Hearing of the Senate Banking, Housing, and Urban Affairs Committee

Federal News Service

SECTION: CAPITOL HILL HEARING

HEADLINE: HEARING OF THE SENATE BANKING, HOUSING, AND URBAN AFFAIRS COMMITTEE
 
SUBJECT: PROPOSALS FOR IMPROVING THE REGULATION OF THE HOUSING GOVERNMENT SPONSORED ENTERPRISES
 
CHAIRED BY: SENATOR RICHARD SHELBY (R-AL)
 
WITNESSES PANEL I:
 
JOHN W. SNOW, SECRETARY, DEPARTMENT OF THE TREASURY;
 
MEL MARTINEZ, SECRETARY, UNITED STATES DEPARTMENT OF HOUSING AND DEVELOPMENT;
 
PANEL II:
 
FRANKLIN D. RAINES, CHAIRMAN AND CEO, FANNIE MAE;
 
GEORGE D. GOULD, DIRECTOR, FREDDIE MAC;
 
NORMAN B. RICE, PRESIDENT AND CEO, FEDERAL HOME LOAN BANK OF SEATTLE
 
LOCATION: 538 DIRKSEN SENATE OFFICE BUILDING, WASHINGTON, D.C.

BODY:
SEN. JACK REED (D-RI): Thank you very much, Mr. Chairman. I appreciate the fact you're holding this very important hearing and welcome Secretary Martinez and Secretary Snow. As we all know, the government sponsored enterprises have played an invaluable role in stabilizing and improving the availability of funds to support homeownership in our country. This has resulted in the United States having one of the highest homeownership rates in the world, and strong and effective oversight of the GSEs is clearly an important part of their long-term success.

As we begin to delve into how to strengthen our GSE regulators, it is increasingly clear how complicated this task may be, especially if we decide to change the regulator for the Home Loan Banks as well. It is my hope, Mr. Chairman, that you intend to hold several more hearings on this matter so that we can fully debate the many issues and hear from other stakeholders in the housing industry, as well as housing experts, on this matter. For example, proposals such as allowing the new regulator to set the minimum capital standard for the GSEs are worthy of their own hearing so that this committee can better understand the ramifications of such a change in the housing market.

Needless to say, I look forward to this morning's testimony and hope it can help this committee begin to decide what we can do to strengthen the regulation of our housing GSEs. Thank you very much, Mr. Chairman.

BREAK IN TRANSCRIPT

SEN. SHELBY: Senator Reed?

SEN. REED: Thank you very much, Mr. Chairman. As a preliminary point, Senator Stabenow asked me to submit to the record a letter from Fannie Mae.

SEN. SHELBY: Without objections.

SEN. REED: Thank you very much, Mr. Chairman.

Secretary Martinez, you are proposing to put together an oversight office within HUD, that is going to be presumably staffed with very skilled individuals with financial experience as well as detailed experience in housing. Why couldn't these individuals have reviewed the programmatic and product lines that are being offered?

MR. MARTINEZ: They could. The question really is that the best way to do this or should safety, soundness and new product lines all be combined in one regulator? Right now we have a divided house. OFHEO does certain things, HUD does the new program approval. We believe that a strong regulator would have all of the ability to do all of those particular items, not have it separated. By separating it, I think you weaken the regulator.

SEN. REED: Well, it would seem to me that there has to be collaboration between the two entities, otherwise it would be, you know --

MR. MARTINEZ: And the bill proposes that collaboration. It suggests that Treasury will consult with HUD in new program approval.

SEN. REED: Why couldn't HUD consult with Treasury with respect to safety and soundness, moreover I would think if Treasury has a safety and soundness responsibilities, that is a -- that's the trump card in everything, that they would be on a daily basis, dealing with these different GSEs where you would be dealing on a periodic basis looking at products and programs.

MR. MARTINEZ: Well, we would be looking at their goals as well, and the fair housing goals too. Senator, I believe that one thing that the secretary and I are very firm and very strong in our opinion is that it all ought to be in one place. Again, I see he said in his testimony and I think in answer to a direct question, you might debate the way that could happen, but inevitably I think it ought to all be under one regulator.

SEN. REED: Well, it seems we're saying that but we're giving you responsibilities, in fact you're asking for enhanced responsibilities with respect to goals, so right away it's not one stop shopping, it's you have a role, and then Treasury has a role. But again, I don't think there's anything that's sort of chiseled in concrete here and I think we have to look going forward with respect to these hearings and evaluation is whether these functions should be in one place or the other, because there's going to be two centers of gravity for this regulation, both HUD and Treasury.

MR. MARTINEZ: A regulator of financial institutions typically can also deal with their new product lines, and I think that's what makes that important distinction. Is that here we're dealing with very important financial institutions that from time to time, not on a continuing basis, but from time to time, may choose to go into a new product line. As they do that, then I think that new regulators should have the ability to examine --

SEN. REED: Well, this becomes almost philosophical debate I mean, the question is how do the goals relate to programs and products, how do the programs and products relate to financial safety and soundness. And that's something we'll thrash through.

Secretary Snow, do you believe that this new financial regulating entity should have sole discretion to set both the risk base and the minimal capital standards?

MR. SNOW: Yes.

SEN. REED: What about just simply allowing that entity to have responsibility for risk-based capital standards in terms of which is usually the measure of the real trust rather for safety and soundness?

MR. SNOW: Well, we think that the regulator ought to have broad flexibility with respect to capital generally, the risk-based capital as well as the minimum capital and I think that's consistent with good regulatory practice. I'm worried about hard wiring capital requirements in a statute because of the fact that we just can't perceive fully the circumstances that the entities will find themselves in, or the capital requirements that will be prudential, given those circumstances. So I think it's better to have a strong capable regulator, sophisticated in what they're doing, who uses good flexibility and discretion.

SEN. REED: Well, I think the flexibility comes with risk-based capital. I mean that's why we have a risk-based capital measure and a basic stated capital measure, sometimes it's called. But have you evaluated the impact on the housing market and investor markets if you have complete ability to change capital requirements at any time?

MR. SNOW: Well, a good regulator approaches the capital, and we're talking about a good regulator here, a strong regulator, an intelligent regulator, a sophisticated regulator. That sort of regulator will approach that issue with enormous sophistication and care, knowing that it is the essential ingredient of the -- of a financial institution's regulatory system, so that strong regulator will approach it with prudence and care.

SEN. REED: Well, we should just pass a statute calling for prudence and care.

BREAK IN TRANSCRIPT

SEN. REED: Thank you. Secretary Martinez, would you have an observation, comment, thought on any of this?

MR. MARTINEZ: No, sir, I think Secretary Snow pretty well covered anything I would have to say on it, but --

SEN. REED: Let me address the obvious tension that's always connected, woven into the fabric of agencies like Fannie and Freddie, the two different commitments, one being the commitment to the affordable housing goals, that Secretary Martinez referred to, Senator Sarbanes has referenced in his questions, versus the other commitment of shareholders equity, maximizing that shareholders equity, profits. Do you see any dynamic here that -- other than a health tension between the two, any conflict, any issues that you think as we are dealing with possible changes in structure, enforcement structures?

MR. MARTINEZ: I think that's a tension that ought to be recognized and I think when I hear commentary that suggests that somehow these are government entities that are almost in the grant business or something like that, I mean that's really misplaced. These are investor owned entities chartered by the federal government to achieve a certain purpose, and one of the things I think is important to note, while recognizing the importance and the value of what they've done, is the fact that they have lagged the market in some very important areas that are part of their charter and you know, I just believe that that ought to be recognized, they there exists that tension, and that they are investor owned entities who have a fiduciary responsibility to their shareholders.

SEN. REED: Secretary Snow, I know my time is up, but if the chairman would indulge me, if you had a comment I would appreciate it.

MR. SNOW: No, I'll associate myself with Secretary Martinez.

SEN. REED: Then, the chairman likes that. Thank you, Mr. Chairman.