Richard F. Syron's Speech to the U.S. Senate Committee on Banking, Housing and Urban Affairs on April 20, 2005

Prepared Oral Testimony for Richard F. Syron
Chairman & CEO, Freddie Mac

Committee on Banking, Housing and Urban Affairs
United States Senate
April 20, 2005

Chairman Shelby, Ranking Member Sarbanes, members of the Committee: Thank you for the opportunity to testify before you this morning.

It is because our role is so important to homeownership and the broader American economy, I am more committed than ever to see us operate under a stronger regulatory regime. For 25 years I regulated financial institutions. I found consistently that the best regulated institutions were also best for their customers, employees and shareholders. That’s why I believe it’s essential for both the public and our shareholders that we pass GSE regulatory reform legislation.

One thing Freddie Mac has always been is safe and sound – with ample capital and strong risk management, even throughout the tumultuous year of 2003. But that is not enough.

In getting our house in order, I have made it clear to every Freddie Mac employee that we have a duty to meet the highest standards. That includes not only accounting and operational controls, but dedication to our mission and the demands of business ethics and integrity. And I am pleased to report that we are on track to become current in our financial reporting.

By charter, the GSE mission is to provide liquidity, stability and affordability to the nation’s mortgage markets. Within that broad mission, I have sought to focus Freddie more on affordability – including our affordable housing goals. We are devoting more resources to this area, introducing new affordable initiatives and products for our lenders, and making other progress as described in my written testimony.

Capital requirements for Freddie Mac are a critical issue for taxpayers, homebuyers and all our industry partners who depend on a vibrant housing system. We support greater regulatory discretion in this area, so long as capital is tied to risk.

The true genius of the GSE structure is that Congress found a way to use the private capital markets to fulfill our public mission. Look, I understand very well that the GSEs, in the past, have complained too much about added obligations and demands. However, for Freddie Mac to continue fulfilling its mission, there is a very real limit to how far the restrictions on us can be increased – and our abilities diminished – before the providers of our debt and equity capital decide to take their money elsewhere. These institutions are not infinitely elastic. We trust that Congress will strike the right delicate balance here.

I’ll end with a brief word on our retained portfolio:

• First, our portfolio helps support and fund our affordable housing activities. It allows us increasingly to subsidize our affordable programs. And some $300 billion of our portfolio qualifies under one of our affordable housing goals.

• Second, Freddie Mac’s portfolio is integral to our mission. Historically, some investors – particularly overseas – have preferred GSE debt to mortgage pass-throughs. Our mortgage portfolio enables us to insource a significant share of the financing of American homeownership.

• Third, our portfolio is very conservatively managed and tightly regulated. Very few institutions in the world manage such a tight book; provide the monthly disclosures to prove it; or could pass the risk-based stress test that we do.

• Fourth, our portfolio growth is increasingly subject to market discipline. It simply is not arithmetically possible for the GSEs to grow our portfolios today at the rapid rate of the 1990s. Competitive forces now prevent this as well. Still, it is a very good thing that we are confined to the mortgage market when conditions change and other players seek higher returns elsewhere.

At the end of the day, shrinking our portfolio, even over several years, will only accomplish two things. First, it will increase the concentration of such mortgages held by four or five explicitly insured depository institutions who are even bigger than we are.

Second, arbitrarily limiting our retained portfolio would decrease over time the availability of the long-term, fixed-rate, prepayable mortgage. The decline of this product would do clear harm to the U.S. economy – an overlooked point I hope to discuss with you in the Q&A.

In closing, I look forward to working with every member of this Committee to help the GSEs deliver the benefits of the Homeownership Society to America’s next generation of homeowners.

Thank you. I look forward to your questions.