Statements on Introduced Bills and Joint Resolutions

STATEMENTS ON INTRODUCED BILLS AND JOINT RESOLUTIONS -- (Senate - January 26, 2005)

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By Mr. HAGEL (for himself, Mr. SUNUNU, and Mrs. DOLE):

S. 190. A bill to address the regulation of secondary mortgage market enterprises, and for other purposes; to the Committee on Banking, Housing, and Urban Affairs.

Mr. HAGEL. Mr. President, I rise today to introduce, along with my colleagues Senators SUNUNU and DOLE, the Federal Housing Enterprise Regulatory Reform Act of 2005. This is needed regulatory reform at a critical time for the Federal National Mortgage Association (Fannie Mae the Federal Home Loan Mortgage Corporation, Freddie Mac, and the Federal Home Loan Banks.

There is no doubt that our housing government sponsored enterprises GSEs, have been successful in carrying out their mission of providing liquidity for the housing market. The market has remained strong through tough economic times, and homeownership in this country is at an all-time high.

The housing GSEs, however, are uncommon institutions with a unique set of responsibilities and stakeholders. Fannie and Freddie are chartered by Congress, limited in scope, and are subject to Congressional mandates, yet they are publicly traded companies with all the earnings pressure that Wall Street demands. Additionally, Fannie and Freddie enjoy an implicit guarantee by the Federal Government that has aided them in developing substantial clout on Wall Street. With their influence in the markets, their ability to raise capital at near-Treasury bill rates, and their use of the most sophisticated portfolio management tools, Fannie and Freddie today are no longer simply secondary market facilitators for mortgages.

The significance of Fannie Mae and Freddie Mac to our economy cannot be overstated. Together, the companies own or guarantee roughly 45.6 percent of all mortgage loans in the United States. The companies combined have issued over $3.9 trillion in obligations comprised of $2.2 trillion in mortgage backed securities and $1.7 trillion of GSE debt.

It is clear that the recent revelations at both Freddie Mac and Fannie Mae precipitate the need for Congress to address GSE regulatory reform. In 2003, Freddie Mac found itself treading through a wave of accounting problems and questionable management actions. That led to an income restatement of $5 billion, a penalty of $125 million and the removal of several members of its executive management. One year later, a similar surge of questionable practices was discovered at Fannie Mae. That led to the retirement and resignation of two of Fannie Mae's top management officials, as well as last month's ruling by the Securities and Exchange Commission, SEC, that Fannie could face a $9 billion income restatement.

At a minimum, the bar for a GSE should not be held lower than it is for any other company. In fact, given its congressionally chartered mission to serve a public interest, the bar should be held significantly higher. The operations of such companies should be managed with uncompromising integrity and unabridged transparency.

Our legislation would create a new independent world class regulator for Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Our bill provides the new regulator with enhanced regulatory flexibility and enforcement tools like those afforded to the Federal Deposit Insurance Corporation, the Federal Reserve System, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Furthermore, the bill would:

Provide the new regulator the authority of receivership to close down a failing GSE and protect against a taxpayer bailout; provide the new regulator greater discretion in raising capital standards to protect against insolvency; provide the new regulator approval power over new programs and activities proposed by a GSE; provide the regulator with greater authority to limit exit compensation packages or golden parachutes for executives removed for cause; require the annual audits of Fannie Mae's and Freddie Mac's affordable housing programs to ensure that these programs support the enterprises' affordable housing mission; end presidential appointments to the board of directors of Fannie Mae and Freddie Mac, and would require all Federal Home Loan Bank directors to be elected.

This reform is important to restoring and maintaining the confidence that investors and the markets require. In light of the recent problems at Freddie Mac and Fannie Mae, it is even more important. I urge my colleagues to support this reform effort and invite them to cosponsor our bill.

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