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




 
                      OVERSIGHT HEARING TO EXAMINE
                    RECENT TREASURY AND FHFA ACTIONS
                       REGARDING THE HOUSING GSEs

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 25, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-142


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 25, 2008...........................................     1
Appendix:
    September 25, 2008...........................................    55

                               WITNESSES
                      Thursday, September 25, 2008

Allison, Herbert M., Jr., President and Chief Executive Officer, 
  Fannie Mae.....................................................    36
Lockhart, Hon. James B. III, Director, Federal Housing Finance 
  Agency.........................................................    11
Moffett, David M., Chief Executive Officer, Freddie Mac..........    38

                                APPENDIX

Prepared statements:
    Bachmann, Hon. Michele.......................................    56
    Brown-Waite, Hon. Ginny......................................    58
    Kanjorski, Hon. Paul E.......................................    60
    Allison, Herbert M., Jr......................................    62
    Lockhart, Hon. James B. III..................................    67
    Moffett, David M.............................................    83

              Additional Material Submitted for the Record

Bachmann, Hon. Michele:
    Letter to Hon. James B. Lockhart, signed by Members of 
      Congress, dated September 11, 2008.........................    86
    Article from Investor's Business Daily, ``How A Clinton-Era 
      Rewrite Made Subprime Crisis Inevitable,'' by Terry Jones, 
      dated September 24, 2008...................................    89
Kanjorski, Hon. Paul E.:
    Written statement of the Massachusetts Bankers Association...    91


                      OVERSIGHT HEARING TO EXAMINE
                    RECENT TREASURY AND FHFA ACTIONS
                       REGARDING THE HOUSING GSEs

                              ----------                              


                      Thursday, September 25, 2008

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 12:08 p.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[member of the committee] presiding.
    Members present: Representatives Kanjorski, Waters, Watt, 
Sherman, Capuano, Lynch, Miller of North Carolina, Green, 
Ellison, Wilson, Perlmutter, Murphy, Speier; Bachus, Castle, 
Royce, Biggert, Shays, Capito, Hensarling, Garrett, Brown-
Waite, and Bachmann.
    Ms. Waters. [presiding] The Committee on Financial Services 
will come to order. This hearing is an oversight hearing to 
examine recent Treasury and FHFA actions regarding the housing 
GSEs.
    I will yield myself as much time as I may consume. Let me 
start by saying that Chairman Frank and, I suppose, 
Subcommittee Chairman Kanjorski, should be joining us shortly. 
I think the world knows where Mr. Frank is today and what he is 
doing.
    And, of course, the hearing that we are having today is a 
hearing that is absolutely necessary based on the recent 
actions that stunned many of us with the takeover of Fannie Mae 
and Freddie Mac.
    Let me just say that when I first came to the House of 
Representatives, I was eager to be involved on the Financial 
Services Committee because of my concern for housing. And I was 
very pleased to learn about the mission of Fannie and Freddie 
and very pleased to work with Fannie and Freddie as we helped 
to find more ways to offer housing opportunities in communities 
that had been redlined in those days.
    I think the mission of Fannie and Freddie was a good 
mission then, and should continue to be a mission that can 
certainly help many Americans realize the American dream. I 
know that Fannie and Freddie both were criticized very strongly 
by many, because some thought that they had too much perceived 
support from the government and were able to get money at 
favorable rates. Some thought they were much too big, and still 
others thought that their mission had creeped into areas where 
it should not be. And so I can recall when FM Watch was 
organized and all of the politics of that.
    And, having said all of that, we find ourselves here today 
talking about oversight of Freddie Mac. But I want to remind 
everyone that it was this committee, under the leadership of 
Mr. Frank in May of 2007 that passed out the legislation to 
strengthen the oversight of Fannie and Freddie. So we took into 
account some of those criticisms, and I think that this 
committee was certainly responsible in what it did to address 
some of those concerns.
    I think we were first directed towards some of the problems 
in accounting when we held some very interesting hearings about 
the accounting practices of Fannie, and then later on Freddie. 
I am hopeful that our new Oversight Committee is moving in the 
right direction.
    But let me just say first, as a Nation, we absolutely need 
the functions that Fannie Mae and Freddie Mac fulfilled in the 
mortgage markets to continue to be carried out. And they need 
to be carried out by an entity or entities that are committed 
to affordable housing, as we required Fannie and Freddie to be.
    How that entity or entities are constructed is something 
that Congress has to think carefully about. And I look forward 
to hearing from the witnesses on that issue clearly. The word 
``quasi'' is an adjective that should probably not be 
applicable to the new structure.
    Second, in addition to preserving the critical liquidity 
and secondary market functions and commitment to affordable 
homeownership Fannie Mae and Freddie Mac undertook, we need to 
bear in mind another object lesson of this crisis. No entity, 
no matter how large, is an island unto itself. By this, I mean 
that in the end, as big as Fannie and Freddie were, and as 
solid as the underwriting standards were to the subprime and 
Alt-A industry, they could not survive the turmoil created by 
the utter lack of Federal regulation that pervaded the rest of 
the mortgage market.
    Therefore, any restructuring of Fannie Mac and Freddie Mae, 
however sound, will be of little impact in the absence of a 
complete overhaul of our regulatory structures. As Chairman 
Frank has frequently noted in recent days, this will be the top 
of our agenda in the committee next year. But I think it is 
important to note how inextricably linked it is to today's 
hearing.
    With that, I will yield to--oh, you are sitting in, Mr. 
Neugebauer. I was going to call on Mr. Bachus, but you 
certainly are not he. So I will yield to Mr. Neugebauer.
    Mr. Neugebauer. I am not even going to touch that. Thank 
you.
    You know, as we look forward to this hearing today, I think 
one of the things that we all realize is that a very stable 
mortgage market is the key to bringing stability back to the 
housing market. And as it has done in the past in times of 
credit crises in this country, going back to the savings and 
loan problems in the 1980's, Freddie Mac and Fannie Mae are 
really one of the few--the only game in town in many cases for 
the mortgage market. And so it is imperative that we continue 
this process to make sure that Fannie and Freddie provide the 
opportunities that they have provided in the past to the 
marketplace today.
    But there is a new dynamic, Director Lockhart, as you know, 
and that is now the American taxpayers have a very strong 
stake, or a very big stake, a potential stake in the safety and 
the soundness of these two entities. And so not only are you 
directing an entity that is providing mortgage liquidity to the 
market so that many American citizens can own homes and 
continue to do that, but you are also going to have to manage 
this entity in a way that we minimize any potential 
repercussions to the American taxpayers.
    I have been talking with some folks over the last few days 
about how these markets are performing, and I am going to be 
very interested to hear from you--as you have been purchasing 
these loans, securitizing them, and hopefully selling the 
mortgage instruments into the marketplace--how that is going.
    There are some other market functions that Freddie and 
Fannie have played in previous years of providing some 
liquidity for some existing product out there. I am going to be 
anxious to hear what you have done to do that. I think there 
are a couple of concerns that I know I have, and I think some 
of my colleagues have, is that where are we with, for example, 
the decision to--whether to fund any additional money or to 
fund any money to the affordable housing fund?
    I know that Freddie and Fannie have been generous in some 
of their giving to other entities over the years. Quite 
honestly, my personal opinion is that in a time like this, 
where we have two companies that are in conservatorship, that 
the dividends have been suspended, who all of the shareholders 
and--preferred shareholders--and we have an entity that is in 
conservatorship, that is not an entity that ought to be passing 
out money to other entities and affecting the overall 
capitalization of that company or those entities. Because, 
quite honestly, at some point in time, this committee and 
others, we are going to have to have a discussion about our 
exit strategy here.
    We have gotten the American taxpayers basically into a 
position here of having some stakeholder positions in these 
companies and it is not the intent, I don't think, of many of 
us for that to be a long-term relationship, and that at some 
point in time, we have to determine what is the best course of 
action without disrupting the mortgage markets and without 
disrupting and causing angst in the marketplace, but at some 
point in time coming to some decision as to where we go on a 
post-conservatorship relationship with these companies. But 
again, I want to stress to you that I believe that continuing 
to make any distributions out of these entities is not 
appropriate, and I am going to be anxious to hear your thoughts 
on that.
    And with that, I yield back my time.
    Ms. Waters. Thank you very much.
    Mr. Sherman for 2 minutes.
    Mr. Sherman. Thank you. This is the season of bailouts. 
There is one model of bailout that we call the Fannie, Freddie, 
and AIG model where the Federal Government takes control of the 
entity and limits executive compensation, and, at least with 
AIG and I believe with Fannie and Freddie, has a real upside.
    The other model is the Bush-Paulson bailout model. With 
that model, the Federal Government gets zero control of the 
entity but only takes control of toxic assets. The Federal 
Government has no serious limit on $10-million-a-year salaries, 
though there may be some limit that Bush implied he might 
tolerate on the bonus compensation and esoteric formulas that 
are used to calculate it. But the $10-million-a-year salaries 
would continue.
    And finally, under the Bush-Paulson bailout model, the 
upside stays with the shareholders and the executives. We put 
up the cash; they have the upside. I have yet to be convinced 
that we should be following the Bush-Paulson bailout model and 
not looking at the Fannie-Freddie-AIG model as something to use 
as we go forward. I yield back.
    Ms. Waters. Thank you very much.
    Mr. Shays for 3 minutes.
    Mr. Shays. Thank you, Madam Chairwoman. For too long, we, 
Congress, allowed Fannie Mae and Freddie Mac to play by a 
different set of rules than other publicly traded companies. 
They didn't even have to disclose any basic financial 
information or adhere to minimum accounting standards, yet 
their implicit Federal guarantee made both enterprises quite 
attractive to investors.
    In 2002, I authored a bill with Congressman Markey, the 
Uniform Security and Disclosure Act, which would have extended 
Federal security and registration and reporting requirements to 
Fannie and Freddie Mac by bringing them under the 1933 and 1934 
Securities Act. This bill had only 21 cosponsors--15 
Republicans and 6 Democrats. We introduced this bill again in 
2003, this time with 27 cosponsors--13 Democrats and 15 
Republicans.
    Then in 2003, I introduced an amendment to H.R. 2430, the 
Mutual Funds Integrity and Free Transparency Act, during a 
Financial Services Committee markup. The amendment would have 
prohibited any registered investment company, particularly 
Fannie and Freddie, from using deceptive or misleading names. 
The amendment was opposed by both sides of the aisle and 
overwhelmingly defeated by voice vote. No one spoke in favor of 
it. During this markup, I warned that we would be back if we 
didn't address the need to better regulate Fannie and Freddie.
    The same concerns were raised by the SEC, the Federal 
Reserve, and the Treasury Department in a 2003 report, jointly 
recommending the repeal of these exemptions to the 1933 and 
1934 acts. That was in 2003. The report cited a need to provide 
investors the same basic financial and operation information 
about GSEs as they would need for any other publicly traded 
company.
    We also considered regulatory form in the 109th Congress, 
the year 2005 to be exact. I was an original cosponsor of this 
reform legislation which would have replaced the Office of 
Federal Housing Enterprise Oversight, OFHEO, and established a 
more robust regulatory authority to oversee the GSEs and their 
risky investment portfolios in order to alleviate the systemic 
risk that now has put the entire financial system in jeopardy.
    I recommend to all members who seem to want to criticize 
this Administration to see if they were cosponsors of that 
amendment and to see what they did to make reforms.
    Unfortunately, it was not until this year both Chambers of 
Congress were able to enact meaningful reform. We are here 
today because we didn't act soon enough. We knew Fannie and 
Freddie were so big and so underregulated that they posed a 
threat to our economic security.
    I think it is pretty clear we need to demand accountability 
from these companies for their previous actions as well as 
transparency in the future. But right now our job in Congress 
is to restore liquidity in the market. My only hope is we will 
not have Members in this Chamber and in the Senate act like 
somehow they were part of the reform, part of the solution, and 
blame someone else, when they weren't there when you had a 
chance to act.
    Ms. Waters. Thank you very much.
    Mr. Scott for 2 minutes.
    Mr. Scott. Thank you, Madam Chairwoman. So much is 
happening so fast here, it is almost difficult to keep up with 
it. There are so many moving parts. We are in such a terribly, 
terribly, challenging time economically. But this hearing is 
very timely.
    I have a couple of concerns as a result of the government 
takeover of Fannie and Freddie. I worry about the situation 
facing our community banks. Our community banks make up 85 
percent of the lenders that hold Fannie Mae and Freddie Mae 
stock, and the Fannie and Freddie fallout is particularly 
affecting Main Street America because these community banks are 
the backbone of communities across the country.
    So I definitely hope we can get into that and see what this 
takeover means as far as that is concerned.
    I also would like to get your opinion on what this takeover 
means as far as a loss of share value of these companies. And 
as if that is not enough problems, we have the FBI looking at 
Fannie and Freddie for investigations. And as if that is not 
enough problems, there are 25 other investigations going on 
with Freddie and Fannie. So we have a real, real doosie here.
    I am looking forward to getting into this with you and I 
appreciate it, Madam Chairwoman. I yield back the balance of my 
time.
    Ms. Waters. Thank you, Mr. Scott.
    Mr. Hensarling for 2 minutes.
    Mr. Hensarling. Thank you, Madam Chairwoman. When you have 
a wheel in a ditch, the first thing you need to do is get the 
wheel out of the ditch, not point fingers.
    Having said that, I feel there is a little bit of 
revisionist history that I must comment upon. People who came 
to the Fannie and Freddie reform issue in May of 2008 came 
about a decade too late. I have been here for 6 years and there 
have been people pointing out the systemic risk that these two 
organizations posed to the economy for every day that I have 
been here. Not once did Alan Greenspan come before this 
committee and not warn about the systemic risk in Fannie and 
Freddie.
    I believe, one, we have to get the wheel out of the ditch; 
but at the same time, we have to look at the root cause of the 
problem that we are in today. I believe that is Fannie and 
Freddie, creatures born in a government laboratory, not in the 
competitive environment of a market economy.
    Because of that, Madam Chairwoman, I believe it would help 
instill more confidence in the markets if we would go to the 
root of the problem. And because of that, later today, I will 
be introducing the GSE Free Market Reform Act that over a 
period of time would return Fannie and Freddie to a competitive 
marketplace. It would end the conservatorship after 2 years. It 
would allow FHFA to either, one, send it into receivership at 
that time or put them back into the marketplace where they 
would see new portfolio limits that would decline 20 percent 
each year, increase minimal capital requirements that would 
mirror those of well-capitalized banks. It would repeal the 
recent increases and the conforming loan limits and limit those 
conforming mortgage purchases that are at or below the area 
median income price.
    After such time, the GSEs would have an opportunity to 
renew this charter for 3 years. After 6 years, it would sunset. 
Their special privileges would be withdrawn. I think it is a 
piece of legislation that hopefully will be considered by the 
committee, and soon. With that, I yield back the balance of my 
time.
    Ms. Waters. Thank you very much.
    I see that Mr. Kanjorski has entered the room. Mr. 
Kanjorski, do you have an opening statement?
    Mr. Kanjorski. Let me submit it for the record.
    Ms. Waters. Mr. Kanjorski will submit his opening statement 
for the record.
    Mr. Green for 2 minutes.
    Mr. Green. Thank you, Madam Chairwoman. In his absence, I 
would like to thank the Chair of the full committee, Chairman 
Frank, because he has been a champion for reform. And I would 
like to echo what the chairwoman has said about 2007 and his 
taking positive productive action to reform and strengthen with 
the legislation for oversight as relates to Fannie and Freddie. 
He truly has done what he could within the time that he has had 
the gavel to make a difference, and I salute him for it.
    I am concerned about restructuring of loans. There are many 
people who will not be able to keep their homes by simply 
extending the time to pay, by simply deciding that some 
forgiveness may take place with reference to fees that are owed 
while they are in foreclosure.
    Many people are going to lose their homes. And when I say 
``many,'' we are talking about more than a few hundred 
thousand. Many, many people. And it seems to me that 
restructuring loans is important, which is why we with FHA 
allowed for the refinancing that would take place when loans 
have been embraced by both the seller--the lender and the 
borrower, to the extent that the holder of the note is willing 
to write down the loan to the current market and then 15 
percent, thereabout, of the current market value. That is a 
helpful means by which people can stay in their homes.
    The unfortunate circumstance is that there has not been 
enlightened self-interest on behalf of the holders of the 
mortgages such that we could see an accelerated pace. And 
perhaps there is one that I have not noticed. So I will be 
interested in seeing how much restructuring is actually taking 
place. That is an important thing to know. And I thank you for 
appearing today. I yield back.
    Mr. Kanjorski. [presiding] Mr. Garrett, for 2 minutes, 
please.
    Mr. Garrett. I thank the Chair and the ranking members for 
holding this important hearing today. And in light of the 
severity of the situation the country is in, I am a little 
surprised that there are not more people here for this very 
important hearing.
    I do appreciate the Director and welcome him to the 
committee. It is good to see you again and I look forward to 
your testimony. In the wake of Fannie Mae and Freddie Mac being 
put into conservatorship by the Federal Housing and Finance 
Administration, I am pleased to see more and more people are 
coming to grips that the GSE model, as was set up and ran, was 
a failed model. That was acknowledged by Secretary Paulson, by 
Chairman Bernanke, and even by the former CEO of Freddie Mac, 
Richard Syron, as well, saying it was an impossible task that 
he had there.
    I want to take this minute, though, to thank Director 
Lockhart for two specific actions that you have already taken 
directly after the GSEs were put into conservatorship. First, I 
want to thank you for cutting off their lobbying activities. 
Federal Government agencies are not allowed to lobby Congress 
or give campaign contributions to Members. And since Fannie and 
Freddie are essentially agencies, and it has now been proven, 
that fact--of the Federal Government, they should not be 
donating money or influencing Members in regard to policy that 
we are considering that will affect on them or their new 
regulator.
    This, as an aside, is something that I have tried to do in 
the past and during this Congress as well, and have been 
rebuffed at every attempt to do so. So thank you for doing 
that.
    Second, I want to thank you for reining in the compensation 
that was supposed to be paid to the now departed executives. 
The government, quite honestly, should not pay executives 
millions of dollars in compensation when the government had to 
come in and take over the company and then use taxpayer dollars 
to keep it afloat.
    So I thank you for those two very important actions you 
have taken, and I look forward to your additional testimony.
    Mr. Kanjorski. Thank you, Mr. Garrett.
    Mr. Ellison, for 2 minutes, please.
    Mr. Ellison. Let me join my voice to those who agree that 
this is no time for finger pointing. It is actually time for 
all of us to try to work together to restore confidence and 
liquidity in the financial markets and the American economy.
    But one of the things that I am concerned about is that 
housing financing efforts that have resulted in giving 
moderate- to low-income people opportunities to be able to get 
into housing have come under attack this last week and have 
been blamed for being the problem. I want to very soundly 
reject that idea. I plan on asking you about that, Mr. 
Director. I was hoping to ask about it yesterday, but I didn't 
get a chance to. I mean, I even heard things like the Community 
Reinvestment Act is the cause of this current crisis, even 
though the Community Reinvestment Act only applies to 
commercial banks, does not apply to mortgage originators, who 
are the ones that originated the overwhelming number of these 
subprime loans. In fact, the CRA probably reduced the impact of 
this problem because they limited the ability for subprime 
loans to be issued through banks because they were regulated.
    Also today, you know, we have heard quite a bit of 
criticism over the Fannie and Freddie model, and I just want to 
remind my friends that Fannie and Freddie were pretty late to 
the game of accepting as part of their assets these more 
liquid--these--what we are calling illiquid assets today. In 
fact, the subprime model, which has been going on for a number 
of years, but Fannie and Freddie really added this as part of 
their business in 2005, 2006, 2007, which is late in the game.
    And so I just want to make it clear that part of what I 
want to make sure to do is to protect programs for low- and 
moderate-income people to be able to gain housing. And I 
personally am not going to just sit by and let people trash 
programs that have helped folks get into housing who have been 
struggling to get it.
    Fannie and Freddie, I don't think, are failed models. The 
CRA certainly is not a failed program. These are important and 
good programs and should be protected. And if you want to find 
blame somewhere, let's look at Gramm-Leach-Bliley. Let us look 
at the very deregulation that so many people called for and 
clamored for, and now we have seen the full manifestation of 
what deregulation, lack of corporate responsibility, put 
together with flat declining wages for the American people will 
bring about. It has brought about this. So I look forward to 
the debate.
    Mr. Kanjorski. Thank you, Mr. Ellison.
    Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. In June of 2000, I 
gave a cadre of Fannie Mae lobbyists the heave-ho and told them 
to get out of my office; I didn't want to see them back in my 
office ever again. I said some other things which I can't 
repeat to the public. They had gone out, under the arrogance of 
Franklin Raines, who had siphoned off $90 million in 6 years 
from Fannie Mae, and stole the name of 2,000 of my constituents 
whom I represent, and used them to petition me against the bill 
that would have reformed Fannie Mae and Freddie Mac the way 
they were intended to do business.
    But the problem was not only did my constituents not 
consent to the use of their names in this Astro Turf lobbying 
campaign, but the very reforms that Fannie and Freddie were 
posing may have protected the very homeowners and taxpayers 
whose identities were stolen by the garbage that was running 
Fannie Mae at the time.
    In one of his first Capital Markets Subcommittee hearings 
on GSE reform in March of 2000, Congressman Baker, the author 
of H.R. 3703, said the bill seeks to improve supervision and 
diminish systemic risk now, whether they are waiting for the 
time of crisis to expose the faults of a hobbled regulatory 
structure. That was 8 years ago. And through an army of 
lobbyists armed with foundations or fake coalitions, Fannie Mae 
and Freddie Mac have been allowed to continue their record of 
questionable business practices.
    It comes as no surprise that that type of leadership has 
led to the disaster that we have on our hands today. My 
constituents are angry. They want to know why somebody who 
siphoned off from the organization that kind of money, and now 
they come back asking for a rescue, and their great plan to 
privatize the profits into their own deep pockets and to 
socialize the risk and let the American taxpayers pick up the 
bill for an organization whose very purpose was to help them 
buy homes.
    Mr. Kanjorski. Mr. Royce, for 2 minutes, please.
    Mr. Royce. Thank you, Mr. Chairman. I think for Mr. Garrett 
and for Mr. Shays and for myself and for many others, this is a 
time for, ``I told you so.'' I think after 5 years of calling 
attention to this and laying out exactly this problem, this is 
a time to look into how this risk was created and why it wasn't 
stopped.
    And frankly, the takeover of Fannie Mae and Freddie Mac--
that marks the official failure of this experiment--but, you 
know, because of the implicit guarantee, the implicit guarantee 
there, these institutions could borrow at a lower rate in the 
market than a legitimately private institution. And this model 
led to excessive risk-taking by these firms, because they 
didn't have a regulator with a right to look into systemic 
risk.
    On September 7th, with their capital base rapidly 
deteriorating and with leveraged ratios 6 times higher than our 
depository institutions, that is how far they were leveraged, 
the Federal Housing Agency moved against Fannie and Freddie and 
put them into conservatorship.
    Now, while the quasi-public model was the foundation for 
the troubles that sank these two institutions, weak regulatory 
authority established by Congress in 1992 failed to prevent the 
excessive risk taking that many of us cautioned against. And it 
is unfortunate that our fears were proven correct, and this 
episode could have been prevented in 2005 when I introduced an 
amendment on the House Floor to give the regulator the 
necessary authority, with the support, by the way, of the 
Federal Reserve that argued for this.
    Mr. Shays referenced this. We had legislation to try to do 
this. And we brought the amendment to the House Floor to 
curtail these companies' portfolios based on systemic risk. And 
my amendment was defeated, leaving the underlying legislation 
unable to address the grave risk that these institutions posed 
to our broader capital markets.
    Now, the 1992 legislation which established what was then 
OFHEO, for the first time in history placed explicit mandates 
on the GSEs, which dedicated a percentage of their business on 
three specific affordable housing goals each year, and these 
mandates skewed the marketplace by providing excessive 
liquidity to the lending institutions, making loans to 
individuals that could not afford them, and exposed the GSEs to 
a riskier class of loan.
    Alt-A loans at both Fannie and Freddie made up 10 percent 
of their business. It accounted for 50 percent of their recent 
losses earlier this year. So the move by Congress in the early 
1990's, the inherent flaw in the government-sponsored 
enterprise structure, the lax regulations, all enabled Fannie 
and Freddie to take on more risk than they could handle and 
ultimately led to their demise.
    I think Congress' failure to pass such critical legislation 
over the years, especially since the mortgage industry began to 
deteriorate 18 months ago, is one of Washington's greatest 
oversights in recent history. And I am glad, Mr. Chairman, that 
we are having this hearing now to discuss it. Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Royce.
    Ms. Bachmann.
    Mrs. Bachmann. Mr. Chairman, I thank you for this 
opportunity and I appreciate the severity of the crisis that we 
are looking at today. In an article written by Terry Jones of 
Investor's Business Daily he said, and I quote, Fannie Mae and 
Freddie Mac, even into the early 1990's, with the juggernauts 
or would later be.
    While President Carter in 1977 signed the Community 
Reinvestment Act, which pushed Fannie and Freddie to 
aggressively lend to minority communities, it was President 
Clinton who supercharged the process. After he entered office 
in 1993, he extensively rewrote Fannie's and Freddie's rules, 
and in doing so he turned the two quasi-private mortgage 
funding firms into a semi-nationalized monopoly that dispensed 
cash to markets, made loans to large Democrat voting blocks, 
and handed favors, jobs, and money to political allies.
    This potential mix led inevitably to corruption and to the 
Fannie and Freddie collapse. The rewrite that was done back in 
2000 made getting a satisfactory Community Reinvestment Act 
rating harder to get. Banks were given strict new numerical 
quotas and measures for the level of diversity in their loan 
portfolios. Getting a good CRA rating was key for a bank that 
wanted to expand or merge with another, so loans started being 
made on the basis of race and often on little else.
    The HUD Secretary at that time was Andrew Cuomo. He made a 
series of decisions, reported the Village Voice newspaper, 
between 1997 and 2001 that gave birth to the country's current 
crisis. These were changes that led Freddie and Fannie to get 
into the subprime loan market in a big way.
    Between campaign donations and between the changes in the 
rules of the Community Reinvestment Act, we have seen a 
dramatic impact on the current subprime mortgage meltdown. It 
is important that minorities have access to money. It is 
important that communities of color have access to 
homeownership; however, we need to have strong lending rules 
that have served our Nation so well. This has hurt, 
unfortunately, the minority community and communities of color 
even more than other communities.
    This was a well-intentioned law. I firmly believe that the 
Community Reinvestment Act was well-intentioned and meant to 
put more minorities and people of color into homes. This is a 
good, positive movement; however, the final event of this Act 
was to, in fact, remove communities of color from true 
homeownership and subject other communities to a more difficult 
time to receive the loans that they so desperately need to be 
able to get into homeownership. Fannie and Freddie, with their 
massive loan portfolios stuffed with securitized mortgage-
backed paper created from subprime loans, are a failed legacy 
of the early 1990's era. I yield back.
    Mr. Kanjorski. Thank you very much. All members having 
sought recognition have been recognized.
    I now have a unanimous consent request that the 
Massachusetts Bankers Association statement be entered into the 
record without objection. There being none, it is so ordered.
    And now, we want to recognize our good friend from 
Connecticut, Mr. Shays.
    Mr. Shays. Thank you, Mr. Chairman. For the purpose of an 
introduction--while I hope I have some tough questions for our 
witness, I have tremendous admiration. He is a constituent from 
Greenwich, Connecticut--and, when you look at his biography you 
just realize--a very dedicated man. He is clearly the Director 
and Chairman of the Oversight Board of the Federal Housing 
Finance Agency that regulates Fannie Mae and Freddie Mac and 
the 12 Federal Home Loan Banks.
    He previously served as Deputy Commissioner and Chief 
Operating Officer of the Social Security Administration and as 
Secretary to the Social Security Board of Trustees from 2002 to 
2006; and then in 1989 to 1993, under the first Bush 
Administration, Mr. Lockhart was the Executive Director and CEO 
of the Pension Benefit Guaranty Corporation. This is obviously 
a wealth of service in the private sector.
    He is a graduate from a Connecticut institution, Yale, and 
got his MBA from Harvard. And probably the most important thing 
in his resume, he was an officer in the U.S. Navy. We 
appreciate your service, and this is the man who is now coming 
to testify before us.
    Mr. Kanjorski. Thank you, Mr. Shays. Mr. Lockhart, that was 
quite an introduction. I don't know what you paid for it, but--
if you will, sir.

  STATEMENT OF THE HONORABLE JAMES B. LOCKHART III, DIRECTOR, 
                 FEDERAL HOUSING FINANCE AGENCY

    Mr. Lockhart. Thank you, Mr. Chairman. I appreciate that 
and I certainly thank you, Congressman Shays, and the members 
of the committee. Thank you for the opportunity to testify on 
Fannie Mae and Freddie Mac and the conservatorships.
    Before doing so, I would like to thank this committee for 
its efforts to pass the GSE reform legislation and create the 
Federal Housing Finance Agency, which is not quite 2 months 
old. Fannie Mae and Freddie Mac share the critical mission of 
providing stability, liquidity, and affordability to the 
housing market. Between them, these enterprises have $5.3 
trillion of guaranteed mortgage-backed securities and debt 
outstanding. Their market share of all new mortgages originated 
in the first half of this year was 76 percent.
    During the turmoil that started last year, they played a 
very important role in providing liquidity to the conforming 
mortgage market which really required a very delicate balance 
of mission versus safety and soundness. It also required 
adequate capital. That balance was completely upset in August 
as house prices, credit losses, and markets continued to 
deteriorate. Without the ability to raise capital, they could 
not provide stability or liquidity to the mortgage market. In 
fact, they were adding to the instability. Their antiquated 
capital structures, even with the OFHEO additional capital 
requirements, were not adequate for this market.
    Rather than putting the markets in further jeopardy, FHFA 
decided to take action. The goal of these dual conservatorships 
is to help restore confidence in Fannie Mae and Freddie Mac in 
the mortgage market, enhance their capacity to fulfill their 
mission, reduce systemic risk, and make mortgages available at 
lower costs to the American people.
    FHFA based its determination for conservatorships on five 
key areas which worsened significantly over the last 2 or 3 
months. The first area was accelerating safety and soundness 
weaknesses. The second was continued and substantial 
deterioration in equity, debt, and MBS markets. The third was 
the current and projected financial performance and condition 
of each company. Fourth, they had the inability to raise 
capital or even to issue debt at normal prices, at normal 
amounts. Fifth, was their inability to fulfill that mission 
which is so critical to supporting the Nation's residential 
housing market.
    As part of our examinations, we have supplemented our own 
exam teams with senior mortgage credit examiners from the 
Federal Reserve and the Office of the Comptroller of the 
Currency. These examiners corroborated our own analysis of a 
deteriorating credit environment and its threat to capital.
    In August, Freddie Mac reported losses of $4.7 billion over 
the last year and Fannie Mae reported losses over the last year 
of $9.7 billion. We had finished our semiannual examination 
that pointed to significant and critical weaknesses across the 
board. Each company reported to FHFA and to the Treasury that 
it was unable to access capital markets and, as you know, we 
have been asking and putting pressure on them to continue to 
raise capital. They couldn't do it, and the only way they could 
do it was with Treasury support.
    Without the ability to raise capital, they would have had 
to shed assets in a very weak market, which would have been 
disastrous for the mortgage market and also for the actual 
credit losses of the two companies. Therefore, in order to 
restore the balance between safety and soundness and mission, 
FHFA placed Fannie Mae and Freddie Mac into conservatorship.
    We did not take this action lightly. We consulted with 
Chairman Bernanke who was made a consultant, as you know, in 
the legislation that just passed. We also consulted with 
Secretary Paulson. They both concurred with me that 
conservatorship needed to be undertaken.
    Let me now turn to the conservatorships. First signs, 
despite all the market turmoil, are that the conservatorships 
are positive. I am pleased to say that enterprise funding cost 
and the spreads on the MBS have declined and, most importantly, 
home rates for 30-year mortgages in particular fell below 6 
percent for the first time since January. On the first day 
after we announced the conservatorships, two businesses opened 
with stronger backing for the holders of their mortgage-backed 
securities, their senior debt, and subordinated debt. The 
enterprises will now have the ability to grow their portfolios 
and their guaranty books again to support this market.
    We were able to hire highly qualified new chief executive 
officers, whom you will be hearing from shortly, and 
nonexecutive chairmen. FHFA worked with the new CEOs to 
establish employee retention programs. In order to conserve 
over $2 billion in annual capital, the common stock and 
preferred dividends were eliminated.
    Critically, the liquidity, MBS investment, and senior 
preferred stock facilities with the U.S. Treasury are all in 
place. These facilities provide the needed support to Freddie 
Mac and Fannie Mae to fulfill their mission over the long term 
while giving a potential upside for the taxpayers.
    The key facility is a senior preferred stock agreement 
which supports all past and future debt and MBS issuances until 
the terms of the facilities are completely satisfied.
    The second facility is a secured credit facility. This 
facility is not only for Fannie Mae and Freddie Mac but also 
for the 12 Federal Home Loan Banks.
    Another element of the Treasury's financing plan is to hire 
investment managers to purchase Fannie Mae and Freddie Mac 
mortgage-backed securities.
    Separately, we also support President Bush's and Secretary 
Paulson's comprehensive approach to relieving the stress on 
other financial institutions and markets.
    I can promise you that FHFA will continue to work 
expeditiously on the many regulations needed to implement the 
new law.
    Importantly, the new legislation also adds affordable 
housing and mission enforcement to the responsibilities of 
safety and soundness regulator. While FHFA has had these 
responsibilities for less than 2 months, we are placing a high 
priority on them. As companies' operating under 
conservatorships, I have already instructed each new CEO to 
examine underwriting standards and pricing. Fannie Mae and 
Freddie Mac will continue to be active in multifamily lending, 
which is really a critical component of affordable housing.
    Over the last year, we have been challenging Fannie Mae and 
Freddie Mac to be more creative on foreclosure preventions. 
They have responded and are doing so.
    The new legislation established a Housing Trust Fund to 
increase and preserve the supply of affordable, rentable 
housing and increased homeownership for very low-income 
families. I recognize the importance of the Housing Trust Fund 
to many Members of Congress. Enforcement of the affordable 
housing goals is now an FHFA responsibility as well. The very 
ambitious goals set by HUD back in 2004 do not reflect today's 
market. Even if these goals are not obtainable, however, each 
enterprise will develop and implement ambitious plans to 
support the borrowers and markets targeted by those goals.
    In conclusion, the decision to appoint a conservatorship 
for each enterprise was a tough but necessary one. They can now 
play their correct role of being part of the solution and not 
part of the problem. With the new legislation and your support, 
we can restore confidence in the enterprises, and build a 
stronger and safer future for the mortgage markets, homeowners, 
and renters in America.
    Thank you. I would be pleased to answer questions.
    [The prepared statement of Director Lockhart can be found 
on page 67 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Lockhart.
    Mr. Lockhart, how did your assessments of the capital 
position of Fannie and Freddie change in late August and early 
September?
    Mr. Lockhart. We were assessing Fannie and Freddie 
continuously for over the last year. In July, we started an 
examination in combination with the Federal Reserve, the OCC, 
and others. We also were continuing our semiannual examination. 
The combination of those exams showed that the capital position 
of these two companies was continuing to deteriorate and there 
were significant questions about loss reserves and other than 
temporary impairments, which going forward we felt would impair 
their ability to serve their mission.
    Mr. Kanjorski. What was the primary cause for their 
deterioration of capital?
    Mr. Lockhart. It was a series of issues, but the primary 
cause was changes in the housing market and, in particular, the 
business they put on their books in 2006 and 2007 that was of 
lower credit quality than previous years.
    Mr. Kanjorski. You are not saying it was the deflation of 
real estate, but it was the bad business choices made in 2006 
and 2007?
    Mr. Lockhart. It was a combination. Certainly, the housing 
market hurt all lenders, and in reality they probably had 
better books than many other lenders. But still, just the 
magnitude of $5.3 trillion of exposure on a very thin capital 
base meant that base could not support the potential losses.
    Mr. Kanjorski. If the real estate market had not 
deteriorated in the last few years, and if the bad practices 
had not been carried on in 2006 and 2007, do you have an 
opinion as to whether or not Fannie and Freddie would have 
continued to exist as they did prior to the conservatorship?
    Mr. Lockhart. Well, certainly 2 or 3 years ago they were 
doing fine before the housing market turned down. They always 
had, as you know, and I was talking about, for the last 2\1/2\ 
years the need for reform. They needed to be strengthened and 
they needed a stronger capital position.
    Mr. Kanjorski. So you have an opinion that this failure--if 
I recall, my memory says we did the GSE reform starting in 2003 
and we passed it in the House; it would go to the Senate and 
linger there, and we passed it 2 years later and another 2 
years later, and it lingered until this last summer. If, in 
fact, we changed and went into that world-class independent 
regulator that you now are, would that potentially have given 
you the strength and capacity to save these two organizations?
    Mr. Lockhart. If the legislation was similar to the one 
that was passed this year--
    Mr. Kanjorski. Yes.
    Mr. Lockhart. --it certainly gave us the kind of capital 
controls we needed. It certainly gave us the ability to control 
the size of the portfolios. I think those were two of the very 
important things. Also, it gave us a lot more power in the 
safety and soundness side that we didn't have either. It is 
certainly a much stronger bill. If we would have had it 5 years 
ago, maybe we wouldn't be having this hearing.
    Mr. Kanjorski. So potentially when Congress failed to 
adequately respond to everybody's comments that we needed a 
stronger world-class regulator, and we tried to do it for 5 
years and failed for 4 of those 5 years, and then finally 
passed the same bill that had been sent to the Senate before, 
if we had done that earlier when we originally sent it over--we 
are not trying to find out who may have been at fault here, we 
will leave that up to the press and the public to determine 
that--but it is reasonable to assume that Fannie and Freddie 
would have succeeded in remaining in place without a 
conservatorship?
    Mr. Lockhart. Certainly, that would have helped. I mean, 
obviously, this market is a tougher market than anybody has 
seen in a long, long time. Certainly we had much stronger 
capital requirements. If their portfolios were smaller, if they 
had taken less risk, they would certainly be much better off 
than they are today.
    Mr. Kanjorski. I have just asked a lot of questions of you, 
but let me go to just one other one. Appraisal independence is 
very important. How will the conservatorship affect the 
agreements with Attorney General Cuomo?
    Mr. Lockhart. We have been working with the Attorney 
General on those appraisal standards and we are very near 
finalizing them. We hope within the next couple of weeks to put 
them out. They have been modified somewhat. They still really 
show that we strongly support the independents. Because it has 
taken us longer than we expected to do it, we would expect to 
actually not have the January 1st implementation date. We 
expect to slip that in a month or 2, or maybe 3. We expect to 
have the appraisal standards out very shortly.
    Mr. Kanjorski. Very good. Seeing that I have exhausted my 
time, I will recognize Mr. Neugebauer.
    Mr. Neugebauer. Thank you. Director Lockhart, when you look 
at Fannie Mae and Freddie Mac's business, obviously they were 
in the portfolio business and in the securitization business as 
well. When you go--and you were assessing their losses, can you 
give me a breakdown of what percentage of the losses were 
attributed to portfolio and what were attributed to the 
securities that they had?
    Mr. Lockhart. At the moment, their major losses are related 
to credit and they have credit risk in both their portfolios 
and their mortgage-backed securities. Historically, the 
portfolios also took on a significant amount of interest rate 
risk and they have shown over the last year some relatively 
large losses from interest rate risk as well.
    The portfolios also took on what are called private label 
mortgage-backed securities. These AAA securities that they 
invested in were underlying mortgages that were subprime and 
Alt-A mortgages. Those have shown significant declines. In the 
case of Freddie Mac in particular, they have shown something 
like a $20 billion loss on those securities. In Fannie Mae, it 
is more like an $8 billion loss.
    So, there were big losses from credit in both their 
mortgage-backed security portfolios and their guarantys.
    Mr. Neugebauer. When you look at those private-label 
securities, do you have the infrastructure in place to really 
unwrap those, look inside those securities, and begin to give 
somewhat of a picture of, you know, what the underlying credit 
risks to Fannie and Freddie are?
    Mr. Lockhart. Yes. We have been working with both of the 
companies and we have actually been asking them to do cash flow 
analysis down to the individual mortgage. We have also been 
working with other providers of that kind of software to look 
at the risk inherent in those private label securities.
    Mr. Neugebauer. So, do you have any indication of what the 
contingent liability is? In other words, if you have a capital 
structure of ``X,'' and then when you look inside these 
securities and look at both their interest rate risk and their 
credit risk, do you have an idea of what the potential 
liability is, and does that exceed the current assets of those 
entities?
    Mr. Lockhart. The companies disclose every quarter a mark 
to market of those portfolios. As I said in the end of June, 
they were about $20 billion underwater at Freddie Mac and about 
$8 billion at Fannie Mae. Obviously, these markets continue to 
move and there has been deterioration since then. If you look 
at the balance sheets of both companies, they still have more 
assets than liabilities. As you know, that is the test for the 
Treasury to put in money.
    Mr. Neugebauer. Now, one of the issues that is being kicked 
around outside of Freddie and Fannie is the Treasury getting 
into a similar business that I guess Fannie Mae was in and 
making a market or purchasing some of these private-label 
securities. Is there the infrastructure within Freddie Mac and 
Fannie Mae not necessarily to purchase those, but to help 
provide some idea of what is exactly inside those securities 
and to help establish a fair market value of those? Because one 
of the things, as you know in the marketplace right now, 
everybody is looking at these individual securities and each 
one of them is an individual, if it is private label, it is an 
individual security and it depends on what kind of mortgages, 
where those mortgages were originated. And so to be able to 
determine an accurate value of that security, you have to kind 
of take the wrapper off and look inside.
    Do these entities have the ability to help facilitate that?
    Mr. Lockhart. Fannie and Freddie have internal models, but 
also they have been working, as we have, with external experts 
in the field. I assume the facility that Secretary Paulson is 
proposing would also be using these many external experts. 
There certainly is the ability to go mortgage by mortgage and 
look at the characteristics in the mortgages. To get an 
accurate price, there is no such thing in this marketplace. But 
you can certainly get some ranges of prices that are indicating 
the underlying economics.
    Mr. Neugebauer. I think one of the key determination 
factors here is to get a feel for what was the underlying value 
of the collateral under those securities because the bottom 
line is that in the event of a default, you are going to go 
back and look at the collateral, and not just the mortgage 
collateral, the mortgage itself, but the collateral underlying 
the mortgage.
    Are you able to go that deep where you can tell, for 
example, in Sacramento, California, we have a loan in this 
portfolio; and it may be current or it may be 30 days 
delinquent, but also the prices in that particular zip code for 
resale are down 20 or 30 or 40 percent--
    Mr. Lockhart. Certainly, people are working on those kinds 
of models to better obtain that kind of detail. It needs to be 
done to better understand what is underlying these securities.
    Mr. Neugebauer. You really couldn't make a fair assessment 
of the value of that security without that information, could 
you?
    Mr. Lockhart. It is certainly very helpful to have the 
underlying mortgage information, yes, sir.
    Mr. Neugebauer. I think my time is up. I saw you reach for 
the gavel and I was--
    Mr. Kanjorski. Mr. Sherman is recognized.
    Mr. Sherman. Thank you. Mr. Lockhart, are Fannie and 
Freddie currently allowed to purchase no doc or low doc loans?
    Mr. Lockhart. Fannie and Freddie do make a few low doc and 
no doc loans, although that has really stopped pretty 
dramatically. They are reviewing that practice. Basically, at 
this point, I don't think they are making any no doc loans. The 
vast majority of the loans they are making today are well 
documented.
    Mr. Sherman. Why would you allow them to make any such 
loans? At very best, these are loans to creditworthy borrowers 
who are cheating on their taxes. And now that the Federal 
Government more explicitly controls these entities, rewarding 
those who choose to cheat on their taxes doesn't seem to be 
part of your mandate.
    Why wouldn't your board absolutely prohibit no doc and low 
doc loans?
    Mr. Lockhart. Both companies are reviewing their practices, 
as we have asked them to do, and we will be hearing from them.
    Mr. Sherman. In other words, you are not going to answer my 
question except to say they are working on it and you won't 
express an opinion on it yourself here in spite of the fact 
that--
    Mr. Lockhart. I will express an opinion that historically 
low doc loans have been one of the big problems in the mortgage 
market. Certainly no document loans have been a big problem, 
and they are well aware of it. It has been a big problem in 
Fannie and Freddie, and they are fixing them.
    Mr. Sherman. Well, I would hope that you would look at 
this. Since you do work for the Federal Government, also on the 
tax side, in facilitating tax fraud or facilitating people who 
are either lying to their lender or they are lying to the tax 
authorities strikes me as not consistent with your role.
    The executive compensation is something we are focused on a 
bit with this bailout bill. It looks like you hired a Fannie 
Mae or a Freddie Mac CEO for $900,000. Now, there are very few 
positions involving the financial world that are quite as 
challenging or as complex as being CEO of Freddie Mac. Are you 
able to get executives who can handle Freddie Mac for less than 
$1 million a year?
    Mr. Lockhart. We are in the process of negotiating 
contracts with the two CEOs. In my view, we have two very high-
quality people whom you will be hearing from shortly. They have 
only been on the job 2\1/2\ weeks, so hopefully you won't ask 
them too many tough questions.
    Mr. Sherman. Then you have already paid them for the last 
2\1/2\ weeks. Are you paying them at a rate below or above a 
rate of $1 million a year currently?
    Mr. Lockhart. The question is that high-quality financial 
executives in my mind certainly should and could earn more than 
a million dollars a year; and if that is the question you are 
asking me, certainly--
    Mr. Sherman. I am not asking what you think is fair, 
because I could take you to my district and have you--you seem 
to have lined up a good quality financial executive for under a 
million dollars a year. Does this demonstrate that it is at 
least possible to get somebody reasonably capable of doing one 
of these major jobs for less than a million dollars?
    Mr. Lockhart. The two individuals have taken these jobs 
because of the public service element as well. I would expect 
to pay them more than a million dollars a year.
    Mr. Sherman. So this headline that it is going to be 
$900,000 is erroneous?
    Mr. Lockhart. Well, that is their salary. They will 
probably have bonuses related to their performance.
    Mr. Sherman. Okay. I noticed that we are able to get 
somebody to preside over the Federal Government for only 
$400,000 a year and free housing.
    Now, dividends: Which dividends have actually gone out the 
door and been paid in July, August, and September by Fannie and 
Freddie? And are you taking or demanding any legal action to 
recover those dividends from shareholders?
    Mr. Lockhart. The dividends that were declared were paid, 
but--
    Mr. Sherman. How much money did we lose on that?
    Mr. Lockhart. I am not quite sure, but it was about $100 
million--no, it was significantly less than that. I am sorry; I 
don't know. I will have to look up that number.
    There was only one dividend payment that was declared 
before we put them into conservatorship that had to be paid 
under the contract. Since then, no dividends have been paid.
    Mr. Sherman. Did you make any effort to try not to pay that 
dividend that went out, even after the conservatorship started?
    Mr. Lockhart. No, we actually followed the law.
    Mr. Sherman. Without litigation, without--
    Mr. Lockhart. No, we decided the appropriate thing to do 
was to follow the law.
    Mr. Sherman. To pay the dividend?
    Mr. Lockhart. Yes.
    Mr. Sherman. Okay.
    The housing markets, in retrospect, look like--or those 
involved at Fannie and Freddie seem to be using models for what 
mortgages would be paid, what the mortgages would be worth that 
were based on the idea that it was unlikely that housing prices 
would ever decline. And now, in retrospect, you look back and 
you see charts showing the fair market value of all homes in 
the country being far more than the household income of the 
country could support.
    And you also see--as Alan Greenspan has, I believe, pointed 
out--the large, increased inventory of unoccupied homes 
available for sale.
    How is it that so many people who were worth so many 
millions of dollars a year got it so wrong when these two 
charts show that obviously housing prices had to come down?
    Mr. Lockhart. As the chairman has said before, there was 
exuberance in markets. This is one of the markets that 
obviously had a bubble in it. People just thought that house 
prices would continue to go up.
    There were a lot of people who were starting to say at some 
point they were going to come down. Certainly, even the two 
companies were saying that a year or so ago, that housing 
prices were going to start to fall.
    Mr. Sherman. But they didn't change their behavior. I hope 
for a mere $900,000, you can get smarter people.
    I yield back.
    Mr. Kanjorski. The gentleman's time has expired.
    Mrs. Biggert? I am sorry, it should be Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    Director Lockhart, I think you spoke about the credit risk 
and the interest rate risk that these portfolios took on, and I 
assume now those portfolios are about $100 billion underwater. 
At one point, they had $1.5 trillion in the portfolios.
    You mentioned that the credit profile at both enterprises 
followed the market down in 2006 and in 2007. So my question 
would be, had Congress acted in the early stages of this crisis 
to pass meaningful GSE reform--and that would imply reform with 
a systemic risk regulator to do something about the problem, as 
argued by the Federal Reserve at the time and as would have 
been included in my legislation and my amendment--do you think, 
had that happened, could that have led not to a situation today 
where Fannie and Freddie were in conservatorship? Could we have 
prevented that potentially?
    Mr. Lockhart. A significantly stronger regulatory regime 
with stronger capital rules, stronger safety and soundness 
rules, stronger portfolio rules, many of the things we tried to 
do, but really didn't have the power to do over the past few 
years, would certainly have helped prevent this from happening, 
yes, sir.
    Mr. Royce. The other question I would ask, as has been 
reported in the press, even as the bubble was popping, these 
institutions dived into pools of subprime and Alt-A liar loans, 
as they have been called, to meet congressional demand to 
finance affordable housing. As the Wall Street Journal wrote 
the other day, Fannie and Freddie's patrons on Capitol Hill 
didn't care about the risks inherent in their combined 
trillion-dollar-plus mortgage portfolios so long as they helped 
meet political goals on housing.
    Even after taxpayers have had to pick up a bailout tab that 
may grow as large as $200 billion, House Financial Services 
Chairman Barney Frank still won't back a reduction in their 
mortgage portfolios, says the Wall Street Journal on that.
    So Director Lockhart, in your testimony you also mention 
the increased portion of riskier loans taken on by the GSEs in 
recent years, especially since the beginning of 2007. And I 
have heard that while Alt-A loans make up, what, 10 percent of 
the portfolio, they make up 50 percent of the recent losses for 
the GSEs.
    Can you expand upon the role this riskier class of loans 
played in the GSEs' downfall?
    Mr. Lockhart. Certainly what was happening in the mortgage 
market in late 2005, 2006, and 2007, there was really a feeding 
frenzy on lower-quality loans. Wall Street was packaging them 
together and putting them into these many tranched securities, 
either subprime or Alt-A, and Fannie and Freddie, to meet their 
housing goals and for other reasons, purchased those 
securities.
    They also did a lot of not subprime, but did Alt-A and 
lower documentation loans and some of the more interest-only 
and other exotic mortgages in that period. And that basically 
led to them taking on more risk than they traditionally had, 
and that caused significant losses.
    Mr. Royce. And my last question: Due to the lack of the 
ability of the regulator at this point to basically regulate 
for systemic risk, to stop systemic risk--we know banks 
leverage 10 to 1 typically--how much were Fannie Mae and 
Freddie Mac leveraging at this point in time?
    Mr. Lockhart. If you look at the leverage, and one way you 
can look at it, I think it is reasonable, is their mortgage 
credit exposure, the $5.3 trillion that they have versus their 
capital, they were at about 1 percent. They were significantly 
leveraged.
    Mr. Royce. Give me an approximate percentage, just a 
ballpark.
    Mr. Lockhart. 1 to 2 percent. Based on their capital--
    Mr. Royce. In terms of their capital. And so they had the 
credit risk and the interest rate risk inherent in these 
portfolios on top of, you know, all of this compounding to 
leverage in a way that was just reckless.
    Mr. Lockhart. I think that is why we kept asking. I 
testified in this committee even before I had my confirmation 
hearing in the Senate about the need for capital for these two 
companies and about the need for reform.
    Mr. Royce. Right.
    Mr. Lockhart. For the last year, we have been pushing them 
to build more and more capital. One of the things that happened 
is, they just couldn't do it anymore.
    Mr. Royce. Well, a number of us, including Mr. Garrett, Mr. 
Shays, and myself have been pushing for over 5 years. But I 
appreciate that very much, Director Lockhart, and thank you.
    Mr. Kanjorski. Thank you very much, Mr. Royce.
    We have three votes on. It will take us approximately 30 
minutes, so the Chair will recess. Upon the completion of the 
three votes, we will continue. Thank you.
    [Recess]
    Mr. Kanjorski. The committee will reconvene. And Mr. Lynch 
of Massachusetts is, I think, our next questioner.
    Mr. Lynch. Thank you, Mr. Chairman. And I want to thank the 
witness as well for his good work and his willingness to help 
the committee with its work.
    I just have a question regarding the wider problem that we 
are having here with the complex derivatives and especially 
those with mortgage-backed elements to it. I am trying to get 
an answer; and this is more on the implementation stages of 
trying to right the ship, so to speak.
    And I guess, very generally, I would like to ask you, Mr. 
Lockhart, if you have overseen any of the what they would call 
``unwinding process'' between some of these complex--taking 
some of these, you know, mortgage-backed securities, 
multitranche securities, and trying to unwind them--trying to 
unwind them so that they can be sold, repackaged, and saved.
    And, you know, I am going to have some traders come in and 
explain to me in micro detail how this happens. Because I have 
some misgivings about the bigger program that we are 
considering in the next few days and the speed at which we 
might be able to unwind some of these securities that we buy 
and get them back out on the market and try to recapture some 
of the money that we are taking from the taxpayer perhaps in 
the next few days.
    Can you shed any light on this? I know you are a pretty 
smart guy, and you are sort of in the middle of this, but you 
might have other smart people that you rely on for this piece.
    So I am not sure. I don't want to put you on the spot, but 
any information you could give us would be helpful.
    Mr. Lockhart. Wall Street sold a lot of what are called 
``private label securities,'' where they packaged up mortgages, 
and sometimes they were subprime mortgages, sometimes what they 
call Alt-A, and sometimes even prime mortgages.
    They structured them into sometimes 10 different what they 
call tranches, and the highest one would have AAA, and you go 
down to something that is really junk.
    What happened is Wall Street then took some of the lower-
quality ones and put them into a new security, a collateralized 
debt obligation, and did it all over again, and did those 
tranches.
    Fannie and Freddie never bought any of the collateralized 
debt obligations; they just bought the private label 
securities.
    Mr. Lynch. I see.
    Mr. Lockhart. They just bought the AAAs.
    Now, what has happened as the house prices have 
deteriorated, some of those AAAs are no longer AAAs. Trying to 
put those securities together is somewhat difficult. We have 
actually been talking over the last year with both companies 
about a Humpty-Dumpty back together again approach. And 
potentially, part of the proposal coming out of Secretary 
Paulson and President Bush would be to be able to buy some of 
those securities and be able to work through those mortgages. 
Hopefully, what can be done is, we can work with individual 
homeowners, prevent foreclosures, have loan modifications, and 
then potentially get the people into new mortgages or sell 
those mortgages in a less toxic way.
    Mr. Lynch. And I appreciate--you described the intention or 
the hope of the administration of, I know, Secretary Paulson; 
but what I am trying to dig at is, how does that happen at the 
implementation stages? How do we get that done? Because looking 
at some of these CDOs, it is difficult. And I have talked to 
some pretty smart people on this--Harvey Pitt, former SEC--and 
it is very difficult to understand who owns what in some of 
these very complex derivatives.
    And here we are about to consider, you know, taking $700 
billion in taxpayers' money for the purpose of purchasing, 
okay, $700 billion, 80 percent of which are securitized. There 
are--only 20 percent of them are whole loans, whole home 
mortgages; the rest of them are securitized, and most of those 
are subprime and Alt-A and God knows what rating they have 
today.
    I am just nervous about the complexity of trying to unwind 
some of these securities. And I am looking for some assurances 
that the impact of what we are doing here is actually going to 
be felt in the market and not be diluted with a process of 
unwinding that takes months and months and months.
    And, you know, unfortunately, you are the witness who is 
before me this afternoon, so you get the question.
    Mr. Lockhart. It is a complex process, but it needs to be 
done. We need to free up the balance sheets of the financial 
institutions so they can lend again.
    As these are taken off the balance sheets, there will be 
the opportunity. One of the key opportunities will be to get 
into the underlying mortgages. And that is the key thing, to 
help people in these underlying mortgages to have their 
mortgages modified, to prevent foreclosures, and to try to get 
them into new, better mortgages.
    Many of the mortgages, as you know, had teaser rates at the 
beginning that are now going up. We need to get these people 
out of those mortgages.
    Mr. Lynch. I understand my time has expired. If I could ask 
you, though--and thank you for your forbearance, Mr. Chairman--
can I get somebody from your shop to sit down, and let's go 
over that whole unwinding process?
    Mr. Lockhart. Our people would be happy to do that.
    Mr. Lynch. Thank you very much.
    I yield back my time, Mr. Chairman. Thank you.
    Mr. Kanjorski. Thank you, Mr. Lynch.
    The gentlelady from Minnesota, Ms. Bachmann.
    Mrs. Bachmann. Thank you so much, Mr. Chairman, and also to 
our witness, Mr. Lockhart.
    Mr. Lockhart, I am interested in your thoughts regarding 
the Housing Trust Fund that was created in the Housing and 
Economic Recovery Act, and whether or not FHFA plans to finance 
it while the GSEs remain in conservatorship. I sent you a 
letter that was signed by 37 other Members of our body, urging 
you not to sign it during these very dire, dismal economic 
times for the GSEs.
    And, Mr. Chairman, I would ask unanimous consent that this 
letter would be submitted for the record, Mr. Chairman.
    Mr. Kanjorski. Without objection, it is so ordered.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    The legislation that authorizes this fund, Mr. Lockhart, 
also specifically directs you to suspend payments to the fund 
if these allocations: Number one, are contributing or would 
contribute to the financial instability of the enterprise; 
number two, are causing or would cause the enterprise to be 
classified as undercapitalized; or number three, are preventing 
or would prevent the enterprise from successfully completing a 
capital restoration plan under section 1369(c).
    It just seems to me that the GSEs have already met these 
specifications one, two, and three. And I am wondering, Mr. 
Lockhart, do you plan to suspend financing of the Housing Trust 
Fund while the GSEs are in the present state of 
conservatorship?
    Mr. Lockhart. We are well aware of the language and 
certainly have analyzed the language. We will be reviewing, 
when they put out their third quarter numbers, whether we think 
it is right to suspend or not.
    At this point, as you know, the money for the first year is 
not going to go into an affordable housing fund, it is going 
into the HOPE for Homeowners part of the bill. To the extent 
that happens, Treasury would have to put in the money instead 
of Fannie and Freddie.
    We will be working that over, looking at the language and 
looking at the financial results, and I will be happy to 
respond to your letter.
    Mrs. Bachmann. Mr. Chairman, if I could just follow up with 
Mr. Lockhart?
    Mr. Lockhart, do you know about what date that would be 
when you receive that information?
    Mr. Lockhart. They should be reporting their third quarter 
numbers in November. There will be no funding before then. Once 
we have seen the numbers, we will make our decision.
    Mrs. Bachmann. Mr. Chairman, and Mr. Lockhart, I am 
wondering, so you stated then that Treasury would be putting 
money into the HOPE NOW account?
    Mr. Lockhart. That is, as I understand it, how the law 
works, yes.
    Mrs. Bachmann. Okay. Mr. Chairman, I yield back. Thank you 
so much.
    And thank you, Mr. Lockhart.
    Mr. Kanjorski. Thank you very much, Ms. Bachmann.
    Mr. Cleaver?
    Mr. Cleaver. Thank you, Mr. Chairman.
    Mr. Lockhart, I have about four questions, and the first is 
rather simple: Have you been involved with the Fed Chairman and 
the Treasurer in the negotiations and discussions that have 
been taking place in an attempt to produce some kind of rescue 
plan?
    Mr. Lockhart. No, not actively. We were certainly very 
involved with them when we were looking at the 
conservatorships. I was on a panel with them earlier this week, 
but we have not been active in negotiations. We have been 
talking to people off and on, but we have not been an active 
participant.
    Mr. Cleaver. I am just wondering because--I mean, if in 
fact the crisis we are facing was launched by the housing 
crisis, I just have some difficulty not seeing you involved.
    Mr. Lockhart. We have talked to people in Treasury and 
certainly people in the Federal Reserve about the issue; but as 
I said, it has really been the Chairman and the Secretary that 
have done most of the structuring.
    Mr. Cleaver. One of the sticking points for many of us is 
the bankruptcy change that we are advocating, which would allow 
a bankruptcy judge to modify the principal in an attempt to 
keep people in their homes.
    Is that a realistic--I mean, I know you are going to talk 
around it, but I am going to ask you anyway. Is that a 
realistic and fair inclusion in the legislation that we are 
going to ultimately consider this weekend, I think?
    Mr. Lockhart. I can't answer that for the Secretary, but I 
can tell you that I think the better solution is to modify 
people before they get into bankruptcy; and to prevent 
foreclosures before, because bankruptcy is such a big blot on 
their record. Fannie and Freddie are reaching out to people and 
trying to help them modify before they get into the need for 
bankruptcy.
    Mr. Cleaver. I agree, and we were a part of that, this 
committee was. But you can understand why we, most of us have 
100 percent of our constituents opposed to any kind of 
resolution of this issue that would require large investment of 
the taxpayers' dollars into the purchasing what could be toxic 
assets, and wealthy folk would have a second home actually 
excluded in a bankruptcy, whereas people in their primary home 
cannot.
    And that doesn't sell well in Sedalia, Missouri. People are 
angry about that. So that is one of the reasons many of us are 
concerned about it.
    My other question is related to the preferred stock issued 
by Fannie and Freddie and the claim by many of the banks that 
it is dragging them under. I read somewhere that upwards of $30 
billion has been negatively impacted by the dividend payments 
of Fannie and Freddie on preferred stock. And I am wondering, 
is there any kind of evaluation right now of the suspension of 
dividend payments on Fannie's and Freddie's preferred stock?
    Mr. Lockhart. Fannie and Freddie had about $35 billion in 
preferred stock outstanding, and it was widely held. But there 
are certainly some holdings, and significant holdings, by banks 
and smaller community banks as well. We felt that they could 
not afford that preferred dividend in conservatorship, and that 
is why it was eliminated.
    We are not rethinking that decision. We had talked to the 
bank regulators before that decision was made, and we are 
continuing to talk to the bank regulators; and certainly they 
are taking actions with the individual banks to try to help 
them address any that have capital problems.
    Mr. Cleaver. Of course, many of those banks are the smaller 
community banks. I had a conference call with a number of them 
in Missouri this morning.
    Mr. Lockhart. Right.
    Mr. Cleaver. And this is one of the concerns they are 
expressing.
    Mr. Lockhart. We also now, because of the new law, 
supervise the Federal Home Loan Banks, which deal a lot with 
smaller banks. They are very actively working with the smaller 
banks and certainly making advances as necessary to the smaller 
banks. So that part is continuing to work, and we will be 
working with the smaller banks, some of which may have these 
preferred stocks.
    Mr. Cleaver. That is all, Mr. Chairman.
    I would like to express appreciation to you, Director 
Lockhart, for the genteel, evasive way you dealt with the 
question on bankruptcy.
    Mr. Lockhart. Thank you.
    Mr. Cleaver. That was very skillful.
    Mr. Lockhart. Thank you, Congressman.
    Mr. Kanjorski. Thank you, Mr. Cleaver.
    Mr. Ellison is recognized.
    Mr. Ellison. Thank you, Mr. Chairman.
    Sir, thank you for coming here today. I have a few 
questions for you. First of all, in your view, is the Community 
Reinvestment Act at all to blame for this housing meltdown we 
have seen over the last several days and weeks and months?
    Mr. Lockhart. I am not an expert in the Community 
Redevelopment Act because--
    Mr. Ellison. Reinvestment Act.
    Mr. Lockhart. Reinvestment Act, I am sorry, CRA, because 
Fannie and Freddie are not subject to that.
    Mr. Ellison. I understand. I am going to get to that.
    Mr. Lockhart. I can't really say that it is responsible. It 
wouldn't seem apparent to me that it would be.
    Mr. Ellison. Now--okay, so just to ask a few basics: You do 
know that CRA applies only to commercial banks, right?
    Mr. Lockhart. Right.
    Mr. Ellison. And you do know that not most, but the 
overwhelming number of subprime loans that have ended in 
foreclosure had come from mortgage originators, not commercial 
banks?
    Mr. Lockhart. Certainly some came from commercial banks, 
but a lot came from various other channels, mortgage brokers 
and other originators, and they were packaged up and sold to 
Wall Street, yes.
    Mr. Ellison. Right. So to somehow imply it is the CRA, your 
sense of what you do know, though you are not an expert, is 
that it is really not the case. Am I right about that?
    Mr. Lockhart. Again, my view is that I have never heard 
that to be a major issue at this point.
    The real problem was everybody lowered their underwriting 
standards dramatically. They were making loans to people who 
couldn't afford them, and they were not telling people that 
they couldn't afford them when they were making the loans. That 
was the problem.
    Mr. Ellison. And based on your understanding, there is 
nothing in the CRA that says, you shall lower your underwriting 
standards. Am I right about that?
    Mr. Lockhart. I assume so, yes.
    Mr. Ellison. Let's talk about Fannie and Freddie. They had 
their own goals for affordable housing. Is that right?
    Mr. Lockhart. That is correct.
    Mr. Ellison. Can you tell me whether Fannie and Freddie's 
pursuit of its own affordable housing goals contributed in any 
way to the demise of Fannie and Freddie?
    Mr. Lockhart. They are not demised. They are actually 
ongoing companies--
    Mr. Ellison. Right. That is true.
    Mr. Lockhart. --that are extremely active in the mortgage 
market, and still the major players in the mortgage market.
    Mr. Ellison. Thank you for that correction.
    You know what I mean. I mean the fact that they--
    Mr. Lockhart. They are in conservatorship, and they are 
continuing to do and fulfill their mission in conservatorship. 
They had goals set by HUD which, before the legislation passed, 
set the goals. Now that the legislation has passed, we will be 
setting goals in the future, this new agency.
    The goals were aggressive and, significantly, they were set 
in 2004 and escalated over the years. As they escalated, it 
became harder and harder for the two companies to meet those 
goals, and sometimes they had to stretch. And sometimes that 
stretch meant that they potentially lowered the underwriting 
standards.
    Certainly, they got credit for many of the subprime 
mortgages in those AAA securities that they bought.
    Mr. Ellison. But is there anything in the mandate of Fannie 
and Freddie that says, reduce your underwriting standards in 
order to meet affordable housing goals?
    Mr. Lockhart. No. The mandate of Freddie and Fannie 
actually is to keep strong underwriting standards. For 
instance, by charter, they are only allowed 80 percent loan-to-
value loans.
    Mr. Ellison. Right, so Fannie and Freddie are actually 
enjoined to keep good underwriting standards. So if somebody 
made a decision to take an overabundance of, say, Alt-A loans, 
that would not be in the spirit of that mandate to keep good 
underwriting standards. Is that right?
    Mr. Lockhart. They made some trade-offs over the years, and 
it turned out those trade-offs were unsuccessful. They 
basically lowered their underwriting standards; and maybe part 
of that was to get affordable housing, but oftentimes it was 
just that they felt it was an attractive loan.
    Mistakes were definitely made, and that is one of the 
reasons that they are in conservatorships.
    Mr. Ellison. Right.
    And other than, for example, getting credit for trying to 
move toward affordable housing goals, Fannie and Freddie's 
decision to take a greater percentage of its portfolio in those 
no doc, low doc-type loans, they got other benefits from that 
as well. Am I right about that?
    Mr. Lockhart. Certainly it was a higher margin business 
than just prime business, yes.
    Mr. Ellison. They made more money from it?
    Mr. Lockhart. Yes.
    Mr. Ellison. So it really wasn't altruism?
    Mr. Lockhart. They thought they were going to make more 
money.
    Mr. Ellison. Right. They thought they were going to make 
more money for it.
    Mr. Lockhart. Right.
    Mr. Ellison. So altruism about affordable housing probably 
wasn't the major factor. Wouldn't you agree with that?
    Mr. Lockhart. I can't really get into the minds of the 
underwriters of Fannie and Freddie.
    They were looking at a variety of things. Affordable 
housing goals were one. Profitability was one too, and 
certainly credit risk was another.
    Mr. Ellison. Right.
    Now, the Washington Post reported on its front page a few 
weeks ago that Fannie and Freddie actually engaged in some 
accounting procedures that may not be standard on affordable 
housing; and HUD let them do it. Instead of buying responsible 
CRA mortgages made by banks and nonprofits in Minnesota, they 
let GSEs nurture brokers who would finance subprime, higher-
cost loans.
    Can you respond to that statement?
    Mr. Lockhart. I am not sure that I--
    Mr. Ellison. Follow that?
    Mr. Lockhart. --am aware of that.
    Mr. Ellison. Me either. Anyway, thank you very much.
    Mr. Lockhart. Thank you.
    Mr. Kanjorski. The gentleman from Colorado, Mr. Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    And Mr. Lockhart, thank you for your testimony today. I do 
appreciate really--you know, with maybe one exception--your 
answering these pretty straight. So I just have some factual 
questions so I understand this a little better.
    The balance sheet, let's go Freddie Mac first. In July, you 
all were here to talk to us about the new bill, the FHA, Fannie 
Mae-Freddie Mac regulatory bill.
    In July, what did the balance sheet of Freddie Mac look 
like?
    Mr. Lockhart. Freddie Mac had core capital of about $37 
billion. It had a shareholders net worth of about $13 billion. 
Actually, another way some commentators were looking at it, as 
if they marked everything to market, it was a negative number. 
There are a variety of ways to look at balance sheets, but the 
legal way, the one that is in the law, is core capital, which 
was $37 billion.
    Mr. Perlmutter. All right. And we will talk about marked to 
market in just a second.
    So assets versus liabilities, what were the assets, and 
generally what are the assets of these two organizations?
    Mr. Lockhart. The assets of the two organizations are 
really their mortgage portfolios. At that point, I think 
Freddie had almost $800 billion in mortgage portfolios, $69 
billion in liquid assets; and debt of $874 billion really 
pretty much offset that. The balance sheet is very simple. They 
borrowed to invest.
    Mr. Perlmutter. Okay. And so from whom do they borrow?
    Mr. Lockhart. They issue their securities worldwide. They 
borrow from institutions in this country, they borrow from 
central banks around the world, and they borrow from 
international investors. It is really spread throughout the 
world.
    Mr. Perlmutter. Short-term, long-term, mixture?
    Mr. Lockhart. They try to do long-term, because their 
assets are long-term, but they have, especially at the moment, 
a big mix of short-term debt.
    Mr. Perlmutter. Okay.
    Now Fannie Mae, back in July when you were here, what was 
their balance sheet, what were their assets and their 
liabilities?
    Mr. Lockhart. They had core capital of $47 billion, so they 
were bigger. They had shareholders equity of $41 billion. They 
actually had a positive fair value of $125 billion, as well.
    Mr. Perlmutter. What was their portfolio?
    Mr. Lockhart. Their portfolio was somewhat similar, $758 
billion in mortgage-backed securities, and then another $104 
billion in liquid assets, and debt of $846 billion.
    Mr. Perlmutter. Okay. Fast forward to September whatever, 
whenever you took the conservatorship. What were the assets and 
liabilities and core capital of Freddie Mac and what were the 
assets and liabilities of Fannie Mae? And tell me how mark to 
market played a role in that.
    Mr. Lockhart. We did not see a new balance sheet. They only 
produce public information once a quarter.
    What we were looking at at that point, and in August and 
September, were some of the very big exposures on the balance 
sheets and the ranges of possible losses, particularly in areas 
like credit losses, and also the losses on their private label 
securities, and also some other issues related to things like 
their deferred tax asset. There were a lot of exposures on that 
balance sheet that could produce a much lower capital number.
    Mr. Perlmutter. So during the month of August, if I 
understand correctly, your office, as well as some outside 
firms, tried to come in and examine the books of Fannie Mae and 
Freddie Mac. Is that right?
    Mr. Lockhart. Our job is to examine. We are continuously 
examining both firms. In July, we brought in help from the 
Federal Reserve and also the Office of the Comptroller of the 
Currency, including some of their credit examiners to look at 
the situation as well.
    Mr. Perlmutter. In August, were these organizations--when 
you took the conservatorship, were they paying their debts as 
they came due? I mean, were they--what was their income versus 
their operating expenses?
    Mr. Lockhart. They were paying their debts as they came 
due, and they continued to pay their debts as they came due. 
The problem was the markets were starting to close up. They 
were starting to look like they might not be able to borrow in 
the future, and the risks were too high to the system not to 
take the conservatorship action.
    Mr. Perlmutter. And did it apply--were both in the same 
boat, or was Freddie Mac in a worse position than Fannie Mae? 
Or how would you, as the regulator, compare the two?
    Mr. Lockhart. That is a good question. Certainly, on June 
30th, the capital position of Fannie Mae was stronger than the 
capital position of Freddie Mac. However, they were losing more 
money. They lost about $2.2 billion in the second quarter while 
Freddie lost about $800 million. Fannie Mae also has a much 
bigger portfolio, so they had a bigger exposure to credit risk.
    It is hard to equate the two, but they both had significant 
risk.
    Mr. Perlmutter. I thank you, and I would like to visit with 
some of your staff to really get into this a little bit more.
    Mr. Lockhart. We would be happy to do that.
    Mr. Perlmutter. Thank you very much.
    Mr. Kanjorski. Okay. The gentleman from Colorado has 
completed his examination.
    The gentleman from Connecticut, Mr. Murphy.
    Mr. Murphy. Thank you very much, Mr. Chairman.
    Thank you, Mr. Lockhart. I just have a few quick questions, 
building on Mr. Cleaver's questions regarding the effect on 
depository institutions. I certainly understand the statement 
in the prepared testimony regarding your understanding that 
their regulator is willing to work with banks that may be put 
in a particularly difficult position by the lack of dividends.
    I think much of the frustration from those institutions, 
whether they held 5 percent of their capital in Fannie and 
Freddie, or 20 percent of their capital, was that, you know, 
they felt that they were being asked, in fact, and saw the 
rules regarding the amount of position that they could take be 
relaxed in order to try to be part of the solution. And having 
seen regulators allow them to take bigger positions in Fannie 
and Freddie, they now feel, I think, a little bit more 
dispirited about where this has gone since then.
    And so I have heard sort of two things, whether the 
dividends have been suspended or whether they have been 
permanently terminated. And you certainly said to Mr. Cleaver's 
questions that you don't have any plans now to revisit that 
issue. But do you have any timeframe, do you have any belief or 
reason to believe that in the future you may return dividends 
to those preferred shares?
    Mr. Lockhart. First of all, the dividends are 
noncumulative, so the ones that are missed are missed.
    Mr. Murphy. Yes.
    Mr. Lockhart. Going forward, coming out of conservatorship, 
there is a possibility. I don't know how large that possibility 
would be, but there is a possibility.
    Many banks were aware. These prices had deteriorated well 
before we took our action in September, and many banks had 
already started to take impairments for well over a year on 
their holdings in these preferred. It wasn't as sudden as you 
might think. In fact, the preferred stocks were selling at 
about 50 percent of their face value before we took the action.
    Mr. Murphy. And without being able to reinstate those 
dividends, there are several other solutions that might be able 
to help those institutions, including a postponement of their 
ability to mark-to-market those assets pending some resolution 
of the actual value of the asset, as well as some differential 
tax treatment, their ability to potentially take ordinary 
versus capital losses.
    Have you been involved at all in those conversations or 
spoken to the community banks about those requests pending on 
the legislation that we are examining now?
    Mr. Lockhart. We have talked to some of the community 
banks, and we have had some of the State banking associations 
in to discuss alternatives. It is really up to the bank 
regulators. To the extent it is going to be a change in the tax 
treatment, that is up to Congress.
    Mr. Murphy. And just lastly, to the extent the actions 
taken through the conservatorship have led to this problem for 
many banks that now precipitate them to be asking for relief 
before other bodies, to the extent that if you believe that 
that is a reasonable ask, I think that many of us would 
certainly appreciate your advocacy with them or on their 
behalf.
    Mr. Chairman, thank you very much for the time.
    Mr. Kanjorski. Thank you, Mr. Murphy.
    The gentlelady from California, Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    Director Lockhart, the Federal Government, the taxpayers, 
have injected $250 billion into Fannie and Freddie, correct?
    Mr. Lockhart. No, that is not correct. They actually 
haven't invested anything yet. What they have done is, they 
have put facilities in place that they might draw down in the 
future if needed. At this point, there has been no taxpayer 
money put into Fannie and Freddie.
    Ms. Speier. So they continue to be private companies?
    Mr. Lockhart. They are private companies in 
conservatorship, which means that the Agency, FHFA, has 
replaced the board of directors as the executive, if you will, 
and we have chosen new CEOs to take over the companies. The 
shareholders are still in place; both the preferred and common 
shareholders have an economic interest in the companies.
    Ms. Speier. All right. Do you think that the naked shorts 
contributed to the financial ruin of Fannie and Freddie?
    Mr. Lockhart. There was certainly a lot of activity in 
Fannie and Freddie's stocks over the last 2 or 3 months, and 
there was probably some short selling. Whether they were naked 
or not, I don't know.
    Ms. Speier. Do you think there is any reason to call in the 
appropriate Federal investigators to see if there was any fraud 
associated with it?
    Mr. Lockhart. I am sure that the SEC is looking at those 
issues. We are pretty close to the SEC; in fact, the Chairman 
of the SEC is on our Oversight Board. I am sure that they are 
very aware of the situation and are looking at it.
    Ms. Speier. So it is certainly, I think, the intent of 
those in Congress that if we are going to assist Fannie and 
Freddie to the tune of $250 billion, that we see mortgages 
reset so that foreclosures don't take place. But the reality, 
it appears, is that most of what you hold are not mortgages, 
but securities that are mortgage-backed. Is that correct?
    Mr. Lockhart. Their basic business is to buy mortgages. 
They package them into securities and then put a guarantee on 
them. They have well over $3 trillion of those outstanding.
    In addition, they buy some of those securities themselves 
and keep them in their portfolio. They have also bought 
securities issued by other issuers, those private label ones I 
was talking about. In addition, they have whole mortgage loans.
    The vast majority of their holdings are either that they 
have guaranteed or they hold in their portfolios. They have 
about, of their $5 trillion, $200 billion or so that are not 
their own securities, but are mortgages.
    Ms. Speier. So you are in a position then to do, for 
instance, what some of the other institutions have done, FDIC 
being one, to freeze the interest rates, keep people in their 
homes, and adjust the mortgages?
    Mr. Lockhart. Fannie and Freddie have very active loan 
modification/foreclosure prevention programs. It is very 
important to them; they are working very hard on expanding 
those activities.
    We just put out a report yesterday, which we are going to 
update quarterly, looking at those loan modification 
activities. I would be happy to send you a copy of it.
    Ms. Speier. Do I have any more time, Mr. Chairman?
    Mr. Kanjorski. There are no lights.
    Ms. Speier. My last question, I guess I am very confused by 
why you would continue a no doc or low doc policy when the Fed 
has basically said that verification by institutions is 
mandatory now.
    Mr. Lockhart. They are not continuing. What they are doing 
is, they are making a few low documentation loans at this 
point, as I understand. The amount has dropped dramatically, as 
far as I know, and they are looking at that policy. Basically, 
as I understand, the ones that are made are to people with 
relatively high incomes and very high FICO scores.
    Ms. Speier. Well, I have income, not high income, and a 
high FICO score; and I had to give all that documentation when 
I put an offer in on a house just 2 weeks ago. So I would 
encourage you to abandon that policy.
    Thank you, Mr. Chairman.
    Mr. Kanjorski. The gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Thank you.
    Mr. Lockhart, thank you for being here. I want to get back 
to what I wrestle with, and that is why Fannie and Freddie, two 
of the largest financial institutions in the world, were never 
under the 1933 and 1934 Securities Acts. The 1933 and 1934 Acts 
were to prevent the kind of problems we have now; they were 
part of the Franklin Delano Roosevelt Administration.
    And I know that you were recommending that we get them to 
play by the rules. Everyone else has to. But they still don't. 
They are under the 1934 Act; they are not under the 1933 Act. 
Can you give me a reason why they shouldn't be under the 1933 
Act?
    Mr. Lockhart. They have both now registered with the SEC. 
Freddie just completed that in June. They went through a very 
thorough registration process.
    Mr. Shays. With all due respect, that is under the 1934 
Act?
    Mr. Lockhart. Right.
    Mr. Shays. And let me just say, to express my bias, the 
reason they agreed to come under the 1934 Act is, they were 
concerned they might have to come under the 1933 Act, so they 
voluntarily told the Congress and the SEC that they had agreed 
to go under, so back off.
    When we put this legislation in, I got a call from Frank 
Raines the next day saying, ``What the hell are you doing?'' I 
had one of their lobbyists practically knock down my door and 
say, ``How dare you introduce this bill before checking with 
me?''
    So I am not impressed that they voluntarily agreed. What I 
am troubled with is that they are not under the 1933 Act. Why 
are they not under the 1933 Act?
    Mr. Lockhart. Congress, when they passed the new law, put 
them under the 1934 Act, but not the 1933 Act.
    The 1933 Act has additional disclosures on securities. My 
view is when you look at the financial statements and their 
disclosures, they are quite extensive at this point. Of course, 
it is an issue that Congress can continue to look at.
    Mr. Shays. Okay. Let me put it differently. So you are not 
advocating. Is there any reason why they should not be under 
the 1933 Act?
    Mr. Lockhart. My view is that the 1933 Act would not add 
significant disclosure beyond the 1934 Act, and it could 
increase cost and friction in the mortgage market.
    Mr. Shays. Because they would have to play by the same 
rules that everyone else has to play by?
    Mr. Lockhart. Effectively, because they are the biggest 
issuers of mortgage-backed securities and securities in this 
country, and it would be extremely paperwork-intensive.
    But, again, it is an issue for Congress to look at.
    Mr. Shays. I understand that. The bottom line to this is, 
though, that had they been under the 1934 Act a lot sooner, 
they wouldn't have been in the mess they are in because they 
played by different rules. Isn't it true that Freddie Mac has 
still not complied to the 1934 Act?
    Mr. Lockhart. Freddie Mac just completed registration in 
June under the 1934 Act.
    Mr. Shays. And that is how many years after--I am sorry, I 
interrupted you.
    Mr. Lockhart. It is the first time in their history that 
they were ever registered with the SEC, if that is the question 
you are asking.
    Mr. Shays. Well, no, my question is, didn't they volunteer 
to be under the 1934 Act about 3 years ago?
    Mr. Lockhart. Probably longer than that--4 or 5 years.
    Mr. Shays. So it has taken them that long?
    Mr. Lockhart. What happened was, all the accounting messes 
were discovered. They were never able to. It took them 3 years 
to actually become a timely filer.
    Mr. Shays. And the reason the accounting mess was there was 
they weren't under the 1934 Act. Because had they been under 
it, they would have had to disclose, there would have been 
transparency; the SEC would have said, you are not conforming.
    And we would have been able to at least not be in as deep a 
mess as we are in right now; isn't that correct?
    Mr. Lockhart. If they had been registered with the SEC, 
there may have been more disclosure than they historically had. 
There is no doubt about that.
    Mr. Shays. And if they had disclosure, they wouldn't have 
been able to do some of the things they had done, correct?
    That is not a hard question to answer.
    Mr. Lockhart. Yes, it is. You can disclose, but not 
disclose the truth.
    Mr. Shays. But they didn't have to disclose it. They didn't 
have to lie.
    Mr. Lockhart. Yes. So I mean--
    Mr. Shays. Well, let me ask it differently.
    If they had disclosed and disclosed the truth, they 
wouldn't have been able to do that; isn't that correct?
    Mr. Lockhart. That is correct. If they would have had good 
disclosure and good accounting, which they didn't back then; 
they didn't have good accounting.
    Mr. Shays. They did not?
    Mr. Lockhart. They did not.
    Mr. Shays. Yes.
    Mr. Lockhart. And that was one of the big problems.
    Mr. Shays. Well, it is not your fault. It is Congress' 
fault for letting them get away with it.
    And the only problem I have in this whole process is 
hearing Members of Congress mouth off about what a tragedy this 
is, why it happened, blaming someone else, when they voted 
against the very legislation that would have gotten them under 
the 1933 and 1934 Acts.
    I yield back.
    Mr. Lockhart. Thank you.
    Mr. Kanjorski. The gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. I am over here.
    I wasn't here for Director Lockhart's testimony, and I 
don't have any questions, but I did want to publicly apologize 
to him. I accused him of doing something that he did not do. It 
was actually Mr. Preston who did it. I just wanted to apologize 
to him publicly. He knows what I am talking about, so please 
accept my apologies.
    Mr. Lockhart. I appreciate that. Thank you, Congressman.
    Mr. Shays. Is that sackcloth over your back?
    Mr. Kanjorski. Does anybody have a chain?
    Mr. Capuano from Massachusetts.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Lockhart, thank you for being here. I know you have 
already answered the question, I heard it earlier, but I want 
to hear it again very clearly.
    At this moment, how many taxpayer dollars are invested in 
Fannie and Freddie since the conservatorship has been--
    Mr. Lockhart. No taxpayer dollars are invested in Fannie 
and Freddie.
    Mr. Capuano. Thank you. I knew it, but I think it is an 
important point to make, particularly this week, that the 
possibility is there, we all know that, but up until this point 
things--absent things beyond your control, at least things 
internally are heading in the right direction, and no taxpayer 
dollars have been put on the table.
    Mr. Lockhart. No. There is a senior preferred facility from 
the U.S. Treasury that they will tap if they have negative net 
worth, that is, assets minus liabilities are negative. They 
will put money in, but until that happens, there is no money 
that has been put in.
    They haven't had to borrow under the facilities either.
    Mr. Capuano. Thank you.
    The other question I had, as I understand it, other than 
the degree or maybe some of the amounts of the dollars, as I 
understand it, Fannie and Freddie were not doing anything 
unique to Fannie and Freddie that other people in the 
marketplace were not doing, such as investing in Alt-As and 
maybe some exotic items and maybe some low verification items.
    Is that a fair assessment or an unfair one?
    Mr. Lockhart. They were not doing things that other people 
didn't. In fact, their underwriting standards, frankly, were 
higher than many other people's standards.
    Their problem was really the structure of the companies, 
that they didn't have enough capital to support the kind of 
risks that they were taking. The capital requirements put on 
them by Congress were changed, but unfortunately, a little 
late.
    Mr. Capuano. Right. And I agree with that assessment. 
Again, I am just trying to have you say it.
    That being the case, one of the things I am interested in 
is, right now, because of the conservatorship, it is my 
understanding that some private institutions, particularly--
banks in particular--I am also interested in public pension 
funds, who in many ways were doing the right thing by investing 
in Fannie and Freddie, doing something that they are supposed 
to do--safe, secure, good cause; Fannie and Freddie do good 
work, at least their mission is good. They were doing the right 
thing, but because of the conservatorship, they may be now 
technically in violation possibly of some of the capitalization 
requirements that they have; and pension funds--not 
capitalization requirements, but some of the underwriting 
standards that they are required to.
    And I know you are aware of it, but again I would like to 
put it on the record that: Number one, you are aware of it; and 
number two, you are working positively towards trying to 
address those issues.
    Mr. Lockhart. We certainly are aware of it. One of the key 
reasons that the financing was put in the way it was, was to 
protect the mortgage-backed security holders and the debt 
holders of these companies, that over $5 trillion.
    That was so important, to track that exposure. We had to 
make a decision that there were some parts that couldn't be 
protected, and that was the common and preferred. Common and 
preferred holders are equity holders, and they are more at 
risk. When you are investing in common stock or preferred, you 
have more risk than you do when you are in debt.
    Mr. Capuano. And I understand that. If everything works out 
the way we hope it works out and people hold on to what they 
have--again, I know there are some bumps in the middle of the 
road--in theory, there is no reason to believe that anybody, in 
the final analysis, should lose any money when this is all said 
and done?
    Mr. Lockhart. I can't say that.
    Mr. Capuano. I understand. I said it. I didn't think you 
would, but I thought I would try.
    Mr. Lockhart. I would think that the common shareholders 
have already lost a significant amount of money, and certainly 
the preferreds. It is hard to imagine they would go all the way 
back.
    At any rate, they still have some economic interest in this 
company, and going forward there may be some value.
    Mr. Capuano. Okay. Thank you very much.
    Mr. Kanjorski. Mr. Garrett, do you have a desire to examine 
Mr. Lockhart, or are you going to allow him to escape? He has 
been on that seat for a number of hours.
    Mr. Garrett. Two minutes. Thank you. I will be brief, and I 
apologize for just running in.
    Following up on my introductory comments to you and 
commending you for some of the actions that you have previously 
taken in that area, I read through your full testimony, because 
your testimony here was an abbreviation of that testimony.
    Along the lines of contributions by Fannie and Freddie, 
what you did was good, as far as I know, was the elimination, 
as far as lobbying on the Hill and also contributions by Fannie 
and Freddie from their respective accounts.
    A question for you, though--and it is not clear in here--
is, what is the status with regard to these entities making 
contributions, charitable contributions, instead? Is that 
continuing?
    Mr. Lockhart. What we said and what they are doing is they 
are reviewing their charitable contributions. They are going to 
put together a plan of what charities they think they should be 
giving to in the future.
    Obviously, when you are in conservatorship, one would think 
your contribution budget would be significantly less, and they 
will certainly be looking at that. On the other hand, there are 
some good causes there that they have supported over the years. 
They are going to be making recommendations to the conservator 
as to what they think they should continue to contribute to.
    Mr. Garrett. Okay. Just a couple of questions along that 
line, and maybe a comment. You have heard both sides say what 
they believe caused this problem, and you have heard probably 
both revisionist history, as Jeb said effectively, what did 
occur and what didn't occur.
    One of the expressions out there in politics, as you know, 
is follow the money, as to what influence at least political 
contributions may have in any organization on the drafting of 
reform or not drafting of reform. Clearly, political 
contributions, has been said throughout history, that it can 
have a direct impact.
    I would think, considering, if you look from my reading of 
the paper at least, that charitable contributions can also, if 
those charitable contributions just coincidentally go to the 
same places as political contributions--not necessarily, of 
course, directly to the Members, they can't, but to one of the 
Members' community, their pet projects and that sort of thing. 
So I would have a real concern from a political aspect of 
trying to get the reform, I think, that you and I both would 
like to see here occur.
    Along that line, as well--I know you can't give me an 
answer to this right now, but I am curious about this--are you 
looking, not just prospectively, you are saying you are going 
to look into as far as what the future, are you looking also 
retrospectively what has been their history of charitable 
contributions?
    And I guess before you answer that, I will say, if the 
answer is yes, is there data that we can get that would 
document where that has been over the last ``X'' number of 
years?
    Mr. Lockhart. We made a commitment to the chairman a month 
or so ago to put out a record of the history of their 
contributions for this year. Certainly, we will be putting that 
out. I am not sure if we are going to go back in history, but 
we will put out this year's contributions.
    Mr. Garrett. Okay. If it is possible--I mean, I assume it 
would be; I don't know how hard--but if it is possible just to 
go back a few years, 3 or 4 years, I would really be curious, 
and I think the public would just be curious, to see if there 
is any correlation as to where the charitable contributions go.
    One of the questions that I bet somebody asked but I will 
throw out a different line, your opinion on the housing fund, 
which came about, of course, through the July bill and what 
have you, just your opinion as to whether or not that has--I 
always coin the phrase--a tax on the GSEs and the bottom-line 
effect of that on going forward?
    Mr. Lockhart. As I answered the Congresswoman from 
Minnesota, we will be looking at whether they should pay the 
4.2 percent basis points for this year. Certainly, we will be 
looking at their financial results as they publish them for the 
third quarter.
    You can look at that as a tax. You can look at it as a cost 
of doing business. You can look at it in a variety of different 
ways. They don't pay State income taxes. They have some 
significant benefits from their GSE status, as you know, 
historically. So, to me--
    Mr. Garrett. That was always the argument why it was there, 
the benefit that they got. And so they have an obligation in 
going forward, if we want to make sure that they are able to 
continue to do those things, whether or not we want to at least 
give them a temporary break of that.
    Mr. Lockhart. Right.
    Mr. Garrett. Yes. Thank you very much. I appreciate your 
candor on those questions, and I look forward to hearing back 
from you, if possible, on some of those in more details. Thank 
you, Director.
    Mr. Lockhart. Thank you.
    Mr. Garrett. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Garrett.
    Thank you, Mr. Lockhart. If you are fast, you can get out 
of that table before another Member shows up.
    Mr. Lockhart. Thank you, Mr. Chairman. I appreciate it.
    Mr. Kanjorski. At this point, we are going to ask our two 
members of the next panel to come forward, Mr. Allison and Mr. 
Moffett.
    Gentlemen, welcome to the hearing.
    Maybe we will try Mr. Allison first for his opening 
statement.

   STATEMENT OF HERBERT M. ALLISON, JR., PRESIDENT AND CHIEF 
                 EXECUTIVE OFFICER, FANNIE MAE

    Mr. Allison. Thank you, Mr. Chairman, and members of the 
committee. Thanks for inviting me to testify this afternoon.
    I am Herb Allison, and I spent 36 years in the financial 
services industry, including as president and chief operating 
officer of Merrill Lynch and, most recently, as chairman, 
president, and chief executive of TIAA-CREF. I am honored to 
have been selected as the new president and CEO of Fannie Mae.
    The Federal Housing Finance Agency placed Fannie Mae into 
conservatorship to conserve our assets, restore sound 
operations, and ensure that Fannie Mae could continue to 
fulfill its mission. Our job is to balance the needs for 
safety, soundness, and taxpayer protection with providing the 
most support possible to the mortgage market.
    You asked me to address how Fannie Mae plans to operate, 
pursue its mission and prevent foreclosures.
    Since September 7th, we have provided a steady supply of 
funding and liquidity to mortgage lenders. Our single-family 
and multifamily purchase and securitization activities have 
continued at a strong pace, despite the uncertainty of the 
markets. We securitized about $31 billion in single-family 
mortgages during the first 3 weeks of September.
    On September 10th, we sold $7 billion in 2-year debt 
securities to global investors, the largest such offering in 
our history and a strong sign of confidence that investors are 
willing to fund our work. Since early last year, Fannie Mae has 
provided more than $1 trillion in liquidity to the mortgage 
market, and we are preparing to do even more.
    In a market like this, making sure mortgages are accessible 
and affordable to homeowners is vitally important, but so is 
preventing foreclosures. Because working with borrowers in 
trouble requires personal interaction, we have increased 
staffing in our servicing operations in Dallas, Texas. We are 
also increasing the use of specialty servicers skilled in 
problem loan workouts, and have revamped our incentives to all 
of our servicers. We have issued 38,000 bridge loans this year 
to borrowers who fell behind because of a temporary life event 
such as a serious illness or a job loss.
    But the scale of the current crisis and the responsibility 
entrusted to us by the government require that we do far more 
to stabilize the market, provide liquidity and prevent 
foreclosures to keep people in their homes. So we are looking 
at every aspect of our business, with the goal of improving our 
funding, pricing, trading, risk management and foreclosure-
prevention efforts.
    We are evaluating how we can participate in the FHA HOPE 
for Homeowners Program. We are also, as Director Lockhart said, 
in discussions with the FDIC and IndyMac on how we can help 
that institution with its streamlined loan modification 
program. We are increasing our purchases of mortgage-backed 
securities to bolster market liquidity, so that new mortgages 
remain available and affordable. Finally, we are examining our 
underwriting and our pricing standards to assure that we strike 
the right balance between expanding our activities and 
safeguarding taxpayers.
    Mr. Chairman, we are working closely with our conservator 
and Treasury to find ways to assist in government efforts, 
including the mortgage asset liquidity fund proposed by 
Secretary Paulson to help the mortgage market recover.
    As we take these steps to support the market, we are also 
taking steps to improve Fannie Mae. We are re-examining the 
company's risk posture, controls, expenses, operations, 
technology, corporate governance, and management structure, all 
to align Fannie Mae more closely with our mission and 
eventually to remove the need for government assistance.
    Thank you again, Mr. Chairman, for this opportunity. I look 
forward to working with you, this committee, and the Congress 
during this difficult period in our housing markets and in our 
country. Thank you.
    [The prepared statement of Mr. Allison can be found on page 
62 of the appendix. ]
    Mr. Kanjorski. Thank you, Mr. Allison.
    And now the CEO of Freddie Mac, Mr. Moffett.

STATEMENT OF DAVID M. MOFFETT, CHIEF EXECUTIVE OFFICER, FREDDIE 
                              MAC

    Mr. Moffett. Thank you, Mr. Chairman. My name is David 
Moffett, and I am the new CEO of Freddie Mac. I am pleased to 
appear before you today.
    With the committee's permission, I would like to submit my 
written testimony for the record.
    I joined Freddie Mac less than 3 weeks ago, when the 
company was placed under the conservatorship of its regulator, 
the Federal Housing Finance Agency, or FHFA. I have a long 
career in the banking industry, having served as vice chairman 
and chief financial officer of US Bank from 1993 until my 
retirement last year.
    It is indeed an honor to have been chosen to lead Freddie 
Mac at this critical time. Nothing could be more important to 
our country's economic strength than to support housing markets 
with a stable supply of low-cost mortgage funds.
    Along with Freddie Mac's dedicated employees, I am firmly 
committed to achieving the goals described by Treasury 
Secretary Paulson on September 7th, namely those of stability, 
mortgage availability, and taxpayer protection.
    Working collaboratively with FHFA Director Lockhart, I am 
quickly getting up to speed. And I am working with Freddie 
Mac's nonexecutive chairman, John Koskinen, to appoint a new 
board of directors.
    The combination of conservatorship coupled with Treasury's 
strong support has already been beneficial. The conservatorship 
lets us focus on strengthening our company, and the Treasury 
program is providing needed confidence to those who help fund 
our operations.
    The easing of capital and liquidity concerns made possible 
by the Treasury funding commitment under the senior preferred 
stock purchase agreement and the Treasury's GSE credit facility 
is enabling us to bring greater liquidity in the market. Since 
the conservatorship, we have begun ramping up our purchases of 
mortgage-backed securities, buying more than $8 billion in 
mortgage-backed securities in the past 10 days alone.
    Freddie Mac also remains focused on our affordable housing 
mission. Although the challenging market is making the housing 
goals very difficult to achieve, we estimate that our 
affordable mortgage purchases will substantially mirror the 
levels of the goal-qualifying loans being originated today.
    And our multifamily program continues to provide needed 
liquidity to the affordable housing market. Every day, we are 
working diligently with our servicers to keep families in their 
homes, by providing borrowers viable workout alternatives such 
as forbearance, repayment plans, and loan modifications.
    I am impressed with the company's innovative approach, such 
as the mass modification pilot that we are now conducting. In 
the weeks to come, I will be reviewing all of Freddie Mac's 
approaches to see if there are any other ways that we can help 
lenders in a prudent and a very sustainable way.
    In closing, let me affirm that the conservatorship and the 
strong Treasury support is helping rebuild confidence in the 
company and in the U.S. mortgage market. I look forward to 
working closely with this committee and others on all these 
vital issues confronting the mortgage market and the housing 
market today.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Moffett can be found on page 
83 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Moffett.
    I am just going to take a few moments so we can move into 
questions quickly. Welcome onboard. You are, should I say 
overpaid executives or underpaid executives? I am not sure.
    Mr. Moffett. We are not sure either.
    Mr. Kanjorski. But I am sure both this committee and the 
American people will take a little bit out of your hides before 
it is over.
    If I could ask really in a joint question, what are your 
anticipations of success for Fannie and Freddie after 
everything settles down and you come up with a workable model? 
What can we expect on how they will contribute to stabilizing 
of the real estate market?
    Mr. Allison?
    Mr. Allison. Actually, I believe, first of all, we can take 
heart from the fact that Fannie Mae has a very strong employee 
base, extremely dedicated to the mission of providing 
affordable homeownership to Americans.
    We have, as you know, a very large book of assets. Much of 
those are good assets. They have been current for years. We do 
have, though, a large subportion of those assets that are 
troubled, and it is going to take some time to work those off 
the balance sheet.
    But I do believe that when that is done--and it will be 
done--that the company will be in a very strong position to 
continue to serve the country.
    Mr. Kanjorski. Very good.
    Mr. Moffett?
    Mr. Moffett. Yes, Freddie Mac, just as Mr. Allison stated, 
has some wonderful employees, and they are very dedicated to 
the mission of Freddie Mac and the housing market.
    I think what you would expect from us over the near term 
and over the long term is to work out some of these problems in 
our mortgage portfolio. And I think what you will see over 
time, we will work through those loans and we will get some 
resolution with regard to the outcome of those loans.
    I think, in addition to that, we need to spend some time 
examining our credit criteria, all the programs around credit 
underwriting. Several of the Congressmen have mentioned 
accounting. We are focusing a lot of time and attention around 
the accounting area.
    We are going to build an organization that can sustain 
itself and continue to meet its mission over time, which really 
means we are reviewing every aspect of the business. And we are 
working hard, at the same time, to restore confidence in 
Freddie Mac, both with our customers and also the securities 
market to provide us debt.
    Mr. Kanjorski. I guess one other question: If we had in 
some way totally privatized Fannie and Freddie, would they have 
been a sufficient threat to the American economy that, as 
private organizations, the Federal Government would have had to 
have taken action to rescue them? Or could they have just been 
allowed to cease?
    I don't know if my question is clear, but I am trying to 
jump into what we think we should do in the future with regard 
to Fannie and Freddie. In other words, should you be this 
special model that you are, or should we totally privatize you 
and then, if there is a failure in the future, let you go?
    Mr. Allison. I think what we are confronting right now is 
the need to put these institutions on a sound footing in their 
current situation and given the crisis in the financial 
markets. And that is going to take a great deal of effort on 
the part of both institutions.
    I don't think we are in a position today to look forward 
and make recommendations on what the form of these companies 
should be in the future. I think that is something that 
Congress will be involved in, as well as the next 
Administration.
    But the fact is that, as Mr. Lockhart said earlier, these 
companies were highly leveraged, and, given the almost 
unprecedented disruption of the capital markets, they were 
facing grave difficulties, and that the conservatorship seems 
to me to have been necessary.
    Mr. Kanjorski. You really do believe it was a perfect 
storm?
    Mr. Allison. I think it is a storm that we haven't seen, 
certainly in my lifetime. And I think it is today still an 
extreme threat to the country's economy and to the global 
economy.
    Mr. Kanjorski. Very good.
    Mr. Moffett?
    Mr. Moffett. I think the role of the conservatorship is 
really the time and the place to rebuild Freddie Mac. And I 
think, with the support of Treasury and the support both in the 
capital and in the funding, it gives us that time to rebuild 
the company.
    I am in no position at this time to recommend how Freddie 
Mac should be structured in the future. I certainly wouldn't 
pretend to be in that position. But I think this rebuilding 
period, while we are in conservatorship, will yield good 
results. And I think the employees are dedicated to building 
back the reputation of Freddie Mac. And, during this time of 
conservatorship, I think it will make a big difference to 
regain that confidence and regain both the employees' and the 
public's view of Freddie Mac.
    At that time, then certainly the question of in what form 
it moves forward once it gets through this conservatorship, I 
think, does need re-examination.
    Mr. Kanjorski. Very good. Thank you very much.
    I think I have exhausted my time.
    The gentleman from Connecticut, Mr. Shays.
    Mr. Shays. Thank you.
    Thank you both very, very much, Mr. Allison and Mr. 
Moffett. I am unclear on a few things that are obvious to a lot 
of people, but just walk me through it fairly quickly. You both 
are the CEOs of the companies. Do you have a board of 
directors?
    Mr. Allison. We don't as yet, no.
    Mr. Shays. So who do you answer to? Do you answer to the 
regulator?
    Mr. Allison. Well, currently the regulator is serving as 
our board of directors. We do have a nonexecutive chairman who 
has been appointed, Mr. Philip Laskaway.
    Mr. Shays. Is that the same for you, Mr. Moffett?
    Mr. Moffett. Exactly.
    Mr. Shays. Okay. No stockholders?
    Mr. Allison. We have stockholders. We still have public 
stockholders.
    Mr. Shays. So the public stockholders basically have no 
value right now?
    Mr. Allison. The stock today at both companies is selling 
at a little over $2 a share.
    Mr. Shays. Okay. Explain to me the difference between 
conservatorship or--you are a conservatorship; is that correct?
    Mr. Allison. That is correct.
    Mr. Moffett. Yes, sir.
    Mr. Shays. Okay. Explain what that means.
    Mr. Allison. The company remains in its current form, but 
its board has been replaced by our regulator, Director 
Lockhart. He is exercising the authorities of the board. And I 
have been delegated by the director to be the chief executive 
responsible for the--
    Mr. Shays. And how is that different from a receivership?
    Mr. Allison. A receivership looks to liquidate the company, 
whereas, in a conservatorship, the conservator is conserving 
the assets.
    Mr. Shays. Thank you.
    Mr. Moffett, I am assuming that you would be saying 
basically the same thing.
    Mr. Moffett. Yes, exactly.
    Mr. Shays. Okay, and I thank you for not saying it twice.
    Neither of you have called on the $100 billion that is 
available to you; is that correct?
    Mr. Moffett. That is correct.
    Mr. Shays. When you do, what do you give up for the 
stockholders?
    Mr. Allison. Well, if we had to turn to the--
    Mr. Shays. Let me ask you this way. If you could go to the 
private marketplace, would that be preferable than turning to 
the government?
    Mr. Allison. Well, right now we have a facility from the 
Treasury where the Treasury stands behind us with $100 billion 
in return for the preferred stock arrangement.
    Mr. Shays. Right. And does that enable you to go to the 
private marketplace with credibility? Or, when you need funds, 
where is the first place you go to seek some of those funds?
    Mr. Allison. Well, first of all, we can go directly to the 
debt markets today. And we do every day. We are extremely 
active. In fact, Fannie Mae--
    Mr. Shays. And that is true for you, Mr. Moffett?
    Mr. Moffett. Yes.
    Mr. Shays. I am sorry to interrupt, but you are being very 
helpful, and I am learning a lot.
    Is there a point in time when you do not think you will be 
able to go to the debt market? And is that proprietary, or is 
it in weeks? Months? What?
    Mr. Allison. We are active in the debt markets today. In 
fact, Fannie Mae issued a 2-year note about 2 weeks ago for 
$700 billion. Demand was over $9 billion. It was the largest 
debt financing of its type in the history of the company.
    Mr. Shays. So the fact that the Federal Government is there 
is making the debt market more comfortable?
    Mr. Allison. Yes, sir.
    Mr. Shays. Is it conceivable you might be able to avoid 
having to turn to the Federal Government for any of this $200 
billion? Unlikely or likely that you could avoid it?
    Mr. Allison. Speaking for Fannie Mae, we are now in the 
midst of an intensive examination of all of our assets.
    Mr. Shays. Give me the short version to the question.
    Mr. Allison. We are not sure, at this point. It is going to 
take a couple of months of intensive work to really understand 
the risk composition of the assets and to begin to plot a path 
forward.
    Mr. Shays. Is it the same with you, Mr. Moffett?
    Mr. Moffett. Yes. I think this next 6 months is going to be 
very telling, because we are both spending a lot of time trying 
to evaluate the assets.
    Mr. Shays. And your question will be also the condition of 
the market, as well.
    Mr. Moffett. First of all, I think the next 6 months will 
determine whether we are going to need to access the facility.
    Mr. Shays. Is it conceivable that the plan that we are 
trying to work out with the Treasury Department and with the 
Federal Reserve will help make it less likely that you will 
have to turn to Federal dollars for assistance?
    Mr. Moffett. It is conceivable.
    Mr. Shays. Or certainly less reliant on it?
    Mr. Moffett. It is conceivable that the facility you are 
describing could help, and it could especially in several ways. 
One, it could give confidence to the securities market and 
confidence to the mortgage markets. That could play a role in 
allowing more refinancing and more mortgages.
    Mr. Shays. So, in some ways, we may be double counting when 
we say we are going to have to spend $200 billion here and so 
on. You may, by our taking action elsewhere, you may not have 
to rely on the $200 billion to $100 billion each? Is that 
possible? Not likely, but possible?
    Mr. Moffett. It is just hard to determine, at this point.
    Mr. Shays. Fair enough, fair enough.
    Thank you both very much.
    Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Shays.
    The gentleman from North Carolina, Mr. Watt.
    Mr. Watt. Thank you, Mr. Chairman. Mr. Allison, Mr. 
Moffett, it is good to see you.
    Mr. Allison, you have done a good job with TIAA-CREF, 
moving part of it to Charlotte. I appreciate that.
    Mr. Allison. Thank you, Congressman.
    Mr. Watt. We always appreciate the fine citizenship of that 
corporation there.
    I presume you are not related to the Allison who is now the 
head of BB&T?
    Mr. Allison. Sir, actually, that Mr. Allison and I had 
dinner together a few nights ago, and over the years we have 
traded e-mails, because we are distantly related. My own family 
comes from North Carolina.
    Mr. Watt. All right. We won't pursue that in public.
    [Laughter]
    It might embarrass somebody.
    Perhaps I should have taken an opportunity to ask Mr. 
Lockhart some of the questions. I really wanted to get more 
focused on the future of Fannie and Freddie, but it sounds like 
you all are not prepared to talk about the future of Fannie and 
Freddie. So let me try to get into this this way.
    It seems to me, based on what I have read, that the mission 
of Fannie and Freddie changed by default when you all took it 
over, because--when we took it over, I guess--in the takeover 
statement, Mr. Lockhart said, ``I have determined that the 
companies cannot continue to operate safely and soundly and 
fulfill their critical public mission.''
    I have read Mr. Paulson's statement that says, ``Since the 
difficult period for the GSEs began, I have clearly stated 
three critical objectives: Providing stability to financial 
markets; supporting the availability of mortgage finance; and 
protecting taxpayers.''
    Apparently, in testimony before the Senate, Mr. Lockhart 
said, ``There is no expectation that either Fannie or Freddie 
will meet the affordable housing goals that were set for 
2008.'' They didn't meet them in 2007 either, even when things 
were going great.
    I am trying to figure out what Fannie and Freddie's goal 
mission is as you understand it now. And if it is not trying to 
meet its affordable housing goals, if it is just supporting 
housing for richer people rather than affordable housing, why 
that couldn't be done through the regular private market 
without any government subsidy.
    I guess my question is, both now and future, can Fannie and 
Freddie have a useful purpose that is a government objective of 
helping people get into housing without either an implicit or 
an explicit government subsidy of some kind?
    Now, that is a big, broad question that I just asked, but I 
don't know how to ask it any more succinctly than that. And 
maybe I should shut up before time runs out and let you all wax 
and wane in that context a little bit.
    Mr. Allison. All right. David, do you want to begin? I 
would like to follow up, though.
    Mr. Moffett. First of all, the company today is seeking to 
fulfill its mission. It is seeking to provide stability to the 
mortgage market, and we are doing that by being active in 
purchasing mortgage-backed securities, which will lead and have 
led to lower mortgage rates.
    We are seeking to fulfill our affordable housing goals. I 
think the point that I made earlier is it is a very difficult 
market to do that in today. We are buying and providing 
mortgage money in the affordable housing market in two ways. 
One is in the multifamily area. That business continues to 
operate, and it has continued to provide financing in the 
multifamily market. It is also doing that in the affordable 
market, as well.
    So both of those missions we are continuing. I think the 
issue that you are raising is, how can we pursue this mission 
and, at the same time, be concerned about safety and soundness. 
And I--
    Mr. Watt. No, I don't think those things are mutually 
exclusive. I am just--well, go ahead.
    Mr. Moffett. Well, what I am trying to get to is I think 
the conservatorship provides the time, in order to rebuild the 
capital of the company, to work through the credit problems 
and, at the same time, meet our mission responsibilities.
    Granted, the affordable housing goals that were established 
in 2004 were based on some assumptions about what the 
environment would be in 2008. That has clearly changed. And, 
therefore, we are still seeking avenues and ways to reach those 
goals, but they are going to be very, very difficult to meet.
    Mr. Allison. Let me just add, if I may, that we are totally 
committed to striving to meet our housing goals, and that is a 
central part of our mission. In fact, I recently reorganized 
Fannie Mae, in just the last 2 weeks, so that our housing and 
community development area reports directly to me.
    We have been very active in supporting efforts to prevent 
foreclosures in cities and in rural areas. We have developed a 
strong and preferred partnership with State housing finance 
agencies. In fact, we have made a $10 billion commitment to 
finance single-family loans for first-time homebuyers. Fannie 
Mae has purchased $1.88 billion in FHA loans this year alone.
    We are the Nation's largest investor in affordable 
multifamily housing. We provided $26 billion for multifamily 
housing this year alone. And so far this year, we have served 
more than 350,000 families who are at or below the area median 
income and 170,000 families at or below 60 percent of area 
median income. And even as we have done all that, we are 
redoubling our efforts going forward.
    Mr. Kanjorski. Mr. Allison, I thank you.
    And, Mr. Watt, we have about 6 minutes left in our vote.
    Mr. Watt. Thank you, Mr. Chairman.
    Mr. Kanjorski. There are three votes. We will take them and 
take about 25 minutes to return.
    Fortunately, this is a great learning process for both of 
you. You will find out why you won't want to come testify 
before Congress.
    [Laughter]
    But we will be back, and several of our members want 
additional time. So thank you very much for your indulgence.
    [Recess]
    Mr. Lynch. [presiding] In the interest of time, I would 
like to reconvene the hearing. We will be joined by Chairman 
Kanjorski in a bit. We appreciate the forbearance of the 
witnesses here.
    And I would like, at this point, to recognize Mrs. Capito 
for her questions.
    Mrs. Capito. Thank you, Mr. Chairman.
    I want to thank the two gentleman for waiting, as well. I 
am going to ask a couple of short questions now. Both your 
stocks are still trading. Are they trading as preferred and 
then general stocks? What is the stock price now--
    Mr. Moffett. Roughly $2, both of them.
    Mrs. Capito. Both $2. And what was the high?
    Mr. Allison. If you mean prior to the conservatorship?
    Mrs. Capito. Yes.
    Mr. Allison. I think ours was around $60 or so.
    Mr. Moffett. I think ours was more like $70 at some point.
    Mrs. Capito. Last summer?
    Mr. Moffett. Yes.
    Mrs. Capito. I know that a lot of Members have been 
contacted by community banks, and you might have addressed this 
in your statements, so excuse me if you are repeating. But I 
just talked to a community banker who invested, and when asking 
their regulator if this was a good investment, they were very 
much encouraged to go to the preferred stock. And they are 
asking for, like, a fair treatment, I believe is what they 
would prefer, excepting losses maybe.
    But I think the fact that the government now is in front of 
the other shareholders is a difficult thing for them to accept, 
especially since they have been playing by the rules and doing 
what they should do. What do I tell my banker at home?
    Mr. Allison. I think you can tell them, as the Director 
said this morning, that the regulators are working with these 
banks; they understand the problem and the concerns. I believe 
the regulator also said that there is no plan to resume 
dividends but that they would work with the various banks to 
see how they can give them some relief, perhaps, from the 
capital requirements. That is my understanding.
    David?
    Mr. Moffett. Yes, my understanding is that the conservator 
made the decision to suspend the dividends. And I think the 
testimony earlier this morning basically suggested that, for 
the time being, they are not going to relook at the dividend 
issue.
    So that is really a conservator issue. It is really a 
question for Director Lockhart.
    Mrs. Capito. Looking at your balance sheets now, could you 
sustain the dividends now in your current condition?
    Mr. Allison. Again, there was a decision by the conservator 
to suspend the dividends at the time that the conservator took 
over these institutions.
    I can speak for Fannie Mae. We are looking at our entire 
financial situation. We are about to embark on financial 
planning for the coming year. We are reviewing all of our risk 
portfolios. So we are not yet in a position to have visibility 
toward what our future financials might look like. And even 
then, when we finish our planning, we will have a range of 
possible financial scenarios, depending mainly on housing 
prices over the next year or 2.
    Mr. Moffett. Yes, I would agree. We are in the midst of 
doing a plan for 2009, which a lot of the issue is going to be 
focused on capital. And that capital is going to be focused on, 
can we sustain our capital over a longer period of time? I 
think, in the near term, the assessment that we are going 
through right now is more critical, quite frankly.
    Mrs. Capito. One final question, and I think it is sort of 
a mind-of-the-man-on-the-street type of question, that these 
financial instruments were all packaged, and nobody really knew 
what was in them.
    Do you know now what is in these packaged mortgages in the 
detail that you need to know so that you can determine--this 
may be naive, the way I am thinking about it. If something is 
packaged with 100 loans, 2 are bad, 80 are good, and 18 are in 
the middle. Do you know now what you are holding, and can you 
say with a certainty that you will know that?
    Mr. Allison. Oh, yes. And speaking for Fannie Mae, we have 
begun a complete review of our balance sheet in depth.
    Mrs. Capito. In depth to, like, even to--
    Mr. Allison. Down to, in many cases, singular loans. We can 
also type certain types of loans, which are similar in 
documentation and risk characteristics.
    But where we have to--we are going down to single loans. 
And this is going to take us several months. It is a very 
intense effort that started 2 days after I arrived. We need to 
move quickly on this and intensely, because we will be filing 
our third quarter reports later on in the fall and we want to 
make sure those are as accurate as possible and that our 
disclosure is as complete as we can make it.
    Mr. Moffett. And we are doing exactly the same thing. I 
think it is going to take several months in order to drill down 
to each individual asset at the loan level or at the security 
level to really, fully understand the impact that this has had 
on the securities and, therefore, on the mortgages underneath 
them. So it is going to take some time.
    Mrs. Capito. Okay. Thank you both.
    Mr. Lynch. Following up on Mrs. Capito's question, with 
respect to the community banks, there needs to be some type of 
accommodation for those banks. They were encouraged by 
government officials and by others to invest. They are a 
bulwark in many communities against the current crisis. And 
there has to be some way to provide some relief.
    Let me just ask you, earlier, in response to questioning 
from Mr. Shays of Connecticut about the necessity of resorting 
to the $100 billion support that you might rely on if you need 
it, I just--I guess I have a more pessimistic view of this 
thing. And I also serve on the Government Oversight Committee, 
and so we are looking from a much more critical standpoint.
    But if I look at, over the last year, what some of these 
international commercial firms and what some of these 
investment banks have written down based on their portfolios, 
they have written down about $500 billion in holdings. As a 
matter of fact, if you take the top 25 firms there, you know, 
they have written down considerably more than Fannie and 
Freddie have, which have a much higher, a much larger 
portfolio. They have written down $500 billion. Fannie has 
written down $5 billion, and Freddie has written down $2 
billion, roughly.
    That just does not jive. They have looked already at their 
portfolios, and they have written it down. And we are in the 
process of looking at ours, you know, figuratively speaking. 
That does not look good to me. And if there is something I am 
missing in that analysis, could you explain that to me?
    Mr. Allison. Well, Congressman, again, I think both of 
these institutions are taking a fresh look at that balance 
sheet. And we are using outside experts, as well as our own 
people, as a double check. This is going to be an extremely 
intensive process.
    Mr. Lynch. It could be bad, right?
    Mr. Allison. Well, I wouldn't draw any conclusions at this 
point. We will be disclosing this fall what we think the 
position is.
    And, also, one has to keep in mind that we have to look at 
various scenarios of housing prices, which have a very 
important impact on the expected value of those securities. So, 
at best, we can present a range of possible outcomes to the 
conservator and, eventually, I am sure, to Members of Congress.
    Mr. Lynch. Okay. I understand that is the process, and you 
have explained that quite well on several occasions, and I 
don't want to eat up all my time on that.
    Mr. Moffett, I assume you are going to give me the same--
    Mr. Moffett. I would just give you--we are going through 
exactly the same process. But one thing I think is important to 
think about is that the composition of what different 
institutions have can vary wildly. So their business, although 
it may be mortgage, it may be different kinds of mortgages.
    Mr. Lynch. Fair enough.
    Mr. Moffett. I think that is one of the things that we are 
also trying to do, is not jump to any conclusions but get the 
facts.
    Mr. Lynch. And I do understand that you were more likely to 
have AAA, you know, or top-rated securities, as opposed to what 
some of these other firms were doing. So I think that might 
ameliorate things as well.
    Let me ask, again, sort of piggy-backing on Mrs. Capito's 
questions, we have a program now where we are anticipating at 
the outset $700 billion, you know, purchasing a lot of 
securities. Eighty percent of that $700 billion is basically--
80 percent of the entire market there is securitized mortgages.
    And you are talking about going through this process that 
is taking several months to pull these mortgages out and look 
at each one of them. I can't imagine that the new entity doing 
this is going to have any better time with such a larger 
portfolio they are going to acquire.
    Is there any estimate that you have on what you are doing, 
how many months that will take?
    Mr. Allison. I don't think I could give you an estimate. I 
think one of the ways that the government may try to ascertain 
the value of those securities is through an auction process 
where many different players can give their own estimates of 
those values.
    And let me also say that we are having conversations with 
the Treasury about how we might help them in their 
administration of their program down the road.
    Mr. Lynch. Okay.
    Mr. Allison. But, honestly, I can't tell you how they would 
value those securities.
    Mr. Lynch. All right.
    Mr. Moffett, could you enlighten us on that at all?
    Mr. Moffett. No, I think that is exactly right. I think 
what the Treasury is trying to do is create a market so they 
can get the best prices for the securities, so that there is at 
least a way to find the price. And I think it is just going to 
take some time, quite frankly, to sort out what it is.
    Mr. Lynch. All right.
    The Chair recognizes Mr. Garrett from New Jersey.
    Mr. Garrett. Thanks to the gentlemen, realizing you are new 
on the job, so to speak. I appreciate that, as far as your 
answers are concerned, but can you give me the best estimate?
    You have probably heard some of my previous questions. One 
of the questions I should have asked at the end of each one of 
those--well, he said, we are looking into these things. I 
should have asked the question, can you give us a ballpark 
timeline of when we should look at them? So I will throw them 
out to you, since you are the guys that are dealing with them 
on a daily basis.
    One of the areas, as you saw my concern, was just the 
charitable contributions by the organizations. Correct me if I 
am wrong. You are looking at the situation now.
    Mr. Moffett. No, that is exactly--we have been instructed 
by Director Lockhart to go through them in detail and give him 
a plan as to what we would do and what we wouldn't do. And it 
is really going to be in his hands.
    Mr. Garrett. Okay. Oh, okay. So then you have to give him--
I should ask that question, then. What is the timeframe that 
you are supposed to give him the plan?
    Mr. Moffett. We haven't set a timeframe, but it is a high 
priority of his. And we are working to meet that.
    Mr. Garrett. And you heard my other--
    Mr. Allison. Yes, sir.
    Mr. Garrett. You heard my other question to him also. Is it 
possible to do a retrospective look, go and have somebody go 
into the accounting office someplace or the other in the old 
files and pull out the records and say, this is what we gave in 
2007, 2006, and 2005? Is that a big--
    Mr. Moffett. I don't know yet, but we are going to try to 
do that.
    Mr. Allison. We will be glad to respond to any inquiry from 
a Member of Congress about that. And I don't know what the 
records are, but we will certainly attempt to provide the 
information.
    Mr. Garrett. If you could both consider this a request to 
put it in writing, I would appreciate that. Because you see my 
concern. I mean, the article in one of the papers said that 
there was just a happenstance correlation, as far as charitable 
contributions going to those Members who happen to be stronger 
supporters of the GSEs. Maybe that is just happenstance, just 
as most earmarks happenstance only go to the chairmen of the 
various committees down here. That is just a coincidence, too, 
always.
    But the other question that I asked--and I will ask your 
side--is, what is your opinion on the element of the housing 
trust fund in the July legislation? Does that make your life 
any easier?
    I know, Mr. Moffett, your closing remarks were that you are 
trying to make this company stronger and what have you, and I 
assume Mr. Allison is also trying to do that. Does that make 
your life easier, or does it have no impact upon you?
    Mr. Moffett. Well, my view is that the most important issue 
at this time is to figure out the values of the securities, 
just like we addressed before, to figure out exactly what we 
need to do going forward. And that is going to be a byproduct 
of either how--the capital needs of the company are ultimately 
going to determine that. But we are way too early.
    Mr. Garrett. When you come out with your plan, I guess, 
going forward, will you come out--and Mr. Allison, too--will 
you come out with a plan and say, this is how we should go 
forward? And, in that plan, say one of the elements of going 
forward will be the current law, which requires us to do ``X,'' 
and if we keep that in place, it will mean this, and if we 
don't do that, it will mean ``Y?'' Is that how--
    Mr. Moffett. I think the interim step is--it is really 
going to be Director Lockhart's call, because he is the one who 
has to make that assessment. We are going to give him the 
facts, and we will give him the projection.
    Mr. Garrett. You will give projections both ways?
    Mr. Moffett. Both ways.
    Mr. Garrett. He has been doing all the talking.
    Mr. Allison. My understanding is the rules have not yet 
been promulgated on that. So we are waiting for the rules, and 
as soon as we have them, we are going to analyze that and then 
make our recommendations to Director Lockhart.
    Mr. Garrett. And another question from the other side--I 
thought it was an interesting one; I didn't know it was still 
going on--it was with regard to the no doc loans. That is also 
something--documentation loans that are apparently still going 
on. And this is also all part of the package that you would be 
looking at.
    Mr. Allison. Let me try to be clear on that. From a Fannie 
Mae standpoint, we are not actively engaged in any significant 
no doc or low doc lending today.
    I think we have to look a little differently at the 
secondary market activities, where, in order to provide greater 
liquidity into the mortgage market, we may decide to purchase 
some securities in the open market that do have some Alt-A in 
them, but where the Alt-A is current and it is seasoned. In 
other words, if there is a record that it has been paying 
steadily, we might view that differently. But we are not doing 
new Alt-A type business today.
    Mr. Garrett. I understand. I appreciate that clarification.
    Last question--I am on the yellow light here, so let me 
just ask this, and this was brought up because of your comment 
at the end of your--making a stronger company and all. There 
are some people who thought it should not have been a 
conservatorship, that it should have been a receivership and go 
in that direction to address future systemic problems.
    The question I have was, your predecessor made the comment 
that was in the paper that said his role was almost, I think 
his words were, an impossible one. It really applies to you, as 
well. He was implying that he had dual responsibilities and 
that it was an impossible task for him to serve both masters, 
basically. I am paraphrasing.
    Do both of you see that the current structure is, as Mr. 
Syron said, an impossible role for any CEO to actually to try 
to cater to both masters?
    Mr. Allison. From my standpoint, as I said in my prepared 
remarks, we have to balance the need for safety, soundness, and 
protecting the taxpayer with the mission of the organization, 
which is to be active in the markets and help provide 
affordable financing for homeowners.
    That is a balance, and we have to gauge both. And we have 
to be open about the way we are making that balance and those 
tradeoffs.
    Mr. Garrett. He was also comparing with regard to, at that 
point, the equity holders in the company as well.
    Mr. Allison. Well, today the taxpayers are, in fact, 
indirectly equity holders, and we have to keep their interests 
in mind. So, on the one hand, the American public owns homes, 
but they are also taxpayers. We have to make a tradeoff.
    And I think the key to this is going to be to be 
transparency about the decision tools we are using to make 
those types of tradeoffs. We will have to get approval of the 
conservator, as well as eventually our own board. And we will 
have to come to Congress and explain those tradeoffs, as well.
    Mr. Moffett. I think ultimately the tradeoffs are going to 
have to be made by Congress. I think you are going to have to 
deal with that issue, that seemingly very difficult balance 
between shareholders and the taxpayers. And I don't think we 
are in a position, at least at this juncture, to comment on 
that. But that is ultimately going to be the issue.
    Mr. Garrett. It is the proverbial ``above the pay grade.''
    Thank you, gentlemen.
    Mr. Lynch. All right. The Chair recognizes the 
distinguished gentleman from Colorado, Mr. Perlmutter, for 5 
minutes.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    Ordinarily, I am the guy who sees the glass as half-empty, 
and Mr. Lynch and Mr. Garrett see it as half-full. But I am 
going to reverse that today, because, coming from Colorado, we 
have seen our foreclosures drop and the number of homes 
available on the market reduced substantially. So I think, you 
know--but we went into this before anybody else did. So I just 
see that.
    My questions to you, first I would like to ask--they are 
just kind of the simple ones.
    For Fannie Mae, what is your cash flow each month, I mean, 
your income versus your expenses on a general basis? And you 
can give it to me before taxes, after taxes, I don't care.
    Mr. Allison. Well, if you look at total cash flows from 
financings and the cash flows out through loans, etc., today 
the cash flows are actually positive. And we have been able, as 
I mentioned in my earlier remarks, to raise our all-time record 
2-year financing of $7 billion. We are able to raise money, as 
well, in the short-term money markets. And we have managed to 
maintain stability in the amount of mortgage-backed securities 
underwriting that we are doing today, in spite of the turmoil 
in the markets.
    Mr. Perlmutter. So you are making $1 million, $2 million, 
$3 million?
    Mr. Allison. Again, there is a difference between cash flow 
and earnings. And, again, that is something we are looking at 
today.
    Mr. Perlmutter. What about Freddie Mac?
    Mr. Moffett. Well, exactly. Freddie Mac also has positive 
cash flow. It is too early to determine what the earnings will 
be in the third quarter and then in the future. But right now 
it is positive cash flow.
    Mr. Perlmutter. Which then brings me to the question that 
you both have talked about, which is capital. How much capital 
does--I mean, I can't remember whether, in the law that we 
passed in July, whether we set a capital requirement for Fannie 
Mae and Freddie Mac.
    If we did, what is it? If not, what are you shooting for?
    Mr. Allison or Mr. Moffett, go ahead.
    Mr. Allison. Allow me, then.
    One of the reasons we are conducting this exercise to value 
the portfolio on our balance sheet is to determine how much 
capital we actually have. And that is going to depend on an 
analysis of the value of the balance sheet with the assets, 
what are these assets worth today--and, by the way, there will 
be ranges of values, depending on projections of home prices--
and also what are our liabilities today. And we will deduct the 
liabilities from the new asset valuations and conclude what our 
equity capital is.
    And, again, there is economic equity, to make this a little 
more complicated, and there is GAAP equity. And we will be 
reporting both when we publish our third-quarter financial 
statements. So I can't give you a precise answer today until we 
do that valuation as to how much capital we have.
    Mr. Perlmutter. Okay. But my question to you two is, Mr. 
Lockhart said that, back in July, it was 1 or 2 percent 
capital. Now, I don't know whether it was equity or GAAP or 
what he was talking about, but apparently that was too low. 
What are you shooting for, like, 5 percent like a bank has to 
have, or what?
    Mr. Moffett. At this juncture, I am just going to, not 
repeat what Mr. Allison said, but I think we have to determine 
what the base is, the base capital, based on the assessment of 
the assets at the end. And I think that is where all the energy 
is being focused, on what exactly is the fair value of the 
assets.
    From the capital point, then I think both of our goals are 
to retain capital and build capital in the companies. And I 
think that is going to depend on future losses and future 
expectations for home prices. But I think the goal is to 
establish that base and then to try to grow the capital base 
from there.
    I do understand that Director Lockhart's team is working on 
capital ratios, re-assessing what those capital ratios are 
going to be and should be. And it is too early, and I certainly 
am not privy to that. But they are working at that level, to 
determine what those ratios should be.
    Mr. Perlmutter. All right. We have this $700 billion thing 
we have just been kicking around for a couple of days and are 
supposed to act on it very quickly. But let's take your 
organizations, all right? You guys go in, you look at your 
portfolio, you say, ``Okay, we have 10 percent distressed 
properties.'' Do you then cordon that off and then sell it? Is 
that something that you would be planning to do?
    I am just trying to figure out what it is that is going to 
happen with that $700 billion, whether it affects a Fannie Mae 
or a Freddie Mac or if it is purely Goldman Sachs and Bank of 
America. I don't know who it is. And I don't know if you have 
thought about it, because we are sort of doing this on the fly 
as we speak.
    Mr. Allison. Well, we, first of all, have to determine what 
we believe the economic value to--let's say, maturity of those 
assets are. And then we have to compare that to the market 
price of the asset out on the open market and the liquidity of 
the market, the market's ability to absorb large volumes of 
those securities.
    And so we have a lot of judgment calls to make down the 
road, and we haven't yet. Until we value these portfolios, we 
will not be in a position to have an asset disposition planned. 
But that is something we are going to have to develop in the 
months to come. I can assure you that we are working extremely 
hard to understand this portfolio and to begin developing 
strategies going forward.
    Mr. Perlmutter. Okay. Is it the same for you, Mr. Moffett?
    Mr. Moffett. Yes, I think, just to add to that, I think one 
of the assessments will need to be should we sell them, or, as 
Mr. Allison discussed, maybe we will realize the value over the 
long haul and maybe it is not in the best interest to sell the 
assets.
    So that is why this asset valuation process is so 
important, not just for the capital considerations that we are 
dealing with today, but also real value, should we keep the 
assets, work through them, and over time realize that value.
    Mr. Perlmutter. Sort of, on the positive side--I know my 
time is up--in this conservatorship you actually have time to 
do that.
    Mr. Moffett. That is right.
    Mr. Perlmutter. Thank you.
    I yield back.
    Mr. Lynch. Okay, we thank the gentleman. I want to thank 
you both for attending the hearing and for helping the 
committee with its work.
    I do want to, before we close, just ask you the same 
question I asked of Mr. Lockhart when he was here before. Back 
in the day when the taxpayer was not a shareholder as they are 
now, and back in the day when the taxpayer did not have any 
skin in the game, it wasn't necessary for the members of this 
committee to understand in such minute detail the conduct of 
and the details of these complex securities.
    However, now the game has changed. And so we need both 
Democrats and Republicans on this committee, we need--exactly 
as I asked Mr. Lockhart--we need your folks who are trying to 
do this work pulling these securities apart, valuing them, to 
give that same instruction to us and let us observe that 
practice.
    So either we have some of your folks come up to the Hill 
and demonstrate that to the members, or we arrange something 
for us to go over to Fannie and Freddie and observe that 
practice as it is going on, without disrupting things, 
obviously.
    But we now need to know in this level of detail what we 
have here. Because we have some pretty important decisions to 
make, and I think it will help the members enormously if they 
can actually reduce this down to a degree where they can 
actually understand it.
    I think that is where much of the weakness in the market 
was, lack of transparency. People didn't know what they had, so 
fear struck because of the unknown. If we can remove some of 
that unknown, at least in the minds of the Members of Congress, 
it would greatly help our ability to find a cogent solution in 
all of this.
    So I will ask you both on the record, if you will be 
willing to do that?
    Mr. Moffett. We will do that, and we look forward to it.
    Mr. Allison. We will absolutely do that.
    And, furthermore, we are looking at how we can communicate 
these issues in our public disclosure in a way that is as 
understandable as possible and as clear as possible. These are 
very complex subjects, as you well know. Reducing them to 
simple, understandable concepts for the public is very 
important, I am sure to both of us.
    But in the meantime, we want to be as open as possible with 
you. And please call on us any time, and we will be happy to 
respond.
    Mr. Lynch. Thank you. I appreciate that.
    I know that we have a lot going on today. There are members 
in various committees right now in meetings on some other 
matters that are very important. So I note that some members 
may have additional questions for this panel which they may 
wish to submit in writing. So, without objection, I would ask 
that the hearing record remain open for 30 days for members to 
submit written questions to the witnesses here and to place 
their responses in the record.
    With that, this meeting is now adjourned.
    [Whereupon, at 4:28 p.m., the hearing was adjurned.]


                            A P P E N D I X



                           September 25, 2008


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