represented today have taken the initial steps in complying with certain of the agreements made last year, so I commend you for that.

Chairman BAKER. Thank you, Mr. Bachus. Your time has expired.

Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Mr. Chairman and Ranking Member

Kanjorski.

As a new Member of this committee and subcommittee, I am

looking forward to learning more about the issues related to Government sponsored enterprises and their work in providing affordable housing in the United States.

I hope to hear from Fannie Mae and Freddie Mac on their implementation of the voluntary initiatives announced last October on

which this hearing is focused.

I’ll just tell you at the start that these companies are doing an

admirable job providing affordable housing in South Texas, and

particularly in the Texas border region I represent from McAllen,

Texas to San Antonio.

The need for affordable housing along the border is great, and

the barriers of home ownership are unique. Fannie Mae has shown

flexibility and creativity in addressing the needs of our immigrant

population and low-income families who may not have the long employment history nor the credit credentials often required to get

competitive mortgage rates.

Without these secondary lenders in the marketplace and the specific HUD mandates to house minorities and the historically underserved populations, I am fearful of the rates and requirements that

would be imposed upon the most economically vulnerable members

of our society.
9

Mr. Chairman, I think that we all should have an equal chance

at the American Dream. By partnering with commercial banks,

Fannie Mae and Freddie Mac, bringing consumers affordable rates

and flexible downpayment amounts, the system appears to be

working the way Congress intended in chartering these GSEs.

They bring competitive rates, creative programs and opportunities

for increased home ownership to our communities, especially the

minority communities I represent.

Some believe that home ownership in the United States has

reached its saturation point and that Fannie and Freddie may no

longer be needed. Mr. Chairman, as I look around my district and

talk to my constituents, I cannot agree with that assessment.

The rate of home ownership for Hispanic Americans in the

United States lags an estimated 26.4 percent behind the larger

Anglo home ownership rate. We need to close that gap. If these

companies can help, then their job and usefulness is far from complete.

In closing, I’ll just say I congratulate this subcommittee for its

vigilance in overseeing the GSEs. I think this hearing will be useful in reviewing the steps taken by the GSEs to guarantee their financial soundness.

At the same time, I trust we will be careful not to cause unintended adverse consequences in addressing GSEs that would have

a negative effect on our Nation’s housing nor on the interest rates

paid by consumers.

I look forward to hearing the testimony of the witnesses, Mr.

Brendsel from Freddie and Mr. Howard from Fannie Mae.

Thank you, Mr. Chairman.

Chairman BAKER. Thank you very much.

Mr. Israel.

Mr. ISRAEL. Thank you, Mr. Chairman and Ranking Member

Kanjorski.

I am also a brand new Member of this subcommittee and learned

early of the Chairman’s concern for enhancing the safety and

soundness of the GSEs. And I am sure that, principally as a result

of that concern, both Fannie and Freddie embarked on its voluntary commitments that today make them better and stronger

companies.

I think we can all agree that the creation of Fannie Mae and

Freddie Mac is one of those instances where Congress really got it

right. They are an enormous public policy success. Their creation

has ensured that our housing system is better than any other in

the world, but it can be even better.

Their existence ensures that Americans have ready access to

mortgage funds at the same rate, no matter where they live in the

country, no matter what the financial state of the Nation or the

world.

The voluntary commitments that Fannie and Freddie agreed to

last fall are added measures to ensure that they will always conduct their business safely and soundly. These commitments not

only demonstrate their financial strength, but they provide not

available previously windows to that safety and soundness.

This Nation is fortunate since no other country has a secondary

mortgage market created by Fannie Mae and Freddie Mac that en-
10

sures we have mortgage credit available all the time, no matter

what happens in other credit sectors.

These are well run, safe companies that bring down the cost of

mortgage credit. Our work should strengthen this model, and I

thank the Chair.

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

There being no further Democrats, I’ll go back to Mr. Sherman.

Mr. SHERMAN. Well, Mr. Chairman, I was going to deliver this

really eloquent opening statement, but the gentleman from New

York just delivered it. So I thank him for his remarks and the

other remarks that preceded his.

I think that this voluntary agreement does a lot to strengthen

these two entities and that they do a lot to provide for home ownership.

We obviously have not achieved the home ownership percentages

that I’d like to see, but we are certainly doing better in every sector

and with every community than we had even 10 years ago. Thank

you.

Chairman BAKER. Thank you, Mr. Sherman. If there are no further opening statements, at this time I would like to introduce our

two witnesses for the hearing today. I certainly think they are no

stranger to the subcommittee.

I wish to welcome the CEO of Freddie Mac, Mr. Leland Brendsel,

as well as the Vice President and Chief Financial Officer, Mr. Timothy Howard.

Gentlemen, we will certainly make your complete testimony as

part of the record. Please feel free to proceed as your pleasure. Mr.

Brendsel, if you would please, sir. Welcome.

STATEMENT OF LELAND C. BRENDSEL, CHAIRMAN AND CHIEF

EXECUTIVE OFFICER, FREDDIE MAC

Mr. BRENDSEL. Thank you, Chairman Baker. And good afternoon. Indeed, I’m pleased to be here and to appear before this subcommittee.

I am the Chairman and Chief Executive Officer of Freddie Mac.

And I’m certainly pleased that Chairman Oxley could be here earlier and look forward to working with him as well as Members of

this subcommittee as we move forward.

As you have already said, Chairman Baker, last October Congressman Kanjorski, you, Members of the subcommittee, Freddie

Mac and Fannie Mae joined together in a landmark announcement,

one that provides, I believe, a model of financial management for

the new century.

Freddie Mac committed to a six-point plan that keeps us at the

vanguard of world financial practices. We did this to put to rest

any concerns about any future safety or soundness of Freddie Mac,

since indeed, as has already been said here today, there are no concerns currently. Indeed, we are rock solid.

Freddie Mac plays a vital role in financing home ownership and

rental housing. It is something we are strongly committed to. And

we are determined to maintain the confidence of Congress, of investors and of the public in our ability to keep meeting our mission.

The commitments that we made last fall and announced with

you are real, they are significant, and I believe they completely out-
11

pace the practices of other financial institutions, with the single exception of Fannie Mae.

Even before we made these commitments, Freddie Mac already

had outstanding risk management and information disclosures for

investors and the public. But we are now providing more relevant

information about our condition than any other financial company,

I believe, in the world.

Our commitments meet or exceed recommendations of international experts in financial regulation. The national rating agency, Moody’s, said last fall that they set new standards not only for

us, but also for the global financial market.

We also asked former FDIC Chairman William Seidman for his

assessment of these commitments. And he concluded, and I quote,

‘‘This package of disclosures and standards puts you in a position

of providing more and better public information than any other financial institution, both regulated and non-regulated.’’ Now with your permission, Mr. Chairman, I would like to enter

his full comments for the record.

Chairman BAKER. Absolutely. Without objection.

[The prepared statement of William Seidman can be found on

page 145 in the appendix.]

Mr. BRENDSEL. Thank you. Now let me walk through each commitment and report on their status of implementation at Freddie

Mac.

I’m pleased to report that Freddie Mac’s implementation is nearly complete.

Briefly, the first commitment is public disclosure of our independent rating. We announced our AA-minus risk-to-the-Government rating from Standard & Poor’s on February 27th.

To put this in perspective, of the ten largest bank holding companies, only two have a rating this high on their senior debt.

Originally we planned to obtain a rating once a year, but now

Freddie Mac has gone beyond that. We asked Standard & Poor’s

for a continuous surveillance rating, which means that S&P will

notify the public if there is ever a change in our financial position

that affects our rating.

Our second commitment ensures that we maintain a high level

of liquidity. We announced that we met that commitment on March

8th. Freddie Mac has enough liquid high quality assets so that we

can meet all our financial obligations even if we are unable to issue

debt for 3 months. That’s a high standard.

The Basel Committee on Banking Supervision suggested that institutions maintain a liquidity reserve of between 1 and 3 months.

We chose the more stringent 3 months. This sets a new best practice for industry.

Our third commitment is semi-annual issuance of subordinated

debt. We completed our first $2 billion issue on March 21st. It will

be the first of many issues, of course.

The benefit of this commitment is twofold. The issuance of subordinated debt enhances our already strong financial base. In addition, it provides real-time information to the market about our financial condition.

After 3 years, the sum of our core capital and subordinated debt

will equal at least 4 percent of our assets.
12

We expect that there will be an additional $8 to $10 billion of

investor funds standing in front of our senior debt holders.

A recent report by the Federal Reserve and the Treasury views

subordinated debt as a tool to enhance market discipline. No bank

has committed to a regular program of subordinated debt, however.

But Freddie Mac, along with Fannie Mae, stepped up to the challenge.

Our fourth commitment is to implement a risk-based capital

stress test on an interim basis until our regulator, OFHEO, completes the final rule. Yesterday, we announced that we passed this

test. Freddie Mac holds enough capital to survive a 10-year downturn much like the Great Depression. This is the most rigorous test

in the financial services industry.

And again, to put this in perspective, for the thrift industry to

pass this test, it would have to triple its capital today.

Our fifth commitment is new quarterly disclosure about credit

risk. Going beyond our already extensive credit risk disclosures

that we currently provide to investors, Freddie Mac has added a

new forward-looking disclosure.

Most credit disclosure, in fact, is backward-looking, focusing on

charge-offs, loans that were already delinquent. Our new measure

predicts the impact of a 5 percent decline in housing prices nationwide and the impact that would have on losses of Freddie Mac.

We made this disclosure for the first time yesterday and will include it for the record. It demonstrates Freddie Mac’s financial

strength and the many layers of protection that we have for our

mortgage purchases.

Finally, our sixth commitment is new monthly disclosure of interest-rate risk. We will meet this sixth and final commitment with

our regular monthly disclosure to investors in the middle of April.

This commitment exceeds supervisory guidance made just last

week by the Federal Reserve and the OCC, I would point out.

These agencies encouraged large financial institutions to adopt the

recommendations of the commission headed by former Chase

Chairman Walter Shipley. They called on banks to move from annual to quarterly disclosure of interest risk. Our move is to monthly disclosure, which keeps us, I think, a step ahead.

Taken together, our six commitments represent a watershed in

financial practices. I think this is important. Because over the next

10 years, America’s families will need an additional $6 trillion to

fund their mortgage loans, a net increase, reflecting anticipated

growth in home ownership as well as the growth in this Nation and

the strength of its economy.

Freddie Mac will open doors of opportunity for the home buyer

of the future who is more likely to be a low-income, minority or immigrant family eager to realize the American Dream.

To meet our mission, Freddie Mac is wringing out every unnecessary cost and barrier to home ownership. We’re pushing the limits

of technology. We’re searching the globe to find the lowest cost

funds for housing. Indeed, housing is one of the few bright spots

on today’s economic horizon. More than ever, the country needs

Freddie Mac’s strength and vitality, and the six commitments demonstrate our determination to remain safe and sound and to finance housing for generations to come.
13

So, Mr. Chairman and Members of the subcommittee, I appreciate your support when we announced these commitments, and I

look forward to working with you in the future to secure the future

of America’s housing finance system and with it the dreams of millions of families.

Thank you very much.

[The prepared statement of Leland C. Brendsel can be found on

page 61 in the appendix.]

Chairman BAKER. Thank you, Mr. Brendsel.

Mr. Tim Howard.

STATEMENT OF J. TIMOTHY HOWARD, EXECUTIVE VICE

PRESIDENT AND CHIEF FINANCIAL OFFICER, FANNIE MAE

Mr. HOWARD. Mr. Chairman, Congressman Kanjorski, Members

of the subcommittee, I’d like to thank you for the opportunity to

come before you today.

My name is Timothy Howard and I am Chief Financial Officer

and a member of the Office of the Chairman of Fannie Mae.

Mr. Chairman, last October Fannie Mae’s Chairman and Chief

Executive Officer, Frank Raines, was pleased to join you, Congressman Kanjorski and others in Congress to announce that Fannie

Mae would adopt a series of six voluntary initiatives to further

strengthen our liquidity, transparency, market discipline and capital.

Under your leadership, this was a signal achievement for the

safety and soundness of the financial system.

Consolidation and globalization in the financial services industry

is a reality today. In the last decade, the total number of banks in

America has fallen by 40 percent, and the share of assets in the

eight largest banks has almost doubled, from 21 percent to 41 percent.

America’s two largest banks now hold 19 percent of all bank assets, nearly double the concentration of 8 years ago.

As financial institutions become larger, more global, more complex and more interconnected, financial supervisors and policymakers worldwide are proposing new strategies to strengthen their

safety and soundness and reduce the potential for systemic risk.

Every large financial institution has the potential to affect the

fundamental safety and soundness of the financial system. Fannie

Mae is no exception.

With that in mind, over the last year, we engaged in a series of

discussions with key policymakers, including people at Treasury,

the Federal Reserve, and our own regulator, the Office of Federal

Housing Enterprises Oversight, to determine how best to ensure

that Fannie Mae’s safety and soundness protections are at the vanguard of evolving world practices.

And I would add, Mr. Chairman, that the hearings and oversight

by this subcommittee under your leadership has played a critical

role in our review.

We learned much that was useful. For example, the Basel Committee on Banking Supervision supports the use of risk-based capital standards with an economic stress test. The Working Group on

Public Disclosure chaired by Walter Shipley recommends increased

transparency as a means to enhance market discipline. And a re-
14

cent study by the U.S. Treasury and the Federal Reserve suggests

that issuing subordinated debt can strengthen market discipline in

a powerful way.

In the end, I believe the discussions we engaged in greatly raise

the level of understanding of Fannie Mae’s role in the housing finance system and our risk management strategies. They also reaffirmed the fundamental wisdom of the changes to our charter

made by Congress in 1992.

Through these charter revisions, Congress provided for a dedicated financial regulator, continuous on-site examination with results disclosed to the public, and most far-reaching of all, a riskbased capital standard with a severe economic stress test long before the Basel Committee proposed this model for others.

These measures in 1992 put Fannie Mae at the cutting edge of

regulatory discipline. But our discussions last year with policymakers made it clear that Fannie Mae had the opportunity to build

on this cutting edge regulatory discipline by adopting measures to

enhance our market discipline.

That led to the joint announcement by Fannie Mae and Freddie

Mac last October 19th committing to the six voluntary initiatives.

Mr. Chairman, Congressman Kanjorski, I am pleased to report

to you today that Fannie Mae now has implemented all six of these

voluntary initiatives during the first quarter of this year, and in

some cases, we have gone beyond our commitment.

In January we did our first issuance of subordinated debt. This $1.5 billion, 10-year issue was rated AA–2 by Moody’s and AAminus by Standard & Poor’s. We priced it at a spread of 22 basis

points over our senior debt. And since that time, it has traded in

a range of 18 to 28 basis points over our senior debt.

That is a higher spread to senior debt than the subordinated

debt of many high quality commercial banks, and it shows that investors do believe that our subordinated debt is in a different risk

category from our senior debt.

In late January we obtained and disclosed ‘‘a risk to the Government’’ rating of AA-minus from Standard & Poor’s. This rating

measures our inherent credit quality without assuming Government support. No U.S. commercial bank holding company or thrift

institution has an S&P rating higher than AA-minus.

And we went beyond the October 19th commitment by seeking

this rating on a surveillance basis, which means that S&P will

change its rating during the year if our financial condition changes.

We announced earlier this month that we have built enough liquidity into our portfolio to allow us to continue to operate smoothly and meet our obligations even if we had no access to the agency

bond market for 3 months. This is a statement very few financial

institutions could make.

We also said that we would disclose each quarter the percentage

of our on-balance sheet assets we hold as liquid assets, again, going

beyond the terms of the voluntary initiatives.

And yesterday we announced that we had made the initial disclosures of our interest rate risk and credit risk sensitivities, as well

as disclosures from our interim risk-based capital stress test.

For our interest rate disclosure, we followed the directives of the

new Basel Accord and released the two measures of interest rate
15

risk we used to manage our business internally: net interest income at risk, and our effective duration gap. We are going beyond

our commitment by releasing our duration gap on a monthly basis.

We also made our first quarterly disclosure of the impact on our

credit losses of an immediate 5 percent drop in home values. We

are showing our credit loss sensitivities both with and without the

effect of credit enhancements to highlight the role that loss-sharing

arrangements play in our credit risk management.

And finally, we carried out our first interim risk-based capital

stress test. We passed this test with a capital cushion of between

10 and 30 percent of our total capital as of December 31st, 2000.

Combined with our charter revisions in 1992, the six voluntary

measures we have just implemented place Fannie Mae at the vanguard of risk management and disclosure practices worldwide with

cutting edge regulatory discipline bolstered by cutting edge market

discipline.

If there is any question or concern about how Fannie Mae is

doing, there are now several ways to find out. You can look at the

results of our supervision exams. You can look at our capital levels,

our regular stress test results, our external rating reports, our

monthly and quarterly reports on how the economy is affecting our

business, or changes in the value of our subordinated debt.

No financial company in the world will tell you more about its

financial condition than Fannie Mae does.

Our new disclosures reinforce the fact that Fannie Mae is one of

the safest, soundest financial institutions in the world. Our subordinated debt and risk-to-the-Government ratings are among the

strongest in the industry.

We have more than adequate liquidity to survive for 3 months

without access to the credit markets, and we could endure the

worst economic shocks in history, shocks few other financial institutions could survive, with significant capital left over.

Mr. Chairman, Congressman Kanjorski, thanks to your leadership and partnership, our safety and soundness regime is now consistent with the best thinking in the world, and it goes well beyond

any federally-chartered bank or financial institution today.

Together, we have produced an even safer, sounder Fannie Mae,

a stronger U.S. housing finance system, and a better chance for

more Americans to own a home. And we have done more than that.

Together, we have created in Fannie Mae nothing less than a

model for financial institutions in America and around the world.

Mr. Chairman, we applaud you for your leadership and look forward to continuing to work with you.

[The prepared statement of J. Timothy Howard can be found on

page 151 in the appendix.]

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

both of you gentlemen.

My first question relates to the comment about the stand-alone

measure of the S&P rating, Mr. Howard. In your testimony, the

rating agencies rated your subordinated debt separate and apart

from Fannie’s relationship with the Federal Government.

I visited with a representative of S&P not long ago trying to understand the mechanisms by which ratings were established. And
16

there’s a fine line that I think has been drawn, but that I need to

clarify from your perspective.

As I understand it, they set aside the value of a governmental

intervention by exercising the line at the Treasury. But at the

same time, they did calculate the value of the ratings.

The fact that the market perceives that you have an implicit

guarantee, therefore, even in illiquid markets, you have the ability

to market your securities and debt instruments in a manner which

others may not, so that there is a buy-side bias, as I would describe

it, in the market toward the rate, although it does take into consideration prohibiting the exercise of a line of credit. Do you see that

differently? That’s the way it was explained to me.

Mr. HOWARD. Let me go into my understanding of both the rating Standard & Poor’s did of our subordinated debt as well as the

risk-to-the-Government rating, because they are rating somewhat

different things, but from a common perspective.

In each case, Standard & Poor’s assumes that our fundamental

operating practices, whatever causes them to be what they are,

whether it’s a view by investors that the Government would in

some form support our senior debt or not, they take no position on

that. They simply say that whatever your current operating practices are—‘‘your’’ being Fannie Mae’s—we assume those will continue in times of duress.

For our subordinated debt——

Chairman BAKER. Excuse me. I’m sorry. But on that point, whatever your existing business practices are will continue during times

of duress?

Mr. HOWARD. Yes.

Chairman BAKER. That is, despite the fact that the securities

may say not guaranteed by the full faith and credit of the United

States, you could buy it with that assumption anyway? That that’s

sort of the market practice today.

Mr. HOWARD. The investors with whom I speak, and Mr. Baker,

Chairman Frank Raines and I returned from Europe a month ago,

doing our annual visit with European investors. For 17 years,

Fannie Mae has been doing a visit with European investors in the

spring and a visit with Asian investors in the fall.

We talk to investors continually. The investors, including the

most sophisticated, fully understand that our debt is not guaranteed by the U.S. Government. There is no ambiguity in their minds

on that point.

What Standard & Poor’s does in rating our subordinated debt,

they have said explicitly they do not assume that in the unlikely

event that Fannie Mae were to encounter financial difficulty, that

the U.S. Government would guarantee or support that debt. That’s

an explicit statement they make.

So the subordinated debt rating is a very pure credit quality rating of our obligations, assuming no Federal support. And that distinguishes it from the senior debt.

The risk-to-the-Government rating, in my understanding from

talking to Standard & Poor’s, attempts to view the U.S. Government as a potential creditor of Fannie Mae, and in effect ranks the

probability of the Federal Government ever being put in a position
17

where it has to make a decision whether to support or not support

the senior debt.

And in both cases, whether it’s viewing the exposure that a subordinated debtholder has to Fannie Mae’s credit condition, or viewing the Government’s role as an entity that has chartered Fannie

Mae and may at some point face a decision about whether or not

to support senior debtholders, in each case we have been accorded

a AA-minus rating, which is extraordinarily high. And that represents, in my view, the fundamentally sound risk management

practices that we have put in place.

Chairman BAKER. Let me follow up with the second part, Mr.

Brendsel, of the stated agreement of October. And first let me congratulate both Fannie and Freddie for your success in the implementation of the proposal to date. I want to acknowledge that and

that you have in my judgment made a good faith effort to comply

with the tenor and tone of the agreement.

However, that meeting of that morning, I announced the intent

to introduce legislation this year with regard to a regulatory structure. I don’t want to open a discussion as to the details of the regulatory structure.

All I want is to confirm, since this is the first opportunity you’ve

had to visit in this forum since last October, that you, both from

a corporate perspective, view the creation of a strong regulatory

structure not only as protection for the taxpayer, but an asset in

the markets, because it gives them confidence and you do have

oversight that is appropriate and sufficient.

Mr. Brendsel.

Mr. BRENDSEL. Absolutely.

Chairman BAKER. Mr. Howard.

Mr. HOWARD. Yes. We believe that the existence of a strong regulatory structure is very much in our interests, the interests of our

investors, policymakers, and anyone who has a strong interest in

the continued smooth workings of the U.S. housing finance system.

Chairman BAKER. Let me do this quickly. I really wish I had a

whole lot more time. But since we have a fair number of Members,

I’ll try to stick to 5 minutes. I would just like to have a little more

in-depth analysis if I might, Mr. Howard, or from both operations

with regard to the spreads on the sale of subordinated debt. It appears that the spreads have widened instead of narrowed from the

first offering at 22 basis points. I’ve seen different reports where

it’s vacillated. But it seems of late to have been significantly higher

than it was at the outset, and I wish to understand better whether

that’s a liquidity issue in the market or other reasons. And I’ll just

get that in writing at a later time.

Mr. Kanjorski.

Mr. KANJORSKI. Thank you, Mr. Chairman.

As I understand it, in developing the voluntary commitments,

you studied worldwide the best practices of regulators for safety

and soundness of financial institutions, particularly those of your

own regulator, OFHEO. How do your commitments stand up in

comparison with other financial regulators, both inside and outside

of the country?

Mr. BRENDSEL. Well, Mr. Kanjorski, as I commented in my oral

statement, our disclosures really stand up extremely well. In fact
18

I would call them world class in terms of the kind of information

they provide to investors.

Justice Brandeis once said ‘‘sunshine is the best disinfectant.’’ And that’s really what has occurred here. We are providing the

kind of information to the marketplace, to investors that really exposes us to the sunshine, to the scrutiny of our investors, and

whether it is our practice to issue additional subordinated debt,

disclosure of our independent rating, disclosure of our interest rate

risk or credit risk, they put us at the head of the pack.

And it really is reflecting the recommendations made by the

Basel Committee on Banking Supervision as well as the Shipley

Commission as well as recommendations by the Fed and Treasury

for commercial banks in this country.

Mr. HOWARD. The recommendations of both the Basel Committee

as well as the Shipley Commission were targeted primarily on disclosure practices of institutions as a supplement to regulation.

Although in the case of Basel, Basel did support quite strongly

the use of specific stress tests and internal models in gauging the

true risk of complex financial institutions. And in that regard, the

legislation in 1992 was quite far-sighted in enshrining in statute

the need to do just such a test, using the actual data from businesses practices in determining the amount of capital that the entity should hold in light of the specific risks that it takes and the

way in which it manages them.

So in that regard, I believe OFHEO’s regulatory structure is indeed at the cutting edge of regulatory practice.

Mr. KANJORSKI. Some have suggested that the recent GAO report

on OFHEO regulatory authority concludes the agency lacks sufficient enforcement power to ensure that Fannie Mae and Freddie

Mac do not pose a threat to the economic stability of our country.

The report, however, also notes that it appears each regulator

has the statutory tools available to address significant safety and

soundness concerns. These views seem to be in conflict. I was just

wondering if you would give us your perspective on these two conflicting views.

Mr. BRENDSEL. My reading of the GAO report—and indeed, it’s

my reading—is that it concludes that OFHEO does have adequate

regulatory authority that they need for regulating the two institutions, albeit in some cases it is slightly different than the authorities that banking regulators have.

But that is also appropriate, given that we are different kinds of

institutions. We’re only two. We’re only focused on one line of business—residential mortgage loans. We’re not engaged in a myriad of

activities like banks are. And indeed, our regulator only has two

institutions to focus on rather than the thousands of banking institutions.

So overall, my conclusion on reading the report is although different in some cases, they conclude that the authorities are adequate and appropriate.

Mr. HOWARD. Congressman Kanjorski, I would echo that. I would

also add that the principal conclusion of the GAO report, and I’ll

quote this, is that ‘‘based on each regulator’s powers and authorities, it appears that each regulator has statutory tools available to

address significant safety and soundness concerns.’’
19

The GAO report did highlight areas where the powers were different. But as Mr. Brendsel said, that seems to reflect largely the

different circumstances of banks and other financial institutions

versus Fannie Mae and Freddie Mac.

Mr. KANJORSKI. I guess it is not proper to ask the hen whether

we should empower the fox, but do you feel that Congress should

give greater powers to your regulators? Is this something we

should presently investigate or potentially legislate?

Mr. BRENDSEL. I think that overall, I would say first and foremost, we support a strong and credible effective regulator. Whatever the structure, whatever the particular authorities that are

necessary to carry out that objective that you give to the regulator,

we certainly want the regulator to be professional, knowledgeable,

have the appropriate authorities. And ultimately, it’s a decision for

Congress to make.

And from my standpoint today, at least from what I understand

their authorities to be in my reading of the GAO report, I would

not recommend to Members of Congress that any changes be made.

But first and foremost, we want a regulator that has credibility

and the confidence of you and of investors worldwide.

Mr. HOWARD. Our view is quite similar.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Kanjorski.

Mr. Ney.

Mr. NEY. Thank you, Mr. Chairman. I have a question for both

witnesses.

Freddie Mac and Fannie Mae operate with less equity capital per

dollar of debt than banks risk. Given your size, what would you

want to comment on the suggestions made that there’s undercapitalization and perhaps the capital adequacy needs to be increased? Do you want to comment on that?

Mr. HOWARD. I’d be happy to. One of the principles of the Basel

Commission is that capital needs to be appropriate for the risk undertaken. In Fannie Mae’s case, and also in Freddie Mac’s case, we

are doing business in a single asset class. U.S. residential mortgages.

We do two things with that asset class. We guarantee the credit

and we take the interest rate risk for the mortgages that we hold

in portfolio. On the credit risk side, the fundamental credit quality

of residential mortgages is extremely high compared with other

asset classes—consumer loans, loans to small businesses, loans to

international borrowers.

There’s a wealth of data on that. And under the principle that

capital needs to relate to risk, if an entity is limited to a single

business which has a low embedded default rate, less capital on an

absolute basis can still mean a much stronger institution if the entity holding that small amount of capital is limited to mortgages.

Fannie Mae’s risk-based capital test is designed to measure exactly that, and it goes beyond that. Because by explicitly relating

capital to risk, it gives us the financial incentive to hedge our risks

and limit our risks in a fashion that we can keep our required riskbased capital under our statutory minimums.

One of the fundamental flaws recognized by international regulators of the current ratio-based system that covers most institu-
20

tions including commercial banks is it requires a large amount of

capital as a buffer against what could go wrong, equivalent to what

you could as capital against the 100-year flood. The only problem

with that is entities that have to hold that capital then have to go

out and attempt to earn a return on that excess capital, which

gives them the incentive to take more risk.

So the incentives under the additional capital system are in my

view precisely the wrong ones. A company that takes modest risk

and hedges it well can actually be considerably safer, sounder and

stronger than the one that has a higher nominal amount of capital,

but is taking more risks, because it has a broader range of businesses and doesn’t hedge as well.

Mr. NEY. Mr. Brendsel.

Mr. BRENDSEL. I’m not certain I can add to Mr. Howard’s dissertation, an excellent dissertation on risk-based capital, other

than to say ditto.

If we can survive, which is basically what is contemplated in the

1992 legislation and essentially how Freddie Mac operates today,

if we can survive an economic calamity that is basically equivalent

to the Great Depression, that clearly indicates we are extraordinarily strong and well capitalized, even though you can’t measure

it by the typical kinds of accounting ratios that many use. But

that’s not the appropriate measure of capital adequacy and capital

strength, as Mr. Howard has pointed out.

Mr. NEY. Everybody talks about the crisis in affordable housing.

How do you feel that the six voluntary commitments that have

been made and are being undertaken in fact would help with the

mission of home ownership?

Mr. BRENDSEL. I think they’re extremely positive, because they

will serve to maintain the confidence of investors in the world’s

capital markets, the confidence of the public policymakers, and indeed, the confidence of our customers, the Nation’s mortgage lenders, that we are there and will be able to meet our obligations as

well as provide the kind of liquidity and stability to the mortgage

market.

Ultimately that means there will be more mortgage money available at lower rates, which is in essence the core of what we’re doing

in terms of providing money to finance affordable housing as well

as housing for middle income Americans.

Mr. HOWARD. There is a very fundamental connection between

our safety and soundness and our ability to carry out our mission.

As Fannie Mae continues to do its part to meet the large number

of unmet housing needs that still exist, we will by definition get a

larger profile. Our mortgage portfolio will continue to grow. We will

issue more debt. Our credit needs will continue to grow.

A growing Fannie Mae is evidence that we are being more effective carrying out our mission of making housing credit more available and more affordable.

As we grow, this concern that exists legitimately among policymakers over whether or not size equates to risk goes fundamentally to the heart of these voluntary disclosures and a strong regulatory system.

We feel that if we can be as transparent as any financial entity

in the world, we can continue to be innovative, be aggressive in
21

achieving our mission and reaching the pockets of unserved areas

and not have concerns be raised about whether or not this should

cause Congress to worry about our fundamental safety and soundness and risk to the taxpayer.

Chairman BAKER. Thank you, Mr. Ney.

Mr. Meeks.

Mr. MEEKS. Thank you, Mr. Chairman.

Mr. Howard, can you—as you know, predatory lending is a

scourge in the minority community. Can you tell us about the specific steps your company is taking to combat predatory lending?

Mr. HOWARD. Yes. I would be happy to do that. Several months

ago we announced a series of guidelines to which we requested that

our lenders adhere in showing us credit-impaired loans that might

conceivably be eligible for purchase by us.

The areas that we specifically looked at included a number of—

the interest rate that could be charged on those loans, whether or

not there were prepayment penalties that were unreasonably imposed on the loan, and the existence of prepaid credit life policies

that might result in an erosion of equity in the property, making

it harder for the borrower to stay in the home.

We came out with a series of guidelines that were quite explicit.

We shared those with our lending partners, came to an agreement

that these were the right set to use, and have implemented them.

And we found that many originators have in fact confirmed their

origination practices to those standards.

So we think that even though our presence in the market as far

as guaranteeing or purchasing of those loans has not increased as

much as ultimately we believe it could, we think we’ve already had

an impact on lending practices which is highly positive.

Mr. MEEKS. Mr. Brendsel, Freddie Mac has bought billions of

dollars of subprime mortgages. In the same vein, how can you ensure that these mortgages are not predatory?

Mr. BRENDSEL. First of all, we only deal with the good guys. And

there are some, as you’ve already pointed out, Congressman, that

are not the good guys. They’re engaged in abusive practice and so

forth.

So what do we do? We have a combination of certainly guidelines

and requirements for any mortgage loan that we will purchase that

includes no high cost loans, no single-premium credit life, no prepayment penalty in excess of 5 years, required monthly reporting

by all of our services, prompt reporting of prompt payments. And

so we begin with that.

Second, we have an audit program that on a regular basis audits

the customers that we do business with around adherence to our

policies and guidelines.

And finally, we engage in a fairly significant education campaign

overall, not only with lenders, but also increasingly with consumers

in communities.

We’ve been involved in something called the ‘‘Don’t Borrow Trouble’’ education campaign that we’ve now taken to 12 cities that

really is a public education campaign around, again, alerting consumers to what to look out for when they go to get a mortgage loan

or any loan.
22

Mr. MEEKS. And finally, let me just ask both of you I guess,

there’s a new problem, or maybe it’s an old problem, that I have

found in my district. While understanding that we need the

subprime market, I’m becoming concerned that we’ve been finding

individuals who had Class A credit, but they are led into the

subprime market.

And as a result of being classified improperly, they are being

robbed in essence of their individual buying power, buying power

that they would have, if not the money for the mortgage, because

of the incorrect classification.

And then I’ve heard this phrase, ‘‘mission creep,’’ that is leading

you into the subprime market. Can you tell me how do you respond

to that? Mission creep and the misclassification of borrowers.

Mr. BRENDSEL. If ‘‘mission creep’’ means trying to clean up practices in the subprime market, trying to find ways to qualify more

borrowers for low cost loans that can be purchased by Freddie Mac,

we plead guilty, absolutely. But in fact, we’re not going beyond our

charter there. That’s foursquare in keeping with the purpose and

mission for which Freddie Mac is chartered.

Indeed, yesterday there was an article in The American Banker

that talked about some subprime lenders who were complaining

that we were engaging in some business, trying to buy some business and purchase subprime loans, and it’s going to drive down

their profit margins, drive down what I would say is their excessive

fees and returns that they are getting today.

So, great article, great compliment, I think, to what Freddie Mac

is doing. I submitted it for the record actually. Beyond that,

though, I think what we’ve also discovered is that there frankly are

just many families that are in the subprime market that really can

qualify for a prime loan if only they are reached by the right lender.

That’s why we want to partner and team up with the right lender with our tools, many of our automated underwriting tools, so

that they can qualify those families for a prime loan at the lowest

possible rate.

[The article referred to can be found on page 144 in the appendix.]

Chairman BAKER. Your time has expired, Mr. Meeks.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. I want to compliment

both gentlemen for their efforts to comply or conform to the voluntary agreement. You’re satisfied, so I’m satisfied.

I also say if you told me a year ago that I’d be reading The American Banker, I’d say ‘‘fat chance.’’

[Laughter.]

Mr. SHAYS. But I want to continue what Mr. Meeks went on, and

I want to know, what is the lowest acceptable score that you would

have?

Mr. HOWARD. We have no automatic cutoff. We have programs

that will evaluate all borrower characteristics, credit score, the

property the person is borrowing.

Mr. SHAYS. So you have no score?

Mr. HOWARD. We have no bright line below which one cannot get

a loan.
23

Mr. BRENDSEL. We do not either.

Mr. SHAYS. And how are you pricing these borrowers’ risks? How

do you determine that?

Mr. HOWARD. We look at the characteristics, and based on a review of the characteristics compared with how loans with similar

characteristics have behaved in the past, we pick prices that we believe adequately compensate us for bearing that risk.

Remember, we have two objectives whenever we’re underwriting

a loan. We want to make sure that the consumer gets the lowest

rate possible, but we also have to grade it and price it so that we

meet our safety and soundness objectives on the other side. It’s a

constant balancing act.

Mr. SHAYS. Mr. Brendsel.

Mr. BRENDSEL. Same answer.

Mr. SHAYS. Same answer as his? Thank you. How are you disclosing your activities to your shareholders? Should we have been

surprised this was happening?

Mr. HOWARD. What’s the ‘‘this’’? I’m sorry.

Mr. SHAYS. How would you disclose your activities to your shareholders? You know, you’re getting into a new market it seems to

me.

Mr. HOWARD. We have been very open with our investors as well

as the Congress about our intent to be active in this market.

I’ll echo what Mr. Brendsel said in that this is in no way mission

creep. Mission creep has a connotation of doing something you

shouldn’t be doing. And making loans to people with less-than-perfect credit is not only totally within our charter, it’s something that

we should do and it’s something that’s right to do.

And as we can take more advantage of the benefits of automated

underwriting that allow us to more effectively grade credit risk, we

can and will be moving further into this area.

I will say that last year we have done an amount of this business

that’s significant to the market.

Mr. SHAYS. I don’t mean to be rude and interrupt, but I only

have 5 minutes.

How do you respond to the allegations that the GSEs are using

their ability to allocate business to the detriment of the institutions

that are outspoken critics of them, such as moving up to the list

of approved bidders for Fannie?

I’m going to give you a chance to—this is today’s edition of The

American Banker. So don’t give me as long an answer as they have

here.

Mr. HOWARD. It actually deserves a longer answer. I will give

you a short answer. The allegations are completely baseless.

Mr. SHAYS. Let me just ask you, though. They’re baseless that

you haven’t done it, but how can you be assured that others in your

organization haven’t made that—if someone said my staff did

something, I could say ‘‘they’re baseless,’’ but I would check it out.

I would know they were baseless. You don’t——

Mr. HOWARD. Congressman, I have checked it out. The only specific cite made in the article alleging threats was that we removed

Wells Fargo Bank from a list of approved or eligible bidders for our

debt. We did not do that. We have no such list.
24

Wells Fargo, as any other bank, can bring us debt transactions

anytime it wants to.

Mr. SHAYS. Fair enough.

Mr. Brendsel.

Mr. BRENDSEL. As I was reported in The American Banker, I

made a statement, wrote a letter indicating that Freddie Mac has

not, does not, will not engage in bullying or abusive tactics. We

have a clear corporate ethic against that kind of thing. Second——

Mr. SHAYS. If any of your employees were implying that might

be the case, what would be your response to those employees?

Mr. BRENDSEL. Depending upon the seriousness, clearly I would

do a review of that particular statement and obviously it could result in an employee being fired.

Mr. SHAYS. You would consider that a very inappropriate action?

Mr. BRENDSEL. Absolutely.

Mr. HOWARD. As would I.

Mr. SHAYS. Thank you very much.

Chairman BAKER. Thank you, Mr. Shays.

Ms. Jones.

Ms. JONES. I’ll pass. I’ll pick up later on.

Chairman BAKER. Mr. Ford.

Mr. FORD. Thank you, Mr. Chairman. Thank you both Fannie

Mae and Freddie Mac for being here. I want to follow up my colleague, Mr. Shays, with a line of questioning he was sort of following through.

I guess in the article from yesterday’s American Banker reads

that ‘‘The idea that Fannie and Freddie would dip their toes’’—it’s

sounding something like ‘‘The Sopranos’’, I might add—but, ‘‘would

dip their toes further into subprime lending has lenders concerned

that their margins will shrink and their profits erode. They also

figure they will lose business as prime lenders snap up their loans

by offering better rates.’’

I applaud you, both of you, for working to make housing more

affordable. It would seem to me, Mr. Chairman, that on this subcommittee we would be applauding that and encouraging that as

well.

Would you mind—I know that you’ve had questions asked by my

colleague, Mr. Meeks and certainly by others on the subcommittee—would you mind elaborating just briefly if you could on

some of your other efforts in the subprime market? I know you

started, Mr. Brendsel of Freddie Mac. I can’t pronounce your last

name correctly.

Mr. BRENDSEL. Brendsel.

Mr. FORD. Mr. Brendsel. I’m sorry. Mr. Brendsel, if you could

elaborate for 30 seconds and perhaps, Mr. Howard, you could as

well, just summarize very quickly some of your activities in the

subprime market.

And why have you made these people so mad at you is what I

want to know. Is it you’re providing more housing for people? Is

that essentially what it is?

Mr. BRENDSEL. Yes. Basically, it’s all about competition if you

want to look at it that way. It is providing additional consumer

choice through other lenders.
25

After all, one of the reasons why someone finds themself in a situation of having to take out a subprime loan is that that’s the only

source of credit that they may be aware of.

And indeed, by working with a number of lenders, small as well

as large, providing them with the kinds of tools so that they can

originate those loans, it means that, you know, that family can get

a better mortgage loan.

Well, the subprime lender that was charging very high fees and

very high costs is going to be unhappy, and that’s what you see reflected in the article of yesterday.

Mr. FORD. Mr. Howard.

Mr. HOWARD. We are very much aware that there are many,

many borrowers who are not getting the best mortgage for which

they are qualified.

We have developed products, including our expanded approval

and timely payment reward mortgages that are designed to address

that. But we’re also working very intensely with our lender partners on figuring out how to get those products in front of you.

We are surprised, frankly, that even with the products, we’re not

getting the demand that we would hope we could. So we think we

have to come up with new ways for making those products available and accessible to people who could benefit from them.

And we are going to work very hard and very diligently until we

figure out how to do that. We think we have a service to offer this

underserved area, and we intend to do that.

And I think that’s one reason why subprime lenders are currently kicking up some dust around this.

Mr. FORD. Is it true that over the life of an average subprime loan that a consumer will pay nearly $209,000 more than a conventional loan?

Mr. HOWARD. It’s certainly possible given the rates that I’ve

heard are being charged in that market.

Mr. FORD. I know we are discussing a potential tax cut here,

which I support, I might add, here in Congress, but I cannot think

of a better tax cut for working people than helping them to save

that amount of money over the life of a loan.

To put some of these voluntary initiatives in perspective, both of

you, could you please comment as briefly—my time is running

out—on how safeguards like these compare to the norms of industry? Have other companies, particularly those that are part of FM

Watch, taken similar steps or they simply mirror what you all are

doing?

Mr. BRENDSEL. I can’t say how particular companies that are

members of FM Watch match up against these particular disclosure commitments.

However, in general, I can say that based on my knowledge of

what financial institutions disclose, our commitments, our disclosures put us clearly up ahead of the pack.

Indeed, last year, we retained PriceWaterhouseCoopers to review

our disclosure practices before we made these additional commitments. At that time, they said our disclosures to investors placed

us among the best of the best in terms of banking and financial institutions.

These additional commitments take us beyond the best.
26

Mr. FORD. Mr. Howard.

Mr. HOWARD. Our commitment is to remain at the forefront of

disclosure practices. We think we have now moved beyond that to

being best practice. If and as disclosure practices improve, we will

revisit what we’re doing, and our commitment is to stay ahead.

Mr. FORD. Thank you, Mr. Chairman.

Chairman BAKER. Thank you, Mr. Ford.

Mr. Bachus.

Mr. BACHUS. Thank you, Mr. Chairman. I’d like to yield 15 seconds.

Mr. SHAYS. Just very quickly. My concern and my questions are,

it’s not a level playing field. We give you a charter because of that.

We cannot go into our business if we put everyone out of business.

And the question is, what’s appropriate for you to be in? And I’m

not asking for a response now, but I’m eager to have a second

round of questions just to pursue what is your legitimate business.

Thank you.

Mr. BACHUS. Thank you. Gentlemen, you all make projections on

your debt in future years, and I’ve noticed that Treasury, they

make projections on what their debt is. And I’m told that the debt

of Fannie Mae and Freddie Mac will exceed that of the U.S. Treasury by 2005.

Is that accurate? Are you aware of that?

Mr. BRENDSEL. I can’t say whether or not those particular projections are accurate. I can say that those types of comparisons that

you read are kind of comparing apples to oranges, or I’d put it this

way.

Declining U.S. Treasury securities outstanding is clearly good

news for the U.S. taxpayer.

Increasing Freddie Mac securities outstanding really reflects

good news for America’s home buyers. And after all, it is securities

that are backed by mortgages on people’s homes.

So our growth is in line with the growth of the U.S. mortgage

market. Indeed, for example, over the last 5 years, residential

mortgage debt outstanding has grown roughly 8 percent a year.

We’ve grown roughly 9 percent a year. But that reflects the

strength of the economy, increasing home ownership rates, the exploding home ownership rates that have occurred over the last several years.

And so, clearly, that is good news for America’s home buyers as

reflected in the strength of Freddie Mac, not any risk to the U.S.

Treasury or taxpayer.

Mr. HOWARD. I’d make a couple of points to that. First of all, this

is what we would call a high quality problem, having Treasury debt

disappear by the year 2010. When Treasury debt totally disappears, my teenaged daughter will have more debt outstanding

than the U.S. Treasury.

Fannie Mae currently has about $640 billion in debt outstanding,

all of which is funneling capital into housing. A very important

point in comparing Fannie Mae debt with Treasury debt is the fact

that, because we deal exclusively in the secondary market, we do

not create debt except insofar as we cause more mortgages to be

made.
27

Whenever Fannie Mae buys a mortgage in the secondary market

by issuing debt, the proceeds of that debt are given to the seller

who then pays off their debt. So what’s happening in the aggregate

is debt is shifting from that of the seller of the mortgage to Fannie

Mae.

We talked earlier that Fannie Mae debt has a stand-alone rating

of AA-minus. It’s very high quality debt. So this is a good problem

to have in my view.

Mr. BACHUS. Thank you. Mr. Howard, Moody’s, in rating your

subdebt, stated ‘‘It is Fannie Mae’s intent to create a class of securities that would reflect the market’s views on the firm’s credit profile via the price at which it trades.’’ Would you explain?

Mr. HOWARD. Yes. What we’re hoping to do is create a class of

security where investors know they have an economic interest in

the risk management practices of Fannie Mae.

And that’s because we built into the subordinated debt a feature

that would cause the holders of that subordinated debt to have

their interest payments deferred for up to 5 years if our capital

falls below a threshold amount. And that threshold amount is 125

percent of our so-called critical capital level.

With that financial incentive, we believe subordinated debtholders will pay attention to our disclosures, monitor our credit

quality, and the reflection of their view will be in the price at

which that subordinated debt trades relative to our senior debt.

Mr. BACHUS. You just mentioned that you would defer interest

payments. A lot of times on subordinated debt, that debt converts

to equity. Is that right?

Mr. HOWARD. Subordinated debt can be structured that way. We

have deliberately chosen not to do that, because we want to ensure

that a holder of subordinated debt has the same interest as the

U.S. taxpayer.

The subordinated debt that converts to equity gives the holder an

interest in the company doing whatever it can to make that subordinated debt principal pay off, even if the risk the company takes

are very high, the equity holders, if a company is in trouble, basically want the company to go for broke, shoot for the moon, on the

hope they’ll get paid off. Debtholders want exactly the opposite.

So subordinated debtholders in that circumstance, if the debt is

not converted to equity, have exactly the same interest as the Congress and the U.S. taxpayer, and that’s what we wanted to create.

Mr. BACHUS. But of course, it might not bring you up to the minimum capital standards, which you are intending to do by deferring

those interest payments.

Mr. HOWARD. No. But remember, the suspension of interest is

only triggered if we fall below those critical capital thresholds

which, given our risk management incentives and practices, is a

highly unlikely event. And again, that’s reflected in our stand-alone

credit rating.

Mr. BACHUS. Who is going to verify the commitments you’ve

make whether they’re being acted upon?

Mr. BRENDSEL. Certainly it starts internally with our own board

of directors and our internal audit function. Externally, of course,

it will be verified by our regulators through their examination function at OFHEO.
28

Mr. BACHUS. So you do see part of their role is to verify that the

commitments you made to this subcommittee are realized?

Mr. BRENDSEL. Yes.

Chairman BAKER. You’ve expired your time, Mr. Bachus. We’ll

come back to you.

Ms. Jones.

Ms. JONES. Thank you, Mr. Chairman. I want to commend you

for holding these hearings once again. It’s kind of like deja vu,

though. Remember last year when you were holding these hearings, Mr. Brendsel, Mr. Howard, and all the articles that came out

about Fannie Mae and Freddie Mac on the issues of mission creep?

I want to quote specifically from an article in The Washington

Post that said, ‘‘Today a hearing before Representative Richard

Baker, Chairman of the House Financial Services Subcommittee on

Capital Markets, Insurance and Government Sponsored Enterprises, was not scheduled to question the company’s lending guidelines, rather aimed at assessing their progress toward a number of

goals laid out last year.’’ And on and on and on.

That was the intent of this hearing, was it not, gentlemen? Is

that why you came prepared to testify today, Mr. Brendsel?

Mr. BRENDSEL. Yes.

Ms. JONES. Mr. Howard?

Mr. HOWARD. Yes it is.

Ms. JONES. And I really didn’t intend to question the issue of

mission creep, but seeing how everybody else decided they’d go

down the line on mission creep, I thought I’d go that route myself.

It’s true that the mission of both of your Government sponsored

enterprises allows you to go into the secondary market? I’m kind

of cross-examining like a prosecutor. Forgive me. Give me short answers. Correct?

Mr. HOWARD. Yes.

Ms. JONES. And in that effort, Mr. Howard, you’ve been with

Fannie Mae maybe—in this position for the past 10 years. Is that

correct?

Mr. HOWARD. Eleven, yes.

Ms. JONES. Eleven. Excuse me. And in those 11 years as the

CFO of Fannie Mae, can you talk about why you chose to go down

the route that you’ve gone to look at your charter and make some

specific changes and what you thought you were permitted to do

under the law?

Mr. HOWARD. We last took a look at our charter in 1992 in conjunction with Congress. At that time, Congress made some

changes, including giving us specific housing goals that we have

met every year since they’ve been in effect. It created a new regulatory capital standard, which we’re now discussing.

Subsequent to the 1992 law, we have made no request for further

charter expansion. We believe our charter as adopted by Congress

in 1992 is exactly the right charter for us to have to carry out the

mission that Congress has given us.

We have been operating within that charter, which is why on the

topic of mission creep, I have yet to hear a credible description of

what it is we are doing that exceeds the charter that this Congress

passed in 1992.
29

Ms. JONES. Mr. Brendsel, would you like to answer that question

as well?

Mr. BRENDSEL. Having been in Freddie Mac since 1982, now 18

years, I have a long history in the evolution of Freddie Mac.

First I’d say our charter is very clear as to our purpose, our authorities, what we can do and what we cannot do. And over time,

while the regulatory structure has been changed and enhanced certainly for Freddie Mac, we have not sought really to change our

charter in terms of our authorities with one exception that I can

remember, and that is in fact we proposed, attempted to get a

change to the charter requirement that we have private mortgage

insurance on every low downpayment mortgage that we purchase.

We proposed making it more flexible so there would be alternative forms of credit enhancement that we could use on low downpayment mortgages. We saw that the evolution of the capital markets meant that there were many other alternatives other than private mortgage insurance to give us that protection.

That particular proposal failed, but I still think it’s a good idea.

Ms. JONES. Do you know who Beneva Scholte is?

Mr. HOWARD. I’ve heard the name.

Ms. JONES. She’s the contact person for the FM Watch report

that outlines how GSE mission creep threatens American consumers, the report that came out about a week ago, just in time

for our wonderful hearing. Have you ever been in contact with her?

Mr. HOWARD. I have not been personally.

Ms. JONES. Let me finally say that you’ve had an opportunity

since last year to comply with these six voluntary agreements to

put your ships in better shape than they already were in, correct?

Mr. BRENDSEL. Correct.

Ms. JONES. You don’t have any issue about entering into voluntary compliance, do you?

Mr. BRENDSEL. No.

Ms. JONES. Did you welcome the opportunity to continue to make

these two companies the leading companies here in the United

States in pushing or providing for affordable housing in the United

States?

Mr. BRENDSEL. Absolutely. I couldn’t have said it better myself.

Ms. JONES. Thank you very much, Mr. Chairman. I yield the balance of my time.

Chairman BAKER. Thank you.

Mr. Weldon.

Mr. WELDON. Thank you, Mr. Chairman.

Mr. Brendsel, you stated regardless of disruptions in the capital

markets that that may make it impossible to borrow, Freddie Mac

has the means to meet our financial obligations for at least 3

months.

Mr. BRENDSEL. That’s true.

Mr. WELDON. I think, Mr. Howard, you said the same thing?

Mr. HOWARD. Yes.

Mr. WELDON. Could you give me a little more detail on how you’d

go about doing that?

Mr. HOWARD. I think we would both do it in a similar way. First

of all, we maintain a fairly sizable liquidity portfolio. As of the end

of last year, it was 8 percent of total assets.
30

That liquidity can be run off. They’re high quality securities that

can be sold to allow us to pay down debt if we don’t have access

to capital markets.

Mr. WELDON. What kind of securities are they?

Mr. HOWARD. Many of them, we made short-term loans to banks,

in the Fed funds market. We have AAA-rated securities that can

be sold readily for prices very close to what we paid for them. We also have over $300 billion in high quality Fannie Mae mortgage-backed securities that can be pledged as security for repurchase agreements that can then be used for borrowing. This is very

standard practice in the financial services industry. And the use of

those securities as collateral for repurchase agreements would give

us many months of access to borrowing without having to issue

debt.

Mr. WELDON. Mr. Brendsel.

Mr. BRENDSEL. My answer would be very similar. Clearly, we

start out with a schedule of what are all the outstanding commitments and obligations that the company will have coming due over

the next 3 months, so we can have a clear idea on that.

And then second, we make certain we have the kind of liquidity

that Mr. Howard was referring to, whether it was in the form of

very high grade, high quality corporate securities and banking securities or our own mortgage-backed securities.

Mr. WELDON. Correct me if I’m wrong. It’s very easy for you to

raise capital by just issuing debt, and that in itself gives you a lot

of liquidity in terms of giving you the ability to expand your business. Would you say that that enhances safety and soundness for

your institutions?

Mr. HOWARD. Not just for our institution, but for the financial

system as a whole. So in times such as the fall of 1998 when credit

was not readily available, we were able to issue Fannie Mae debt

that investors valued and would invest in, take those proceeds and

channel them into the housing market.

So we can serve as a stabilizing force for the entire system.

Mr. WELDON. Do you want to add to that at all?

Mr. BRENDSEL. This may be just a point of clarification. This liquidity and contingency commitment would assume that we would

not be able to issue any debt at all for that 3-month period.

Mr. WELDON. Right. I realize that. You have been conducting the

internal risk-based capital test, the so-called ‘‘stress test.’’ In the

agreement you committed to disclosing the parameters of your testing models and the outcomes of the testing. What level of detail are

you going to be providing on that? Or have you made that decision

yet or not?

Mr. HOWARD. Yes. In implementing the interim risk-based capital test associated with the voluntary agreements, we have moved

from using a model based on Fannie Mae’s own specification that

we have been running since 1993 to one that uses as its basis the

notice of proposed rulemaking that OFHEO put out in 1999.

So we use that as the basis plus amendments OFHEO has made

subsequent to that.

In addition, we added elements in our comment letter of March

10th of 2000, which is publicly available, and made some additional

adjustments to approximate as closely as we could what we think
31

a final official standard might look like. And those changes are

available on our website as part of our disclosure package.

So by going to OFHEO’s website, looking at our comment letter

on our website, an observer can look at all of the elements that we

used in running our risk-based capital test on an interim basis that

we just announced.

Mr. WELDON. The same for you as well?

Mr. BRENDSEL. Similar. We’ve attempted to coordinate wherever

possible types of disclosures with Fannie Mae to assure that investors wouldn’t be confused.

Mr. WELDON. Have two standards.

Mr. BRENDSEL. Yes, two standards and so forth. And I wouldn’t

say that in all cases we have adopted the identical approach.

But I’d like to add one additional point about Freddie Mac. We

really began managing the company under a kind of a stress test

approach to assess capital adequacy and to maintain assurances

that we were appropriately capitalized beginning in the late 1980s.

Indeed, we were an advocate of the legislation that was crafted

in 1992 establishing this very dynamic and forward-looking, at the

time an avant garde risk-based capital approach, and we’ve been

managing according to that at Freddie Mac ever since.

Indeed, we were disclosing a lot about how we assessed capital

even before we made this final commitment. And now of course,

we’re going to provide additional information including general information around the kind of parameters in this stress test that we

use for this disclosure.

Mr. WELDON. Thank you, Mr. Chairman. I think my time has expired.

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

Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Mr. Chairman. I want to yield my

first 2 minutes to my good friend and colleague, Congressman

Israel.

Mr. ISRAEL. Thank you. I thank the gentleman for yielding.

There seems to be near-unanimous praise on both sides of the

aisle for the voluntary initiatives that you are conforming to, and

you’ve already stated that those voluntary initiatives help you meet

your core competency, which is to provide affordable housing.

I’m just wondering whether you can estimate the approximate

cost of conformance with the voluntary issues in terms of personnel

or hard dollars. Mr. Howard?

Mr. HOWARD. Most of the voluntary commitments codify or make

public practices that we have already undertaken. Those practices

do have costs, because we need to have high quality staff to do risk

assessment. We need to do lots of modeling to help us get a sense

for how best to measure and manage our risk.

The one specific cost that’s easy to track is the additional cost we

pay to issue subordinated debt. Because if we didn’t have a subordinated debt, we would issue senior debt at a lower cost.

So for the first issue we did, $1.5 billion, we paid 22 basis points

more. That’s a pure additional cost.

We have committed to build our subordinated debt up to roughly

1.5 percent of total assets, which over the next 3 years will be between $12 and $15 billion of subordinated debt. And if we pay 22
32

basis points on all of that, that will be a real incremental cost over

and above the others that I’ve mentioned.

Mr. ISRAEL. Mr. Brendsel, if you answer briefly please.

Mr. BRENDSEL. Yes. The additional incremental cost on subordinated debt would be similar. I think our first issue, we had 22

basis points, which would amount to, on a $2 billion issue, that we

did about $4.4 million annually in additional cost.

If, however, these commitments, including the subordinated debt,

provide greater assurance and confidence to the investors in the

stability of the company, really the confidence of Congress and the

public, that will be more than offset in terms of overall cost on our

senior debt.

Mr. ISRAEL. I thank the gentleman for yielding.

Mr. HINOJOSA. Thank you. I was looking at the closing statement

that Mr. Brendsel used, and he said that he looks forward to working together with us to secure the future of our housing finance

system and with it the dreams of millions of families.

So that brings me to one of the points that I made earlier in my

opening remarks, and that was my concern about the wide gap that

exists between the standard families owning a home, Anglo-Saxon

families, I think that there’s a lag of 26 percent behind AngloSaxon home ownership.

So can you tell me what your company is doing to close this wide

gap?

Mr. BRENDSEL. Yes. I can tell you what our company is trying

to do with all its energy and all the commitment of the 4,000 employees at Freddie Mac and their creativity.

First of all, I’d emphasize that we are committed to closing that

gap, finding every avenue that we can within our charter.

Certainly, it includes developing new flexible mortgage products

that make it easier for a low-income or minority family to afford

their first home. It includes partnering with organizations that

know the Hispanic community well, like the National Council of La

Raza and the National Association of Hispanic Real Estate Professionals.

Indeed, we recently entered into an agreement, a partnership

really, with those two organizations, $2 million to develop webbased technology to increase home ownership counseling for Hispanic families.

In addition, we’re constantly trying to improve our underwriting

systems, use technology to drive down origination costs, increasing

the ability of a low-income family or a minority family to get a

mortgage loan. And, of course, we are constantly exploring new

ways to attract capital from throughout the world at a lower cost,

making it again more possible to afford a home.

I think it’s a journey. It’s a journey that we’ve been on for decades now. Clearly, there’s a long way to go. Yes, the average home

ownership rate nationally approaches 70 percent, 67 percent. But

as you have clearly indicated, the home ownership rate for Hispanics as well as African American families in this Nation falls

well below and indicates that there is still a lot more work to be

done.

Mr. HINOJOSA. Mr. Howard, your group has done a great deal of

effort in San Antonio to Brownsville, to McAllen, to Laredo and
33

that area, because I’ve seen some of the programs that were introduced in these last 4 years as we were moving many families from

welfare to jobs, and in some cases not letting them stay more than

2 years in Section 8 housing.

Do you have a way of monitoring and assessing the success or

failure of your new programs as they relate to get Hispanics to own

their own homes?

Mr. HOWARD. Yes we do. Last year, Fannie Mae announced our $2 trillion American Dream commitment. That was the successor

to our $1 trillion initiative that we announced back in 1994.

In both cases, we established a very rigorous pattern of announcing specific goals and then tracking and reporting on how we were

doing against those goals.

One of the subgoals of the American Dream commitment is a

specific minority lending initiative where we are setting targets to

help close the home ownership gap between minorities, including

Hispanics, and majority Americans.

But I’ve noticed in recent publications by FM Watch and others,

they’re claiming that we have solved the home ownership problem

and that we should stop. That totally ignores the very wide gap between minority home ownership and majority home ownership that

we are committed to working on to close.

And through the American Dream commitment and specific target initiatives that we are working on with interest groups as well

as lenders and others, we will follow up on those initiatives, track

and report on them, and hopefully be a positive force in achieving

a good outcome.

Mr. HINOJOSA. Would you repeat the name of the organization

that felt that you should stop?

Mr. HOWARD. FM Watch.

Chairman BAKER. You’ll be hearing more from those folks, Mr.

Hinojosa, I’m sure.

[Laughter.]

Chairman BAKER. The gentleman’s time has expired. I’ll start

back on a second round. There being no further Republican Members.

Just one comment again on the specifics of the arrangement of

last fall. The requirement to issue subordinated debt equal to 4

percent as subtracted from the core capital, whatever that difference turns out to be, an annual rating which now has turned

into a surveillance rating, new liquidity standard for a 3-month operating window, an interest rate risk disclosure and credit risk disclosure that is new and heretofore not engaged in, and each of you

commented that you feel that that package represents a substantive structural change in the level of transparency and disclosure to the markets. Is that correct?

Mr. HOWARD. Yes it is, sir.

Chairman BAKER. And to your knowledge, has it had an adverse

impact on your operations since you complied with these activities?

Mr. HOWARD. None whatsoever.

Mr. BRENDSEL. No.

Chairman BAKER. Well, I just want to make the point, and this

is coming from a little different perspective, that it is possible to

manage the affairs of Government sponsored enterprises without
34

necessarily legislation, but with regulatory changes that do not result in adverse circumstances, like throwing hundreds of thousands

of people out of home ownership. I feel that’s a pretty substantive

point to make.

Second, that with regard to the discussion of the regulator piece

that is yet to come, these are elements that a—I don’t want to say

a well-run shop, because you all are extraordinarily well run— would want to have in the marketplace, coupled with a competent

regulator so there’s no question about the stability of your debt

issuances.

And the reason for bringing that up is I am concerned about the

consolidation of the counterparties because of mergers and acquisitions internationally and domestically and your ability to hedge

risk appropriately.

I am concerned about the difficulty we may engage in if we have

a short-term 1998 liquidity problems and whether or not—I’m not

suggesting we haven’t gone far enough, but what I’m asking you

is, what is your level of confidence, knowing now that these new

standards are operative, that the markets are now expecting this,

and you can’t back off of it. It’s a requirement that you must go

forward with. Am I reading anything into the spreads on the

subdebt as being any indicator of any concern, particularly with the

consolidation of counterparties’ potential liquidity problems in the

broader market, not within your shop?

How good do you feel about the deal we put together here and

its effect on being able to insulate taxpayers from any adverse circumstances that could develop? Keep in mind we’re talking the

1980s and Louisiana/Texas oil and gas patch circumstances that

are in pretty dire consequences.

Mr. BRENDSEL. Mr. Chairman, I think I would answer the question this way. We started from a point at the time that we announced the commitments that we were already extraordinarily

well capitalized for the risks we take and face, because we’re only

in the home ownership business and rental housing.

And we only added to that by the additional commitments. Obviously, spreads on securities fluctuate from day to day for a variety

of reasons, many of which have nothing to do with any one institution. So I don’t know what you’re reading into a spread moving

from 22 basis points to 28 basis points, but in the scheme of things,

that is just a random fluctuation.

I used to be the chief financial officer at Freddie Mac years ago

and I’ve lost my edge a little bit, so I’ll let Mr. Howard comment

as well.

Mr. HOWARD. I put the movement in our subordinated debt in

this perspective. As Mr. Brendsel mentioned, each of us priced subordinated debt around 22 basis points off our senior debt.

In our case, we traded as tight as about 18 and as wide as 28.

That’s a minus 4 plus 6 move. That is a range that is well within

what other issuers of subordinated debt have experienced over the

same time period. These are the high quality commercial banks

that have subordinated debt outstanding that is quoted publicly in

the market.

I would also say that over the last year, our 10-year senior debt

spreads to Treasuries have moved within a swing of about 45 basis
35

points, reflecting a host of factors, none of them specifically being

credit quality-related.

Chairman BAKER. Well, the overall interest market since the

date of introduction of the legislation year til now has been nothing

but a continuous, steady downhill trend, and we’re enjoying a very

low interest market at the moment, which certainly has to have a

much larger effect on the cost of selling than anything else I can

imagine. I’m again exceeding my time.

Mr. Kanjorski.

Mr. KANJORSKI. Mr. Chairman, I think I have asked all my questions and heard all the answers. I suggest this has been a very successful hearing.

Chairman BAKER. Does any other Member wish to be heard?

Ms. JONES. Just very briefly. Some would say that the current

interest market has been influenced by conversations by our chief

officer of Government and other elected officials or appointed officials in his Administration. Some would say that, wouldn’t they,

Mr. Brendsel, Mr. Howard?

I’m not asking you to say it, because you can’t say it, but I can

say it. That some of the articles would say that the interest or the

economy is in the position that it was—I think it was the New York

Times in fact that said that some in our Administration have

talked the economy down. You read that, didn’t you, Mr. Brendsel?

You don’t have to admit to it. But I know you read it. Well, let me

go on.

[Laughter.]

Ms. JONES. Standard & Poor’s and Moody’s, those are the organizations that evaluated your economic status and debt ratio, right?

Correct?

Mr. HOWARD. Yes, that’s correct.

Mr. BRENDSEL. That is correct.

Ms. JONES. And in fact, they’re kind of like Alan Greenspan.

When he speaks, people listen. When Standard & Poor’s and

Moody’s give you a rating, people listen to that, right?

Mr. HOWARD. Yes they do.

Ms. JONES. And in fact, in order to judge your soundness, and

what’s the other word I want?

Mr. HOWARD. Safety.

Ms. JONES. And safety. Thank you very much. You went to these

institutions to have them evaluate you and even passed what was

part of the voluntary agreement.

Mr. HOWARD. Correct.

Ms. JONES. And so if I were sitting in your shoes, I would feel

pretty darn good about the—I wish my son would get A and double

AA and what are those other ratings?

[Laughter.]

Ms. JONES. But he says, Mom, give him time. But you’re at that

status right now. Is that correct?

Mr. HOWARD. Yes we are.

Ms. JONES. I wondered if you might briefly elaborate for me. One

of my colleagues said something about when you can raise capital

by issuing debt. I can’t think of his name. He’s seated four down

on the side. He said that the way you can raise capital for your

company is by issuing debt. Is that correct?
36

Mr. HOWARD. He may have said that.

Ms. JONES. Anyway, he raised the question. My question is—and

I’m not a business expert or anything—but most corporations raise

capital by issuing debt. You’re not doing anything unlike other corporations. Is that a fair statement?

Mr. HOWARD. I don’t believe we are.

Ms. JONES. OK. And wouldn’t it be fair to say that because of the

lack of affordable housing in the United States and because there

are so many people in need of housing, there’s room at the table

for many, many financial institutions who want to engage in mortgage lending in communities, regardless of their color, economic interest, to get involved?

Mr. HOWARD. Very much so.

Ms. JONES. And that even though this is a competitive market,

Fannie Mae does not have to engage in threatening tactics in order

to be successful?

Mr. HOWARD. We do not and have not.

Ms. JONES. What about you, Freddie Mac? Do you have to engage

in threatening tactics in order to be successful?

Mr. BRENDSEL. No. We never have and we never will.

Ms. JONES. I’ll yield, Mr. Chairman.

Chairman BAKER. Thank you.

Mr. Shays.

Mr. SHAYS. Thank you, Mr. Chairman. I just want to say that

both your organizations have been very helpful to me. Both organizations are very responsive.

But I found the hair on my back rising when you talked about

going to any market where you see an opportunity, where there’s

an overpricing and so on. It almost sounded a little sanctimonious

to me, with all due respect.

You all are given opportunities to compete that your competition

in a sense doesn’t have. Is that correct?

Mr. HOWARD. This is a longer discussion, but I think that’s a

complicated subject.

Mr. SHAYS. It is a complicated subject. And that’s almost an arrogant answer. I realize it’s a complicated subject. But the bottom

line is, you are given certain opportunities that your competition

doesn’t have.

Mr. HOWARD. We are given different opportunities from those

which our competition’s been given.

Mr. SHAYS. Your cost of capital is less, correct?

Mr. HOWARD. In the long-term end of the market, yes. In the

short term, it is higher than our competition.

Mr. SHAYS. You don’t have to file certain reports, correct?

Mr. HOWARD. That’s correct.

Mr. SHAYS. You don’t have to pay State and local taxes?

Mr. HOWARD. Through Congressional design.

Mr. SHAYS. I know that. I’m not saying that you have these powers illegally. You have them. We’ve given them to you. And doesn’t

that apply to you as well? It applies to both organizations.

Mr. BRENDSEL. That’s correct.

Mr. SHAYS. So you don’t have to pay State and local taxes. You

can get capital, at least in the long-term, cheaper. There are certain advantages you have.
37

And so what obligations do I have up here to make sure that you

don’t use those advantages to basically put everyone out of business?

Mr. HOWARD. We have a charter that precisely limits us to channeling whatever those advantages may be into housing.

Mr. SHAYS. So the charter basically sometimes is going to tell

you that you can’t go into a marketplace even if you happen to

think that the market is overpriced and you have opportunities?

Mr. HOWARD. Yes, that’s correct.

Mr. BRENDSEL. I think I would agree with many of the points

that you were making, Congressman. We compete with certain

tools, advantages, that come as a result of our charter. And indeed,

with those tools come special or different responsibilities. We’re

limited obviously to only the residential mortgage market.

Indeed, we’re also limited. We can’t originate a mortgage loan. In

addition, of course, we can’t buy mortgage loans on expensive housing, so-called jumbo loans.

Our charter is very clear. We can’t go off into doing credit cards.

We can’t go off into any number of different other things.

Mr. SHAYS. The bottom line, the purpose for which you exist is

to enable Americans to buy more homes. That’s the basic purpose

for why you exist. And you’ve done a pretty good job of that. Am

I wrong? Isn’t that the basic purpose? If we want more residential

housing, we want more homeowner properties.

Mr. HOWARD. But beyond that, it’s targeted residential investment. That’s why we have housing goals that guide us as to where

we should focus whatever benefits Congress gave us. There are limits that come with the benefits.

Mr. SHAYS. So you could make a determination in your charter

allowed it that there’s great opportunities in the jumbo loan market?

Mr. HOWARD. No. That’s expressly——

Mr. SHAYS. Maybe you didn’t hear my question. If your charter

allowed it?

Mr. HOWARD. Yes.

Mr. SHAYS. And we tell you you can’t go into that marketplace.

Why do you think we do that?

Mr. HOWARD. To focus our efforts where Congress deemed they

were most necessary.

Mr. SHAYS. So you have a problem with this subcommittee overseeing your activities?

Mr. HOWARD. No.

Mr. SHAYS. Do you have a problem with our investigating the

possibility of providing more regulations?

Mr. HOWARD. No.

Mr. SHAYS. That’s good.

Mr. HOWARD. Terrific.

Mr. SHAYS. We’ll be watching.

Mr. HOWARD. We look forward to it.

Mr. BRENDSEL. Congressman, could I make an additional comment? And indeed, with regard to the last point, we in fact welcome the oversight.

Actually I think it makes us a better organization, a better company, and it’s really better for the Nation as a result.
38

Finally, the other point I wanted to make is the issue of benefits

or advantages relative to others. Mr. Howard said it’s a complex

issue. It’s more complicated than simple, I think, as has been reflected here today in our conversation.

Freddie Mac recently requested that James Miller, former Director of OMB in the Reagan Administration, and James Pearce with

Welch Consulting, do a study to look at our companies’ advantages,

the benefits we receive, and then the benefits to consumers. That

was a report they issued on January 9th.

Two points I would leave you with. One is it clearly shows that

the benefits realized by the Nation, consumers and homebuyers,

the value of those greatly exceeds the advantages realized by

Freddie Mac and Fannie Mae.

The second point they make is, in fact, there are many other institutions in the marketplace in residential mortgage markets elsewhere that possess their own set of federally bestowed advantages,

specifically banking institutions that have federally-insured deposits and that are members or are able to borrow from the Federal

Home Loan Bank system, which are themselves Government-chartered corporations.

And so, their final conclusion was, in fact, that we were a more

efficient way for the Government to support and encourage the flow

of mortgage credit to this Nation’s mortgage markets.

Mr. Chairman, I’d like to submit that report for the record.

[The report referred to can be found on page 103 in the appendix.]

Chairman BAKER. Without objection.

Mr. Hinojosa.

Mr. HINOJOSA. Thank you, Chairman Baker.

I would ask Mr. Howard a question. Can you please tell me what

the predatory lending is and how it differs from subprime lending?

Mr. HOWARD. Predatory lending in my view—and I’m not the

world class expert on this—does not have a precise definition. In

general, they are lending practices that are not in the best interests of the consumers, and typically the consumer is not made fully

aware of prior to committing to a loan.

We have categorized predatory lending practices into certain

groups. And at that point, the basis for the guidelines that we put

out to our lenders.

But precisely because there is not a specific definition of predatory lending, we entered into discussions with numerous parties to

try and come up with a right balance, because the flip side of too

restrictive guidelines is that people who have only one place to get

credit find they can’t get credit anywhere, which is an outcome we

don’t want. So we’re attempting to find that fine line between making sure that people have loans they can afford, even if they have

to pay a higher rate because of their past credit, and abusive practices that end up causing them to lose their home.

Mr. HINOJOSA. I think Freddie Mac—I’d like to ask you what is

your company doing to respond to the problems that Mr. Howard

just outlined?

Mr. BRENDSEL. In predatory lending?

Mr. HINOJOSA. Predatory lending, yes.
39

Mr. BRENDSEL. We refuse to purchase certain kinds of loans that

are generally regarded as being associated with predatory lending

practices, excessive interest rates on those loans, single-premium

credit life insurance, prepayment penalties that extend for an excessive period of time.

We also refuse to deal with certain lenders that we have determined are associated with predatory practices. So it’s a combination of having policies against purchasing certain kinds of loans

and also policies against dealing with lenders that are associated

with abusive practices.

Mr. HINOJOSA. Thank you for that explanation. I wish to yield

the balance of my time to Congresswoman Jones.

Ms. JONES. Thank you, my colleague. Let me begin with the

question on restrictions and go through maybe a few restrictions

that Fannie Mae has as a result of being a Government sponsored

enterprise.

You’re restricted to a single line of business, residential mortgages. Is that correct, Mr. Howard?

Mr. HOWARD. Yes it is.

Ms. JONES. You are confined to mortgages under the loan limit,

currently $275,000 for a single family loan. Is that correct?

Mr. HOWARD. Yes it is.

Ms. JONES. You’re required to operate in all markets at all times.

Is that correct?

Mr. HOWARD: Yes.

Ms. JONES. Must meet percent of business goals for affordable

housing, correct?

Mr. HOWARD. Correct.

Ms. JONES. And meet a rigorous risk-based capital test in addition to six voluntary agreements or policies you just recently accorded yourself to. Is that correct?

Mr. HOWARD. Yes. Although currently we’re meeting the interim

test because the regulatory test has not been officially promulgated.

Ms. JONES. Now let me go to the charter purposes. One, to provide stability in the secondary market for residential mortgages. Is

that correct?

Mr. HOWARD. It is.

Ms. JONES. To respond appropriate to the private capital market,

correct?

Mr. HOWARD. Yes.

Ms. JONES. To provide ongoing assistance to the secondary market for residential mortgages, including activities relating to mortgages on housing for low- and moderate-income families, and following a reasonable economic return that may be less than the return on other activities by increasing the liquidity of the mortgage

investments and improving the distribution of investment capital

available for residential mortgage financing, correct?

Mr. HOWARD. That sounds right.

Ms. JONES. And finally, to promote access to mortgage credit

throughout the Nation, including central cities, rural areas, and

underserved areas by increasing, quote, ‘‘the liquidity’’, unquote, of

mortgage investments and improving the distribution of invest-
40

ment capital available for residential mortgage financing charter

purposes, correct?

Mr. HOWARD. Yes.

Ms. JONES. And it is not your intention in any of the activities

that you engage in, Mr. Howard, Mr. Brendsel, to act outside of

those chartered purposes.

Mr. HOWARD. It is not.

Ms. JONES. Is that a fair statement?

Mr. BRENDSEL. That’s correct.

Ms. JONES. Thank you. I yield the balance of my time, Mr. Chairman.

Chairman BAKER. Thank you, Ms. Jones.

Ms. JONES. Mr. Hinojosa’s time actually.

Chairman BAKER. Thank you, Mr. Hinojosa-Jones.

[Laughter.]

Chairman BAKER. Mr. Shays.

Mr. SHAYS. Mr. Chairman, I didn’t really need a full 5 minutes

just to say that I really appreciate both witnesses appearing before

us.

You know, I’m new to this subcommittee. I find this a very interesting subcommittee to serve on. I appreciate your chairmanship of

this subcommittee.

But I have a lot of constituents who both work with you and appreciate your partnership and also compete with you. I have a lot

of consumers who have benefited deeply by what your organizations do, but I’m absolutely convinced that the playing field isn’t

level. And because it’s not level, we have that oversight responsibility.

I look forward to learning more about what you all do and how

you try to conform to your charter and so on. Thank you. I thank

you, Mr. Chairman.

Mr. HOWARD. We look forward to working with you on that.

Chairman BAKER. Thank you, Mr. Shays.

There being no further comment from Members, I just wish to

wrap our hearing up today.

Someone asked earlier in the course of the hearing who would be

the overseer to assure third parties that the terms of the voluntary

agreement are successfully implemented over time.

Since we joined hands at the start, I guess it would be appropriate for us not to release hands until we get a regulatory structure that we can pass this responsibility off to.

So I will announce, with the agreement of Mr. Kanjorski, who

had to leave a little bit earlier, that we will continue in this fashion

on some semi-annual or annual basis to receive reports from the

enterprises using today’s report as the benchmark against which

future measurements can be made.

Second, and it’s has been referred to widely, but we will have legislation to introduce in the near term on the suggested regulatory

structure, which I have not yet, but do intend to visit with both of

the GSE management teams before the bill is finally brought.

I also shared that with Mr. Kanjorski and assured him that we

would get him a copy of the bill before it would be finally introduced.
41

We will also soon receive the report from the CBO relative to the

now long-awaited subsidy evaluation which could be the subject of

an additional topic.

Suffice it to say we are going to move very slowly, but I want

the Members of the subcommittee and the representatives of the

GSEs to understand that we’re going to have a very thoughtful

through-the-summer type of discussion, no rush to judgment. But

I do believe that the steps we take in here build a platform of a

cooperative agreement that can be carried forward, and that we

won’t find it necessary to result in some of the exchanges which occurred in last year’s debate and that we can jointly perform the

service of making good public policy while not adversely affecting

home ownership, and I think at the same time enhance the marketability of the two enterprises’ products by creating a regulator

that does have credibility.

To that end, gentlemen, I look forward to working with you and

Members of this subcommittee.

Mr. BRENDSEL. And we welcome the opportunity to work with

you, Mr. Chairman.

Mr. HOWARD. As do we.

Chairman BAKER. Thank you very much. The hearing is ended.

[Whereupon, at 4:20 p.m., the hearing was adjourned.]

(43)

A P P E N D I X

March 27, 2001
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