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[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

 
                  REFORMING FANNIE MAE AND FREDDIE MAC

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 11, 2001

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 107-32

                        U.S. GOVERNMENT PRINTING OFFICE
74-101                          WASHINGTON : 2002
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                     JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice Chair    BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska                  PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana              MAXINE WATERS, California
SPENCER BACHUS, Alabama                  CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware              LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York                  NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California              MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma                 GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                      KEN BENTSEN, Texas
BOB BARR, Georgia                        JAMES H. MALONEY, Connecticut
SUE W. KELLY, New York                   DARLENE HOOLEY, Oregon
RON PAUL, Texas                          JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                    BRAD SHERMAN, California
CHRISTOPHER COX, California              MAX SANDLIN, Texas
DAVE WELDON, Florida                     GREGORY W. MEEKS, New York
JIM RYUN, Kansas                         BARBARA LEE, California
BOB RILEY, Alabama                       FRANK MASCARA, Pennsylvania
STEVEN C. LaTOURETTE, Ohio               JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois             JANICE D. SCHAKOWSKY, Illinois
WALTER B. JONES, North Carolina          DENNIS MOORE, Kansas
DOUG OSE, California                     CHARLES A. GONZALEZ, Texas
JUDY BIGGERT, Illinois                   STEPHANIE TUBBS JONES, Ohio
MARK GREEN, Wisconsin                    MICHAEL E. CAPUANO, Massachusetts
PATRICK J. TOOMEY, Pennsylvania          HAROLD E. FORD, Jr., Tennessee
CHRISTOPHER SHAYS, Connecticut           RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona                 KEN LUCAS, Kentucky
VITO FOSELLA, New York                   RONNIE SHOWS, Mississippi
GARY G. MILLER, California               JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia                    WILLIAM LACY CLAY, Missiouri
FELIX J. GRUCCI, Jr., New York           STEVE ISRAEL, New York
MELISSA A. HART, Pennsylvania            MIKE ROSS, Arizona
SHELLEY MOORE CAPITO, West Virginia  
MIKE FERGUSON, New Jersey                BERNARD SANDERS, Vermont
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio

             Terry Haines, Chief Counsel and Staff Director

            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

ROBERT W. NEY, Ohio, Vice Chairman   PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
CHRISTOPHER COX, California          NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio                KEN BENTSEN, Texas
RON PAUL, Texas                      MAX SANDLIN, Texas
SPENCER BACHUS, Alabama              JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware          DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California          FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma             STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia                    MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina      BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio           GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona             JAY INSLEE, Washington
DAVE WELDON, Florida                 DENNIS MOORE, Kansas
JIM RYUN, Kansas                     CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama                   HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York              RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
GARY G. MILLER, California           RONNIE SHOWS, Mississippi
DOUG OSE, California                 JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey            MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 11, 2001................................................     1
Appendix:
    July 11, 2001................................................    73

                               WITNESSES
                        Wednesday, July 11, 2001

Carnell, Richard S., Associate Professor of Law, Fordham 
  University School of Law.......................................    30
Delk, Mitchell, Senior Vice President, Freddie Mac...............    12
Edwards, Martin, Jr., Partner, Wilkinson & Snowden, Inc.; 
  President-Elect, National Association of Realtors, on behalf of 
  the National Association of Realtors...........................    33
Howard, J. Timothy, Executive Vice President and Chief Financial 
  Officer, Fannie Mae............................................     9
Miller, James C. III, Director, LECG Economics-Finance; former 
  Director, Office of Management and Budget, former Chairman, 
  Federal Trade Commission.......................................    35
Paige, Leslie K., Vice President, Citizens Against Government 
  Waste, on behalf of the Homeowners Education Coalition.........    38
Rothschild, Edwin S., Principal, Podesta Mattoon, on behalf of FM 
  Watch..........................................................    40

                                APPENDIX

Prepared statements:
    Baker, Hon. Richard H........................................    74
    Ford, Hon. Harold E. Jr......................................    76
    Hinojosa, Hon. Ruben.........................................    83
    Jones, Hon. Stephanie T......................................    85
    Kanjorski, Hon. Paul E.......................................    87
    Carnell, Richard S...........................................   127
    Delk, Mitchell...............................................   112
    Edwards, Martin, Jr..........................................   148
    Howard, J. Timothy...........................................   101
    Miller, James C. III.........................................   157
    Paige, Leslie K..............................................   211
    Rothschild, Edwin S. (with attachments)......................   220

              Additional Material Submitted for the Record

                                                                   Page

Ford, Hon. Harold E. Jr.:
    Letter to Fannie Mae Chairman and CEO Franklin D. Raines, 
      July 30, 2001, with response...............................    80
    National Black Caucus of State Legislators, Opportunities 
      Industrialization Centers of America, World Conference of 
      Mayors, joint press 
      release with attachment....................................    78
Kanjorski, Hon. Paul E.:
    AARP letter, May 22, 2001....................................    89
    City of Birmingham, AL Mayor Bernard Kincaid letter, April 5, 
      2001.......................................................    93
    City of Charlotte, NC Mayor Patrick McCrory letter, April 9, 
      2001.......................................................    95
    City of Columbus, OH Mayor Michael B. Coleman letter, April 
      23, 2001...................................................    96
    City of Los Angeles, CA Mayor Richard J. Riordan letter, 
      April 6, 2001..............................................    97
    Congresswoman Barbara Lee letter, May 1, 2001................    91
    Navy Federal Credit Union letter, April 18, 2001.............    98
Howard, J. Timothy:
    Written response to questions from Hon. Richard H. Baker.....   110
Miller, James C. III:
    Freddie Mac and Fannie Mae: Their Funding Advantage and 
      Benefits to Consumers......................................   163
Council of FHLBanks, prepared statement..........................   232
National Association of Home Builders, prepared statement........   238

                  REFORMING FANNIE MAE AND FREDDIE MAC

                              ----------                              

                        WEDNESDAY, JULY 11, 2001

             U.S. House of Representatives,
       Subcommittee on Capital Markets, Insurance, 
              and Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 1:30 p.m., in 
room 2128, Rayburn House Office Building, Hon. Richard H. 
Baker, [chairman of the subcommittee], presiding.
    Present: Chairman Baker; Representatives Cox, Castle, 
Royce, Barr, Weldon, Biggert, Hart, Kanjorski, Ackerman, 
Velazquez, Bentsen, J. Maloney of Connecticut, Hooley, Jones, 
Sherman, Meeks, Inslee, Ford, Moore, Hinojosa, Lucas, Shows and 
Israel.
    Chairman Baker. This hearing of the Capital Markets 
Subcommittee will come to order. The purpose of our hearing, of 
course, today is to receive comment from the two principal 
Government-sponsored enterprises with regard to the report 
issued by the Congressional Budget Office analyzing the effect, 
amount and utilization of the subsidy created by the charter 
authority of the Government-sponsored enterprises.
    Additionally, we will hear comments from other interested 
parties as to their views of this matter, as well as comments 
with regard to H.R.1409, the matter now pending before the 
Committee with regard to the creation of a new regulatory 
structure for the enterprises.
    And further, we will solicit opinion as to what, if any, 
additional modifications to the current regulatory model should 
be considered.
    As everyone knows, this has been a subject of long-standing 
interest to the Committee and one in which we are moving very 
slowly and cautiously to ensure that all perspectives are heard 
and understood.
    It would not be the intent as a result of our hearing today 
to reach any final disposition in this matter. And in fact, I 
would intend to convene additional hearings before the year is 
out on any approach which might be deemed advisable.
    To that end, I am certainly appreciative of all who have 
expressed interest in this matter. It has received significant 
attention. And I think, as market conditions continue to 
change, the need for continued review and consideration of all 
perspectives is particularly important public policy 
responsibility.
    With that, I'd like to recognize Mr. Kanjorski for any 
opening statement he may choose to make.
    [The prepared statement of Hon. Richard H. Baker can be 
found on page 74 in the appendix.]
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Chairman, since we began our extensive examinations 
into GSEs 16 months ago, we have met nine times to discuss 
these matters.
    I suspect that very few other entities have received such 
scrutiny in either the 106th Congress or the 107th Congress, 
particularly without corresponding legislative action.
    During our numerous hearings, although I have consistently 
sought to identify the problems posed by GSE performance and 
regulation, I have so far concluded that no compelling reason 
exists for pursuing any legislation affecting them at this 
time.
    Nevertheless, our inquiry today will focus on two issues.
    First, we will again discuss the study compiled by the 
experts at the Congressional Budget Office on GSE subsidies. As 
we learned in May, Fannie Mae and Freddie Mac pass on about 
two-thirds of their Federal subsidies to homeowners in the form 
of lower mortgage prices, and this report confirms that GSEs 
are performing a function that Congress wants them to perform.
    Namely, they are working to help lower home ownership costs 
without Government funding.
    In return, the GSEs' stakeholders receive a share of the 
Federal subsidy to provide a financial reward for their 
efforts.
    Our second topic concerns H.R.1409, the Secondary Mortgage 
Market Enterprises and Regulatory Improvement Act. This bill 
would dramatically restructure the current regulatory system 
for Fannie Mae and Freddie Mac.
    In my opinion, it also represents a solution in search of a 
problem.
    Nearly a decade ago, Congress created a rational, 
reasonable and responsive system for supervising GSE 
activities. That system, with two regulators, is operating 
increasingly effectively.
    H.R. 1409 would unfortunately interrupt this continual 
progress.
    Yet, some have continued to suggest that in order to avert 
another S&L crisis, we must act now to change the GSEs' 
regulatory structure.
    In studying H.R. 1409, we should therefore review the 
lessons learned from that debacle. This examination will help 
to ensure that we do not create another troubling situation 
requiring bail-out legislation.
    Before FIRREA, we had a Federal board which is currently 
serving as a chartering authority for some depository 
institutions and as their regulator. This same board also 
served as the operating head of a depository insurance program 
and supervised the activities of some housing GSEs.
    During our extensive deliberations over FIRREA, we 
determined that this concentration of powers contributed 
significantly to the S&L crisis. Consequently, we separated 
these overlapping regulatory functions when restructuring the 
industry.
    However, by moving the supervisory responsibility over the 
GSEs to the Federal Reserve, H.R. 1409 would again concentrate 
regulatory power in one entity and ignore an important lesson 
learned in the thrift crisis.
    After all, the Federal Reserve, like the old Bank Board, 
already has chartering and regulatory authority over depository 
institutions.
    In addition, it develops and oversees many of our Nation's 
consumer laws and it received significant new responsibilities 
in the financial modernization law.
    Further, although it does not oversee deposit insurance, 
the central bank does manage our Nation's monetary policy. As a 
result, in times of hardship, the Federal Reserve might turn to 
GSE securities to help to manage interest rates and the money 
supply. That combination of conflicting duties could prove very 
dangerous and Congress should avoid creating it.
    In other words, we should not follow the same legal recipe 
that led to the thrift crisis.
    That said, Mr. Chairman, I am pleased that we worked 
together to put forward a balanced panel for today's hearing. 
Fannie Mae and Freddie Mac will have an opportunity to educate 
us about their concerns related to the CBO study and H.R. 1409. 
We will also--for the first time--finally hear from an 
individual representing FM Watch, which was noticeably absent 
from last year's GSE roundtable.
    I additionally look forward to hearing the opinions of 
Martin Edwards with the National Association of Realtors, and 
James Miller, who headed OMB during the Reagan Administration.
    Several others also wanted to participate in today's 
hearing but could not do so. The National Association of 
Homebuilders, for example, supports a strong GSE regulatory 
system that balances safety and soundness concerns with mission 
fulfillment.
    Like me, it believes that the separation of powers among 
two regulators in the current system meets these objectives.
    The homeowners expressed additional dismay that H.R. 1409 
``ignores the extensive hearing record of the past year,'' and 
that it ``exacerbates'' the concerns that the group articulated 
about H.R. 3703 in the 106th Congress.
    AARP, a number of mayors, and others, have also contacted 
me to express their apprehensions about H.R. 1409. To ensure 
that our hearing reflects these views, I ask unanimous request, 
Mr. Chairman, to submit these materials into the record.
    In closing, Mr. Chairman, I share your desire to conduct 
effective oversight over the housing GSEs and to ensure that we 
maintain an appropriate and sufficiently strong supervisory 
system.
    If we decide to continue to pursue GSE reform in the 107th 
Congress, I also hope that we will follow a prudent course. 
Perhaps we could again use a roundtable discussion to identify 
the problems among the affected parties, reach consensus about 
a suitable course of action, and then, only if necessary, work 
to write legislation.
    Mr. Chairman, I have the unanimous consent request for the 
materials.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 87 in the appendix.]
    Chairman Baker. Without objection.
    I thank the gentleman.
    Ms. Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman.
    I would like to begin by thanking Chairman Baker and 
Ranking Member Kanjorski for holding this hearing and allowing 
the Members of this subcommittee the chance to hear the 
response of representatives of our housing GSEs to the CBO 
study recently released.
    Of late, it has become fashionable to question the 
continuing value of our housing GSEs, particularly Fannie Mae 
and Freddie Mac. Arguments abound as to whether these two 
entities are overstepping their bounds or, conversely, not 
doing enough.
    Is it mission creep that we must be aware of? Or are we 
concerned that the GSEs are not doing enough for the very 
people that they are designed to help?
    We have looked at this issue, at the issue of safety and 
soundness, and we have reviewed the merit of the implied 
Government backing caused by the line of credit at the 
Treasury. We have pondered the question of whether these 
institutions are too-big-to-fail.
    The issue of the day is the size and scope of the so-called 
Government subsidy provided to the GSEs, as calculated by the 
CBO, and whether or not the subsidy is being passed on to 
homebuyers.
    At the last hearing on this topic, a number of my 
colleagues raised concerns about the methodology used by CBO to 
calculate its latest estimate of $10.6 billion annual subsidy.
    While I acknowledge the validity of these concerns, I would 
also like to point out that when we get bogged down in the 
details of how this figure was reached, we obscured a larger 
point--that we need to be focused on ensuring that our rising 
home ownership rates survive the softening economy. And more 
importantly, that we continue to make strides in reaching our 
goals for increased home ownership rates among minorities.
    Last year, then-HUD Secretary Cuomo announced a new policy 
initiative to bring Afro-American and Latino home ownership up 
to 50 percent within 3 years. We are one-third of the way to 
that deadline.
    How are we doing? What steps have the GSEs taken to ensure 
that we get there? What can we in Congress do to encourage 
greater innovation to these entities in this process?
    These are the questions that we should be asking and issues 
that should be concerning us.
    Yesterday, the Appropriations Subcommittee on VA/HUD marked 
up a bill that, by all accounts, will be disastrous for 
housing. Earlier this year, the Republican leadership passed a 
tax cut that will place very serious limitations on spending 
for social programs.
    The result is that now, more than ever, we need to 
encourage the activities of the housing GSEs. Their mission has 
become more important than ever.
    I look forward to hearing the testimony of Fannie Mae and 
Freddie Mac and to working with my colleagues on this 
subcommittee to ensure that we move toward an environment in 
which the housing GSEs can continue to make strides in 
increasing home ownership opportunities for all Americans.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Velazquez.
    Mr. Bentsen, do you have an opening statement?
    Mr. Bentsen. [Nods in the negative.]
    Chairman Baker. Ms. Hooley.
    Ms. Hooley. Thank you, Mr. Chairman, and Ranking Member, 
for holding these hearings today.
    I couldn't agree with you more that Congress needs to 
continue working to increase home ownership for all Americans. 
While over two-thirds of American families presently own their 
own homes, overall, that's only 3.6 percent increase in the 
last decade. And you have to keep in mind that this last decade 
was the best decade we've ever had, an economic boom.
    But we still have a third not being able to share in the 
American dream.
    Mr. Chairman, it's no secret who the majority of these 
citizens are who can't afford their own home. The census 
clearly indicates that Americans who classify themselves as 
minorities are far less likely than white Americans to own a 
home.
    In the part of Oregon which I represent, these Americans 
tend to be of Hispanic origin, and although I know I'm hardly 
unique or special in that regard, Hispanics are the fastest-
growing minority in the United States, and ignoring their 
problems, including the ability to purchase a home, will only 
erode the quality of life for all of our citizens.
    As such, I don't believe that the stated goals of today's 
hearing genuinely addresses this problem. Clearly, our reliance 
on the GSEs to increase home ownership have helped get us where 
we are today.
    I'm hoping they can do more. I'm not sure that doing away 
with their charter or subsidies or enacting H.R. 1409 would 
ultimately lead to lower mortgage rates for our constituents, 
or grow the mortgage money available for minority and low-
income homebuyers.
    Moreover, I'm equally doubtful that any of these options is 
necessarily going to increase home-buying opportunities for 
minority Americans.
    That said, I'm sure that some of our witnesses will 
disagree and, in the interest of fairness, I look forward to 
hearing their views and I look forward to learning how we are 
going to increase home ownership for all Americans, 
particularly our minorities.
    Thank you.
    Chairman Baker. Thank you, Ms. Hooley.
    By time of arrival, Mr. Lucas, you're next for a statement. 
Do you have an opening statement, sir?
    Mr. Lucas. [Nods in the negative].
    Chairman Baker. Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    I want to thank you for the opportunity to be able to read 
a statement into the record. I welcome the opportunity to 
address the subcommittee on the important topic of housing and 
role played in housing finance by Fannie Mae and Freddie Mac.
    I take particular interest in today's hearing because of 
the far-reaching ramifications of this subcommittee's action. 
There are a handful of issues that most profoundly affect the 
quality of all of our lives. Housing is certainly high among 
that list.
    Home ownership and affordable housing is central to the 
fabric of a community and to building wealth and security among 
our constituents. Real people with real hopes, dreams and 
needs, people seeking to fulfill their desire for a piece of 
the American dream.
    The question is how and who is getting it done?
    In that vein, I thought it would be helpful to share my 
experience with Fannie Mae and the work they have been doing in 
my congressional district. After all, we can talk about 
affordable housing and getting people in homes. But the real 
goal for all of us is to make it happen.
    Last fall, Fannie Mae and the National Association of 
Hispanic Real Estate Professionals launched a close-the-gap 
campaign. That campaign is intended to address the home 
ownership gap between the United States population at large and 
Hispanic and African-Americans.
    The Anglo home ownership rate is currently estimated to be 
at 73.9 percent, outpacing the Hispanic and African-American 
home ownership rates by as much as 26.4 percent to 26.1 
percent, respectively.
    To diminish that gap in my district alone, Fannie Mae this 
spring provided $29.4 million in mortgage financing to 352 
families to help ensure that home mortgage money was available 
at the lowest price.
    As of March, 2001, Fannie Mae has bought or guaranteed 
$606.9 million in mortgage loans with 10,443 families served.
    Mr. Chairman, as a former business owner, I know that our 
Fannie Mae housing is good business. Its charter as drafted by 
Congress was designed to give it specific competitive 
advantages as well as restrictions.
    As an elected representative, I know that my constituents' 
housing needs are being addressed by the diligent work of 
Fannie Mae and Freddie Mac.
    Can GSEs do more?
    Certainly. And I will continue to call on them to do so. 
Likewise, as a purchaser of mortgages, Fannie Mae and Freddie 
Mac need the primary market to generate those loans. I will, 
therefore, look to lenders to keep pace with changing 
demographics and the credit needs of our communities.
    Mr. Chairman, I know that the time has run out. But I would 
like to ask that the entire statement that I have prepared be 
read into the minutes.
    [The prepared statement of Hon. Ruben Hinojosa can be found 
on page 83 in the appendix.]
    Chairman Baker. Without objection.
    Mr. Hinojosa. Thank you.
    Chairman Baker. Thank you, Mr. Hinojosa.
    Ms. Jones, do you have an opening statement?
    Ms. Jones. Thank you, Mr. Chairman, I sure do.
    I'd like to say good morning to my Chairperson, Mr. Baker, 
Ranking Member Kanjorski, and Members of the subcommittee. I 
seek unanimous consent that my full statement be included in 
the record.
    Chairman Baker. Without objection.
    Ms. Jones. We're here this morning to review another bill, 
H.R. 1409, that seeks to strengthen Federal regulation, 
supervision of Fannie Mae and Freddie Mac.
    Many of us have been here before. We started with safety 
and soundness, then to transparency, mission creep, validation 
of subsidies, to strengthening Federal regulation.
    I want to note at the onset that I feel that it's imprudent 
to offer new regulatory regimes when we've not allowed the 
existing schemes and processes to work.
    On what basis do we abandon the ship on HUD and fail to set 
sail in new, untested waters with the Federal Reserve Board?
    Mr. Chairman, I do not support efforts to increase the 
regulatory burden placed on GSEs, although I fully respect your 
decision to do so, burdens that will ultimately be passed on to 
customers.
    If the information suggests that the GSEs have not done 
what they are required to do, let's fix it and move on. If the 
GSEs, however, are on track and accomplishing their mission 
again, let us move on.
    My concerns relative to this legislation are many. 
Primarily, I fail to see the need to transfer housing policy to 
the Federal Reserve Board. I believe the Fed has enough 
responsibilities in simply handling monetary policy and working 
with banking institutions relative to improving CRA.
    Moreover, this bill grants HUD authority over GSE housing 
goals, while yet basically transfers all housing powers to the 
Federal Reserve. One or the other ought to be in the same 
house.
    It provides bank regulatory extensive powers over housing 
and approving new GSE business activities. These new powers do 
not mesh with me.
    What historical knowledge does the Fed possess that will 
make it more effective in addressing housing issues of low- to 
moderate-income persons and minorities?
    In essence, the Fed is an inappropriate regulator in this 
area.
    Many of us on this Committee remember and sat through eight 
previous GSE hearings in which we examined with great detail 
Fannie Mae and Freddie Mac. From those hearings we examined 
safety and soundness to an exhaustive degree.
    Afterwards, Fannie and Freddie Mac made pledges themselves 
to six voluntary commitments. For every one of these 
commitments, they have either completed or will complete. These 
commitments put them at the forefront of financial 
organizations.
    I fear that H.R. 1409 does little to help or improve upon 
the GSEs' ability to fulfill their housing mission. Their 
mission is an important one and I'm not concerned about market 
share wars, but I'm concerned about affordable housing in my 
district and across this country, particularly special housing 
needs of the elderly, home ownership for those who seek the 
American dream.
    I know I've run out of time, Mr. Chairman. I submit the 
rest of my statement for the record and would hope by the time 
we complete this hearing and the other ten or so hearings we've 
had, that we will get back to allowing Freddie Mac and Fannie 
Mae to meet the mission that they were originally set in place 
to do.
    [The prepared statement of Hon. Stephanie T. Jones can be 
found on page 85 in the appendix.]
    Chairman Baker. The statement will be inserted in the 
record, without objection, as will all Members' statements.
    Ms. Jones. Thanks, Mr. Chairman.
    Chairman Baker. Mr. Israel, did you have a statement?
    Mr. Israel. Thank you, Mr. Chairman.
    Let me state again that I have enjoyed the opportunity to 
learn about your concerns for this issue. At the same time, I 
believe that Fannie Mae and Freddie Mac are true American 
success stories, created by Congress to ensure that Americans 
have access to low-cost mortgage funds. Fannie Mae and Freddie 
Mac help millions of Americans, including many in my district, 
achieve the dream of home ownership.
    At each and every hearing of this subcommittee, I have 
commented that, while we ought to explore these concerns, and 
while there is always room for improvement, we should not 
hinder Fannie Mae and Freddie Mac's ability to perform their 
core competency of creating affordable housing opportunities.
    Mr. Chairman, I wish to repeat that refrain this afternoon.
    I'm pleased that former OMB director James Miller will be 
here to testify today and I look forward to that testimony. In 
fact, I have noted that Dr. Miller's study estimated total 
interest rate savings to America's families to be between $8 
billion and $23 billion a year, compared to an annual funding 
advantage held by the GSEs of between $2.3 billion to $7 
billion.
    He concludes in this study, and I quote: ``Even using the 
lowest estimate of consumer benefits and the highest estimate 
of the funding advantage in our range of estimates, the value 
of the consumer interest cost savings resulting from Freddie 
Mac and Fannie Mae's activities significantly exceeds the 
highest estimates of their funding advantage.''
    I also believe it's important to note that on calculating 
the benefits that the GSEs receive, our own CBO may have failed 
to calculate the value Fannie Mae and Freddie Mac provide to 
American homeowners.
    In its calculations, CBO measures all of the costs, but 
only a portion of the benefits provided to consumers. For 
example, CBO concedes that it did not attempt to measure 
important benefits the GSEs provide, including their 
fulfillment of their statutory affordable housing goals, their 
investment in new mortgage products and technology innovations, 
and their continued commitment to increase minority home 
ownership.
    In conclusion, we should be mindful of the important place 
Fannie Mae and Freddie Mac hold in the mortgage finance market 
before passing legislation or subjecting them to further 
unnecessary scrutiny which will only serve to make it more 
difficult for them to continue fulfilling their mission.
    Again, we should always be mindful of various concerns. We 
should always seek improvements. But we should not inhibit 
these important GSEs from performing their core competency of 
creating affordable housing for my constituents and for all of 
our constituents.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, sir.
    Mr. Shows, do you have an opening statement?
    Mr. Shows. [Nods in the negative.]
    Chairman Baker. Mr. Moore.
    Mr. Moore. [Nods in the negative.]
    Chairman Baker. If no other Member has an opening 
statement, we'll proceed to our first panel.
    I'd like to welcome here today individuals who are 
certainly no stranger to the issue.
    We have representing Fannie Mae, the Vice President and 
Chief Financial Officer, Mr. Timothy Howard, as well as the 
Senior Vice President for Government Relations from Freddie 
Mac, Mr. Mitch Delk.
    Mr. Howard, please proceed at your tempo.

STATEMENT OF TIMOTHY HOWARD, EXECUTIVE VICE PRESIDENT AND CHIEF 
                 FINANCIAL OFFICER, FANNIE MAE

    Mr. Howard. Thank you. Thank you, Chairman Baker, Ranking 
Member Kanjorski, and Members of the subcommittee. My name is 
Timothy Howard. I'm Executive Vice President and Chief 
Financial Officer of Fannie Mae and a member of Fannie Mae's 
office of the chairman.
    I appreciate this opportunity to continue our dialogue.
    I've submitted written testimony, including our perspective 
on the recent CBO study regarding Freddie Mac and Fannie Mae, 
with an appendix providing our detailed response to the study.
    To sum up my testimony, I'll briefly make three points this 
afternoon.
    First, housing is a bulwark of our economy. The housing and 
mortgage market today is the strongest, most stable sector of 
the economy. It appears to be keeping the entire economy from 
falling into recession.
    The recent strong appreciation in home values has boosted 
the average homeowner's net worth. In addition, we estimate 
that homeowners refinancing their mortgages to benefit from 
falling interest rates or to take some equity out of their 
homes is pumping an additional $40 billion of consumer spending 
into the economy.
    Given the success of the American housing system and record 
home ownership, some theorists have begun to question whether 
this country is over-housed.
    We would forcefully assert the contrary.
    Housing is a powerful force in the economy precisely 
because the demand for housing continues to be so strong. 
Recent census data indicates that, if anything, we are heading 
toward a housing shortage, as demand outstrips supply.
    So the most important issue is not whether the country is 
over-housed, but how to keep us from being under-housed. Which 
leads to my second point.
    The housing sector depends on a strong, effective Fannie 
Mae.
    Under our congressional charter, Fannie Mae's job is to 
ensure a steady flow of low-cost mortgage funds to communities 
at all times under all economic conditions, even when other 
financial institutions choose to withdraw from the market.
    This was never more apparent than during the credit crunch 
of 1998, when Fannie Mae and Freddie Mac greatly increased 
their mortgage purchases, making sure that homebuyers had 
access to the lowest rates in a generation, at a time when many 
borrowers had no access to credit at all.
    Today, the housing sector is counting on us for another 
reason--our unique focus on providing low-cost financing to 
historically under-served families, including minorities, 
families of modest means, women-headed households, new 
Americans, and other groups.
    The home ownership rate for these Americans is still around 
17 percent lower than the national rate. And according to the 
new census, a key driver in the potential housing shortage is a 
projected boom in immigration and minority household formation.
    These families are Fannie Mae's bread and butter. Indeed, 
no company in America provides more home-buying funds for 
minority, lower income, and other historically under-served 
families than we do.
    In 1994, we pledged to provide $1 trillion by the end of 
the year 2000 to help 10 million under-served families own or 
rent a home.
    Last year, we met that pledge early and immediately 
launched our $2 trillion American dream commitment to help 18 
million under-served families during this decade.
    Within that plan, we will provide $420 billion specifically 
to help 3 million minority families. These commitments have 
transformed our business, making Fannie Mae the largest 
affordable housing company in America.
    Today, more than three-quarters of our business goes to 
families targeted under these commitments. We would be proud to 
compare our record of expanding equal housing opportunity with 
any other financial institution in America.
    And that leads to my third and final point today.
    Fannie Mae's net benefit to consumers can be measured every 
day. From our point of view, the best measures of the public 
benefit of Fannie Mae are the spread between jumbo and 
conventional mortgage rates, currently worth up to $21,000 over 
the full life of the loan, how many consumers benefit from our 
low-cost financing and what those benefits cost the Government, 
which, in fact, is zero.
    Our housing finance system is operating at peak 
performance. It's the envy of the world. The economy and 
millions of families depend on it. This means that any measure 
of our public benefit, or any proposed change to the housing 
finance system, must be based on indisputable, irrefutable 
analysis.
    By that standard, we believe it is fully justifiable to 
closely examine both the approach and the results of the most 
recent CBO study.
    Now let me preface my comments on that study by emphasizing 
our great respect for the Congressional Budget Office, its 
leadership, its public service in providing Congress with 
timely and non-partisan analysis.
    In attempting to calculate a GSE subsidy, which, by 
definition, can only be theoretical, the CBO has tried to do 
something that is unique and extremely difficult. We believe, 
quite candidly, that the CBO came up short in this effort.
    Let me mention just five points that capture the bulk of 
our concerns with the study.
    First, we think its fundamental premise is flawed. CBO has 
attempted to quantify the value of a subsidy that does not 
explicitly exist. That's problematic by definition. Fannie Mae 
does not receive a dollar of Federal funds. Put another way, if 
the Government were to revoke Fannie Mae's charter, it would 
not recover a single subsidy dollar. But homebuyers would 
certainly face higher mortgage rates.
    Second, the Government's methodology for valuing express 
Government guarantees is detailed in the Federal Credit Reform 
Act of 1990, which can be used as a point of comparison.
    When Price Waterhouse did a study using the Federal credit 
reform approach, it found that the cost to the Government if 
Fannie Mae mortgage-backed securities had an explicit guarantee 
would be zero.
    Third, the study used the wrong data to calculate our 
funding benefits. It compared the yields on Fannie Mae and 
Freddie Mac debt to those of both A-rated and AA-rated 
financial companies, even though S&P has rated both Fannie Mae 
and Freddie Mac AA-minus on a risk to the Government basis.
    CBO also misstated the amount of short-term debt the two 
companies issue. Correcting these two errors reduces the 
funding subsidy in 2000 from $6 billion to between $3 billion 
and $3.6 billion, and reduces the retained subsidy to virtually 
zero.
    Fourth, the study overstated the benefits from our 
mortgage-backed securities business. It concluded that Fannie 
Mae and Freddie Mac receive a $3.6 billion benefit from our 
MBS. But later in the report, conceded that most of this 
benefit goes directly to mortgage lenders and not to us. 
Correcting this error would reduce the gross subsidy by $3 
billion.
    And fifth, the study understates our benefits to consumers. 
It takes the benefit to homebuyers of lower mortgage rates and 
applies that only to mortgages that Fannie Mae and Freddie Mac 
owner-securitize. Because of market competition, however, every 
borrower eligible for a conforming mortgage enjoys lower rates, 
regardless of whether their mortgage is part of a transaction 
that involves Fannie Mae or Freddie Mac directly.
    Correcting all of these assumptions reverses the conclusion 
of the CBO study, erasing any net subsidy to Fannie Mae and 
Freddie Mac and taking our net benefit to consumers even 
higher.
    But let me make one final point.
    Even if one fully accepts the CBO's methodology and 
results, a benefit pass-through rate of 63 percent, which is 
the CBO's gross subsidy less the 37 percent retained subsidy, 
still would be quite high for any direct Government subsidy.
    This discussion, then, is really about whether we pass on 
two-thirds of the benefits we receive, as CBO asserts, or a 
higher percentage, as we would claim.
    Arguably, in either case, we are doing what Congress 
intended us to do. We are delivering billions of dollars in 
public benefits without using a penny of public funds.
    The American housing finance system is the best in history 
and the best in the world, in large part because of the wise 
decision Congress made in 1968 to charter Fannie Mae as a 
private company.
    We look forward to doing whatever we can to help make this 
great system even better. And I thank you once again for the 
opportunity to be here today.
    [The prepared statement of Timothy J. Howard can be found 
on page 101 in the appendix.]
    Chairman Baker. Thank you, Mr. Howard.
    Mr. Delk, welcome.

 STATEMENT OF MITCHELL DELK, SENIOR VICE PRESIDENT, GOVERNMENT 
                     RELATIONS, FREDDIE MAC

    Mr. Delk. Thank you, Chairman Baker, Mr. Kanjorski, and 
other Members of the subcommittee.
    I am Mitchell Delk, Senior Vice President of Government 
Relations at Freddie Mac.
    It's a pleasure to be here with you today.
    Freddie Mac is in a great business--financing homes in 
America. Over the past 6 years, the home ownership rate has 
risen across all income, racial and ethnic groups. Minority 
families have experienced the fastest rate of growth.
    For most families, their home is their most valuable asset 
and greatest source of financial security.
    Chairman Baker. Mr. Delk, if you could pull the mike a 
little closer. It's not real sensitive and we can't hear well.
    Mr. Delk. Home ownership also plays a critical role in 
stabilizing our economy. Throughout 2001, the Nation's robust 
housing market has defied the softening evident in other parts 
of the economy.
    Our system works so well, we often take it for granted. 
With Freddie Mac and Fannie Mae operating at the heart of the 
Nation's housing finance system, there is never a shortage of 
mortgage money. America's homebuyers enjoy the lowest possible 
rates. And they choose from an array of products.
    Former Office of Management and Budget Director Jim Miller 
and economist Jim Pearce estimate that our activities save 
families up to $23 billion a year in mortgage interest--at no 
cost to the Government, I might add. They conclude that the 
benefits we bring consumers far outweigh the value derived from 
our charters.
    This is not the conclusion reached by CBO. Nor, however, is 
it the first time CBO has been wrong.
    Recently, CBO conceded having made errors totaling $2.1 
billion when it first studied the issue in 1996. This is the 
exact amount CBO accused Freddie Mac and Fannie Mae of failing 
to pass on to homebuyers.
    Unfortunately, CBO's latest report is another contrived 
academic exercise. CBO's casual use of the term, ``subsidy,'' 
suggests that Freddie Mac receives a direct outlay of Federal 
funds.
    In fact, the corporation has never received a cent of 
Federal money and is one of the Nation's largest taxpayers.
    CBO's new report is based on wrong assumptions and flawed 
analysis. Simply correcting four of the largest errors would 
completely reverse the conclusion CBO appears determined to 
reach.
    First, CBO unfairly compares our funding costs to companies 
with lower credit ratings. Of the 70 firms considered, only 
eight had ratings comparable to Freddie Mac's S&P risk-to-the-
government rating of AA-minus.
    Let me repeat this, please:
    Of the 70 firms considered, only eight had ratings 
comparable to Freddie Mac's S&P risk-to-the-government rating 
of AA-minus.
    Second, CBO grossly over-estimates our share of long-term 
debt, further inflating our funding advantage.
    Third, CBO uses an arbitrarily low estimate of the 
difference between the conforming and jumbo mortgage rates. 
CBO's estimate of 22 basis points is well below the range 
documented in numerous studies. CBO itself used 35 basis points 
in 1996.
    Fourth, CBO credits Freddie Mac and Fannie Mae with 
reducing mortgage rates only on loans we actually purchase.
    In fact, thanks to our activities, all conforming market 
borrowers enjoy lower rates, whether we buy the loan or it's 
held in a bank portfolio.
    These errors and omissions disqualify CBO's report from 
serious consideration. Not surprisingly, however, our critics 
have seized on it in an attempt to impugn us. Their latest 
collection of half-truths and distortions shamefully 
misrepresents our service to low-income and minority families.
    Apparently, our critics haven't read Freddie Mac's annual 
report to Congress, which documents our outstanding support for 
affordable lending. I'd like to submit our report for the 
record.
    Last year, 58 percent of Freddie Mac's business financed 
housing for one million families with low incomes or living in 
under-served neighborhoods. And nearly 14 percent of our 
business financed homes for minority families.
    In addition, Freddie Mac is the unquestioned leader in 
combatting predatory lending. Our critics cannot begin to match 
such a strong track record.
    Mr. Chairman, today you and Members of the subcommittee 
have a unique opportunity to question and assess the record of 
the subprime lenders, mega-banks and mortgage insurers 
criticizing us.
    Everyone knows they are good at manufacturing sensational 
reports every time you hold a hearing. But how good is their 
service to low-income and minority borrowers and their efforts 
to combat predatory lending?
    I predict their spin is more potent than their performance.
    Now I'd like to say a few words about Freddie Mac's 
financial condition and regulatory oversight.
    Freddie Mac is unquestionably safe and sound. The six 
voluntary commitments we announced last October with Members of 
the subcommittee, and which were fully implemented this spring, 
put Freddie Mac at the vanguard of world financial practices.
    Effective regulatory oversight is an essential complement 
to our strong financial position.
    We believe that the regulatory structure set forth in the 
GSE Act is fundamentally sound.
    The regulatory structure ties capital to risk. It 
establishes a comprehensive set of enforcement authorities. And 
it provides substantive oversight without unnecessary 
intrusion. This enables Freddie Mac to respond aggressively to 
market developments with innovations to meet our mission.
    Mr. Chairman, in H.R. 1409, you propose changing the 
location of Freddie Mac's safety-and-soundness regulation. 
Given the gravity of this issue, any proposal to change the 
regulator should meet the following criteria:
    First, the proposed entity must be highly competent and 
credible. It must have the confidence of Congress, the public, 
and the markets.
    Second, it should support housing as an important public 
policy objective.
    And finally, the entity should enjoy bipartisan support.
    Mr. Chairman, Members of the subcommittee, I appreciate the 
opportunity to appear before you today. I look forward to 
working with you to secure the future of America's housing 
finance system and, with it, the dreams of millions of 
America's families.
    Thank you.
    [The prepared statement of Mitchell Delk can be found on 
page 112 in the appendix.]
    Chairman Baker. Thank you, Mr. Delk and Mr. Howard.
    Last fall, we agreed, voluntarily or otherwise, to the 
terms for certain disclosures. And as part of that press 
conference, there was general agreement to proceed with the, 
quote ``regulatory piece.''
    H.R. 1409 represents my take at it, which it's pretty 
clear, neither of the organizations seems to be enthusiastic 
about.
    But I would wonder, since the date of that agreement and 
the public statement that we want to work on a regulatory 
reform that we would both like to have appropriate regulatory 
oversight, do either of you intend to forward any 
recommendation to me with regard to modifications to the 
current regulatory structure?
    Mr. Delk. Mr. Chairman, we'll be glad to submit to you in 
writing comments on H.R. 1409, and our views on the current 
regulatory structure.
    As I indicated in the oral testimony, we believe that the 
existing structure is a credible structure. Notwithstanding 
that, as I indicated also, we'd like to work with you and other 
Members of the subcommittee to address the concerns of the 
subcommittee.
    Chairman Baker. Well, I don't think I need additional 
comment on H.R. 1409. I believe I've read enough about that. 
But my real question is, do you think the status quo is 
sufficient, or will you recommend any modification at all?
    Mr. Delk. We think the status quo is sufficient.
    Chairman Baker. OK. Contrary to the statement of last fall 
when we all agreed that we needed to have a stronger regulator.
    Is that correct, Mr. Howard?
    Mr. Howard. Well, let me first say that we would be pleased 
to continue discussions with you, Ranking Member Kanjorski, and 
others, on ideas for improving still further the efficiency of 
the housing finance system.
    We think, though, that given the high level of efficiency 
in the system, proposals for change face a high hurdle of 
clearance.
    Chairman Baker. Let me move on because I will enforce the 
5-minute rule today given the number of Members here today.
    Would that mean, then, that when OFHEO's OMB stress test is 
finally promulgated, you will agree to whatever the outcome of 
that test is because you believe OFHEO to be a good regulator?
    Mr. Howard. We have been engaged in discussions with a 
number of parties about the goals of the risk-based capital 
standard.
    And we believe that OFHEO believes that it should attempt 
to, as closely as possible in the model, capture the risks as 
they exist in our business.
    Chairman Baker. But what I'm getting at is, if you believe 
OFHEO is a competent regulator and no change is required at 
all, and they finally, after a decade-long struggle, produce 
the long-awaited stress test--let me rephrase.
    Have either of your organizations written the letter to OMB 
asking for an extension of the promulgation period from the 
current July 16th, which is a delay from the initial date, to 
any subsequent date?
    Mr. Howard. We have urged OMB to take the time necessary to 
make sure that the risk-based capital test that OFHEO is 
working on is workable and properly reflects the risks that we 
take.
    Chairman Baker. Did that communication include an extension 
of the date?
    Mr. Howard. We did send OMB a letter several weeks ago 
requesting an extension.
    Chairman Baker. Mr. Delk, did Freddie Mac do the same?
    Mr. Delk. We did. Let me, if I can, follow up. I know time 
is of the essence.
    I think you know, Mr. Chairman, for years, Freddie Mac has 
embraced the concept of risk-based capital. We have managed our 
company by a risk-based capital stress test for over 15 years. 
We supported the concept in the 1992 legislation and we're 
anxiously awaiting the completion of the risk-based capital 
rule.
    Having said that, I think all concerned parties want to 
make sure, in fact, that the rule, in fact, does capture risk 
relative to the amount of capital we have.
    Or said another way, that in fact, the capital requirement 
is, in fact, aligned with the risk we take. And it's certainly 
going to take some time for OMB to make this assessment. We all 
want to make sure that there are not unintended consequences. 
But I don't think that that in any way undermines our support 
for the proposal.
    Chairman Baker. Well, I was only making the point that if 
we are defending OFHEO here today as the premier regulator of 
the most sophisticated financial institutions in the modern 
world, and they finally come up with a decade-long weighted 
stress test to adequately assess risk, after the review by OMB, 
that there would be resistance to either enterprise in adopting 
whatever that regulatory structure might be.
    That's my hope.
    I would formally request copies of the correspondence sent 
to OMB requesting the extension of date.
    One last question before I run out of time. Mr. Howard, I 
understand that Fannie is now engaged in the distribution and 
sale of debt securities in thousand-dollar denominational 
amounts.
    I have concerns about that because of the impact of 
liquidity potentially on community and independent banks.
    Does Fannie intend to sell those thousand-dollar 
denominational notes directly to investors?
    Mr. Howard. Congressman, all of our debt, both debt that 
goes to retail investors and debt that goes to institutional 
investors, is available at denominations as low as a thousand 
dollars.
    It's been true for retail investors since late 1996. We 
have made no change in the denomination of the investment 
product since that time.
    What you may be referring to is, a few months ago, we took 
some steps to make the pricing of our retail securities more 
transparent to investors by posting visible rates that retail 
investors could compare with alternative fixed income 
instruments on a screen available to brokers and to retail 
investors.
    So they had a better way of assessing the quality of 
securities that we've been selling since the early 1980s.
    Chairman Baker. But the distinction between having a note 
in thousand-dollar denominations and the total book value of a 
sale, that's a distinction of some significance.
    For example, can I purchase directly from Fannie Mae a 
thousand-dollar denominational debt security today?
    Mr. Howard. You could not.
    Chairman Baker. And why would that be?
    Chairman Howard. We do not sell directly to individual 
investors.
    Mr. Baker. Well, that's what troubles me because on page 46 
of your offering circular, sales directly to investors.
    We may also sell debt securities directly to investors on 
our own behalf. We will not pay a commission to any dealer on 
direct sales.
    I'm at the end of my time. I don't want to take any more 
time today to get into this exchange. Please just forward at 
your leisure an explanation of what appears to be a conflict in 
the issuing circular and your understanding of the matter.
    Thank you very much.
    Chairman Howard. I would be pleased to do that.
    [The information referred to can be found on page 110 in 
the appendix.]
    Mr. Baker. Mr. Kanjorski.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Howard, what is your experience with OFHEO as a 
regulator? Do you think that finally, they have matured to the 
point where they are starting to perform in accordance with the 
mission that the Congress gave them?
    Mr. Howard. Let me break that into two parts, Congressman.
    First of all, I have been very impressed with the quality 
and thoroughness of the work done by the examination staff. I 
find them to be very well informed, highly professional, and 
committed to the work they do.
    On the risk-based capital standard, the agency has set 
itself an extremely difficult task, which is creating a 
detailed model itself of two businesses engaged in enterprises 
that are complex.
    We are on record as saying that we thought the initial 
choice that was made by the regulator to do its own model 
rather than to use models developed by the enterprises as other 
banking regulators said they would do, was problematic.
    And I think that that has contributed to the delay in 
completing the risk-based capital standard.
    Having said that, it now appears as if the OFHEO capital 
standards group is making progress on using what's inherently a 
cumbersome and difficult process to produce a standard that we 
hope will be workable.
    And when we met with OMB, we wanted to make all parties 
aware of the benefit to be gained by making sure that this 
approach did properly model our risk, because it will affect 
our behavior and will affect the availability of credit 
throughout the mortgage system.
    Mr. Kanjorski. How soon do you think that the standards and 
the models established by the regulator are going to be 
complied with and arrived at?
    Or does Congress have to take some action?
    Mr. Howard. Based on what I have currently heard, my belief 
is that a regulation could be put out within a 90-day period, 
having been subjected to sufficient testing to let OFHEO and 
OMB know whether there are, in fact, any unintended 
consequences from putting this rule in effect.
    Mr. Kanjorski. Would that have been vetted by both Fannie 
Mae and Freddie Mac?
    Mr. Howard. Vetted may not be the correct term. It would be 
useful for us to be able to compare the results of the OFHEO 
model with our own internal model to make sure that we are 
treating risk in a way that is consistent.
    Mr. Kanjorski. You're not in that process right now, but 
you will be as soon as the----
    Mr. Howard. We are not in that process directly at the 
moment.
    Mr. Kanjorski. Mr. Delk, do you have anything to add in 
regard to the regulations being promulgated by the regulator?
    Mr. Delk. Not much more than I said earlier, Mr. Kanjorski, 
other than to say that our conversations with OMB have been 
intended to ensure that there are no unintended consequences.
    This is a very complex rule. It's the first of its kind. 
But, clearly, it is the way to assess and to determine capital 
adequacy based on the risk you take.
    And so, I concur with Mr. Howard. I think that this will be 
completed imminently. I think everyone wants to complete it. 
But, again, I think no one wants unintended consequences 
because it will be a model for other financial institutions.
    Mr. Kanjorski. Do you concur with Mr. Howard's expressed 
evaluation of the regulators?
    Mr. Delk. Yes. I would emphasize, I think, their 
examination staff is probably unparalleled. They have an 
individual heading the examination staff who has years of 
experience at the comptroller of the currency.
    I think they recently announced that they are bringing in a 
deputy director who is an individual who had extensive 
experience, in fact, retired from the OCC.
    So I think what they have done is put together a very good 
staff and I think Mr. Falcon deserves to be complimented for 
the staff he's put together.
    Mr. Kanjorski. In my opening statement, you heard me 
indicate my dissatisfaction with the Federal Reserve as a 
prospective regulator as established under H.R. 1409.
    I wonder if in the 30 seconds remaining, either one or both 
of you could tell me, do you feel that we should look at a new 
regulator in the nature of the Federal Reserve, or should we 
stay with the existing regulator and just proceed?
    Mr. Delk. Let me preface any comment on that question by 
saying that the Federal Reserve is the most august body 
regulating financial institutions in the world.
    Having said that, I laid out in my opening statement three 
criteria that we would suggest that the Committee or 
subcommittee look at in considering whether a new regulator is 
warranted.
    The first was that it be highly competent and credible. 
Unquestionably, the Federal Reserve is highly competent and 
credible.
    The second was, does it support housing as an important 
public policy objective?
    I think issues can be raised on whether, in fact, the 
Federal Reserve does support housing as a public policy 
objective. In fact, many economists at the Federal Reserve have 
raised the issue of whether we have too much investment in 
housing now.
    That clearly is not Freddie Mac's view, but I think that 
has been a concern. So I think that would raise at least issues 
on whether they would be a regulator of choice. And finally, I 
said the regulators should enjoy bipartisan support.
    We've heard today through opening statements a number of 
concerns through Members on the subcommittee about the Federal 
Reserve. So I'm not in a position to say whether they would or 
wouldn't. But at least under this criteria, at least two of the 
criteria, we raise serious concerns on whether that would be an 
appropriate policy choice.
    Mr. Kanjorski. Thank you, Mr. Delk.
    Mr. Howard.
    Mr. Howard. We have similar criteria to what Mr. Delk 
outlined and believe it is at Congress' discretion to assess a 
regulatory structure and make sure that it's satisfied.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Kanjorski.
    Mr. Castle.
    Mr. Castle. Thank you very much, Mr. Chairman.
    I was just checking, but I wanted to ask questions about 
your legislation. That is part of this hearing, as I understand 
it.
    First of all, gentlemen, I have a great deal of respect for 
both of your organizations. I think you do a tremendous amount 
to aid with the financing of housing across this country and 
have helped in many ways.
    That doesn't mean it's perfect, however. That doesn't mean 
that there couldn't be things that could be done better.
    I'd be interested in your comments on the legislation of 
Chairman Baker with respect to the regulation, the possible 
change from the Office of Federal Housing Oversight to the 
Federal Reserve Board.
    I assume you're both adamantly opposed to that. Is that 
correct? Or your organizations are adamantly opposed to it, I 
should say.
    Not you personally.
    Mr. Howard. I think it is incorrect to say that we are 
adamantly opposed to it.
    Mr. Castle. Can you do me a favor? Can both of you hold the 
microphones a little bit closer, or bring them closer to you?
    Thank you.
    Mr. Howard. I think it would be incorrect to characterize 
our position as adamant opposition to the Federal Reserve as a 
regulator.
    We do, as Mr. Delk mentioned, have some concerns about 
their commitment to our housing mission. Assuming that an 
adequate division of responsibilities can be worked out between 
a mission regulator and the Federal Reserve as a potential 
safety and soundness regulator, the Fed has enormous 
credibility and respect on the safety and soundness front.
    Mr. Castle. OK.
    Mr. Delk.
    Mr. Delk. I don't think I could add much more, Mr. Castle. 
I went through the criteria which we, in fact, think or would 
recommend that the subcommittee go through. And I do think that 
there are concerns regarding the Fed's interest in and 
commitment to housing.
    Again, having said that, they are clearly the world's 
premier financial institution regulator. Anyone you canvassed 
worldwide would agree with that assessment.
    So I think it makes it a difficult call. But the balance I 
think swings to the point that it would raise serious policy 
concerns on whether they would be a regulator of choice.
    But having said that, again, we're not adamantly against 
it. But it does raise policy issues and we think that they are 
very serious policy issues.
    Mr. Castle. I don't have a particular opinion, either, at 
this point. Nor do I have anywhere near the knowledge to be 
able to form an opinion.
    But it just seems to me that this is a very significant 
question of very significant players in this field and it's 
something that we should all be paying attention to to see if 
we can come up with the right solution.
    Mr. Howard. And we believe that given the importance of the 
role that we play in the housing finance system, it is 
absolutely critical that our oversight committee be totally 
confident in the regulator that oversees our activities.
    Mr. Castle. Let me change subjects for a moment. And, 
again, I'm not that familiar with all of this, but I'm looking 
at the CBO testimony of May 23rd on the Federal subsidies for 
the housing GSEs.
    My staff prepared a report which summarizes some of the 
things which reveals the value of Government subsidies to 
Fannie and Freddie as $10.6 billion a year with $3.9 billion, 
or 37 percent of that, being passed through to its shareholders 
instead of to mortgage borrowers.
    We all know--I mean, there are arguments about whether 
you're a Government agency at all or not. There are arguments 
about whether there is truly a subsidy or not, which you pretty 
much made here in your statements in answering the questions so 
far.
    And again, I'm not an expert on every word that's in here. 
But I assume that you disagree entirely with the underlying 
premise of what the CBO has said. You're not arguing about the 
numbers or anything of that nature. You disagree, because there 
are no direct subsidies, you disagree that there's anything 
that should be able to be encapsulated in terms of numbers one 
way or another.
    Am I saying that correctly?
    Mr. Howard. Let me attempt to be as clear as I can on this.
    The CBO method, because Fannie Mae does not receive direct 
Federal outlays, the method is inherently theoretical. They 
build a construct and attempt to evaluate in dollars the 
benefits that the charter conveys.
    Mr. Castle. What you said in your opening.
    Mr. Howard. Because it's a theoretical approach, it is 
critically dependent on the assumptions that are made. And 
those assumptions can be made in a number of different ways 
which are reasonable, but which, if made in different ways, 
produce very different results.
    So I do think it's incorrect to lock into one particular 
set of assumptions and say this is the right number and 
furthermore, that this number, which is done in a theoretical 
construct, has policy implications, because by changing those 
assumptions, we think that the CBO made the assumptions 
incorrectly in cases having to do with our debt cost.
    Mr. Castle. But you're not saying, because it's a 
theoretical construct, it does not mean that it's completely 
invalid.
    You're suggesting that the numbers may be invalid because 
you don't agree with them. But you're not suggesting that the 
whole idea of doing a theoretical construct because of your 
long-standing history with the Federal Government is 
necessarily completely wrong.
    Or am I misstating? I want to make sure that I'm stating it 
correctly.
    Mr. Howard. I think you are stating it correctly. We 
completely agree that the charter that Congress gave Fannie Mae 
and Freddie Mac has value and does convey a benefit to us.
    We believe that that benefit flows very directly through 
our two businesses to the intended recipients, which are 
homebuyers. And we think that the CBO construct is one way, but 
not the only way, and we don't think the best way, of 
quantifying that flow of benefits.
    Mr. Castle. I think I used up my time, Mr. Chairman. I 
meant to yield you some time, but I apologize.
    Chairman Baker. Mr. Bentsen, do you have questions?
    Mr. Bentsen. Thank you, Mr. Chairman.
    In his testimony before this subcommittee a month or so 
ago, Mr. Crippen, I think, made clear--and I apologize. I was 
reading through the transcript--made clear that you could 
believe CBO's subsidy arguments if you agreed with the 
assumptions that are in there.
    But, obviously, you all disagree with those set of 
assumptions. And I think that you make a very good point as 
well that--and I think we got Mr. Crippen to agree to this--
that in fact, there's not one dollar of outlay from the Federal 
Government or from the taxpayers that goes to do this.
    And furthermore, I think we got the agreement that even if 
you agreed with the assumptions on the ratings and the spreads 
and the like, that if you agreed with the $3.9 billion in the 
year 2000, that $1.2 billion of that could be associated with 
fees and taxes that are paid.
    And yet, Mr. Crippen also said at that time in the 
testimony that he probably did not believe that were the 
Federal Government to just go ahead and appropriate $1.2 
billion through some form of program, that we would be able to 
achieve the leverage that they otherwise found had been 
achieved.
    And I think that's important for the record here.
    I want to turn for a second to H.R. 1409 and ask you about 
a couple of provisions of it. And I don't want to focus on the 
question of whether the Federal Reserve is the appropriate 
regulator or not. There are some issues there and I'll wait for 
other witnesses to ask that.
    But what I'm curious about, in your review of H.R. 1409, 
particularly as it relates to regulation and enforcement, how 
does it comport to the Bank Holding Company Act or the Gramm-
Leach-Bliley Act?
    Does it treat, would the bill treat the GSEs in the same 
way in terms of things like cease and desist, receivership, and 
the like, as it would treat holding companies under the Bank 
Holding Company Act or Gramm-Leach-Bliley?
    Or does it give greater enforcement authority, comparably 
speaking, as it relates to the GSEs?
    Mr. Delk. Mr. Bentsen, let me not draw on my knowledge of 
the issue, but refer you to the GAO report that was 
commissioned by Chairman Baker.
    He requested GAO to look at this specific issue. And I 
think what GAO came back with, and I read this many, many 
times, nothing in that report suggests that there is a problem 
with the statutory enforcement structure that needs to be 
corrected.
    In fact, that GAO found, and let me quote from the report: 
``Based on each regulator's powers and authorities, it appears 
that each regulator has statutory tools available to address 
significant safety and soundness concerns.''
    So while there might be some differences, at the end of the 
day, and I think that I would argue that this is substantiated 
by the GAO study, OFHEO has the functional equivalent 
authorities or tools that it needs to ensure that we operate 
safely and soundly.
    Mr. Bentsen. But as you look at H.R. 1409, would you see 
H.R. 1409 as increasing the amount of regulation over the 
operations of Fannie Mae or Freddie Mac? And how would you 
compare that to the existing regulatory authority they have 
over other financial holding companies?
    Would you view it as more excessive, as going beyond what 
the Bank Holding Company Act provides for, or what Gramm-Leach-
Bliley provides for as it relates to other financial holding 
companies?
    Mr. Delk. I would argue that it, in fact, adds a lot of 
additional structure and oversight and involvement of the 
regulator that is, in fact, gratuitous.
    It's interesting also, if you think about the 1992 statute 
and the way it was structured, it was structured only 3 years 
after FIRREA and only 1 year after FIDICIA.
    And so, for anyone to argue, in fact, that Congress 
developed this in a vacuum I think is a little bit ludicrous.
    They had the value of those two statutes, the value of the 
experience of those two statutes, and I think that was, in 
fact, the model that was used.
    However, the structure was, in fact, created to, in fact, 
oversee two companies that are, in fact, quite different from 
financial institutions for many, many reasons.
    Mr. Bentsen. Thank you.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Bentsen.
    Mr. Barr, did you have questions?
    Mr. Barr. Thank you, Mr. Chairman.
    Mr. Howard, if you could, I know people use this term 
subsidy a great deal in talking about Fannie Mae and Freddie 
Mac.
    What exactly does that term mean? What is the subsidy? I 
was looking here recently at an article from the Wall Street 
Journal, a very complimentary article and I think a very nice 
article. And all of a sudden, in the middle of the article, 
they all of a sudden launch into the use of the term, subsidy.
    What exactly is the subsidy that people talk about in terms 
of your agencies?
    Mr. Howard. As I indicated in my opening statement, the 
term subsidy is used somewhat loosely in referring to the 
benefits that flow from our charter.
    Webster's definition of subsidy----
    Mr. Barr. Is any benefit that flows from a charter a 
subsidy?
    Mr. Howard. I would not call it a subsidy. But I wouldn't 
quibble with people who use that word to describe it. I just 
think using the term subsidy confuses the issue because, 
normally, a subsidy is a monetary outlay.
    And in this case, our benefit is not a direct transfer of 
funds that we can then direct at will.
    The benefit that we have is observable in the lower 
interest rates that attach themselves to loans that we can buy 
or guarantee versus loans that we can't.
    Mr. Barr. And you're not doing anything improper in that.
    Mr. Howard. I don't believe we are.
    Mr. Barr. Is it similar--I know a couple of years ago, 
particularly here in our work in this Committee, there was 
legislation that dealt with credit unions. And there was a lot 
of talk at that time that the credit unions receive a subsidy 
because of the way the tax laws work.
    Is that a subsidy in the same sense that people apply the 
term to Fannie Mae?
    Mr. Howard. I'm not sufficiently familiar with the credit 
union structure to be able to opine on that.
    Mitch, can you?
    Mr. Delk. Mr. Barr, I think it's a very complicated subject 
matter when you talk about subsidies. I'm not an economist, and 
so I really am not familiar with what they are referring to. 
And therefore, I use kind of the commoner's definition of 
subsidy, as was articulated by Mr. Howard.
    So, not being familiar with the credit union model, I don't 
know that I can opine on that.
    Mr. Barr. The point I'm trying to make, I tend to agree 
with what I think you're saying, that people bandy this term 
about. And I'm not sure that either people that bandy it about 
really understand it. Perhaps they use it in a way to try and 
draw some negative implication from it. I don't know.
    But I was just curious as to whether or not there really is 
something that you can grab onto and sink your teeth into.
    Mr. Delk. Let me add one thing to what I said.
    Mr. Barr. And I'm not sure there is.
    Mr. Delk. Let me add one point, if I can. I don't want to 
be disingenuous and insinuate that there are not benefits that 
accrue from the charter.
    Mr. Barr. No, I understand that, certainly. I understand 
that. And I think you all have been very forthcoming in that 
regard.
    Mr. Chairman, I'd yield whatever time I have remaining. I 
think you might have some additional areas of inquiry.
    Chairman Baker. Thank you, Mr. Barr.
    On the question of subsidy, that is a benefit of operation 
in the market place which others do not enjoy which result in 
an enhanced profitability or a lower cost of product.
    In this case, currency is the product which, because of the 
implicit guarantee of the United States Government, and bond-
holders making the assumption that the debt will be paid off by 
the United States Treasury in case of default, is a clear 
market advantage and therefore, defined as a subsidy.
    If we were to look at the current operation of Fannie and 
Freddie, a large wave of prepayments potentially could be the 
largest exposure.
    And I'm bringing this up to the Committee only because of 
the observations made by the S&L crisis in the 1980s. The 
United States Government paid no dollar into any S&L prior to 
their foreclosure. The S&Ls put premiums into an FSLIC fund 
which was used to pay off losses.
    Unfortunately, the losses were far more widespread than 
anticipated. Therefore, the losses that needed to be covered 
exceeded the premiums' reserve by the industry, therefore 
calling on the United States taxpayer to pay off the losses.
    This is no different. There is no outlay by the United 
States Government, nor exposure by the United States taxpayer, 
until such time as there would be an untoward economic reversal 
resulting in a dollar loss to the institutions which could not 
be covered by their capital adequacy.
    Hence, the concern about leverage and capital adequacy is 
very important. Do we have a regulator who can tell us that 
it's adequate?
    Well, it's only taken them a decade and now we're being 
told that we want a 90-day extension from July 16th to take 
another quick look.
    In the meantime, pre-payment penalty I think is the largest 
potential exposure that they could have, as high-interest 
mortgage holders want to pay off those notes and refinance them 
at a lower rate.
    Fannie and Freddie have to make very sure that they hedge 
against those downturns in interest cost because it has direct 
impact on their spread.
    Said another way--can they make money?
    They do this by using derivatives. Also issuing callable 
bonds that can be bought back before maturity, thus allowing 
them to pay, freeing them from the higher interest rate 
exposure and allowing them to issue replacement debt at the 
lower market rate.
    However, this means that they have to get their derivatives 
distribution exactly right. Too little callable debt means the 
profit spread gets squeezed and in 1998, when mortgage pre-
payments were rampant, Fannie's interest costs went up more 
quickly than interest income and therefore, they had a net 4-
percent revenue increase from its retained mortgages.
    That's not a good rate of return based on their history.
    So the point is I think I understand this. There is a 
subsidy. It is handed off to the corporations in the term of 
benefits guaranteed by the taxpayer and it's all just ducky as 
long as we remain profitable.
    Get a business reversal, a Jimmy Carter 21-percent interest 
rate, and hang onto your hat.
    I thank the gentleman for yielding.
    Ms. Velazquez. Ms. Velazquez is not here. I'm sorry.
    Mr. Hinojosa.
    Mr. Hinojosa. Yes, thank you.
    Mr. Howard, can you please tell me what you estimate the 
cost of Fannie Mae's restrictions to the housing market to be, 
and how the CBO estimate would change if those restrictions 
were factored in, in addition to your economic participation in 
the larger housing market?
    Mr. Howard. The same complications that present themselves 
in attempting to quantify our benefits also present themselves 
in attempting to quantify the restrictions that come with our 
charter.
    I could create a theoretical structure that would do that. 
But it wouldn't be particularly reliable.
    So, put another way, I don't know how to quantify the 
restrictions. But you make an important point, that there are 
restrictions. And our charter, which gives us benefits, comes 
with obligations to meet certain housing goals, to direct all 
of our activities into a single line of business.
    It comes with restrictions, loan limits, risk-based capital 
standards. All of those could be subject to some type of 
quantification.
    We have chosen not to do it because it is inherently 
speculative. But that's the same basis on which I think one 
needs to be careful in interpreting the results of a study such 
as the CBO study.
    It suffers the same challenge.
    Mr. Hinojosa. Let me ask another question, and I'll direct 
this one to Mr. Delk.
    One of the main reasons for the creation of your 
organization was to increase home ownership across the Nation 
and to create a fair and accessible housing market for 
minorities, minorities in search of purchasing homes.
    With that said, how is your enterprise helping increase 
home ownership and what have you done for the Hispanic 
community?
    Mr. Delk. Well, by the creation of Freddie Mac, what you 
have done is create a uniform national mortgage market. 
Whereas, prior to 1970, you saw various rates in various 
sectors of the country, geographic areas of the country, in 
large part depending upon the supply and demand of deposits.
    So by creating a secondary market, whereby there is a 
continuous flow of money into the country, what you have seen 
is the elimination of these pockets where money was plentiful 
and where there was a dearth of mortgage money.
    So we've evened out that flow of mortgage funds across the 
country.
    While we have done that, we have in fact, as we stated 
earlier in the oral statement, we've lowered the interest cost 
for all mortgages that we could buy by 25 to 50 basis points, 
which translates into a $10 to $15 billion savings to 
homebuyers every year.
    So by lowering the cost, we're making mortgages more 
accessible.
    Having said that, Freddie Mac is engaged in a number of 
initiatives to expand the home ownership for Hispanic-
Americans.
    We have recently announced an exciting initiative with the 
National Council of LaRaza and the National Association of 
Hispanic Real Estate Professionals to use an Internet-based 
program to reach out and educate Latino families about credit 
and home ownership through Latino real estate professionals.
    And we believe this is an exciting initiative that will 
bring education to these families and present them with 
opportunities to, in fact, be part of the American dream.
    Mr. Hinojosa. Fannie Mae mentioned that they had a $1 
trillion initiative and they met it. Then they started a new $2 
trillion initiative.
    What size is yours?
    Mr. Delk. Well, we don't have a commitment of that nature. 
We, in fact, are subject to the same affordable housing goals 
they are. But we haven't announced any initiatives that are 
dollar-related.
    Ours are more programmatic, including programs with various 
communities and various sectors within the economy and 
different groups.
    Mr. Hinojosa. Well, is there another goal besides, say, a 
dollar figure like Fannie Mae announced?
    Mr. Delk. I'm sorry?
    Mr. Hinojosa. I said, if you don't have a dollar amount in 
this new announcement that you made, is there a goal in the 
number of homes?
    How can I----
    Mr. Delk. How can you judge whether we're being successful?
    Mr. Hinojosa. Yes, how can I judge how aggressive you're 
going to be?
    Mr. Delk. OK. Well, let me say, if you look over the last 
half-decade, our numbers for minority purchases have increased 
every year and therein lies our objective, is to continue that 
increase of minority purchases.
    Last year, as I indicated in the opening statement, our 
minority purchases were 14 percent. And it's our objective to 
keep that going up in order to bridge the gap that exists 
between white ownership and minority ownership.
    Mr. Hinojosa. Well, don't misunderstand my question. I 
really want to be supportive of you and Fannie Mae. But I do 
want you to get up on your tiptoes like they're doing and 
constantly be moving those targets further up so that we can 
close that gap amongst the minorities who want to own their own 
home.
    So I'd like to work with you on that.
    Mr. Delk. We would like to work with you. We share your 
objective of bridging that gap between white home ownership 
rates and minorities and, again, would be willing to work with 
you to ensure that, in fact, every year we're increasing our 
purchases by minorities, generally, but Hispanic loans in 
particular.
    Chairman Baker. If I may, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Baker. Thank you, sir. I'd like to get Dr. Weldon 
in before the break.
    Dr. Weldon.
    Mr. Weldon. Thank you, Mr. Chairman.
    I'll direct my question to both witnesses. In criticizing 
the CBO study, you note that CBO ignores the extent to which 
the GSEs must bear the costs of increasing home ownership for 
those with low incomes.
    What is your estimate of the contribution of Fannie Mae and 
Freddie Mac to increased home ownership for individuals with 
low incomes?
    Mr. Howard. Congressman, last year, over 49 percent of the 
business Fannie Mae did, was to individuals with incomes at or 
below the area median in which they live.
    That was an all-time high that exceeded the statutory goal 
that was set for us by the Department of Housing and Urban 
Development.
    It's something that we take very seriously. We have a whole 
host of programs that are designed to achieve very high results 
in that regard and we are proud of our record.
    Mr. Weldon. You can't estimate the cost of actually doing 
that, reaching out to low income?
    Mr. Howard. It's hard to do that. We have not attempted a 
dollar assessment.
    Mr. Weldon. Mr. Delk, did you have anything to add to that 
at all?
    Mr. Delk. I do not. We have not gone back and looked at and 
tried to quantify the benefits that were not included in the 
CBO study.
    Having said that, one of the criticisms of the study are 
there are many, many benefits that we bring, in fact, that are 
not taken into account by CBO.
    Certainly one you've cited would be a good example.
    Another would be, for example, the cost of originating a 
mortgage which has substantially gone down over the last few 
years because of a number of the innovations that have been 
pioneered by Freddie Mac and Fannie Mae.
    But these additional benefits to the consumer have not been 
attempted to be quantified.
    Mr. Weldon. There was a study done by FM Watch called 
``Shuttered Dreams.''
    Are either of you familiar with that?
    Mr. Howard. I am now.
    Mr. Weldon. Do you want to respond at all?
    Mr. Howard. To what?
    Mr. Weldon. Their conclusions in that study.
    Mr. Howard. If you have a specific question about it, I 
might be able to. But I'm not that familiar with it.
    Mr. Weldon. Well, they made some conclusions about where 
exactly the part of the subsidy that you pass through actually 
goes.
    Mr. Delk. Dr. Weldon, let me attempt to address that, if I 
could, very briefly.
    Mr. Weldon. Sure.
    Mr. Delk. My first comment would be, consider the source 
who issued that.
    I think Freddie Mac and Fannie Mae have done more to 
finance low-income and minority households than any financial 
institutions in the country.
    And I'm a little bit shocked that they would try to bring 
this subject matter up, given this coalition consists of sub-
prime lenders and the mega-banks and the mortgage insurers.
    Having said that, this paper is really a series of half-
truths and distortions.
    For example, the whole premise of the paper is based on the 
CBO study and it makes the assumption that the CBO study is 
flawless.
    I think we've demonstrated, and I think others have 
demonstrated, that the CBO study is tremendously flawed and 
that the benefits we receive from the Federal charter that we 
have, in fact, are dwarfed by the benefits that go to 
consumers.
    And so, I think the original premise that the CBO study is 
correct, the whole study put out by FM Watch falls on its face.
    if that were not the case, it still would be a flawed study 
because it uses artificial and contrived methodologies to get 
to its desired results.
    For example, they totally take out the benefit that 
refinancing mortgages to minorities in fact, and low-income 
people, would produce.
    And so, they're really trying to crop the picture to, in 
fact, produce a subset of purchases and activities to, in fact, 
exaggerate the benefit we bring to minority and low-income 
borrowers.
    Again, I would say that our record is outstanding on this 
and I would hope that during the second panel, you would take 
the opportunity to ask the witness from FM Watch what, in fact, 
the members of that organization are doing to aid low-income 
families and minorities, as well as what they're doing to 
combat predatory lending.
    I think you'll be surprised at the answer.
    Mr. Howard. I would add one thing to that. And that's that 
my quick read of the study suggests that these are contrived 
and made-up numbers.
    What we report annually or more frequently are real numbers 
in detail to real regulators on our service to targeted 
communities. And if you want to know what we are doing, look at 
the real data, not data made up and misanalyzed by a lobbying 
group.
    Mr. Weldon. I believe my time is expired. Thank you, Mr. 
Chairman.
    Chairman Baker. Thank you, Doctor.
    Mr. Ford and Mr. Royce, you both have waived?
    Mr. Ford. I just want to make sure that I can submit my 
statement for the record, Mr. Chairman, if you don't mind.
    Mr. Baker. Absolutely.
    Mr. Ford. I want to raise the question that Mr. Delk raised 
regarding what are the FM Watch members doing to increase home 
ownership opportunities specifically as it relates to some of 
the communities in which Fannie Mae and Freddie Mac are both 
heavily involved, including mine in Memphis.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Ford. I'd like to support 
that request in that the Freddie Mac information statement of 
March 30, 2001, page 18, for the record, states that those 
conforming loans above 95 percent of LTV--which means poor 
people buying houses--the percentage of loans in the portfolio 
represented is 4 percent, which means for folks who are paying, 
who have an LTV below 70 percent, meaning folks who are putting 
down $10,000 to $20,000, you would be interested to know that 
in the year 2000, constituted 65 percent of the agency's 
portfolio.
    So I appreciate the gentleman bringing that issueup.
    Mr. Delk. Mr. Chairman, can I make one point?
    Chairman Baker. Certainly.
    Mr. Delk. That statistic is in our circular. I will say, 
though, that that particular statement ignores seasoning of the 
portfolio.
    Chairman Baker. Certainly.
    Mr. Delk. I just want to make sure that the record is 
clear, if you don't mind.
    Chairman Baker. I think what we'll do, if you don't mind, 
is we'll explore this down the road and we'll have an exchange 
on the details to fully understand it, without prejudice.
    We will give you the opportunity.
    I want to make one other statement because I don't want to 
detain you. We have three votes in a row.
    Mr. Ford.
    Mr. Ford. Mr. Chairman, I think it's only fair that you let 
him make the statement for the record.
    Chairman Baker. I'd like, if I can, Mr. Ford, to get it in 
writing. I've had discussions with folks before in the past 
that haven't proved fruitful, and I think we need to put this 
on a correspondence basis.
    I'll follow this up, and I'll share it with you.
    Mr. Ford. I mean, you put it on the record, these numbers. 
And if he has something that is different than that that speaks 
to something more current----
    Chairman Baker. Mr. Ford, I'd point out, this is the 
Freddie Mac information statement. This is not the CBO, the 
irresponsible party. This is the company's own sheet.
    Now, if there's explanations to help us better understand 
what this data represents, that should be given to us in 
writing and that's what I'm asking the gentleman to provide.
    Is that fair?
    Mr. Ford. Fair enough, Mr. Chairman.
    Chairman Baker. Thank you, sir. I would make one other 
comment because I think I know your opinion on the matter. We 
are really down short of time. I don't want to hold you up for 
the votes. We'll go on to the second panel. But I wish to make 
you aware that I do intend to put on the record Mr. Crippen's 
response as I requested to your testimony and make that 
available to you.
    And in that response, he responded to my question on the 
matter of increasing competition among GSEs would have on the 
subsidy pass-throughs.
    CBO's analysis, which I understand you will fault, 
attributes the GSEs' ability to retain a portion of the subsidy 
to the fact that their GSE status limits competition from other 
financial institutions in the conforming mortgage market.
    If the number of companies granted a GSE charter were 
increased, the secondary market would become more competitive 
resulting in a larger portion of the subsidy being passed 
through to borrowers.
    That is a very interesting idea which I do intend to fully 
explore and wanted to put it in the record for both 
enterprises' awareness, and then would welcome your comments at 
a later time, and we'll provide a copy of this letter to you, 
as well as fleshing out in more detail what that means.
    My assumption is that you don't want additional 
competition. My assumption is that creating another enterprise 
with the same standards and responsibilities, capital adequacy, 
same regulator, somebody who plays by the same rules, is 
something else that we perhaps should explore.
    I don't want to hold you. You're welcome to stay if you 
choose to stay and respond. We're going to go run and vote. We 
will put the Committee temporarily in recess, and I leave it to 
you gentlemen. If you'd like to stay, you're welcome. If you 
choose to leave, we'll go on to the second panel.
    Is that fair?
    Mr. Howard. Yes.
    Chairman Baker. Thank you very much. We'll stand in recess.
    [Recess.]
    Chairman Baker. We're back. If the witnesses and the 
audience would take their seats. Members are on their way to 
return.
    I'd like to reconvene our hearing.
    Let me welcome each of our panelists here this afternoon 
for our second panel. Members will be returning from the floor 
momentarily.
    We'll proceed in what is our customary order, left to 
right, and welcome today our first witness on the panel, Mr. 
Richard Carnell, Associate Professor of Law, Fordham University 
School of Law.
    We'd certainly welcome you back from your prior capacity in 
the former Administration. We enjoyed working with you then and 
it's a pleasure to have you back, sir.

 STATEMENT OF RICHARD S. CARNELL, ASSOCIATE PROFESSOR OF LAW, 
                FORDHAM UNIVERSITY SCHOOL OF LAW

    Mr. Carnell. Thank you, Mr. Chairman.
    I'm pleased to have this opportunity to discuss Fannie Mae, 
Freddie Mac, and H.R. 1409.
    I'll begin by briefly discussing some key provisions of the 
bill and I'll then touch on four broader themes that I develop 
more fully in my written statement.
    These themes are:
    First, Fannie and Freddie play a double-game over whether 
they do or don't have a Federal guarantee;
    Second, Fannie and Freddie falsely argue that banks get a 
much bigger Federal subsidy than Fannie and Freddie;
    Third, people often say Fannie and Freddie are too-big-to-
fail. I'll explain why that doesn't have to be true; and
    Fourth, regulators can act now to correct defects in the 
regulation of Fannie and Freddie.
    Turning to the bill itself I believe the bill would take 
important steps to remedy weaknesses in current law.
    Right now, OFHEO, a bureau of HUD, is responsible for 
keeping Fannie and Freddie safe and sound. The bill would 
abolish OFHEO and have the Federal Reserve Board regulate 
Fannie and Freddie.
    I support moving GSE safety and soundness regulation out of 
HUD. Having OFHEO part of HUD creates two types of problems.
    First, HUD lacks the will and the institutional credibility 
to stand up to Fannie and Freddie.
    Second, and more subtly, having OFHEO in HUD encourages the 
White House in any Administration to regard the OFHEO 
director's job as a housing appointment and not a safety and 
soundness appointment.
    Nonetheless, I have several concerns about having the Fed 
regulate GSEs. Regulating GSEs could conflict with the Fed's 
responsibility for setting interest rates, since so much of the 
GSEs' business involves managing the risk of changes in 
interest rates.
    Regulating GSEs could also conflict with the Fed's role in 
making emergency loans to banks through the discount window. In 
particular, it could be seen as giving Fannie and Freddie a 
fast track to a Fed bail-out if they ever got into trouble.
    I recommending keeping GSE safety and soundness regulation 
in OFHEO, but making OFHEO an autonomous bureau of the Treasury 
Department.
    Another key provision of the bill would require Fannie and 
Freddie to comply with the public disclosure requirements of 
the securities laws, the same requirements as apply to all 
other large corporations.
    This provision makes good sense. Fannie and Freddie say 
they already comply with those disclosure requirements. But if 
that's true, why do they object to having the disclosure 
requirements apply?
    It's not enough for Fannie and Freddie to say they comply 
with the securities laws. All large corporations say that, but 
the SEC still finds violations.
    Investors in Fannie and Freddie deserve the protection of 
the disclosure requirements.
    Finally, the bill would rightly correct some glaring 
defects in the safety and soundness statutes governing Fannie 
and Freddie, statutes that certainly are not functionally 
equivalent to those governing FDIC-insured depository 
institutions.
    The bill would strengthen regulators' authority to set 
capital standards, take prompt corrective action, and take 
enforcement action.
    It would also give regulators the authority they need to 
deal with a GSE in an orderly way if it became insolvent or 
critically under-capitalized. This would fill a dangerous gap 
in current law.
    Now to the first of my four broader themes.
    Fannie and Freddie play an extraordinarily successful 
double-game in dealing with their relationship to the Federal 
Government. The double-game has two parts.
    Fannie and Freddie emphatically deny that they have any 
formal, legally enforceable Government backing. So far, so 
good. But they do this in a way that leaves the impression that 
they have no Government backing at all. And yet, they then work 
to reinforce the market perception that the Government 
implicitly backs them.
    Here's one example from Fannie Mae.
    Fannie Mae emphasizes, quote, ``the implied Government 
backing of Fannie Mae.'' That's Fannie's own words. And they 
then go on to say that that backing makes Fannie Mae 
securities, quote, ``near-proxies for Treasuries.''
    Now think about that. Fannie says its implied Government 
backing is so strong, that its securities are almost as good as 
U.S. Treasury securities.
    This double-game lets the GSEs have it both ways. It's sort 
of like telling Congress and the press--``Don't worry, the 
Government is not on the hook,'' and then turning around and 
telling Wall Street--``Don't worry, the Government really is on 
the hook.''
    It's amazing how they get away with this year after year, 
but they do.
    My second broad theme involves how Fannie and Freddie 
mistakenly argue that the Government gives FDIC-insured banks 
more generous subsidies than it gives Fannie and Freddie.
    Contrary to what you might expect, Fannie and Freddie get a 
greater net subsidy from their Government sponsorship than 
banks get from Federal deposit insurance. And there are six 
reasons for this which I detail in my written statement.
     First, the market perception of implicit Government 
backing applies to all GSE obligations. It isn't limited to 
deposits and there is no $100,000 limit like there is with 
deposit insurance.
    Second, if Fannie and Freddie were to become bankrupt, 
there's no legal mechanism to handle their bankruptcy, a defect 
that your bill would correct, Mr. Chairman.
    The absence of this legal mechanism encourages the GSEs' 
creditors to believe that the Government would have to bail 
them out.
    Third, unlike banks, Fannie and Freddie don't have to make 
payments into an insurance fund. They're not even responsible 
for each other. So if there were a Government bail-out, the 
taxpayers would be left holding the bag.
    Fourth, Fannie and Freddie have their own special statutes. 
They're often exempt from having to comply with the same rules 
as other businesses.
    Fifth, Fannie and Freddie get such a sweet deal from the 
Government, that it's hard for anyone except another GSE to 
compete with them effectively. This lack of effective 
competition lets Fannie and Freddie keep a large part of their 
Government benefits, instead of being forced to pass those 
benefits through to their customers.
    Sixth, Fannie and Freddie do not have to provide public 
benefits that impose significant costs on their shareholders.
    Considering the great value of the benefits Fannie and 
Freddie receive from the Government, they should be doing far 
more to increase home ownership at the margins, such as by the 
lower-middle class, the working poor, and members of 
historically disadvantaged minority groups.
    My third broad theme involved systemic risk.
    Fannie and Freddie are often called too-big-to-fail, 
meaning that if they ever got into trouble, the Government 
would have to bail them out to avoid unleashing systemic risk 
that would harm the financial system and the economy.
    But systemic risk is not inevitable. It results from human 
decisions. And if investors expect the Government to rescue 
troubled GSEs, investors will tend to let GSEs take greater 
risks. This in turn will increase the chances of the GSEs 
getting into trouble.
    But the Government, by acting in a timely way, can correct 
too-big-to-fail expectations. Congress did just that in the 
FDIC Improvement Act of 1991, which curtailed too-big-to-fail 
treatment of banks.
    It worked.
    My fourth and final theme involves opportunities for 
administrative action. Regulators can and should act now to 
improve the regulation of Fannie and Freddie. I suggest six 
ways they can do so without legislation.
    First, bank regulators should obtain accurate data on FDIC-
insured banks' investments in GSE securities.
    Second, if banks have excessive concentrations of GSE risk, 
bank regulators should limit and correct those concentrations.
    And let me emphasize--bank regulators can take care of both 
of those points right now. And in my opinion, they have no 
business running to this Committee and saying, give us more 
authority.
    They have the authority they need right now.
    Third, the SEC should end the mislabelling of mutual funds 
as, quote, ``Government,'' or, quote, ``U.S. Treasury funds 
when they actually contain large amounts of GSE securities.''
    Fourth, the Fed should review the current safeguards on the 
GSEs overdrawing their accounts at the Fed.
    Fifth, HUD should tighten its scrutiny of the GSEs' 
activities and mission.
    Mr. Chairman, you've taken on an admirable but unenviable 
challenge, seeking to fix problems before the crisis hits and 
before the scandal breaks.
    Your bill would make significant improvements in the 
regulation of Fannie and Freddie. More broadly, the bill and 
this hearing are important in continuing to focus the spotlight 
on the GSEs, their valuable Government benefits, and the 
question whether they give the American people a return 
commensurate with those benefits.
    Thank you, and I'll be glad to respond to questions at the 
appropriate time.
    [The prepared statement of Richard S. Carnell can be found 
on page 127 in the appendix.]
    Chairman Baker. Thank you. I was going to interrupt your 
remarks and ask you to wind up a bit. But you got to the really 
good part and I wanted to make sure you got that in.
    [Laughter.]
    If you can, and I know that each of you has prepared 
testimony, we will have other Members participating. We're 
going to give flexibility here. If you need to go over 5 
minutes, that's fine. But as best you can, try to keep it 
within the constraints.
    Thank you.
    Our next witness is Mr. Martin Edwards, Jr., Partner, 
Wilkinson & Snowden, Incorporated, who appears today here on 
behalf of the National Association of Realtors.
    Welcome, Mr. Edwards.

STATEMENT OF MARTIN EDWARDS, JR., PARTNER, WILKINSON & SNOWDEN, 
    INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS

    Mr. Edwards. Thank you, Mr. Baker.
    Good afternoon, Members of the subcommittee. My name is 
Martin Edwards from Memphis, and I am President-elect of the 
National Association of Realtors.
    As Chairman Baker mentioned, I'm a partner in Wilkinson & 
Snowden, a commercial industrial real estate firm in Memphis.
    I'm taught real estate finance for a number of years at the 
University of Memphis, the National Association of Realtors, 
and the Mortgage Bankers Association.
    Let me also introduce to you America's realtors, the nearly 
780,000 members of the National Association of Realtors.
    For the most part, realtors are small, independent 
contractors, successful to the extent of their own initiative. 
Nearly 77 percent of realtors work in firms with fewer than ten 
employees.
    Together, we are the largest group of business 
entrepreneurs in America; realtors are extremely proud of our 
role in helping nearly 72 million people buy homes.
    Almost 68 percent of Americans own homes, as you've heard 
today, with the highest home ownership rate in the Nation's 
history.
    We are very proud that the Nation's housing industry is one 
of the only sectors of the economy that is standing tall as the 
U.S. economy struggles. The housing sector contributes 14 
percent of gross domestic product.
    For nearly 30 years, Fannie Mae, Freddie Mac, and the 
Federal Home Loan Banks have used benefits of the Federal 
charters that Congress granted them to help build a housing 
finance system that is the envy of the world.
    Today's home ownership costs are lower and access to 
mortgage credit, even for borrowers with blemished credit, is 
easier and more equitable than ever before, due in no small 
part to the mortgage investment activities of Freddie Mac and 
Fannie Mae.
    Realtors across this country know from painful experience 
that booming mortgage lending and real estate cycles inevitably 
will slow. But Fannie Mae and Freddie Mac, unlike primary 
market lenders, remain in the the markets during downturns.
    In exchange for the advantages inherent in their Federal 
charters, the GSEs fulfill their charter obligations to benefit 
millions of America's homeowners and thousands of lenders.
    Despite realtors' general support of the GSEs, we do have 
our differences. We disagreed when the GSEs opposed increasing 
the FHA mortgage limits 2 years ago. In the future, it is 
likely that we will clash again on this and other issues.
    We've also had differences with the GSEs' disposition 
activities, but we are hopeful we can resolve these.
    Realtors firmly believe that GSE regulatory reform should 
not be a vehicle to alter significantly the critical roles that 
Fannie and Freddie play in the American system of home 
ownership.
    Transferring significant regulatory authority from HUD and 
OFHEO to the Federal Reserve, as proposed by H.R. 1409, would 
effectively hamstring the GSEs. It would reduce their 
effectiveness as mortgage investors, make them more vulnerable 
to attempts by the mega-banks to control the secondary market, 
and limit customers' financial choices and home ownership 
opportunities.
    Mr. Chairman, the Federal Reserve has little experience 
regulating housing and real estate-related entities. We believe 
the central bank may have a natural conflict of interest in 
that the Fed's primary mission is to control the Nation's money 
supply by regulating the commercial banking system, 
particularly the bank holding companies, which are increasingly 
competing against the GSEs in the secondary mortgage market.
    Furthermore, the Federal Reserve has generated its own 
share of controversy by raising the prospect of classifying 
real estate brokerage and property management as a financial 
activity under the Gramm-Leach-Bliley Act.
    Realtors urge this subcommittee to consider the following 
questions before embarking on sweeping changes that affect the 
GSEs:
    What would housing finance be like without strong GSEs? 
Would this Nation be as well housed? Would as many families 
have access to the American dream? Would housing be as strong a 
sector of the economy as it is today?
    Chairman Baker, we share your concerns about improving the 
regulatory environment. However, we believe that the current 
GSE regulatory structure best serves the Nation's interests in 
housing.
    We believe that the secondary market system works to the 
benefit of the mortgage lending industry, homeowners, and the 
Nation's housing policy.
    Realtors believe that without strong and vital housing 
GSEs, the Nation would not be as well housed, nor would the 
dream of American home ownership be reached by as many American 
families as it is today.
    Let me just close by making a comment regarding affordable 
housing and housing parity.
    The National Association of Realtors, in partnership with 
five minority real estate professional associations, have 
embarked on a major program to promote parity among white and 
minority homeowners.
    The Home Ownership Participation for Everyone, or HOPE 
awards, will recognize unsung heroes across the country who are 
helping to break down the barriers of minority home ownership.
    As we go forward with this and other projects, we want to 
make sure that the mortgage market remains accessible to 
minorities. Two of the very strongest voices for minority home 
ownership have been Freddie Mac and Fannie Mae.
    And I thank you for the opportunity to participate, 
Chairman Baker, and will stand for your questions.
    [The prepared statement of Martin Edwards Jr. can be found 
on page 148 in the appendix.]
    Chairman Baker. Thank you, Mr. Edwards.
    Our next witness is Mr. James C. Miller, III, the Director 
of LECG Economics-Finance.
    Welcome, Mr. Miller.

  STATEMENT OF JAMES C. MILLER III, DIRECTOR, LECG ECONOMICS-
                            FINANCE

    Mr. Miller. Thank you, Mr. Chairman, congressmen. Thank you 
for holding this hearing and thank you for inviting me to 
participate.
    As you probably know, I served as President Reagan's budget 
director, and before that, chairman of the Federal Trade 
Commission.
    As you may not know, I was trained as an academic and have 
published over a hundred articles in journals and such, and 
have published nine books.
    I have done some work in the GSEs, stretching back almost a 
decade, and have authored a series of reports over the past 
year or so.
    In my experience, the decisions made by Government 
affecting private institutions or commercial institutions or 
market-based institutions tend to be more difficult than the 
decisions those institutions make themselves.
    Why?
    Because sometimes the decision rules are unclear. Sometimes 
the information tends to be wholly inadequate for making an 
informed decision.
    Often, the incentives to make the right decision, the 
correct decision, aren't the best.
    Now this doesn't mean that you shouldn't make reforms. But 
what I think it does is urge caution when you're going to 
restructure an industry that's working palpably well because 
there may be unintended consequences.
    So I think it's important that you do have such hearings 
and look at these things with great care and in great detail.
    Two issues before this Committee, I understand, from your 
letter, Mr. Chairman.
    One is the CBO report recently issued, and the other is 
H.R. 1409. Let me comment on them seriatim.
    In anticipation of the issuance of the new report, back 
last fall, Freddie Mac asked Dr. James Pearce, an economist at 
Welch Consulting in College Station, Texas, and me, to evaluate 
the 1996 CBO report and comment on it. And we did.
    And they asked us also to provide our own assessment of the 
GSEs, the benefits and costs.
    Briefly, we found that the 1996 report systematically 
overstated the benefits to the GSEs--they call them subsidies--
and understated the benefits to consumers.
    When we made technical corrections in the CBO numbers 
because of some mistakes we believe they made, it wiped out 
this difference. The characterization that the GSEs are a, 
quote: ``spongy conduit,'' disappears.
    Now I have a copy of the report that we submitted, and I 
have submitted that for the record and I would appreciate it, 
Mr. Chairman, if you would include that with my prepared 
statement and that report as an attachment.
    Chairman Baker. Without objection.
    [The information referred to can be found on page 163 in 
the appendix.]
    Mr. Miller. We concluded independently that the benefits to 
consumers ranged between $8.4 billion and $23.5 billion 
annually, and that the benefits to the GSEs ranged between $2.3 
billion $7 billion annually.
    Now we did get an advanced copy of the 2001 CBO draft, and 
it's a draft that we guarded very carefully and it's confidence 
that we respected, and we responded to it.
    We were very pleased that the CBO made certain changes in 
their methodology, certain corrections. And I think this 
improved the quality of their analysis.
    However, they compounded their mistakes in some areas, in 
our judgment. They also changed the methodology for counting 
the ``subsidy,'' from a flow method to a capitalized method, so 
they basically scored the subsidy when it happened, when the 
transaction took place, rather than over a period of time. And 
for reasons that I go into in the report, I think that's 
inappropriate.
    But it seems to me the major problem with the CBO 
methodology is very simple.
    In the minds of the CBO, in the model they adopt, and in 
the rhetoric that has been discussed so often about this, it's 
as if you, Mr. Chairman, and other Members of Congress lay on a 
subsidy, whether it's implicit or explicit, lay on a subsidy to 
the GSEs which they then parcel out to consumers, and they keep 
back a service charge.
    And CBO says that that service charge is one dollar for 
every three they get.
    This is totally incorrect. The institutional arrangement 
that you have put in place generates far more benefits than the 
funding advantage that is CBOs measure of the degree of the so-
called subsidy.
    I put the word ``subsidy'' in quotes every time I use it. I 
think Mr. Barr raised that question. I think that is an 
inappropriate way of looking at it.
    Suppose that there were property rights in some area in the 
economy that were not defined and not enforced. And you, Mr. 
Chairman, and other Members of Congress were to pass a law 
identifying, assigning property rights and enforcing the 
property rights.
    Well, we know that commerce then would flourish and the 
benefits generated from that would be far in excess of any kind 
of imputation of some subsidy to the firms, because you had put 
that law in place.
    So it's the whole institutional arrangement that has to be 
analyzed. And that includes all of the effects that the GSEs 
have on the mortgage market in bringing about additional 
competition and lowering mortgage rates all across the board.
    That was done in a limited way by CBO, but not in a 
thorough way.
    Let me comment briefly on H.R. 1409.
    I haven't gone through the regulatory morass facing the 
GSEs in great detail. It's very complicated, as you know. You 
know this far better than I do.
    But I've had a lot of experience in regulation. I've 
written books about regulation. And if I understand your bill, 
and I read the bill at one time and one of your staff members 
was kind enough to send me a section by section, what it says 
is you're going to place in the hands of the Federal Reserve 
Board the authority to be the regulatory czar for the GSEs.
    They cannot engage in additional kinds of activities 
without board approval. Under certain circumstances, the board 
could even fire members of the board of directors, can cap pay, 
can do a number of other things.
    They have to make a finding that it's in the public 
interest. This is old public convenience and necessity 
regulation of the sort that we threw out, you threw out, with 
respect to the Interstate Commerce Commission, you threw out 
with respect to the Civil Aeronautics Board, and others.
    Surely, one thing we've learned is this old economic 
regulation, whether it's maximum interest rates in financial 
institutions or it's regulation of transportation: it just 
doesn't work.
    And surely, there would seem to be more cost-effective, 
less intrusive, more market-based ways of accomplishing the 
goals I think you want to achieve, and I want to achieve. And 
that is assuring safety and soundness.
    So, to sum up, I think any public policy initiative based 
on CBO's report today would be an error. And second, I think 
that H.R. 1409 is premature, at best. I would strongly urge you 
wait and see what OFHEO is going to come up with in their risk-
based capital standards and if they get them right.
    Thank you, Mr. Chairman. I'd be glad to respond to 
questions.
    [The prepared statement of James C. Miller III can be found 
on page 157 in the appendix.]
    Chairman Baker. Thank you, Mr. Miller.
    Our next witness is Ms. Leslie Paige, Vice President, 
Citizens Against Government Waste, appearing today on behalf of 
the Homeowners Education Coalition. Welcome, Ms. Paige.

STATEMENT OF LESLIE K. PAIGE, VICE PRESIDENT, CITIZENS AGAINST 
    GOVERNMENT WASTE, ON BEHALF OF THE HOMEOWNERS EDUCATION 
                           COALITION

    Ms. Paige. Thank you, Mr. Chairman, Members of the 
subcommittee. Thank you for the opportunity to testify today.
    My name is Leslie Paige. I'm the Vice President at Citizens 
Against Government Waste. We are a non-partisan, non-profit 
taxpayer watchdog group with more than one million members and 
supporters nationwide.
    I'm also here today on behalf of Homeowners Education 
Coalition, which is a small ad hoc coalition of taxpayer 
groups, including the National Taxpayers Union, the Competitive 
Enterprise Institute, 60 Plus, the Free Congress Foundation, 
Capital Watch, the Small Business Survival Committee, and the 
American Association of Small Property Owners.
    Home EC's mission in this issue is to raise questions about 
the Nation's largest housing GSEs, and to participate in this 
public dialogue about their activities and the impact of those 
activities on taxpayers and the economy as a whole.
    The time to address the concerns of taxpayers regarding the 
GSEs is not at some future date when the GSEs might be facing a 
financial crisis.
    Been there, done that.
    We experienced exactly that same type of scenario in the 
1980s with the savings and loan crisis, which cost taxpayers 
hundreds of billions of dollars. And that bail-out basically 
occurred because Government officials created an oversubsidized 
environment and then were ill-prepared to deal with the 
unforeseen consequences of its actions.
    That sounds rather uncomfortably familiar to us.
    With the release of the CBO update, it's no longer tenable 
in our opinion to continue to argue that there is no subsidy. 
And it's a little surreal, I have to say, with all due respect 
to the gentleman sitting to my right, to be arguing about what 
a subsidy is. We all know that a subsidy is the value of a 
benefit conferred by the Government, in this case.
    And I appreciate, by the way, I wanted to tell you that I 
appreciated, Mr. Chairman, your earlier description of that.
    There are as many ways of handing out Government benefits 
as there are Members of Congress who have an idea of how to do 
it. But at the other end of that subsidy is a taxpayer waiting 
to bail it out if it goes bad.
    And the GSEs continue to try and tell us that there is no 
subsidy and it's tying them in rhetorical knots. They argue 
simultaneously that there is no subsidy, and then they go on to 
say that this non-existent subsidy isn't worth as much as the 
CBO says it is.
    And that, furthermore, the benefits they convey far 
outweigh the value of this non-existent subsidy.
    There are subsidies. The value is substantial. And 37 
percent of the subsidies are soaked up by the GSEs, according 
to the CBO.
    It's clear that they've converted their charters into very 
highly efficient profit-delivery systems. And we have nothing 
against the pursuit of profits, Mr. Chairman. But when this 
pursuit could result in another taxpayer bail-out of an out-of-
control financial institution, we tend to take notice.
    There are very real reasons to believe that Government 
would bail-out the GSEs, in spite of official disclaimers to 
the contrary. Actions speak louder than disclaimers.
    The Federal Government has stepped in to bail out the farm 
credit system and Fannie Mae itself was afforded regulatory 
forbearance in the 1980s when it was in trouble.
    This is not just an academic exercise. The GSEs, in fact, 
are too-big-to-fail and as such, they merit the scrutiny of 
this Congress.
    Together, they either own or guarantee $2.4 trillion in 
mortgages and mortgage-backed securities. By 2003, they will 
have more debt and guarantees outstanding than the U.S. 
Treasury debt held by the public.
    But more importantly, these mortgage giants now control 71 
percent of the conventional conforming mortgage market, 
according to a recent analysis by the American Enterprise 
Institute, which I'd like to attach for the record. They will 
own or guarantee 91 percent of that market within 3 years at 
their current growth rate.
    They are purchasing more and more of their own mortgage-
backed securities, which is an inherently riskier practice and 
which has been described by the Congressional Research Service 
as the repatriation of debt with no discernible mission-related 
purpose.
    In fact, we would submit that profit is the purpose and 
that motive is also the driving force behind their purchase of 
home equity loans, even though 70 percent of home equity loans 
are used for consumer purchases.
    Fannie Mae is securitizing Home Depot loans, loans which 
will be used for remodeling or consumer purchases.
    We'd like to know how this kind of financial activity gets 
low-income people into affordable housing. There are 
indications that they would like to get an increase in the 
conforming loan limit. That limit is already too high, in our 
opinion.
    Those who can afford a mortgage of $275,000 are not low-
income borrowers. Congress should block any attempts to raise 
the conforming loan limits.
    The GSEs should not be subsidizing consumer loans, eyeing 
the jumbo market, getting into retail investment banking, or 
dabbling in e-commerce at a time when they are lagging in their 
mission to provide low-income people with affordable housing.
    The affordable housing goal, by the way, has become nothing 
more than a politically convenient fig leaf, in our opinion.
    What is or is not a secondary market is very vague. We 
believe that mission creep is a problem and it's an inevitable 
problem for several reasons.
    The GSE charters are vague. Subsequent legislation hasn't 
done enough to clarify what the parameters are of the secondary 
mortgage market or what is an appropriate activity for a GSE to 
be engaging in.
    As a result, they tend to just interpret their charters as 
more of a set of a loose guidelines where anything that make 
them a hefty profit can be construed as helping low-income 
people.
    Strong supervision of the GSEs is a very advisable interim 
measure. But it is no substitute for market discipline, true 
market discipline.
    The optimum, long-term reform that we favor, and that is 
Citizens Against Government Waste, as well as the other members 
of our group, is full privatization of the GSEs. Taxpayers no 
longer need to subsidize mature businesses engaging in normal 
business practices which could achieve success on their own.
    Subsidy programs, whether they are implicit or explicit, 
they breed inefficiency, they breed waste, and they breed 
abuse. And they tend to hang on long after their mission has 
been accomplished and they put taxpayers at increased risk.
    We've seen this in a lot of other Government programs, from 
agriculture to transportation to energy.
    If Congress wants to promote home ownership among low-
income people, which I believe is the intent of the charters, 
the real question they should be asking is, is this the most 
efficient way to do that?
    The fact is that what we have now is that taxpayers are 
subsidizing mortgage debt and increasingly, consumer debt, and 
they are boosting the profits of the GSEs themselves.
    We believe that this is the least efficient, least 
transparent, and least accountable subsidy delivery system.
    On behalf of our one million members and supporters, we 
thank you, Mr. Chairman, for the opportunity to speak with you 
today and we are available to answer any of your questions.
    [The prepared statement of Leslie K. Paige can be found on 
page 211 in the appendix.]
    Chairman Baker. Thank you, Ms. Paige.
    Our next witness is Mr. Edwin Rothschild, Principal, 
Podesta Mattoon, here today on behalf of FM Watch.
    Mr. Rothschild.

 STATEMENT OF EDWIN ROTHSCHILD, PRINCIPAL, PODESTA MATTOON, ON 
                       BEHALF OF FM WATCH

    Mr. Rothschild. Thank you, Mr. Chairman, Members of the 
subcommittee.
    I am the Chair of the FM Watch affordable housing task 
force and I'm accompanied here today by my colleagues on that 
task force, Mr. David Tornquist, who has the distinction of 
having worked for both Mr. Miller and Mr. Raines, as a policy 
and budget analyst at OMB for 15 years, and Lottie Shackelford, 
who is the former Mayor of Little Rock, Arkansas and with the 
firm of Global USA, and is the current Deputy Chair of the 
Democratic National Committee and has a long interest in 
housing issues.
    I'd like to, if I can, Mr. Chairman, just go through the 
study that was referred to in the earlier panel that we have 
just completed, called ``Shuttered Dreams,'' and go through how 
we see the subsidy being allocated----
    Chairman Baker. If you would, that's fine. But pull that 
mike a little closer because if you turn away, we lose you.
    Mr. Rothschild. All right. Is that better, Mr. Chairman?
    Chairman Baker. Yes.
    Mr. Rothschild. OK. We have taken a look at the subsidy 
using the latest CBO study. We began this study prior to it 
using the 1996 study as a basis for that. But when you, Mr. 
Chairman, asked for an update, we decided to wait and issue our 
study with the most recent data.
    The rest of the data that underlies this report is the data 
that the GSEs report, the GSE public use database that the GSes 
report to HUD, plus the HMDA database.
    So all of this is the official----
    Mr. Bentsen. Mr. Rothschild, are these data in your 
appendices of your statement or not?
    Mr. Rothschild. Yes, they are in the statement.
    Mr. Bentsen. Because I can't read that far away, but others 
may be able to.
    Mr. Rothschild. OK. Well, Figure 1 would be on page 3 of my 
statement.
    And if you look at that, I'm happy to go through what it 
details.
    First, as the CBO calculated, 37 percent of the $10.6 
billion subsidy is retained by stockholders. So that's the far 
right quadrant.
    Then you have 29 percent of the subsidy that's passed 
through is in refinance loans. So basically, you have 66 
percent of the subsidy not going to the home purchase market, 
which is 30 percent of the loans. And there's 4 percent in the 
other category which includes non-owner-occupied and multi-
family homebuyers.
    So that's the general distribution of the subsidy by those 
specific categories.
    The next figure I'd like to refer to is Figure 2, where we 
looked at it on the basis of income distribution, the amount of 
the loans, the value of the loans going to home purchases.
    Again, we're just looking at the home purchase category, 
the amount of the subsidy that actually goes to help put people 
into homes. Refinances are very, very useful because they help 
people pay less. But refinances don't put people into homes.
    So you have, looking at the median household income of 
$40,000, that's half the people in the country. Less than 5 
percent of the subsidy goes to those homebuyers.
    We're talking about $500 million out of the $10.6 billion, 
while $3.9 billion goes to stockholders.
    Purchasers above the median income receive 26 percent of 
that subsidy.
    The next figure on page 5, Figure 3, we again divided the 
subsidy that goes to benefit home purchases by race, again 
using data submitted to HUD, HMDA data. And you can see there 
in terms of minority benefit, African-Americans, Hispanics, 
Asians, all received approximately 1 percent of the subsidy.
    That's about $100 million each, while the stockholders got 
$3.9 billion.
    One other category, unknown race, that's a problem with the 
data. There are reports that don't contain that information so 
we don't know the racial category of that grouping.
    The last figure that we have here, we have more tables in 
our full report, but I think these summarize it adequately, you 
see the percent of the U.S. population. And this again refers 
to that quadrant of home purchases. And we divided that up to 
look at it in terms of percentage of the population versus the 
percentage of people who got the subsidy.
    And you can see that, with respect to African-Americans and 
Hispanics in particular, in terms of the percentage of the 
population, a very small amount, much less than their 
percentage of the population went to those groups.
    Now one thing we need to point out, and I think it has been 
mentioned from time to time, is that FM Watch is not coming up 
with this information.
    The fact is that Fannie Mae and Freddie Mac are not 
fulfilling their mission of assisting and supporting low-income 
and minority, particularly African-American and Hispanic, 
homebuyers.
    They have lagged the market. The private sector has done a 
far better job in supporting minority home purchases and low-
income home purchases than Fannie Mae and Freddie Mac. That's 
been reported by HUD, by GAO, by the National Community 
Reinvestment Coalition and others.
    I have a report here that was done by a very well respected 
housing analyst. It was done by the Public Justice Center, by 
Calvin Bradford, who looked at Baltimore, who said that the 
GSEs are lagging the market. They are not doing their job.
    They could be. And our argument is that the 37 percent 
that's being retained by the stockholders of Fannie Mae and 
Freddie Mac, that portion could be used so that the 
institutions, the GSEs, could do more for the very groups that 
they were chartered by Congress to do. And the usual argument, 
for example, one of the suggestions that's been made by housing 
groups is that Fannie Mae and Freddie Mac could be buying more 
CRA loans from banks that make them, the banks that subsidize 
those loans with other loans.
    But Fannie Mae, and we point out a statement by Fannie 
Mae's chairman, Mr. Raines, last year, in a question and answer 
session when he was asked by a housing advocate from Delaware 
whether or not he would use the resources of Fannie Mae to buy 
those loans, he basically said, no, we choose not to do that. 
We choose not to subsidize what the banks have subsidized.
    But they could. And I want to just reinforce what the 
Congress chartered them to do. And this is ``to provide ongoing 
assistance to the secondary market for residential mortgages, 
including activities relating to mortgages and housing for low- 
and moderate-income families involving a reasonable economic 
return that may be less than the return earned on other 
activities by increasing liquidity of mortgage investments and 
improving the distribution of investment capital available for 
home mortgage financing.''
    In other words, they could earn less.
    Finally, I would like to point out that having listened to 
the testimony of the two witnesses from Fannie Mae and Freddie 
Mac, I am astounded because I think every time someone comes 
out with a report, no matter who it is, that is critical of 
these institutions, it's like they never met a report that they 
didn't like unless it was written by themselves.
    It doesn't matter whether it's the CBO, whether it's HUD, 
whether it's the Fed, whether you, Mr. Chairman, hold a hearing 
on a particular date.
    All of it seems to be something that they can't possibly 
have done or agree with.
    And I would like to put into the record something that 
happened last year after The Washington Post reported on HUD's 
finding that Fannie Mae and Freddie Mac were lagging in loans 
to African-Americans.
    Fannie Mae circulated charts here on Capitol Hill, 
particularly to the Congressional Black Caucus, showing how 
they were not lagging the market. That was one that they did in 
May, 2000.
    In February, 2001, they showed, in fact, that they were 
doing better than the market in some years, from 1996 to 1999.
    But I have also attached HUD's data, where Fannie Mae has 
continually decreased its support of homebuyers, African-
American homebuyers. Freddie Mac has about stayed the same, a 
slight increase. But the market is much greater.
    In other words, the private sector, when it comes to 
originating loans, is doing far better.
    Mr. Chairman, I see my time is up. It was up before. So 
I'll stop and be happy to answer questions.
    [The prepared statement of Edwin Rothschild can be found on 
page 220 in the appendix.]
    Chairman Baker. Thank you, Mr. Rothschild.
    Mr. Miller, let me start with you. In meeting with the GSEs 
last year, we reached an agreement. Whether they call it 
voluntary or I call it involuntary, we got together. And as a 
consequence of that, we announced that we would like to do the 
regulatory piece, as it was called this year, and suggest that 
for the interest of the GSEs themselves, as well as 
stakeholders and taxpayers, it would be good to assure that we 
had strong regulatory oversight.
    I wore out a good mailbox going back and forth every day, 
looking to see what they were going to send me. And it's still 
empty and I've got a new box, still waiting.
    So I came up with H.R. 1409. And I'm not suggesting that 
that's the end-all. Even Mr. Carnell has suggested that there 
might be a more appropriate regulator.
    Do you have any recommendations to change the status quo to 
assure taxpayers that what the GSEs tell us can be verified by 
a third party?
    To date, every regulator who has issued an opinion, 
regardless of what they said, has been challenged by the GSEs.
    Where can we get a credible regulator? What should it look 
like? And what do we do to get there?
    Mr. Miller. Well, Mr. Chairman, you need to establish the 
regulator and have oversight of the regulator's activities. And 
I think the regulator needs to establish the least intrusive 
means of assuring that the two enterprises are adequately 
capitalized, that they cover their risks.
    Chairman Baker. On that point, OFHEO has taken now a 
decade.
    Mr. Miller. Yes, I'm well aware of that, and I can 
understand your frustration. And I think you're quite justified 
in being upset about that.
    I think it's important for them to come forward with a set 
of standards.
    I do know enough about the standards that they propose to 
have a judgment about that. And that is that I think that 
they're not quite ripe and I think that it would be useful for 
them to withhold making them final for a few months in order to 
make sure that they work.
    It's almost like debugging software. If they make the 
program final, then they can't do any debugging. And so I think 
that that is important to do.
    It's in the interest of the taxpayer, as Ms. Paige is 
suggesting. It's in the interest of markets generally. It's in 
the interest of homeowners or prospective homeowners to have 
the GSEs in solid financial shape and to have very well 
understood, transparent standards and that their activities and 
that their capital be very transparent.
    Chairman Baker. So you feel that the work we're engaged in 
is appropriate. We may not have the right answer, but we 
shouldn't give up yet.
    Mr. Miller. I think what you're looking for, the objective, 
is in fact, the appropriate one.
    As I indicated, I have significant, serious questions about 
the proposal to make the Federal Reserve essentially a 
regulatory czar.
    I think there are less intrusive, more market-based ways of 
assuring that capital standard than the provision in H.R. 1409.
    Chairman Baker. Well, let me point out that OFHEO is the 
capital czar today and HUD is the product czar. And in the 
entirety of the application process that the GSEs have made to 
HUD, HUD has never to date denied one request for new product.
    Now I'm not suggesting that there's anything wrong with 
that. Perhaps every submission has been perfect. But I do find 
it over the life of any enterprise a bit irregular.
    If I may, let me jump to Mr. Carnell before I expire on my 
time.
    The question of subsidy has come about repeatedly. And I 
recall, Mr. Carnell, I believe you were a member of the 
Administration when Under Secretary Gensler testified before 
the committee and made the reckless and unprofessional comment, 
as it was characterized by many, that the line of credit to the 
GSEs should be repealed.
    Concurrent with that, almost to the minute, after the 
hearing was over, I found that the market volatility was rather 
dramatic.
    Analysts, apparently, and shareholders, began to express 
some concerns with their pocketbook about the potential of your 
administration repealing that line of credit.
    Is my recollection of history correct? And do markets 
perceive that that line of credit is an essential component of 
the value of the GSE charter?
    Mr. Carnell. Your recollection of history is exactly 
correct, except in one inessential detail, which is that I had 
left the Administration at that point, even though I fully 
concurred in what they said.
    And it's worth noting that Mr. Howard, who sat in this seat 
at the first hearing, called Under Secretary Gensler's 
testimony irresponsible and unprofessional.
    Now Mr. Gensler said that the Government did not guarantee 
Fannie Mae and Freddie Mac. What is irresponsible about that?
    I can tell you as a law professor, that's the truth, the 
Government does not guarantee Fannie Mae and Freddie Mac.
    Chairman Baker. But when you read the face of the security, 
it's got it in type big enough I can read it without my 
glasses--not guaranteed by the full faith and credit.
    Mr. Carnell. That's right.
    Chairman Baker. I don't know how much more clear we can 
make it.
    So why would the market react that adversely when we talked 
about repealing something that's not there?
    Mr. Carnell. Well, I think there is a problem in the 
disclosures so far, Mr. Chairman, which is that Fannie Mae and 
Freddie Mac have been allowed to go around and tell people that 
the Government implicitly backs them.
    Implicitly backs is not a guarantee. That's why Under 
Secretary Gensler's testimony is not correct. But this comes 
back to the double-game that I talked about, where Fannie and 
Freddie say one thing to Members of Congress in this room and 
elsewhere, and they say something else on Wall Street.
    It's like a sailor who has wives in two ports and they 
never come together.
    Fannie and Freddie get to say different stories to 
different people and get away with it year after year. But the 
fact is that there is no Government guarantee here.
    Essentially, what the capital markets are doing is pricing 
the political risk of whether the Government would or would not 
bail Fannie and Freddie out in the future.
    If they feel that the Government is developing a backbone, 
then the risk is going to go up.
    Chairman Baker. I've exhausted my time.
    Mr. Kanjorski.
    Mr. Miller. Mr. Chairman, could I offer an alternative 
explanation, I think?
    Chairman Baker. Sure. Yes, sir.
    Mr. Miller. And that is as follows. A lot of things can 
impact upon a company's price or the price of their stock.
    If there's a perception that a movement by this Committee 
or others in Congress would disrupt the markets in whatever 
ways beyond the question of this line of credit, that could 
have a significant adverse effect on the price of Fannie Mae, 
Freddie Mac stock.
    And that, I suspect, was the concern expressed.
    They have never used that line of credit, I understand. It 
probably doesn't matter very much. They make it very plain, as 
you point out, in big type.
    The people that make markets with Freddie Mac and Fannie 
Mae are very sophisticated people. They are not likely to have 
the wool pulled over their eyes about that issue and whether 
they might be misrepresented.
    Chairman Baker. No, I'm not alleging that at all. What I'm 
suggesting to you is, when I asked Fannie and Freddie directly, 
CEOs, since you don't use it, since you're so well capitalized, 
since you're so highly profitable, since it wouldn't equal a 
couple of weeks of your debt issuance, why don't we just get 
rid of it and clear it up?
    After oxygen is applied, they usually say that that doesn't 
make sense.
    Mr. Kanjorski.
    Ms. Paige. May I also interrupt, or am I going to be 
impinging on your time, Mr. Chairman?
    I want to address something that was said earlier about 
HUD.
    Chairman Baker. If you'll be brief, yes.
    Ms. Paige. Very briefly. Thank you. HUD is not known to be 
one of the best managed agencies in the United States 
Government. In fact, it's very high-risk and it's been on our 
high-risk list and it's been the subject of lots of inquiries 
by Citizens Against Government Waste, as well as other members 
of HomeEC.
    And when you mentioned earlier that they've never turned 
down a particular product request, I just wanted to mention the 
fact that the most recent thing that they did, that Freddie 
did, was the Lending Tree dot.com investment that they made in 
March, which was $2.5 million.
    Admittedly, that's a very small amount of money by their 
standards. But the question I think that we should be asking, 
we should be asking HUD, who has not yet ruled on whether 
that's a permissible investment, is what are they doing 
investing in any kind of a dot.com startup company in a 
volatile e-commerce market?
    Now HUD says that they're still waiting for data to make a 
decision. And I would humbly request that somebody ask HUD to 
finish up on a rule that they started last year which would 
start to define what kind of investments Fannie and Freddie are 
allowed to do that are supposed to be mortgage-related and non-
mortgage-related.
    Draw a bright line so that we know where that is as 
taxpayers.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Paige.
    Mr. Kanjorski.
    Mr. Kanjorski. Listening to all the witnesses and their 
various positions, I'm somewhat astounded. I'm not sure whether 
I'm in the world of Oz.
    My friends on this side of the aisle are for regulation, 
more strict regulation, control of product. And my friends on 
this side of the aisle seem to be reporting something 
different.
    And then when I look down there and see the different 
groups you come from--let me start off first, Mr. Edwards.
    From my observation of the present state of the American 
economy, manufacturing, for all intents and purposes, would be 
classified as being in recession.
    The agricultural economy of the United States would be 
classified as being in recession.
    The dot.com economy of the United States would be 
classified as depression.
    There seems to be two fundamental industries that are still 
doing quite well, and that's home building and real estate. And 
perhaps the automobile industry if it still holds up, that are 
supportive of our present status of the economy.
    Would it be that way if we were to do away with Freddie Mac 
and Fannie Mae?
    Mr. Edwards. Thank you, Mr. Kanjorski.
    As I said in my statement, we'll put together the home 
building and the real estate brokerage business into one 
industry and call it the housing industry.
    The housing industry now is probably your strongest sector 
of the Nation's economy, and it's remained that way despite the 
slowdown. Perhaps is that the American public believes that the 
home is, first of all, shelter, and then a safe investment, or 
you wouldn't have 68 percent of ownership.
    They--the American public--also believe that it is the 
right investment to get started in their financial future.
    And so, I think those are some of the factors that have 
kept the home ownership rate growing. Among others, certainly a 
big part of that is that we've got a mortgage interest 
environment which is healthy as far as acquisition because, as 
those interest rates come down, the present value of the loan 
amounts go up. And so, people are able to buy a home and obtain 
mortgage financing.
    Someone mentioned refinancing. Refinancing actually is 
healthy for the market because it keeps the markets and the 
neighborhoods stable. It keeps people in homes that might lose 
them otherwise.
    So I think a lot of these factors, Mr. Kanjorski, have come 
together. But I truly believe that Americans believe that home 
ownership is, first of all shelter, then a good investment in 
their future and their children's future.
    Mr. Kanjorski. Thank you.
    Mr. Miller.
    Ms. Paige. Mr. Kanjorski, can I add something to that, 
please? I'm sorry, sir.
    Mr. Kanjorski. Very quickly, if you want.
    Ms. Paige. Thank you. It's just that Mrs. Hooley made a 
comment earlier today about the modest increase in home 
ownership and I think that should be re-emphasized, that 
there's been a 4-percent increase in kind of a long period of 
time. And there could be other attributable factors to that, 
including low rates of interest rates and lots of other things.
    Mr. Kanjorski. Mr. Miller, you've had an opportunity to 
study this whole financing vehicle of real estate in the 
country.
    Do you have an opinion as to whether or not it is, one, a 
very efficient system of delivery from the market place? And 
two, whether these are well-managed and operated companies as 
opposed to, say, 15, 20, 25 years ago?
    Mr. Miller. I have a reasonable degree of confidence that 
this institutional arrangement is working well. There are 
things that could be done to improve it. I'm not suggesting 
it's perfect.
    I think these firms are managed well, from all that I've 
seen. And also, they're very competitive.
    I don't see any--I said in my testimony that I'm not one of 
these people who say, ``if it ain't broke, don't fix it,'' 
because that's the refuge of people that don't have much to say 
on their side.
    But I don't see any reason for alarm that would cause 
precipitous action.
    Mr. Kanjorski. So you're talking about fixing around the 
edges, but not fundamentally changing the core of the product 
or the operations.
    Mr. Miller. I think you need to make sure that these GSEs 
do meet standards for risk-based capital and whether you accept 
what OFHEO is doing here or not, I think you need to see what 
they're going to do.
    They're at the precipice of doing something rather 
substantial in the regulatory area. See what they do and then 
make a decision.
    Mr. Rothschild. Mr. Kanjorski, can I just make one quick 
comment?
    Mr. Kanjorski. I just want to make an observation. I 
welcome you because we had a roundtable discussion and I don't 
think FM appeared at that when we had an opportunity for all 
these different interest groups to talk to each other.
    I wish you had been part of that interchange because it 
would have helped us. I guess I want to make an observation 
with you.
    You do not represent anyone who has conflicting interests 
with these two organizations in any way. You are coming here 
strictly out of the interest of national policy and home 
ownership for minorities.
    You really do not have a financial interest, anybody that 
you represent in your organization.
    Is that correct?
    Mr. Rothschild. I think I would only comment that I think 
it's important for Congress to look at three elements. They've 
all been discussed. I'll answer that question if I can just get 
this one point out.
    That, on the one hand, GSEs are not accomplishing the 
mission they were designed to do with respect to----
    Mr. Kanjorski. I'm going to stop you there. I listened to 
you before on that. And I know you represent a lot of the free 
enterprise sector of the community. I'm glad they're here. I'm 
glad they're active.
    But where were they when we needed a secondary market?
    It seems to me all these people show up to cast aspersions 
on organizations that the Congress created to create a viable 
market. It's rather successful. Certainly, when I first came to 
Congress Fannie Mae and Freddie Mac were not nearly as 
economically sound as they appear to be today.
    And this is not to say--I agree with Mr. Miller. That's not 
to say that there's nothing we shouldn't be looking at.
    But where were you all when the private sector could have 
developed the secondary market? Hell, we didn't have to do it 
in Government. It's just that you didn't step up.
    Now I want to move to Mr. Carnell. I understand your 
philosophical position on GSEs. But it would be remiss for any 
of us to sit here and say that there isn't an implicit 
guarantee that the Federal Government in catastrophic economic 
circumstances wouldn't have to, for systemic risk, shore up 
these organizations.
    We would shore up Mr. Rothschild's organizations. There are 
banks that are just too-large-to-fail.
    Not too many years ago, we shored up Mexico because the 
catastrophic result of the domino effect would have been that 
the world economy could not afford a failure to step in.
    So to make this argument that, I don't care whether they 
print it. It's not supportive. We know that anything that is 
dealing in trillions of dollars in a depressionary economy is 
going to have to be shored up, or we're going to have to give 
up the entire system, that I think we would do anything before 
we come to that situation.
    Or do you really believe that the Congress, the American 
people, don't believe in the concept of too-large-to-fail?
    Mr. Carnell. I do not believe in the concept of too-big-to-
fail. And as I said in my testimony, Mr. Kanjorski, whether or 
not too-big-to-fail is a reality is a matter of what you, other 
Members of Congress, and financial regulators do.
    If during good times you say to yourself, there's not a 
problem, or, in fact, you reaffirm too-big-to-fail, you and 
others are creating too-big-to-fail in doing that.
    One of my basic points is that there's a circularity with 
too-big-to-fail. Too-big-to-fail comes from expectations.
    If you stoke too-big-to-fail expectations, you reduce 
market discipline and you increase the chances of problems, and 
you also increase the shock to the financial markets if you 
disappoint them.
    In 1991, in the FDIC Improvement Act of 1991, which this 
Committee passed and was enacted, Congress made a major step 
back from the practice of treating banks as too-big-to-fail.
    If you looked back in 1990, you would see that the FDIC was 
protecting all depositors at banks as small as $500 million.
    And in fact, a senior official of the OCC, echoing 
sentiments a little bit like what you said earlier, said to 200 
London financial market people in my presence in 1990, that the 
FDIC's practice meant that you did not have to worry about 
losing a cent, no matter how much money you had on deposit at a 
U.S. bank, if the bank had more than $500 million in assets.
    Now go forward 2 years.
    On October 30th, 1992--this is less than 2 years after that 
statement by the number-three person at the OCC, and just 4 
days before the Presidential election. The OCC closed a group 
of banks in Texas that had almost $9 billion. So that's 18 
times the size that was described as being too-big-to-fail.
    And the financial markets took it in stride. The financial 
markets took it in stride because this Committee and other 
concerned Members of Congress had gone about changing market 
expectations.
    So the markets made adjustments. They weren't shocked. And 
it was possible to deal with things in stride.
    So what I'm saying, Mr. Kanjorski, is that too-big-to-fail 
expectations are not like hurricanes or earthquakes. They're 
something that we as human beings, they're something that you 
and other policymakers create by your decisions about how to 
act or not act.
    And they're something that financial market participants 
create by their decisions about risk-taking.
    Mr. Kanjorski. So it's your opinion that the Congress 
should have penalized the Federal Reserve when they went to the 
rescue of Capital Management.
    Mr. Carnell. I think the Federal Reserve's action was 
irresponsible. I think it was and I said so privately at the 
time.
    As a Treasury official, I was not free to say so publicly 
at the time.
    Mr. Kanjorski. How about the Mexican bail-out?
    Mr. Carnell. That's a tougher issue. Let me emphasize that 
the U.S. had no legal obligation to go to the aid of the 
Mexican government.
    The issue is, were we better off tiding Mexico over that 
time, using an arrangement that, in fact, posed almost no risk 
to the U.S. Treasury because we got a complete claim on their 
stream of foreign oil.
    Mr. Kanjorski. If you're having a hard time making that 
decision that that was a successful bail-out, then we have a 
difficult time communicating.
    Now I was not in favor of it at the time and if it had come 
to the Congress of the United States, it would have failed.
    I think the Administration took probably one of the best 
acts at that time that significantly saved the world economy.
    Mr. Carnell. I'm not criticizing the Mexican bail-out. What 
I am saying is----
    Mr. Kanjorski. You were there. Looking with your hindsight, 
did you make a mistake or didn't you?
    That's a simple answer.
    Mr. Carnell. There are two parts to it. I think that----
    Mr. Kanjorski. You are definitely now in a classroom 
situation. Put yourself back in Treasury. You've got to make a 
decision one way or the other.
    I mean, don't try to carry water on both sides. Condemn the 
man you served as president and the Federal Reserve for the 
acts they did when they bailed out Mexico. Or agree that it was 
a wise decision.
    I'm going to go you one further, Mr. Carnell. I've served 
on this Committee long enough to know that in 1989, George H. 
Bush took the office of the President and in 7 days, he came up 
here with the RTC bail-out for the S&Ls.
    I thought that was one of the most politically courageous 
acts anyone had done. And I'm a Democrat. I can say that about 
a Republican President.
    And I will tell you about a second great act he did in 
1991. He went against his pledge for no new taxes and raised 
taxes, and I think participated to a large extent in the 8 
years of the fantastic economy that we have just gone through.
    Now, I don't find that difficult as a Democrat to pay 
attention and pay respect to I think two courageous chapters in 
the profiles in courage. Lost his presidency because of it.
    No question in my mind.
    Mr. Carnell. I agree that both of those actions by the 
first President Bush were courageous and right. I think you put 
very well the case for them.
    Let me emphasize that what the Government was doing in 
1989, was not bailing out the thrift institutions themselves, 
but making sure that the Government could honor its own 
guarantee to their depositors.
    So it can be true that actions like this can be 
responsible. It can be true that they can be courageous. But I 
think we would be very mistaken to say that bail-outs in 
general are right and heroic and responsible.
    Mr. Kanjorski. I'm not saying bail-outs in general. I'm 
saying that if any of us are sitting in this room and we are 
delusional enough to think that there aren't institutions in 
this system that are too-large-to-fail, because of the 
ramifications that would be caused both in the domestic and the 
international market, I think we're being intellectually 
dishonest with ourselves.
    Chairman Baker. Would the gentleman yield?
    Mr. Kanjorski. Yes.
    Chairman Baker. I would just trying to join in, Mr. 
Kanjorski, to steer it just a little bit in the conversation.
    The purpose of all of this is not to decide what we shall 
do in the vent of failure. The purpose of this is to determine 
how we can preclude the conditions for failure.
    And I am not confident, given the enormous amount of 
information the Committee has reviewed over the many months 
that we have been back and forth, that we are in a position to 
be able to say without question of conscience that we know for 
certain the status of these enterprises.
    That's all. However we get there is of no difference to me. 
I will take any game plan anyone chooses to put forward.
    But I don't think we have that assurance.
    Mr. Kanjorski. Mr. Chairman, I agree with you. The only 
thing I'm disturbed about is that I think the next 3 to 6 
months in the American economy is probably the most crucial 
period of time that we will experience in our lifetime.
    And, for either the Congress or this Committee or the 
Administration or the leaders of industry and the economy of 
this country to further jeopardize this very delicate moment, I 
think is very dangerous.
    Chairman Baker. Correct.
    Mr. Kanjorski. So that's the reason I asked Mr. Miller, if 
these organizations are not being well run, or if he feels that 
they are at economic risk, then we do not have any alternative 
because of how large they are, we may have to bail them out.
    But we are not pressed with that time. For us to be 
attacking a fundamental pillar that's holding our economy up at 
this time, for whatever reason, because it doesn't 
philosophically, politically, or otherwise, appeal to us, I 
think perhaps it may be a misspent opportunity on our part.
    Chairman Baker. Well, I would only respond this way.
    It's a very large ship on which all the future of every 
homeowner and every taxpayer and every economic interest, not 
only in the United States, but internationally, rely to a great 
extent.
    There are now 74 foreign central bankers, Alan Greenspans 
around the world, who hold billions of dollars on deposit at 
the New York Fed.
    This is of no mere incident, that this is of enormous 
significance.
    And whether that ship stays on course, I'm not suggesting 
that we take a crew down to the basement of the ship and start 
cutting a hole in the hull.
    What I'm suggesting is there may be a few rusty spots that 
we need to examine or to go take a look at before we run 
aground and find ourselves in a circumstance from which we 
cannot extricate ourselves.
    I am indeed worried about it.
    Mr. Kanjorski. I think you're looking at the ship as a 
cruise ship and I'm looking at it as a lifeboat.
    Chairman Baker. Well, whether it's life or cruise, if it 
sinks, we all go down.
    Mr. Cox.
    Mr. Cox. Thank you, Mr. Chairman, and I thank our 
witnesses. I think we've had a great discussion.
    I was just remarking privately up here that our witnesses 
are very aggressive advocates for their respective points of 
view.
    Chairman Baker. Welcome to Financial Services.
    [Laughter.]
    Mr. Cox. If I might just put a question to Mr. Edwards 
because I think your testimony is crystal clear. You certainly 
don't want to throw out the baby with the bathwater here. You 
want us to be cautious, and I hope that we will be.
    I want to ask a question on a very discrete subject. I hope 
it's also a discrete question.
    And that is, SEC registration of publicly traded securities 
issued by GSEs.
    The GSEs take the view that they essentially conform to 
existing Federal norms of disclosure. Would the realtors 
support, oppose or be neutral on making sure that those 
disclosures were exactly what is required of all other issuers?
    Mr. Edwards. Mr. Cox, I think I'd have to have a little bit 
more information to comment on that. I would be happy to get 
back to you. But I really don't know that we've considered it 
or what have you.
    Mr. Cox. And actually, that tells me something, that at 
least that's not at the core of your concerns.
    Mr. Edwards. Right. I would like to make one other comment.
    There's been several questions, and maybe this will help on 
the issue of home ownership. Ms. Paige and others have made a 
comment about there's only been a certain increase in the 
percentage of home ownership in a number of years.
    I would remind the Committee that the two GSEs are not only 
involved in home ownership. They're very much involved in 
rental housing.
    I have been involved in rental housing in my city and I 
have seen the help and--I'll call it the foundation--the 
support that we've gotten out of the GSEs as far as rental 
housing.
    That is to me one of the real large problems in this 
country, is the disappearance of rental housing.
    And so, it's not just home ownership we're talking about. 
It is the support of the rental housing community which is a 
lot of the lower income housing that you're talking about.
    This is a very serious issue in this country and I think we 
can't walk away without remembering that this support of not 
just home ownership, but good, quality housing.
    Mr. Cox. I appreciate that. Mr. Miller, I wonder if I could 
ask you as the representative on the panel, the only one 
speaking, in your case, indirectly, for the GSEs, what your 
view would be on the question that I just put to Mr. Edwards.
    Would repeal of the exemption from the securities laws be 
material to your concerns?
    Mr. Miller. It strikes me, Congressman Cox, that the system 
today with the exemption is working well, lowers cost. I don't 
see any abuse of the sort that SEC registration----
    Mr. Cox. Do you think that SEC regulation--that is to say, 
just the registration requirements imposes on new costs, that 
aren't already being borne by the GSEs in their disclosure?
    Mr. Miller. Just the process of registration requirements, 
other regulations.
    Mr. Cox. Because it strikes me that if the smallest 
business in my district has to register its securities, that, 
surely, somebody with a multi-trillion-dollar portfolio could 
afford to do it.
    And markets since the 1930s have become accustomed to a 
certain style and form of disclosure. And I think we're this 
close anyway.
    I just want to make sure that we're not going further than 
necessary in granting Government exemptions to people if it 
doesn't do any good and certainly, there's no investor 
protection involved.
    Mr. Miller. The logical implication is that maybe some of 
the firms in your district might well be exempt. Rather than 
not exempting anyone, maybe there should be selective 
additional exemptions, or the regulations should be less 
onerous.
    Mr. Cox. Since I practiced securities law for a decade, I 
don't consider the registration requirements to be all that 
burdensome and unlike other laws and regulations, they don't 
change very often.
    Furthermore, the investing community is used to seeing this 
style and format of disclosure.
    And furthermore, I think the GSEs would tell us that 
they're pretty much there already anyway, that they attempt to 
do this even though they're exempt.
    So I don't know what we're buying by fighting it.
    Mr. Miller. And the market-makers there are very 
sophisticated. I'm not speaking on behalf of the GSEs. Let me 
just make that clear, in any of my comments today.
    Mr. Cox. I'm just going to you because you're as close as I 
can get on this panel. So I'm going to put that burden on you 
one more time and ask you, on the subject of encroachment, 
which has been raised by some of the panelists, you remember 
that President Reagan issued an executive order that 
essentially said that the Government should not compete with 
the private sector if the private sector could do the job.
    Do you think that same thing should be true for Government-
sponsored enterprises?
    Mr. Miller. No, I think that basic philosophy ought to 
apply here for reasons that I outline in the attachment, the 
second attachment.
    I looked at this, and because basically the financial 
institutions, the other financial institutions have an upward-
sloping supply curve for loanable funds, whereas the GSEs 
supply curve is very elastic, that to take away from the GSEs 
the same kinds of advantages that are now given to the other 
financial institutions would result in an inefficient mix of 
financial institutions, accounting for loanable funds.
    We're in the world of the second best. If we could start 
all over and clear out all the undergrowth of the Government, 
and so forth, and streamline everything, you would probably not 
have any special arrangement for GSEs.
    The problem is, as my mentor, Jim Buchanan, says, where you 
go from here depends on how you got here.
    And I think we have to work with where we are. I don't see 
Congress making dramatic changes in the financial institutions 
and the nexus between Government and the financial 
institutions.
    And therefore, I don't see good reason to make fundamental 
changes in the charters--let me put it a different way.
    I see reason not to.
    Mr. Cox. Across the hall, I've spent some time worrying 
about Internet taxes. In fact, we're going to be dealing with 
that when the moratorium expires in October, dealing with it, 
hopefully, before that time.
    And of course, in connection with passing the Internet Tax 
Freedom Act in the first place, I spent an awful lot of time, 
several years, talking to the Nation's Governors before winning 
the endorsement of the National Governors Association and the 
mayors and the county executives and so on because they are 
worried about their tax base.
    And I think the realtors actually share that concern. 
They're worried about making sure that we don't short-change 
State and local tax bases.
    Do you think that, given the financial success of the GSEs, 
that they should continue with an exemption from all State and 
local income taxes?
    Mr. Miller. Mr. Cox, you know that my position on taxes is 
that whenever you can eliminate a tax, do it.
    There is a tendency for governments to reach too far and to 
tax too much. You can make a case for non-differential tax 
rates or not exempting some from taxes, whereas you do exempt 
others.
    But this would not be a high priority for me.
    Mr. Cox. Well, I think the Chairman is probably indicating 
my time is up. But I've got----
    Ms. Paige. Congressman Cox, could I respond to that for 
just one second? Or not?
    Mr. Cox. In fact, I won't ask any more questions. And if 
the Chairman will just permit the panelist to answer the 
questions.
    Ms. Paige. Thank you, Mr. Chairman. I couldn't disagree 
with Mr. Miller more on the charters and the taxation issue.
    The charters are possibly where the problem resides. 
They're very vague and the subsequent legislation doesn't do 
enough to clarify where secondary mortgage market parameters 
are.
    We are not kind of advocating some wholesale privatization 
that's going to happen tomorrow. I think that's politically 
untenable and everyone knows that it's not going to work that 
way.
    But I think a continuing dialogue lays some groundwork for 
some future enactment of some reforms that would be helpful to 
taxpayers without harming homeowners or the economy or the 
GSEs.
    And we would hope we would ramp up to an idea where we 
could discuss privatization. We're not going to be doing it 
tomorrow.
    And if they are as successful as they say they are, and we 
all say that they are supremely well managed, they can pay 
their taxes, and there are other things. They could probably 
pay their SEC fees as well.
    And it isn't even the fees that they're objecting to. It's 
just registering. It's having somebody look at their 
investments to be sure that they're safe and sound. They're 
objecting to that as well, besides the fees.
    So there are a lot of things that I think that they could 
be doing. And every time we suggest something, they say, well, 
we'll have to pass that on to the consumer.
    I'd like to see them maybe look at some other options, like 
taking less of a profit, since their mission requires them to 
look at affordable housing. And that's what they're supposed to 
be doing.
    Chairman Baker. Thank you.
    Mr. Bentsen.
    Mr. Bentsen. Thank you, Mr. Chairman.
    Just for clarification, I think, if I understand this 
correctly, and for sort of full disclosure for the Members that 
are here, I think they is us because Fannie Mae and Freddie Mac 
are in existence only because Congress created them and they 
did not choose to not pay taxes somewhere. They did not choose 
to not file SEC registration.
    Congress chose that.
    Now there is a strong case that could be made that Congress 
has made mistakes along the way during the last 200-plus years.
    [Laughter.]
    Again, that's a judgment call. We'll let everybody decide.
    To my knowledge, they haven't made many mistakes in the 
last 7 years on anything that I've voted for.
    But, in any event, I think we need to clarify that.
    Now, I also, and I'm sorry that Mr. Cox has left, but he 
raises an interesting point which is worth some review because 
with respect to the registration issue, it may be that the 
concern is not so much the registration as it is that it brings 
the Securities and Exchange Commission into the picture as a 
regulatory entity that they otherwise would not be.
    It's something to think about. Moreso than the cost 
question.
    But I have a number of questions that I'd like to go over.
    Mr. Carnell, you talked about the implicit guarantee 
question. I think this is correct, that we also provide for a 
perceived implicit guarantee as it relates to FICOs and 
REVCORPs.
    They're backed by the funds or by the assessments. But the 
market has always treated them as having an implicit guarantee. 
And in fact, for legal purposes, many escrows are allowed to 
hold those, including public escrows, in the same way that 
they're allowed to hold a Treasury.
    So I don't think that we can say that the GSE debts are 
unique in that respect, that there have been subsequent times 
when we have allowed this.
    Mr. Carnell. Just as an aside, Mr. Bentsen, I would note 
that FICO and REVCORP were created as sham GSEs. That is, FICO 
was created as a way to provide money, a little bit of money, 
to protect thrift depositors without it going on budget.
    And so what they did was they used the GSE model as a 
precedent for it.
    Mr. Bentsen. I understand that. But nonetheless, they were 
created.
    And second of all, and I don't have all criticism for your 
statement. But second of all, I think we have to be careful 
when we make a direct comparison between the savings and loan 
industry prior to FIRREA or FIDICIA and the GSEs today because 
I think the savings and loan industry was a much different 
animal. I think the structure was much different. I think the 
markets were much more different.
    And while you had funds to protect that, we all know that 
the taxpayers ended up spending a considerable amount of money 
in doing that.
    Now I do want to say that you were on point in your 
discussion of the regulator. And you hit the points exactly 
right when it comes to the inherent conflict of the Federal 
Reserve.
    I would add one other point.
    The way I read H.R. 1409 is the Federal Reserve would have 
veto power over the Treasury in allowing the GSEs to hit the 
line of credit which raises another conflict at the same time 
that the Fed may be conducting open market operations using GSE 
debt, which I think they are in the process of doing or, if 
not, strongly considering doing.
    But I think you're on target there, that if we were to 
consider a new regulator, that we would move in that direction.
    And I'm going to run out of time, although I would ask for 
the Chairman's indulgence because we had this long discussion 
about the relationship between the GSEs and the bail-out of the 
peso. And so, I'm going to get there.
    [Laughter.]
    And you can do this for the record, if you will, because 
the individuals from the GSE really didn't get to this point.
    The Chairman's bill, in providing for the GSEs to be under 
the regulatory authority of the Federal Reserve, provides for a 
number of new regulatory oversight and enforcement mechanisms.
    And what I want to know is where those comport or conform 
with other financial institutions as per the Bank Holding 
Company Act or Gramm-Leach-Bliley.
    Chairman Baker. If the gentleman would yield.
    Mr. Bentsen. Sure.
    Chairman Baker. I can maybe help cut that sort.
    We requested the GAO, pursuant to last session, to go 
through and do an analysis of current bank regulatory authority 
and GSE authority. And where there was a disparity in the 
enforcement action given to the regulator, we move to the bank 
standard for enforcement.
    For example, if the GSE gets to a condition of insolvency, 
you can't put them into a receivership. You can only move them 
to a conservatorship.
    The distinction between the two is that in a receivership, 
stakeholders, creditors, shareholders, can take a haircut. In a 
conservatorship, they do not.
    So it's a very distinct difference in consequence to 
markets. Therefore, there's confidence that the GSE's debts 
will be honored.
    That's just one. But there were a litany of things.
    So anything that the gentleman sees in the bill that 
appears to be new regulatory authority, are only those 
provisions identified in current bank regulatory authority made 
applicable to the GSEs.
    Thank you.
    Mr. Bentsen. Well, I appreciate that.
    But I would appreciate for the record if you would----
    Mr. Carnell. I would be glad to do that, Mr. Bentsen. And 
if I could just very quickly respond to your three points just 
for now.
    The first is that the Chairman's bill moves in the 
direction of making GSE safety and soundness regulation, for 
example, enforcement authority and prompt corrective action, 
more comparable to bank enforcement authority.
    But we're not talking about something here, despite the 
moaning and groaning from the previous panel, we're not talking 
about regulatory overkill.
    The fact is that OFHEO's authority right now in many 
respects is much weaker than that of the Federal banking 
agencies.
    And the Chairman's bill reduces some of that weakness.
    Second, I would note that in making the GSE line of credit 
at the Fed contingent on the regulator recommending it, I think 
that's a good move in the Chairman's bill because it means that 
the step of the GSE going to the Treasury and borrowing that 
money has the regulator complicit in it.
    In other words, that increases the political risk to the 
regulator of the GSE going on the public dole through borrowing 
from the Treasury.
    I think, institutionally, that's helpful. It puts a little 
bit more backbone.
    Mr. Bentsen. But the current law, if I understand it, 
allows--it's up to the Treasury Secretary to make that 
determination.
    Mr. Carnell. Correct.
    Mr. Bentsen. And so this would be a belts and suspenders 
effect, that you would have two regulators, one a political 
appointee and one theoretically not a political appointee.
    Mr. Carnell. Yes. But I think the concept, as you suffer my 
testimony, I don't favor making the Fed the GSE regulator.
    Mr. Bentsen. Right.
    Mr. Carnell. But if they were, I think the Chairman's bill 
is right on this point. And I think that if it stays at OFHEO, 
it would be right to enact a comparable provision saying that 
OFHEO needs to recommend it to the Treasury.
    Mr. Bentsen. With the Chairman's indulgence, let me move 
on.
    Mr. Rothschild, in your statement, you talk a lot about 
refinances as a percentage of--I think you were just talking 
about the year 2000 in those numbers.
    And I would ask you or Mr. Edwards, since he's speaking for 
the realtors, just in the general market, not just the GSE 
market, what percentage of mortgages originated in 2000 were 
refinances versus actual new mortgages?
    Mr. Edwards. Mr. Bentsen, I don't know that I have an 
answer to your question. We can certainly try to find an answer 
to your question.
    Mr. Bentsen. If you could find out because I know in 
various years, depending upon interest rate comparisons, refis 
have been a large portion of the mortgage.
    Chairman Baker. Let me add on to your question. I'm not 
trying to cut you off.
    Mr. Bentsen. Yes.
    Chairman Baker. If whoever is going to prepare the answer 
to that one, also needs to know how much of it was cash out 
because a lot of that refi stuff, people took money out and 
went and bought boats and stuff, just if we have that data.
    Mr. Bentsen. Right.
    Mr. Rothschild. Just a clarification. Our data for refis 
and the home purchase, it was all based on 1999 HMDA and GSE 
data.
    Mr. Bentsen. OK. Well, then, for 1999, so we're talking 
apples and apples.
    And then, Mr. Miler, you actually hit on a point that I 
thought about, which I thought is very interesting in this last 
exchange, or one of the prior exchanges.
    I don't disagree with the argument of the subsidy. And I'm 
not particularly afraid of the subsidy. I think what we're 
doing here is we're leveraging credit of the United States. And 
we do that in various instances.
    And there are groups like Ms. Paige's group and the 
Libertarians and others who think that that's an awful thing 
that we ought to do, and there are others who believe it's a 
good idea.
    But we do it in the municipal bond market. We do it all 
over the place.
    Nonetheless, you raise the issue of the supply curve for 
loanable funds. And I haven't read your report, but I'll take a 
look at it.
    The argument has been made, not today, but made before, 
that the fear--and it was referenced with the rising amount of 
debt--the fear that the GSEs have access in effect to cheap 
money because of the subsidy and the lower borrowing rate that 
that creates.
    And as such, when an entity has access to more and more 
cheap money, then they will be chasing cheaper and cheaper 
credit along the way.
    And I'd like you to comment on that because it seems to me, 
at least under their initial structure, they are somewhat 
limited in where they can put their dollars, which is in 
mortgages in some form or fashion.
    And if you look at where mortgages are written, they are 
written pretty much from the top of the income scale down and 
they come down to a certain point to where people basically 
can't afford to buy a house or don't know that they can afford 
to buy a house. And there's a small percentage in there of 
people who voluntarily choose not to own a house or whatever, 
and there's a small percentage who pay cash.
    But I'm curious whether or not we're being contradictory 
where we say, on the one hand, they're borrowing too much to 
make too many loans and on the other hand, they're not making 
enough loans down the income scale because down the income 
scale, the credit risk does increase.
    Chairman Baker. And to whom is that directed? Which witness 
is that?
    Mr. Bentsen. Well, to Mr. Miller and Mr. Rothschild can 
answer it.
    And that's it.
    Chairman Baker. I need to get two more Members in before we 
get called for a vote. And whoever would choose to respond.
    Mr. Rothschild. In our report, page 11 that we published, 
you can see the percentage of loans purchased by income group 
by Fannie and Freddie.
    And what you find is that although, and this is not on the 
basis of 100 percent of the loans that are out there that they 
can buy in the conventional conforming market.
    So those who are making between zero and $40,000 a year, 
they're buying 26 percent of those making between zero and 
$20,000, 39 percent between $21,000 and $40,000.
    And yet, for the upper income categories, they're buying 
much more. Between $61,000 and $100,000, they're buying 52 
percent of all the loans that are out there.
    You find a similar pattern of their purchases when you look 
at it by race.
    For whites and Asians----
    Mr. Bentsen. Of course, we realize that Ginnie Mae is in 
that market, in that lower end market as well, where they're 
created to buy those loans.
    And I guess the point I'm trying to make is that FM Watch 
and other groups have come back and said that they're issuing 
too much debt, they're chasing too much credit and creating the 
systemic risk in the market.
    And I think we do know that even though all of us want to 
see them go down the income scale, that there is greater risk 
the more you go down the income scale.
    Mr. Rothschild. Well, in a lot of those loans, there isn't 
greater risk. There may be lower cost, lower money to be made 
on those loans because they're smaller loans.
    So if you spend your time going after larger loans, you're 
going to make more money for every larger loan you buy versus 
the smaller loans.
    Mr. Bentsen. The Chairman is about to step on me here, but 
I just don't agree with that statement at all. I think that 
statement is illogical.
    I don't know if anyone else wants to comment on this.
    Chairman Baker. For the gentleman's perspective, I believe 
there's academic study which indicates a review--it's more a 
question of the amount of downpayment as opposed to income 
levels.
    And as long as someone has their own equity at risk, the 
relative risk ratio between lower income and higher income is 
not statistically significant in my view.
    But that's something that we can explore. Somebody jump in 
and then I've got to get to Mr. Meeks.
    Mr. Miller. I will give back the balance of my time.
    Chairman Baker. Thank you.
    Mr. Meeks.
    Mr. Meeks. Thank you, Mr. Chairman.
    Real briefly, and I apologize. There's been a lot going on 
today, for not being here to hear all the testimony. But let me 
just ask a couple of questions.
    You may know that I represent a district that's 
predominantly minority homeowners.
    And so, my first question goes out to Mr. Rothschild. 
Besides having GSEs purchase CRA loans, and I know that they're 
doing that and pushing that and that's good, despite when I 
initially got here, we found when we were doing the banking 
bill that there was a lot of opposition from banks that wanted 
to do CRA or continue CRA.
    But I'm interesting in making sure that more minority 
homeowners exist.
    Let me just ask, what is your organization doing to help 
increase minority home ownership?
    Mr. Rothschild. First of all, Congressman Meeks, our 
organization represents a number of trade associations.
    So, first of all, we don't do that as an organization. But 
I think if you look at the data, which is what we analyze, that 
is, the private sector in terms of its origination of loans to 
low-income, to moderate-income, to minorities, is doing as a 
percentage of their business, of all of the business that they 
do, is doing a far better job of doing those kinds of loans, 
making those kinds of loans, than the GSEs are at purchasing 
them.
    Mr. Meeks. Some data that I have seen and that we still see 
with a lot of the financial institutions, still in the year 
2001, minorities with equivalent financial status as their 
white counterparts, are still being turned down.
    And just indicating, what I'm trying to find out, I believe 
in your study, Shattered Dreams, you also indicated that the 
GSEs have not done as much as they should to support minority 
home ownership, when I know also that, at least in my 
community, it seems as though a lot of individuals, a lot of 
minorities are being pushed toward the sub-prime lending market 
and/or for whatever the reason, advertisements or not feeling 
comfortable, being pushed toward the sub-primes.
    And so, I know, therefore, you object to the GSEs moving 
into, if I understand right, moving into the sub-prime market. 
But if they are to increase their support of minority home 
ownership, wouldn't it then be a logical extension to go into 
the sub-prime market so that you're going after where African-
Americans and minorities are going because of what the trend 
has been thus far?
    And they've been paying much too much money in the sub-
prime market now at any rate.
    Mr. Rothschild. The fact is that HUD looked at this. They 
took out the sub-prime loans out of the analysis of the data 
that they analyzed, the HMDA data.
    And they found that, in fact, taking out the sub-prime 
loans, the GSEs are still not doing as well as the private 
sector in making the loans to minorities, to African-Americans, 
to Hispanics and to low-income.
    There are studies done just this past December by HUD that 
document that.
    This study that was done on the City of Baltimore, and it's 
fairly thick, shows that really what takes place is that when 
the GSEs come into a community, they are sort of the 
bellwether.
    They announce that if they're going to come into the 
community, the lenders follow and make those loans.
    So you have to consider the role of the GSEs. They're two 
institutions. They buy most of the loans. They are the 
organizations, they're a duopoly that buy the bulk of the loans 
in the conventional conforming market.
    That's the market they buy in.
    Mr. Meeks. Is that a good thing?
    Mr. Rothschild. Is it a good thing that they buy loans?
    Well, of course it's a good thing.
    Mr. Meeks. And the market follows.
    Mr. Rothschild. FM Watch supports the fact that the GSEs 
are important to provide liquidity.
    Go back to the CRA loans. If the GSEs bought more CRA 
loans, which everyone that I know from the housing community 
says is a good idea, then the banks would have more money to 
make more loans.
    That's liquidity. That makes a lot of sense.
    But they're not doing it. They're very, very limited in the 
amount of CRA loans they want to buy. They don't want to use 
their subsidy to basically buy the loans that the banks have 
subsidized in making CRA loans.
    I think that's a very, very important issue. I'll give you 
another issue.
    There are different definitions for CRA that define low- 
and moderate-income. They are lower than they are for the 
housing goals.
    If the housing goals definition conformed to CRA, it would 
direct the GSEs to buy far more low-income loans, which would 
make a big difference in the amount of low-income loans they 
buy.
    Mr. Meeks. I want to follow up but I know that we're 
limited. I know that there's a vote coming up. But I want to 
just ask Ms. Paige a question also, real quickly, because I 
know that your organization says that it supports reasonable 
spending by the Government on behalf of the taxpayer.
    And I've not been too long elected to Congress. But since 
I've been here, and you tell me whether I'm wrong or right.
    Ms. Paige. You're right. You're right. Whatever it is, 
you're right.
    Mr. Meeks. It seems to me that GSEs have brought private-
sector liquidity to the secondary mortgage market and a sound 
investment for its investors and industry leading management 
practices without the need for Congress to appropriate a dime 
for these organizations, which seems to be based upon what your 
organization stands for, a good thing.
    So I was wondering, would your organization support such an 
innovation by Congress?
    Ms. Paige. Thank you for the question, Mr. Meeks. And let 
me say that, without being too blunt about it, the GSEs are not 
private.
    The last time I checked, private organizations don't have a 
$200 billion line of credit with the Treasury. They don't have 
board members who are appointed by the President. They don't 
get to borrow at preferred rates. They don't get tax exemption.
    Most banks and financial institutions, mortgage bankers, 
they pay taxes.
    There's a raft of benefits that the GSEs get that put them 
in a hybrid situation. They're half and half. They've got a 
charter that gives them special benefits that are worth a lot 
of money, whether you agree with Mr. Miller's analysis or the 
CBO's analysis.
    It's a lot of money. It's billions of dollars.
    As they do that, they put the taxpayers at risk. We're what 
stands behind them, basically, us taxpayers and the Congress of 
the United States.
    So it isn't fully private. And so, we would want it to be 
fully private. And we're not suggesting that they would 
suddenly go away. What we're saying is that they would become 
players in the private market along with other players in the 
private market and there would be increased competition.
    This is not as if--our suggestion would not suddenly make 
the GSEs disappear. They would become private organizations. 
They would compete with other private organizations.
    We don't know what that environment would be like. But I 
would dare say that it would be more competitive than it is 
even now because right now they compete with each other and 
that's it.
    Thank you, Mr. Chairman. I hope I answered your question.
    Chairman Baker. Mr. Meeks, if I may, let me get Mr. Ford's 
question on the record. And if you don't have to dash off, I 
want to engage with you. You make some excellent points and I 
want to provide a little explanation, if I may.
    Mr. Ford.
    Mr. Ford. Thank you, Chairman. Before I start, I see so 
many friends in the audience, the distinguished Mayor from 
Arkansas, from Little Rock, Ms. Shakelsford, my dear friend. 
And certainly, all of the panelists are wonderful people. But 
there's really a wonderful person on the panel from Memphis.
    Chairman Baker. Mr. Ford, since you're being so nice, 
please pull that mike close so that we can all hear you.
    Mr. Ford. It's always good to see people from Memphis, Mr. 
Chairman, the President of the National Association of 
Realtors, my friend. We're delighted to have you here.
    If I could, Mr. Chairman, I know that a lot of things have 
been said about minority home ownership.
    FM Watch sounds so sinister, but those members of this 
organization who are here today to express their opposition to 
the GSE subsidy, FM Watch sounds a little--I think the people 
who make up the organization are good people. I disagree with 
them. I think you're wrong on this issue. But I hate to refer 
to you as FM Watch. But for lack of a better term. There's been 
a lot of talk about how minorities perceive, or blacks or 
Hispanics, perceive and there's been a lot of talk here about 
it.
    I do hope that this subcommittee at some point will take up 
an issue that appeared on the front page of the New York Times 
over the 4th of July holiday, squeezing out some other news 
about a particular congressman here in the House that dealt 
with how Nissan might be charging higher finance rates to 
African American car buyers.
    I hope it's an issue that the oversight investigations arm 
of our Committee will take up at some point.
    In relation to that, I know that the National Black Caucus 
of State Legislators, as well as the chairlady of the 
Congressional Black Caucus, both issued statements regarding 
this hearing and the impact that the GSEs have had on minority 
home ownership rates over the past years.
    And if I could submit them to the record I would appreciate 
it, Mr. Chairman.
    Chairman Baker. Without objection.
    [The information referred to can be found on page 78 in the 
appendix.]
    Mr. Ford. I guess my question, or my thoughts, I hope home 
ownership rates increase for everybody, not just black folks. I 
happen to be African-American, but I think it's a good thing 
when people own homes.
    And as much as this debate may create a greater appetite 
for those in the financial services industry to provide 
opportunities for home ownership, it's a good thing.
    Now for both sides to dual back and forth about who is 
doing more in the low-income and middle-income housing markets 
is a good thing because you both could be doing a lot better.
    But to suggest that the GSEs have not provided enhanced 
opportunities for particularly black home ownership and home 
ownership in areas that have been overlooked by this market, I 
think is a little misleading.
    I understand what my friend, Mr. Rothschild, who comes from 
a great organization himself that he's a part of, but I think 
it's important to recognize that Fannie Mae, as well as Freddie 
Mac, and I know the distinguished professor made some points 
with my good friend, Mr. Bentsen, who is far smarter than me 
talking about all these financial terms and all.
    But I think his larger point is that I think it's hard to 
measure this in a zero-sum game, or hard to analyze or assess 
this from a zero-sum approach.
    My great Chairman of this Committee, who understands these 
issues as well as anyone, whom I also disagree with, I think 
would also have to agree that, in large part, the GSEs have 
performed some good things for the economy and made possible 
home ownership opportunities for a lot of people who had been 
left out of the market and shut out of some of these 
opportunities.
    It's important to note that the realtors, the homebuilders 
and a whole array of organizations who sometimes agree, 
sometimes don't agree, all agree that the GSEs have indeed 
provided a valuable part and an important part of home 
ownership growth across this Nation.
    I guess my question would be directed to the professor and 
to Mr. Rothschild in particular.
    FY Watch uses HUD studies to compare Fannie Mae to the 
primary mortgage market.
    And forgive me for reading this. I'm not smart enough to 
understand this without being able to read this, Mr. 
Rothschild, so just bear with me:
    ``But there are serious issues with respect to HUD's 
methodology, including questions about the appropriate use of 
HMDA data, the importance of missing race data, and the 
treatment of sub-prime and manufactured housing lending.
    ``The correct comparisons show that probably over time, 
Fannie Mae has led or met the market in lending to low- and 
moderate-income households and to minorities.''
    Perhaps you can respond to that or correct me or correct 
the record as it relates to that issue. And I would love to 
open it up to the professor as well, if he would be so kind.
    Mr. Carnell. And since you mentioned FM Watch, let me just 
mention that there's somebody here representing FM Watch, and 
that's not me.
    I have no ties to them.
    Mr. Ford. They're not a bad group of folks to be associated 
with, but I appreciate your correcting the record.
    Chairman Baker. If you can withhold to say a couple of 
minutes, because I want to make sure that we wrap this up 
before the next vote occurs.
    Mr. Rothschild. Sure. I would like to give my colleague 
here, who has been dying to make a comment, and it's a perfect 
segue because he did all the data work and can talk about the 
HMDA data.
    Chairman Baker. And please identify yourself for the 
record, sir.
    Mr. Tornquist. My name is David Tornquist. I'm also a 
principal at Podesta Mattoon. I worked on the FM Watch study.
    The criticism that you raise about the HMDA data has, of 
course, been raised by Fannie and Freddie in response to every 
study that has come out that criticizes their performance in 
the market.
    HUD has looked at the criticisms that Fannie and Freddie 
have made of the HMDA data and they have issued a report back, 
I think it was 2 years ago, where they have said that Fannie 
and Freddie exaggerate the problems with the HMDA data.
    And I would point out that they say that the HMDA data is 
acceptable to use to make assessments of the market shares of 
the GSEs' activities in the mortgage market, as well as the 
fact that HMDA is what HUD uses to enforce the affordable 
housing goals.
    But also, I would like to point out that we did not just 
simply rely on the HMDA data. We also relied on the GSEs' own 
data. From the GSEs' own data, we got the same results that we 
got from the HMDA data.
    So there shouldn't be a question of the accuracy of the 
numbers. You can argue about what you want to do about the 
numbers, but the numbers still show that Fannie and Freddie buy 
fewer loans from low-income people than from wealthier-income 
people and fewer loans from minority borrowers than they do 
from white borrowers.
    Chairman Baker. Anyone on the other side want to respond, 
or defense the data?
    Mr. Carnell. I would just note that the general point 
that's being made there about Fannie and Freddie doing 
proportionately less is consistent with the Federal Reserve's 
study by Canter & Passmore. It's consistent with the 1996 
Treasury study, as well as with the HUD report.
    One of the issues here is how much of the credit risk is 
being borne by Fannie and Freddie, as opposed to how much is 
borne by banks and thrifts.
    And the conclusion of all of these three studies that I 
mentioned is that banks and thrifts were doing more to extend 
home ownership in the groups we're talking about here than 
Fannie and Freddie were.
    And I want to note that that's all the more remarkable 
because Fannie and Freddie don't pay for their Government 
benefits, whereas banks do.
    The net subsidy to Fannie and Freddie is significantly 
greater than the net subsidy to banks, if indeed there is a net 
subsidy to banks.
    Mr. Ford. Mr. Chairman, I know that Mr. Miller addressed 
some of that in his remarks as well.
    If the president would speak.
    Chairman Baker. We'll give a couple of minutes to both Mr. 
Edwards and Mr. Miller.
    Mr. Edwards.
    Mr. Edwards. Well, I think I'd like to comment back on what 
I mentioned a while ago. We continue focusing on just home 
ownership and buying loans and not buying loans and home 
ownership.
    I've got to re-emphasize that Fannie Mae and Freddie Mac 
are also involved in rental housing. And that housing supplies 
housing for a lot of people that are not buying a home or are 
never going to buy a home.
    Chairman Baker. Do you know what the percentage of their 
business is represented by what?
    Mr. Edwards. I do not know the percentage, but I will get 
it for you.
    I do know in our market place, Mr. Chairman, that they have 
been very successful and a very big part of assisting us in 
rental housing renovation and what have you.
    And so, I will get those numbers for you. But I think it's 
important for this group to know that we're not talking about 
just home ownership. We're talking about where people live in 
total housing.
    Mr. Rothschild. And it's a very small percentage of their 
overall business, Mr. Chairman. And when they do get into 
multi-family type of housing, it's usually at the upper end 
rather than at the lower end.
    Chairman Baker. Mr. Miller.
    Mr. Miller. Let me say that, I won't take time now, but I 
might want to respond if you would allow, Mr. Chairman, in 
writing to the question of this vertical lending practice.
    Chairman Baker. Absolutely.
    Mr. Miller. Also, I want to take issue with Professor 
Carnell on the issue of to what extent the financial 
institutions, other financial institutions receive a similar 
benefit as bestowed upon the GSEs.
    Chairman Baker. Without question.
    Mr. Ford. Would you summarize--I just think it's important, 
Mr. Chairman, that he be given one minute because that was at 
least part of your testimony that I had the opportunity to 
read.
    You touched on that a little bit. And since I relish the 
opportunity to agree with you on something, Mr. Miller, I'd 
appreciate it if you would just give us a little, maybe a 
minute summary of what it is that you talked about in your 
remarks.
    Mr. Miller. It's worth noting our agreement, isn't it, Mr. 
Ford?
    Mr. Ford. Absolutely.
    [Laughter.]
    Mr. Miller. In my judgment, while the other financial 
institutions do pay fees for some insurance, they have other 
benefits bestowed on them.
    If you will look in the second attachment to my testimony, 
there will be identification of some of those. I'd be glad to 
respond to you in writing about them.
    But there are similar benefits that are received by the 
other financial institutions. And it goes to the point that I 
think you raised a while ago that I was going to respond to 
when I conceded back my time. Dr. Pearce and I believe that 
there is a similar benefit at each level of loanable funds that 
goes to the other financial institutions. They have an upward 
sloping supply curve, the GSEs have essentially a horizontal 
supply curve.
    And for that reason, if you took away the so-called benefit 
from the GSEs, you would essentially have the financial 
institutions granting too many loans and the GSEs too few, and 
you would have an inefficient outcome in that case.
    There is something that Mr. Bentsen, raised, and the 
argument that because of the support of the mortgage market, 
too much money, too many loanable funds are going into the 
mortgage market.
    That is a very valid argument.
    But I don't take issue with that in my analysis. It is a 
policy determination of the Congress whether to promote home 
ownership or not promote home ownership.
    Chairman Baker. Thank you, Mr. Miller.
    Mr. Ford. Mr. Chairman, I think this is such a wonderful 
thing, regardless of what happens with the Committee. I do have 
my opinion on this.
    But for poor people and low-income people and moderate-
income people to force the attention of you incredible minds on 
this issue and to have the GSEs engage, and FM Watch engage.
    When you pay attention to people in any market, good things 
can happen.
    So on behalf of all the poor people in my district, I say, 
thank you, Mr. Chairman, and I thank those of you who are here 
because, in the end, those who want to own homes and who are 
willing to make the commitment, will indeed have that 
opportunity.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Mr. Ford. I just want to respond 
to the gentleman's observation, and that of Mr. Meeks as well.
    I have concerns about the affordability for homes for 
working people. And I don't believe that any sector of the 
current financial system is doing enough.
    On average, when you look at the portfolio of Fannie, 
Freddie, and a commercial bank, Fannie and Freddie will be 
somewhere below 5 percent of their portfolio fits the criteria 
of concerns you're looking at.
    A similar analysis using the same standards through a 
commercial bank portfolio will be roughly 13 percent.
    I don't think the argument today should be they're doing 
bad things, we're doing good things, regardless of the team. I 
think they both need to be doing better.
    Let's take an example.
    I'm a former realtor. Let's assume that a person wants to 
buy a $60,000 house.
    To have a conforming loan means you've got to have a 20-
percent downpayment, unless you want to have private mortgage 
insurance. A $60,000 house, you've got to have $12,000 cash for 
a $48,000 conforming loan balance.
    Now I haven't in my real estate experience--you've got to 
add on 3 percent closing costs on average. The lawyers have got 
to get their cut.
    So you're up to $15,000.
    How many working families do you know who are buying a 
$60,000 house are going to put 15 grand into it? Well, they 
don't. They have to have special programs.
    97 percent loan-to-value is a customary kind of program 
that Fannie has. It's a great program. They even have interest 
rate buy-downs. You also have downpayment help programs.
    If you live there long enough, you get credit each year for 
having lived there. You've got to go through a home ownership 
school.
    Those are wonderful programs.
    But Fannie and Freddie don't originate the loans. They buy 
the loans.
    You go to your hometown banker. He fills out the mortgage 
application. He services it, takes your credit, all that, and 
then he cranks it into this mystical box that Fannie and 
Freddie have called an underwriting system.
    All that means is you put the application in and if you 
don't come back looking right, you don't get approved. If you 
happen to have a septic tank on the property line, that's a 
non-conforming loan because it doesn't fit the secondary market 
criteria.
    So there is a cookie cutter that stamps your loan. And if 
it fits, you get access to credit. If you don't, you're out.
    So a lot of the independent community bankers who are 
portfolio lenders, they extend the credit because they know 
you. And they hold it 15, 20 years, and they manage the entire 
risk of that mortgage inside their bank, are relatively few.
    On the other hand, when you go to Freddie Mac's own 
information sheet, which I found to be quite troubling, and I 
mentioned to the gentleman earlier in the day I wanted to get 
the response from Freddie, which they indicated it needed to be 
seasoned.
    It would take 12 pounds of cayenne pepper to get this in 
good shape.
    [Laughter.]
    But I'm going to be looking at that response very carefully 
and I invite both gentlemen to sit down with me in a non-biased 
discussion of what these folks are really doing.
    Let me tell you, if you get close to five, you're going to 
know you had something.
    Now, in looking at this data, in describing the people I 
was just talking about, the ones you and I both think ought to 
get a better shake out of all of this, the loans according to 
their loan-to-value ratio range that are above 95 percent in 
loan-to-value, so that individuals putting 5 percent or less 
down, 3 percent closing close, that's somewhere manageable for 
a $65,000, $70,000 house.
    Two percent of the portfolio. Two percent.
    Now where is the rest of it going? Folks are getting loans 
below 70 percent of LTV. Or let's go to 80. 80 and down. That's 
the folks putting up the $12,000 on the $60,000 house and, 
frankly, that's not where it's happening. It's in the big-
ticket houses.
    You could come to Baton Rouge today, buy a $342,000 house, 
make that downpayment and have a $275,000 mortgage. That's a 
mortgage that Fannie and Freddie can buy. That's a conforming 
loan under the current rules.
    73 percent of the portfolio, according to the Freddie Mac 
information statement, not CBO, not Treasury, not any 
irresponsible party, of their portfolio is made up in those 
loans.
    That's my problem, guys.
    We are paying a lot of money in a subsidy to provide a 
housing opportunity for low-income individuals and it ain't 
working.
    Now on top of that, I'm not convinced that the safety and 
soundness questions are properly supervised. I'm willing to 
take anybody's deal on any front. If we can get the low-income 
portfolio percentages up to ten percent, sign me on. You all 
figure out what you want, I'm with you.
    At the same time, we can figure out that the safety and 
soundness is there, so we have a secondary mortgage market 
security act, the worst thing in the world, for your interest, 
my interest, taxpayer interest, is to make the presumption that 
they are operating in a safe and sound fashion, don't do the 
due-diligence, and wake up one morning in a high-interest rate 
environment when they can't find a counter-party to hedge their 
risk, and we're all in the tank.
    That's what it's about.
    Now I appreciate you gentlemen staying for that 
explanation, because I've had frustration in trying to get 
folks to understand this is not all that I think it should be. 
And it's a very expensive delivery mechanism to provide a 
limited amount of benefit to the targeted community.
    And I don't like it. I just knocked over my ice.
    Mr. Meeks. Let me----
    Chairman Baker. Yes, sir.
    Mr. Meeks. I haven't studied the report, but I don't know 
how much of that is bumped up by a city like New York City or 
Chicago or San Francisco.
    Chairman Baker. I think we ought to find out.
    Mr. Meeks. Where you can't buy a $60,000 house.
    Chairman Baker. Right.
    Mr. Meeks. And if you're going to buy a house generally in 
New York, even poor people, it has to be $200,000, $250,000.
    Many times, it's a two-family home and so, therefore, they 
try to do what they have to do with the income from the two-
family home, but that will bump up that price.
    Chairman Baker. I'm saying to the gentleman, let's find 
out.
    Mr. Meeks. In New York, that's what we're looking at doing.
    Chairman Baker. I'm saying, you may be right, I may be 
wrong, the old song.
    I may be crazy, that's the next line.
    But I think we owe it to ourselves to sit down, find some 
folks--if we don't trust HUD and we don't trust CBO, you tell 
me where we can find somebody we can talk to who's got real 
numbers and find out.
    We owe it to ourselves to determine that.
    Mr. Ford.
    Mr. Ford. I couldn't agree with you more, Chairman. But one 
probably objective way, if we can use that term, and we've used 
it somewhat loosely here, is if we see home ownership rates 
increasing, isn't that somewhat of an objective indicator that 
maybe some of these efforts on behalf of the GSEs, as well as 
those in the FM Watch and all of the competitors of the GSEs, 
isn't it some indicator that perhaps the system is working?
    I do think that Mr. Meeks' point is a valid one when you 
look at the price of the housing market in Washington.
    Chairman Baker. I won't dispute the gentleman. And I'm not 
saying that they are without merit or that they don't provide a 
service.
    What I'm suggesting is that the service we get for what we 
pay may be not in balance, and that the percentages of 
resources that flow through to low-income families are not what 
they should be.
    And I'll say it on the private side as well. I don't think 
either team is getting where they need to be in light of what 
we are saying as a congressional chartering operation, this is 
what you're in business to do.
    Are you in business to make 22 percent rate of return on 
equity, one of the highest rates of return--always in the top 
20 of the Fortune 500 and now the third and sixth largest 
assets corporations in the world.
    I don't know what compensations look like over there. I'm 
sure they're probably all right.
    But the point is that there may be a way to squeeze money 
out of that operation toward the intended purpose, as opposed 
to saying, we don't need to change anything. This thing's 
great.
    Mr. Ford. But if they weren't making money, we'd probably 
hold hearings to bring them to task on that.
    I hear you. I just think that at some point, that home 
ownership rates and whether they're going up or down has to be 
considered or weighed in a far heavier way than perhaps some of 
the things that----
    Chairman Baker. And the gentleman makes a great point. If 
this was 1979, we'd be having hearings because Fannie's 
insolvent.
    It's happened. They were insolvent for 5 years.
    So it's not something that can't happen. All we need to do 
is two things. Make sure we understand the risk, have a 
regulator we can blame so Congress isn't at fault, and 
encourage them to do the right thing by low-income individuals, 
and I go away.
    [Laughter.]
    But right now, we've got the worst of both worlds. They 
make a bunch of money. They don't help low-income folks. And we 
can't say for sure that it's not our responsibility.
    I don't see how any Member of Congress could just take that 
pill.
    Mr. Ford. Greg Meeks and I will sign on right away to the 
Richard Baker Immunity Act and GSE Failure right away to make 
sure that you're not responsible.
    Chairman Baker. Let me tell you, I'm going to sleep better 
tonight just because of that.
    [Laughter.]
    I want to cover one more thing before we call this thing to 
an end.
    Mr. Miller, let's come at this horse from a different end. 
I'm going to suggest that they're well-managed, that they're 
highly profitable, no potential of risk, a model of business 
excellence that ought to be held up to the world, envied by 
all, showing the path to home ownership with floodlights on 
every corner.
    It is an extraordinary model of business perfection in 
which I am in awe.
    I would suggest that, however, there might be one group of 
four or five people--let's just say the homebuilders and the 
realtors get together, and they want to make application for a 
GSE charter.
    Knowing that you are a Reagan Republican who believes 
fiercely in competition, what would be wrong with that?
    Mr. Miller. I would have no objection to that.
    Chairman Baker. Wonderful.
    Mr. Miller. But let me just say this. The problem that you 
have to address is the one that we talked about earlier 
briefly.
    And that is, what signals you're giving to the market. To 
the extent that the market might interpret action by this 
Committee, whether it is to propose, for example, withdrawing 
the line of credit, which they don't use, anyway, or some other 
initiative as taking Draconian action with respect to the GSEs, 
that would harm markets, harm their ability to carry out their 
mission of increasing liquidity in the mortgage markets.
    To the extent that the markets might view such an action 
that you just described as being the precursor of Draconian 
measures, that would harm markets and so, that would need to be 
avoided.
    But in the abstract, as a thought experiment, I don't have 
any problems with that.
    Chairman Baker. Well, while I'm thinking about it, we do it 
all on the same terms and conditions, no special privilege. 
Whatever capital adequacy requirements, whatever regulatory 
oversight that appears to be so capable and efficient that we 
currently now have would be applied to the new applicants.
    We could have Treasury review it, have the Fed review it, 
have everybody review it. But at the end of the day, having 
more competitive housing GSEs would drive the intended subsidy 
to the targeted groups and perhaps result in a more efficient 
and less costly and less risk exposure to the taxpayer.
    And I want to explore that.
    Mr. Miller. That's where we would disagree. I do not 
believe that numbers are a necessary condition for competitive 
outcomes.
    My view based on observations, some testing, is that these 
GSEs are quite competitive. There are 12 other home loan banks 
around engaged in similar kinds of activities. There are 
private entrepreneurs engaged in similar kinds of activities.
    I don't think the addition of, as you characterize, another 
GSE or two GSEs or three GSEs, would change the behavior of the 
market very much.
    Chairman Baker. Well, let's look at it this way. If we only 
had two banks instead of 8500, somebody would call that a 
concentration risk.
    If you had 12 GSEs instead of two, some folks might say 
that that might diminish risk. We wouldn't be creating new 
mortgage product because, as we all know, we have 70 percent 
home ownership only because of Fannie and Freddie. That can't 
possibly be improved on.
    So what it might mean is that if a GSE offered a lower 
rate, there would be a little refinancing going on.
    But let me ask--and I do have regard for your intellect on 
this matter. And any member of the panel who would choose to 
respond, or anybody else out there who wants to speak----
    Mr. Miller. Could I just clarify again, though?
    I think the question of the signal you send to markets 
would be important. We're going to set that aside.
    I don't have any reservation about your doing this as a 
thought experiment. But I would just caution--in my judgment, 
you would not change the behavior of the market. You would not, 
in the model that the CBO adopted and you implicitly seemed to 
be affirming, get more of this, ``subsidy'' passed along to 
consumers.
    As you know, I have a very different perspective of how all 
of that works.
    I don't think there would be improvements in the 
performance of that industry if you were to add another GSE.
    Chairman Baker. I'd just come at this very simply. If I'm 
in the suit-making business and I'm the only one in town and 
everybody's required to wear a suit, I figure I can charge what 
I want.
    If some yahoo moves in down the street and makes a good-
looking suit for about $20 less, I might have to start looking 
at my prices.
    I may be wrong. But I'd like to request participants' 
recommendations, analysis of the concept. There are some 
academic papers of history out there on the subject.
    I just want to thank everybody for their long-standing 
tolerance. No one would have expected that you would have been 
here, including myself, at this hour of the day on this 
subject.
    I do appreciate very much your contribution and the two 
Members--yes, Mr. Meeks.
    Mr. Meeks. Mr. Chairman, Mr. Ford and I were just talking. 
We thought it would maybe a good idea for the CBO to do a study 
where you maybe take out the five largest markets and the five 
smallest markets and see then where we come with the median 
income, with reference to the cost of housing that Fannie Mae 
and Freddie Mac had.
    Chairman Baker. I don't have any problem with the 
gentleman's suggestion in getting a study. I suggest, based on 
reactions to the current study, we may want to get somebody 
else other than CBO or--and I'm serious.
    Let's try to get folks that at the end of the day, there's 
not going to be people looking over their shoulder saying, this 
one doesn't make sense.
    We'll talk. Let's try to come up with a way of putting this 
together. I didn't think Mr. Kanjorski's idea of a roundtable 
last summer was going to be that productive and I was wrong. It 
turned out to be real good.
    This might be something where we might want to do a 
roundtable kind of thing later in the fall.
    I think we owe ourselves an honest discussion about the 
benefits that accrue and where they might be going sideways. 
And if I'm wrong, I'll say so. I've been wrong before. I've got 
H.R. 1409.
    I know I'm wrong.
    [Laughter.]
    I have two statements that I would like to introduce for 
the record. One is by Chairman Mike Oxley and the other is a 
statement by the Council of Federal Home Loan Banks regarding 
the subject matter of today's hearing.
    Unless any Member has further comment--I've been reminded 
to announce that we will have, much to the dismay of many, 
another hearing on this matter later in the year, perhaps 
centered around the competitiveness concept, depending on the 
interim studies that may be engaged in.
    But thank you for your--oh, yes. And we are very much 
interested in the Administration's position, once formulated, 
on the whole matter.
    Hearing adjourned.
    [Whereupon, at 5:37 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 11, 2001

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