Statement of the Honorable Walter E. Fauntroy
Before the House Subcommittee on Capital Markets, Securities, and
Government Sponsored Enterprises
June 21, 2000
Chairman Baker and members of the committee. Let me first thank you for the opportunity you have given me to return to lay out in greater detail the views that I was only able to summarize at your hearing last week. I appear before you in three capacities today. The first is as president of the National Black Leadership Roundtable, the national network vehicle of the Congressional Black Caucus. Composed of the heads of more than 200 national black organizations in eighteen categories of American life, the Roundtable convenes twice a year to determine how best to support a CBC public policy agenda designed to improve the quality of life for African American citizens in the broad categories of (1) income generation, (2) education, (3) health care, (4) housing and (5) justice. For guidance on matters of housing and community development, we rely heavily upon two of our members who are out there where the rubber hits the road on the question of affordable housing: the National Black Caucus of State Legislators, the National Conference of Black Mayors and its parent body, the World Conference of Mayors.
With your permission, Id like to enter into the record at this point, letters sent me on the subject of H.R. 3703 by State Representative James L. Thomas, President of the National Black Caucus of State Legislators, and The Honorable Johnny Ford, founder and director of the World Conference of Mayors. These letters state their support of Fannie Maes efforts to remove remaining barriers to homeownership and to bring even more families closer to the realization of the American Dream. They also oppose H.R. 3703 because it would "impeded future progress" of increasing homeownership in this country.
Secondly, Mr. Chairman, I testify here today against the background of the nearly twenty years that I spend as a member of this committee, six of them as chair of the subcommittee on Domestic Monetary Policy and four of them as chair of what we called the subcommittee on International Development, Finance, Trade and Monetary Policy. And third, Mr. Chairman, I testify against the background of more than forty years as an inner-city pastor, civil rights activist and community organizer who, in the 1960s and 1970s, developed and implemented a national demonstration project aimed at housing low and moderate income citizens here in our nations capital that enjoyed the enthusiastic support of both President Lyndon Johnson and President Richard Nixon.
There are two reasons that I have asked to appear before a House Banking subcommittee for the first time since I left the congress in 1991. The first is my great appreciation for what this committee did in 1992 in passing the Act that modified Fannie Mae and Freddie Macs charter. That 1992 Act was long over due and one for which I had longed for years. It created the GSEs affordable housing goals, strengthened HUD's role as the GSEs' mission regulator, and created a system and a regulator for ensuring these companies continued to be financially safe and sound. The second reason is that, as quiet as it is kept, we have a greater need today for our GSEs to carry out the mission given them than at any time since they were first chartered. Thats because of a single disturbing trend in the nation that reflects itself most acutely right here in our nations capital. Despite the booming economy, worst case housing needs are more severe across the nation today than ever.
THE DEEPENING CRISIS
Let me remind you of what HUD had to say to you in its most recent Report to Congress on Worst Case Housing Needs, published in March of this year. It informed you that worst-case housing needs reached an all-time high of 5.4 million households and that there are now 600,000 more worst case households today than there were in 1991 when the current economic recovery began a rate of increase that is almost twice as fast as overall household growth. Nowhere is this deepening crisis more acutely reflected than right here in our nations capital. In the last two years, our Section 8 waiting list in the District has increased by 29%, our public housing waiting list by 24%. Time on our waiting lists for both Section 8 and public housing is up to five (5) years. The national average for waiting time is eleven months.
This situation here and across the country would have been worse had you not passed the 1992 Act and had not Fannie Mae and Freddie Mac responded to the directive that HUD, in its new regulatory role, gave them to devote 50% of their business to the service of low- and moderate-income families. Members of congress cannot dismiss the fact that in communities across the country, including the District of Columbia, these mission-driven companies have helped harness private capital and direct it toward fulfillment of the American dream of homeownership. Let's look at some of the facts:
It is clear that our GSEs are part of the answer to narrowing the homeownership gap and raising the rate of minority homeowners. These are significant results, and these are results that should not be taken lightly or dismissed. Any effort to reform or change the current structure and the role of Fannie Mae and Freddie Mac must, in my view, look at the huge benefits these companies provide to Americans, and the costs "reforms" would mean to homeowners. Because there arent as many people in the African American community who own houses, my community would be hit the hardest.
In light of the deepening crisis in affordable housing for low and moderate income families that is upon us, we do not need to stifle the progress that our GSEs are belatedly making on the mission for which they were chartered. We need, rather, to challenge them further to enhance the tools at their disposal to serve those segments of our society that the so-called "private market", left to its own devices, will not serve; -- segments where it is perceived that the risks are too high and the returns too low. We need to challenge our GSEs to do more to clean up the "predatory loan" market for second mortgages. They need to come up with even more creative ways of making home ownership available to senior citizens on limited incomes and moving more credit worthy low and moderate income loan applicants from "C" to "B" to "A" ratings where those moves are warranted. And once they become homeowners, our GSEs need to facilitate access to affordable, non-predatory home improvement loans such as they are now beginning to do.
CRITICISMS THAT HAVE NO BASIS IN FACT
I would like to take a moment to challenge some of the points made by critics of the GSEs. There are those who assert that the GSEs should no longer exist -- that whatever market failure they were originally created to address has been remedied, and that the "private market", without the GSEs, can fully meet the housing finance needs of our country. I dont believe that for a moment, Mr. Chairman. There is a reason why Congress -- why this Committee -- has seen the need to enact laws like the Community Reinvestment Act. It is precisely because this so-called "private market", left to its own devices, will not serve certain segments of our communities -- segments where it is perceived that the risks are too high and the returns too low. This is not to say that everyone can and should be a homeowner -- it is just that Congress has determined that it is appropriate to create additional incentives and structures to push the market to do more and to recognize the business opportunities of non-traditional markets.
To dramatically change or "privatize" Fannie Mae and Freddie Mac would mean that the underserved would be even more underserved. That would keep many people in my community out of houses and that is bad. Homeownership strengthens our communities. That is a fact. How can we ever hope to solve many of the social and economic problems facing low-income and African American communities if we take away the opportunity for them to become homeowners? Our society and Congress have determined that homeownership is good and Congress had created additional incentives and structures to push the market to do more. Just like the housing tax credit, the GSEs are an important part of our nations policies designed to promote and encourage homeownership.
I've heard complaints about Fannie Mae and "mission creep" but Fannie and Freddie are just trying to do the job Congress gave them. For example, critics say home equity loans are "mission creep." That is not "mission creep" -- home equity loans are an IMPORTANT part of Fannie and Freddies mission. Today's fancy term "home equity loan" was and is a second mortgage. At least that's what we called it in 1984, when I was here and this committee explicitly added second loans or home equity loans, to the list of products we wanted Fannie Mae to buy. We did this because it meant that second mortgages would come down in price. Having Fannie and Freddie in this market helps lower consumer prices for those products. Thats good!
Other critics say Fannie Mae and Freddie Mac are risky. This claim is ridiculous. Fannie and Freddie are the best risk managers on the planet. Their credit losses low and they also have a great record of helping their lenders work with borrowers who are in trouble. That means that their lenders forbear on delinquent loans and develop workout plans. Thats why Fannie and Freddies losses are so low -- they know how to manage risk up front and they know how to manage risk when the going gets tough. And this good work helps keeps people in their houses, which helps keep a community strong.
Business competitors who get just as many government benefits as Fannie and Freddie are bringing many of the complaints about Fannie and Freddies government benefits. As Chairmen Volcker and Greenspan taught me, these banks have access to cheaper working capital because of federal deposit insurance (for which they do not pay), access to the federal home loan bank advance system, and the advantages of the Federal Reserve Systembut these banks try to call themselves "private" while claiming that Fannie and Freddie are part of the government. If Fannie and Freddie have, as some believe, an "implicit benefit from the government," which even CBO claims is largely passed onto consumers, how much of the very real bank subsidy Mr. Greenspan talked about gets passed on?? I suspect very little, Mr. Chairman. But, that would be an interesting question for the Congressional Budget Office to answer.
I get the feeling that this bill represents a wish list of people who dont like Fannie Mae and Freddie Mac for competitive reasons and only want to drive them out of business so they can lea into their place and charge those about whom Im most concerned a lot more a lot less of a loan.
Some have challenged, for example, Fannie Mae and Freddie Mac's entry into the subprime market. But being in the subprime market means Fannie and Freddie can help fight predatory lending. Predatory lending is very bad. It is destroying many people in the communities I work with and it must be stopped. Fannie Mae and Freddie Mac will help be a solution to the predatory lending problem. We need them there to help. These companies were the first to speak out against this problem and we need their leadership. Most of the complaints about Fannie and Freddie entering the subprime markets are not coming from regulatory authorities--HUD wants them to go therebut from the predatory lending companies who have been overcharging millions of American families, especially minority and low-income families.
Simply put, Mr. Chairman, this proposed bill would raise the costs of homeownership. These are costs that already are too high for many people in our minority communities.
Fannie Maes Exemption From State Taxes
Let me say a word as well about this matter of Fannie Maes exemption from state taxes. As you know, Congress chartered Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to lower the cost of homeownership in all 50 states, to smooth out regional imbalances in mortgage supply, and to integrate regional mortgage markets into the national capital markets. By creating a liquid secondary market for mortgages in all 50 states, Fannie Mae also lowers the exposure of banks and swifts to regional downturns.
Congress exempted Fannie Mae from taxation by the states, not as a subsidy, but to help the GSEs fulfill their mission in all 50 states. Fannie Maes Congressional charter requires the company to pay Federal income taxes and local property taxes but exempts the company from paying state income taxes for a very good reason. Without the exemption, one or more states might attempt to overtax the company, and Fannie Maes charter would prevent it from attempting to leave the state which is how other private corporations respond to states attempts to overtax their income. With its bargaining power hobbled by it charter, Fannie Mae might be forced to pay state tax on more that 100% of its income if its exemption were withdrawn.
To avoid that unfair result, Congress had the choice of either exempting Fannie Mae from state income taxes, or inserting itself into the fair apportionment of Fannie Mae income among the 50 states. Congress wisely chose the former course, and demonstrated that this was a policy decision, not a subsidy, by allowing the states to tax Fannie Maes real property (which does not create the difficulty and ongoing apportionment problems). Rescinding the exemption would in effect impose a national housing tax, as Fannie Mae would be required to pay hundreds of millions of dollars annually in taxes on business it does throughout the country. These expenses would be passed to consumers in the form of higher mortgage rates.
As the District of Columbias first elected Delegate to the U.S. Congress, author and enabler of the Home Rule Charter that was suspended by the Congress in 1995, and as an ardent advocate of self determination here and around the world, I must say a word about the proposal to impose a state tax on Fannie Mae income here in the District of Columbia. Fannie Mae, of course, while exempt from paying local and state income taxes, does pay 100% of its share of local property taxes here in the District of Columbia and in all other states.. In fact, I understand, the company paid more than $2.4 million in local property taxes here last year.
I have steadfastly maintained over the years that the District of Columbia, whose residents are treated like a state for taxation purposes, should be treated as a state in all respects: voting representation in both houses of congress, the right to impose a tax on the income of non-residents as do other states, and the right to payment in lieu of taxes from the Federal government in light of the fact that 55% of the taxable land in the district is taken off tax rolls due to federally mandated exemptions. We want no more, and no less than the same privileges and the same responsibilities every other American has. Since Congress granted Fannie Mae an exemption from local and state income taxes in order to assist the company in its mission to make home mortgages more affordable and available to families of modest means in every state and territory of this country, I do not want an exception to that rule for us for the reasons cited above.
Since the low and moderate income families of the District have a greater need per capita for a whole variety of the GSEs services and mortgage lending programs than any state in the Union, I do want to see them commit substantially more of their resources to serving the affordable housing needs low and moderate income families in the country generally and in the District of Columbia in particular.
That is precisely why, even as I oppose further consideration of H.R. 3703 by the subcommittee, I have proposed a better course of action. I have proposed that members of the subcommittee join ranking member Paul Kanjorski and me on a bipartisan basis in an exciting national demonstration that is about to commence at the request of a faith-based organization that it is my privilege to head. It is a partnership made possible by your passage in 1998 of the Asset Control Area Partnership Act which creates a new way of revitalizing neighborhoods, one that creates decent housing through federal/local govern partnerships with faith-based institutions to efficiently dispose of HUD-owned single family homes.
The Fund for Affordable Innercity Turnkey Housing (FAITH), which I chair, has proposed a Neighborhood Revitalization Partnership anchored by HUD that includes the District Government, Fannie Mae, Freddie Mac and Bank of America among other banks in the District of Columbia to buy, rehabilitate and sell to qualified low/moderate income homeowners all of the HUD owned and District owned single and multi-family family homes located in D.C. As an instructive example to the rest of the nation, we intend to integrate and concentrate all available federal and district government housing programs into a comprehensive approach to solving the present crisis called to our attention by HUD this year. With your help, I believe it will be even more successful than the magnificent bipartisan effort put together by Presidents Johnson and Nixon thirty years ago.