FOR THE RECORD OF THE HEARING
ON THE "HOUSING FINANCE REGULATORY
IMPROVEMENT ACT OF 2000"
BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS,
SECURITIES AM) GOVERNMENT SPONSORED ENTERPRISES
OF THE U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON BANKING AND FINANCIAL SERVICES
MARCH 22, 2000
Thank you, Mr. Chairman, and Chairman Leach and other members of the Subcommittee for allowing me, as one of three Directors of the Federal Housing Finance Board, this opportunity to offer my comments on the "Housing Finance Regulatory Improvement Act of 2000". My comments are my own, and not that of the other members of the Federal Housing Finance Board.
For the reasons listed in my testimony before this subcommittee on July 24, 1997, a persuasive argument can be made to allow the two housing-related government sponsored enterprises to continue to exist as separate entities. Those two reasons were: 1) the mission and safety and soundness of the Federal Home Loan Bank System are currently well-regulated together by the Federal Housing Finance Board. The System has not experienced a credit loss since its creation in 1932, and the System continues to successfully meet its public purpose. In other words, as I stated in my prior testimony, "if it isnt broken, dont fix it." 2) Creating a single government sponsored enterprise violates the GAO criterion of the separation of the primary and secondary market regulation. Keeping the oversight of these public missions separate is a healthy policy to maintain for effective regulation.
In addition, another reason to allow the entities to exist separately is found in their inherent differences. The secondary markets are centralized in nature while the Federal Home Loan Bank System is entirely decentralized with its 7,000 members throughout the United States. To try to regulate two such different bodies the secondary market/centralized entities and a primary market/decentralized entity under one regulator may be counterproductive.
If, however, the U.S. Congress decides to consolidate the housing-related government sponsored enterprises under the Housing Finance Regulatory Improvement Act of 2000, the following are my concerns:
1) If enacted, Section 101 which establishes a 5 full-time member board, including the Secretary of HUD and the Secretary of the Treasury could end 67 years of independence for the regulator of the Federal Home Loan Bank System. Given the Systems glorious history through some rather tumultuous times, I think the regulators independence from the Administration has served the United States well. I strongly feel that having three out of five Board Members who are not private citizens impairs the mandated independence of the Board. I prefer the status quo that allows for a Board independent of the Administration, especially since safety and soundness are not, and should not be partisan issues.
2) If enacted, Section 111 which establishes a limitation on non-mission related assets could pose serious problems for the liquidity and the membership of the System during an economic downturn. Care must be taken not to straightjacket the FHLBanks in the belief that the current economic prosperity will continue indefinitely. Section 111, as written, does not provide flexibility for the Federal Home Loan Banks to maintain liquidity in the event of an economic crisis.
3) If enacted, Section 138 which eliminates the super-lien priority for the Federal Home Loan Banks over the assets of a member financial institution that fails could pose serious problems for the Federal Home Loan Bank System. Care must be taken not to destabilize the Federal Home Loan Bank System while removing the super-lien.
In conclusion, I believe the current method of separately regulating the housing-related government sponsored enterprises has fared well for the Federal Home Loan Bank System, a system that continues to successfully meet its public purpose without ever having incurred a credit loss. Maintaining separate oversight of a primary market/decentralized entity such as the Federal Home Loan Bank System from the oversight of the secondary market/centralized entities of Fannie Mae and Freddie Mac is a healthy policy for effective regulation. If, however, the U.S. Congress should decide otherwise and the Housing Finance Regulatory Act of 2000 becomes law, it is my hope that the Act better addresses the three above-listed concerns.