Congresswoman Waters Addresses Council of Federal Home Loan Banks

Congresswoman Maxine Waters (D-CA), Chairwoman of the Financial Services Subcommittee on Housing and Community Opportunity, delivered the following remarks today to the Council of Federal Home Loan Banks at an event in the U.S. Capitol Visitors Center:

"Good afternoon, ladies and gentleman.  Thank you for inviting me here to speak to you today on the future of housing finance reform.  First of all, I would like to take this opportunity to recognize the very important role of the Council of Federal Home Loan Banks in general and the Federal Home Loan Bank of San Francisco, in particular, in sustaining our local economies and community banks nationwide.

More than 8,000 community banks in the U.S. belong to the Federal Home Loan Bank System and each member relies on its Federal Home Loan Bank as a stable source of lower-cost funding through all economic cycles.  The funds provided from the twelve Federal Home Loan Banks help to finance homes, jobs, small businesses, local infrastructure and affordable housing throughout the country.  It is evident that the Federal Home Loan Banks play a crucial role in supporting lending within local communities. 

Unfortunately, as we are all aware, the state of the other government sponsored entities, Fannie Mae and Freddie Mac, are under extreme scrutiny.  

Prior to the current financial crisis, Fannie Mae and Freddie Mac operated successfully for many years.  It was only within the past few years that they veered off-track in an effort to regain market share, and purchased poorly underwritten, and in some cases abusive, subprime loans and securities containing such loans. 
As a stockholder-owned entity with an implicit government guarantee, Fannie Mae and Freddie Mac were able to set their own underwriting standards.  With the growth of private label mortgage backed securities, they lowered their underwriting standards and entered the subprime and Alt-A markets, driven by short-term, quarterly profits in order to stay competitive in the housing market.

Since their conservatorships began over a year ago, they have received substantial infusions of government assistance, including Treasury's purchase of $64.1 billion in Freddie Mac preferred stock and $86.1 billion in Fannie Mae preferred stock.   As part of the preferred stock purchase agreement, Treasury also received warrants to buy up to 79.9 percent of each enterprise's common stock. 

In addition to Treasury's assistance, the Federal Reserve purchased $1.36 trillion in mortgage backed securities held by Fannie Mae and Freddie Mac, according to a June 30, 2010 FHFA report. 

Given the enterprises past earnings history -- for example, Freddie Mac earned no more than $5 billion a year -- it may be a long time before these GSEs will be able to repay Treasury.  That is why urgent consideration of new structures for these GSEs is critically important.

This is not the first time housing GSEs have had trouble.  In 1989, during the Savings and Loan (S&L) Crisis, the Home Loan Bank System was at the eye of the storm.  At that time, the bank system was both the regulator of its customers, the Savings and Loans Associations, and the source of cash through its advances to S&L's.  This conflict of interest helped propel the S&L Crisis.  Congress was wise and did not get rid of the Home Loan Bank System; instead, it reformed it. 

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) expanded the membership of the FHLBs, eliminated the regulatory role of the FHLBs, created the Affordable Housing Program (AHP), and charged the banks for the cleanup of the S&L Crisis through Resolution Funding Corporation (REFCORP) bonds. 

As the current crisis has proven, the reforms of 1989 have worked.  That is because the FHLBs were part of the solution in this crisis, not the problem.  So when I look at the Fannie and Freddie crisis, I look at how we can structurally change them to meet their important mission and to remove conflicts.

I am studying various proposals for housing finance reform, including making them entirely publicly- or privately-owned.  I don't believe elimination altogether is a viable option.  Currently, no legislation has been considered yet to address how we will reform Fannie Mae and Freddie Mac.  However, one option worthy of study is a cooperative structure, similar to that of the Federal Home Loan Banks.

In my role as Chairwoman of the Subcommittee on Housing and Community Opportunity, I requested that the Government Accounting Office (GAO) conduct a study of the cooperative structure as it would apply to the GSEs. Under the cooperative structure, the GSEs would be privately owned by lenders and conduct secondary mortgage market operations with explicit financial support from the federal government. 

However, the cooperative structure is just one model being proposed.  We are still in the information-gathering phase as we examine and assess the different types of structures and role that would work best for the future of housing finance.  As we continue to consider alternative models, I would also like to highlight the importance of ensuring affordable housing goals in whatever system we decide to implement. 

This government has a responsibility to assist Americans with affordable housing. In the last Congress, we passed legislation to create the first affordable housing production program with a dedicated source of funding, as provided in the National Housing Trust Fund.  Unfortunately, funding for that Trust Fund never materialized once Fannie and Freddie went into conservatorship.  It is critically important, moving forward, that we find a workable way to finance affordable rental housing construction, as well as ways to encourage sustainable homeownership.  I am committed to ensuring that the new housing finance system will include affordable housing goals as a top priority. 

During this time where credit is tight and obtaining a home loan is harder than ever, the role of the FHL Banks in providing their member banks with access to low-cost funding is essential to the recovery of the national housing market.

Although the conversation on the future of housing finance is just now beginning, it is clear that we must preserve the stability of the financial markets and create a new system with as little disruption to the markets as possible.  I commend the role of the FHL Banks in supporting lending to our community banks nation wide and to assisting in the recovery of the housing market.

Thank you for inviting me to speak today and I look forward to working together toward an expedient and effective recovery of our financial system."

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