Statement of William C. Apgar
Assistant Secretary for Housing
Federal Housing Commissioner
House Subcommittee on
Capital Markets, Securities and Government Sponsored Enterprises
Committee on Housing, Banking and Financial Services
March 22, 2000
Chairman Baker and members of the subcommittee, my name is William Apgar and I am the Assistant Secretary for Housing/Federal Housing Commissioner at the U.S. Department of Housing and Urban Development (HUD). I am pleased to be here today on behalf of HUD Secretary Andrew Cuomo, and would like to thank you for the opportunity to testify on the Housing Finance Regulatory Improvement Act, H.R. 3703.
To place my comments today into perspective, I will offer a brief summary of HUDs current regulatory activities as they relate to Fannie Mae and Freddie Mac. Under the leadership of Secretary Andrew Cuomo, HUD has achieved a solid record as an effective regulator. Even so, more could be done to enhance the oversight of these two entities. To the extent that provisions in H.R. 3703 strengthen regulatory oversight of the Government Sponsored Enterprises, or GSEs, they merit careful consideration. More effective regulation will help ensure that Fannie Mae and Freddie Mac, as well as the Federal Home Loan Banks, are achieving their public purposes as mandated by Congress.
HUDs CURRENT OVERSIGHT IS EFFECTIVE
Recognizing that Fannie Mae and Freddie Mac enjoy tremendous advantages over their private sector competitors the Department is actively involved in ensuring that Fannie Mae and Freddie Mac achieve their public responsibilities. Under the leadership of HUD Secretary Cuomo, HUD has recently proposed substantial increases in the affordable housing goals, initiated a major review of Fannie Maes and Freddie Macs automated underwriting systems, and stepped-up its oversight of the GSEs non-mortgage investment portfolios. Let me review our accomplishments in these and other areas with you.
Proposed Increases to Affordable Housing Goals
In July 1999, Secretary Cuomo announced a plan to increase Fannie Maes and Freddie Macs affordable housing goals. The higher goals, announced after a period of extensive consultations with Fannie Mae and Freddie Mac, will require the two enterprises to purchase $2.4 trillion in mortgages over the next 10 years, providing affordable housing for about 28.1 million low- and moderate-income families. The higher levels for the three Congressionally mandated goals will increase their mortgage purchases by $488.3 billion over the next 10 years, providing affordable housing for seven million more low- and moderate-income families than they currently serve. The rule proposing the increased housing goal levels was published in the Federal Register on March 9, 2000 and comments are due to the Department by May 8, 2000.
The substantially higher goals will require that at least half of all of Fannie Maes and Freddie Macs mortgage purchases will benefit families of low- and moderate-income. Fannie Mae and Freddie Mac have been successful in meeting their housing goal requirements in the past, yet their share of the affordable housing market is substantially smaller than their share of the total conventional conforming market. Lower income families, certain minorities, central-city residents, and immigrant populations continue to be underserved by Fannie Mae and Freddie Mac. These new more challenging goal levels will close the gap between the GSEs performance and the opportunities available in the primary markets.
For example, in 1997, the GSEs purchased mortgages financing 39 percent of all owner occupied and rental units available in the market, but only 30 percent of the units available to low- and moderate-income families, 24 percent of the special affordable units available in the market, and 33 percent of the units located in underserved areas.
Additionally, when GSE mortgage purchases are analyzed by property type, it becomes clear that the GSEs purchases of mortgages on multifamily properties, particularly small multifamily properties, lag those that are available for them to purchase from the conventional mortgage market. The GSEs market share for single-family owner units was 49 percent, for single family rental properties 13 percent, for small multifamily properties (5-50 units) 2 percent and for large multifamily properties 34 percent. This analysis indicates there is substantial room for growth, particularly in the areas of single-family rental properties and small multifamily properties properties that traditionally provided significant housing opportunities for low- and moderate- income families.
Fair Lending Review of Automated Underwriting Systems
This past year HUD initiated the first review by Government of Fannie Maes and Freddie Macs underwriting and appraisal guidelines. This is a massive and historic undertaking. The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (FHEFSSA) requires HUD to review these guidelines periodically to ensure that the GSEs do not discriminate and are consistent with the Fair Housing Act and FHEFSSA. Moreover, in light of the importance of the GSEs underwriting standards and the growth of their automated systems in determining whether many families actually realize the dream of homeownership, this review is timely and essential. Unlike most other areas of GSE mission regulation for which I have been delegated lead responsibility by the Secretary, primary responsibility for this effort and for Fair Lending regulation of the GSEs is assigned within HUD to the Assistant Secretary for Fair Housing and the General Counsel.
The GSEs underwriting and appraisal guidelines are the standards that lenders use to determine whether the GSEs will purchase a borrowers mortgage and allow the borrower to receive the most favorable interest rates available in the conventional mortgage market. Within the last five years, both GSEs have separately introduced automated underwriting systems (AUS) that computerize the GSEs guidelines. Although the GSEs AUS are relatively new, they are rapidly becoming the prevailing means by which borrowers are approved for conventional conforming mortgages.
While virtually everyone agrees that this new technology is making the process of obtaining home financing faster and possibly cheaper, little is known yet on whether these systems are helping all prospective borrowers, particularly minority borrowers, obtain mortgages on favorable terms. Today, minorities are underrepresented in the mortgage market. They are less likely to obtain mortgage financing and less likely to receive loans on as favorable terms as whites. HUD has determined that the GSEs have purchased proportionately fewer loans for African-American and Hispanic borrowers than are originated in the overall private mortgage market. The HUD underwriting review will assess whether Fannie Mae and Freddie Mac are in full compliance with Fair Lending requirements and identify whether it is possible to adapt GSEs underwriting to expand minority mortgage lending.
Early last year, HUD requested extensive information from both GSEs on how the underwriting systems were developed and how they work, including how their "scorecards" function in deciding which borrowers will be accepted. HUD also requested extensive computerized data on the characteristics of the millions of loans that were processed by the GSEs automated systems since 1995 in order to examine how borrowers and potential borrowers were actually treated by the systems.
The GSEs have submitted a large volume of information and data in response to HUDs request much of which the GSEs indicate is highly confidential or proprietary business information. HUD expects that it will be able to provide the first results of its review within 6 months, and that it will complete the review by the end of this year.
New Program Reviews
HUDs new program review and approval responsibility is an integral part of the Departments regulatory framework. Considerable resources are being made available within the Department to ensure that new activities are identified, analyzed, and, if appropriate, reviewed as new programs. HUD monitors the GSEs business activities on an on-going basis and recently requested information on a number of their initiatives including their mortgage insurance initiatives and their various internet activities which involve the delivery of various mortgage services and products over the internet through a variety of partnerships and joint ventures.
Neither GSE takes the view that these activities constitute "new programs as defined in current law, and they did not submit them to HUD for approval prior to introducing them in the market. HUD, through its regulatory authority, requested comprehensive information on these activities to determine independently if, in fact, they constitute new programs. This information was recently submitted to HUD by the GSEs and HUD staff are reviewing the material to make these determinations.
The Department increased its oversight activities in the area of non-mortgage investments several years ago. HUD issued an Advance Notice of Proposed Rulemaking on the subject. In addition, the Department now regularly receives and analyzes quarterly reports from Fannie Mae and Freddie Mac on their non-mortgage investment portfolios. HUD also engaged a contractor to study on this issue. The research report will assist the Department by identifying and analyzing various policy options to consider in determining the most appropriate regulatory approach to take with regard to the GSEs non-mortgage investments. HUD expects to receive the final report very shortly and will actively analyze and consider its findings.
Availability of Public Information on GSE Activities
Educating the public about the GSE activities in order to assist the public in evaluating those activities is another area regulatory responsibility that HUD actively carries out. Each year since 1993, HUD has released a public use data base containing loan level information on Fannie Maes and Freddie Macs mortgage purchases. The March 9 proposed affordable housing goals rule also contains certain rule changes in the classification of the GSEs mortgage data. These changes would classify data in a manner more compatible with loan information reported by primary lenders under the Home Mortgage Disclosure Act (HMDA). Greater consistency between these two important data sources will increase the comparability and therefore, the usefulness of the GSE public use data base.
In addition, HUD recently determined that certain cross tabulations of GSE data are not proprietary even if they were aggregated from loan level elements that are identified as proprietary. HUD believes that when certain information is aggregated at national and certain regional levels it loses its proprietary characteristics and should be made available publicly. HUD is continuing to identify whether certain other aggregations of data should be made publicly available.
OFHEOs Risk-Based Capital Rules
The Office of Federal Housing Enterprises Oversight (OFHEO) functions as an independent office within HUD. As the safety and soundness regulator for the GSEs, OFHEO was mandated by Congress to develop a risk based capital rule for Fannie Mae and Freddie Mac. OFHEOs proposed rule described a comprehensive model to use for determining the appropriate level of capital the GSEs must hold. The comment period for the proposed rule ended earlier this month and we expect that a final rule will be published within the next year.
EXISTING STRUCTURE WORKS WELL
The existing regulatory structure governing Fannie Mae and Freddie Mac which separates the mission and safety and soundness regulatory functions but creates mechanisms for consultation and coordination -- allows for a careful balancing of public policy needs with legitimate safety and soundness considerations. Congress understood this in 1992 when it created the Office of Federal Housing Enterprise Oversight or OFHEO, as an independent agency of HUD responsible for the safety and soundness of the enterprises and charged the HUD Secretary with mission oversight. At the same time, we recognize that for the long haul, revisions to the existing regulatory structure may be necessary to keep pace with changing market conditions.
By placing regulation of Fannie Mae and Freddie Mac under the jurisdiction of HUD, Congress recognized that this significant regulatory function merited cabinet level emphasis that would ensure that there was an integrated and coordinated housing policy for the nation. At the same time, OFHEOs role as the safety and soundness regulator was designed to be sensitive to the GSEs critical housing missions. While OFHEO was designed to be independent, Congress recognized the importance of OFHEO maintaining a link with HUD to ensure that the safety and soundness regulation interfaced with the GSEs programmatic missions.
After seven years of experience, we can affirm that the current structure between HUD and OFHEO is working, as intended by Congress. HUD and OFHEO frequently communicate on issues of common interest. Most recently, the two organizations worked closely to ensure that the two proposed rules issued recently by HUD and OFHEO the affordable housing goals and the risk-based capital requirement were consistent and coordinated.
With regard to the Federal Housing Finance Board, I am the Secretarys Representative on the Finance Board. I am in contact with staff or other Finance Board members regularly. The overlap in my responsibility on the Finance Board with my responsibility for regulating the mission of Fannie Mae and Freddie Mac allows for the Administration to have critical input on housing policy issues of the Finance Board and allows for coordination of mission oversight activities between both agencies where appropriate.
HOUSING FINANCE REGULATORY IMPROVEMENT ACT - H.R. 3703
H.R. 3703 includes a number of helpful elements for GSE regulation that are worthy of careful consideration. HUD Secretary Cuomo and I look forward to working with the Chairman and the Committee to make needed improvements in mission regulation that will further the GSEs public purposes. Three items in the bill that would strengthen HUDs mission oversight are those that provide for (1) authority to assess the GSEs for the cost of regulation including mission regulation outside of the appropriations process; (2) strengthened authority to review new program activities; and (3) additional legislative direction for limiting non-mortgage investments.
Assessing the GSEs for the Cost of Regulation (Sec. 105)
HUD supports the principle that the GSEs should pay for the full cost of their regulation including mission regulation.
It is important to recognize that Congress gave HUD specific responsibilities for mission oversight of Fannie Mae and Freddie Mac that are separate from the other areas of the Departments responsibilities with regard to housing. For example, the fair lending provisions of the GSE Act go beyond the standard enforcement of the Fair Housing Act. Adequate resources need to be devoted to mission oversight if it is to be fully effective.
New Program Review Authority (Sec. 110)
The Department also supports the principle of strengthening and clarifying the approval authority for new activities of the enterprises. The Secretary currently has authority to review new programs of the GSEs under its new program authority and ongoing activities of the GSEs under the Departments general regulatory authority. But unquestionably, the provisions in this section would further clarify these authorities and change the standard for review by requiring the regulator to affirmatively conclude that the GSE activities are in the public interest.
Even so, this provision may be too limited since it does not expressly permit the regulator to review activities except those that are connected, or related, to mortgages. For example, the proposal does not address instances where the GSEs pursue new diverse activities that are asserted by the GSEs to fall within their existing charter authority to invest. While these activities are addressed under the Governments current general regulatory authority, H.R. 3703 does not expressly authorize the regulator to review such activities.
HUD reserves judgment on the advisability of Federal Register public notice of proposed new activities. While providing interested parties with an opportunity to comment, we have some concerns that the procedure may be too unwieldy and/or tend to stifle innovations in the mortgage market.
Non-Mortgage Investments (Sec. 111)
HUD believes it currently has regulatory authority over the GSEs non-mortgage investments but welcomes clearer direction from Congress on its responsibilities and enforcement powers in this area. Some express limitation on non-mortgage investments may be appropriate to ensure that GSEs do not take advantage of their GSE status and that they further their public purposes.
Fair Lending Oversight (Sec. 109)
In addition, the Department believes that its fair lending responsibilities with regard to the GSEs are significant and unique in that there is no other regulator assessing the GSEs fair lending practices. With other financial institutions, banking regulators conduct fair lending reviews as part of compliance examinations. Fannie Mae and Freddie Mac scrutiny comes from HUD. Given the significant role the GSEs play in the mortgage market, it is important that their underwriting practices are reviewed to ensure that they are consistent with the fair lending laws.
For this reason, it is critical that the current fair lending enforcement authority governing the GSEs not be weakened. As we read H.R. 3703, responsibility for the fair lending provisions contained in FHEFSSA would be retained by HUD, but the power to enforce this responsibility, which currently resides with OFHEO, would be transferred to the new entity. Such a provision fragments fair lending responsibility for the GSEs and thereby hampers the Governments ability to carry out this critical function.
OTHER MATTERS WORTHY OF CONSIDERATION
With regard to the provisions of H.R. 3703 that govern the elimination of the GSEs line of credit with the U.S. Treasury, the conforming loan limit governing the upper limit on the mortgages the GSEs can purchase, and the release of information on the GSEs activities, the Department does not take a specific position but raises several issues for consideration.
Treasury Line of Credit (Sec. 136)
As part of their Congressional Charters, the two enterprises, receive significant benefits that are not enjoyed by any other shareholder-owned corporations in the mortgage market. These benefits include access to the $2.25 billion line of credit from the U.S. Treasury, exemption from the securities registration requirements of the Securities and Exchange Commission and exemption from all State and local taxes except property taxes. These benefits, conferred upon the GSEs by Congress, lead the markets to provide the GSEs with advantages over wholly private companies. Consequently, all of these benefits need to be reviewed regularly to determine their value and continued need. We defer to the Treasury Departments testimony on whether repeal of the line of credit would be consistent with the GSEs Congressional status.
Release of Information (Sec. 103)
H.R. 3703 provides that the new board will make available information to the public on the GSEs. Increased light on the GSEs activities and financial position is helpful. Given their status as GSEs and their market dominance, Fannie Mae and Freddie Mac should be subject to a higher standard when it comes to the release of such information. More expansive and detailed information will allow the public to independently determine the benefits of public sponsorship.
At the same time, the need for broad public disclosure must be carefully weighed against the GSEs concerns about protecting proprietary or trade secrets, the release of which could have a negative impact on their business operations and their financial condition. HUD now has extensive experience in working with the GSEs on these matters and would be pleased to work with the Committee to draft language that expands public access to GSE information while at the same time protecting legitimate proprietary interests.
Conforming Loan Limit (Sec. 112)
This provision governing the determination of the conforming loan limit that establishes the upper limit on the dollar amount of an individual mortgage a GSE may purchase appear to leave an ambiguity that has presented a problem in the past. The conforming loan limit language does not appear to adjust for decreases as well as increases.
Safety and Soundness Provisions
The provisions in the bill that address safety and soundness related areas, such as the broader stress test authority, certain supervisory actions, the use of ratings agencies and the appointment of receivers are matters within the responsibility of OFHEO. We, therefore, defer to OFHEOs and the Treasury Departments testimony on these topics.
In summary, HUD believes that it is a strong and effective regulator ensuring that the regulatory responsibilities assigned to it under current law are carried out prudently. The current regulatory structure is working well and is having a valuable impact on affordable housing markets. But, there is more, much, much more that can and must be done. There is a crisis in need for affordable housing and the need is growing not diminishing. There are actions Congress can and should take to make HUDs mission oversight more effective that will allow Americans to receive the full benefit of Fannie Maes and Freddie Macs government sponsorship.