FROM THE OFFICE OF PUBLIC AFFAIRS

September 14, 2004
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Remarks of Brian Roseboro, Under Secretary for Domestic Finance before the American Community Banker’s Federal Home Loan Bank Stockholders Forum, Mandarin Oriental Hotel,Washington, D.C.

Thank you very much for inviting me. I greatly appreciate this opportunity to speak with you today. I will spend my time reviewing three inter-dependent topics: the economy, the health of our nation's financial institutions and the Administration's goals to expand homeownership - all-important issues of concern to the Federal Home Loan Bank system.

The past year has been one of tremendous progress for our country and our economy. The President's enactment of tax relief for families and incentives for small businesses to invest has delivered results. Factories are busier, families are earning more, and people are returning to the labor market and finding work. Consumer confidence continues to be substantially higher than it was a year ago and America's standard of living is on the rise. The national homeownership rate, in the second quarter of 2004, was at an all time high of over 69 percent. A healthy banking system has been a key support of this progress.

The primary stockholders of the Federal Home Loan Bank System – the commercial banks and thrifts that are here today – make up a vitally important component of our nation's financial infrastructure by providing businesses and consumers with financing options and other financial services. The ability of our nation's financial institutions to successfully intermediate funds from savers to productive uses forms the underpinnings of a strong economy and enhances our prospects for strong economic growth. The robust performance of U.S. financial institutions empowers businesses, both small and large, to generate jobs and growth in the economy.

The last year and a half has witnessed outstanding results by our nation's financial institutions. For example:

• U.S. banks and thrifts earned a record $120.6 billion in 2003, easily surpassing the previous record total of $105.1 billion set in 2002. Earnings in the second quarter of this year were the second highest ever at $31.2 billion, a 3.3 percent increase over last year's second quarter earnings. This follows on the heels of a record first quarter, when $31.9 billion in earnings were reported.
• Both the banking industry's annual return on assets and return on equity reached all-time highs in 2003 at 1.38 percent and 15.04 percent, respectively. The data from second quarter 2004 show that these ratios have remained relatively high at 1.33 and 14.21 for ROA and ROE, respectively.
• Loan loss provisions were down $14.2 billion, or 27.6 percent, in 2003 from 2002, and that trend continued with loan loss provisions down 26.7 percent in the first half of 2004 compared to the first half of 2003. Likewise, loan charge-offs declined to 0.78 percent of loans in 2003 from 0.97 percent in 2002, with the second quarter of 2004 showing a further decrease to 0.60 percent of loans.

The Fed's most recent business lending survey of banks found that more banks reported an increase in the demand for business loans than those that reported a decrease. Increased loan demand was seen from businesses of all sizes in comparison to the last survey. And greater loan demand from businesses means expansion and putting more people to work. According to the Labor Department's payroll and household surveys, nationwide nearly 1.7 million to 2.4 million jobs have been created since August 2003. The national unemployment rate declined to 5.4 percent in August – down almost a full percentage point from a peak of 6.3 percent in June 2003 and the lowest rate since October 2001. At 5.4 percent the unemployment rate is below the average of the 1970s, 1980s, and 1990s. These results imply strong underlying economic fundamentals and continued economic growth.

Creating jobs and encouraging greater business investment is a key goal of the Administration, but that is not our only focus. Another goal of great importance is continuing to make America a place where families have the opportunity to purchase their own homes. Minority homeownership set a new record of 51 percent in the second quarter and is up over 2 percentage points from a year ago. Remarkably, in the past 18 months alone, 1 million minority families have already achieved their dream of homeownership. Still, the President says we can do better.

As part of the Administration's plan to build an ownership society, the President has focused on encouraging homeownership, particularly among minorities and low-income families. The Administration is pursuing an aggressive homeownership agenda that includes the goal of creating 5.5 million new minority homeowners and 7 million new affordable homes. This will be achieved through a variety of proposals to assist low- and moderate-income families.

To meet our goal of expanding homeownership:

• The President signed into law the "American Dream Down Payment" initiative, which authorizes $200 million a year to assist an estimated 40,000 low-income families with downpayment funds.
• In this year's budget, the President proposed the "Zero Down Payment Initiative," which would eliminate the statutory requirement of a minimum 3 percent down payment for Federal Housing Administration (FHA)-insured single-family mortgages for first-time home buyers. Preliminary projections indicate that the new FHA mortgage product would generate about 150,000 homebuyers in the first year alone.
• The Administration has also proposed to triple funding for self-help programs that offer homeownership opportunities to families willing to contribute their own "sweat equity," and has increased funding for housing counseling programs.
• To increase the supply of affordable housing, the Administration proposed a $2.54 billion, five-year Single-Family Affordable Housing Tax Credit for up to 50 percent of the project costs of rehabilitation and construction of affordable homes (provided they are offered to home buyers with incomes of not more than 80 percent of area median income). The tax credit would eventually result in an additional 200,000 affordable single-family homes becoming available through construction or rehabilitation.

The driving force to increase homeownership, of course, is to increase access to credit. Our mortgage markets have rightly been characterized as the best in the world, and in order to help ensure that this remains the case, the Administration last year pushed forward its plan for reforming the regulation of the housing government sponsored enterprises (GSEs). It remains a priority.

The central principle behind reforming regulation of the housing GSEs is relatively straight forward: these entities are among the world's largest financial institutions and they are significant participants in U.S. and global financial markets, which implies that they should have a world-class regulator – one that is on par with other such financial institution regulators in the U.S. and around the world. The Administration has called for placing Fannie Mae, Freddie Mac and the Federal Home Loan Banks under a single regulator. A regulator equipped with the stature and the tools to ensure that these institutions continue to operate in a safe and sound manner, and are able to perform their mission of improving access to mortgage credit for all Americans.

The Administration set forth and remains committed to some key elements that must be included in any GSE regulatory reform bill:

• The new regulator should have broad authority with regard to setting the capital requirements of the enterprises, both with respect to risk-based capital and minimum capital. 
• The new regulator should have the authority for approving new activities
• The new regulator should have all the necessary authority to direct an orderly wind down of a GSE.

Some have questioned why the Federal Home Loan Banks need to be included in this reform effort. In some cases, the Federal Housing Finance Board already has powers consistent with those that I just listed. The Finance Board has broad authority to liquidate a Federal Home Loan Bank and approve new activities. In addition, at least as it relates to risk-based capital, the statutory structure for developing risk-based capital standards is more flexible for the Federal Home Loan Banks than it is for Fannie Mae and Freddie Mac.

Despite these differences, the importance and the evolution of our housing finance markets requires that all of the housing enterprises be included in a single program of world-class supervision.  We see the need for this for the Federal Home Loan Banks just as we see it for Fannie Mae and Freddie Mac.  Part of the reason is that over time the activities of the Federal Home Loan Banks and the other housing GSEs have converged. The Federal Home Loan Banks are no longer simply a wholesale financing outlet for their member institutions, but have moved more directly into mortgage investment business, which encompasses the same types of risks as Fannie Mae and Freddie Mac.

In particular, as of year-end 2003, the Federal Home Loan Bank System had almost $100 billion in mortgage-backed securities investments, and $116 billion in direct mortgage investments through the Federal Home Loan Banks' mortgage purchase programs. Some individual Federal Home Loan Banks have rapidly expanded their mortgage investment business. For example, as of June 30, mortgage purchase program assets of the Federal Home Loan Bank of Chicago totaled $49 billion, which was 52 percent of the Bank's total assets. Other Federal Home Loan Banks also hold significant amounts of mortgage purchase program assets. For instance, mortgage purchase program assets make up 32 percent and 22 percent, respectively, of the total assets of the Des Moines and Seattle Banks.

Some have raised concerns about whether the structure of the new regulatory agency would consider the unique characteristics of the Federal Home Loan Bank System. There are some differences between the Federal Home Loan Banks and the other housing GSEs that require special consideration as changes to their regulation are considered. Some of these include: debt issuance of Banks by the Office of Finance; how the differing capital structures of the housing GSEs are addressed; and how the cooperative ownership structure of the Banks would be handled. While some of these issues may need to be addressed specifically with legislation, another useful way to account for the unique characteristics of housing GSEs is to create two divisions within the new regulatory agency - one division specializing in Fannie Mae and Freddie Mac and one in the Federal Home Loan Banks. Under such a structure, benefits in financial oversight could be achieved through the sharing of best practices in examination procedures and overall measurement of risk, while at the same time the unique characteristics of each of these entities could also be considered.

We commend the efforts of Congress, especially the leadership of Chairman Shelby, of the Senate Banking Committee for the careful consideration it has given to the regulatory regime for GSEs.

Let me finish today by commenting briefly on two other Federal Home Loan Bank System issues.

First, I understand that there remains some concern throughout the System regarding registering with the Securities and Exchange Commission. Given the size of the Federal Home Loan Bank System's outstanding debt obligations, $816 billion as of June 30, capital market investors should have the same level and types of disclosure about the Federal Home Banks as they do for other participants in our capital markets. Our nation's disclosure-based capital markets regime is overseen by the SEC, and to provide the same level of consistency in terms of format and interpretation the SEC should also oversee the capital markets disclosures of the Federal Home Loan Banks. In addition, given the many changes to the System over the past 15 years, particularly the holding of mortgages via the mortgage purchase programs and the increase in investments, this type of disclosure is even more pertinent.

Both the Administration and the Finance Board have recognized the need for increased oversight of the System in this area, which includes improvements of System disclosures and standardization of System financial statements. As part of this initiative, in July 2002, my predecessor at Treasury set forth the Administration's view that the Federal Home Loan Banks, as well as the other GSEs, should voluntarily comply with SEC disclosure requirements by registering their equity securities under the Securities Exchange Act of 1934 (the '34 Act).

Due to the Federal Home Loan Banks' cooperative structure some unique issues may arise when fitting the Banks under the SEC framework. To move this process forward on June 23 the Finance Board approved a final rule that will require the Federal Home Loan Banks to register a class of their equity securities with the SEC under the '34 Act. The Federal Home Loan Banks will have until June 30, 2005 to file a registration statement and must ensure that the statement becomes effective no later than August 29, 2005. Under the '34 Act, the Federal Home Loan Banks will report the same timely financial information to the SEC as publicly traded companies. This will allow for member institutions, debt holders, and other counterparties to better assess the condition of the individual Federal Home Loan Banks on the same basis as other companies that issue publicly traded securities.

We have heard concerns that registering with the SEC could have unintended consequences as it relates to the System's access to capital markets. While it is important the Banks provide disclosures to the SEC along the lines mandated by the '34 Act, it is of course important that this process does not unintentionally impair the Banks' ability to fulfill their important role in increasing homeownership opportunities. The SEC and the Banks must continue to work cooperatively in this process. I am confident that these issues can be worked out with the SEC and that the Federal Home Loan Banks will be given the opportunity to explain the unique aspects of their business to capital market participants.

Finally, let me touch briefly on multi-district membership within the Federal Home Loan Bank System. There may be a number of issues worth considering in relation to multi-district membership.  Clearly our financial system has changed dramatically since the System was established in 1932 and the predecessor to the current regulator created the 12 banks, and determined their locations and boundaries.  In the intervening years, however, Congress has revised the governing statutes on several occasions.  It is to the Congress that these arguments should be offered and where any change in the statute will have to be made. To some, multi-district membership represents a natural progression in the modernization of the Federal Home Loan Bank System.  However, because the activities permitted under a GSEs' charter have been defined fairly specifically by Congress, if multi-district membership is considered, Congress should consider it within the general context of evaluating the Federal Home Loan Bank System's charter.

I thank you for inviting me to speak today, and I thank you for the work you do to support economic growth in our nation and expand homeownership possibilities in our communities. As issues related to the Federal Home Loan Bank System are considered please know that we at Treasury have an open door and welcome your input. Thank you.

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