component of the Treasury's legislative proposal. The Director, who would serve at the pleasure of the President, would supervise the day-to-day safety and soundness of FNMA and FHLMC. The Secretary would formulate basic policies and regulations. Through this division of responsibilities the possibility of capture is ameliorated further.

3) What steps will Secretary Kemp take to ensure that such dominance by Fannie and Freddie does not take place?

Answer:

Under the bill the Secretary would take all necessary steps to ensure the independence of the staff and of the Department. Under his direction, the Department would establish the same safeguards that other financial regulators use to avoid capture, including standards of conduct rules and other measures.

Protection would also be provided by regulations that would be promulgated by the Department, reflecting the letter and spirit of the law and embodying the rules necessary to accomplish the goals of Congress.

Statement of

JAMES A. JOHNSON

CHAIRMAN AND CHIEF EXECUTIVE OFFICER

FANNIE MAR

Before the

SUBCOMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT of the

COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

of the

UNITED STATES HOUSE OF REPRESENTATIVES

MAY 29, 1991

Mr. Chairman and Members of the Subcommittee:

Summary

My name is Jim Johnson, and I am Chairman and Chief Executive officer of Fannie Mae. I appreciate the opportunity to appear before you to discuss the housing benefits Fannie Mae has provided over the past decade and what needs to be done to continue and enhance those benefits in the 1990s.

excellent financial condition

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In the last twelve months, seven reports by five government agencies have examined Fannie Mae's health. We at Fannie Mae are very gratified by the findings of these reports. The reports found Fannie Mae to be well run, well capitalized, and in for taxpayers, for home buyers and renters, for the investors who capitalize the company. They found that not only does Fannie Mae present no risk to the taxpayer today, but also that we have the strength to survive a nationwide recession or depression for an extended period, and are unlikely to be harmed by large changes in interest rates. In sum, not only is Fannie Mae in very sound health today, it will remain so even under the most stressful financial conditions.

We never had any doubt about this conclusion, because we operate our business prudently and capitalize it well for the risks we bear. In February 1990, we committed ourselves to significantly increase our level of capitalization in 1990 and 1991. I am pleased to report to you that we have more than $5.3 billion of capital today and will achieve our goal of $6.0 billion in capital before the end of this year. To build this capital, we put more than 85 percent of our earnings right back into the company. solid, unimpaired capital provides a cushion of safety for the federal government and for the taxpayer, and is clear evidence of our commitment to manage Fannie Mae in a manner to ensure that it will never pose a risk to the federal government.

This

We now have independent confirmation of Fannie Mae's sound financial health. Fannie Mae has never been in a stronger position to fulfill its housing mission.

When the House Banking Committee rechartered Fannie Mae in 1989, in the midst of the thrift crisis, you stated that our functions were to provide liquidity, efficiency, and increased access to housing finance, while operating as a private company with no government financial support. In short, our basic mission is to provide the capital and financing necessary to enable a broad range of Americans to obtain housing. You can be very pleased

with our performance.

2

Fannie Mae has become one of the strongest companies in America today. It is an idea that works, and I am pleased to review our record with you.

During the 1980s, Fannie Mae served over eight million households. Together with Freddie Mac, we brought more than $450 billion into housing that would not have been there without us. At a time when housing affordability is a national concern, we are not only a pivotal source of capital and liquidity for mortgage financing; our presence in the market results in reduced interest rates on mortgages for millions of Americans. We estimate that during the 1980s Fannie Mae's and Freddie Mac's activities saved low-, moderate-, and middle-income home buyers more than $30 billion in mortgage interest payments. Last year that savings was $4.3 billion. In 1990, Fannie Mae alone financed almost $92 billion of the $370 billion conventional single- and multi-family mortgages originated, serving more than 1.3 million families and nearly 1500 lenders all over the country. We'll continue on this course in the 1990s, serving over 10 million more families.

We benefit both the national and regional economies. CBO explained in its recent report that Fannie Mae and Freddie Mac "can finance mortgages at relatively low costs, because their portfolios are geographically diversified, their operations are large enough to achieve substantial economies of scale, and their management teams are highly skilled." Pick up any Saturday real estate section of The Washington Post or your local newspaper and turn to the chart comparing rates on loans eligible for purchase by Fannie Mae and Freddie Mac with rates on loans above our mortgage limits. The spread has increased over the decade with increased Fannie Mae and Freddie Mac activity, and in recent years has steadily been between 35 and 50 basis points.

Fannie Mae supports mortgage lending in all economic circumstances and in all areas of the country. This is especially important when a regional economy experiences a downturn. Because of our dedication to home finance and our national scope and financial strength, we are a stable and significant market presence at all times good and bad. For example, when the Texas economy hit bottom in the mid-1980s, Fannie Mae stayed in when others pulled out, financing almost one-fifth of the Texas obligations in 1988. We're in New England today, financing almost one-third of the new mortgages. And in New York, where FHA guaranteed just 4.4 percent of the new loans in 1989, Fannie Mae financed 22 percent. As Federal Reserve Chairman Alan Greenspan testified, there is no credit crunch in mortgage finance today because of Fannie Mae and Freddie Mac.

The borrowers we serve are the large middle class, as well as those with more modest incomes. During 1990 the average loan size for the 30 percent of the most affordable mortgages we purchased was $36,100. The size of the average first mortgage purchased in 1990 was $89,700. The average loan size for our entire book of business is $58,000. In city after city, district after district,

3

Fannie Mae mortgages are affordable by police officers, fire fighters, municipal workers, teachers and nurses. Over half of all mortgages we financed in 1990 were affordable to families with incomes of $40,000 or less.

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Over 36 percent of the one- to four-family units we financed met HUD's definition of low- and moderate-income housing homes priced at or below 2.5 times the household median income in the area in which they are located. The number increased to over 38 percent for the first quarter of this year. Our multifamily activities are almost entirely concentrated in units affordable to families of low and moderate incomes. In 1990, our multifamily activities provided housing for 104,000 families. Our total outstanding multifamily business supports housing for 1 million families. We estimate that in all but the highest cost regions, more than half of our conventional multifamily units are affordable to families with incomes of less than 80 percent of the area median income.

A crucial element of our mission beyond our basic financing programs, and one to which the management of Fannie Mae and I are especially dedicated, is to serve low- and moderate-income home buyers and renters. We have developed a number of low- and moderate-income housing initiatives and are proud of our achievements in this area. We recognize that more needs to be done. That is why this past March, I committed Fannie Mae to finance more than $10 billion of housing for those with special needs over the next three years. Housing not only for those of low income but for the elderly, the disabled, those in minority communities and in rural areas who haven't been served well by the conventional housing market. $10 billion is a stretch for us but we know it isn't enough. So when we hit that target we will go further.

At the same time, we will maintain the company's well-documented efficiency. General and administrative expenses are well under three-tenths of one percent of the mortgages we finance. For both 1989 and 1990, Forbes magazine ranked Fannie Mae first among all financial services companies in America in job productivity based on sales and assets and second based on profits.

You know that our success in doing our business safely and profitably has enabled the market to reward our shareholders, a fact that both OMB and CBO noted in stating that Fannie Mae is subject to significant private market discipline. However, you might also be interested to know that, between 1981 and today, Fannie Mae's shareholders have paid in to the corporation in new equity investments over $500 million more than the corporation has paid out to them in dividends and stock repurchases. Shareholders

over the last few years have made profits, but they have made them in the equity markets and not by taking a single dollar away from what Fannie Mae has available for housing.