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Letters to the Hill

Regulatory Structure for Fannie Mae, Freddie Mac and the Federal Home Loan Banks

February 9, 2004

Hon. Richard Shelby
Chairman
Senate Banking, Housing and Urban Affairs Committee
SD-534 Dirksen Senate Office Building
Washington, D.C. 20510

Dear Chairman Shelby:

As you continue to examine ways to improve the regulatory structure of the government sponsored enterprises, Fannie Mae, Freddie Mac and the Federal Home Loan Banks, Independent Community Bankers of America would like to reinforce some of the views that we expressed in testimony before your Committee last fall. The United States housing sector has contributed enormously to the broad economy in recent years, as a record number of families became homeowners. Community banks, Fannie Mae, Freddie Mac and the Federal Home Loan Banks all serve a critical role in the housing finance sector that contributes to the well being of our nation, families and communities.

The potential restructuring of the regulatory structure over the Federal Home Loan Banks, Fannie Mae and Freddie Mac is of critical importance to the community banking industry. We support strong independent regulators for these GSEs, and believe that the regulator of the unique Federal Home Loan Banks should be kept separate from that of Fannie Mae and Freddie Mac. While not our first preference, the ICBA may not oppose the concept of one new independent regulator for all three GSEs outside the Treasury, depending on how key details are fleshed out. This regulator must have a structure that recognizes the unique mission and ownership, operational and capital structure of the Federal Home Loan Banks that is very distinct from that of Fannie Mae and Freddie Mac.

ICBA has long supported strong independent regulators and we remain opposed to giving the Department of the Treasury direct authority over any new housing GSE regulator, including the ability to review regulations and testimony. We do not believe that Treasury has the necessary housing expertise to oversee the mission of these GSEs. We have serious concerns that should Treasury be granted supervisory and regulatory oversight of these GSEs, its tax policy and fiscal responsibilities would likely present clear conflicts of interest with housing policy. We urge you to ensure that any new legislation contains appropriate firewalls and independence between the regulators of Fannie Mae, Freddie Mac, the Federal Home Loan Banks and the Treasury's politically appointed policy makers. Also, funding of the GSEs' regulators should be removed from the appropriations process and be provided by a self-generated fee structure.

We continue to support giving the regulator of any GSE the authority to establish and modify as necessary the level of risk-based capital a particular GSE is required to hold. We do not support granting the GSE regulators the authority to modify statutory or minimum capital due to our concerns that such authority could be improperly used to adjust program levels. The Office of Federal Housing Enterprise Oversight just imposed a higher capital requirement on Freddie Mac, demonstrating that if observed risk warrants a higher capital level, the regulator can require an adjustment, even though the GSE's minimum capital requirement is set by statute.

The success of our housing market and the record homeownership level is due in large part to the financial innovations in the mortgage industry in terms of loan products, down payments, underwriting changes and technological innovations. Many of these changes have come at the demands of consumers and the market place. Fannie Mae and Freddie Mac must have the flexibility to continue to develop, in a timely manner, the housing finance products needed by consumers and not have new products, programs and activities be bogged down by bureaucracy awaiting approval. We do not see this limiting the ability of a regulator to ensure these endeavors are consistent with safety and soundness, or the GSEs' congressionally mandated missions, as part of their examination and supervision responsibilities. We believe that the Department of Housing and Urban Development has the experience and expertise to continue its role in setting housing goals and controlling the mission activities of Fannie Mae and Freddie Mac in achieving these goals.

Fannie Mae, Freddie Mac and the secondary market programs of the Federal Home Loan Banks provide important benefits to community banks that want to offer long term fixed rate mortgages and other mortgage products to their customers. When community banks sell mortgages, they receive needed liquidity that they can re-deploy in more loans for their communities. The Federal Home Loan Banks provide their members a critical source of liquidity to serve not only their residential mortgage customers. They also provide those institutions that qualify as community financial institutions (approximately $500 million in assets or less) a much-needed source of funding for loans to agricultural and small business customers.

The Federal Home Loan Banks, Fannie Mae and Freddie Mac all serve an important function in financing homeownership, one that benefits not only consumers who want to realize the American Dream of Homeownership, but also that directly affects the health of communities across the country. More can be done to strengthen the regulatory oversight of the housing GSEs, but it must be done in a manner so as not to impede the good work they have been doing as evidenced by the latest record homeownership levels and allow further progress in increasing minority homeownership levels.

We would appreciate your making this letter part of the permanent hearing record. More details on these points can be found in testimony we delivered before your Committee on October 23, 2003.

Sincerely,

Kenneth A. Guenther
President and CEO

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