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23–132 PDF 2005

THE ADMINISTRATIVE PERSPECTIVE

ON GSE REGULATORY REFORM

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

APRIL 13, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–15

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

ROBERT U. FOSTER, III, Staff Director 

(III)

C O N T E N T S 

Page 

Hearing held on: 

April 13, 2005 ................................................................................................... 1

Appendix: 

April 13, 2005 ................................................................................................... 49

WITNESSES 

WEDNESDAY, APRIL 13, 2005

Jackson, Hon. Alphonso, Secretary, United States Department of Housing 

and Urban Department ....................................................................................... 8

Snow, Hon. John W., Secretary, United States Department of Treasury ........... 10

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 50

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

Royce, Hon. Edward R. .................................................................................... 53

Jackson, Hon. Alphonso ................................................................................... 54

Snow, Hon. John W. ......................................................................................... 58

(1)

THE ADMINISTRATIVE PERSPECTIVE 

ON GSE REGULATORY REFORM 

Wednesday, April 13, 2005

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to call, at 10:07 a.m., in Room 

2128, Rayburn House Office Building, Hon. Michael Oxley [chairman of the committee] presiding. 

Present: Representatives Oxley, Leach, Baker, Bachus, Castle, 

Royce, Ney, Kelly, Paul, Ryun, Miller of California, Tiberi, Kennedy, Hensarling, Garrett, Barrett, Harris, Neugebauer, Price, 

Davis of Kentucky, McHenry, Frank, Kanjorski, Maloney, Watt, 

Carson, Sherman, Meeks, Lee, Moore of Kansas, Capuano, Clay, 

Baca, Lynch, Scott, Green, Cleaver, Wasserman Schultz. 

The CHAIRMAN. [Presiding.] The committee will come to order. 

Pursuant to Rule 3(f)(2) of the rules of the Committee on Financial Services for the 109th Congress, the Chair announces he will 

limit recognition for opening statements to the Chair and Ranking 

Minority Member of the full committee, the Chair and Ranking Minority Member of the Subcommittee on Capital Markets, Insurance 

and Government-Sponsored Enterprise, or their respective designees, to a period not to exceed 16 minutes, evenly divided, between the majority and minority. 

The prepared statements of all members will be included in the 

record. 

The chair recognizes himself for an opening statement. 

I want to welcome Secretary Snow and Secretary Jackson back 

to the committee this morning. I am looking forward to your views 

on H.R. 1461, the Federal Housing Finance Reform Act of 2005, 

and the administration’s perspectives on GSE reform in general. 

We have been working on this issue for a long time. Since the 

106th Congress, this committee has held 22 hearings and has 

heard from 101 witnesses on GSE-related matters. 

Chairman Baker should be commended for his hard work in 

monitoring the GSEs over the years, and I am proud to be a cosponsor to the legislation he introduced to create a new GSE regulatory agency. 

This legislation will foster confidence by granting the agency the 

necessary powers to ensure the safe and sound operations of these 

complex enterprises. 

I would encourage my colleagues to join in support of this legislation. 

2

At this time, in 2003, we were all led to believe that the GSEs 

were running smoothly with only a routine accounting restatement 

in progress at Freddie Mac. What we have learned since then is 

that these enterprises were involved in revenue smoothing, the 

misapplication of accounting standards and irresponsible corporate 

governance. 

The Federal Home Loan Bank system has also had its share of 

problems over the years with accounting problems and inadequate 

management. The governance situation in Seattle seems to be particularly troubling. 

It is time for a new oversight structure for the GSEs that will 

give the regulator the tools it needs to prevent these problems from 

developing and permit swift action when problems do arise. 

We have learned in our hearings that the current regulator, 

OFHEO, lacks the critical tools needed to supervise these enterprises. It is our duty to structure a strong regulator to ensure that 

the housing market, the taxpayers and the financial system as a 

whole remain safe. H.R. 1461 strikes the right balance of strong 

regulation that is not overly burdensome. 

Authority over minimum capital, program approval and receivership are all concepts that this committee has discussed over the 

years. 

This regulator is independent from the political process. That 

means there is no influence on safety and soundness or on mission 

compliance. 

Some argue that HUD has the expertise in housing mission. 

However, I would contend that it is not HUD that has the expertise 

but rather it is the people at HUD who have that expertise. These 

people can move to the new regulator and make decisions that are 

independent and in the best interest of the U.S. housing market. 

H.R. 1461 also grants the regulator the authority to adjust the 

portfolios of the enterprises. This is an important power, and it will 

ensure that the enterprises do not hold portfolios that are unsafe 

and unsound or in violation of their mission. 

In a similar manner, banks are forced to keep their portfolios in 

check through capital levels mandated by the Basel Accords. This 

structure encourages the holding of a diverse portfolio of assets, 

since the holding of too much of a particular asset, or a risky asset, 

results in a higher capital charge. 

We have heard from some that Congress should be cautious in 

its efforts to create a new regulator and that we need to be mindful 

not to harm the housing market. In truth, the housing markets are 

being threatened now by the various accounting and regulatory 

problems at the GSEs and by the lack of a regulatory agency with 

a real and real authority. 

A regulator with enhanced powers will assure that our housing 

financing system recovers and becomes stronger and more resilient 

in the future. The goal of this bill is to create a credible GSE regulator—nothing more, nothing less. 

I also want to remind members of the committee that both Secretary Jackson and Secretary Snow have been generous with their 

time. Last week Secretary Jackson appeared before us, and next 

week Secretary Snow will be back to discuss international financial 

issues. 

3

I would urge members to keep their statements and questions focused on GSE-related issues this morning so that we can have a 

productive session. 

Thank you both for appearing today, and I look forward to your 

testimony. 

Now I recognize the gentleman from Massachusetts, the Ranking 

Member, Mr. Frank. 

Mr. FRANK. There are three sets of concerns that have been 

brought out with regard to the government-sponsored enterprises, 

and I will talk particularly Fannie Mae and Freddie Mac. 

I think we are all fairly clear that the reason the Federal Home 

Loan Banks are going to be included in this legislation is that it 

would look funny if they were not. That is, absent the concern over 

Fannie and Freddie, we would almost certainly not be dealing with 

the Federal Home Loan Banks, but people are afraid that the markets would react negatively if we did this new scheme and they 

were not included, so they will be included. 

I trust they will be included in ways that will recognize the very 

quite distinct differences between Fannie Mae and Freddie Mac. 

Now, with regard to Fannie Mae and Freddie Mac, it seems to 

me there were sets of concerns. I want to begin with what I think 

is some context that has gotten too little attention. 

We have a serious housing problem in this country. We have a 

particular problem in many parts of the country. But housing affordability is one of the gravest social problems we have. 

And while general prosperity, which we all welcome, helps alleviate some social problems, reduces unemployment, can increase real 

wages, in some ways it makes the housing situation in some parts 

of the country worse. 

The prosperity of the 1990s, because of market imperfections, 

meant that in some parts of the country the demand for housing 

increased far beyond what the supply of housing could meet. And 

so in many parts of the country, the 1990s made things worse. 

We have decided—over my objection, but I see no near-term reversal of that—substantially to reduce the direct federal role in 

housing affordability production. We are basically out of the production business at HUD. We have rental assistance programs, but 

we are not constructing much housing. 

In addition, we have hundreds of thousands of units of housing 

that has been built over the years with federal assistance, under 

the 221(d)(3) and 236 program, the rural housing programs, which 

is at risk because of market forces and the expiration of legal restrictions of going out of the affordable housing inventory. 

So if we were to project current housing policies forward—I will 

be opposed to that, but I cannot guarantee obviously it does not 

happen—we will have 5 years from now many fewer affordable 

units than we now have federally provided for. 

There are a couple of offsets to that. One, has been the most successful thing we have done in a long time. It was originally very 

partisan when it was done, but it is now universally accepted. The 

former chairman of this committee, Henry B. Gonzalez, was the 

leader in it. We mandated an affordable housing program to the 

Federal Home Loan Banks with a percentage of their profits that 

has become a major source of housing affordability production. 

4

And now we come to Fannie Mae and Freddie Mac. And the context is that Fannie Mae and Freddie Mac are important sources of 

affordable housing, and in my judgment should become even more 

important sources of affordable housing, and that is one of the 

things I hope we will do in this bill. 

There are three sets of concerns. One has to do with the financial 

safety and soundness of these two large institutions. And here I 

think there is general consensus that we should increase the ability 

of regulators to take action necessary to protect safety and soundness. 

I would say that I think the situation is not nearly as critical as 

people have thought. We have found with both Fannie Mae and 

Freddie Mac inappropriate behavior, bad accounting—I think influenced probably by the compensation schemes of the top officials—

and we have been able to step in through the regulator and correct 

those. 

What is interesting to me is that in both cases, multibillion dollar mistakes happened. The leadership committed—the mistakes 

were not made; people made the mistakes. Mistakes do not happen 

by themselves. 

No one should be allowed to use the passive voice when talking 

about screw-ups. We ought to identify who did it. The leadership 

of Fannie Mae and Freddie Mac did it. And they have—all those 

I believe have left. I am sorry that their compensation lingers on, 

and I would like in the bill to make sure that we can more adequately cut off compensation for people who misbehave. 

But in neither case has the safety and soundness of Fannie Mae 

or Freddie Mac or the housing market or the United States been 

implicated. In other words, there was more solidity there than people think. 

But in any case, I agree that we should take action to strengthen 

the safety and soundness regulation. 

But there are two other agendas at stake here. One is the notion 

that it is inappropriate for the federal government to interfere with 

the allocate of functions of the capital market. I believe this partly 

motivates Mr. Greenspan. 

There is obviously a very respectable, intellectual tradition that 

says: The market knows all, the market is smart and government 

is dumb—to quote a former majority leader from Texas, a current 

former majority leader from Texas—and he said the markets are 

smart and the government is dumb. 

And the view is that Fannie Mae and Freddie Mac, with a particular set of legislative and executive arrangements, biases capital 

allocation towards housing. And there are people who want to stop 

that. I very much disagree with that. 

There are also competitors. There are organizations of people 

who compete or resent the fact that Fannie Mae and Freddie Mac 

can borrow money more cheaply than others, because of a perception in the market that we are going to bail them out. I am not 

going to bail them out, and if they want to lend money to Fannie 

and Freddie cheaper, that is their judgment. Do not come to me if 

it does not work out. 

But there are competitors who want to reduce that advantage, 

who want to restrict what Fannie Mae and Freddie Mac can do. 

5

I find the latter two inappropriate. I will cooperate in trying to 

enhance safety and soundness. But I will resist efforts to impose 

an ideological agenda to get them out of the housing business, as 

people try to get the government out of the housing business in 

general. I will oppose efforts to hinder their ability to do things 

that competitors do not want them to do. 

And I would make the final point with this—with your indulgence, Mr. Chairman, and I appreciate it: I agree with those who 

say that Fannie and Freddie are not spending enough of their resources on affordable housing in particular. 

They get an advantage from the market. So there is a general 

agreement on that. But there are two approaches to it.There is the 

administration prediction, and the administration predilection is: 

‘‘Fannie and Freddie get certain advantage because of this market 

perception, and they can borrow money more cheaply, and they do 

not do enough for affordable housing, let’s reduce their overall activity, let’s cut down what they do.’’

Others of us believe—and I think this is overwhelmingly the case 

on our side, and it is certainly the case with virtually every organization in America that is concerned about housing production and 

affordable housing—instead, let’s leave them at the current level, 

unless safety and soundness dictate otherwise, and have them do 

more about affordable housing. 

So our effort is going to be, one, to enhance safety and soundness; and two—unlike, frankly, the administration position—to advocate a greater allocation of resources toward affordable housing. 

That is the approach that we will be taking, and I think those 

are the issues that we will be dealing with in the legislative situation. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Louisiana, Mr. Baker, chairman of the subcommittee. 

Mr. BAKER. I thank you, Mr. Chairman. 

And I want to start by acknowledging your hard work and, 

frankly, tolerance on this issue over the years. I am most appreciative of your leadership in this area. 

I also wish to make clear that the bill now pending is not a bill 

drafted in a void by any individual, but a collaborative effort led 

by the Chairman, in consultation with Secretary Snow, Secretary 

Jackson, Chairman Greenspan, Director Falcon—all those who 

have had some significant interest in this matter for many years 

and who bring to this perspective the insights that are extremely 

important in having a bill which is constructed appropriately and 

is balanced. 

Just without reviewing history, why do we need this bill? There 

are some who would suggest that circumstances are not sufficient 

to cause great change in the current oversight of these enterprises. 

If any other public operating company issued an announcement 

that we will have a multibillion dollar restatement over multiple 

years, that we cannot perform our duty to report our financials in 

a timely manner to the market and cannot yet give a date by which 

that financial information will be provided, the market reaction to 

that news for that public operating company would be immediate 

and extremely adverse. 

6

The reason why we have not seen such reaction in this case is 

clearly because of the market perception of the federal backstop. It 

skews market discipline, it prevents management from reacting in 

a manner which is appropriate in all other circumstances, and 

therefore the need to change the regulatory regime is absolutely essential and immediate. 

I am grateful that we have not had more significant adverse consequences, that interest rates have not gone through the ceiling, 

that homeownership has not been precluded for millions of the 

Americans who chose to pursue that vision, and that we are able 

in a relatively calm and dispassionate environment to discuss the 

needs for regulatory reform. 

I think it is also important to recognize what the bill does not 

do. It does not, for example, repeal the line of credit, it does not 

set arbitrary limits on investment portfolio, it does not make immediate or requisite adjustments to capital. 

It does create a world-class regulator, with the ability to act not 

only in the interest of taxpayers but in the interest of homeownership. 

There is the authority to adjust capital, to assess risk, to approve 

programs and to act in the interest of homeownership. 

It is much like having a fire extinguisher in a commercial building. You may never have a fire. But if a fire breaks out, you would 

be well served to have the fire extinguisher on the wall. 

This bill is the fire extinguisher. We hope none of these powers 

are ever essential or necessary. 

And let me speak to one point about limitations on growth of the 

GSEs. 

Prior to the innovation of the investment portfolio and mortgagebacked securities, and even in the early days, one CEO—former 

now—sitting at that very table said, ‘‘Oh, we would never repurchase our own MBS, because we are moving interest rate risk and 

prepayment risk off our books and into the market.’’

Now we see in substantial number these enterprises repurchasing their own mortgage-backed securities without concurrently 

increasing their capital to offset or hedge against that risk. 

Prior to the creation of MBS, these enterprises, principally and 

only, securitized home mortgages—a very profitable line of business. The G-fees are significant, the margins are great. 

Without the investment portfolio, these enterprises can grow, 

and substantially grow, and remain highly profitable without the 

adverse risk that the investment portfolio brings to the issue. 

However, we only vest the authority in the regulator to make 

judgments, going forward, after appropriate study, if the investment portfolio should be constrained in any manner. 

I want to make clear that this bill is not about artificial, arbitrary statutory regulation. It is about creating a regulator with sufficient tools to respond to any adverse conditions—not only in the 

interest of taxpayers, but in the promotion of homeownership for 

every American who hopes one day to live in the luxury of their 

own home. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Pennsylvania, Mr. Kanjorski? 

7

Mr. KANJORSKI. Mr. Chairman, we need to have a strong, independent and a world-class GSE regulator. Such a regulatory system will promote confidence in the GSEs, protect the continued viability of our capital markets, ensure taxpayers against systemic 

risk and expand housing opportunities for all Americans. 

To ensure that we have appropriate GSE regulation, I believe 

that any future legislative reform efforts should also adhere to several key principles. 

For example, the regulator must have a funding stream separate 

and apart from the annual corporations process. In order to be 

credible and effective, the regulator must additionally have genuine 

independence from the political system. Such independence must 

consist of complete autonomy from the enterprises, include sufficient protection from outside special interests and provide substantial insulation from political interference. 

A strong regulator must further have robust supervisory and enforcement powers. In this regard, many have suggested that we 

should model GSE safety and soundness regulation on that of other 

financial institutions. I agree with this sensible concept. 

In fact, the general goal of our reform debates heretofore has 

been to make GSE supervision more bank-like. However, some recent reform proposals, such as those aimed at imposing arbitrary 

portfolio limits and requiring a burdensome approval process before 

the GSEs can go to market with new innovations, would appear to 

be more than bank-like. These proposals, therefore, cause me considerable concern. 

Moreover, we must ensure that we continue to remember why we 

created these public-private entities as we work to develop regulatory reform legislation. We created GSEs to make credit available 

to finance home purchases because the private market was not effectively meeting credit needs. The GSEs’ charters limit business 

activities to their public missions. And they receive benefits from 

the government that help them carry out those public missions. 

Beyond ensuring that GSEs can continue to fulfill their missions, 

we must maintain a public interest in the boards of these publicprivate entities. In that vein, I have been very concerned that the 

administration has failed to appoint independent directors at 

Fannie Mae, Freddie Mac and the Federal Home Loan Banks as 

it is required to do under the law. 

Public participation on these boards helps to focus the GSEs on 

their missions. 

Additionally, I am very concerned that the removal of the presidential appointment authority in any legislation, as some have regrettably suggested, would result in a greater probability of privatization in the future. 

Privatization of the housing GSEs is a very bad idea for financial 

institutions of this size and of such importance to our economy. 

In sum, Mr. Chairman, in developing any enhanced GSE regulatory system, we should perform deliberate surgery. We should abstain from considering radical proposals that would fundamentally 

change the ways in which the GSEs operate or undermine their 

charters. 

Finally, as we implement strong independent and world-class 

GSE regulation, we must also ensure that the GSEs continue to 

8

achieve their statutory objectives and carry out their public missions. 

Thank you, Mr. Chairman. 

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

on page 52 in the appendix.] 

The CHAIRMAN. I thank the gentleman. 

We now turn to our distinguished panel. Our first witness is Secretary Jackson. 

Secretary, welcome back. It is good to have you back. You seem 

very comfortable before the committee after all this experience that 

you have had. 

[Laughter.] 

We welcome you, and you may proceed. 

STATEMENT OF HON. ALPHONSO JACKSON, SECRETARY, 

UNITED STATES DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Secretary JACKSON. Thank you very much, Chairman Oxley and 

Ranking Member Frank and members of the committee. 

I welcome the opportunity to join Secretary Snow in discussing 

the administration’s views on how best to improve and reform regulatory oversight of the housing government-sponsored enterprises. 

The President has set an ambitious goal: to build an ownership 

society where everyone has a chance to own a home, a retirement 

account, a health care plan, and to gain permanent stake in the 

American dream. 

Ownership brings stability to our neighborhoods and security to 

our families. To build on an ownership society, the President is 

committed to helping even more Americans buy homes. 

This commitment is embodied in the President’s challenge to the 

housing industry to join with us to create 5.5 million new minority 

homeowners by the end of this decade. It is embodied in the Blueprint for the American Dream Partnership, through which HUD 

has brought together the private sector, not-for-profit and government agencies to meet the President’s challenge. 

Secretary Snow will outline the core principles that the administration believes should underline any GSE regulatory reform. He 

and I are in full agreement: Congress and the administration has 

an opportunity and an obligation to strengthen the regulatory 

structures of the GSEs. 

A strong regulator is in everyone’s best interest: the administration, the Congress, the housing industry, Wall Street, investors 

worldwide and the American homebuyer. 

The administration has two goals in this process: First, we must 

ensure that the GSEs continue to fully carry out the mission granted to them by Congress of promoting affordable housing and homeownership; second, we must ensure that the GSEs are subject to 

rigid oversight so that they serve the public purpose. 

To ensure that the GSEs have appropriate finance oversight and 

are held accountable, the administration supports strengthening 

the power of the GSE regulator. Doing so would make the regulator 

more comparable in terms to statute, power, authority and resources to other financial regulators charged with safety and 

soundness oversight. 

9

Seventeen months ago, in the wake of Freddie Mac’s 2000 accounting scandal, 2003 accounting scandal, Secretary Snow and 

then-Secretary Martinez came before the committee to make a case 

for reform. As Secretary Snow will describe in his testimony, other 

troubling problems that impact the safety and soundness of the 

GSEs have come to light. 

In addition, in July 2004, HUD reported that Fannie and Freddie 

continued to substantially lag the conventional markets in serving 

first-time homebuyers, especially minority first-time homebuyers. 

In October of 2004, HUD determined that Freddie Mac overstated its 2002 performance under the low-and moderate-income 

and underserved-area housing goals by doubling the account by 

45,000. 

Recently HUD determined that some of Fannie Mae’s international activities may not be consistent with the chartered purpose. Therefore, HUD has advised Fannie that it must obtain prior 

written approval from HUD before it engages in any international 

activity. 

Last week, HUD ordered Fannie to cease and desist serving sale 

programs for third-party lenders. Again, this activity is inconsistent with the charter purpose. 

The best way to prevent similar or worse abuse in the future is 

through the oversight of a strong regulator empowered to hold 

Fannie Mae and Freddie Mac accountable to the highest standards 

their size and statute demands. 

The administration strongly supports retaining the core element 

of oversight of Fannie and Freddie, setting enforcement and affordable housing goals at HUD. 

Congress established the housing goals to ensure that the GSEs 

fulfill their mandate to provide leadership to the mortgage market. 

To transfer this role from HUD could delay years of implementing 

of the new regulatory plan. 

We also consider it important that the fair housing requirement 

and enforcement pertaining to the housing GSEs remain at HUD, 

given HUD’s expertise in housing discrimination. HUD should have 

full enforcement power for those authorities in the same way it enforces the Fair Housing Act. 

Secretary Snow will testify of the additional powers for the new 

regulator, and I would add one more: allowing the regulator to establish conforming limits on a local basis each year using the best 

available data to more appropriate serve low-and moderate-income 

families. 

Let me stress that we believe that such encompassing of changes 

to the regulatory structure will boost the confidence of the GSE 

stakeholders. Investors will be better protected under the regulatory system that empowers the regulator to do the job we expect 

them to. And the American public will ultimately benefit. 

As the same time, we will strengthen the GSEs’ ability to serve 

low-and moderate-income families pursuing homeownership. 

I join Secretary in saying that I look forward to working with the 

committee. 

And my full statement will be submitted to you, Mr. Chairman 

and the Ranking Member. 

10

[The prepared statement of Hon. Alphonso Jackson can be found 

on page 54 in the appendix.] 

The CHAIRMAN. Without objection. 

Thank you, Secretary Jackson. 

Secretary Snow, it is good to have you back before the committee 

and look forward to your appearance next week as well. 

STATEMENT OF HON. JOHN W. SNOW, SECRETARY, UNITED 

STATES DEPARTMENT OF TREASURY 

Secretary SNOW. Thank you very much, Mr. Chairman. It is a 

great pleasure to be here. 

Chairman Baker, former Chairman Leach, Mr. Frank, Mr. Kanjorski, members of the committee, I appreciate the invitation you 

have given me. And as with Secretary Jackson, I look forward to 

working with you to make legislation to strengthen the regulation 

of the GSEs a reality. 

I am heartened by the comments. I am heartened by private conversations. 

Mr. Chairman, thanks to you, Chairman Baker and others on the 

committee, we have made a lot of progress over the last 2 years. 

The administration’s position on this is clear. I think it is unequivocal. 

Secretary Jackson has stated the commitment of the administration to housing, to advance the housing objective. Underlying the 

housing objectives is a strong and secure mortgage market. 

The GSEs play a very important role in providing liquidity to the 

mortgage market through their operations in the secondary market. The strong regulator plays an essential role in assuring the 

soundness and safety of that market, and thus continuing to make 

sure that liquidity is available to advance the important goal of 

homeownership. 

The need for the strong regulator is clear. These are large and 

important financial institutions that affect not only the housing 

markets and the mortgage markets, they also affect, because of 

their size, the financial risks to the country as a whole. 

The strong regulator we envision would focus primarily on 

soundness and safety of the housing markets, but it would also 

take into account the broader issue of systemic risks to the financial system. 

That regulator ought to be world-class. It ought to have the authorities and powers and responsibilities that other world-class financial market regulators have—like the Federal Reserve Board, 

like the OCC—the sorts of authorities laid out in the Basel Accords. 

I think your legislation advances that objective in a very positive 

way, and we commend you for that. 

The new regulator ought to have powers at a minimum over riskbased capital and minimum capital, the ability to set those standards, not through statute but through administrative discretion, 

taking into account the changing marketplace conditions that the 

entities find themselves in. 

It ought to have independent funding, as Congressman Kanjorski 

said. 

11

It ought to have, also, broad supervisory powers to review the activities of the entities. 

Importantly, it ought to be able, if the entities find themselves 

in deficiency, in default, to trigger a receivership process. 

And also it needs to have the ability, consistent with making 

sure liquidity is available to carry on the primary mission, to limit 

the GSEs’ retained mortgage investments. That is a very important 

power as it goes directly to this issue of systemic risks. 

As I say, I think your efforts are to be deeply commended. We 

have made tremendous progress here. 

And we want to continue, ‘‘we,’’ the administration, Secretary 

Jackson and I want to continue to work with you and the committee, Mr. Chairman, to try and make a reality of new legislation 

to establish that strong regulator with all the powers necessary to 

have a world-class regulator supervising the activities of these very 

important entities. 

Thank you very much. 

[The prepared statement of Hon. John W. Snow can be found on 

page 58 in the appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary. 

Thanks, both of you, for your excellent presentations. 

Let me begin, Secretary Snow, with an issue. First of all, it 

seems to me that over the last year, a lot of the issues that were 

very contentious and very difficult have tended to become less so 

for a lot of reasons that I will not get into. The receivership issue, 

for example, stands out. 

There is one issue that is a relatively new issue to the debate, 

at least in terms of how high it has been perceived, and that is the 

portfolio limits issue. Some cite it as systemic risk—Chairman 

Greenspan and others—because so many financial institutions hold 

GSE debt and the obvious potential problem that exists. 

Could you lay out for us the GSE-related risks that concern you 

the most as Secretary of the Treasury? And are the risks related 

to investments and securities held by the GSEs and their portfolios? And lastly, do the GSEs hold inherently risky investments 

in and of themselves? 

Secretary SNOW. Thank you very much, Mr. Chairman. That is 

a question that gets at the heart of this important issue. 

The problem of systemic risk grows not out of the holdings themselves, or the nature of those holdings. Mortgages are a pretty secure holding. MBSs themselves are a pretty safe and secure holding. 

The systemic risk issue arises because of the vast size of these 

holdings that have grown just enormously over the past decade and 

a half or so. And the size of these holdings is what concerns me—

I think it concerns Chairman Greenspan—but not the holdings 

themselves. 

These holdings of the paper of the GSEs are heavily concentrated 

in financial institutions, in pension plans, in insurance companies, 

in community banks, and in the financial system generally. A very 

heavy percentage of all the GSE paper is held in those institutions. 

But derivatives, the hedging mechanisms that are used to deal 

with the risks that the GSEs properly are trying to spread and 

12

hedge against, are concentrated in five or six very large financial 

institutions. 

What concerns the Treasury Department and the Federal Reserve Board is the concentration of these risks in our financial institutions which, in the event of a default or even the threat of a 

default, could have far reaching, contagious effects across the financial system, creating this thing we call systemic risk. 

Our proposal would limit the GSEs to holdings of MBSs or mortgages or other investments to the extent required to carry out their 

primary function. We understand they need liquidity. We understand there may be a case for holding some amount of this paper 

and making these investments. 

The precise amount I think is best left to the regulator to determine against a standard which would say they should not hold 

anymore than they need to hold to carry out their primary function 

to make the secondary market. 

The CHAIRMAN. Well, that raises the issue that I wanted to—and 

I am glad you set that up, because the issue is: How do we deal 

with that systemic risk in terms of portfolio? Some have, as you 

know, talked about a prescriptive, in the legislation, that is, that 

would shrink the portfolios by a particular dollar amount each 

year. 

And it strikes me that, given the fact that markets change, interest rates change and the like, that to enact something like that in 

a prescriptive nature invites some real problems, that in fact if we 

are going to create a world-class regulator, then we ought to have 

some faith in that world-class regulator, given the authority by 

Congress to make those kinds of decisions going forward. 

What is your opinion on that? 

Secretary SNOW. Mr. Chairman, I would agree with those 

thoughts. 

Regulatory agencies are set up to have expertise to deal with 

day-in, day-out changing circumstances and conditions. It is hard 

to legislate once and for all. And this is a case that, it seems to 

me, cries out for the application of that sort of regulatory expertise 

and discretion. 

I do not know whether the liquidity requirements of the GSEs 

call for portfolio reductions of X, Y or Z. But a good regulator, given 

a good staff and the resources to get into those issues, could make 

that determination. 

I would urge you, though, to direct the regulator—and this is 

such an important issue—to direct the regulator in a policy sense 

that they should not permit the GSEs to hold more of these assets 

than is necessary to carry out their primary function. 

They do need liquidity. The regulator is in the best position, I 

would think, to determine the role of MBSs, mortgages and other 

paper in fulfilling that requirement for liquidity to carry out their 

primary function. 

So I am much more comfortable leaving it to the regulator, with 

strong policy guidance from the Congress. 

The CHAIRMAN. Thank you. 

My time has expired. 

The gentleman from Massachusetts? 

13

Mr. FRANK. I said earlier that I think it is important to sort out 

some strains. And I will tell you that I am concerned. 

Until well into the administration, this administration ignored 

the affordable housing mission. When this administration took 

power 2001, they inherited affordable housing goals for the government-sponsored enterprises which covered 2001 and 2002. They 

had been promulgated to people in the administration. 

The administration had the authority then to promulgate goals 

that would have taken effect in 2003 and 2004, new goals. They 

forgot. 

We finally inquired whether they planned to do anything about 

goals, and HUD said they did. But by the time they said they did, 

the time had expired. And when I asked them why—I think I may 

have asked you, Mr. Secretary—but somebody said to me, well, it 

was an oversight. 

So HUD deliberately or negligently failed to do anything to increase the goals. 

The concern for the goals, which I share—indeed, not share, 

which I had before they did—did not come until there was an assault on Fannie and Freddie. There were other issues. 

One of the most important things you are going to have to do if 

you want to expand homeownership beyond the current income 

level is fully to take advantage of manufactured housing. Manufactured housing is an indispensable asset as part of the effort to expand it. 

Fannie Mae decided to pull back from manufactured housing because it was being pressed by regulators, by financial credit-raters 

to do that. 

Several of us, on both sides of the aisle, rural and urban, wrote 

to Fannie Mae and said, ‘‘Please do not do this. We need you to 

get back into manufactured housing.’’ We tried to work with HUD 

on that. 

We wrote to Secretary Martinez, then the Secretary of HUD, and 

asked him for a meeting. The answer was that he was too busy to 

meet with us. 

HUD, to my knowledge, still has not done anything about helping us get them into manufactured housing. 

We found Fannie and Freddie not taking advantage of some of 

the rural housing programs. And, again, it has been a congressional initiative to do that. 

So let me say I welcome this interest in affordable housing. I 

wish it had come earlier. 

And now let me ask some specific questions. 

Mr. Secretary, to Secretary Jackson, are you aware of what HUD 

is doing with regard to manufactured housing with Fannie and 

Freddie, because we have found that to be a gap. We tried to get 

HUD interested, and we were brushed off. 

Is HUD working on trying to do anything? Do you agree with us, 

that they ought to be engaged with manufactured housing? 

Some people say, ‘‘Well, it is too risky.’’ But we have been pressing them to do more. Is HUD doing anything in that regard? 

Secretary JACKSON. First of all, let me say this, that your analysis, from the inception. is very well correct. And let me address 

14

first the affordable housing goals and then the manufactured housing. 

Yes, it is clear that in 2001, 2002, we did not come up with the 

affordable housing goals. Some were still in play. And the reason 

was that in many cases, as you know, Mr. Ranking Member, even 

when we came up with them, we were constantly in dispute. 

What I did——

Mr. FRANK. In dispute with whom? 

Secretary JACKSON. With Fannie Mae as to whether they were—

may I finish, please? 

One of the things that occurred in the 2003 when we started the 

goals is, I made a conscious decision that we were no longer going 

to debate with Fannie and Freddie or members of this body about 

whether the goals were acquirable or obtainable or not. We said 

that ‘‘these are the goals and you are going to have to meet them.’’

Mr. FRANK. Mr. Secretary, I asked about manufactured housing. 

The fact is——

Secretary JACKSON. And I am ready to answer that question——

Mr. FRANK. I wish you would. You raise the thing on the goals, 

let me go back. 

2002 went by, you had the ability to raise the goals, you said—

nobody here in 2002 was telling you not to do it. We raised it with 

you, and the answer we got was, well, it just was not on the agenda. 

So it is clear——

Secretary JACKSON. That is not the answer. 

Mr. FRANK. HUD had the ability in—well, I will go back and get 

you the transcript, when we asked why. HUD could have done it, 

and nobody would have tried to stop you from doing it. 

We had some suggestions about how to do it, but not about increasing the goals. 

But let me ask you about manufactured housing: What has HUD 

been doing——

Secretary JACKSON. Well, we have no authority to tell them what 

to do about manufactured housing. We have talked to them, we 

will continue to talk to them. 

Mr. FRANK. I didn’t say authority. I do not have any authority, 

either, Mr. Secretary, but, you know, there is jaw-boning, there is 

pressure. People speak, and we try to, as I said, to get them into 

manufactured housing. Could you tell me what HUD has been 

doing to persuade them? 

Secretary JACKSON. We have tried to get them—and I think you 

have said something that is very important. You work with them 

too. It has been very difficult to get Fannie Mae and Freddie Mac 

to work with us until now. 

Mr. FRANK. It has been easier to get them to work with us on 

affordable housing than it is get you to work with us. 

Secretary JACKSON. That is not true. 

Mr. FRANK. Well, it certainly is to me. 

Secretary JACKSON. You know why? 

Mr. FRANK. Let me ask you about affordable housing. We have 

in our version of the legislation—those of us on the Democratic side 

in the Senate and the House, and it is not in the bill—a requirement that they put a certain percentage of their profits into an afVerDate 0ct 09 2002 10:03 Sep 14, 2005 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 G:\DOCS\23132.TXT FIN1 PsN: MICAH
15

fordable housing program modeled after, in general, the Federal 

Home Loan Bank program. 

Could I ask both of you what you think of that, that proposal 

that we take a percentage of their profits, that we mandate that 

a percentage of their profits go into an affordable housing program, 

direct production subsidy, similar to what the Federal Home Loan 

Banks have done? 

Secretary JACKSON. But you know, Mr. Ranking Member——

Mr. FRANK. What do you think of that proposal——

Secretary JACKSON. May I finish? Mr. Ranking Member, why 

should they do it? Their charter mandates that they must do it. 

Why should they set aside something that the charter mandates 

that they do? 

Mr. FRANK. So, you will not answer the question, I guess. Are 

you in favor of——

Secretary JACKSON. The charter does not mandate with the Federal Home Loan Banks should do. They have decided to do that. 

But charter is mandated——

Mr. FRANK. Excuse me, the Federal Home Loans Banks were 

mandated to do it by an act of Congress. And the charter does require them to do something that does not, as explicitly as we think 

it should, require them to put the profits—not just in the loans. 

We are talking about going beyond the charter. The charter says 

that as they lend the money, as they do the secondary market 

stuff, that they should do affordable. We want to go beyond that 

get them more directly into, as the Federal Home Loan Banks are, 

into more direct stuff. 

So are you in favor of that provision? 

Secretary JACKSON. My position is, I have as long as they want 

to do more, that is fine. 

Mr. FRANK. Are you in favor of us mandating it? That is English. 

I am sorry for my diction, but you can understand that. 

Secretary JACKSON. But you are the Chairman, I am not—I 

mean, you are the Ranking Member. This is the finance——

Mr. FRANK. Yes, I am the Ranking Member asking the—excuse 

me, Mr. Secretary, but you have come before us to make recommendations about legislation. I asked you about a specific piece, 

and you act as if somehow I am invading your privacy. 

The point is this: We have legislation. I do not want to wait for 

Frannie or Freddie to decide to do it. 

This is the point: I think we are doing more to get them into affordable housing than you have done. 

Are you in favor of an amendment to this bill that would mandate that 5 percent of their profits go into subsidized affordable 

housing? 

Secretary JACKSON. That is your decision to make. 

The CHAIRMAN. The gentleman’s time has——

Mr. FRANK. Why are you here? 

Secretary JACKSON. I am here to tell you what our viewpoint is. 

Mr. FRANK. Well, then tell me your viewpoint on that. 

Secretary JACKSON. That is my viewpoint. 

Mr. FRANK. I know it is my decision. What is your viewpoint on 

our decision? 

The CHAIRMAN. The gentleman’s time has expired. 

16

Secretary JACKSON. If you choose to do that, that is fine. 

The CHAIRMAN. The gentleman from Louisiana? 

Mr. BAKER. I thank the Chairman. 

Good morning, Secretary Jackson. Welcome. 

I would just like to comment that from my perspective, the department has been very forthcoming and aggressive in seeking out 

ways to get Fannie and Freddie to the table. 

I have repeatedly pointed out that when we look at the function 

these enterprises engage in, you would assume that they would 

have a degree of mortgages in their portfolios that have high loanto-value correlation. 

I have made the brash assumption that poor people do not have money. So that if they are to buy $100,000 home that requires a 

$5,000 down payment and $3,000 in attorney’s fees, that $8,000 

cannot be easily accumulated and therefore they cannot purchase 

homes. 

There are programs that allow 100 percent of the purchase price 

to be financed. And so you would look at the portfolio thinking you 

would find an aberrant amount of loan-to-values in their portfolio 

in excess of 95 percent to 100 percent, meaning they are loaning 

$98,000 out of $100,000 or $100,000. 

When you go back and examine the portfolio, you find that in 

each enterprise’s case, it is less than one-half of 1 percent held in 

portfolio fits that characterization. 

So where are they making loans? They are making them in the 

fat and middle part of the market where the homeowner has 30 or 

40 percent down payment, and the typical home-loan value is well 

in excess of $250,000, with mom and pop both working, with two 

kids, a dog, a Chevrolet pickup truck and a bass boat. These are 

not the folks that the charter says they should be focusing on to 

help fulfill the dream of homeownership. 

I have long been troubled by it. I have long known they underperform the market. Commercial banks hold on average 13 percent 

of those loans in their own portfolio. And Fannie and Freddie are 

stumbling over getting beyond 3 or 4 percent. 

So there is much work to be done, and I commend you for your 

efforts. 

Secretary Snow, I just want to hit a couple of points very quickly 

as they, I believe, were raised in the course of Senate considerations that did not get the attention I think they needed to receive. 

One, with regard to the debate over limitations on investment 

portfolio versus the activity known as securitization: For many 

years there was in the life of both enterprises no mortgage-backed 

securities. It is a relatively recently developed financial entity. 

You could constrain the mortgage-backed security acquisition, an 

issuance process, and the investment portfolio, and is it not true 

that the enterprises could continue to grow quite successfully with 

handsome margins by only engaging in the activity known as 

securitization? 

Secretary SNOW. I think there is a big market, and they have 

shown they have a comparative advantage in that market. 

Of course, if we move down the road we are suggesting, they 

would have an incentive to focus more of their efforts on making 

that secondary market and providing those guarantees. 

17

Mr. BAKER. Sure. And to a great extent, the portfolio in the past 

has been the basis on which they have returned double digit rates 

of return, enabling shareholders’ profit, and perhaps some might 

suggest, executives to earn rather large compensation—no comment expected. 

Secondly, with regard to concentration of holdings: Under the 

rules requiring the aggregation of tier-one capital for institutions 

insured by the FDIC, there are three things permissible for a bank 

to hold, meeting the tier-one capital requirement: U.S. treasuries, 

cash and GSE securities. 

It is now my understanding that an excess of 4,000 banking institutions meet their tier-one capital requirements to the extent of 

100 percent is now constituted by GSE securities. 

By contrast, if a bank is to make any other investment, there is 

an investment cap of 10 percent of assets on that particular investment. 

With regard to loan obligations, there is a loan limit to one borrower rule of 20 percent of assets. 

So, then, all other cases, except for the GSE securities, there are 

statutory and regulatory limits on how far one may go as a CEO 

of a banking enterprise in investing in a single course of business 

activity. 

Do you think it advisable for us to examine the concentration 

question and authorize the regulator to take appropriate action to 

limit this concentration? 

Secretary SNOW. I think it is a subject that deserves consideration. And I would urge you to continue to look at it. 

I think having the strong regulator in place with the power to 

limit those portfolios is probably even more important in dealing 

with this issue of systemic risk. 

But, clearly, the numbers you have laid out for us suggest how 

broad the systemic risk is and why we need that strong regulator. 

Mr. BAKER. Just in closing, I want to commend both of you for 

your leadership in this tough area. It has been a battle over many 

years, and under your leadership, something finally might happen. 

Thank you. 

Secretary JACKSON. Let me say this to you, Mr. Chairman, I 

think to add to what Secretary Snow said is, that if we look at today’s GSE portfolio, it could easily be reduced by prepayments on 

a number of the mortgages, and that would reduce it in itself. 

Also I think that the Secretary alluded to something that was 

important. 

In 1990, the securitized market for the GSEs was $740 million. 

If you look at it today, it is $3.8 trillion. That is a huge difference. 

And I think that, clearly, what the Secretary is saying, that if 

we have world-class regulator, they can look at many ways and will 

not hurt the market at all with the abilities of the GSEs to continue to fund low-and moderate-income loans, and even the top end 

of the loans, it will not affect them. They will not be able to hold 

as many mortgage-backed securities as they do. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Pennsylvania? 

18

Mr. KANJORSKI. First of all, Mr. Secretary, I think you have come 

a long way, from what I recall a year or so ago, and I want to congratulate you on that. 

Secretary JACKSON. Thank you. 

Mr. KANJORSKI. I think that shows good flexibility. And we are 

now working towards something we may be able to get our hands 

around. 

I have a couple of questions. 

But one is—and maybe I am wrong and you can fill me in, Mr. 

Secretary—I understand that normally the regulator of banks has 

the flexibility to require greater capital if they anticipate or see 

risk on whatever formula that they lay out. And, clearly, the proposed legislation would contain that type of authority in this new 

regulator. 

Would you tell me, though, is there a limitation or a strength or 

authority for the regulator to dictate the investments of any private 

banking institution? 

Secretary SNOW. The OCC and the Federal Reserve Board have 

broad regulatory supervision, including lines of business and, as 

you say, broad authority over capital, minimum and——

Mr. KANJORSKI. Well, I understand the capital side. I am talking 

about the portfolio side. 

Secretary SNOW. No. But let me say that the reason that sort of 

authority is really important here, is critical here, is to deal with 

the incentives that exist for the GSEs to continue to take on more 

and more debt, because they have a borrowing advantage which allows them to make an above-normal rate of return on any interestbased asset they buy. 

And that is an incentive for continuing expansion of their loan 

portfolios, which is leading to this situation where systemic risks 

are created. 

Normal bank regulators do not have——

Mr. KANJORSKI. Mr. Secretary, but if a system risk appears to be 

possible, the regulator will have the authority to increase the need 

for capital, and that we have all agreed on. 

But you are capping both sides. You are giving the power to increase capital to avoid systemic risk, but you also, for the first 

time, want to get very involved, by the regulator, in the portfolio, 

and that seems a very strange inconsistency if we are going to look 

at these institutions as similar to other financial institutions, other 

than the fact that they have a special charter. 

Secretary SNOW. Congressman, we would limit it only to the extent they hold more of these investments than is necessary to carry 

on——

Mr. KANJORSKI. The regulator is going to determine what is necessary. 

Secretary SNOW. The regulator would—per my exchange with the 

Chairman—have the power to determine what is necessary. 

Mr. KANJORSKI. And we all wish we get a very good and fair regulator, but we are—sometimes some administrations tend to appoint individuals that are necessarily enamored with the institutions they are appointed to serve in. I think there is something 

happening in the Senate on that issue today. 

19

And that raises the question: How do we know what this regulator’s propensity will be? 

Once appointed, he will have a term and have this extraordinary 

power to decide that he does not like this idea of a portfolio of 

Freddie or Fannie, and by fiat, without a standard—does not have 

to show systemic risk, does not have to show anything—he can just 

limit that investment concept that these institutions have determined on their own, for good purposes, and in a sound way, and 

fulfilling their mission will have to bend their corporate decisionmaking authority to this regulator who may have no justification 

in the world other than the fact that he decides that is good practice. 

Secretary SNOW. Congressman, I would set a standard. My recommendation is, you do set a standard. You tell the regulator that 

they can hold such paper—MBSs, mortgages, other paper, outside 

of treasuries—but only to the extent they need to, to have the liquidity to carry on their mission. Seemingly, that is consistent——

Mr. KANJORSKI. If we should do that, we should be worried probably even more so about the derivatives. That seems to be a major 

problem as to just how good the derivatives are, how effective are 

the counterparties, how over-invested are the counterparties. 

Are you suggesting, then, that this committee and the Congress 

legislate regulatory authority over hedge funds and other derivative purchasers? 

Secretary SNOW. No, I am not at all, Congressman. 

Remember why we have the extensive derivatives. We have the 

extensive derivatives because of these vast and growing portfolios 

of investments which are subject to both prepayment and interest 

risks. And the GSEs appropriately say, ‘‘We have better hedge 

this,’’ and this is sophisticated hedging that ends up being held by 

the counterparties that are five or six very large financial institutions that hold virtually all of these derivatives. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Iowa, Mr. Leach? 

Mr. LEACH. Thank you, Mr. Chairman. 

First, I think it very important to underscore that great credit 

goes to Mr. Baker and to you for bringing forth an approach the 

thrust of which I strongly agree with. 

But I would go a little bit further, Mr. Secretary. 

You have underscored systemic risk. I think there is enormous 

free market risk that is under the table and never raised. These 

institutions that come under the rubric of GSEs have advantages 

in the market, and they stilt the market in very profound ways. 

It is not simply coming from the perspective of advantages on 

cost of money and the cost of funds. 

They also have regulatory advantages that are profound. A small 

institution that competes against the GSEs for the holding of a 

mortgage has to carry more capital than they do. And one of the 

most interesting aspects of the American mortgage system is that 

it is quite possible, contrary to all regulatory history at this moment in time, that the larger an institution, the greater capital it 

needs, not the less capital it needs. 

The risk gets greater when size gets to be of a different dimension. And we have had a system where bigness has meant less regVerDate 0ct 09 2002 10:03 Sep 14, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 G:\DOCS\23132.TXT FIN1 PsN: MICAH
20

ulatory intrusion rather than more. At a minimum we need comparability; quite possibly you need more regulation with ‘‘the big’’. 

There is also this issue of once you get great powers, you tend 

to want to spread your wings. And one of the things that I would 

like to add to this bill, and I will attempt to do so, is that I believe 

that the same regulatory authority ought to apply to all GSEs. And 

that includes the Farm Credit System, it includes Farmer Mac. 

There is no more egregious example of stretching government 

powers than Farmer Mac. 

There is no more interesting model of inappropriate spreading of 

power than the Farm Credit System which tries to get out of serving farmers and into serving the market economy itself, using the 

advantages of GSE powers. 

I think this committee does a great disservice not to put all GSEs 

under comparable regulation that is being set forth today. 

Finally, I would stress again, when you give someone power at 

a governmentally mandated level and they grow, the oversight 

should not only be about prudence, it ought to have something to 

do with competition. It might be sensible for this new regulator 

that is set up should not have an FTC kind of component. 

I raise these thoughts for your consideration and would ask for 

your comment. 

Secretary SNOW. Congressman Leach, you raise some very good 

issues there, issues that it seems to me we ought to think about. 

I do not know that we have moved far enough down the road in 

thinking on those that we at least, from the Treasury side—maybe 

Secretary Jackson has thought about them more—would be in a position to come down hard and fast one way or another. 

But there is a commonality to government-sponsored entities. 

And they do have certain advantages. 

Whether the Farm Credit Bureaus and the other, the GSEs, fit 

this pattern in the same way, I just do not know. 

What I do know about this situation, though, is that the marketplace treats the paper of these entities far different than the paper 

of other financial institutions because of that implied guarantee, 

because of the sense that the market gives that these entitites are 

too large to fail. 

Mr. LEACH. I appreciate that. My time is about over. 

I just want to make one final point: The word ‘‘Farm Credit System’’ has the word ‘‘farm’’ in it. But if you took the word ‘‘farm’’ 

out and just called it ‘‘credit system,’’ and you look at what the entity is attempting to do, which is to serve all the functions of all 

banks, it is more pervasive and powerful than either the two housing GSEs and affects Treasury concentration of interest far greater 

than the two housing GSEs. 

And from the Banking Committee’s perspective, I would stress 

that this issue of the Farm Credit System, as a banking institution 

with GSE powers, that wants to operate as a bank, not simply 

serving the farm economy, is very, very concerning and is potentially far more explosive than the two-housing GSE circumstance. 

If we do not deal with it today, it becomes more explosive tomorrow. 

Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. 

21

The gentleman from New York, Mr. Meeks? 

Mr. MEEKS. Let me first go to Mr. Snow. 

One of the things that has bothered me all throughout this incidence with Fannie Mae and Freddie Mac, et cetera, is that—and 

as Mr. Falcon had stated in his testimony, that they were able to 

recognize problems with major—where major accounting firms had 

certified financial statements. And some of the issues went back 20 

years or so. 

My question is: What do you see in this new legislation that 

would allow a regulator to recognize problems within a more reasonable time frame, say within a year at least? Is there anything 

that you see in this—the regulator, in this bill, have that problem? 

Secretary SNOW. Congressman Meeks, I think the new regulator 

will have more robust authorities, better funding, funding not dependent on the appropriations process, and freer of all political constraints, as we envision it, and with more resources, the ability to 

attract more resources. 

I would put it outside the civil service system. I would give them 

the ability to hire the people who have these skills and understanding the mathematical models that underlie the derivatives, 

that understand the complicated accounting that goes with derivatives. 

It is essential that they get access to those sorts of people with 

that sort of expertise. 

I think the legislation creates that environment where this would 

be a much more robust and muscular agency, capable of doing a 

lot more, capable of attracting just top-flight people, and top-flight 

people will get on top of these things better. 

Mr. MEEKS. That being said, you know, next week, I guess as the 

Chairman has indicated, we are going to have a hearing on Sarbanes-Oxley, and that, I guess, legislation will be focused on auditing firms and their qualifications and responsibilities. 

It seems as if the role of the auditor, not only in regards to GSEs 

but in corporate America, is generally falling short of being the 

watchdog it was meant to be. 

Do you think that the role of the auditor needs to be addressed 

in this legislation also? For instance, should we force GSEs to rotate auditors every few years? 

Secretary SNOW. Congressman, I think strengthening the general 

oversight, corporate governance, as has been done through Sarbanes-Oxley, clearly should apply to the GSEs in totality, including 

registration under the Securities Acts, which some have agreed to 

do but have not yet done. 

So, yes, I think part of this that we recommend is required registration under the 1934 Act. 

Mr. MEEKS. And one for Secretary Jackson: Since the Treasury 

does not have a history of understanding the needs of the housing 

market, what responsibilities do you believe that your agency 

should have in relations to the GSEs, such as its missions and 

goal? 

Secretary JACKSON. Well, I still believe, as I said in my opening 

statement, that we should have the fair housing component because we have the necessary staff to address that. 

22

And secondly, I think, clearly, the housing goals—because the 

goals are to meet low-and moderate-income standards, and I think 

that we are in a better position to do that. We are doing it now. 

And in fact, as I stated to you all before, the acting chairman and 

the present chairman and CEO of Freddie Mac, we have worked 

with him and we have come up with goals we think that are obtainable, and they are working toward those goals. 

But I would think we would still—those goals should stay necessarily with HUD. 

Mr. MEEKS. What about program approval? 

Secretary JACKSON. Well, I think program approval really could 

be with the regulator or with HUD. 

I mean, the problem is, a new program—I think that the new 

regulator clearly will have on their mind safety and soundness in 

new programs to make sure that the GSEs conform to the charter. 

Mr. MEEKS. But would not it—I mean, the experience with reference to the program, it belongs to you. Treasury has not——

Secretary JACKSON. Well, today it is with HUD. 

Mr. MEEKS. And would not you believe that your expertise—I 

mean, you do not think that you should have some role as far as 

approval of programs. 

Secretary JACKSON. I think so, advisory role or some role if it 

goes to the new regulator, clearly, because we could get with them 

and give them experience that we have had in this process for the 

last 20 years or so. 

Mr. MEEKS. Last, Mr. Jackson, let me ask: Am I correct in understanding that HUD has the authority to prevent breaches of the 

charter of GSEs now? 

Secretary JACKSON. Well, we have general regulatory authority. 

You know, we have been trying, Congressman, to decide what 

that general regulatory authority is. We have made efforts to stop 

new program authorities, we have made efforts to make sure that 

they conform to the program limits. 

But in many cases we have not been very successful because—

and I am going to be very candid—because we were consistently 

being contested by the GSEs as to what we had the power to do. 

And I can tell you, over the last 3 years that has not been the 

case. We have, as my mother would say, we have put our foot down 

and told them it is not really relevant what they think; it is the 

decisions that we make since we have the general regulatory authority. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from California, Mr. Royce? 

Mr. ROYCE. Thank you, Mr. Chairman. Thank you very much for 

holding this hearing. 

And I would also like to thank Secretary Snow and Secretary 

Jackson for their very able service to our country. 

And I really want to commend you, Mr. Chairman, and Chairman Baker, for your efforts in crafting legislation to reform oversight of the three housing GSEs. 

I continue to support the creation of a single new regulator with 

the authority to set minimum and risk-based capital standards, to 

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proval and mission, and to be independently funded outside of the 

appropriations process. 

And I am very pleased to see that this H.R. 1461, the Federal 

Housing Finance Reform Act, contains all of these critical components. 

Now, since the introduction of H.R. 1461, Chairman Greenspan 

and Secretary Snow have both testified that any new legislation 

should place limits on the portfolio holdings of Fannie Mae and 

Freddie Mac. 

And in Chairman Greenspan’s remarks, he said that the Federal 

Reserve is concerned that the large concentration of mortgage assets in the two enterprises puts the safety and soundness of the entire financial system in jeopardy. 

In fact, in all my years here in Congress, this is the strongest 

and most stern warning I can recall coming from a chairman of the 

Federal Reserve. And the words from Chairman Greenspan were, 

‘‘To fend off possible future systemic difficulties which we assess as 

likely′′—as likely—′′if GSE expansion continues unabated, preventative actions are required sooner rather than later.’’

In light of the Federal Reserve’s warnings, Mr. Chairman, I 

would respectfully request that this committee hold a hearing on 

the risks associated with Fannie and Freddie holding large quantities of mortgage assets on their balance sheets before we mark up 

legislation. 

And such a hearing would allow this committee to understand 

more fully the concerns expressed by the Federal Reserve chairman 

and by Secretary Snow. 

Mr. Secretary, my question to you is: In your testimony to the 

Senate Banking Committee last week, you suggested that Congress 

give the new regulator the authority to limit portfolio growth. However, you did not recommend a statutory cap, as proposed by Chairman Greenspan. 

And I remember reading a comprehensive equity research report 

in 2002 which forecast that together Fannie and Freddie would 

own $12 trillion of mortgages on their balance sheet by the year 

2020, and that this would amount to 53 percent of the total mortgage debt in 2020. 

In 2002, Fannie and Freddie owned about 20 percent of mortgage 

debt outstanding. 

I presume that you and Chairman Greenspan have seen similar 

forecasts. 

If Fannie and Freddie one day own 50 percent, or even 40 percent, of all mortgage debt outstanding, would that concern you? 

And if so, would your proposed solution to give the regulator the 

authority to limit portfolio holdings, as opposed to a statutory solution as proposed by Chairman Greenspan, be enough to ease systemic fear at Treasury? 

The last question I wanted to ask you was: I understand that the 

OCC usually gets public comment before letting national banks 

into a new line of business. In your view, has this process harmed 

innovation by the national banks? 

Secretary Snow? 

Secretary SNOW. Thank you, Congressman Royce. 

24

No, that review process has not harmed innovation. We have 

seen lots of innovation in national banks that are subject to the 

OCC regulation. 

On the subject of the systemic risks, the concern is with the 

present, but it is also very much, as you point out, with the future. 

And the rule that I would urge you to think about hard is one that 

says: GSEs can hold such amounts of this paper——

Mr. ROYCE. As is necessary for liquidity? Or how would you define——

Secretary SNOW. As is necessary for liquidity. 

Mr. ROYCE. How would you define liquidity under that? 

Secretary SNOW. Well, I would define it the way regulators normally define it. There are exigencies that come up. There may be 

needs for them to step in and make the market. 

And maybe—and this is a hard case to make—maybe there is 

some case for their holding some MBSs and some mortgages for 

unique circumstances. But it is hard to see that it would be very 

much, because treasuries provide the closest thing to liquidity, the 

best form of liquidity and the safest form of liquidity. 

So I would think this rule would, in the hands of a good regulator, lead over time to a gradual reduction in the holdings of mortgage-based paper, and they could fulfill their liquidity needs 

through treasuries and such amount of mortgage-based paper that 

the regulators says they really need. 

But I would not have the regulator make an affirmative finding 

that they need to hold it. 

Mr. ROYCE. Thank you very much. My time has expired. Thank 

you, Mr. Secretary. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Georgia, Mr. Scott? 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Secretary Snow, I take it from your testimony that the administration does support legislation that creates an independent regulator for housing GSEs outside of the Treasury Department. Correct? 

Secretary SNOW. Yes, Congressman Scott. We think the important issue here is not where the regulator is housed, but that the 

Congress establish that strong regulator with the powers I laid out. 

Our point is that if you decide to put it into Treasury—and I 

take it there is not overwhelming sentiment to do that—but if you 

did put it in Treasury, then we suggested some conditions that we 

thought ought to be met. 

Mr. SCOTT. Well, do you believe, then, that if the Treasury Department had full policy control of the GSEs that the markets 

would perceive that control as full backing of the GSEs by the government? 

Secretary SNOW. Congressman, there is a risk of putting the GSE 

regulator inside Treasury that the market would presume the relationship of the government to these entities is strengthened and 

enhanced. That is the very perception that we would want to disabuse the markets of. 

And that is why I am saying, if you put it in Treasury, then 

Treasury would need to be able to have certain oversight powers, 

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25

tionship between the Treasury and the entities has been strengthened. 

Mr. SCOTT. Let me ask you this also as a follow up on that point: 

Last week we had the Commerce Secretary and Mr. Jackson in, 

and I raised some points then that I just want to get your opinion 

on. 

That was proposed that about 18 programs be shifted over to 

Commerce Department from housing, and in effect reduction of 

about 35 percent of the budget of HUD goes over to Commerce, just 

the idea, the plan, about $4 billion could be transferred there. 

Today we are talking of further erosion of HUD. 

Do you feel that the American people would perceive this as a 

dismantling of HUD? 

For you, Secretary Snow, I would like your opinion on that. 

Secretary SNOW. Well, Secretary Jackson is probably in a much 

better position to address that than I am. 

Mr. SCOTT. I had asked that Secretary Jackson before, in view 

of the fact that Treasury now is getting involved in this, particularly from the oversight and the regulation of the prior responsibility of HUD, via GSEs, Treasury now is beginning to be a part 

of that. 

Just your opinion, do you feel that we are dismantling HUD? 

Secretary SNOW. No. What I think we are doing, as I understand 

this—and I am not as close to this as Secretary Jackson or Secretary Gutierrez is—what I think is being done here is an effort to 

concentrate these programs, streamline them, and provide for the 

delivery of the underlying services more effectively. 

Mr. SCOTT. Let me go to you, Secretary Jackson: Do you believe 

that H.R. 1461 will provide enough input from HUD regarding the 

housing goals of the GSEs? 

Secretary JACKSON. No, because if we look at the present bill, the 

housing goal and the fair housing component is encompassed within this present bill. And as I stated in my opening statement, I believe that clearly we are the best persons to handle it. 

But let me say this to you, Congressman, which I think is very 

important: Even today in OFHEO, even though it sets in HUD, we 

really have no control over OFHEO. OFHEO is basically an independent body. 

And I agree that if we are going to regulate the GSEs, it has to 

be an independent body with the appropriate powers to do. 

But then to answer the latter part of your question: No, we still 

believe that those two components are best served at HUD. 

Mr. SCOTT. Okay, I want to take advantage of my time. I have 

a number of questions. 

Do you believe, then, Mr. Jackson, that HUD should maintain 

oversight of the housing mission? 

Secretary JACKSON. I really do. I think that HUD, because it has 

the appropriate staff, understands what the mission of the GSEs 

are, and we are quite capable and prepared to address those missions. 

Mr. SCOTT. Now, the flip side of that: Do you believe that Treasury currently has the expertise to oversee the GSEs’ housing mission? 

26

Secretary JACKSON. Well, we are not talking about Treasury getting the program; we are talking an independent agency. And I am 

not sure whether any independent body at this point in time, until 

we can see the configuration, has that power. I cannot say no and 

I cannot yes. 

The CHAIRMAN. The gentleman’s time is expired. 

The gentlelady from New York, Ms. Kelly? 

Mrs. KELLY. Thank you, Mr. Chairman. 

Secretary Snow, I would like to get your thoughts on BSA compliance. 

As you know, currently the GSEs are exempt from BSA compliance. In the first beneficial case, others—the filing of SARs may 

have allowed fraud against the taxpayers to be detected sooner. 

In addition, sound public policy ought to demand, I think, that 

all financial institutions be subject to this key component of our 

fight against money laundering and terror-finance. 

Casinos, the post office, small community institutions are subject 

to the law. Yet institutions with hundreds of billions in financial 

assets, like Fannie Mae, are exempt. 

So I would like your thoughts on this issue. 

And, secondly, concerning the BSA, can you comment on the recent action taken by the OCC against Arab Bank. Might this yet 

be another instance of where the regulator is consistently giving a 

clean bill of health to a bank, found out, then, only in retrospect, 

that there were problems they had not identified. 

I want to know what we can do to meet our objectives of a solid 

BSA compliance regime that prevents money laundering, provides 

good intelligence, protects banks and their customers from the 

harmful uncertainty that they are currently experiencing. 

As we examine the Arab Bank issue, I am afraid that we are 

going to find the kind of missteps and gaps between the relevant 

entities, like OCC and FinCen, that contribute so much to the current jumbled regulatory environment. 

I am going to be having a hearing next week, and I hope that 

Treasury will be there, and Treasury will be there to present their 

views on this. And I want to know if I can count on Treasury to 

be there at the hearing to discuss the Arab Bank issue. 

But I also would like you to go back and talk to me about the 

BSA and whether or not we should apply it to Fannie and Freddie. 

Secretary SNOW. Congresswoman Kelly, the BSA Act lies at the 

forefront of our efforts on terrorist finance, as you know. And while 

it is not perfect, I think we are making good inroads with it and 

clearly having effects. 

We yield to no one in our commitment to enforcing it and enforcing it effectively and having the resources to make sure we do that. 

Whether or not Fannie and Freddie should be directly subject to 

it is something let get back to you on, think about. 

And be delighted to participate in your hearing. 

On the Arab Bank, certainly OCC found some very questionable 

behaviors there and entered into some orders against the bank. 

But that matter is still under investigation, so I better not go any 

further in responding to it, except to say that we are monitoring 

it, we are vigilant with respect to it. 

27

And we have had follow-on meetings with the Jordanians to try 

and make sure that they understand BSA, how it applies, and the 

need for the scrutiny that BSA calls for and due diligence in the 

conduct of the affairs of their financial institutions. 

Mrs. KELLY. Well, thank you, Mr. Secretary. And I appreciate 

the fact that you said that you would be delighted to come to the 

hearing. I look forward to having you there. I think it is very important Treasury be there and present what is going on. 

Secretary SNOW. I understand you are having discussions with 

our staff now, and if we can work it out, I certainly would look forward to it. 

Mrs. KELLY. Thank you. 

I yield back. 

The CHAIRMAN. Ms. Kelly yields back. 

The gentleman from Texas, Mr. Green? 

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

Mr. Secretaries, I am very much concerned about the power to 

regulate possibly becoming the power to eliminate. And I am concerned because much consternation has developed as a result of 

what appears to be consolidation that can possibly lead to the 

elimination of some programs. 

We have programs that have been traditionally a part of HUD 

that are finding their way to another department—at least one 

now, two, maybe others. 

And I do believe that the consternation is becoming greater as 

we perform additional investigations. We see that the Brownfields 

Grants are being moved and defunded, the Empowerment Zones, 

Rural Housing and Economic Development, Section 108 CDBG 

loans, capacity-building grants, EDI set-asides. 

My concern is whether or not we are seeing the alpha of HUD’s 

omega. Are we witnessing the genesis of revelations yet to come 

that will reveal that we had this opportunity to save a program 

that has been of great benefit to the American people, but somehow 

we missed the opportunity and at some point later we will be sitting here deciding whether there should be a HUD at all. 

Mr. Secretary? 

Secretary JACKSON. Thank you very much, Mr. Congressman. 

To me those are two clearly separate issues. 

The shifting of the block grant to Commerce is quite different 

than the proposal before us that has been presented by Chairman 

Baker in the sense that I have said that we still believe that the 

fair housing goals for the GSEs, the new fair housing goals, and 

the housing review of the appropriate housing goals should stay 

with HUD. 

But as a whole, moving OFHEO to an independent regulator 

does not at all disturb me, because, clearly, OFHEO does not have 

all of the necessary powers that is inclusive in this bill to make 

sure that the GSEs are regulated. And that is all we are saying. 

We want the GSEs to be as strong as possible. And I think Secretary Snow has said it. But at the same time, as I said when I 

was before the Senate committee, this belief that they have the 

tacit backing of the federal government has given it a great deal 

of leeway. 

28

And let me give you an example of what I mean. 

If you deal with most commercial bankers, the most that they 

can leverage their money is 11 to 1. The GSEs have been 50 to 1. 

That is the advantage. 

And I am saying to you that if it is going to be brought in compliance, we must have a strong regulator, and that regulator’s name 

might not be OFHEO. It might be something else. 

But the point is, I think, really, it needs to be regulated. 

And that is not to destroy them; that is to keep them strong. 

Mr. GREEN. I yield back the balance of my time. Thank you. 

The CHAIRMAN. The gentleman leads back. 

The gentleman from California, Mr. Miller? 

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Chairman. 

Welcome, Secretaries. 

My question is for Mr. Jackson: Freddie and Fannie are chartered to operate in every district across this country, and they have 

a difficult time operating in my area. If you look at Hawaii, Alaska, 

Guam, Virgin Islands, conforming in that area is about $539,475. 

Yet in Hawaii, Honolulu, the medium home price is $460,000. 

In Orange County, California, the medium home price is 

$627,500. In L.A. County it is $470,990. Even L.A. County is 

$10,000 higher than Hawaii. And the current limits are $359,650. 

How can you ensure the high-cost areas of the country are served 

by conforming loan-limit market? 

Secretary JACKSON. I would think that, clearly, we cannot have 

a set conforming loan limit, the same as I have said we cannot 

have a nationwide fair market housing rent. It is impossible, because, clearly, the obstacles that you face in California are certainly different than what we face in Texas. 

So, therefore, I would say the regulator must have the flexibility 

to work with the specific areas to make sure we address those 

needs. And in your case, it is very, very critical that the regulator 

has that flexibility. 

So I would say absolutely not the same thing as I would say with 

capital. I think the regulator should be flexible. 

And the question was asked, Mr. Chairman, ‘‘Well, how do we 

know the regulator will be prone to do that?′′

Well, I would hope that any regulator that we put there would 

have the expertise and the fairness to look at it, the same as the 

Chairman of the Federal Reserve or the OCC. And when we chartered those, we did not know who the persons were going to be at 

that point in time. But they have worked out very well. 

And that is the confidence and faith I have in this country, that 

when we look at the new regulator, their job is to regulate based 

on what is best for this country, not what is best for an individual. 

Mr. MILLER OF CALIFORNIA. If they are given the discretion to 

adjust limits, what would you envision a process to be? 

Secretary JACKSON. I really cannot tell you today. 

Mr. MILLER OF CALIFORNIA. Would you, then, suggest that we include high-cost areas in statute? Would that be more appropriate? 

Or would you allow the leeway for them to go to high-cost areas 

and raise it? 

Secretary JACKSON. I would say statute-wise, because when we 

are talking about California or New Hampshire or Maine or 

29

Vermont or Massachusetts, the high-cost might be $550,000 today, 

but next year it might be $575,000, and the year after that it might 

be $600,000. 

Mr. MILLER OF CALIFORNIA. But you do believe it has to be addressed. 

Secretary JACKSON. It has to be addressed, because otherwise, we 

would be doing your constituents a disservice, we would be doing 

the Ranking Member’s constituents a disservice. I mean, because, 

clearly, we have a unique situation in both places. 

Mr. MILLER OF CALIFORNIA. Would you say that applying to FHA currently is $312,895, which nobody in our area can qualify for 

FHA, where that is needed in many cases, and yet applying to 

them also? 

Secretary JACKSON. Yes, it clearly is. And we just did it a couple 

of months—well, about 4 or 5 months—in Nevada, because we 

clearly knew we were out of sync. 

Mr. MILLER OF CALIFORNIA. Temporarily I would like to yield to 

Ms. Kelly. She had a question at the last moment. 

Mr. FRANK. Well, would the gentlemen yield to me, briefly? 

Mr. MILLER OF CALIFORNIA. After Ms. Kelly, I would love to. 

Mrs. KELLY. Thank you very much, Mr. Miller. 

I just wanted to ask the Secretary: I understand that Treasury 

today has taken a very important step in designating a financier 

of the al-Zarqawi network in Iraq, an individual named al-Hiyari. 

I want to know if you could elaborate a little bit on that. I think 

that people here are interested in it. 

Secretary SNOW. Thank you very much, Ms. Kelly. 

Yes, today we have—at about 10:30, while this hearing was 

under way—designated a Zarqawi financier, Mr. al-Hiyari, who has 

been providing support for the Zarqawi network. We did this pursuant to the executive order, 13224, which is aimed at freezing the 

assets, designating and freezing the assets, of terrorists and their 

financiers. 

This is one more important step in our efforts. It is the third in 

a series of strikes by the government to undercut the foundations 

of the Zarqawi network. 

This fellow, al-Hiyari, to Mr. Zarqawi two decades almost, back 

to late 1980s, when they met in Afghanistan. 

This is another important step on the part of the United States 

government in taking actions to deal with terrorist finance. 

I thank you for the chance to mention that. 

Mrs. KELLY. I congratulate you on taking that step. 

Mr. MILLER OF CALIFORNIA. You are taking my time. 

Mr. Frank, I yield. 

Mr. FRANK. Thank you. 

I just wanted to thank the Secretary, first, for the graciousness 

of including my district, and you are right. 

And also just to express my appreciation with answers to the 

gentleman from California on both FHA and Fannie Mae and 

Freddie Mac. 

I think you are right that we can be flexible out there, so there 

ought to approach, and I thank you for that. And I thank the gentleman from California——

Mr. MILLER OF CALIFORNIA. Thank you, Mr. Secretary. 

30

Mr. SHERMAN. Mr. Chairman, if I could just say amen. 

The CHAIRMAN. The gentleman’s time has expired. 

Mr. FRANK. I am not sure under the Constitution you can, but 

you go ahead anyway. 

[Laughter.] 

The CHAIRMAN. The gentleman’s time is expired. 

The gentleman from Massachusetts, Mr. Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Gentlemen, I generally do not have a whole lot of specific concerns with the bill. I am not terribly thrilled with changing some 

of the proposals that would allow the regulator to set policy goals. 

That bothers me a lot. I think policy should be with policy-makers 

and regulation should be with regulators. But that is a specific 

item that hopefully we can work out over time. 

And honestly, I do not disagree with any of the regulator items 

that you have raised. I mean, I like strong regulation. I used to 

think that was Democratic philosophy; I guess now it is a Republican one as well, and that is a good thing. 

I have no problem with strengthening the regulators. I actually 

always thought that the regulators that were there had the power 

to do something and chose not to do it for several years. That is 

not a problem with the legislation; that is a problem with the individuals who are the regulators. 

And I am particularly of that opinion in the last couple of years 

when the regulators finally did step up and do their job. 

But all that being said, on some levels I do not really care where 

regulators are, I do not really care what you call them, I do not 

care where the chairs on the ship as long as they are there. 

But I am concerned about housing markets. And my question to 

you is relative not for the regulation aspect of it but more to the 

scope of allowed activity for the GSEs. 

And, again, not because I am interested in specific scope of activities, that is of no concern to me. The only concern I have is: 

What is the impact on mortgage rates. 

And I am specifically starting with mortgage rates for the average applicant—and we are now, give or take, I do not know, in the 

6, 6.5 percent range, if I remember correctly. 

If this legislation were in place and activated in a manner that 

would satisfy you two gentlemen, have you looked at what the 

mortgage rates would be today? 

Secretary JACKSON. Congressman, I really do not think that it is 

going to adverse or negatively affect the market. 

I think a few minutes ago I said to you that if we decide—if the 

regulator decided to limit the mortgage-backed security that the 

GSEs owned, that would not have a significant effect. 

When people prepay their loans, their mortgages, it would just 

go away, and they could continue to make loans that should be 

made to low-and moderate-income people at the same level. 

We looked at it——

Mr. CAPUANO. So you are satisfied that—in general, I am not 

going to hold you to decimal points—that people today would be 

able to walk into their local bank, apply for mortgage and get it 

on the same rates as we have today. 

31

Secretary JACKSON. Because I believe—and I said this before 

your committee before; I think the Ranking Member asked—I think 

that Fannie Mae and Freddie Mac will be very competitive. 

Mr. CAPUANO. Mr. Snow, do you agree with that general assessment? 

Secretary SNOW. Congressman, I absolutely do. Because remember, we are saying that all the liquidity they need to carry on their 

primary mission should be available to them. And that is a directive I would urge you to give the directorate of this agency, that 

they be allowed to have all the liquidity they need to carry 

their——

Mr. CAPUANO. And I presume that is just not rates but also 

terms as well, because that is just as equally——

Secretary SNOW. This legislation should not adversely affect the 

terms or rates on which mortgages are available. 

Mr. CAPUANO. Fair enough. 

I would also ask, again, a similar question along the same lines. 

The availability of those loans, as well, to the people who are qualifying for those loans. It will not do me any good, if the rates stay 

the same, if my constituents are no longer qualified to apply because I do not have sufficient income or whatever the changes 

might be. 

So to me it is rates, it is terms, it is qualifications, and I just 

want to make sure we are clear. 

Secretary JACKSON. And we agree with you. 

Mr. CAPUANO. Thank you. 

I guess the last part of it is, again, I understand fully well—I 

think that the Ranking Member made some good points as far as 

I would love to see Fannie and Freddie and anybody else step up 

to the plate in affordable housing because I think—it is not the 

only thing I focus on. That is why I focused on rates for people who 

do not quality for affordable housing. 

I think it is a whole ladder of housing. But affordable housing 

is part of that ladder. 

And the availability of capital to support affordable housing—we 

can argue about the policies and who should give them and everything else—but the capital available, I also want to make sure that 

you feel that this legislation would not adversely impact the 

amount of capital that is on the table that is available for those 

items. 

Secretary JACKSON. Congressman Capuano, no, it would not. 

And let me say this to you: Not only do you feel that way about 

affordable housing, President Bush has emphasized to the GSEs 

the importance that they lead the market in carrying out their mission. And my responsibility is to make sure that they do, and we 

are doing everything within our power. 

And I must say this, on behalf of the acting chairman at Fannie 

Mae and the Chairman and CEO at Freddie Mac: Over the last 12 

to 14 months, they have been working very well with us to try to 

address and meet those goals. I think that it is finally settled, or 

they finally realize, that not only is the President and the administration serious about this, but Congress is serious about it also. 

The CHAIRMAN. The gentleman’s time has expired. 

32

Mr. CAPUANO. Mr. Chairman, I would just like to get Mr. Snow’s 

answer to it as far as——

Secretary SNOW. I agree with Secretary Jackson. 

Mr. CAPUANO. Thank you. 

The CHAIRMAN. The gentleman from Texas, Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. First, I want to 

commend you and Chairman Baker for bringing this very important piece of legislation before us today. 

Secretary Jackson, it is good to see you again once again. The 

last time I looked, I think we are enjoying the highest rate of 

homeownership in the entire history of the United States of America. So contrary to some opinions, you must be doing something 

right. 

Secretary JACKSON. Well, we are enjoying it because the President has put in motion the necessary tools for us to increase homeownership. We have Congresswoman Katherine Harris, who was 

very, very helpful to us in the American Dream Down Payment 

Act, which helps 40,000 families a year become new homeowners, 

because we can help them with the closing costs and down payment. 

And we have a number of other avenues that the President has 

put in place to make sure that low-and moderate-income people 

and middle-income people understand the responsibility of being 

homeowners, and it is working. 

Mr. HENSARLING. Thank you, thank you. 

The question I have has to do with what some call ‘‘mission 

creep.’’ And one of my colleagues brought up whether or not there 

is a meeting of the minds on regulation between both sides of the 

aisle. 

The concern that I have is that obviously Congress has granted 

the GSEs some very special benefits, but ostensibly the quid pro 

quo is that they use these benefits purely to engage in what is 

their charter-approved activities. 

So in your testimony you speak, I believe previous international 

consulting work that was done by Fannie, third party real estateowned management and services activities. I think previously they 

have engaged in airplane lease activities, activities related to loan 

originations, for example, automated underwriting systems. 

We know they are engaged in retail brand-building, because you 

cannot watch the television without seeing one of their excellently 

produced television spots. 

But it would seem to me that all of this would detract from what 

their charter says they are supposed to be doing with these government-granted benefits. And I am also concerned about the unfair 

competition, because I believe that indeed the consumer’s best 

friend is a competitive marketplace, and if they are going to leverage these benefits into non-charter activities, it is not a level playing field. 

So my first question is: Is this an ongoing problem with the 

GSEs in seeing new activities that are not specific to their charter? 

Secretary JACKSON. It has been in the past, but let me say this 

to you: We have taken a firm stand, as I said a few minutes ago 

to another congressperson, that when we see these kinds of activities taking place, we are stopping them very quickly. 

33

We believe the same as you do, that they should address their 

mission, and their mission is to provide low-and moderate-income 

secondary mortgage liquidity to the market. And that is what we 

think they should be doing. And when we find them doing things 

that they should not we are going to stop them. 

But at the same time, I want to reiterate again, because I think 

that the last 12, 14 months the kind of cooperation that we have 

gotten out of the GSEs is much better, and our relationship is 

much more amiable than it had been before. 

Mr. HENSARLING. Well, we have a couple of pieces of legislation 

out there now dealing with new product approval. And certainly in 

the House version of the bill, some might argue that there is not 

as bright a line test between the primary and the secondary market, as some might argue would be in the Senate language. 

So in your opinion, given that you have had to exercise some discretion over new product approval, is the line sufficiently bright in 

the House language for the new regulator to get the job done? 

Secretary JACKSON. From reading the language that Chairman 

Baker has done, to me it is clear that they delineate between the 

primary and secondary market. 

Now, I have to tell you, the GSEs have—we have had serious debate about some of the programs, because they will not call them 

products, ‘‘new programs,’’ and they said they are not in the primary market. We believe that they were. 

And we are saying now that, clearly, when you look at the bill, 

it says ‘‘activities,’’ ‘‘all activities,’’ which in this case, they will not 

be able to use the logical argument, ‘‘Well, this is a program, not 

a product. This is not a new product.’’

So I think, clearly, it will be delineated in the new bill. 

From my understanding, their responsibility is the secondary 

market. 

Mr. HENSARLING. In the seconds I may have left, if I could switch 

to Secretary Snow and talk about systemic risk. 

With respect to GSEs’ portfolio holdings, I would assume they 

would argue that somehow they are adequately hedging the various risks that are involved, the default prepayment interest rate. 

But your concern is, is that most of these derivatives are held by 

perhaps by five or six firms. Can you elaborate on the systemic risk 

that this presents? 

Secretary SNOW. Yes, yes, Congressman. 

The systemic risk comes from the fact that so much of the GSE 

paper is out there in the marketplace, held by all sorts of financial 

institutions—insurance companies, pension plans, community 

banks, thrifts, commercial banks. 

And on the derivative side, since they have these large portfolios 

that are subject to down payment and interest risks, they have to 

hedge it. They should hedge it. 

The counterparties to those hedges are concentrated in five or six 

very large financial institutions, and the aggregate amount of this 

hedging is gigantic. The concern is, if something unravels, it could 

cause systemic risk to the whole financial system. 

The regulator needs to have the authority to look at systemic 

risks, not just housing soundness and safety but systemic risks 

34

generally. I think the legislation does that, and I think it is awfully 

important that it stay in the legislation. 

The CHAIRMAN. The gentleman’s time is expired. 

The gentleman from Missouri, Mr. Clay? 

Mr. CLAY. Thank you, Mr. Chairman. 

I thank both of the witnesses for being here. 

First, for Secretary Snow: Chairman Greenspan has recently argued that the portfolios of the GSEs are too big. He has suggested 

that they may have to be reduced to maybe $100 billion. Mr. 

Greenspan has defended higher mortgage interest rates as a positive development and that capital would be made available to consumers who otherwise cannot get mortgage loans. 

The St. Louis Post Dispatch writes that this is like saying the 

inner-city poor should be thankful for the high interest rates because nobody else is providing the service. 

Do you feel the same way, Mr. Secretary? 

Secretary SNOW. Congressman, on that issue of the limits and 

how best to approach the limits, I agree that the holdings of the 

mortgage assets should be constrained, should be limited, and I 

think what the Chairman said is that one option was to do it 

through legislation. I do not think he said that was the better option. 

We think it needs to be constrained, and I would suggest that 

the appropriate way to do it, as I have suggested, is by giving the 

regulator broad authority against a directive that they not hold 

more than is required. 

Mr. CLAY. Well, do you favor a 90 percent reduction in the portfolios of the GSEs? 

Secretary SNOW. No, I would not put that in legislation, but I 

would allow the regulator, this expert regulator that would be created by the statute, to render whatever judgment regulator, after 

due process, felt was appropriate. 

Mr. CLAY. Mr. Secretary, do you believe that the inner-city poor 

should be thankful for having to pay higher interest rates? Secretary Snow? 

Secretary SNOW. I do not think anybody should be thankful for 

having to pay more than a competitive rate for anything. 

Secretary JACKSON. That is right. 

Mr. CLAY. Okay, just to make you aware. Secretary, thank you 

for your response. 

Secretary Jackson, the St. Louis Post Dispatch also stated that 

the question should not be whether mortgage lending is occurring 

in underserved communities but whether minority consumers are 

being ripped off through unjustifiable, high interest rates and fees. 

They also quoted a study by the National Community Reinvestment Coalition that says about 29 percent of African Americans 

who bought or refinanced homes last year were stuck with highcost loans compared with about 10 percent of whites. 

Will the change to the GSEs help alleviate this condition? And 

are these disparities in interest rates considered in this proposal 

being advanced in the handling of the GSEs? And will the situation 

worsen? What do you think? 

Secretary JACKSON. I cannot tell you about the language in the 

present bill. I can tell you what we are doing at HUD to address 

35

predatory lending, which is exactly what you are speaking in terms 

of. 

Mr. CLAY. Sure. 

Secretary JACKSON. We do not condone it. We have been absolutely—we have just tremendously been dealing with this issue almost since day one, when we got here. 

I just do not believe that in the refinancing process that the education of many of the persons who are doing the refinancing, or 

buying their first home, has been very, very good. That is why that 

when we came in here, came to office, there was $8 million being 

spent on counseling; today we are spending $45 million to work 

with people so, Congressman Clay, we will not have that situation. 

That is appalling. I read the study, and it is not a good study. 

I have talked to the people in Planning, Development and Research 

to come up with a solution how HUD can better curtail what has 

been occurring. 

Secretary SNOW. Since I am running out of time here—as we emphasize reducing the size of the portfolio held by the GSEs, has 

anyone measured the positive effect that Fannie Mae and Freddie 

Mac have had on increasing minority homeownership through their 

programs and through their influence on the entire industry regarding minority homeownership. 

And then what happens now? We are basically changing the mission of these GSEs. 

Secretary JACKSON. We are not changing the missions. 

Let me say this to you, Congressman. Though, I do not want in 

any way contradict you, but Fannie does not have a sparkling 

record of addressing first-time minority homebuyers. It has a dismal record compared to the other industry. 

If you look at the other commercial banks, there are many of 

them that are doing much better addressing minority homeownership than Fannie Mae and Freddie Mac. 

Now, we have been working with them and we will continue to 

work with them, but I do not want you to be under any illusion 

that they have been leading the market, they have been even coming close to leading the market in the process. They have not been. 

And that is one of the criticisms that we have had with Fannie. 

Mr. CLAY. Well, don’t you think we pretty much brought them 

all along kicking and screaming? 

Secretary JACKSON. No, I can tell you some of the commercial 

banks are not kicking and screaming. 

Mr. CLAY. The results of this study, Mr. Secretary——

Secretary JACKSON. I am telling you some of the commercial 

banks are not——

Mr. CLAY. Do you want to name some? 

Secretary JACKSON. No, I am not going to name any today. 

Mr. BAKER. [Presiding.] The gentleman’s time has expired. 

Mr. CLAY. Thank you, Mr. Secretary. 

Mr. BAKER. Thank you, Mr. Clay. 

Mr. Garrett? 

Mr. GARRETT. Thank you, Mr. Chairman. 

And thank you, Secretary Snow and Secretary Jackson as well. 

I am pleased today that some of my colleagues agree with myself 

and also with Chairman Greenspan, as one of the main focuses of 

36

our debate here should be to dealing with first and foremost the 

rapid growth of the portfolio of these entities, and also as Mr. 

Hensarling just mentioned, also the issue of mission creep as well. 

Chairman Greenspan has previously testified here that the limitation or the slowdown in the portfolio size should occur over a period of time, and you have already, Secretary Jackson, addressed 

that issue, doing payback and what have you. 

Is this something that we need to look at over a long period of 

time? Or could we simply look at it today to say that they have no 

role for them to have this portfolio of this size and that we could 

simply say that they should stop immediately adding to the portfolio and let the rest of it simply pay itself off over a short period 

of time? 

Secretary SNOW. Congressman, that is sort of the approach implicit, I think, in the legislation. 

Secretary JACKSON. Right. 

Secretary SNOW. And over some fairly short period of time, if 

they are not adding to the portfolio—which I think would be the 

policy implicit in the statute that you are looking at then the portfolio would wind down. And it should wind down to a level that is 

consistent with achieving the statutory purpose, giving them the liquidity they need from these instruments to serve their underlying 

statutory purpose——

Mr. GARRETT. And no more, though. 

Secretary SNOW. And no more, because I agree with you: The 

real issue here is the rapid growth of the portfolios. 

Mr. GARRETT. Right, and Secretary Snow, you had indicated that, 

to put it one way, size does matter as being the main problem as 

far as the interest rate risk as far as portfolio size. 

And if you look at some of the numbers at the end of last year, 

you were looking at $757 billion in derivatives, that was more than 

the $732 debt that they held. 

We have to look a ways back to get any financials out of them, 

of course, to see what they say. But if you go back to June of last 

year, they were looking at a trillion dollars in derivatives, again in 

excess of the $940 billion in debt that they had at that period of 

time. So size is certainly an element here. 

But I would suggest that in addition to the size aspect, even if 

they were to bring it down to a certain element of size to it, is not 

there an aspect of this that they have been engaging in cherrypicking? 

And in the portfolio that they have engaged in, keeping the better risk, from their point of view, as far as their stockholders are 

concerned, by keeping those who are not prepaying, which for the 

short-term benefits them and benefits the stockholders, because it 

adds to the bottom line because you do not have the prepay, but 

for the taxpayers, we are put on the risk because that there is a 

greater interest rate risk at that point of time. 

And then what happens is—and you can comment on this—is 

that you shift the bad risks over to those securities that are over 

at the other side of the table where they are securitizing them, and 

by doing so, that you are adding a premium to those securities, and 

that that has added to the cost to the consumers. 

37

So in essence, they are cherry-picking, benefiting their bottom 

line, benefiting their stockholders, benefiting their profit line, hurting the taxpayer, and also—and this goes to the question, that is 

why I bring it up, it was just said on the other side—that if we 

do not do something, that they will continue to add this premium 

to the other side of the securitization. 

Secretary SNOW. Congressman, the fundamental problem is that 

the dynamics of the business therein, structured as it is with the 

implied guarantee, creates an incentive for these entities to continue to buy paper, market-priced paper, because any marketpriced paper they buy other than treasuries is a good arbitrage. 

Any, that they buy, any interest rate instrument they buy, creates an opportunity for above-market rate of return, because their 

borrowing costs are low relative to the returns on that paper, except for one instrument: that is treasuries. 

That is why we think that for liquidity needs, their focus ought 

to be on treasuries to deal with the systemic risk. 

Mr. GARRETT. I appreciate that. 

And perhaps Secretary Jackson could address the point. 

But what they are doing, though, is by the other side of the equation, is that the risk that they are putting into the securitization 

aspect of it are these risks that do have the earlier pre-payback 

basis to them. So those people who are then in the market that are 

buying those securities know that this is not as good a risk as the 

risk that they are holding, and therefore there is a premium added 

to that. 

Secretary JACKSON. That is correct. 

Mr. GARRETT. And that goes to the question that was raised over 

here: Is not this bad for the consumer, what they are doing? No 

matter what level of securities they are holding in their portfolio, 

if they are allowed to continue to cherry-pick that portfolio, this is 

bad for the consumer. 

Secretary JACKSON. Yes, sir. 

Mr. GARRETT. The other aspect to this—Mr. Hensarling got to 

the aspect of secondary markets and primary markets, and I guess 

you are addressing this, saying this is going to be addressed in the 

legislation. 

I would just close by saying the administration has certainly said 

that we should be looking towards a more competitive and private 

sector approach to all this, and of course you have already said, 

Secretary Jackson, the private sector is doing a better job. 

Can we look to you to come back to us with additional avenues 

that we could go to the private sector to encourage them to be able 

to compete on a fair, level playing field in this market? 

Mr. BAKER. And that has to be the gentleman’s last question. 

Secretary JACKSON. Yes, I will be happy to do that for you. 

Mr. BAKER. I thank the gentleman. His time has expired. 

Mr. Cleaver? No questions? 

Mr. Davis is not here. 

Ms. Harris? 

Ms. HARRIS. Thank you, Mr. Chairman. Thank you for holding 

this important hearing. 

To our speakers, thank you for being here and for all your important answers. 

38

I would like to address three quick questions to Secretary Jackson. 

Fannie and Freddie are playing critical roles as the administration strives to increase the rate of homeownership in low and moderate households. And I appreciate all of your efforts and all the 

great ideas. You have worked with me and our district so closely. 

But achieving this goal is going to require Fannie Mae and 

Freddie Mac to develop programs for these underserved markets. 

And I share concerns with the gentleman from Massachusetts 

when we ask what measures that Congress can undertake to ensure that this mission remains their central objective—first quick 

question. 

Secretary JACKSON. We have put in place housing goals that are 

measurable, both for the primary and secondary market—and I do 

not mean in the sense that it is primary or secondary. But we have 

three specific goals that deal with the different sectors of society, 

with low-and moderate-income communities, low-and moderate-income households, and we measure those goals. 

And I think that sitting through with Fannie and Freddie over 

the last year, we made some adjustments, and we think that those 

goals can be met. And we are meeting with them periodically to 

make sure that those goals are being met. 

Ms. HARRIS. We are desperate in our region for affordable hous- ing when we read that affordable housing is a $290,000 home. So 

obviously, our first responders, teachers, everyone needs that type 

of opportunity. 

But as you are increasing these housing goals for both Fannie 

and Freddie, is not it going to force the GSEs to engage in a little 

bit more risky opportunities? And don’t you think there should be 

some sensitivities as to how that impacts their safety and soundness? 

And don’t you think it makes more sense that there would be one 

authority that would be governing or weighing those two conflicting 

issues, one against the other, so there is that kind of accountability 

as we move forward? 

Secretary JACKSON. Let me say this to you: I have heard before 

that if we stress that they meet the housing goals serving the low 

and moderate market that it is going to affect their abilities. 

Well, I will just pose a question as I posed a year ago: What affected their abilities to carry out their responsibilities more than 

those derivatives? That is affected their abilities, not serving lowand moderate-income people. 

And if you notice today, Fannie and Freddie are not making that 

argument to you all again. They made it a little over a year ago, 

but that is not an argument they are making. We worked through 

it, and I think they will be able to do it. And they can still serve 

the high-end and the middle market just as well. 

Ms. HARRIS. I am extremely interested in the low and moderate, 

that there are affordable opportunities. 

Concerning the bright line, the mortgage brokers have approached me. I really would like to know kind of what you believe 

is the intent of that. 

In my discussions, it is clear that there are distinctions between 

the primary and secondary markets. But they are concerned that 

39

there will be a negative impact on their ability to provide these 

kind of immediate services for eligibility. 

They believe that those loan creations are going to really fall 

more closely in the hands of the large banks, and right now that 

could extend the time frame up to 90 days in terms of loan approval, which would be devastating to our housing markets. 

They still believe that they are the most efficient delivery of services, and so consequently, I just really do not understand that intent. They feel they will be precluded from those loan originations, 

and that efficiency would be devastated. 

Secretary JACKSON. You know, Congresswoman, I really cannot 

answer that specifically, but it would seem to me that competition 

is absolutely good. And the only thing that I see in Chairman 

Baker’s bill is he is saying: We are going to delineate what the 

GSEs’ responsibilities are between the primary and secondary market. 

I just think that the competition will be there, and they will still 

be able to serve the market. And I could be wrong, but I do not 

think I am. 

Ms. HARRIS. We will have further discussions with the Chairman. I am sure he can help us out with those answers. 

Thank you. 

Secretary JACKSON. Thank you. 

Ms. HARRIS. One quick question for Secretary Snow: The demand 

for the GSE to create in the market more mortgage—they always 

say that the more mortgages, that that will help drive down the 

mortgage costs. And have you taken a look or are there any studies 

that determine what the impact on mortgage rates would be if the 

hard cap were enacted? 

Secretary SNOW. If what? 

Ms. HARRIS. The more mortgages that exist, the more competitive, how it drives down the mortgage rates. So if a hard cap is enacted, is that going to lessen the amount of mortgages? 

Secretary SNOW. I think I can say without much fear of contradiction here that all the evidence and all the theory suggests 

that limiting their holdings of mortgages, as we suggest, or of mortgage assets, as we have suggested, will have little or no effect on 

the mortgage rates. Because, remember, our focus is to say they 

should hold what they need but no more to have the liquidity to 

pursue their primary purpose. 

So we would allow them to hold what they need, as determined 

by the regulator, to have the liquidity to make that secondary market. So they would continue to play the large and significant role 

in the secondary market they play today. 

In fact, they might begin to play a larger role, because now, rather than making money off the arbitrage in their portfolio, taking 

their low borrowing costs and then buying other market-based 

paper, they would have an incentive to focus on their primary mission: making the secondary market. 

Mr. BAKER. The gentlelady’s time has expired. I thank the 

gentlelady. 

Mr. Paul? 

Mr. PAUL. Thank you, Mr. Chairman. 

I have a question for Secretary Snow. 

40

You know, there is a free market axiom that says that when government intervenes in the market, they sometimes solve the problem and sometimes they do not. But they inevitably create two new 

problems which requires two more regulations. And I happen to believe that. 

And the gentleman on the other side of the aisle earlier mentioned that he thought that the Democrats were the good regulators, but he was very pleased to know that we have joined the 

crowd and that now we are the regulators. 

And that suggests to me that the problem we face with the GSEs 

is that we believe that it is come about because of lack of regulation, and all of a sudden, if we have more regulations, we are going 

to solve our problems. And I think it is much deeper than that. 

You mentioned that the—and I think everybody has conceded 

here that the size of the holdings is a significant problem, and it 

introduces the notion of risk. And I would agree with that. But nobody seems to be asking the question: Why are they so large? 

You know, we are dealing with—this to me is somewhat like 

thinking back in January of 2000, and there were many who predicted that there was a Nasdaq bubble. And they said, ‘‘Well, we 

have a Nasdaq bubble, and we are going to have a collapse, and 

we need to do something about it, we need to regulate it so that 

we do not have a collapse,’’ which the bubble was already there. 

And if we have the distortions built into the system, regulations 

may even help precipitate a major crisis or a major change if we 

do not look at it. 

And I would suggest that there are two major reasons why we 

have this huge size of the holdings of the Fannie Mae and Freddie 

Macs, and that is, one, it deals with Federal Reserve policy that 

makes credit easy, interests rates low, it causes the speculations 

the same as it has in stock markets in the past. 

And of course, I know you are not in charge of interest rates, and 

we cannot deal with that, but we have a line of credit to the Fed 

and to the treasury, which you mention in your written report, that 

it is not a guarantee, it is only a perception. But markets’ perceptions are just about everything on the short run because they are 

anticipating what the benefits are. 

So I would say that if that is part of it, why do not we deal with 

that and move toward a market, and say, ‘‘Why do not we limit 

that or get rid of it?’’ because that helps to build these giant holdings. 

And I think that, to me, would be so much more important than 

waiting for the day—interest rates may be controlled by the Fed 

on the short run and in the short term, but ultimately the market 

overtakes. 

And we are dealing with a major problem with the dollar. If the 

dollar goes down, which many people predict it will, especially with 

our current account deficit, we are going to see rising interest 

rates. And if there truly is a bubble—as those who have predicted 

correctly about the bubble in the Nasdaq—if it is there, I think we 

face a lot more serious problems than just dealing with a few more 

new regulations and think we are going to solve it. 

If you would comment, please? 

Secretary SNOW. Yes, I will be happy to. 

41

You asked, why the rapid growth? I think that the single most 

important factor in the rapid growth of these portfolios is the fact 

that beginning about 1990 or so, the entities decided that there 

was a very sizable profit to be made from simply arbitraging their 

lower borrowing costs against holding other market-priced paper, 

and, in effect, became in many ways like a hedge fund simply 

arbitraging a cost advantage in one market to get higher returns 

in another. 

And you are absolutely right, Congressman Paul, that the problem here is the growth of these portfolios. And our concern is, without a strong regulator, there will be ineluctable pressures here for 

that portfolio to grow and grow and grow and grow, because the incentives are so large when you can borrow at a rate lower than 

anybody else and then invest in another market, in any marketpriced paper, and make a large profit. 

That just creates huge incentives to continue to take out loans 

and then turn around and buy the mortgages and the mortgagebacked securities. 

Mr. PAUL. Does that mean that you would be sympathetic to removing that benefit they have, this line of credit to the treasury, 

as Alan Greenspan has suggested? 

Secretary SNOW. Congressman, yes. In my testimony, I said we 

would only use that line of credit in furtherance of a receivership 

where it might serve a useful purpose. But other than that, absolutely. 

Mr. PAUL. Thank you. 

Mr. BAKER. Let me make an announcement for the benefit of 

members. Secretary Snow has informed me of a need to depart 

here by 12:30. I do have three members in regular order who would 

be recognized. I know others have an interest in a second round, 

but we are going to proceed in regular order—Mr. Davis, you are 

next—and I will try to enforce the five-minute rule to make sure 

all members get recognized. 

Mr. Davis? 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. 

First of all, I want to commend you and Chairman Oxley and the 

Ranking Member on bringing this bill forward to introduce the 

Federal Housing Finance Agency. I think it is important that we 

restore credibility to our government agencies and trust in them. 

My question is for Secretary Jackson, kind of a follow-on to Congressman Hensarling’s questions earlier, two points around that. 

The proposed regulatory authority I think has the much needed 

just common sense guidelines in terms of authority to set minimum 

and risk-based capital levels, approving new programs, placing 

failed GSEs in receivership, which I think is an important statutory authority, among other things. 

And one question is, we have talked about primary and secondary market operations so that I am curious. The administration 

has been very forthright, very pro-small business community development, encouraging homeownership in many ways. You and I 

have had some discussions on this as well. 

Secretary JACKSON. That is right. 

Mr. DAVIS OF KENTUCKY. And I guess my first question would be: 

Do you believe that the new agency should define what are primary 

42

and what are secondary market operations in order to, you know, 

better understand the types of programs that should be permitted 

and what should not, to avoid the type of snowball effect that we 

had with Fannie Mae? 

Secretary JACKSON. Yes, I do. I do believe that that is important, 

and having briefly read over the legislation that is put forth by 

Chairman Baker, I think that makes a good delineation of what is 

primary and what is secondary. 

Mr. DAVIS OF KENTUCKY. I guess my follow-on to that: Since you 

all have advocated these very open market policies and the idea of 

less regulatory intrusion, do you think that it would follow logically 

that you would want to curtail the encroachment of governmentsponsored enterprises into the private sector to the detriment of 

businesses from the standpoint they do not enjoy some of these special governmental privileges? 

Secretary JACKSON. I think they should be put in a position 

where they have to compete. 

It is clear to me, Congressman Davis, that if you get an allocation from the treasury, and 33 to 35 percent of it goes directly to 

your shareholders, and then the other portion is used exactly as 

Secretary Snow said, to buy down loans at a lower price and sell 

off the others, it does give you an advantage, there is just no question about it. 

And I think that if they are forced to compete in the market with 

a strong regulator saying that ‘‘This is the way you are going to 

operate,’’ yes, I think the competition will still be there. But at the 

same time, it will not diminish their ability to carry out their charter. 

Mr. DAVIS OF KENTUCKY. I appreciate that. 

The concern I have had is that, particularly knowing Dave 

Hehman, who is the CEO of the Federal Home Loan Bank in our 

region, in the Cincinnati region, the home loan banks run a totally 

different operation. 

Secretary JACKSON. Absolutely. 

Mr. DAVIS OF KENTUCKY. They tremendously serve the market 

sector. In fact, Mr. Hehman is actively involved in urban housing 

initiatives to get working families into housing. It is a much more 

true and friendly face of compassionate conservatism, I think, in 

terms of involvement in the trenches. 

And my bigger concern is making sure that they compete openly 

and fairly and serve a specific market sector, but to make sure that 

the other GSEs toe the line and are good stewards of our taxpayer 

dollars. 

Secretary JACKSON. And let me say this: The Federal Home Loan 

Banks have a regulator, and he can make the necessary adjustments, and you can see it right now in a number of the Federal 

Home Loan Bank boards, which is quite different than the other 

two GSEs. 

And the other thing, as I said a few minutes ago, with him setting aside the affordable housing goals, they have done a very excellent job in making sure that they are carrying out that, which 

was not initially part of their mission. 

Mr. DAVIS OF KENTUCKY. Thank you very much, Mr. Secretary. 

I yield back my time. 

43

Mr. BAKER. I thank the gentleman. 

Mr. Ney? 

Mr. NEY. Thank you, Mr. Chairman. 

Because my time is limited, I just want to get a couple of major 

questions in. So I am not going to cut you off on certain things, but 

I want to just try to get as much in as possible. 

A lot of people are suggesting, or some, that there should be a 

bright line between the primary and secondary mortgage markets? 

This is for Secretary Jackson. 

Do you support this? And if so, should Congress or the regulator 

define the bright line? 

Secretary JACKSON. Yes, I do support it. And I think that clearly 

it should be defined, in my mind, in the legislation, because we 

have tried in many cases to deal with the situation, as you know, 

between new products and new programs, and that has been a very 

difficult process. 

Mr. NEY. So do you think this should be part of the program approval? 

Secretary JACKSON. I think in this present legislation, it is within the legislation introduced by Chairman Baker. 

Mr. NEY. Something I found surprising with your testimony—

and this has nothing to do with you personally as Secretary reversing any position, but it is a position reversal, which I am not saying is bad in my mind, from previous, probably a year ago—but you 

mentioned in your testimony that HUD’s expertise in developing 

and enforcing the housing goals makes it appropriate for the department to retain the authority to set the affordable housing 

goals. 

I think before, it was going to be moved from the department—

this is prior to your being Secretary—but it was going to be moved 

from the department. What changed everybody’s mind? I am just 

curious. 

Secretary JACKSON. Well, I think if you look at the last 12 to 14 

months where HUD has really asserted its authority, and we have 

had to work with the GSEs, and they realized for the first time 

that we were serious about meeting our—well, I will not say the 

first time—that we were serious about having them meet the housing goals. 

It was clear we have the expertise, and we utilized the expertise 

in the way that it should have been utilized for a number of years. 

And therefore, I still think that we are the appropriate place that 

it should. 

Mr. NEY. If this legislation passes, then, do you view that HUD 

will have to go through a different type of process to establish new 

goals? Or will a lot of it stay as it is? I mean, do you have any, 

not details, say, but any ideas about that? 

Secretary JACKSON. The present way that Chairman Baker’s proposal is put, we are not involved at all. I mean, that would be 

clearly within the independent regulator, and we would, for transitional purposes I would think, give them all the information that 

is necessary. 

Mr. NEY. We know safety and soundness is important, and we 

have to have a good regulator so that some of the past problems 

are avoided. One of the questions—how does it go together? In 

44

other words, you have a mission. How do we make sure we have 

standards and regulations in place, safety standards and mission, 

and how do we do it without risking damage to the markets? 

Secretary JACKSON. We are doing it now. I mean, we have the 

HUD mission, the fair housing goals, and OFHEO is making sure 

that in essence the safety and soundness is done. I think that if 

you work together, it can be done. 

Others would say, ‘‘Why do not we have it in one specific place, 

housed?’’ as the Chairman has said. I am convinced that that 

would work too. It would take some time. And let me say this to 

you: That is my only concern, is if all aspects are in one place and 

we are trying to regulate the GSEs——

Mr. NEY. I guess if you have separate—my question would be, if 

you have separate regulators, would that cause a problem? 

Secretary JACKSON. No, it does not, from my perspective. 

Mr. NEY. Okay. 

My yellow light is on, so I wanted to just make a note as I close 

here, and it is on manufactured housing. 

I have been, for 10 years, onto this issue. We have talked with 

you and we have appreciated you talking with us. But in manufactured housing, I think there has been a reluctance to the bureaucracy, there has been problems, and, you know, there is not one fit 

for people in housing in one particular area. There is urban centers, and you know the whole story of housing. 

So I do hope down the line we can continue to, you know, make 

things go decently with manufactured housing, walk through some 

of the problems that are out there, and just even when it comes 

to, you know, some of the ways that—there was a bureaucracy that 

was tough to get even some of the units approved. 

This has been endemic for quite a few years, and I just want to 

mention it. I think it is a problem, and I know Mr. Frank spoke 

on it earlier, and I just want to continue to stress that we need to, 

you know, work with that issue. 

Thank you, Mr. Chairman. 

Mr. BAKER. The gentleman’s time has expired. 

Mr. Bachus? 

Mr. BACHUS. Thank you. 

This question is for Secretary Snow. 

Secretary Snow, I am sure I am just like anybody else, if I go 

out to get a mortgage, if I buy a new house or refinance, I am going 

to look for the cheapest rate, cheapest interest rate. You know, if 

I can get something for an eighth of a point less in someplace else, 

that is where I am going to go. So if you can offer a lower interest 

rate, you have a tremendous advantage in the market. 

Now, having said that, the GSEs charge loan originators, mortgage companies, a G-fee, guarantee fee. 

Secretary SNOW. Right. 

Mr. BACHUS. And that determines to a large extent, I mean, to 

some extent, exactly what interest rate they can charge the public 

or mortgage company. 

Now, I understand that these G-fees are not set on how safe or 

sound a mortgage is, like an 80 percent mortgage or a 90 percent 

mortgage; it is based on volume. And what they do is, they negotiate in private confidential agreements with mortgage originators, 

45

and they charge some one fee, they charge others other fees. And 

I understand that that can vary by as much as 15 percent. Obviously, the more volume you do, the lower fee you get. 

And I am not sure I think this is good public policy for a government-sponsored entity, because it obviously favors your biggest 

mortgage companies, and it puts your smaller mortgage companies 

or your local mortgage companies at a disadvantage. 

So my questions to you is, I guess number one, what they charge 

companies, since it is a government-sponsored entity, should it be 

made public where the public can scrutinize that? Because it can 

be a tremendous advantage. And it is my understanding that some 

mortgage companies, some of the smaller ones, are being charged 

15, 20 basis points more. So I would just like you to comment on 

that. 

And Secretary Jackson, if you would also like to comment. 

But we want to promote competition, and we also want to promote a level playing field in any government-sponsored entity. 

Secretary SNOW. Well, this is really a subject that Secretary 

Jackson knows a lot more about than I do. 

I would say two things: It certainly is an issue that I think deserves consideration and review and monitoring and so on. How 

best to do that, I would leave to you, Congressman. 

But as you do it, you also want to make sure that we do not 

interfere with whatever appropriate economics are at play that create those differentials, because there probably are some lower costs 

associated with large bundling that justify somewhat lower rates 

on just a market cost basis. But clearly it should not be beyond 

that. 

And that certainly seems to me to be something that ought to be 

subject to being monitored and looked at and followed up on, but 

Secretary Jackson——

Secretary JACKSON. Congressman, I would echo exactly what 

Senator Snow said—senator——

Secretary SNOW. You promoted me. 

Secretary JACKSON.—Secretary Snow—quite a Freudian slip—

has said. 

I think you will have to address the issue. 

We really cannot address it at HUD because they do not report 

to us. We have no knowledge of how that system works. We can 

tell you how our system works at FHA and Ginnie Mae. 

It is clear, we set a standard, and we abide by those standards, 

and they are public knowledge. 

I think you will have to make the decision as to whether they 

are public knowledge. 

Now, as you know, I think you raised the question because there 

has been great criticism in areas, especially about those who are 

not large institutions dealing with the two. And in many cases, it 

has been said that that is why they have not been able to address 

the low and moderate market because of that situation, because 

the smaller institutions usually are the ones who are addressing 

the marginal people we were talking about earlier with the Ranking Member. 

But we have no way of knowing how they set the system. 

46

Mr. BACHUS. Well, you know, that is one thing that I sort of disagree with. If you are going to have a government-sponsored entity 

that securitizes loans, the public ought to know. And they are 

charging different people different guaranty fees, different rates, 

and when these rates can amount to 15, 20 basis points, that is a 

big difference. 

Secretary JACKSON. Yes, it is. 

Mr. BACHUS. It is a competitive advantage. So they could be 

showing favoritism. 

So, number one, I think as a public policy they ought to reveal 

their guarantee rates; and number two, I think that it is a guarantee rate that the mortgage will be paid, that they will not lose 

their money. It ought to be based on credit-worthiness of the mortgages as opposed to volume. 

And I think there is a strong right to know by the public. 

The second question is this——

Mr. BAKER. The gentleman’s time has expired. 

Mr. BACHUS. Okay, thank you. 

Mr. BAKER. I appreciate the gentleman. 

I want to recognize Mr. Cleaver for his question. 

Mr. CLEAVER. This is a question for both of you. It is one simple 

question, although the history of the world will change based on 

what your answer is. 

[Laughter.] 

And it is very important. 

A lot of people are saying, ‘‘Well, you know, we do not want to 

throw out the baby with the bathwater.’’ I am not there. I think 

that, you know, what we need to do is probably just bathe the baby 

and not adopt a new baby. 

My concern is that—well, let me ask the question: Are either of 

you experiencing, even slight discomfort, with the fact that if all 

these changes are in fact brought about, that we are making major 

changes to the GSEs and that we are not in any way going to damage their ability to continue to bring new homeowners across the 

length and breadth of this country? Do you have perfect calmness 

in your spirit over what we are doing? 

Secretary JACKSON. I do, because, Congressman, I believe that it 

is in our best interests that we keep the three GSEs healthy for 

this economy. If we do not, then it presents a serious problem. 

So I would be remiss and I think the administration would be 

remiss to support anything that would be causing of the demise of 

these GSEs. That is not what we are saying. 

We are saying strengthen them, but at the same time, take some 

of the risk that they have afforded us out of their hands. 

Secretary SNOW. Congressman, I would agree with Secretary 

Jackson and say without any hesitancy that the actions that are 

being proposed in the legislation will strengthen the mortgage markets, will remove risks that otherwise could be there, and therefore 

lead to, in my view, much healthier markets long term for mortgages. 

Mr. CLEAVER. We are recording that for history. 

Thank you, Mr. Chairman. 

Mr. BAKER. I thank the gentleman. 

47

I believe that is the last person who is here to be recognized for 

questions. 

I wish to, on behalf of Chairman Oxley, express our deep appreciation to Secretary Jackson and Secretary Snow, not only for your 

participation but for your lengthy commitment to get resolution on 

this important public policy matter. We are indeed appreciative of 

your leadership. 

Our meeting stands adjourned. 

Secretary SNOW. Thank you very much. 

Secretary JACKSON. Thank you very much. 

[Whereupon, at 12:35 p.m., the committee was adjourned.] 

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April 13, 2005

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