Mr. Chairman, I want to thank you for calling this hearing on a timely and important topic. Housing continues to be a bright spot in an otherwise sluggish economy. This is because home equity has been a large and continuing source of funding to fuel consumer demand.
One important reason this has been possible is that the United States has the deepest, most liquid housing capital markets in the world. Fannie Mae and Freddie Mac are at the heart of that system -- companies that helped to bring about $2.5 trillion to finance millions of homes here in America last year. It is very important to understand that we are dealing with a major sector of our economy and we have to be ever mindful of how we impact upon it.
To address the system's safety and soundness, Congress created the Office of Federal Housing Enterprise Oversight (OFHEO). And our job is to make sure that OFHEO has the tools to do its work, and to make sure that it pursues its work vigorously and effectively.
Fannie Mae and Freddie Mac have assets of about $1.6 trillion; nearly double the level they had in 1997. Their retained portfolios are valued at about $1.4 trillion; together, the two companies have outstanding debt equal to about $1.5 trillion; and they have derivatives with a combined notional value of over $1.5 trillion. The size and complexity of these 2 companies, and the central role housing plays in our economy, makes it all that much more important to ensure that OFHEO has the kind of funding and sophistication it needs to do a good job.
It is in this light that I believe we need to ask whether OFHEO was sufficiently knowledgeable about the accounting problems as well as the internal control problems at Freddie Mac. We need to explore whether or not OFHEO took the appropriate action to address these problems, and whether or not it did so in a timely manner. Finally, we ought to consider whether or not we have given the regulator the tools it needs to do an effective job.
I should note that Mr. Falcon has been seeking independent funding over the last few years for OFHEO, parallel to what some other financial regulatory agencies have available to them. This is a suggestion that has been made by a number of people for improving the regulatory structure of Fannie Mae and Freddie Mac.
I think that as we explore these questions about the activities of OFHEO, we should also acknowledge that some progress has been made in the nearly three years Mr. Falcon has served as its Director.
He has guided the agency to the completion of the risk-based capital rule that was many, many years overdue. In doing so, he resisted considerable pressure to adopt a process whereby the regulator would set the parameters of the risk-based capital stress test, but the institutions themselves would develop and run the actual model. We need to remember the dynamics that existed in the not to distant past. I believe OFHEO's decision to move forward with its own model has contributed to the fact that the current concerns about Freddie Mac have not, at least to this point, led to questions about the safety and soundness of that company.
This is a point worth emphasizing. The concerns that have led to this hearing today relate to the accounting for derivatives at Freddie Mac. But the economic effectiveness of those derivatives as hedges against risk has not as of yet been put into question.
Finally, Mr. Chairman, as we examine OFHEO's efforts, I want to raise a concern I have about the effectiveness of the Federal Housing Finance Board. It appears that the Finance Board is seeking to reconfigure the membership and expand the powers of the Federal Home Loan Bank system; without regard to its statutory authority and without regard to the significantly increased risk its proposed action would bring to the Home Loan Bank system.
As former Bush Administration official, Assistant Secretary of the Treasury, Sheila Bair said:
"The [Federal Home Loan Bank] system is taking risks for which it is not prepared, and inviting scrutiny and controversy by forging ahead with activities that far exceed its congressional charter and with which it has no historic experience or expertise." (American Banker on July 9, 2003)
I hope that we can examine this issue at some future date.
In closing, I want to commend Chairman Shelby for his reasoned approach to the serious problems that have come to light at Freddie Mac. There are a number of investigations ongoing by a number of agencies - OFHEO, the SEC, the Board of Directors of Freddie Mac itself, and others. I think it is prudent to first spend some time gathering the facts before coming to the conclusions about what actions might or might not be appropriate. And I am pleased to join you in that effort.