Heated Debate in 2003 about GSE regulation – Barney Frank Claims “Even if there was a problem, the Federal Government Doesn’t bail them out”

Mr. Shays. I want to thank you both for being here.
    As someone who is tremendously concerned about the GSEs, I
think this Office of Housing Finance Supervision is a step in
the right direction. When I hear some of my colleagues talk
about the present system working so well, in my judgment OFHEO
is a joke. Congress gives them about one-third the money to
regulate, and you all are asking that this office of
supervision have no more power than the OCC, the FDIC, the
Federal Reserve, and OTS, Office of Thrift Savings. So you are
asking that they have no more power, but people in this
committee do not think that the 20th and 40th largest companies
or the second and fourth largest financial institutions should
have the same kind of regulation. It blows me away.
    Now, I have to say to you, Secretary Snow, you blew me away
when you said this, that you didn’t think they should come
under any security regulation in the 1933 Act because you said
there is no evidence of fraud or corruption within any of the
GSEs, which I think is about as an irrelevant a comment as you
can think of.
    That is like saying the S&Ls, no problem here, but it blew
up in our face. The auditors doing consulting, this committee
came and said, no, we don’t mind auditors doing consulting.
That blew up in our face.
    Enron, the directors didn’t direct, the managers didn’t
manage, the employees didn’t speak out, the lawyers didn’t do
their job, the auditors didn’t do their job, the bankers didn’t
do their job, the investors didn’t do due diligence, the rating
agencies didn’t do their job, but we saw no problem with Enron.
    But when we saw the problem with Enron, we then said we are
going to have Sarbanes-Oxley. And, Secretary Snow, when we did
Sarbanes-Oxley, the GSEs didn’t come under it because they
didn’t come under the ’33 and 1934 Act. So then what did we do?
We voluntarily got them to comply to the 1934 Act.
    I don’t understand how we can say that trillions of dollars
of transactions shouldn’t be looked at. And could you explain
to me why your position would be diametrically opposite to
Allen Greenspan who didn’t say we haven’t seen corruption? He
said, of course they should be under it. They are a Fortune 500
company. Please explain to me why.
    Secretary Snow. Well, Congressman, as you I think know, we
have been in the forefront of urging both Fannie, Freddie and
the home loan banks to go under the 1934 Act.
    Mr. Shays. Why urge? Why is it their decision? And Freddie
hasn’t even done it yet. And let me ask you this: With all due
respect, isn’t it true that Freddie is in a little problem
right now?
    Secretary Snow. If I could just complete the answer,
because I think you will get the full picture then.
    Mr. Shays. I am sorry.
    Secretary Snow. We don’t have the authority to mandate they
go under the ’34—-
    Mr. Shays. You can recommend.
    Secretary Snow. Well, that is what I am saying.
    Mr. Shays. But you recommended they may not.
    Secretary Snow. No. Let me just finish the answer, and then
I think you will get the full story.
    We have urged them to go under the 1934 Act. Now, you know
the 1934 Act. The 1934 Act deals with corporate disclosures. It
is the act which is the subject of Sarbanes-Oxley, and it is
the fundamental act to oversee the regulation of the securities
markets. We think it is essential that those entities all be
under the 1934 Act.
    Mr. Shays. What about the 1933 Act?
    Secretary Snow. Now let me move to the 1933 Act and make a
distinction. The 1933 Act deals with a different subject. It
deals with registration of securities, which is a separate
subject, related but separate.
    Mr. Shays. You don’t think that is important?
    Secretary Snow. If you will let me, I will finish and tell
you what I do think. I think that there is no need demonstrated
for those entities to go under the 1933 Act. And maybe you
weren’t here when I addressed this earlier, but what I said
earlier is—-
    Mr. Shays. I just don’t want to take my time. You have said
there is no need, and I understand. We just have a dispute.
    Secretary Snow. But I am trying to explain why there is no
need. There is no evidence of any fraud in the issuance of
securities.
    Now, what the 1933 Act deals with—-
    Mr. Shays. I need to interrupt you because you have just
repeated your statement. But the bottom line is it has a lot to
do with their reserve requirements, and we know that these
institutions have half the reserves set aside, and I just want
to get to the second point. You, to Mr. Baker, said that this
new authority can exchange reserve requirements, correct?
    Secretary Snow. Yes. We—-
    Mr. Shays. But you said—-
    Secretary Snow.—-are proposing a broad expansion in the
authority with respect to risk-based reserves.
    Mr. Shays. But not minimum?
    The Chairman. The gentleman’s time has expired.
    Mr. Shays. Can he answer that question? Not the minimum?
    The Chairman. The gentleman’s time has expired. The
Secretary could answer—-
    Mr. Shays. The gentleman was allowed to answer the
question—-
    The Chairman. The Secretary may respond.
    Secretary Snow. We see no need to change the minimum
standards now. What we are proposing, though, is that the
agency have all the authority it needs to deal with capital
standards, and my comments I think were misconstrued by you
when you said I was making some observations with respect to
general practices at these agencies. I was simply talking about
the 1933 Act, and there we see no need for inclusion. In fact,
as I said earlier, I think the SEC has observed that they don’t
want to see that happen because the issuances are so vast that
they would overwhelm the process. Congressman, as you probably
know, today, the Treasury has authority with respect to the
issuance of debt instruments by those entities, and we have
seen no necessity to exercise that jurisdiction.

Mr. Frank. Thank you, Mr. Chairman.
    I appreciate hearing from the two Cabinet secretaries, but
I would say at the outset that before we move on any
legislation, I would hope we would have some additional
hearings. And, in particular, I think it is important that the
variety of groups in our country who care about housing be
invited, because that is my major focus here, as it has been
during my service on this committee.
    I want to begin by saying that I am glad to consider the
legislation, but I do not think we are facing any kind of a
crisis. That is, in my view, the two government sponsored
enterprises we are talking about here, Fannie Mae and Freddie
Mac, are not in a crisis. We have recently had an accounting
problem with Freddie Mac that has led to people being
dismissed, as appears to be appropriate. I do not think at this
point there is a problem with a threat to the Treasury.
    I must say we have an interesting example of self-
fulfilling prophecy. Some of the critics of Fannie Mae and
Freddie Mac say that the problem is that the Federal Government
is obligated to bail out people who might lose money in
connection with them. I do not believe that we have any such
obligation. And as I said, it is a self-fulfilling prophecy by
some people.
    So let me make it clear, I am a strong supporter of the
role that Fannie Mae and Freddie Mac play in housing, but
nobody who invests in them should come looking to me for a
nickel–nor anybody else in the Federal Government. And if
investors take some comfort and want to lend them a little
money and less interest rates, because they like this set of
affiliations, good, because housing will benefit. But there is
no guarantee, there is no explicit guarantee, there is no
implicit guarantee, there is no wink-and-nod guarantee. Invest,
and you are on your own.
    Now, we have got a system that I think has worked very well
to help housing. The high cost of housing is one of the great
social bombs of this country. I would rank it second to the
inadequacy of our health delivery system as a problem that
afflicts many, many Americans. We have gotten recent reports
about the difficulty here.
    Fannie Mae and Freddie Mac have played a very useful role
in helping make housing more affordable, both in general
through leveraging the mortgage market, and in particular, they
have a mission that this Congress has given them in return for
some of the arrangements which are of some benefit to them to
focus on affordable housing, and that is what I am concerned
about here. I believe that we, as the Federal Government, have
probably done too little rather than too much to push them to
meet the goals of affordable housing and to set reasonable
goals. I worry frankly that there is a tension here.
    The more people, in my judgment, exaggerate a threat of
safety and soundness, the more people conjure up the
possibility of serious financial losses to the Treasury, which
I do not see. I think we see entities that are fundamentally
sound financially and withstand some of the disastrous
scenarios. And even if there were a problem, the Federal
Government doesn’t bail them out. But the more pressure there
is there, then the less I think we see in terms of affordable
housing.
    I want Fannie Mae and Freddie Mac to continue as government
sponsored enterprises with some beneficial arrangement with the
Federal Government in return for which we get both the general
lowering of housing costs and some specific attention to low-
income housing. In particular, I am concerned right now that
there has been–and it has been raised by Fannie Mae, it has
been raised by one of the rating agencies that have been
critical of the Federal Home Loan Bank–manufactured housing.
    Manufactured housing is a very important housing resource
for low- and moderate-income people. You talk about increasing
homeownership among low- and moderate-income people, and
disproportionately, if you look at the increases in
homeownership, it has come with their ability to get
manufactured housing; and I do not want to see Fannie and
Freddie pushed in the direction of being tougher on
manufactured housing. And many of us will be in touch with
Secretary Martinez to see how we can improve this.
    I have talked to my colleagues in the Congressional Black
Caucus, and the Blue Dogs. This is a very important and, I
think, somewhat underrated form of housing. I think we now see
pressure on it that is generated in part by exaggerated fears
of a financial crisis.
    So I am prepared to look at possibilities here, but in
particular–and this is the major point I want to make; I saw
this in the letter from the homebuilders–I do not want to see
any lessening of our commitment to getting low-income housing.
    And here is my concern: If you move the regulator to
Treasury and you leave HUD with the mission, I am not sure that
it isn’t “mission impossible,” or at least implausible. What
is HUD going to do, yell at them? I mean, if all the regulatory
authority and all the clout is over in Treasury, what is left
in HUD? And I noticed that the homebuilders raised that.
    So my threshold question is, if you move this regulator to
Treasury, if you bifurcate in terms of the Cabinet departments
the responsibility for the low-income housing mission,
including manufactured housing–very important to me, as I
said–and other forms of housing, if you bifurcate that, what
real strength is there left behind the mission if most of the
regulation and most of the teeth–I guess if you put all the
teeth from Treasury, having HUD gum them into doing more low-
income housing doesn’t strike me as the ideal situation.
    And that is why I say, Mr. Chairman, in closing, that as we
proceed on this, I would hope we would have a day when groups,
a range of groups that are concerned with housing, could
specifically address that. Thank you.

Under current law the GSEs must submit a new program
approval request to HUD if the initiative is significantly
different from a program that has been previously approved or
it is an activity in which the GSEs have not previously
engaged. Section 108 of H.R. 2575, Mr. Baker’s bill, would give
HUD the ability to micromanage the GSEs. The process can only
be intended to slow down the ability of the enterprises to
partner with lenders to bring new mortgage products to market,
including products that assist the disabled, provide needed
housing rehabilitation and provide down payment assistance.
Banks are not subject to such burdensome processes.
    Fannie Mae has worked with lenders to expand access to low
down payment mortgages and to extend financing to those with
imperfect credit. These innovations are possible because they
are not stifled by an additional layer of government approval.
    This morning we have the opportunity to establish the
framework of how the government sponsored enterprises, the
Federal National Mortgage Association, Fannie Mae, and the
Federal Home Loan Mortgage Corporation, Freddie Mac, will be
regulated. Fannie Mae, as the number one provider of mortgage
funds to low-income families, has been a strong and consistent
partner in providing homeownership. Last year they served 2.9
million families in their affordable housing goals, and 1.8
million families were served in their underserved areas,
geographically targeted goals.

Given the environment and the concerns of the committee and
this Congress about the reform of corporate governance, how
appropriate is it for us in this environment to reflect upon
these enterprises and determine how we can enhance safety and
soundness? In recognizing there may be a potential for loss, we
must also recognize that these individual institutions are
unusual in that they have a direct responsibility between the
losses of the enterprises and the taxpayer. Do not forget that
a GSE model is unique. If they make a profit, they get to keep
it. If they lose money, the taxpayer gets the right to pay it
off.
    As of the last quarter of 2002, the combined outstanding
debt of Fannie and Freddie was $1.99 trillion, not an
insignificant number; and to appreciate it in the current
context, consider the following remarks issued yesterday by the
International Monetary Fund from its semiannual global
financial stability report, released just yesterday: Recent
developments have highlighted the extremely large, highly
leveraged nature of these enterprises and the risks they are
managing.