[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                  LEGISLATIVE PROPOSALS ON GSE REFORM

=======================================================================



                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 12, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-12




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
RON KLEIN, Florida                   TOM PRICE, Georgia
TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio              PATRICK T. McHENRY, North Carolina
ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           DEBORAH PRYCE, Ohio
BRAD SHERMAN, California             RICK RENZI, Arizona
GREGORY W. MEEKS, New York           RICHARD H. BAKER, Louisiana
DENNIS MOORE, Kansas                 CHRISTOPHER SHAYS, Connecticut
MICHAEL E. CAPUANO, Massachusetts    PAUL E. GILLMOR, Ohio
RUBEN HINOJOSA, Texas                MICHAEL N. CASTLE, Delaware
CAROLYN McCARTHY, New York           PETER T. KING, New York
JOE BACA, California                 FRANK D. LUCAS, Oklahoma
STEPHEN F. LYNCH, Massachusetts      DONALD A. MANZULLO, Illinois
BRAD MILLER, North Carolina          EDWARD R. ROYCE, California
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             BLACKBURN, MARSHA, Tennessee
ALBIO SIRES, New Jersey              GINNY BROWN-WAITE, Florida
PAUL W. HODES, New Hampshire         TOM FEENEY, Florida
RON KLEIN, Florida                   SCOTT GARRETT, New Jersey
TIM MAHONEY, Florida                 JIM GERLACH, Pennsylvania
ED PERLMUTTER, Colorado              JEB HENSARLING, Texas
CHRISTOPHER S. MURPHY, Connecticut   GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana                JOHN CAMPBELL, California
ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
DAN BOREN, Oklahoma

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 12, 2007...............................................     1
Appendix:
    March 12, 2007...............................................    43

                               WITNESSES
                         Monday, March 12, 2007

Connelly, Arthur R., Chairman & CEO, South Shore Savings Bank, on 
  behalf of America's Community Bankers..........................    10
Menzies, Michael, President/Chief Executive Officer, Easton Bank 
  and Trust Company, on behalf of the Independent Community 
  Bankers of America.............................................    11
Petrou, Karen Shaw, Managing Partner, Federal Financial Analysts, 
  Inc............................................................    13
Price, John R., President and Chief Executive Officer, Federal 
  Home Loan Bank of Pittsburgh, on behalf of The Council of 
  Federal Home Loan Banks........................................     4
Robbins, John M., CMB, Chairman, Mortgage Bankers Association....     9
Stern, Scott, Chief Executive Officer, Lenders One, Chairman, 
  National Alliance of Independent Mortgage Bankers..............    15
Stevens, Thomas M., 2007 Immediate Past President, National 
  Association of Realtors........................................     7

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    44
    Kanjorski, Hon. Paul E.......................................    46
    Connelly, Arthur R...........................................    48
    Menzies, Michael.............................................    57
    Petrou, Karen Shaw...........................................    69
    Price, John R................................................    76
    Robbins, John M..............................................    93
    Stevens, Thomas M............................................   115

              Additional Material Submitted for the Record

Kanjorksi, Hon. Paul E.:
    Statement of the American Bankers Association................   125
    Statement of the Asian Real Estate Association of America....   131
    Statement of the National Association of Federal Credit 
      Unions.....................................................   134
    Statement of the National League of Cities...................   137
    Statement of the Pennsylvania Bankers Association............   139


                  LEGISLATIVE PROPOSALS ON GSE REFORM

                              ----------                              


                         Monday, March 12, 2007

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:03 p.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Present: Representatives Kanjorski, Moore of Kansas, Lynch, 
Klein, Perlmutter, Murphy, Donnelly; Renzi, Baker, and Garrett.
    Also present: Representative Maloney.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order.
    We have opening statements, and I will take the opportunity 
to put my opening statement in the record. We will have two, 
and then if there are any additional statements, we will have 
them.
    We meet this afternoon to examine, once again, how best to 
regulate the housing government-sponsored enterprises, or GSEs. 
The debate on GSEs regulatory reform began 7 years ago this 
month, in 2000, when we held a hearing on H.R. 3703, the 
Housing Finance Regulatory Improvement Act. In every session of 
Congress since then, the House has had at least one regulatory 
reform bill under consideration. The Financial Services 
Committee has also held dozens of hearings on these matters 
over the years, and we have heard from scores of witnesses.
    These hearings, as well as external events, like the 
financial reporting problems at the GSEs, have led us to 
develop a growing consensus on GSE regulatory reform.
    In the last Congress, we considered H.R. 1461, the Federal 
Housing Finance Reform Act, and it was approved by a vote of 
330 to 91. Because this bill did not become law, we are 
returning to these important matters today.
    The housing GSEs play vitally important roles in our 
Nation's housing finance system. Fannie Mae and Freddie Mac 
presently guarantee about $3 trillion in mortgage-backed 
securities. The Federal Home Loan Banks also have more than 
8,100 members, possess in excess of $1 trillion in assets, and 
hold about $100 billion in mortgage loans.
    As we have long said, we need to have strong, independent, 
and world class GSE regulation to oversee these sizeable 
institutions. Such a regulatory system will promote confidence 
in the GSEs, protect a continued viability of our capital 
markets, ensure taxpayers against systemic risk, and expand 
housing opportunities. An appropriate regulatory system, like 
the bill we passed in the 109th Congress, should adhere to 
several key principles.
    For example, the regulator must have a funding stream, 
separate and apart from the annual appropriations process. In 
order to be credible and effective, the regulator must 
additionally have genuine independence from the political 
system. Such independence must consist of complete autonomy 
from the enterprises, include sufficient protection from 
outside special interests, and provide for substantial 
insulation from political interference.
    A strong regulator must further have robust supervisory and 
enforcement powers. In this regard, many have suggested that we 
should model GSEs safety and soundness regulation on that of 
other financial institutions. I agree with this sensible 
concept.
    In fact, the general goal of our longstanding regulatory 
reform debates has been to make GSE supervision more bank-like. 
Any safety and soundness regulator for the housing GSEs needs 
to have enforcement powers on par with other Federal banking 
regulators. As we proceed in the coming weeks, I also hope that 
we will continue to remember why we created these public/
private entities. We created GSEs to help make credit available 
to finance home purchases, because the private market was not 
effectively meeting credit needs.
    Beyond ensuring that the GSEs can continue to fulfill their 
missions, we must maintain a public voice on their boards. 
Public participation on these boards helps to focus the GSEs on 
their missions. Beyond working to improve GSE regulatory 
oversight, we should also look at the upcoming legislative 
debates as an opportunity to update the statutory mission of 
the Federal Home Loan Bank system, and to reflect what it 
actually does now.
    In 1999, I worked with then-Chairman Baker, to allow the 
Federal Home Loan Banks to provide liquidity to community 
financial institutions for the purposes of serving small farms, 
small businesses, and small agri-business customers. In its 
bill in the last Congress, the Senate Banking Committee had 
language that would have explicitly added such economic 
development activities to the mission of the Federal Home Loan 
Banks. This idea has merit, and we ought to consider it in this 
chamber.
    In sum, in developing any enhanced GSE regulatory system, 
we should perform deliberate surgery. We should abstain from 
considering radical proposals that would undermine their 
charters. We should also take appropriate steps to improve 
their mission and performance, in addition to providing for 
strong, independent, and world-class GSEs.
    And now, Mr. Renzi.
    Mr. Renzi. Thank you, Mr. Chairman. Thank you, witnesses, 
for coming all the way today, and members, for joining us. I am 
filling in for Ranking Member Pryce this afternoon, who could 
not be here, as we move forward with the examination of H.R. 
1427, which was introduced by Chairman Frank, along with 
Congressmen Baker, Miller, and Watt last Friday.
    As you know, the House Financial Services Committee and 
this subcommittee spent countless hours studying the issue of 
GSE reform over the years, and the House passed comprehensive 
GSE legislation in the last Congress, but the bill was not 
taken up by the Senate.
    This hearing is the first of two hearings on this bill 
scheduled for this week, and Chairman Frank has expressed a 
willingness to move quickly on this legislation. Therefore, I 
am eager to hear from many of my colleagues on our panel today 
on their opinions of this new bill, most notably the changes 
between last year's piece of legislation and this year's 
proposed new legislation.
    I believe there is certainly a need for a regulator over 
Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, to 
supervise both the safety and the soundness of the mission 
compliance of the GSEs. As we move forward, we must be careful 
not to negatively impact the housing market, and I really look 
forward to hearing the substance of your arguments, in 
particular, on that issue.
    The bill we are discussing today is different from last 
year's proposal in many ways, most notably that the affordable 
housing fund that would be established would be funded by 
dedicating hundreds of millions of dollars for the construction 
of affordable housing. This fund would be established by using 
a formula based on portfolios of Fannie Mae and Freddie Mac, 
rather than profits of Fannie Mae and Freddie Mac.
    Additionally, the bill would change the structure of the 
regulatory board to eliminate independent board members, and 
would also allow regulators to increase minimum capital 
standards if unsafe or unsound conditions exist. I look forward 
to the opinions of the witnesses, and to my colleagues today, 
and I thank you, Mr. Chairman, for calling the hearing.
    Chairman Kanjorski. Mr. Lynch, do you have an opening 
statement?
    Mr. Lynch. Mr. Chairman, in the interest of time, I have a 
written statement that I ask unanimous consent to submit for 
the record.
    The only thing I would like to do at this time is to thank 
the panelists for their attendance, and for working with us, 
and helping the committee do its work.
    We went down this road last year, with H.R. 1461, and I 
think we had not unanimity, but certainly consensus, about the 
better parts of that legislation. I am interested, as Mr. Renzi 
pointed out, in any differences between what we did last year, 
and some of the changes that might be warranted, especially in 
light of the problems that we are seeing in the subprime market 
lately.
    And so, I will reserve my time for questions. Thank you, 
Mr. Chairman. I yield back.
    Chairman Kanjorski. Without objection, all members' opening 
statements will be made a part of the record. No objection. So 
ordered.
    The gentleman from New Jersey.
    Mr. Garrett. Again, also, in the interest of time, to move 
forward, I just got here from New Jersey specifically for this 
hearing, and I look forward to your testimony.
    I share Mr. Baker's concerns, as he has expressed over the 
years, with the performance of the GSEs and their finances and 
their transparencies. I also share the concerns that I 
expressed last year, when we passed the legislation out of this 
committee, with regard to the housing fund, and how that would 
have a negative impact upon the housing marketplace. And in 
light of the subprime market's concerns, I am wondering how 
that will all flesh out, as well, whether what we may be doing 
here today is exacerbating that problem.
    As we only saw this bill drop in--as Mr. Renzi indicated--
on Friday, I am still in the process of reviewing it, as well. 
I am pleased to see that there may be some additional 
safeguards, with regard to the portfolio limitations, something 
that Treasury, I know, was looking for, and I was, as well. So 
I will be looking forward to the panel's discussion on those 
ends, as well.
    But thank you, Mr. Chairman, on the point of the hearing 
today.
    Chairman Kanjorski. Thank you. Our panel today consists of 
seven individuals: Mr. John R. Price, president and chief 
executive officer of the Federal Home Loan Bank of Pittsburgh; 
Mr. Thomas M. Stevens, immediate past president of the National 
Association of Realtors; Mr. John M. Robbins, chairman of the 
Mortgage Bankers Association; Mr. Arthur R. Connelly, chairman, 
South Shores Savings Bank; Mr. Michael Menzies, president and 
chief executive officer of Easton Bank and Trust Company; Ms. 
Karen Shaw Petrou, managing partner, Federal Financial 
Analysts, Incorporated; and Mr. Scott Stern, chief executive 
officer, Lenders One, and chairman, National Alliance of 
Independent Mortgage Bankers.
    Oh, I'm sorry. Mr. Perlmutter, do you have an opening 
statement?
    Mr. Perlmutter. Thank you, Mr. Chairman. When you're down 
here about four levels, it's hard to see. I'm not the biggest 
guy in the room, either.
    Chairman Kanjorski. It takes a little while, but you will 
get up here.
    [Laughter]
    Mr. Perlmutter. No, I just appreciate the panel's being 
here. I'm sorry we didn't have more of our colleagues here to 
listen to this testimony. I am a freshman, so I am just here to 
listen and learn. I have had experience with Fannie Mae and 
Freddie Mac when I was in the private sector, and I am just 
interested in your testimony today. Thank you.
    Chairman Kanjorski. Well, thank you. Mr. Price.

   STATEMENT OF JOHN R. PRICE, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, FEDERAL HOME LOAN BANK OF PITTSBURGH, ON BEHALF OF THE 
               COUNCIL OF FEDERAL HOME LOAN BANKS

    Mr. Price. Thank you. Chairman Kanjorski, Mr. Renzi, and 
other subcommittee members, I am John R. Price, president and 
CEO of the Federal Home Loan Bank of Pittsburgh, and I am 
appearing today on behalf of the Council of Federal Home Loan 
Banks.
    One of the 12 Home Loan Banks, Pittsburgh helps 334 member 
financial institutions meet the housing and community and 
economic development credit needs throughout Pennsylvania, 
Delaware, and West Virginia, just as our 11 sisters do, 
providing services to 8,100 member banks and financial 
institutions across the country.
    At year end last year, we had assets of $77 billion at the 
Pittsburgh bank, and the system had, as the chairman mentioned, 
$1 trillion, on a consolidated basis, in assets.
    We are cooperatives. We are not a listed company. And as 
cooperatives, we are active partners with our members, as they 
serve individual consumers, affordable housing providers, 
homebuilders, small businesses, and local governments around 
their markets.
    Some of the results of this partnership include: one, 
helping a first-time low-income home buyer achieve ownership 
through downpayment or closing cost financing, which we call 
``first front door''; two, assisting thousands of families 
through the affordable housing program--more on that later; 
three, providing thousands of jobs at hundreds of small 
businesses through our banking on business program; and four, 
helping communities meet pressing infrastructure needs, such as 
water treatment repairs, through our community lending program.
    As you approach the legislation here today, it is important 
to ask why the Home Loan Banks are so important to the Nation's 
economy, and why it is so important to ensure that the new 
regulatory structure enable, and not impede, our mission 
achievement.
    Member institutions use the Home Loan Banks' loans--we call 
them advances--to meet the housing community and economic 
development lending needs in their local markets. Home Loan 
Bank advances are, in fact, the only capital market access for 
many Home Loan Bank members.
    The Home Loan Banks' mortgage purchase programs also 
provide members, particularly smaller-sized institutions, a 
desirable secondary market alternative, and are a very 
important part of our mission to provide liquidity. These 
programs have allowed many of our smaller members to offer 30-
year fixed rate mortgage products for the first time.
    The Home Loan Banks also represent the single largest 
private sector source of grants supporting low-income housing. 
Home Loan Bank members utilize the AHP, the affordable housing 
program, to help low-income families obtain housing, and have 
been awarded over $2.5 billion to create more than half-a-
million--520,000--affordable housing units since 1990.
    A key strength of this affordable housing program is its 
flexibility to adapt to differing community needs across the 
country. Unlike some other programs, AHP funds can be used for 
both housing rehab and new construction, and can be used to 
augment other sources of funding, by filling in gaps.
    And, Mr. Chairman, knowing of your personal and strong 
interest in, and your leadership around Home Loan Bank efforts 
to support community development as integral to our mission, I 
wanted to highlight what the Pittsburgh Bank is doing in that 
regard. These brief Pittsburgh examples are reflected in what 
the other Home Loan Banks do in their geographies.
    Banking on Business, or BOB, as we call it, helps eligible 
small businesses with start-up and expansion costs. It is 
financing--this is a slice of financing that really enables a 
small business to be creditworthy for regular banking. Since 
2000, more than $27.5 million in BOB funding in our Pittsburgh 
geography has created or retained over 3,800 jobs.
    Just simple examples of the businesses include: the Grace 
Dental Practice in Cabin Creek, West Virginia; Nazar Diesel, in 
Jessup, Pennsylvania, a diesel engine repair business; and many 
others like them. This year we will be putting into the pot 
some $7 million in new funds for these new small businesses.
    Then we have our community lending program, an $825 million 
revolving loan pool that offers loans to our member financial 
institutions for lending for community and economic development 
projects. A Pittsburgh member bank, for example, recently used 
CLP, community lending, to help three northeastern 
Pennsylvania--does that have a certain ring to it--three 
northeastern Pennsylvania municipalities upgrade their public 
water and sewer systems with $8 million in flexible low-
interest financing.
    Systemwide, the Home Loan Banks have used these programs to 
provide over $44 billion, financing over 600,000 housing units, 
and thousands of economic development projects throughout the 
country.
    In another take on economic and community development, 
working with the Governor of Pennsylvania and with the 
Brookings Institution, the Pittsburgh Bank developed something 
called ``Blueprint Communities Program,'' in cooperation with 
multiple partners. It's a neighborhood revitalization 
initiative that was launched 2 years ago.
    The program, at first, involved 22 urban and rural 
communities across Pennsylvania, and is expanding to Delaware 
next year. In West Virginia, the program was announced by 
Governor Joe Manchin this morning.
    Home Loan Bank letters of credit can be used to help 
members improve the credit rating for tax-exempt housing bonds, 
taxable community lending, and public finance transactions. 
Additionally, they can be used by our Home Loan Bank members to 
secure municipal deposits.
    I would like to mention important tax legislation, which 
would allow Home Loan Bank member banks to assist their 
municipalities' non-profit care outfits, and institutions of 
higher learning. The bill adds Home Loan Banks to the list of 
GSEs that can credit-enhance tax-exempt bonds, without 
triggering the loss of the bond's tax-exempt character. 
Introduced last Congress as H.R. 5177 by Ways and Means members 
Phil English and Sander Levin, it has not yet been introduced 
in this Congress. I would like to thank you, Mr. Chairman, and 
many of the committee members, including Congresswoman Pryce, 
Congressman Bachus, and others, for their strong support for 
this legislation, and we look forward to working with you this 
Congress.
    Several current issues command our attention here today. On 
appointed directors for the Home Loan Banks, the Council had 
been very concerned about the lack of appointments, and is 
pleased that the finance board recently issued an interim final 
rule establishing a process for selecting and appointing 
directors. Currently, the boards of each of the 12 Home Loan 
Banks are actively engaged in the process of identifying and 
nominating candidates for these appointive directorships.
    Concerning the pending GSE legislation, the Council 
believes it is important to resolve the uncertainty, the 
existing legislative uncertainty. You said that we have been 7 
years at the table. It would be good to get resolution, and we 
support your efforts to create a strong, independent regulator 
for the housing GSEs.
    We hope this legislation will preserve the mission of the 
Home Loan Banks, our regulators' independence, the system's 
access to capital markets, and the system's unique regional 
cooperative structure.
    We also support the provisions in the legislation that 
increase the size of community financial institutions, and 
expand the eligible collateral to include economic development 
assets.
    We are concerned about the inclusion of the Home Loan Banks 
under the deputy director proposed of FHFA for housing mission. 
Combining the housing mission oversight of the home loans and 
Fannie Mae and Freddie Mac does not reflect the unique benefits 
of each, and may inadvertently create homogenized regulation 
and programs.
    Just as Home Loan Bank corporate operations and business 
models are really different from Fannie Mae and Freddie Mac, 
since we work through our members, the Home Loan Banks' 
affordable housing and community investment programs are 
different.
    Mr. Chairman, thank you for the chance to address the 
subcommittee on these important matters, and I will be 
delighted to take your questions at the appropriate time.
    [The prepared statement of Mr. Price can be found on page 
76 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Price. The 
next witness will be Mr. Stevens, the immediate past president 
of the National Association of Realtors.
    Mr. Stevens.

   STATEMENT OF THOMAS M. STEVENS, IMMEDIATE PAST PRESIDENT, 
                NATIONAL ASSOCIATION OF REALTORS

    Mr. Stevens. Chairman Kanjorski, Representative Renzi, and 
members of the subcommittee, thank you for inviting me here 
today to testify on the important issue of government-sponsored 
enterprises regulatory reform.
    As the 2007 immediate past president of the National 
Association of Realtors, and former president of Coldwell 
Banker Stevens Realtors, I am here today on behalf of our 1.3 
million Realtors who work in all fields of commercial and 
residential real estate.
    Fannie Mae and Freddie Mac are our partners in the real 
estate industry, so keeping them strong and sound is in 
everyone's interest. With that in mind, Realtors have six 
recommendations that we believe should be considered in any 
legislative proposals to reform GSE oversight.
    First, the GSEs need a strong regulator and sound corporate 
governance. Regulatory oversight of Fannie Mae, Freddie Mac, 
and the Federal Home Loan Bank should be transferred to a new 
regulator which has the authority to set capital standards, 
liquidate a financially unstable enterprise, and approve new 
programs and products. The regulators should also understand 
and support the GSEs' vital housing finance mission and the 
role housing plays in supporting our national economy.
    Realtors also support legislative efforts to strengthen the 
governance of the Federal Home Loan Banks, by raising the 
number of independent directors, adding community and economic 
development expertise, and allowing appointed independent 
directors to continue their service until a successor is in 
place.
    Second, the GSEs' vital housing mission should be preserved 
and protected. This mission ensures that Fannie Mae and Freddie 
Mac provide capital to the market during downturns, and use 
their Federal ties to facilitate mortgage finance, and support 
homeownership opportunities. The GSEs' housing mission is vital 
to the continued success of the housing market. Realtors will 
oppose legislative proposals which diminish that.
    Third, the GSEs must be able to develop new products and 
programs that respond to market needs. The standards for 
approving new products and programs should be those contained 
in the Federal National Mortgage Association Charter Act, and 
the Federal Home Loan Mortgage Corporation Act. We support 
requiring the GSEs to provide notice to the regulator, so that 
adequate safety, soundness, and mission review can be 
accomplished.
    We oppose requirements that could unduly delay or prevent 
the GSEs from developing new programs and products that support 
their missions.
    Fourth, there should be no overly restrictive bright line 
test that explicitly limits the GSEs' role in the secondary 
market, strictly defined. Realtors believe such a test would 
seriously hinder important mission-related consumer outreach 
activities now supported by the GSEs, such as home buyer 
education.
    Fifth, portfolio limits should be regulated, and not 
legislated. The GSEs' retained portfolios help support 
affordable housing programs, and also help provide financing 
for low-income borrowers. For example, Freddie Mac reports that 
approximately 300 million of the mortgages in the retained 
portfolio qualify under their affordable housing goals. We 
believe the best way to ensure safety is for a strong regulator 
to limit portfolio risk, and moderate portfolio growth, when 
appropriate.
    Finally, Realtors support increasing the conforming loan 
limits for high-cost areas, and we would like to thank Chairman 
Frank and Representative Miller for their support on this 
important issue, and for including the Miller amendment 
language in H.R. 1427.
    While the 2007 national cap of $417,000 exceeds the local 
median for the vast majority of housing markets, it is 
considerably below the local median in a few high-cost 
metropolitan areas. Regional adjustments will help more low- 
and moderate-income working families in high-cost areas qualify 
for conforming GSE loans. They will also expand access to FHA 
and VA mortgages, since those limits are tied to the conforming 
ceiling, and give homebuyers access to safer mortgages.
    Realtors applaud the committee's current efforts to build a 
more robust GSE regulatory structure. Targeted reform should 
strengthen our housing financing system. It should not become a 
reason or justification for rewriting the GSEs' housing 
mission, or weakening the housing finance system.
    Realtors look forward to working with Congress to enact 
meaningful GSE legislation, and I am happy to answer any 
questions. Thank you.
    [The prepared statement of Mr. Stevens can be found on page 
115 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Stevens. The 
next witness will be Mr. John Robbins, chairman of the Mortgage 
Bankers Association.
    Mr. Robbins.

 STATEMENT OF JOHN M. ROBBINS, CMB, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Robbins. Thank you, Chairman Kanjorski, for the 
opportunity to testify today.
    Fannie Mae and Freddie Mac, the GSEs, are critically 
important to modern mortgage financing, and the MBA supports 
the role the GSEs play in maintaining and improving liquidity 
and stability in the secondary mortgage market. Therefore, MBA 
has long advocated GSE regulatory reform, to ensure that they 
are operating in a safe and sound manner, engaging only in 
activities that are consistent with their charter purposes, and 
are subject to reasonable affordable housing goals that do not 
distort the market.
    My written statement is comprehensive, so I will only touch 
on a few highlights here today. There seems to be general 
agreement on the fundamental tools that the new regulator will 
need. MBA is particularly interested in the powers of the 
regulator related to the review and approval of GSE activities, 
ongoing and new.
    Today, it is unclear whether certain current GSE activities 
are actually permitted. The new regulator needs sufficient 
authority to solve this problem. MBA has reviewed the recently 
introduced bill, H.R. 1427. We believe that the product 
approval language heads in the right direction to satisfy some 
of these concerns, and we strongly oppose any effort to weaken 
it.
    We particularly support the no limitation clause at the end 
of this section on powers to review new and existing products 
or activities. This is essential authority for a world class 
financial regulator.
    We appreciate that H.R. 1427 calculates the size of the 
contribution to the affordable housing fund on the GSEs' 
portfolio, rather than on net income. This approach would make 
it more difficult for the GSEs to pass the cost of their 
contribution on to mortgage lenders and consumers. It would 
also tie a benefit of government sponsorship, the lower capital 
cost, to the GSEs' affordable housing contributions.
    Various proposals have been offered to regulate the GSEs' 
investment portfolios, and we are pleased with the progress 
H.R. 1427 makes in this area. MBA maintains that the GSEs' 
portfolios are an important part of their ability to help 
stabilize mortgage markets, and encourage affordable housing.
    Because markets are dynamic, the GSEs need flexibility to 
adjust their portfolios to changing conditions and marketplace 
needs. MBA does not believe there is a need to expand the 
definition of high-cost areas under the GSE charters, and we 
respectfully ask the committee to consider the points in our 
written testimony.
    Jumbo loan borrowers are well served by the private sector, 
and there is no lack of liquidity in the primary or secondary 
market for these borrowers. We note that H.R. 1427 requires the 
registration of Fannie Mae and Freddie Mac stock, but not 
mortgage-backed securities, and we are supporters of that 
approach.
    Finally, Congress should strengthen both the secondary 
mortgage market and the Federal Home Loan Banks, by expressly 
affirming in H.R. 1427, that the Banks are authorized to 
securitize loans. Thank you, Mr. Chairman, and I look forward 
to your questions.
    [The prepared statement of Mr. Robbins can be found on page 
93 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Robbins. The 
next witness will be Mr. Arthur R. Connelly, chairman of South 
Shore Savings Bank.
    Mr. Connelly.

 STATEMENT OF ARTHUR R. CONNELLY, CHAIRMAN & CEO, SOUTH SHORE 
     SAVINGS BANK, ON BEHALF OF AMERICA'S COMMUNITY BANKERS

    Mr. Connelly. Good afternoon, Chairman Kanjorski, 
Representative Renzi, and members of the subcommittee. If I 
might add, I would be remiss if I didn't recognize one of South 
Boston's own, Congressman Lynch, this week of March 17th.
    My name is Arthur Connelly, and I am chairman and CEO of 
South Shore Bank Corp., MHC. I am also first vice chairman of 
America's Community Bankers, and I am testifying today on 
behalf of ACB.
    From the outset, I would like to point out that the 
committee's GSE discussion draft bill is 331 pages, yet only 25 
pages pertain to the Federal Home Loan Bank system. We believe 
this illustrates the effectiveness of a good system that is 
running well.
    Regulations of the Federal Home Loan Bank system can be 
improved within the framework of a single consolidated GSE 
regulator, but only if adequate safeguards are provided to 
recognize and maintain the unique cooperative characteristics 
of the system.
    Community banks have a rich history of superior performance 
in lending to minority and low-income borrowers, as well as 
first-time homebuyers. The affordable housing program of the 
Federal Home Loan Banks supports this business with advances 
and programs. These activities would not be possible without 
access to advances. The creation and availability of the 
Federal Home Loan Bank products, such as advances, are critical 
to the Federal Home Loan Bank system's ability to evolve and 
meet the specific needs of our communities.
    We believe that any meaningful reform legislation must 
create a new, independent regulator with the authority to 
strictly prevent Fannie Mae and Freddie Mac from entering the 
primary market. It must also possess the regulatory and 
supervisory authorities equivalent to that of the Federal 
banking regulators, including the authority to adjust portfolio 
holdings and capital requirements for safety and soundness.
    The independence of the Federal regulator is also a crucial 
element. A structure that provides autonomy from the 
congressional appropriation process is essential. Most 
importantly, the unique cooperative structure of the Federal 
Home Loan Banks must be preserved.
    The finance board has powers and authorities similar to 
those of the banking regulators in the areas of capital, 
activities, and supervision. They, too, should be preserved. 
The success of the Federal Home Loan Bank affordable housing 
programs suggest certain characteristics that should be 
fostered in similar programs that are proposed for other GSEs.
    America's Community Bankers strongly recommends that any 
newly established AHPs draw heavily from the experiences of the 
Federal Home Loan Banks. The design should include private 
sector lenders, and developers with public and not-for-profit 
partners, both at the proposal stage and in project management.
    We believe that the composition of the boards of each of 
the Federal Home Loan Banks is a vital mechanism to ensure that 
the governance of the banks is undertaken in an appropriate 
manner. Recently, the finance board passed a rule to address 
the growing number of vacancies on the Federal Home Loan Bank 
boards in the public interest director category. The rule 
called for Federal Home Loan Banks to provide two candidates 
for each public interest director vacancy on the board.
    It is our preference that the boards be populated through 
an election, rather than an appointment process. There is no 
regulator who knows the strengths and weaknesses of the boards 
better than the Banks themselves. Even the current chairman of 
the finance board agrees, and has stated repeatedly that the 
regulator should not be in the position to appoint the 
regulated.
    Again, I wish to express my appreciation for the 
opportunity to testify on this important issue. The bright 
issue of the Federal Home Loan Banks and a strong, well-
regulated secondary market, is a necessity to the day-to-day 
operations of many of our community banks, including South 
Shore Savings Bank, and the communities that we serve.
    I look forward to working with you, Mr. Chairman, and the 
members of the subcommittee, as the legislative process 
continues. Thank you.
    [The prepared statement of Mr. Connelly can be found on 
page 48 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Connelly. Our next 
witness will be Mr. Michael Menzies, president and chief 
executive officer of the Easton Bank and Trust Company.

    STATEMENT OF MICHAEL MENZIES, PRESIDENT/CHIEF EXECUTIVE 
   OFFICER, EASTON BANK AND TRUST COMPANY, ON BEHALF OF THE 
            INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Menzies. Thank you, Mr. Chairman, Representative Renzi, 
and members of the committee. I am Mike Menzies, president of 
Easton Bank and Trust, from downtown Easton Maryland, the Goose 
Capital of the World.
    We are a 14-year-old community bank, with $130 million in 
assets, and I am pleased, as vice chairman of the Independent 
Community Bankers of America, to testify on behalf of GSE 
regulations.
    The GSEs are vital to our Nation's community banks. Over 
the last 4 years, our bank has originated over $103 million in 
mortgages sold in the secondary market. We have a $20 million 
line of credit with the Federal Home Loan Bank of Atlanta, and 
we use that for liquidity and asset liability management, match 
funding of small business loans, and to meet the community 
develop needs of our region.
    Though very different in key respects, all three of the 
GSEs provide community banks with critical access to capital 
markets. We can offer the same home mortgage products to our 
customers that the largest firms offer to theirs.
    ICBA supported the GSE reform legislation that cleared the 
House last year by a strong bipartisan vote. That bill created 
a world class independent regulator, recognized the unique 
structure and mission of the Federal Home Loan Bank system, and 
protected the GSE status of the enterprises.
    We urge Congress in the strongest possible terms to reject 
proposals that claim to improve GSE regulation, but are 
actually designed to undermine their mission, or pave the way 
for privatization. There are a variety of ideas that could 
disrupt the functioning of the GSEs. One is to impose a cap on 
their growth or size. Another is to severely restrict the types 
of mortgage assets that could be included in their portfolios.
    We strongly oppose the placement of arbitrary caps or 
limits, without regard to the changing needs of our customers 
over time. Statutory limits could compel Fannie Mae and Freddie 
Mac to give preference to larger volume customers, to the 
disadvantage of community banks and our customers. Therefore, 
we oppose granting the new regulator authority to limit 
portfolio growth or composition, except where it is truly 
needed to ensure safety and soundness.
    The regulators should not be permitted to use capital 
levels to change the Nation's housing policy. Congress should 
maintain control over the statutory or minimal capital 
standards for Fannie Mae and Freddie Mac, as is currently the 
case. Otherwise, a new regulator could be subject to political 
pressure to use minimum capital authority to reduce the 
resources available for housing.
    However, the GSE regulator should have the authority, 
consistent with the current authority of banking regulators, 
over the risk-based capital the GSEs must hold to ensure their 
safety and soundness. The new regulatory agency must be 
structured and directed to maintain the cooperative nature, 
operations, and mission of the Home Loan Banks.
    These cooperatively owned banks are very different from the 
publicly-traded housing GSEs. Home Loan Bank advances enable 
community banks to make and hold mortgages and other types of 
loans in their own portfolios, loans that generally cannot be 
securitized.
    In a complementary fashion, Fannie Mae and Freddie Mac help 
community banks originate mortgages that can be securitized. 
Congress should not attempt to draw a bright line between 
primary and secondary mortgage market activities. Frankly, the 
workings of the modern mortgage market are not as tidy as some 
have suggested.
    For example, automated underwriting systems devised by 
Fannie Mae and Freddie Mac have been criticized as straying too 
close to the line between primary and secondary market 
activities. However, these systems help community banks to 
quickly and objectively qualify a customer for a mortgage, and 
determine if that loan is saleable. We want to preserve the 
ability of Fannie Mae and Freddie Mac to innovate to meet the 
changing needs of community bankers and our customers.
    In the Gramm-Leach-Bliley Act, Congress allowed the Home 
Loan Bank members that qualify as community financial 
institutions to use long-term advances for community 
development. Not all the Home Loan Banks have implemented this 
authority. We don't think Congress envisioned this as a result.
    Therefore, we urge Congress to clarify that, in addition to 
housing finance, the mission of the Federal Home Loan Banks 
includes this CFI authority. In addition, ICBA strongly 
supports a provision in last year's housing bill to increase 
the size of institutions eligible for the CFI program to $1 
billion in assets. We agree with you, Mr. Chairman, that CFI 
expansion would benefit all.
    Since Congress has now debated significant regulatory 
reforms to the regulatory oversight of Fannie Mae, Freddie Mac, 
and the Federal Home Loan Banks, it's a good time to look at 
the oversight of another GSE, the farm credit system. This 
issue is especially important in a year such as this, when 
Congress is considering renewal of the Farm Bill.
    We expect the farm credit system to attempt to expand into 
non-farm lending through this legislation. We commend the 
leadership of this committee for your letter to the leadership 
of the Agriculture Committee, highlighting this potential 
expansion into lending under the Financial Services Committee 
jurisdiction.
    Thanks for the opportunity to share these thoughts with 
you, and the views of our Nation's community bankers. I would 
be delighted to answer any questions, should you have them.
    [The prepared statement of Mr. Menzies can be found on page 
57 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Menzies. The next 
witness will be Ms. Karen Shaw Petrou, managing partner of 
Federal Financial Analysts, Incorporated.

   STATEMENT OF KAREN SHAW PETROU, MANAGING PARTNER, FEDERAL 
                    FINANCIAL ANALYSTS, INC.

    Ms. Petrou. Thank you. It is an honor to appear before this 
subcommittee to discuss the urgent need for GSE reform. I last 
did so in June of 2003, shortly after the problems at Freddie 
Mac became apparent. I said then that those were deep problems 
that warranted action to reform the Office of Federal Housing 
Enterprise Oversight, or OFHEO, and I worried then that Fannie 
Mae would soon follow Freddie Mac, and shows signs of 
significant internal control problems, as well.
    At that time, those were debatable propositions, and of 
course, now, they're not. This committee has worked very hard, 
and there is clear consensus now on the need for world class 
and bank-like regulation. The challenge, I think now, is not on 
the overall need for the legislation, because that debate has 
finally ended, but rather, on what constitutes a bank-like 
world class framework, and there is still some debate.
    H.R. 1461, as passed by the House in the last Congress, was 
a significant improvement over current law, with regard to the 
safety and soundness governance of all of the housing GSEs. And 
H.R. 1427, as introduced on Friday, is, I think, a still more 
sound and far-reaching piece of legislation.
    If I may, I would like to quickly talk about some of the 
key provisions in the new bill, H.R. 1427, highlighting how 
they compare to the powers that the banking agencies have. I 
would like to focus quickly on the more controversial issues of 
capital, new product review, and the portfolio, but also 
mention several other critical prudential provisions--that were 
in--H.R. 1461 and are now in H.R. 1427. You all know all too 
well how things can end up on the cutting room floor in the 
middle of the night, and some of these provisions that aren't 
drawing as much attention are truly critical to a bank-like, 
world class regulation. So I would like also, quickly, to 
mention them.
    On capital, it is, I think, very important to provide, as 
the legislation would do, the new regulator with flexibility to 
set minimum and risk-based capital thresholds. We have given 
that to the banking agencies, because it is critical that 
capital rules not only reflect risk, but also anticipate it.
    The capital frameworks for Fannie Mae and Freddie Mac were 
set in 1992, and that for the Home Loan Banks in law in 1999. 
And you know all too well the many changes in the markets, now 
that very troublesome problems in subprime, but before that, 
the growth of derivatives, and many other issues that were not 
anticipated when the statutes went into the depth they do on 
the capital frameworks now in place.
    The regulators should be freed, as the banking agencies 
are, to set capital appropriate to risk. And, indeed, you may 
wish to consider creating this same incentive for the GSEs that 
you have for the banks, that they not only be adequately 
capitalized, but also, in fact, well capitalized, to create a 
strong bulwark against any call on the taxpayer.
    H.R. 1427 is a significant improvement over the prior 
approach to new product review, because it provides for full 
prior review by the regulator, and public notice and comment of 
new GSE ventures.
    Congress, when you last looked at this issue--did so in 
Gramm-Leach-Bliley in 1999--and you then required the Federal 
Reserve and the Treasury to issue public notice and comment of 
any significant new ventures for financial holding companies. 
That is how Congress learned of the proposal to permit real 
estate agency and brokerage powers. It is how other interested 
parties became engaged, and it is the same early warning 
process that should apply to the GSEs, especially in light of 
their far greater market power than any single private sector 
institution would have.
    H.R. 1427 has a compromise approach on the portfolio that 
gives the regulator considerable discretion, as Chairman 
Bernanke has suggested, that this be used to focus on 
affordable housing. And certainly, there is a good deal more 
that could be done to serve underserved borrowers in a safe and 
sound way by Fannie Mae and Freddie Mac.
    Some have suggested that this portfolio limit is not bank-
like, that nothing like that applies to the banks. And I would 
just like to mention that, indeed, there are numerous express 
statutory provisions about what banks may hold, and how much 
they may hold.
    Draw your attention, for example, to the provisions in 
Gramm-Leach-Bliley that dealt with holdings of private equity, 
and the prohibition against banks holding any form of assets 
related to commerce. I know those are the major three 
controversies. But if I may, I would like just quickly to 
mention two other critical provisions in H.R. 1427.
    One is in section 102, which details the prudential 
standards, rules, orders, or guidance that the new regulator 
must issue. This is stronger than the Senate bill, which made 
it discretionary. It is important to keep not only the firm 
directive to the regulator to issue these standards, but the 
full list that you have in the legislation, to get a rule book 
in place as quickly as possible for all of the GSEs that 
approximates the standards in place for insured depositories 
and their holding companies.
    Finally, the House bill also has extensive provisions 
related to GSE corporate governance, expressly governing Fannie 
Mae and Freddie Mac. These, too, should be retained because we 
know from sad experience the significant problems at these 
enterprises, and the lack of market discipline that applies to 
them.
    Any questions about the statutory authority of the 
regulator to ensure effective corporate governance at the GSEs 
should be retained.
    I very much appreciate the opportunity to appear here 
today, and I would be happy to answer any questions you may 
have.
    [The prepared statement of Ms. Petrou can be found on page 
69 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Petrou. Our 
final witness, Mr. Scott Stern, chief executive officer, 
Lenders One, and chairman, National Alliance of Independent 
Mortgage Bankers. I will just add I didn't believe you were old 
enough to hold that role.
    [Laughter]
    Chairman Kanjorski. It has been proven to me that you 
clearly are a Wharton man. Anybody who is a Wharton man 
certainly is qualified.

STATEMENT OF SCOTT STERN, CHIEF EXECUTIVE OFFICER, LENDERS ONE, 
  CHAIRMAN, NATIONAL ALLIANCE OF INDEPENDENT MORTGAGE BANKERS

    Mr. Stern. Thank you. Chairman Kanjorski, Representative 
Renzi, and members of the subcommittee, my name is Scott Stern, 
and I am chief executive officer of Lenders One of St. Louis, 
Missouri, and chair of the National Alliance of Independent 
Mortgage Bankers. We appreciate the opportunity to present our 
views on the impact of proposed legislation on the GSEs.
    Since this is the first time our group has testified in 
front of this committee, let me say a quick word about Lenders 
One. We are the Nation's largest mortgage cooperative. We play 
a unique role in the mortgage industry. Much like the 
agricultural co-ops that enable family farms to survive in an 
era of large-scale agri-business, Lenders One permits locally 
owned mortgage bankers to compete in a rapidly changing 
marketplace.
    We are owned by 100 shareholder companies who collectively 
originate $40 billion annually in mortgages, including low 
income and minority lending. We have originated almost 2 
million home loans since 2000. The mission of Lenders One and 
AIMB very informs our analysis of GSE legislation.
    Like everyone at this table, we support a strong regulator 
with appropriate powers to regulate the safety and soundness 
and mission-related activities of the GSEs. Our written 
testimony outlines our more specific positions on issues such 
as portfolio, capital, loan limits, and program approval. So we 
will focus today on what we believe to be the most crucial 
aspect of the discussion.
    If anyone needed to be reminded why Congress created the 
GSEs, you need look no further than the front page of the Wall 
Street Journal on most any day of the past 4 weeks, or look at 
CNBC, where it seems that every 20 minutes or so they run a 
segment called ``Mortgage Meltdown,'' a term for which you will 
find 41,000 hits on Google this afternoon. Or, at this front 
page headline in yesterday's New York Times, ``Mortgage Crisis 
Looms.''
    I don't personally believe we are approaching a broader 
mortgage crisis, but there is clearly a growing perception that 
we could be headed in that direction. But my confidence in the 
Nation's housing finance system remains high. Tomorrow, I will 
go back to St. Louis, and I and my member companies are going 
to keep making mortgage loans. Why am I so confident at this 
time of market uncertainty?
    Because even at this time of insecurity about the mortgage 
markets, I know with complete and utter certainty that if I 
make a good loan, I will have a buyer: Fannie Mae and Freddie 
Mac. I can't make a loan unless I can sell that loan.
    You see, that's the way the mortgage business works. And 
even though, in some segments of the market, investors are 
disappearing faster than an ice cube on a hot summer day in 
D.C., I know Fannie Mae and Freddie Mac are going to be there 
to buy my loan. That's why they were created, and that's the 
brilliance of the system set up by your predecessors almost 80 
years ago, at the establishment of Fannie Mae, and the concept 
of a government-sponsored secondary market.
    While other investors can and do walk away, Fannie Mae has 
to be there. Simply put, Fannie Mae and Freddie Mac are the 
firewall that safeguards the Nation's housing finance system, 
and its borrowers, from market shocks and excessive volatility, 
by providing confidence in mortgage capital markets.
    I will frankly tell you that the GSEs are not our biggest 
business partner for our companies. Really, not even close. But 
they are, nonetheless, crucial to me and my members in the 
housing finance system. Our confidence that the GSEs will be 
there at a size and strength that enables them to keep the 
market stable, even in volatile conditions, is what makes the 
system work. To us, keeping the GSEs at a vigorous scale and 
strength to safeguard that confidence is what the debate over a 
GSE bill is all about.
    We support the general approach of H.R. 1427 introduced 
last week by Chairman Frank. The bill would create the strong 
regulator we have all supported. However, we do believe the 
bill requires certain clarifications to ensure that the new 
regulator's power and authority is never used to diminish the 
one sector of the housing finance system best shielded from 
market uncertainty. You will find our detailed positions in our 
written testimony.
    Mr. Chairman, we appreciate your leadership on this matter, 
and we are grateful for the opportunity to share our views.
    Chairman Kanjorski. Thank you very much, Mr. Stern. Without 
objection, the written statements of all the witnesses will be 
placed in the record in their full text.
    And I have one other unanimous consent to insert into the 
hearing record statements from: The National Association of 
Federal Credit Unions; The National League of Cities; The 
American Bankers Association; The Pennsylvania Bankers 
Association; and The Asian Real Estate Association of America. 
Without objection, they will be inserted in full in the record.
    I think it would be fair to comment that the seven 
witnesses, so far, liked the product as introduced on Friday by 
Mr. Frank. Is that a reasonable statement? And we just have a 
few disagreements, or twitches that should be made or 
considered?
    I want to address myself to Mr. Connelly. I am one of the 
individuals who has been struggling over the appointment of 
members to the board, both to the Federal Home Loan Bank and to 
Freddie Mac and Fannie Mae, and your observation that members 
of the board should be elected, as opposed to being appointed, 
interests me.
    I totally agree with that concept, except that the 
peculiarity of these organizations, having an outside mission 
created by the Congress, I feel that there is less likelihood 
of an incestuous relationship existing if the outside 
appointees are made, in fact, by the normal members of the 
regulatory board. They have interests slightly different, in 
terms of mission, and whether or not, over a period of time, 
particularly the Federal Home Loan Bank system could be lost in 
its mission without any way of the Congress or anyone else 
correcting the mission, or bringing about or even finding out 
that the change of the mission has occurred.
    Why do you find it so difficult to have either the 
nominating process that is suggested in the bill, or the old 
process that the regulator make the appointment of the outside 
directors?
    Mr. Connelly. Well, Mr. Chairman, first I think that we're 
in a new environment today, coming under SEC registration. It 
is important that the Federal Home Loan Banks should have the 
ability to pick the brightest and the best, and most 
representative of the constituencies, the skill set that are 
required.
    Chairman Kanjorski. Who is the constituency, though, in 
your mind?
    Mr. Connelly. Well, there is a mission, you know. The 
mission is to serve the credit needs, and what not. The 
cooperative nature of the system suggests that it is owned by 
the bank members and insurance company members. However, we are 
very mindful of the mission to provide for the credit needs of 
our communities that we serve, as well as the housing mission, 
the affordable housing program, which we think is a model 
program.
    And it just--under the current proposal, providing several 
suggestions, which is essentially what this amounts to, doesn't 
necessarily guarantee that we get the most qualified people for 
the board. And it perhaps dilutes the pool for future 
appointments, because if you don't happen to be in the first 
successful round of people who are selected, you may not be 
willing to stand for consideration the next time around.
    Chairman Kanjorski. Well, you know, I had a long discussion 
with the present regulator on that very issue not too long ago. 
Sometimes there is a tendency to define the most qualified as 
either academically most qualified, business success most 
qualified.
    And of course, the mission involves the involvement with 
the community, with economic development and with housing. And 
very often, the appointments are not necessarily those that 
would be made to private boards, but come from the billing 
associations, the Realtors, and average people in the 
community, to get input on the mission from those types of 
people.
    On the other hand, the present regulator suggested how nice 
it would be if college presidents, for instance, could be put 
on the board. I don't want to denigrate my opinion of college 
presidents, but very often I find them captives of the 
establishment, and the very point of the mission is to make 
sure that these entities don't become captives of the 
establishment.
    So if you empower the internal board to make the 
appointment of the outside board members, their natural 
inclination will be to add to the board people more like 
themselves, who are part of the establishment. And over a 
period of time, it seems to me that they will naturally 
gravitate toward not necessarily attending to the mission of 
housing or economic development, but will attend to the mission 
of profit. It's very tempting.
    Not that I am against profit, but we didn't establish this 
as an entity for pure profit. Because if it is pure profit, 
then the private sector should run the operation, and we should 
step out of it. On the other hand, I'm a very strong supporter 
of the cooperative system, of the Federal Home Loan Bank 
system.
    So my question to you is, even though you disagree with 
what's in the bill, is it so fundamental a disagreement on your 
part that we should scratch the bill if it's in there?
    Mr. Connelly. No, I think the bill is more important than 
anything at this point in time. As a member of the board of the 
Federal Home Loan Bank of Boston, though, I can tell you that 
we have identified the skill sets that are critically necessary 
to complement the board.
    Somebody, for instance, who is familiar with not 
necessarily all of the public appointees, but someone certainly 
who is familiar with the securities business, somebody who 
understands the particular nuances of leveraging, of hedging, 
should be represented from among those many people that would 
constitute the public interest directors on the Boston board.
    Chairman Kanjorski. Why shouldn't that be an appointment of 
the board, of the regular election process, to get that kind of 
expertise?
    That point was made to me, to appoint someone who 
understands derivatives. And quite frankly, my response to that 
was I think the present directors are paid, about $19,000 a 
year? If you could find an expert on derivatives for that 
price, you should hire him and recontract him out, because--
    Mr. Connelly. Point well taken, Mr. Chairman.
    Chairman Kanjorski. My intent in structuring these 
appointments is to make sure that, regardless of what political 
party controls the Congress, or what political party controls 
the White House, that over a long period of time the mission 
remain in the public interest for housing and for economic 
development.
    Mr. Connelly. And I think we--
    Chairman Kanjorski.--including that broad knowledge base 
into the board, sometimes even anti-establishment type 
individuals, may be very helpful.
    Mr. Connelly. I couldn't agree with you more in that 
respect.
    Chairman Kanjorski. Very good. Now, the one other question 
that I am also--I am past my 5 minutes. I am verbose. That is 
the pleasure of the Chair.
    The one question that you raised, Mr. Menzies, is something 
that we have not passed over lightly, and that is to try and 
see whether we could eventually consolidate GSEs under one 
jurisdiction, and particularly as they apply to farm credit.
    I guess I have to plead a little ignorance in what you 
anticipate the Agriculture Committee doing, or being requested 
to do. Are they enlarging the loan capacity of farm credit 
agencies to circumvent the banking system? Is that what your 
primary thrust is?
    Mr. Menzies. Mr. Chairman, ``circumvent'' probably wouldn't 
be an apt description. However, we believe the farm credit 
system, which is the only retail, direct-to-the-consumer GSE, 
does, in fact, wish to expand its income source, and does, in 
fact, wish to expand its role, if you will, by lending beyond 
its original mission to just support farming.
    And we believe that they would like to go into small 
business and lending into other activities that, currently, the 
banking industry supports quite nicely. That's the basic issue.
    Chairman Kanjorski. What--
    Mr. Menzies. The question is, do we need the farm credit 
system of this Nation to further expand its retail influence 
into small businesses and the like?
    Chairman Kanjorski. So it's not just who may have 
jurisdiction over these entities here in the Congress that 
you're worried about? There is a thrust to substantially change 
and enlarge the mission of these entities, is that correct?
    Mr. Menzies. Yes, sir. That is correct.
    Chairman Kanjorski. Well, I have the assurances of the 
chairman of the Agriculture Committee that it is an issue that 
he is aware of. But quite honestly, I tend to sympathize with 
his position, and that is that we have cut out a lot of issues 
in the 110th Congress, and that may just be one issue too far, 
but that we should keep it in view, and try to coordinate 
something eventually.
    Watch it, and we will have to watch in this committee, and 
in the Congress, that something isn't in the Agriculture bill 
that goes way beyond anyone's intentions.
    Mr. Menzies. If it remains on your radar screen, we will be 
grateful.
    Chairman Kanjorski. It is. I know how active all of you are 
in the use of the Federal Home Loan Bank system for rural and 
ex-urban economic development, and I see a great void in the 
Federal system and in the private sector.
    Financing is much easier in urban areas; as you move out 
from the urban areas, it's much more difficult. Even our 
government programs are much more difficult to comply with. And 
it seems to me that since the populations have been moving out 
of cities into urban and suburban areas and rural areas, that 
we develop means and mechanism, both in the private sector and 
in government-sponsored enterprises, to have a uniform standard 
to meet these needs that are less shocking.
    I will give you an example--the rural development program, 
and business loans, and business guarantees. They are great on 
paper, except they really don't apply in most areas--
particularly Pennsylvania, because Pennsylvania is a State of 
very small communities--but, they are bunched up alongside 
other communities which are really tied into a very large 
community.
    By virtue of the fact of their structure, they have been 
barred from giving government guarantees, even in communities 
of 2,000 or 3,000, if they are considered to be in an urban 
area, which nobody can quite define to me. They just have a 
map, and they say, ``If you fall in the yellow, you're in an 
urban area,'' and yellows usually are wherever there are masses 
of people, including the rural and suburban and ex-urban areas 
around concentrated cities.
    It would just seem to me that what I am trying to do is 
create the availability of community and economic development 
funds on a rather uniform basis with a relative cost that is 
similar, regardless of the size of the entity, or population of 
the entity making the loan. The reason for this is so that we 
can get the marketplace to really function well, that you don't 
have to start sitting down with a pencil and a paper, and try 
to figure out where you have to move your business in order to 
qualify for what type of loan, or what type of interest rate, 
etc.
    But I do want to assure you that we are paying particular 
attention to the fact that, in an ideal world, if we were 
starting everything again, all of these financial institutions 
should be incorporated within the jurisdiction of this 
committee, so we could handle them more fairly. But if you know 
anything about the Hill, once a designation of jurisdiction is 
made, it takes extreme seniority and a little help from God to 
change that jurisdiction. But we're working on it, and we are 
optimistic.
    Mr. Menzies. Thank you. Thank you, sir.
    Chairman Kanjorski. Now that I have exceeded my 5 minutes, 
Mr. Garrett of New Jersey?
    Mr. Garrett. Thank you, Mr. Chairman. Again, thank you to 
the members of the panel. And as I indicated at the outset, I 
had the opportunity, as I guess you have, to try to go through 
this over the weekend. Even after the testimony, I still have 
some serious concerns with the legislation, as it now stands, 
and hope that we do not rush to judgement on it, and move too 
quickly on the matter.
    I will note, on the positive side, that there are a couple 
of elements to the bill that I agree with, that we have a much 
stronger capital requirement in the legislation, that I believe 
also addresses the issue, as has been addressed by this panel, 
of a clear line on the primary and secondary mortgage market 
activities.
    But in regard to the issue discussed here, the portfolio 
issue, and also one of their core functions of the GSEs, my 
initial feeling is that the legislation really doesn't go far 
enough in reigning them in, and may, in fact, encourage the 
GSEs to actually expand on their portfolios even further. The 
Federal Reserve indicated that, ``The GSEs' portfolios appear 
to have no material effect on the cost or availability of 
residential mortgages.''
    In fact, Chairman Bernanke, in a speech last week, noted, 
``Contrary to what would be expected if the GSE portfolios 
lowered the funding cost of mortgages, over the past decade or 
so the spread between yields on 30-year fixed rate mortgages 
and treasuries of similar duration has tended to rise in 
periods in which the GSEs have increased the share of single 
family residential mortgage held in their portfolio, and to 
fall when the GSE share has fallen.''
    He went on to specifically state, ``Due to the GSEs' 
support for affordable housing,'' and he answered his own 
question by saying, ``At the present time, Fannie and Freddie 
fail the test.''
    So, I believe this bill will unwisely tie the amount that 
the GSEs hold in their own portfolios to what they contribute 
to low-income housing. And I have said this in the several 
hearings that we held on this last year, when we talked about 
this new function of GSEs, as far as what I call a mortgage tax 
increase, the housing fund, that may have a negative impact on 
the overall housing market, as well.
    Basically, as Mr. Stern has said, we have seen rises and 
declines in the housing market. Is this the time that we want 
to be adding yet another tax, overall, which eventually goes 
down to the consumers?
    So, I will initially just turn to the panel, if you would 
wish to address either one of those issues, as far as this 
mortgage tax increase that this bill would include, and the 
fact that we may be exacerbating the problem of the portfolio 
size, as well.
    Mr. Robbins. Let me comment, if I could. The GSEs' 
portfolios are needed for liquidity in the marketplace to 
support it. If we go back to 9/11, the meltdown of--the 
liquidity crisis in 1998, the First Gulf War, the market was 
disrupted by those events, and can be disrupted by other 
cataclysmic events.
    Mr. Garrett. I appreciate that comment, and actually, Mr. 
Stern was making that same sort of suggestion earlier, in his 
testimony, that as any day you said you open the paper, it goes 
up and goes down, what have you, as far as overall economy in 
the housing market.
    The testimony that we received on this issue in the past 
when that was raised was just contrary, unfortunately, to what 
you're saying and what Mr. Stern was saying. What this 
testimony and the evidence indicates, reports and studies of 
GSEs says that instead of stepping into the market to pick up 
where you would hope that they would do the good job that they 
are supposed to by their mission, instead what they do, in 
essence, is to cherry-pick the market, and that the private 
market still has sufficient capacity to address it, but the 
GSEs basically come in as the suitor of the best portion of the 
market, and takes that. And that is what they have been holding 
primarily in their portfolio, even during those down-times, 
when we wish that the GSEs were doing the job which was the 
core mission to satisfy the underlying market.
    Mr. Robbins. I appreciate what you're saying, 
Representative. What I was saying is in this particular case, 
there was a day or two immediately following all of those 
events where there was no market, other than Fannie Mae and 
Freddie Mac. The private market was not there to support--I 
sold mortgages through those markets. And that's the kind of 
events that need the liquidity that we are talking about.
    What the MBA proposes is that a world-class regulator--
    Mr. Garrett. Yes, but again, that goes to what--Chairman 
Greenspan testified on those points, because we addressed the 
exact same points after the fact.
    Mr. Robbins. Well, I can tell you, after the First Gulf 
War, there was no market for 2 days following the announcement 
of the war. The mortgage-backed securities market was 
unavailable, while it tried to reprice itself.
    Mr. Garrett. And GSEs were in during those 2 days, picking 
up all those periods?
    Mr. Robbins. That's correct.
    Mr. Garrett. And that lasted after the 2-day period?
    Mr. Robbins. They posted a price, if memory serves, the 
afternoon that it was announced, and had a price the following 
morning.
    But beyond that issue, that's why we feel that a world-
class regulator should make the determination on what that 
portfolio size should be, and what the leverage should be on 
that. We know that outstanding mortgage debt is going to grow, 
according to Harvard University, some $20 trillion over the 
course of the next 20 years or so.
    And so, it is inconsistent today to sit there and think 
about what would be the right number to attach to the GSEs. 
That's why a strong regulator, world-class regulator, should be 
there, both as the market rises and falls in size, or rises and 
falls, should be the one to make that determination.
    Mr. Garrett. Okay. I saw a lot of other hands.
    Mr. Menzies. I would be the very last to question Mr. 
Bernanke's economic logic on the rise and fall of prices in the 
secondary market. As a community banker, I do know, however, 
that we need access to that market. And the 5,000-some 
community banks that belong to ICBA are basically small banks. 
We are little banks, and I don't know what we compose of the 
total secondary market, but it's not a whole lot; it's a fairly 
small percentage of the whole.
    So, having access to that market is critical. If you were 
to theorize that reducing the size of the portfolio, and 
setting capital limits, and reducing the quantity of loans that 
Freddie Mac and Fannie Mae can guarantee would, in fact, 
improve market prices, that is possible, I guess.
    Mr. Garrett. Well, no one is suggesting that would reduce 
the amount of loans that they are--would be able to go secure 
from them, but simply that they would no longer be holding the 
mortgages as they have, but instead would do what their core 
function is, to securitize those loans.
    Right now, one of the other testimonies was a testimony 
that they are only holding around a third of their loan in 
their--which is basically their core function--the secondary 
market loans.
    By reducing their overall portfolio to just a limitation in 
that area, how would that reduce your ability of liquidating in 
a market, if they were securitizing the rest of the market?
    Mr. Menzies. Well, yes, if you believe that is the case, 
then that would not hurt community banks. I think our concern 
is that it could hurt community banks if it reduced our access 
to the market.
    Mr. Garrett. Yes. Thank you, Mr. Menzies. Mr. Price? Yes, 
sure.
    Mr. Price. Yes. If I could speak briefly to the point?
    Mr. Garrett. Sure.
    Mr. Price. The Home Loan Banks are--and historically have 
been--a source of liquidity. In fact, they were an initiative 
of Herbert Hoover. And in December of 1931, he proposed both 
the Home Loan Bank Act, and something called the Reconstruction 
Finance Corporation. And on January 22, 1932, both bills were 
passed on the same day, by the Congress.
    The purpose of both, the Home Loan Bank Act and the 
Reconstruction Finance Corporation, RFC, of which Roosevelt 
made much greater use later, was to provide liquidity to the 
financial system. And the Home Loan Banks were limited at the 
time--as until recently--to the thrifts, whereas RFC made 
liquidity available to commercial banks, insurance companies, 
railroads, and through the banks for public finance to 
municipalities, as well.
    So, historically, our mission has been liquidity. And that 
is what we continue to be. We are an accordion. We will close 
down our balance sheet if members say, ``We don't need the 
money,'' we don't roll over our loans. We will go to the market 
immediately to fund a loan if a community bank comes into us at 
3:00 in the afternoon. We are in the market through our 
combined office of finance multiple times every day.
    So, liquidity is our business, and we think that, at least 
as far as the primary market is concerned, that that's why we 
are here, and that's why we are a tool of great usefulness to 
the folks you see around the table.
    Mr. Garrett. Well, would any of you, then, short of having 
a set number--as I think Mr. Menzies and other have stated, 
that you wouldn't want to have the lack of flexibility by the 
regulator--would any of you adopt an approach that Chairman 
Bernanke has suggested to address the issue of the affordable 
housing end of it, which he said--and I sort of alluded to 
this--he said, ``A straightforward means would be of anchoring 
the GSE portfolios to a clear, public mission would be to 
require Fannie Mae and Freddie Mac to focus their portfolios 
almost exclusively on holdings and mortgages or mortgage-backed 
securities that support affordable housing.''
    And then he points to your point, ``The evolution of 
mortgage markets since the GSEs''--since back then--``were 
created, strongly suggests that a concentration on affordable 
housing products would provide the greatest public benefit. 
Markets for the more highly rated assets, including most 
residential mortgages and the pools of the MBSs backed by such 
mortgages, have become extremely deep and liquid. With more 
than $25 trillion in outstanding instruments, these markets are 
international in scope, and market participants include 
thousands of banking organizations,'' and so on.
    So, his suggestion is that in the other market that the 
liquidity is much greater. But at that area that you're talking 
about, which was the original mission, is not so much. So does 
anybody want to comment on Chairman Bernanke's suggestion, 
maybe we should not put a limit on it, total number on it, but 
give the regulator some direction, as far as what the portfolio 
should be aimed at?
    Mr. Connelly. We support--America's Community Bankers 
supports a Federal Home Loan Bank like an affordable housing 
program that the regulator would have the power to oversee. And 
I think we have seen it work so well with the Federal Home Loan 
Bank system, where the Federal Home Loan Bank's contribution is 
tied to its profitability, along with its other obligations, 
and what not. And we have--there are so many creative programs 
that have come about as a result to create housing for low and 
moderate-income people.
    And maybe one of the more spectacular examples would be 
something like an equity builder program that the Boston bank 
has created, where it helps people who wouldn't be able to get 
into the market. It helps them with a portion of the 
downpayment, and a portion of money to help cope with 
discounted entrance fees, legal fees, and what not.
    So, I think the model that is working would be the Federal 
Home Loan Bank model, and we would encourage the committee to 
look at that model.
    Mr. Stark. Representative Garrett, if I could also comment, 
the portfolio, to kind of look at it for what it is, is a 
source of revenue for the GSEs. But they do use that revenue to 
build the size and scale to be relevant, and to provide 
liquidity to the marketplace.
    The holding of mortgage assets is somewhat of a zero sum 
game. If you take assets away from one entity, such as a GSE, 
it doesn't disappear; it is reallocated. And in the case of the 
American housing finance system, it would be reallocated to 
large-scale American financial institutions and global 
financial institutions.
    The only difference is those financial institutions don't 
have a charter, or a mission to serve the housing finance 
system, whereas Fannie Mae, Freddie Mac, and the Federal Home 
Loan Bank system do. To arbitrarily limit the size of their 
portfolio based on the size of their affordable housing 
mission, or their affordable housing loans, limits their 
revenue that they could make, and it limits the service that 
they can provide to the housing finance system, in general.
    The NAIMB and Lenders One would strongly oppose a policy to 
limit the size of their portfolio to their housing, low-
income--
    Mr. Garrett. They could still increase, if they were just 
earmarked for the affordable housing segment, but I appreciate 
your comment.
    Mr. Robbins. Could I add just two more very quick comments 
to this?
    Number one, we have seen the largest mortgage markets in 
history over the last 5 years--international buyers come into 
our marketplace and purchase strips of our securities to sizes 
never seen before, but that's no guarantee that those same 
investors are going to support this market to the size and 
extent that they have for the last 5 years.
    It is incredibly important that the GSEs maintain some 
flexibility relative to the size of their portfolios if, in 
fact, an American real estate-based security does not become 
the most popular financial asset to buy in the world.
    Number two, in many States, $417,000 is affordable housing.
    Mr. Garrett. Thank you.
    Chairman Kanjorski. Thank you, Mr. Garrett. Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman. First of all, since we 
have hashed this bill out in the past, we certainly have fallen 
to focusing on those few areas that we still have some level of 
discontent on, and I think that's good.
    Let me begin by saying, Mr. Connelly, you have at least 
three branches of South Shore Savings Bank in my district. I 
know you have one in Stoughton, you have one in Braintree, and 
you have one in--let me think, where else--East Bridgewater.
    Mr. Connelly. Glad you're keeping track.
    Mr. Lynch. You do a good job. Mr. Chairman, Mr. Connelly is 
our version of George Bailey. I don't know if you saw that 
movie, ``It's A Wonderful Life.'' He is a good corporate 
citizen, and not only in the financial sense, but also like a 
lot of our bankers, our community bankers, very much involved 
in the civic life of our communities, and the charities, as 
well.
    But it's important that we get this legislation right. Mr. 
Stern was kind enough to mention the article yesterday by 
Gretchen Morgenson in the New York Times about the looming 
mortgage crisis, and of course, she was speaking directly about 
the subprime market, but I think it affects all of us here.
    Since we are looking at this new regulator model, I wanted 
to ask a few of you--and, Mr. Robbins, you had mentioned in 
your written remarks--which were very good, by the way--about 
the bright line distinction that you would like to maintain 
between the GSEs and the primary market, and now we have a 
situation where we have had a fairly sharp uptick in the number 
of delinquencies associated with subprime mortgages. We have 
had two dozen mortgage lenders either fail or close their 
doors.
    We are waiting, as Ms. Morgenson noted yesterday, for the 
rating agencies--Moores, and Standard and Poors--to downgrade a 
lot of these mortgage-backed securities in the coming weeks and 
months, which I know as a former--I used to sit as a director 
on a pension fund--it will require a lot of our pension funds 
and insurance companies, because they're not allowed, under 
their guidelines, to hold lower classes of securities once 
they're downgraded; they will have to sell.
    That whole downgrading and sell-off is likely to drive 
these securities even further downward, and I am just concerned 
that may have a dramatic effect, generally, on the distribution 
of capital for mortgages.
    I would like to ask all of you, what do you see the effects 
of that being on your businesses, at least in your part of this 
mortgage industry? And what might we do here, in drafting this 
legislation? Can we learn some lessons from this meltdown in 
the subprime market? Is there something we can do to guard 
against that? Or, should we? Some people may say that this is 
the market just working, so leave it alone; this is the way it 
happens.
    But I would like to get your thoughts on it, if I could.
    Mr. Connelly. Mr. Lynch, from our perspective, I think 
probably the strongest thing that this committee could do would 
be to appoint a world-class regulator with the appropriate 
powers to oversee and regulate good behavior.
    Mr. Lynch. But, Mr. Connelly, that would necessitate--well, 
it would be in conflict with the idea that the regulator should 
not be active in the prime mortgage market in a way--the--some 
of the failings of these mortgages in the subprime market are 
happening in the origination process, where you have people who 
shouldn't be getting loans but are, in fact, getting them.
    It deals with the new program issue about new programs 
coming out, and you're going to have a regulator back here, 
saying, ``No, that's not an approved product,'' so it's going 
to affect some things that are helping our low- and very-low-
income folks out there.
    It's just that some of what you're asking for and agreeing 
to may have an effect on some of the issues that you're 
concerned about, and I'm wondering how that's going to play 
out.
    Ms. Petrou. It would seem to me, sir, that the key issue, 
as we look at the subprime situation, first from the GSE point 
of view--and there I think it's quite troubling--we don't have 
good numbers from Fannie Mae, and Freddie Mac. As you know, 
that's part of the problem this legislation is hoping to solve.
    But if you accept for the moment that the subprime sector 
is about $1 trillion, and then you look at the numbers that are 
available on the holdings of private label securities that 
Fannie Mae and Freddie Mac have, the bulk of which--again, 
we're not sure, may come from that market, and probably do--
Fannie Mae and Freddie Mac seem to have about 25 percent of the 
subprime, secondary market.
    Now, they are holding only the AAA traunches, i.e. the 
highest quality, or the lowest risk pieces. But behind that, 
are the mortgages themselves, and the borrowers. And I think 
what really concerns me is that we need to bring together in a 
new regulator, someone who looks both at the risk pieces, but 
also at the market issues.
    Because if a GSE is holding a AAA traunch, it may be 
protected. But that doesn't mean a vulnerable borrower whose 
mortgage was booked without any regard to capacity to repay is 
facing foreclosure. And that is a real tragedy. So we need to 
bring that together in a far better regulator than we have now, 
in my opinion.
    Mr. Lynch. Well, thank you. Mr. Stern, do you have anything 
to add?
    Mr. Stark. It's our opinion, in looking at this issue, 
that, in many cases, it was not actually the product, an 
individual product, responsible, but in fact, a layering of 
risk--in many cases, loan-to-value, credit, documentation.
    We believe that a lot of the products in the marketplace 
now were responsible for increasing homeownership in minority 
borrowers, and across America, such that we now have the 
highest homeownership rates that we have ever seen.
    We do believe that there are aspects, in terms of 
education, and in some cases, that we need to do a better job 
of policing our own industry for our long-term reputation, to 
make sure that when a borrower achieves the American dream 
through purchasing a home and getting a mortgage, it's for the 
intention of them being in the mortgage for a long time, 
because we do know some of these products contain features that 
set the borrowers up for risk.
    However, with regard to program development, we believe the 
regulator should only oversee program development when there is 
an issue of safety and soundness, or the mission, as it relates 
into the GSEs, their role in providing assistance for 
origination, technology such as DU, for example, should not go 
through the laborious process of full posting and comment 
review, which takes a long time.
    Mr. Lynch. Right. And just in closing--I agree with most of 
what you just said--but I think that one of the financial 
analysts yesterday in that New York Times article said that 
about 20 percent of the subprime, actually BBB bonds, that had 
been issued during 2006 will be downgraded in the next few 
months.
    Also, I think it was noted that some of these loans were no 
money down, some of the loans were so-called--this is the term 
they used--``liar loans,'' where there was very little 
information that was required in the application for the loan, 
and very little verification of an ability to repay.
    I am just concerned that we might not--if we're going to 
maintain that bright line between the GSE operating and the 
secondary market, and we still have these flaws in the 
origination process in the primary market, that we still may be 
having these problems, and I'm just wondering if there is a way 
we can get at that.
    Mr. Robbins. Yes. Mr. Chairman, a couple of thoughts. And 
to frame the size of the issue, to begin with, there are 
approximately 50 million home loans in the United States--13.5 
percent of those are subprime loans, with a foreclosure rate 
slightly over 4 percent today.
    Mr. Lynch. That's for the whole market?
    Mr. Robbins. That's for the subprime market, alone. The 
highest--
    Mr. Lynch.--say 12.9 percent, almost 13 percent--
    Mr. Robbins. That's total delinquencies.
    Mr. Lynch. Yes.
    Mr. Robbins. I'm talking about loans actually entering 
foreclosure.
    Mr. Lynch. Oh, I see. Okay.
    Mr. Robbins. The highest in the modern-day era, which 
includes hybrid loans, was in 2000 at 9.35 percent of all loans 
entering foreclosure. Today, because of mitigation techniques 
that the industry uses, about 50 percent of the subprime loans 
that enter foreclosure actually go through the entire process, 
and only about 25 percent of all loans.
    That being said, if you said that the all-time high was 
exceeded, and 10 percent of all subprime loans went into the 
foreclosure process, something like 5 percent will ultimately 
be foreclosed against, which means that about 95 percent of the 
recipients of subprime loans will ultimately be successful 
homeowners.
    This is important, only out of the respect that we know 
that 45 percent of the loans that were made were to people or 
borrowers to buy homes. And so--and those were people that, in 
all probability, could not use traditional sources in order to 
obtain that.
    Mr. Lynch. Right.
    Mr. Robbins. That being said, there is absolutely no 
question that there were lenders with this product that got 
very aggressive in their underwriting, in order to grow a 
market share, as happens in those kinds of cycles, and 
ultimately, the market being extraordinarily efficient, has 
punished them pretty severely, if not totally, for that 
aggression.
    The market itself, as I said, is extraordinarily efficient. 
It is much faster than most regulators and legislators in the 
sense that it--the aggressive parts of those products, or 
product features, have already been curtailed dramatically by 
institutional investors all around the world.
    And, quite frankly, the loans that are being made today, 
including subprime loans made today, are probably the best 
group of loans that have been made in the last 5 years, so we 
would argue that the market is extremely efficient, and has 
already moved to correct the mistakes that were made by the 
more aggressive companies.
    Mr. Lynch. That's a fair answer. Thank you, Mr. Chairman. I 
yield back.
    Chairman Kanjorski. The gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman, and I am going to 
apologize, because I'm about 10 steps behind everybody here. We 
are talking about Friday's bill as compared to last year's 
bill, and my first question is, what were the excesses of 
Fannie Mae, or Freddie Mac, or the Federal Home Loan Bank 
organization that we're trying to solve by the bill that was 
coming down the pike last year, and has that been improved this 
year?
    Mr. Stevens, or Mr. Robbins, could you tell me what those 
excesses are that we're trying to do by this super-regulator, 
just to get me into the right timeframe here, because we're 
talking about the subprime loans, and subprime loans, that's 
today's problem. And you know, we had a lot of money chasing 
some lousy loans, quite frankly. That's the problem there.
    And, Mr. Stern, you know, you have Fannie Mae and Freddie 
Mac backing you up on many loans. You also had some other 
securities buyers backing you up on other kinds of loans. 
Fannie Mae and Freddie Mac, I have always understood had 
certain qualifications, and you had to have a certain quality 
factor to your loan before they would purchase it in the 
secondary market, and maybe some of these other companies were 
buying, you know, slightly crummier loans.
    But my question is, what were the excesses that created 
this need in the first place, for a super-regulator?
    Mr. Robbins. I think, first and foremost, the super-
regulator was there to take a look at a host of different 
things.
    The first one is the size of the portfolio. Does the size 
of the portfolio, and the leverage behind that portfolio, 
contain systemic risk, and if it does, does it need to be 
paired down to a size that meets market demand, but is not a 
portfolio used for investment purposes in order to inflate 
earnings?
    Mr. Perlmutter. Was that more of an accounting issue, that 
they were inflating the--what was the problem there? How does 
this regulator now stop Fannie Mae or Freddie Mac from 
inflating their earnings?
    Mr. Robbins. Because they have the ability to control the 
size of those portfolios by ordering them, as an example, as a 
bank regulator would do as they supervise a bank, order them to 
downsize the size of their portfolio, and to shed themselves of 
certain assets.
    In other words, they would determine the size that 
portfolio would need to be, in order to meet its market demands 
and provide liquidity to the system.
    Mr. Perlmutter. Okay.
    Mr. Robbins. Number two, they would determine what their--
whether they are holding true to their mission charter. That 
is, providing low- to moderate-income housing, and providing 
liquidity to a system.
    They would determine whether they were operating within 
their secondary market charter, or they were moving more into 
the primary market, which--the concern then becomes they are--
they enjoy certain benefits that would represent unfair 
competition, moving into a primary market, and essentially 
threatening organizations that operate within that area.
    So, a big piece of this resolution would be control 
products, do those products represent safety and soundness 
concerns? Size of portfolio control, mission control, primary 
versus secondary market activities, monitor low-income housing 
goals. Are they realistic? In other words, it's important that 
they be goals that are obtainable at some point, without 
destroying the primary market.
    Mr. Perlmutter. The bottom--
    Mr. Robbins. Those kinds of issues.
    Mr. Perlmutter. The bottom line being if they're going to 
get assistance from us, as the United States of America, they 
need to stay within their mission and not grow their portfolio 
just to be the biggest, you know, underwriter in the world, or 
whatever?
    Mr. Robbins. And, ultimately, not present some kind of a 
systemic risk to the system, which is one that would affect the 
overall financial system--i.e., the name systemic behind it. In 
other words, if the GSEs were to implode for some reason, it 
could have a rippling effect through the entire economy.
    Mr. Perlmutter. Do you think the bill that Chairman Frank 
filed on Friday, do you think it handles this key piece, you 
know, the excess of just growing too large, or trying to go 
into areas that thy weren't initially supposed to go into? Does 
it handle that?
    Mr. Robbins. I think that the Mortgage Bankers Association 
is pleased with the bill, the way that it has been released.
    Mr. Perlmutter. Now, I have--that was just sort of getting 
me on the same page with everybody.
    I am sort of a child of the 1980's. When there was plenty 
of bank regulation and thrift regulation, and banks were 
failing, and thrifts were failing, and mortgage banks were 
failing, you know, so you can regulate like crazy sometimes, 
and still, the market turns on you. It might be a product that 
is bad, or it's just a bad time.
    Is there discretion within--are we, in this legislation, 
setting down firm numbers, or are we giving the regulator 
plenty of discretion, and he is going to allow the individual 
Fannie Mae, Freddie Mac, Federal Home Loan Banks some 
discretion to develop or deal with their portfolios? Are we 
setting it down?
    Because we had to change a lot of laws back in the 1980's 
to drop interest rates and things like that. Does my question 
make any sense? I mean, is there flexibility in this bill, or 
are we trying to legislate, instead of provide the regulator 
with some discretion, which then can allow the Fannie Mae, 
Freddie Mac, and the bank boards some discretion? Mr. Stevens?
    Mr. Steven. Well, I think the bill--you know, again, it 
just came out Friday, so we're still looking at it. But I 
think, overall, from what we can gather, this bill does do just 
that. It doesn't over-regulate; it gives the regulator the 
authority to make the proper adjustments. I think that's what 
is key in keeping the housing market moving forward.
    I think it does accomplish that, it doesn't over-regulate, 
and I would say that, you know, that is something that is a 
fine line, and we want to be cautious of it.
    Mr. Perlmutter. And then, just as a follow-up, Mr. Menzies, 
I can tell you that with respect to the farm credit system, 
they--we should take care of this first, and then deal with 
that later, because they will fight like crazy to stay where 
they are, just having been interviewed by them on the campaign 
trail, so--
    Mr. Menzies. The chairman was perfectly clear about that.
    Mr. Perlmutter. Okay.
    Mr. Menzies. Thank you.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    Chairman Kanjorski. Mr. Murphy?
    Mr. Murphy. Thank you, Mr. Chairman. I wanted to return for 
just a moment to Mr. Lynch's line of questioning, so that maybe 
I can better understand the limitations of GSE reform, as it 
relates to the topic du jour of subprime lending. And maybe 
this is to the panel, but specifically to Ms. Petrou and Mr. 
Connelly, who both suggested that part of our response to the 
subprime lending issue is a world-class, or effective, 
regulator.
    And given the fact that GSEs, as Ms. Petrou said, hold only 
about 25 percent of the subprime loans, only that top traunch 
that--are sent out into the market. Beyond that top level of 
subprime loans, what is the ability of GSE reform to really 
affect some of the issues happening at the origination of many 
of these subprime loans?
    It just seems that maybe we do need to have a broader 
conversation about a more comprehensive regulatory system that 
takes into consideration many of the excesses within the 
subprime market. I just am not seeing right now that GSE--or 
maybe I should ask the question. What are the limitations of 
reform of GSEs, in terms of some of the things we have been 
seeing within the subprime market?
    Ms. Petrou. The limitation, I think, is that the GSEs are 
only a part of the market, and so that which is not theirs 
would not be affected by the GSE regulator.
    But a good regulator looking at both credit risk and market 
risk, and ensuring that the GSEs meet their mission, which is 
not only to serve affordable housing, but also to support a 
liquid and, importantly, stable residential mortgage market, 
would make a great difference.
    As has been said on this panel, mortgage brokers and many 
mortgage banks originate mortgages to sell. If they cannot sell 
them, they will not make them. If they cannot sell--if a 
mortgage secondary market purchaser looks at this and says, 
``Wait a minute. The income line on this mortgage is blank, 
this is a stated income loan yet this is''--I just was reading 
today a story about an 89-year-old home health care worker who 
refinanced her mortgage into a hybrid ARM, raising her mortgage 
payments from about $800 a month to $3,000 a month.
    Now, that loan was originated and sold into the secondary 
market, because no one was looking carefully at its terms. A 
good regulator for the GSEs who says to them, ``These are 
unsafe, unsound, predatory loans, you may not purchase them,'' 
would have a major impact on the market, as a whole, because if 
they can't sell them, they won't make them.
    Mr. Murphy. So, some of this is doing a better job of a 
regulator deciding what gets into the secondary market, rather 
than trying to influence origination?
    Ms. Petrou. Yes, sir.
    Mr. Robbins. The GSEs are not a regulator. They are an 
investor in mortgages. And the real answer, I mean, to the 
question that you have asked, is that the GSEs had no 
supervision over the subprime lenders, even remotely, because 
they originated a class of product that the GSEs were not 
purchasing, I mean, other than in an--out of the marketplace, 
in a AAA strip. So, they really fell under, if you will, the 
radar screen, relative to regulation in that respect.
    Mr. Murphy. Right. And I'm sorry if I misspoke. I certainly 
understand that the GSEs aren't regulators. But I guess that 
was the point of my question, is to make sure that we are not 
expecting this reform bill to have, you know, a major impact on 
the issue of subprime lending.
    My second question is more to Mr. Menzies. You specifically 
raised a concern that GSE reform may have some impact on the 
ability of small, community banks to access that secondary 
market, and I would maybe just ask you to expand on that 
concern.
    Because as someone new to this issue, the question how much 
a secondary mortgage holder may be able to keep in their 
portfolio versus how much they may be able to securitize 
doesn't strike me as a barrier to access from smaller banks. It 
merely is a question of how much the GSE may be able to hold, 
and how much they may be able to send out for securitization. 
So, maybe just speak a little bit more on how portfolio 
standards are going to limit a small bank's ability to get into 
that market.
    Mr. Menzies. As Mr. Stern pointed out, when you contract 
the GSE, or reduce its portfolio, you reduce its income, you 
reduce its ability to have liquidity and flexibility, and the 
like.
    It may well be that, by saying you can only have so much in 
portfolio, that you don't restrict access of community banks to 
the capital markets. But the reality is that the lion's share 
of portfolio loans are coming out of the larger institutions, 
not the smaller institutions, so, our concern would be that, 
however it goes down, we continue to have access to those 
markets, and that the bill doesn't unintentionally create an 
environment that supports the larger volume institutions and 
doesn't support the smaller volume institutions. If we do $103 
million worth of loans over a 4- or 5-year period of time, that 
is somewhat beneath the drop in the bucket. It's really a very 
small amount of money.
    So, it may be that, by restricting portfolio size, it 
doesn't reduce liquidity or access to the markets for community 
banks, but that certainly is our concern.
    Mr. Murphy. And is there anything beyond giving more 
flexibility on portfolio standards that we could do within this 
legislation to make sure that small lenders with very small 
pieces of the pie still have access to the secondary market?
    Mr. Menzies. Absolutely. We have lived, since the 1980's, 
when it all came apart, in a world of risk-based banking, and 
you can promulgate legislation and capital requirements that 
are truly risk-based, not just arbitrary, or some number.
    I have lived in a risk-based world for the past 15 years, 
and it's worked quite nicely, thank you. I think that our 
regulators have done a great job of looking at our risks, at 
telling us what risks were acceptable, and telling us what 
risks were unacceptable, and there certainly would appear to be 
some risks that have gone into the GSEs that today, in 
hindsight, may be unacceptable risks. But risk-based capital 
should drive the capital requirements of the GSEs, I believe.
    Mr. Murphy. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you. We now have an opportunity 
to go to the other side of the aisle. And before I recognize 
Mr. Baker, may I say that his time spent on this issue over the 
last 7 years may be coming to a final, successful conclusion.
    So, I welcome my good friend from Louisiana, who is a major 
contributor to this process now. Mr. Baker?
    Mr. Baker. I thank the gentleman for his kind words. 
Actually, I started causing trouble almost 15 years ago on this 
subject, and it's amazing to me that we are now talking, still, 
about a bill. But I know the gentleman's leadership will cross 
the finish line.
    I wanted to return, just for a minute, for just a broad 
statement about the purpose of the underlying legislation, 
which is regulatory in nature, and to review the facts that for 
some time, the enterprises engaged in leveraging resources that 
were inherently guaranteed by the taxpayer for the charter 
purpose of facilitating first-time ownership opportunities for 
those otherwise not likely to get access to affordable credit.
    On review of their practice, however, we found, over time, 
that their involvement in minority, women, first-time homebuyer 
participation not only did not lead the market, but in fact, 
trailed the market, and that the apparent utilization of the 
taxpayer guarantee was transferred over to the shareholder 
side, which enabled the enterprise, in good and bad financial 
markets, to make significant profit.
    That, then, led some to question, ``Where is the regulator 
in all of this? Shouldn't we get these folks focused on their 
mission? And is it the right use of a taxpayer guarantee to 
make shareholders double digit rates of return, when the rest 
of the market is going sideways?'' The answer, generally, was, 
``Well, we at least ought to look at it.'' And I think, now, 
with the underlying bill, we have provided the regulator with 
some tools to make some of those judgements.
    As to the problems of the existing portfolio and its 
distribution in the market, there is one very clear point that 
has always troubled me--and I don't believe it was mentioned 
here today--and that is among our insured financial 
institutions, for meeting their tier one capital requirements, 
about 70 percent or more of those institutions now meet those 
capital requirements by holding GSE securities. I was told by 
an FDIC person some time ago not to worry, that was really 
broad GSE debt. So I took great comfort in the fact that must 
have meant Farmer Mac. So I knew I wasn't worried, then.
    Despite that fact, a significant amount of Fannie Mae and 
Freddie Mac debt are held by financial institutions as 
collateral for the day in which the bank has a difficult 
circumstance on its hand.
    Secondly, when MBS was first developed and sold earlier, 
Freddie Mac and Fannie Mae representatives indicated they would 
not consider purchasing their own MBS, which now we know they 
do quite readily.
    And one may argue that a large portfolio makes a great deal 
of sense if you're in the midst of a liquidity crisis, because 
the Chinese currency goes sideways. But the idea that several 
billion dollars of dollars of your own mortgage-backed 
securities are held in your own account does nothing but 
transfer the risk that was originally designed to be moved to 
the broader market; it is now brought back onto the books in 
order to yield the higher earnings that are provided by holding 
that MBS in portfolio. And it does nothing for housing--
nothing.
    And so, the debate over portfolio today, which a few years 
ago was repeal of the line of credit, which before that was 
some other issue, really is diversionary from the underlying 
purpose of the legislation, which is to have a gatekeeper 
worthy of its merit, standing between the activities of these 
enterprises, which are shareholder-owned, and business-driven 
institutions, and the guarantees of the United States taxpayer, 
which stands behind the hopefully unlikely, not to be expected 
sideways event which could occur at some point, therefore 
minimizing the scope of loss, with a regulatory shop of 
significant competency.
    I believe that the bill now drafted and pending before the 
committee to be considered within the next week or so to be a 
good product, on the regulatory side. I don't know whether or 
not we have gone quite far enough on the portfolio side, 
although I recognize that is somewhat of a managerial decision.
    Since the enterprises were constructed to help get access 
for low-income individuals to housing, there should be some 
inherent risk involved in that portfolio, if they are 
facilitating product that enables that to occur. That's a 
balancing act, as against the shareholders, who are expecting 
financial reward for a well-managed company, and not to take 
unwarranted risk.
    So, there is a managerial conflict we cannot preclude, nor 
should we try, I think, in a policy to step in between good 
management and shareholder resources, and tell them, ``You 
simply cannot do this.''
    I think the bigger question, which hopefully will not be 
drawn into this discussion, is what constitutes inappropriate 
lending practices? What constitutes predatory? What is it that 
people are doing in the market that is not already a violation 
of Federal or State law, and let's get after that. That seems 
to be a much more difficult task in designing and coming up 
with the appropriate remedy.
    But I do believe it is important for members of the 
committee to revisit the initial underlying issues for having 
the bill at all. The bill is needed to ensure that taxpayers 
are protected from hotshot management, and let me just say one 
quick word on that point.
    There were 5 years of financials which enabled, because of 
hitting the earnings per share target, to the one-ten-
thousandth of a cent accuracy--and I was told it was a 
statistical fluke, it just happened--that triggered $250 
million in bonuses paid out to top executives over a 5-year 
period, on which there is now significant question as to if the 
financials were accurately accounted for. That, in itself, 
should be enough for this committee to act in a meaningful way.
    But there are far more issues than just fudging the books 
and not providing the adequate incentives for individuals to 
get access to housing. And I believe the bill which the 
chairman has before the committee today is an excellent first 
start, and I hope we do not step aside from the principal goal.
    And with that statement, I just wanted to ask, is there 
anything in the regulatory side of this bill that causes any of 
you at the table any discomfort? Anything we missed?
    We hadn't talked, I don't think, much about portfolio 
regulation, but I believe putting that authority in the hands 
of the director, given the authority the new director will 
have, is quite sufficient. Anybody want to comment?
    Mr. Connelly. Mr. Baker, America's Community Bankers thinks 
that the bill is a great start.
    And I am delighted that you pointed out that for several 
years Fannie Mae and Freddie Mac haven't been able to produce 
financial statements. This clearly represents a huge internal 
control issue. What additional justification for better 
regulation is needed, when you think about it?
    Mr. Baker. Well, my comment would be if any other public 
company had a multi-year, multi-billion dollar misstatement of 
financials, and could not certify their accounting, I don't 
know how they would effectively survive on Wall Street, going 
into year six. But that only points out, I think, the belief 
that many have in the market that the U.S. Government will 
stand in and do what's necessary, in the event bad things 
happen. And that's what we have to fix. Anything else?
    Mr. Stern. Mr. Baker, just to respond to different sides, 
you know one part of the mortgage industry a lot better than I 
do. And I know the origination side very well. And just a view 
from what's going on in the market, for a second. You had 
talked about the role of the GSEs, and their effectiveness in 
creating--in providing low to moderate-income housing, and 
their success in their mission.
    The reality of the recent marketplace is borrowers had 
choices. You could have a GSE loan with 5 percent down, or a 
private loan with zero percent down. Well, what do you think 
the borrowers took? They took the zero percent down. They could 
have a loan with full pay stubs and bank statements and tax 
returns, or they could have a loan with no pay stubs and bank 
statements and tax returns? Well, what do you think the 
borrowers took? No pay stubs, no bank statements.
    So, the GSEs market share was affected not because they 
lowered their standards, or because they weren't doing their 
mission, but because products existed that said to the 
borrower, ``You don't need a downpayment, you don't need tax 
returns, you don't need bank statements.'' And look what 
happened.
    It was not the GSEs and--but--and their performance, and 
their achievement of their mission where the problem has been. 
In fact, I would say if there was anything that the GSEs have 
done incredibly well, it is the products they put into the 
marketplace, and the regulations they have which give us 
suitability and uniformity with investors across the world. But 
we are going to go through a correction in the private 
marketplace, the unregulated marketplace. But if anything, it 
is not the GSEs, and their area of product.
    We do applaud the efforts of a strong, world-class bank-
like regulator, for purposes of things like their accounting. 
But, if anything, I think that the GSEs are doing well. It is 
their products and the role they are playing in the market, in 
that regard.
    Mr. Baker. If I will--my time has long since expired, and 
just with the deference with the chairman, I have some 
differences with the statement in that I do believe that when 
you look at the number of mortgages held in portfolio by the 
GSEs over time, you will find them to be less than 2 percent, 
in most cases, of the kinds of individuals that they should be 
helping. And you will find that, in most cases, the average 
housing cost is somewhere north of $200,000, with 2 working 
incomes, the dog, the cat, the Chevrolet, and the Ford.
    It is middle America that makes up Fannie Mae's portfolio, 
and that's where they make their money. And the mismatch which 
caused the trouble was internal managerial fluffing to get the 
numbers where they needed to be to make themselves look right, 
and that's what caused the ultimate demise. It wasn't a market 
failure, it was a managerial failure that got them to this 
point in time.
    Chairman Kanjorski. Thank you, Mr. Baker. Finally, Mr. 
Price?
    Mr. Price. Mr. Chairman, I can't speak to Fannie Mae or 
Freddie Mac, but Mr. Baker, before you came in, there was some 
discussion about the public independent directors. And in 
response to your question, let me raise one thing for the 
consideration of the committee.
    Our bank, like all the other Home Loan Banks, has been very 
seriously taking its responsibilities to find appropriate skill 
sets--that were alluded to earlier by panelists here--for 
members of the boards to be appointed or selected as the 
independent directors.
    One thing we are finding, even looking at non-establishment 
figures, Mr. Chairman, is that many of the people whom we had 
short-listed as having competencies in either rehabilitation 
housing, home building, community development, public finance, 
derivatives in complex financial instruments, audit and 
accounting, we are finding that the bulk--more than 60 percent 
of the folks that we had first thought might make great 
directors--are disqualified, because the statute evidently says 
that no person may serve as a public independent director who 
owns one share of any member institution of the Home Loan Bank 
in that geography.
    So, if you had a community development person, an executive 
director of a local community development authority, who 
happened to own a share of stock in Sovereign Bank in 
Pennsylvania, or a community bank, or Citibank, which is one of 
our customers through Delaware, they would be disqualified to 
serve.
    So, I simply put that in front of the committee for 
consideration as part of this legislation. Thank you.
    Chairman Kanjorski. Thank you, Mr. Price. And now, finally, 
the gentlelady from New York, Mrs. Maloney.
    Mrs. Maloney. I thank you, Chairman Kanjorski, and I thank 
all the panelists today. And first, I want to congratulate 
Chairman Frank, and really, Congressman Baker, for their 
introduction of the GSE reform bill, and compliment Mr. Baker 
for his long-standing leadership.
    I think this is a strong and balanced bill, which builds on 
the bill we passed last year, and I also want to compliment 
Chairman Kanjorski's work with Treasury. I fully support it.
    When I first came to Congress, the very first bill I voted 
on--the one that I remember--was the bail-out of the S&Ls, the 
savings and loans, to the tune of billions of dollars. It was a 
tough thing for a freshman who won by less than 1 percent to 
vote on, but I voted on it, and we bailed them out. But still, 
I believe strongly in strict regulation and strong attention to 
safety and soundness.
    And I am particularly concerned with the safety and 
soundness provisions in this bill, the capital, new product 
review, and portfolio proportions that the witnesses commented 
on. I would like to build on the questions of Mr. Lynch, Mr. 
Perlmutter, and Mr. Murphy, and ask Ms. Petrou, all--happy St. 
Patrick's Day, by the way, Mr. Murphy--by the way, I wanted to 
ask Ms. Petrou about the closely related safety and soundness 
issue, which is the GSEs' involvement in the subprime market, 
and their exposure to the crisis that is going on in the market 
right now.
    Freddie Mac announced that they will no longer buy subprime 
hybrid mortgage loans, and they basically said that they would 
follow the guidance that came out from some of the regulators, 
that they would--you should no longer issue loans that the 
consumer cannot pay for.
    And I would like to ask Ms. Petrou if you believe that the 
other GSEs should follow Freddie Mac's leadership in basically 
saying that they will adhere and follow the new guidance. As 
you so eloquently said earlier in response to Mr. Murphy, if 
you don't buy the product, they're not going to make the 
product.
    And as was pointed out by the gentleman recently, Mr. 
Stern, you were saying they are selling loans where you don't 
have to show your income, you don't have to show any record of 
making your sales, of being loyal--your creditworthiness. So, 
if you don't have any creditworthiness, should we be surprised 
that there appears to be a crisis in the market?
    I, too, read the article that Ms. Petrou talked about. It 
was on the cover of the Wall Street Journal. I would like to 
put it in the record, with unanimous consent, where basically, 
a woman had an $800 a month loan, and she is older and 
confused, and they ended up selling her a $4,000 a month loan, 
which she could not afford, and she is in the process of losing 
her house.
    So, I would like to hear your comments, and anyone else's 
comments, on having the GSEs follow the guidance that has come 
out from the regulators, which Freddie Mac has voluntarily 
adhered to.
    Ms. Petrou. Thank you. I think it is a very good thing that 
Freddie Mac has made this statement about hybrid ARMs, and the 
qualifications it will look to, that the banking agencies 
Friday a week ago came out with standards, and OFHEO a while 
ago asked Fannie Mae and Freddie Mac to comply with the 
guidance issue last year on traditional mortgages, and one 
would expect that it would likely do the same, once the banking 
agencies finalize the subprime guidance.
    But what really concerns me is not so much looking forward, 
but looking at where we are now, and saying, ``Oh, heavens, I 
just won't buy any more hybrid ARMs, you know, with stated 
income, and all of these other criteria.'' Well, what about the 
borrowers who are in them now, and the risks which were 
palpable and obvious then?
    And I think that speaks to the urgent need for good 
regulation, because we have a lot of hurting homeowners out 
there. And forward-looking reform is critical, but we also need 
to think through why we are where we are, both from the 
borrower and the lender and the GSE point of view, because it 
is a very distressing picture at this point.
    Mrs. Maloney. Well, following up on your statement, why do 
you think we are where we are?
    Ms. Petrou. There was another very good article in the New 
York Times on Sunday by Ben Stein, who said that too many 
teenagers were running things. I think I'm up in age now where 
I agree with that.
    People forgot that subprime is higher-risk. Higher risk 
means more losses. Lack of documentation invites fraud. Lack of 
risk-based capital--Mr. Menzies is very right about that. The 
OFHEO risk-based capital rule now does not capture credit risk. 
It is ratings-based.
    This was an issue built in by Congress when you enacted the 
1992 Act without the ability--which, of course, could not have 
been done--but by hard-wiring the GSE capital rules in 1992, 
they do not capture market realities now, and they do permit a 
tremendous amount of gamesmanship, regulatory capital, 
arbitrage, and perhaps creating undue market incentives for 
inappropriate risk taking.
    Mrs. Maloney. I would say that in the past it was very 
uncomplicated. I grew up in a small town, and our neighborhood 
community banker knew everyone. He knew their credit depth. He 
knew everything about them, and he didn't give out loans that 
they couldn't pay back.
    And to what extent do you think the increase in loan 
originators, entities offering homeowners mortgages made 
possible by the huge growth of the GSEs, how much do you think 
these sort of new loan originators have contributed to the 
present subprime problem, and what can we do about it through 
GSE regulation?
    We certainly want to expand available credit, but expanding 
credit is really, in some cases, in conflict with safety and 
soundness. Have we gone too far in allowing so many entities to 
get involved? I invite anyone on the panel to respond.
    Mr. Menzies. If I could speak as a community banker, we do 
know most of our customers on a personal basis. And we do write 
subprime loans, but we don't put them in the secondary market.
    We may do 100 loan to value loans, as a community bank, and 
Daddy will guarantee 20 percent, and the kids will do 80 
percent, and we will put it on our books, and after 3 or 4 
years, when the double income has grown up, then it goes into 
the secondary market. And we do that on a regular basis.
    ICBA Mortgage Corporation generated about an $800 million 
or $900 million mortgage portfolio with RMS, our servicing 
vendor, over about a 6-year or 7-year period of time. And that 
mortgage portfolio that came strictly from community banks was 
the best performing portfolio in the entire $30 billion RMS 
portfolio.
    Community banks generally write the 30-year, 15-year, 
fixed-rate, plain vanilla ordinary loan, and don't generally 
get into the subprime type credits. So, my answer would be to 
appoint a strong regulator, and make that strong regulator do 
risk-based capital allocations, the same way I do. If I write a 
loan, and the FDIC comes in and they look at it, and they say, 
``We don't like that loan,'' then I have to appropriate more in 
reserves. And they grade my risks, based on the risks that we 
take. And we set aside reserves, based on the risks that we 
take.
    So, my perspective would be risk-based capital, and a 
strong regulator.
    Mrs. Maloney. To some extent, the affordable housing goals 
set for the GSEs, our intention with any tightening of credit, 
no matter how necessary, and is there enough guidance and 
authority in this bill to allow the new regulator to properly 
shape that balance? Anyone?
    Ms. Petrou. I would say that the new bill, as I quickly 
read it over the weekend, contains language that does, first of 
all, I think aligns the GSE affordable housing goals better 
with those applicable to banks under the Community Reinvestment 
Act, so that the definitions of low and moderate income are 
more appropriate. I think that will help serve the market 
better.
    But the regulator does have the authority to review those 
goals, and reset them, if safety and soundness concerns are 
presented. Right now, that is not possible, because the goals 
are solely under the guidance of HUD, and HUD is not a safety 
and soundness regulator. So that balance, under current law, 
does not properly exist.
    Mrs. Maloney. Do you think we should write legislation that 
would apply the guidance rule that Freddie Mac is now 
following, do you think we should legislate it so that all 
housing GSEs must follow it? Would that bring more safety and 
soundness to the markets?
    Mr. Robbins. It--I would argue--well, number one, Freddie 
Mac said that they would continue to buy hybrid loans, but only 
ones that were underwritten at the fully indexed rate.
    Mrs. Maloney. Right.
    Mr. Robbins. The problem with underwriting loans at the 
fully indexed rate is that it will literally take away the 
opportunity for thousands of homeowners to purchase homes. I 
went through some statistics earlier that are in the record for 
your observation, and I want to go over them again and take--
but one of the things that we need to separate in our minds is 
the difference between loan products that were used to help 
homeowners get in homes and predatory loans. They are two 
different types of issues.
    Predatory loans--the 80-year-old, or 85-year-old lady--are 
unconscionable, and everybody in the industry wants to see the 
perpetrators of those kinds of loans dealt with.
    The products that help homeowners get into homes are the 
issue, and we would argue that loan products, whether they are 
228s or negatively amortized, or interest only, used properly, 
are extremely valuable in getting homeownership to near-record 
levels, where it is, especially with minority Americans, and 
would argue that it would be improper to put undue restrictions 
on loan products, other than dealing with the people who use 
them improperly.
    Mrs. Maloney. But, basically, the guidance, as I read it, 
said you don't give a loan to someone who can't pay for it. And 
I think that makes common sense, that we don't give a loan to 
someone who can't pay for it.
    Mr. Robbins. We--
    Mrs. Maloney. In other words, if you have a law student who 
is going to be paid a lot of money next year, they can take the 
hybrid loan. But if you have an 85-year-old woman on a fixed 
income, you don't sell her a loan that she can't pay.
    To me, it seemed like good guidance that made common sense, 
and--
    Mr. Robbins. We at the Mortgage Bankers Association 
absolutely agree with you. I can tell you, from personal 
experience--I have been in the mortgage banking business for 36 
years--a foreclosure costs us $40,000. And so, our economic 
interests are 100 percent aligned with the borrowers in this 
case.
    And as I had mentioned earlier, there were some aggressive 
players in the industry who wanted to grow market share. They 
did sell through very aggressive underwriting, and are paying 
the price for that today. And so, underwriting a loan, and 
providing that instrument to people who you think have the 
capacity to repay that loan, are still imperative within this 
industry.
    Mrs. Maloney. Well, my time is up. I thank the chairman for 
this hearing, and all of the panelists for testifying.
    Chairman Kanjorski. Thank you. Just an observation on your 
question, if you can't get a loan if you can't pay for it, it 
seems to me that the U.S. Government should have a tough time 
getting a loan.
    [Laughter]
    Chairman Kanjorski. Having made that observation, I do want 
to ask one other question, something that is the jurisdiction 
of this subcommittee--insurance.
    Has anyone done an analysis of the credit problems in the 
subprime lending market, and its draw on mortgage insurance, 
whether or not that will risk the mortgage insurance firms, and 
therefore, expand the risk to otherwise good paper in the 
marketplace?
    Ms. Petrou. Mortgage insurance firms generally do not 
provide coverage on subprime mortgages. Their focus is on the 
prime market. So, the immediate concern for the private 
mortgage insurance industry is not significant.
    However, there is considerable concern for the Federal 
Housing Administration, because the FHA and the Federal 
Government do back many loans which might be, by virtue of the 
risk of the borrower, considered to be subprime.
    Chairman Kanjorski. Very good.
    Mr. Stern. Just to reinforce, we do a limited amount of 
subprime loans, but to concur, those ones typically do not need 
private mortgage insurance, so the subprime loans are not a 
drain on the mortgage insurance market.
    Chairman Kanjorski. Very good. Thank you. Mr. Baker, do you 
have any other questions?
    Mr. Baker. I just want to thank you for your leadership on 
this, and I look forward to working with you, Mr. Chairman.
    Chairman Kanjorski. Mr. Garrett, I want to thank all the 
members that were here. This is a tough day to have a hearing, 
a Monday, when they are in travel.
    I particularly want to take this opportunity to thank the 
panel, and make an observation, because so much of the panel is 
involved with community banking, either directly or indirectly. 
Although I don't necessarily have the most famous reputation in 
town as an advocate of community banking, I want to disgorge 
that thought process.
    In reality, I am interested in the proper operation of the 
Federal Home Loan Bank system, and the success of Freddie Mac 
and Fannie Mae. It is primarily because I am acutely aware, 
coming from Pennsylvania, of how intricately involved and 
successful the community banks are in providing for an area 
that otherwise would not be provided for, if we had to rely on 
the huge institutions of this country.
    So, the fact that so many of you have connections, 
interests, or represent the community banks, I want to thank 
you for your testimony. We certainly want to take that into 
consideration. This is obviously not a credit union bill, this 
is a community bank bill, and we are going to protect the 
community banks in this instance, as we would the credit 
unions, if they had an issue here. So, thank you very much. I 
appreciate your attendance.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses, and to place their responses in the record. This 
hearing is adjourned.
    [Whereupon, at 4:18 p.m., the hearing was adjourned.]


                            A P P E N D I X


                             March 12, 2007


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