March 22, 2000
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
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 HUD's 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
HUD's CURRENT OVERSIGHT IS
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 Mae's and Freddie Mac's 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
In July 1999, Secretary Cuomo
announced a plan to increase Fannie Mae's and Freddie Mac's 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 Mae's and Freddie
Mac's 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 undeserved 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 undeserved 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
This past year HUD initiated the first review by Government of
Fannie Mae's and Freddie Mac's 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 home ownership, 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 borrower's 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 under represented
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 HUD's 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
HUD's new program review and
approval responsibility is an integral part of the Department's
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
Mae's and Freddie Mac's 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.
OFHEO's Risk-Based Capital
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. OFHEO's 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, OFHEO's 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
With regard to the Federal Housing
Finance Board, I am the Secretary's 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 HUD's 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
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 Department's 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
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
Department's 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
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 Government's
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.
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.
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 Government's 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
Treasury Line of Credit (Sec.
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 Department's testimony on whether
repeal of the line of credit would be consistent with the GSEs'
Release of Information (Sec.
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.
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 OFHEO's
and the Treasury Department's 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 HUD's mission oversight more effective that
will allow Americans to receive the full benefit of Fannie Mae's
and Freddie Mac's government sponsorship.
Content Archived: January 20, 2009