[Senate Hearing 110-957]
[From the U.S. Government Publishing Office]


                                                         S.Hrg. 110-957
 
    REFORMING THE REGULATION OF THE GOVERNMENT-SPONSORED ENTERPRISES 

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

THE PROBLEMS RELATED TO GSE ACCOUNTING POLICIES AND PRACTICES, INTERNAL 
CONTROLS, CORPORATE GOVERNANCE, AND CORPORATE CULTURES AND TO CONSIDER 
                 IMPROVEMENTS TO THE REGULATORY SYSTEM


                               ----------                              

         THURSDAY, FEBRUARY 7, 2008 AND THURSDAY, MARCH 6, 2008

                               ----------                              

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html





















              REFORMING THE REGULATION OF THE GOVERNMENT-
                         SPONSORED ENTERPRISES
















                                                        S. Hrg. 110-957


    REFORMING THE REGULATION OF THE GOVERNMENT-SPONSORED ENTERPRISES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

THE PROBLEMS RELATED TO GSE ACCOUNTING POLICIES AND PRACTICES, INTERNAL 
CONTROLS, CORPORATE GOVERNANCE, AND CORPORATE CULTURES AND TO CONSIDER 
                 IMPROVEMENTS TO THE REGULATORY SYSTEM


                               __________

         THURSDAY, FEBRUARY 7, 2008 AND THURSDAY, MARCH 6, 2008

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        MEL MARTINEZ, Florida
JON TESTER, Montana                  BOB CORKER, Tennessee

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                       Dawn Ratliff, Chief Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor



























                            C O N T E N T S

                              ----------                              

                       THURSDAY, FEBRUARY 7, 2008

                                                                   Page

Opening statement of Chairman Dodd...............................     1
        Prepared statement.......................................    67

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     3
    Senator Carper...............................................     5
    Senator Reed.................................................     7
        Prepared statement.......................................    70
    Senator Martinez.............................................     8
    Senator Menendez.............................................     9
    Senator Crapo................................................     9
    Senator Schumer..............................................    10
    Senator Dole.................................................    12
    Senator Allard...............................................    14
    Senator Casey................................................    14
        Prepared statement.......................................    81
    Senator Bennett..............................................    15
    Senator Bayh
        Prepared statement.......................................    83

                               WITNESSES

David G. Nason, Assistant Secretary for Financial Institutions, 
  Department of the Treasury.....................................    16
    Prepared statement...........................................    85
    Response to written questions of:
        Senator Crapo............................................   139
James B. Lockhart III, Director, Office of Federal Housing 
  Enterprise Oversight...........................................    18
    Prepared statement...........................................    90
    Response to written questions of:
        Senator Bayh.............................................   140
        Senator Crapo............................................   141
Ronald A. Rosenfeld, Chairman, Federal Housing Finance Board.....    20
    Prepared statement...........................................   110
    Response to written questions of:
        Chairman Dodd............................................   142
        Senator Bayh.............................................   150
        Senator Carper...........................................   152
        Senator Crapo............................................   154
Richard F. Syron, Chairman and Chief Executive Officer, Federal 
  Home Loan Mortgage Corporation (Freddie Mac)...................    51
    Prepared statement...........................................   119
    Response to written questions of:
        Senator Crapo............................................   157
Daniel H. Mudd, President and Chief Executive Officer, Federal 
  National Mortgage Association (Fannie Mae).....................    53
    Prepared statement...........................................   130
    Response to written questions of:
        Senator Crapo............................................   160

              Additional Material Submitted for the Record

Prepared statement of Geoffrey A. Bacino and Allan I. 
  Mendelowitz, Directors, Federal Housing Finance Board..........   166

                              ----------                              

                        THURSDAY, MARCH 6, 2008

Opening statement of Chairman Dodd...............................   173
Opening statements, comments, or prepared statements of:.........
    Senator Corker...............................................   175
    Senator Reed.................................................   175
    Senator Bennett..............................................   176

                               WITNESSES

William B. Shear, Director, Financial Markets and Community 
  Investment, Government Accountability Office...................   177
    Prepared statement...........................................   212
Vincent E. Malta, Chair, National Association of 
  REALTORS', Public Policy Coordinating Committee.....   178
    Prepared statement...........................................   230
Kieran P. Quinn, Chairman, Mortgage Bankers Association..........   180
    Prepared statement...........................................   246
Gerald M. Howard, Executive Vice President and Chief Executive 
  Officer, National Association of Home Builders.................   181
    Prepared statement...........................................   297
Nancy Andrews, President and Chief Executive Officer, Low Income 
  Investment Fund................................................   183
    Prepared statement...........................................   308


    REFORMING THE REGULATION OF THE GOVERNMENT-SPONSORED ENTERPRISES

                              ----------                              


                       THURSDAY, FEBRUARY 7, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    This morning's hearing is entitled ``Reforming the 
Regulation of the Government-sponsored Enterprises,'' and while 
this is the first meeting on this topic in the 110th Congress, 
I want to acknowledge that the Committee has established a very 
substantial record on these issues, which was developed through 
a comprehensive series of hearings organized by my colleague 
and friend, the former Chairman, Senator Dick Shelby, when he 
was Chairman of the Committee. He has shown important 
leadership on this issue, and I want to acknowledge that at the 
very outset of all of this.
    I want to acknowledge as well Senator Tom Carper's strong 
interest in this issue. Hardly a day goes by when Tom Carper 
has not asked me when we are going to deal with the GSE issues. 
And Jack Reed, of course, I want to mention this in a moment, 
the issue as well on the affordable housing issues and the 
like. There has been a lot of interest in the Committee on the 
subject matter.
    Because we have a number of Members that are new to this 
Committee, I think it would be useful to remind people of the 
backdrop on these issues. A pattern of serious abuses and 
irregularities surfaced at Fannie Mae, Freddie Mac, and the 
Federal home loan banks starting in the year 2003. These 
entities misstated their incomes by billions of dollars and 
exhibited serious problems with their internal controls, 
accounting practices, and corporate governance. Today, Fannie, 
Freddie, and the Chicago Home Loan Bank are still operating 
under regulatory agreements.
    It is because of these very serious problems that we all 
agree that a new world-class regulator with broad powers like 
those of the banking regulators should be created to oversee 
GSEs. By the same token, we need to recognize the tremendous 
benefits that the GSEs have brought to the American people, to 
our communities, and to our economy.
    For example, the widespread availability, nearly unique in 
the world, of a 30-year, fixed-rate, payable mortgage is due in 
no small part to the existence of Fannie Mae and Freddie Mac. 
As a result, millions of Americans have achieved the dream of 
safe and stable homeownership that would otherwise have been 
out of their reach, in my view. This homeownership has been an 
engine of wealth creation for our Nation, wealth that is 
measured in the hundreds of billions of dollars, wealth that 
homeowners may use to pay for a child's college education, to 
finance a secure retirement, or simply to get them over a 
financial rough patch. Fannie and Freddie are two of the key 
drivers of the housing finance system that has created this 
wealth.
    Now, let me be clear. I will not be one to preside over a 
legislative process that dismantles this system. I will pursue 
GSE legislation, and I will do so aggressively. But I will not 
do anything that undermines the foundations of this highly 
beneficial system.
    Ironically, we have sat through hours of hearings over the 
years with witnesses repeatedly raising alarm bells about the 
risks Fannie and Freddie pose to the financial system. Yet 
today, the only part of the housing finance system where credit 
is still flowing is the GSE and FHA sectors. Everywhere else 
mortgage credit is either unattainable or incredibly expensive. 
One financial institution after another failed effectively to 
manage its risks and has been forced to seek capital infusions, 
often from foreign governments, to cushion their losses. Many 
financial institutions have gone bankrupt, but only after 
making bad loans have they turned the American dream into a 
living nightmare for millions of our hard-working fellow 
citizens. In short, the system is under siege, and it is the 
GSEs that are riding to the rescue.
    I would note the second paragraph of Mr. Lockhart's 
testimony this morning in his opening statement makes that 
point very, very clear. As you point out, Mr. Lockhart, in your 
statement, but for the GSEs today, this problem would be a far 
more pronounced and serious one, and I thank you for that 
opening statement because it makes the point that I am making 
here. I will not bother reading it, but suffice it to say that 
that second paragraph states the case very clearly.
    I know that there are some who take a very different view 
of this matter. Many are philosophically opposed to the very 
existence of these entities. Former Chairman Alan Greenspan 
told this Committee very frankly that he was in this camp and 
that he favored privatization. In my view, it is time to get 
beyond this stale ideological debate. We need to get down to 
the hard work of crafting a balanced bill that will create the 
kind of regulator that we all agree is needed. By doing so, we 
will ensure the public that a credible regulator is on the job, 
increasing confidence in our system. We will also be able to 
demand as an integral part of the process that the GSEs 
strengthen and deepen their commitment to affordable housing.
    Senator Jack Reed of Rhode Island has provided a framework 
for doing just that, and I commend him for it. I intend to work 
closely with him going forward on that issue.
    In addition, I believe the GSEs need to do more to help 
subprime borrowers get out of the abusive subprime loans and 
into the safer, more affordable stable products. Indeed, as 
Fannie and Freddie successfully address their accounting and 
management problems, I think it would be very helpful for them 
to devote a portion of the surplus capital they have been 
required to maintain for the purchase and workout of these 
troubled loans.
    As my colleague Senator Schumer noted last week, these are 
the times when GSEs must live up to their public obligations, 
and I intend to put them to the test on this.
    Before I recognize the Ranking Member, I want to reiterate 
that we are in agreement in many areas, and I look forward to 
working with him, with our colleagues on this Committee, with 
our witnesses, and with other stakeholders to produce a strong, 
broadly balanced, and effective piece of legislation. The 
American people are looking for us in these uncertain times to 
act. We do not have the right to disappoint them, and I do not 
intend allowing that to occur.
    So we are going to move and move carefully with balance, 
without rigidity, but also understanding these are very, very 
critical times. Very critical times. And how we act, not only 
the pace of how we act, but what we produce is critically 
important for the well-being of our Nation. And I intend to see 
that we do that.
    So, with that, let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Thank you for 
calling this hearing. At the outset, I also want to 
acknowledge--you acknowledged the work of some of the other 
Senators, but Senator Hagel, Senator Crapo, Senator Dole, and 
Senator Martinez, the former Secretary of HUD, along with 
Senator Sununu, have been very involved with all of us on 
trying to reform GSEs and make them work.
    I remain committed, Mr. Chairman, to seeing this Committee 
create a new regulator with the authority and independence 
necessary to ensure that these institutions carry out their 
mission in a safe and a sound manner. While it is easy to 
recognize the role the GSEs play in providing liquidity to our 
home mortgage markets, I believe it is also important for us to 
recognize the size and scope of their operations. The combined 
obligations of Fannie Mae, Freddie Mac, and the Federal home 
loan banks exceed $6 trillion. That is over $1 trillion more 
than the $4.4 trillion publicly held debt of the U.S. 
Government.
    Think about it a minute. Additionally, Fannie Mae and 
Freddie Mac are among the largest participants in the 
derivatives market, arising from their need to hedge the risks 
associated with their combined $1.4 trillion portfolios. 
Through their debt exposure in derivative contracts, the GSEs 
affect an extensive network of financial institutions. Clearly, 
these are large organizations with a tremendous influence on 
our financial markets. Should a GSE be unable to meet its 
obligations, the ramifications for our mortgage market and our 
financial system could be devastating. The current difficulties 
in the subprime market would be small in comparison if one of 
the GSEs were to falter.
    Mr. Chairman, you have heard me say here many times that an 
institution that is well managed, well regulated, and well 
capitalized is not only likely to be safe and sound, but is 
also in the best position to weather bad economic conditions. 
We know that. Both Fannie and Freddie have had significant 
management problems, as evidenced by a string of disturbing 
accounting scandals, which are not yet entirely resolved. They 
are not well regulated because the structure and the 
authorities of the current regulator are grossly inadequate to 
ensure the safe and sound operation of institutions the size of 
both Fannie and Freddie.
    Finally, Fannie Mae and Freddie Mac are not well 
capitalized, as we know. Roughly 3 years ago, OFHEO placed a 
30-percent excess capital requirement on the GSEs' statutory 
minimum capital requirements because of serious operational 
deficiencies. While a 30-percent surcharge may sound like a 
significant increase, let's put it in perspective. The 
practical effect is that their capital went from 2.5 percent--
2.5 percent capital--to 3.25 percent for assets. In the wake of 
their combined losses of over $8 billion this year alone, 
representing almost 20 percent of their capital, both Fannie 
Mae and Freddie Mac are leveraged over 80:1 on a fair value 
basis--80:1. These margins leave little, if any, room for 
error. Even a minor decline in the value of their assets or 
higher than anticipated losses on guaranteed mortgage-backed 
securities could leave Fannie and Freddie ill-equipped to 
perform the necessary liquidity role in today's troubled 
housing market.
    Considering that housing market analysts are uniformly 
forecasting further price declines, and some are even 
suggesting home values may decrease by as much as 25 percent 
next year, I believe it is only prudent to ensure that the GSEs 
are properly capitalized.
    While we may ask the GSEs to perform the critical task of 
adding liquidity to the market, I believe we must also be 
cognizant of the fact that the GSEs face the same heightened 
risk as every other participant in the mortgage market. We have 
already seen some of the effects in the GSEs' bottom lines. In 
four of the last five quarters, Freddie has reported losses; 
Fannie has had two losses in the last five quarters. For the 
third quarter, the most recent public data, Freddie Mac 
reported a $2 billion loss while Fannie Mae reported a $1.4 
billion loss. The fourth quarter is not likely to be any 
better, and 2008 promises to continue this trend for the GSEs 
and other market participants.
    Today, as we find ourselves surrounded by waving red flags, 
what is the first thing we do? Do we look for ways to shore up 
the safety and soundness of these massive institutions by 
creating a strong and independent regulator? Do we look for 
ways to focus them on their original mission of facilitating 
affordable housing? Do we look for ways to decrease the risk 
profile of the GSEs so that we first and foremost protect the 
American taxpayer from another costly bailout?
    The answer to all of these questions is no. We do none of 
these. In fact, we do quite the opposite. As part of the 
stimulus package, the Congress is considering an increase in 
the GSE conforming loan limit from $417,000 to over $700,000.
    Let me repeat so that there is no confusion. The Congress 
is considering an increase in the GSE conforming loan limit 
from $417,000 to over $700,000. This represents a nearly 75-
percent increase in the loan limit, despite the fact that this 
Committee has not held one hearing, has built no record, and 
has no clear picture as to the status of the jumbo market and 
whether it really needs this kind of help at this time.
    So we are clear, an individual would need a yearly income 
in excess of $150,000 to even qualify for a $700,000 loan. Once 
again, instead of thinking of ways to further protect the 
American taxpayer, we are actually considering ways to further 
expose them for the benefit of those making healthy six-figure 
salaries. As one Member of this Committee who lived through the 
savings and loan crisis and its aftermath, as the Chairman did, 
the mood reminds me of the 1980 behind-closed-doors increase in 
the deposit insurance limit from $40,000 to $100,000.
    Mr. Chairman, we must ask ourselves why the GSEs are 
regulated in the first place and let the answers drive the 
structure of their regulation. Fannie Mae and Freddie Mac are 
not regulated for the sake of protecting their shareholders or 
their debt holders from loss. They are regulated to protect the 
taxpayers and to protect the stability of our financial system.
    I commend the hard work of Director Lockhart and his agency 
in making use of the limited tools at their disposal to monitor 
the GSEs. Mr. Chairman, I believe, however, that OFHEO lacks 
the necessary authority to protect both our financial system 
and the American taxpayer from significant loss in the event of 
a GSE insolvency. This deficiency becomes all the more striking 
as we consider increasing the conforming loan limits by nearly 
75 percent without even entertaining some added protection.
    The role played by the GSEs in our mortgage and financial 
markets is necessary, as you have pointed out. But what is 
equally necessary, I believe, Mr. Chairman, is the need to 
ensure the safety and soundness of their operations so that 
they continue to be a vital and dependable source of liquidity 
in our mortgage market. Therefore, I believe, Mr. Chairman, 
that we must craft strong legislation that will address the 
very real risks posed by the GSEs while at the same time 
facilitating and strengthening their core mission.
    I hope we can work together on that goal.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Let me just ask our colleagues here, I want to go around 
and ask them for opening statements. It is a big issue and an 
important issue, but if you could try to limit them to a few 
minutes, this way we can get to our witnesses and so we will 
have a chance to hear them.
    Let me turn, if I can, to Senator Carper. And I am, again, 
going to recognize people in the order in which they arrived 
here this morning.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman. Thank you for 
bringing us together, and to our witnesses today, welcome. We 
look forward to your comments and your responses to our 
questions.
    Like many of us gathered here today, I have been a strong 
supporter of GSE reform for a number of years. Fannie Mae and 
Freddie Mac are, I believe, the backbone of a mortgage market 
that is reeling from the subprime crisis. And as we have seen 
both this year and last year, subprime mortgages have destroyed 
the private-label mortgage-backed security market. It is almost 
as if a hole had been punched in a bucket and all of the 
liquidity in the mortgage market had drained out.
    There are any number of reasons for the decline. This 
Committee has held hearings on the subprime mortgage market and 
the foreclosure tragedy. In order to bring liquidity back into 
the marketplace, we must use Government-sponsored enterprises. 
The Federal home loan banks have stepped up to this task 
already. Federal home loan bank advances have increased 
dramatically over the last year, from approximately $600 
billion to some $900 billion. And while much of the news is 
focused on the $50 billion advances to Countrywide, this system 
has served many more institutions, and I will follow up with 
some questions later on that explore the risks associated with 
the concentration of advances to Countrywide.
    The stimulus package currently pending before the Senate 
includes a provision to raise the conforming loan limit from 
Fannie Mae and Freddie Mac to $730,000, alluded to by Senator 
Shelby. This will certainly provide needed liquidity to the 
markets by expanding the mortgage-backed securities that are 
guaranteed against credit losses, to include mortgages much 
higher than the $417,000 limit under current law. And while 
this will help, it will also bring some added risks to these 
enterprises, and we must take steps to bring the regulator back 
into the 21st century.
    You know, we have debated these issues over the years, and, 
unfortunately, at least to date, we have not resolved our 
differences. But we now have some serious challenges facing our 
economy, and this is the time to restore confidence in our 
mortgage markets. I look forward to working with our Chairman 
and Ranking Member and a lot of other folks around this table 
to find common ground on these issues.
    Some of the issues we have argued over in the past have 
been overtaken by market events, and because time is of the 
essence, I would hope that we would use the House-passed bill 
as a starting point. And while I have some concerns about some 
of its provisions, it is a good middle ground, and we can build 
on the consensus reached by Chairman Frank, his Committee, and 
Secretary Paulson and others.
    With that said, any bill that we debate should have the 
following key provisions: A new regulator with combined 
authority should be independent. A new regulator should be able 
to set minimum capital requirements. A new regulator should 
have enhanced enforcement authorities. SEC registration--Fannie 
on track, and I think all 12 Federal home loan banks have been 
registered now. New program approval. Affordable housing fund 
and goals should be included as well. And there should be 
limits on retained portfolio.
    And while we are searching for ways to help a distressed 
marketplace, let's just keep in mind that there are $46 
trillion of GSE securities currently in the market around the 
world, and we need to do everything we can to maintain the 
confidence in the GSEs and their security. The best way to 
maintain confidence is to create a regulator that would have 
the authority and the stature to calm the markets and ensure 
that both the debt and the mortgage-backed securities issued by 
our GSEs continue to be seen favorably by investors.
    I would just close with this, Mr. Chairman. Go back 2 years 
ago. There was a whole lot that we disagreed on. And if you go 
down the list of things we used to disagree on, on which there 
is now consensus, we agree on a whole lot more today than we 
disagree on. And with that consensus, my hope is we will be 
able to move forward expeditiously. I am delighted that we are 
here and get this party started.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Carper, very, very much.
    Senator Hagel.
    Senator Hagel. I will wait for the testimony.
    Chairman Dodd. Thank you, Senator.
    Senator Reed, Jack Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman. I have a written 
statement which I would like to submit to the record.
    Chairman Dodd. Done.
    Senator Reed. And I would make some very brief comments, I 
think.
    First, we all recognize the crucial importance that the 
GSEs play in our financial system, particularly providing 
liquidity in our mortgage market at a time when that liquidity 
is desperately needed.
    We also, I think, agree, based on everything I have heard 
this morning, that the GSEs need a strong regulator with a full 
panoply of powers as outlined by Senator Carper, and that is a 
good starting point.
    As we go forward, Senator Shelby has suggested that we will 
consider allowing Fannie and Freddie to purchase jumbo 
mortgages. We have to do that carefully, and we also have to 
ensure they do not lose focus on the primary area of their 
concern, which is the moderate- and low-income market in the 
United States, to provide those individual Americans with 
access to mortgages and homeownership.
    As the Chairman indicated, I have introduced, along with 
colleagues, the GSE Mission Improvement Act, and this would 
create an Affordable Housing Trust Fund. I think that has to be 
part of a final legislative GSE proposal. Sixty-five percent of 
the money would be a formula grant to States which, in the 
first year, could be used to go in and help people who are 
underwater with their mortgages by providing fixed 30-year 
mortgages rather than the exotic mortgages that are now 
plaguing their lives. The other 35 percent would be a capital 
magnet fund which would attract private capital for renovation, 
rehabilitation, and construction of affordable housing. We do 
understand that at some point going forward we have to get back 
into building affordable housing, not expensive housing 
exclusively.
    And I think without our concentration on affordable housing 
for our citizens, we will continue to have significant 
problems. Many of the people that are troubled today because of 
mortgage difficulties, had they had access to not only 
affordable housing but affordable mortgage financing would not 
be in the terrible predicament they are in today. I think we 
can do more and we should do more.
    I thank the Chairman and Senator Shelby for holding the 
hearing and their wise comments. Thank you.
    Chairman Dodd. Thank you very much.
    Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much. I want 
to welcome the panel, very especially Ronald Rosenfeld, who I 
had the pleasure to work with while I was at HUD as he was 
Director of Ginnie Mae at the time.
    Mr. Chairman, for a long time, I have been concerned about 
the role of the GSEs, and let me just say that I will put my 
full statement in the record and just make brief comments.
    The concern arose during my time at HUD because of the 
great risks that the implied guarantee of the Federal 
Government presented a point of liability to our Government, 
while at the same time understanding the weakness of the 
current regulator. OFHEO and HUD share the regulation. It is 
not all under one roof. And in this bifurcation and without the 
independence and the enhanced powers that a regulator should 
have, OFHEO does not have the tools available to properly 
regulate these entities.
    This is why it is critical that we do GSE reform. This is 
why it is critical that the time be now, because we are at a 
time of crisis in the housing market. We are at a time of 
crisis in the liquidity of mortgages in the housing market.
    In order to have a strong regulator, we would not only be 
ensuring the safety and soundness, we would be giving a sense 
of comfort and security to the United States taxpayer, but also 
we would be enhancing the credibility of Fannie and Freddie and 
the other GSEs as a prudent place to invest money. It would 
increase liquidity into the housing market at a time when 
tremendous needs for liquidity exist.
    So for my way, I think that the time has come. I think we 
need to move to ensure that the new product requirements be 
fully overseen, that there be a timely opportunity to object. 
The current regulator gets told when a new product goes into 
market. We have got to have a situation where, before a product 
goes into market, that it is brought before the regulator for 
an approval or disapproval in a timely way, because I know that 
the market shifts quickly. But, in any event, safety and 
soundness, new product approval, sticking to the charter 
mission, ensuring that it is about helping housing at a certain 
level of the marketplace.
    I am very, very concerned about the current stimulus 
including an increase in the conforming loan limits. We are 
doing that without properly knowing and understanding the 
implications of it, the increased liabilities to companies that 
already are stressed at a time of difficulty. And I know there 
are good reasons why. The people in Miami would have an 
opportunity to get loans that they otherwise might not get. I 
am encouraged that this would be very limited in terms of 
markets where this would happen, but I am very concerned----
    Chairman Dodd. And in time, too.
    Senator Martinez. And time. Certainly in time. But it also 
ought to be coupled with a commitment, Mr. Chairman, that we 
will get GSE reform, that we will not delay on this, because 
the two ought to be coupled together. Sure, there is a need for 
them to have increased loan limits in certain markets and for a 
period of time, but at the same time, we should not do so 
without a strong commitment to a strong regulator.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very, very much.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. Let me thank you 
and Senator Shelby for bringing us back to this incredibly 
important topic, and I look forward to your leadership in 
moving ahead on this.
    Very briefly, the discussion of reform has largely come 
back to the forefront of the debate due to the discussion of 
loan limit increases in the economic stimulus package, and I 
want to pick up where Senator Martinez left off.
    Let me say that I clearly support a temporary increase in 
the GSE loan limits. It will help restore liquidity to the 
market. It will increase confidence, make loans more affordable 
and available. It is an appropriate and necessary step to help 
get our economy back on track.
    That said, looking forward, I firmly believe that it is 
time to pass a GSE reform bill. It is time to create a 
stronger, politically independent new regulator. I also believe 
that it is also time, once they have met the requirements of 
their consent orders, to move forward and not let the 
accounting scandals of the past define their future.
    I have seen the great work that Fannie and Freddie have 
done in my home State of New Jersey. I know the vital role that 
they play in the housing community. Their mission to help low- 
and moderate-income families get affordable financing for a 
home has never been more critically needed than now in terms of 
the midst of this subprime crisis.
    Millions of homeowners across this country are crying out 
for help. They are pleading for help in saving their homes, and 
today, on their behalf, we are asking you to help modify their 
loan terms. I know that you are already working toward this 
goal, and I simply hope you will continue to do so and that we 
use every resource possible to help these people keep the 
American dream and not have it become the American nightmare.
    And with that we look forward to meaningful GSE reform as a 
critically important step for the longer term and the 
opportunity to do some of what you have suggested in the short 
term.
    Chairman Dodd. Thank you very much, Senator. And let me 
just say to all Members that their full statements will be 
included in the record.
    Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman, and I 
want to state at the outset, in order to be brief, that I 
support the comments that many of my colleagues have made with 
regard to concerns about the increases in the loan limit in the 
stimulus package and the need for us to move forward with full 
GSE reform legislation, primarily to assure that we have a 
strong, independent regulator. I just want to highlight two 
issues, and then I will look forward to working with the 
witnesses.
    First, one of the areas that I believe we need a lot more 
evaluation and debate on and vetting is an evaluation of the 
comparative strengths and weaknesses that exist between 
affordable housing goals, affordable housing programs, and an 
affordable housing fund. Fannie and Freddie have affordable 
housing goals. The Federal home loan banks have an affordable 
housing program. And the House-passed GSE reform legislation 
would establish a new housing fund with goals.
    I think that we need to look at the--by the way, the most 
recent GSE reform legislation from this Committee did not have 
the housing fund, but I know there is now a very strong concern 
for including one.
    Although I do not think there is much disagreement about 
the need to reaffirm the Government-sponsored enterprises' 
mission with regard to affordable housing, there is still a lot 
of debate about how this can best be accomplished, and 
specifically, we need to determine what is the appropriate 
amount of resources that should be allocated to these 
affordable housing issues, and who should allocate the funds, 
and how these funds should be best spent. I think that is a 
very critical issue as we move forward with regard to this 
legislation.
    Another issue that I want to revisit is the question of the 
combining of the regulatory authority of all housing GSEs. I 
note that in Assistant Secretary Nason's testimony, he 
reaffirms the position that the Federal home loan banks should 
be included in the GSE reform and that we should have one 
independent regulator. I am going to be interested in 
evaluating the structural differences between Fannie and 
Freddie and the Federal home loan bank system to determine how 
we would accomplish that and still achieve the necessary 
purposes and objectives that we have for both of the different 
types of systems that we have to deal with there and whether it 
is the right decision for us to move to one combined regulator 
for all.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. Once again, thank 
you for holding this hearing and for your leadership on this 
issue of GSE reform, which has been long and steadfast. And, of 
course, we are in the midst of one of our Nation's worst 
housing crises, so it is especially important that we examine 
the critical role that GSEs play in providing liquidity and 
stabilizing the housing market.
    But rather than focus exclusively on the specific issues of 
GSE reform that we have discussed many times in the past, I 
would like to examine the role that GSEs can and should play in 
these times.
    As this Committee has worked on this issue over the past 
several years, as you well know, I have been one of the 
strongest supporters of the enterprises. Fannie and Freddie 
were created to provide liquidity to the Nation's mortgage 
market and to ensure that a steady supply of mortgage credit is 
available in all market conditions. In the past, they have done 
a stellar job. Fannie and Freddie have served our country well. 
They have created unique products that could not have been 
developed by purely private or purely public sector companies. 
This ability strengthens and fills a gap in the housing 
markets.
    However, during the housing market disruption, Fannie and 
Freddie have not lived up to my expectations and those of many 
others when it comes to assisting borrowers who are having 
difficulty affording their loans. Instead of leading the charge 
to help troubled borrowers, we have had to push them forward 
every step of the way. As Government-sponsored enterprises, 
Fannie and Freddie fill a special need. However, in this time 
of our greatest need in the housing markets since we have 
recovered from the Great Depression, I have been disappointed 
by their response.
    The conforming loan limit increase, which the enterprises 
have sought for many years, will be a significant and 
profitable new business for Fannie and Freddie, and I expect 
that in return for allowing the enterprises to enter the jumbo 
market, the companies will make a commitment to fund additional 
refinancing or modification resources to lower-income borrowers 
who are having difficulty affording their payments.
    While Fannie and Freddie have developed new products and 
increased their rate of securitization to date, I am 
increasingly concerned by statements from the companies and 
from their regulator that additional action will be difficult 
or impossible because of capital constraints and market 
conditions.
    Let me be clear. This is not an acceptable response. These 
organizations were created specifically to help in times of 
crisis. It would be like calling the fire department to put out 
a raging fire and have them tell you they were busy getting a 
cat out of the tree. That is what they have always done, and 
that is what they want to keep doing. If capital constraints 
are restricting action by the GSEs, they should consider 
raising additional capital, and OFHEO and Congress should 
consider ways to give them additional flexibility to help their 
subprime borrowers.
    One option is to re-examine the 30-percent capital 
surcharge imposed in the wake of the accounting scandals at 
Fannie and Freddie. If, as expected, the companies become 
timely filers in February, OFHEO should consider reducing the 
enterprises' capital surcharge, if that can be done in a safe 
way.
    Any capital relief has to come with a substantial new 
commitment to purchase loans for struggling subprime borrowers. 
If Fannie and Freddie will not enter this agreement 
voluntarily, we should consider imposing it as part of the 
agreement to lift the capital surcharge. If the debt markets 
are not allowing the GSEs to borrow as cheaply as they once 
could, that is how the world works, the capitalist world works. 
They still enjoy advantages that no purely sector actor has, 
and, thus, they have a responsibility to use those advantages 
to provide liquidity and stabilize the markets. To simply 
maximize profitability and say we are not going to help because 
there are other things we do that are more profitable is not 
acceptable in these very critical times.
    So I am calling on their CEOs today, Fannie and Freddie's 
CEOs, to continue to improve the GSEs' response to the crisis 
and make a renewed commitment to help struggling borrowers. 
Although market conditions may not be ideal to maximize the 
GSEs' profit, their role in these conditions is to step in 
where the private market will not and ensure continued 
liquidity for the mortgage market.
    The GSEs also need to be industry leaders when it comes to 
other aspects of the market. Yesterday, I wrote to both 
enterprises to urge them to clarify mortgage servicing 
standards for outside servicers. Because Fannie and Freddie 
represent such a large share of the market, their servicing 
guidelines create a de facto industry standard that prevents 
servicers from performing principal writedowns--a critical type 
of loan modification that will help many homeowners during the 
housing crisis, especially those trapped underwater in their 
loans.
    The clarification of these standards would be a simple and 
prudent step by the GSEs to show their commitment to help at-
risk homeowners during these troubled times. If Fannie and 
Freddie had the right proactive attitude, I would not have had 
to write letters to Fannie and Freddie imploring them to set 
clear and high standards for loan servicing. These companies 
operate with an implicit Government guarantee, are exempt from 
paying State and local taxes, and are able to borrow at reduced 
rates. With these advantages come responsibilities. I think 
many of us expect these organizations to be in the vanguard of 
efforts to help borrowers, especially in times of crisis. They 
should be proactively looking for ways to improve all aspects 
of their business, from subprime refinancing products to their 
purchasing commitments, to their loss mitigation and loan 
servicing guidelines.
    Mr. Chairman, I have some other things I wanted to say to 
Mr. Rosenfeld and what I feel is the lack of response, 
particularly in regards to Countrywide, but I will ask--in the 
interest of time, I will put that statement in the record and 
save it for questions.
    Chairman Dodd. Thank you, Senator, very, very much. And 
before you came in, I made the point, to pick up on your point 
here, regarding the lifting of the capital surcharge. I would 
like to see that money stay there so they start utilizing that 
close to $20 billion that is there specifically to do exactly 
what you have talked about, and that is, to assist those people 
who are struggling, to keep them in their homes. That is 
exactly the role that Fannie and Freddie I think could play at 
this critical time.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Dodd. Hardly going to be enough, I might point 
out. I think more is needed. But that would be one wise use of 
that capital.
    Senator Schumer. I could not agree more. Thank you.
    Chairman Dodd. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman. I certainly want to 
welcome our witnesses today. Director Lockhart and I have 
worked together in the past when I was serving as Secretary of 
Labor and he was heading the PBGC, and I thank you for your 
service to our country.
    As you know, the GSEs have been of particular concern to me 
and for many of the Members of this Committee. I appreciate the 
Committee's careful attention to this matter today, 
particularly in light of the current housing and financial 
unrest.
    Originally, Fannie Mae was created in 1938 as an agency of 
the Federal Government, fully backed by the U.S. Treasury 
Department. Its intent was to increase affordable housing 
options for Americans. Fannie created a secondary market for 
home mortgage loans at a time when we all know our Nation's 
housing market was in a period of dire straits. In 1970, 
Congress charged Freddie Mac with a similar mission. Fannie Mae 
and Freddie Mac's principal business is mortgage 
securitization. These GSEs buy mortgage loans from the original 
lenders, pooling and repacking them as mortgage-backed bonds. 
According to the current edition of Business Week, Fannie and 
Freddie accounted for approximately 87 percent of mortgage 
securitizations in December 2007 versus fewer than half in 2005 
and 2006.
    Over the past 5 years, there have been well-documented 
financial issues involving Fannie Mae and Freddie Mac. In 2003 
for Freddie and in 2004 for Fannie, serious problems were 
revealed, as we all know, with respect to their internal 
controls. Through various restatements, it was determined that 
Freddie had understated its net income by $5 billion while 
Fannie overstated its earnings by $6.3 billion. Due to these 
accounting problems, the GSEs have had to restate their 
earnings for several years and pay fines totaling hundreds of 
millions of dollars. I hope to learn today from our panelists 
that these types of financial improprieties are confidently in 
the rearview mirror.
    Over the past two Congresses, I have been an original 
cosponsor of bills that have helped pave the way for 
comprehensive GSE reform. S. 1100, introduced by Chuck Hagel 
and cosponsored by Senators Martinez and Sununu and me, 
concentrates on focusing Fannie and Freddie's portfolios toward 
its affordable housing mission, improves SEC disclosure 
requirements, and requires a comprehensive review of the GSEs' 
lobbying activities.
    Mr. Chairman, it is of the utmost importance that we enact 
legislation this year to ensure that Fannie Mae and Freddie Mac 
operate under an effective world-class regulator. As recent 
events have demonstrated, comprehensive GSE reform is long 
overdue. One has to look no further than the current proposal 
embedded in the economic stimulus package for a temporary 1-
year expansion of the conforming loan limits from $417,000 to 
$730,000 to see why the time to act is now. Without such 
reform, at worse, Congress could end up further jeopardizing 
the stability of the housing and credit markets, even as this 
provision is aimed at increasing liquidity and the breadth and 
depth of the mortgage market. Hence, this Committee has a great 
opportunity to work in a bipartisan fashion to craft 
comprehensive reform that I think most of us would agree is 
long overdue.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Dole.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman. I want to thank 
you for holding this hearing and for Senator Shelby working 
with you in that capacity.
    I have a full statement I would like to make a part of the 
record and ask unanimous consent that it be made a part of the 
record. In the meantime, I just have a few brief remarks that I 
would like to make.
    For me, and I think for the rest of the Committee, it is 
sort of a feeling of deja vu all over again. It just seems like 
it was just a short time ago when we had some huge Government 
scandals and accounting scandals, 5 years ago, when it came to 
light in both Freddie Mac and Fannie Mae, and here we are today 
still debating whether we need adequate regulation or not. In 
fact, back to that time, I even recall a few issues relating to 
executive compensation.
    So the housing GSEs are huge. Their combined obligations 
exceed the publicly held debt for the entire United States by 
more than $1 trillion, and yet we do not have reform. We have 
seen a dramatic increase in their share of mortgage 
origination, yet we do not have reform. We have seen a huge 
increase in their mortgage credit leverage, and still lack 
reform. We have seen more than $10 billion in financial 
restatements, and yet we still do not have reform.
    Now, despite their promises, Fannie Mae and Freddie Mac are 
still not timely filers. So I think that it is urgent that we 
move forward with GSE reform, and particularly in light of the 
fact that we have, in legislation that has come to the floor of 
the Senate for a stimulus package, increasing those loan limits 
where we increase all those factors that have been pointed out 
to this Committee as a problem.
    And so I would hope and urge the Chairman to do whatever he 
can to get these reforms in an expeditious way.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Casey.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Thank you, Mr. Chairman. I appreciate you 
calling us together today. I want to thank the panelists who we 
will be hearing from, both panels.
    We have had in the last couple of years, as everyone knows, 
a real shaking of the confidence of the American people, and I 
know that since 2003 and 2004, both Fannie and Freddie have 
come a long way and there have been certainly new management 
and updating of business practices and all that, and that is 
wonderful. We appreciate that and we are grateful for that.
    But when a public official, when a public agency, or even 
in the context of Government-sponsored enterprises, whatever we 
are talking about in terms of public trust, when that is shaken 
or eroded or in some cases shattered, it takes a long, long 
time to rebuild that. And I know a lot of people in this town 
have worked hard to rebuild that trust, and I am confident that 
is happening. But in some cases, it takes a long time, and that 
is the kind of trust that we all have to earn as public 
officials and as participants in public agencies. We have to 
earn that trust every single day, and even more so if it has 
been compromised or shattered. So we know that people are 
working to do that, but it is not going to happen in a couple 
of years or it is not going to happen overnight.
    But I do know that in 2006, Freddie Mac helped 2,098 
Pennsylvania families avoid foreclosure while Fannie Mae helped 
another 2,700. That is good news for our State, and I am sure 
we could repeat similar numbers in other States. So the GSEs 
are helping to bring millions of dollars in capital into our 
cities and our States to help families purchase homes, and I 
hope we can continue to work together to create a unified, 
sensible regulatory structure that allows the GSEs to continue 
bringing the world's capital into local neighborhoods.
    But as I said before, we have still a long way to go, and I 
look forward to working with those who will testify today and 
with Members of this Committee on that common shared agenda.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Casey, very much.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Mr. Chairman, we have plowed this ground 
and raked these leaves enough. I agree that we need a strong 
regulator, and I agree that we are in a crisis, and I look 
forward to the witnesses.
    Chairman Dodd. Thank you very much, Senator. I appreciate 
that.
    Well, I thank all of my colleagues. We have had, I think, 
13 Members of the Committee here this morning. I appreciate the 
patience of our witnesses, but you get a sense of the sense of 
urgency here on a bipartisan basis about the issue and some 
very common points that have been raised as well. I think 
without exception everyone has talked about the need for a 
strong regulator. So we begin, I think, with a good opportunity 
for us to be able to craft something here. It probably will not 
be exactly what everyone would like, but like any other product 
that comes out of a Committee like this, we try to work 
together to come out with something we can all agree on and 
move forward.
    This is not the only piece of the puzzle, but it is an 
important piece of doing what needs to be done to restore the 
sense of confidence and optimism in the country. So, with that, 
let me thank our witnesses and introduce them quickly, if I 
can.
    Our first witness, David Nason, Assistant Secretary for 
Financial Institutions at Treasury, serves as the senior 
adviser to the Secretary, Deputy Secretary, and Under Secretary 
for Domestic Finance on financial institutions, GSEs, financial 
literacy, and other issues, and, Mr. Nason, we thank you very 
much for being with us.
    Next will be Jim Lockhart, who has been already referenced 
here several times this morning, Director of OFHEO. Mr. 
Lockhart has served as Director since June of 2006 and prior to 
that served as the Deputy Commissioner of Social Security.
    And, finally, we will hear from Ronald Rosenfeld, Chairman 
of the Federal Housing Finance Board, a position to which he 
was confirmed by the Senate in December of 2004. Prior to 
becoming Chairman, Mr. Rosenfeld served as President of Ginnie 
Mae.
    And so I want to welcome all of our witnesses here this 
morning, and before taking their testimony, I want to note that 
the witnesses were asked to provide written copies of their 
testimony 24 hours before the hearing, which is the 
longstanding tradition of this Committee. I have been on this 
Committee for 26 years, and we have always required it. It is 
pretty much a standard requirement before any committee of the 
U.S. Senate to have the testimony before us. Both OFHEO and the 
Treasury failed to meet that deadline, I would point out. In 
fact, Treasury's testimony did not arrive until 6 p.m. last 
evening, and OFHEO's testimony did not arrive until 4 p.m. 
yesterday.
    We take our oversight responsibilities very, very seriously 
here, all of us do, and it is critically important that Members 
and staffs have an opportunity to be able to read that 
testimony so we can do our jobs here in terms of questioning 
and raising issues that are important to everyone.
    I want to note this is the second time in 2 weeks we have 
had a problem with the Treasury, Mr. Nason. I want you to carry 
the message back. I am a new Chairman of this Committee. If 
that happens again, you will not be appearing before the 
Committee. Now, there can be extreme circumstances that come 
up, and certainly let the Committee know when that occurs. But 
I want testimony here in a timely fashion, and so don't let it 
ever happen again here, at least under my watch. OK? Do we 
understand each other on that point? Thank you very much.
    Mr. Nason.

STATEMENT OF DAVID G. NASON, ASSISTANT SECRETARY FOR FINANCIAL 
            INSTITUTIONS, DEPARTMENT OF THE TREASURY

    Mr. Nason. Thank you very much, and I will certainly take 
that message back.
    Chairman Dodd, Ranking Member Shelby, and Members of the 
Committee, thank you very much for inviting me to appear before 
you today. I very much appreciate the opportunity to present 
the Treasury Department's perspective on GSE regulatory reform.
    The U.S. economy is diverse and resilient, and our long-
term fundamentals are healthy. Yet economic growth has slowed, 
and the risks are clearly to the downside, given current 
conditions in the housing, credit, and energy markets. Issues 
related to housing and credit markets bring us directly to the 
topic of today's hearing. This Committee is very well aware 
that the housing and mortgage markets are going through a 
transition period that is exerting stress on homeowners. The 
current housing downturn comes after years of exceptional 
housing price appreciation, and the housing market is likely to 
remain weak well into this year and potentially beyond 2008.
    The Administration also recognizes that the GSEs have 
played an important role in making credit available to current 
and prospective homeowners. Since year-end 2006, Fannie Mae and 
Freddie Mac have increased their outstanding mortgage-backed 
securities by over $600 billion. In addition, outstanding 
advances of the Federal home loan bank system increased by $184 
billion in the third quarter alone.
    However, the well-documented accounting and corporate 
governance problems that emerged first at Freddie Mac in 2003 
and then later at Fannie Mae in 2004 raised fundamental 
questions about the risk management practices at both 
companies. Substantial progress has been made to address these 
issues, but challenges remain. In addition, the Federal home 
loan banks were not immune to similar risk management issues as 
the regulatory actions associated with problems at the Federal 
Home Loan Bank of Chicago and the Federal Home Loan Bank of 
Seattle illustrated.
    More recently, much like other financial institutions 
involved in mortgage finance, Fannie Mae and Freddie Mac have 
experienced various levels of stress in the current mortgage 
environment. For example, in the third quarter of 2007, Fannie 
Mae and Freddie Mac reported losses of $1.5 billion and $2.1 
billion, respectively. All of these factors point to a clear 
and urgent need for completing housing GSE regulatory reform, 
and we thank this Committee for taking this important step 
toward this goal.
    The Treasury Department's core objectives for housing GSE 
regulatory reform are: first, the need for a sound and 
resilient financial system; and, second, increased 
homeownership opportunities for less advantaged Americans. It 
is paramount that the housing GSEs properly manage and 
supervise the risks they undertake and that a strong regulator 
oversee their operations. Otherwise, their solvency could be 
threatened, and this could have a negative impact on the 
stability of other financial systems and the overall strength 
of the economy.
    Throughout the debate on housing GSE regulatory reform, the 
Treasury Department's focus has been on ensuring that the new 
regulator has all the powers, authority, and stature required 
to perform its mandated function. In this regard, the new 
regulator's powers should be comparable in scope and force to 
those of our Nation's other financial regulators.
    Many of the following key elements of housing GSE 
regulatory reform have been debated in recent years: providing 
authority to set capital, providing receivership authority, 
transferring new activity approval and mission oversight from 
HUD, providing independent funding and litigating authority, 
eliminating Government-appointed directors to the GSEs' boards, 
and combining the regulatory authority over Fannie Mae, Freddie 
Mac, and the Federal home loan banks.
    The housing GSE regulatory reform bill passed by the House 
of Representatives addresses many of these issues 
aforementioned in an adequate manner. However, additional 
elements of reform are necessary to address the GSEs' 
particular characteristics.
    In addition to addressing the fundamental shortcomings in 
the current GSE regulatory structure, it is just as important 
that the new regulator have the appropriate authority to 
consider the unique characteristics of the GSEs and their 
housing missions. The housing GSEs were created to accomplish a 
mission, and they were provided a certain set of statutory 
benefits to help in carrying on that mission. Freddie Mac and 
Fannie Mae operate in the secondary mortgage market by 
providing credit guarantees on MBS or by directly investing in 
mortgages and mortgage-related securities through their 
retained mortgage portfolios.
    The combination of three key features of Fannie Mae and 
Freddie Mac's retained mortgage portfolios warrant the 
attention of policymakers: first, the size of the retained 
mortgage portfolios of Fannie Mae and Freddie Mac, $1.4 
trillion as of year-end 2007; two, the lack of effectiveness 
market discipline over these organizations; and, three, the 
interconnectivity between the GSEs' mortgage investment 
activities and the other key players in our Nation's financial 
system, both insured depository institutions and derivatives 
counterparties. The combination of these three factors caused 
the GSEs to present the potential for systemic risk to our 
financial system and the global economy.
    Policymakers have been struggling with the inherent tension 
and the potential problems posed by the GSEs for years. In 
fact, a Treasury Department official stated in testimony a few 
years ago, and I quote, ``[a]s the GSEs continue to grow and to 
play an increasingly central role in the capital markets, 
issues of potential systemic risk and market competition become 
more relevant.''
    That statement was not from a member of the Bush 
Administration Treasury Department but, rather, from testimony 
delivered in March of 2000 by then-Under Secretary Gensler of 
the Clinton Administration Treasury Department.
    As we further consider authorities of the new GSE regulator 
to address the long-run issues posed by their retained mortgage 
portfolios, the new housing GSE regulatory agency must be 
provided specific review authority over the retained mortgage 
portfolios. Such authority must establish a clear and 
transparent process based on guidance from Congress on how the 
new regulatory agency will evaluate the retained mortgage 
portfolios in terms of risk and consistency with mission.
    In conclusion, we at Treasury remain convinced that a new 
regulatory structure for the housing GSEs is essential if these 
entities are to continue to perform their public mission 
successfully. We look forward to continuing to work with you on 
this important issue.
    Thank you very much.
    Chairman Dodd. Thank you very much, Mr. Nason. That was 
good timing, too. Right on the button here.
    Mr. Lockhart.

STATEMENT OF JAMES B. LOCKHART III, DIRECTOR, OFFICE OF FEDERAL 
                  HOUSING ENTERPRISE OVERSIGHT

    Mr. Lockhart. Mr. Chairman, Ranking Member Shelby, Members 
of the Committee, thank you for the opportunity to testify on 
the critical need for GSE regulatory reform.
    The GSEs have become the dominant mortgage funder in these 
troubling times as they fulfill their missions of providing 
liquidity and stability and affordability. They have been 
reducing risk in the market, but concentrating mortgage risk on 
themselves. They are now being asked to take on even more risk 
in the subprime and jumbo markets. Given the past accounting 
and operational problems of both Fannie Mae and Freddie Mac, 
OFHEO directed the enterprises to take many remedial actions. 
We also capped the growth of their portfolios, which we 
loosened last September, and required them to keep capital 
levels 30 percent higher than the minimum required by law. In 
retrospect, these actions were extremely important in reducing 
credit losses and preventing disruptions of the conforming loan 
market.
    Both enterprises have made significant progress on their 
remediation efforts, but significant issues do remain. They did 
publish third quarter financials, but that accomplishment was 
dampened by about $3.5 billion of losses. They expect to 
produce timely 2007 financials at the end of this month.
    During 2007, the housing GSEs' debt and guaranteed MBS 
outstanding grew 16 percent to $6.3 trillion. To put trillions 
in perspective, this chart you have a copy of, a simple 
comparison is to the debt of the United States, which was $5.1 
trillion, including that held by the Fed. The whole debt of 
Fannie and Freddie in their MBSs equals that, and if you add on 
the Federal Home Loan Bank's debt of $1.2 trillion, you get 
$6.3 trillion of debt.
    Housing market conditions in many parts of the country are 
weak. Virtually all measures of the housing market have 
deteriorated very sharply, especially over the last two 
quarters. During this period of turmoil, the enterprises have 
provided stability and liquidity to the conforming mortgage 
market. They have securitized almost $100 billion a month in 
mortgages. As a result, there has been a dramatic reversal in 
their market share, as you can see in this next chart.
    Their share of total mortgage originations was less than 38 
percent in 2006. By the fourth quarter of this year, it had 
doubled to 76 percent. They are effectively, combined with the 
Federal Home Loan Banks, the mortgage market. Actually, it 
might be 90 percent if you added in the Federal Home Loan 
Banks.
    Credit losses and risks are growing. In the fourth quarter, 
they cut their dividends and raised almost $14 billion in 
preferred stock, which is critical, as both CEOs have said they 
are going to have very tough fourth quarters and 2008s. An 
increase in the conforming loan limit will add to the 
enterprises' risk. OFHEO believes an increase should be coupled 
with quick enactment of comprehensive GSE reform.
    Jumbo loans would present new risks to the already 
challenged GSEs. Underwriting them successfully will require 
new models, systems, and tough capital allocation decisions. 
OFHEO has promised to work closely with Fannie Mae and Freddie 
Mac to ensure that an increase is implemented as quickly, 
safely, and soundly as possible.
    Why is GSE reform so critical now? As I said, they have 
really become the secondary mortgage market in these very 
troubling times, and they need to continue to provide that 
liquidity. We in turn need to maintain confidence in the GSEs, 
especially with foreign and domestic investors, who hold that 
$6.3 trillion of securities.
    We need to rebuild confidence in the housing and mortgage 
markets. Their growing credit losses, risk, and market share 
requires a stronger regulatory framework to reduce the 
potential risk to the financial markets.
    The first component of comprehensive GSE reform is the 
creation of a single, unified, and independent GSE regulator by 
combining OFHEO, the Federal Housing Finance Board, and HUD's 
mission and product authority.
    Second, as the enterprises agree, the regulator needs bank 
regulator-like powers, including receivership and independent 
litigation and budget authorities. Most critically, OFHEO needs 
the flexibility to adjust capital requirements, both the 
statutory minimum and the risk-based requirement, which is not 
even working at the moment.
    Finally, the new regulator needs to be able to consider 
mission fulfillment and risk of the portfolios.
    I believe the House bill is a good start, but the effective 
date should be upon enactment. The GSEs are stretched and are 
being asked to do more. I note the Committee's strong agreement 
that we need to restore confidence by creating a much stronger, 
unified regulator to support the U.S. housing finance system. I 
look forward to working with you to achieve GSE reform soon.
    Thank you.
    Chairman Dodd. Thank you very much, Mr. Lockhart.
    Mr. Rosenfeld, thank you very much.

  STATEMENT OF RONALD A. ROSENFELD, CHAIRMAN, FEDERAL HOUSING 
                         FINANCE BOARD

    Mr. Rosenfeld. Thank you, Chairman Dodd, Ranking Member 
Shelby, and distinguished Members of the Committee. Thank you 
for the opportunity to present a statement to you about the 
importance of reform of Government-sponsored enterprises. The 
views that I will be expressing today are mine and do not 
necessarily represent the views of my colleagues on the Federal 
Housing Finance Board.
    The Congress and the administration have discussed and 
debated reform of the GSEs for years. I believe it is now time 
to act. Together, the Federal home loan banks, Fannie Mae, and 
Freddie Mac play a vital role in helping to finance 
homeownership for millions of Americans, and stabilizing and 
strengthening housing and financial markets and the economy at 
large.
    Given the size and significance of these institutions, 
which together have more than $3 trillion in assets, it is 
imperative that they be supervised and regulated by a single 
Federal regulator and that the regulator have all the tools 
necessary to provide effective and thorough oversight.
    The Federal banking agencies have a full arsenal of 
supervisory and enforcement tools at their disposal which 
allows them to take early and resolute action, if necessary. 
Those tools include examination, capital, and enforcement 
authority over the institutions they regulate. A new GSE 
regulator should, at a minimum, have the same tools possessed 
by the Federal banking agencies.
    In particular, a new GSE regulator should have the ability 
to fund itself through the assessment of the GSEs and be 
outside of the appropriations process. It should have the 
ability to place a GSE into receivership or conservatorship. It 
should have the authority to approve new and existing business 
activities. And it should have the power to set minimum capital 
levels.
    The Finance Board already has the authority to assess 
Federal home loan banks to fund its operations. Among the 
Federal financial institution supervisory agencies, only OFHEO 
relies on appropriated funds. In addition, the Finance Board 
has the authority, and exercises it, to require an individual 
Federal home loan bank to have and maintain additional capital, 
to approve new business activities, and to regulate the 
composition of the Federal home loan bank's assets portfolio.
    A single, unified GSE regulator would provide for a more 
efficient and effective regulatory body. It would be more 
efficient in its ability to share examination and supervisory 
information among examiners and other agency staff. The 
agency's risk modeling would be enhanced by greater interaction 
and consultation among the quantitative risk professionals 
already in place at OFHEO and the Finance Board. Examination 
and risk management expertise and resources could be shared as 
appropriate, particularly in dealing with complex or 
significant supervisory matters at one of the enterprises or 
the home loan banks.
    Finally, all GSEs should have to meet the same high 
governance and disclosure standards. At present, all 12 Federal 
home loan banks are registered with the SEC and are subject to 
its oversight of their financial statements and disclosure.
    While I believe consultation and interaction are critical 
attributes of a single Federal regulator for the housing-
related GSEs, the differences between the Federal home loan 
banks and the enterprises must also be recognized and 
accommodated through any legislation that would reform GSEs' 
supervision. The Federal home loan banks are member-owned 
cooperatives. Their corporate structure and their business 
operations are far different from that of shareholder-owned 
Fannie Mae and Freddie Mac. These differences exhibit 
themselves in different capital structures, different board 
structures, and different orientations toward return to 
shareholders and the pricing of products to their customers.
    Also, the essence of the Federal home loan banks' business 
is secured lending, where most of the collateral is mortgage 
loans. The Federal home loan banks do not securitize mortgages, 
and the direct mortgage holdings are only 7.2 percent of their 
assets.
    In conclusion, the recent stress in the housing markets has 
taught us that the GSEs are vital to supporting the Nation's 
housing needs. In particular, Federal home loan bank advances 
have provided critical liquidity to members whose alternative 
sources of funding have dried up. A single regulator would 
assure homebuyers and the market participants that the overseer 
of the housing GSEs speaks with a single voice, acts with a 
consistent purpose, and is clear, consistent, and vigilant. 
While the housing GSEs can and do operate in a variety of 
different ways to fulfill their housing finance mission, they 
have a common heritage, they share many of the same customers, 
they raise funds from the same sources; and the recent 
environment has shown us that whether they securitize 
mortgages, whether they own mortgages, or whether they take 
them as collateral, they have common concerns.
    Simply put, the reform of GSEs makes sense. It will help 
promote a healthy and vibrant housing market.
    Thank you.
    Chairman Dodd. Thank you very much, to all three of you 
here, and what I would like to do is try and keep our time to--
with this many Members here, let's say 6 minutes here for 
questions and answers in the first round, and then we can give 
a chance to everyone to stay involved and make as many Members 
be able to stay as possible. I know if we move a little quickly 
here, we can maintain that participation.
    I mentioned, Mr. Lockhart, at the outset of my remarks the 
statement that you make in your prepared statement for this 
morning, and just to read it here, it said, ``The GSEs have 
become the dominant funding mechanism for the entire mortgage 
system in these troubling times. They are fulfilling their 
missions of providing liquidity, stability, and affordability 
to the mortgage markets.'' You go on to say, ``In doing so, 
they have been reducing risk in the market, but concentrating 
mortgage risk on themselves.'' And you go on. But I appreciate 
that statement in that paragraph. It is an important one.
    Let me ask you, if I can, to take a look at the proposal--
Senator Schumer raised this issue, but I raised it more 
directly here, and that, again, I am pleased to note in your 
testimony on page 11 that you have ``encouraged the enterprises 
to increase subprime rescue mortgages,'' to quote you. And in 
my view, and I think the view of some here, Fannie and Freddie 
could play a very constructive role in this regard as well, 
given the importance of it.
    Could the current capital surcharge to be devoted to this 
purpose, at least in part? For example, could Fannie and 
Freddie use their capital to buy subprime loans and restructure 
them to help keep homeowners in place? In his testimony, Dan 
Mudd notes that Fannie Mae is very close to fulfilling all the 
requirements of the 2006 consent order which he signed with 
OFHEO. You have made reference as well that there are still 
some outstanding issues you just pointed out. And what is the 
appropriate response of the regulator at that point with regard 
to the capital surcharge and the portfolio limits?
    Mr. Lockhart. We have been looking at that 30 percent 
capital surcharge. We have been talking to the two companies 
about it. It was imposed because of their operational problems. 
They made good progress, but they still have a series of issues 
to go on the operational side and, obviously, they have 
significantly more credit risk than when it was imposed a long 
time ago.
    Chairman Dodd. Right.
    Mr. Lockhart. We are working with the two companies. We are 
developing lists of what has to be done to get that 30 percent 
removed. You are right. We have been encouraging them to do 
more in the subprime area, and they have done a lot of 
refinancings of people out of subprime into more prime-like, 
less risky mortgages. They have been making good progress on 
that and will continue to do that.
    They do have enough capital at the moment to do more, 
especially in the securitization area. Securitization takes 
about 20 percent of the capital versus having to buy them and 
put them in their portfolios. They have been doing more. They 
are taking these rescued mortgages and putting them into their 
mortgage-backed securities and are selling them. We are 
continuing to monitor that and working with them.
    Chairman Dodd. What about the amount that is in there? 
There is about $17 or $18 billion, I think. There is 8 or 9--I 
forget the numbers exactly there that exist. What would be your 
recommendation regarding that?
    Mr. Lockhart. Are you talking about the capital at this 
point?
    Chairman Dodd. Yes.
    Mr. Lockhart. My recommendation is that we need to be very 
careful as we take this off, given the added risks that these 
two companies have. We need to be very careful.
    I think the important thing is I would be much more 
comfortable taking this off if I had regulatory power to look 
at capital. At the moment I really do not. These were only 
imposed because of a consent agreement. What we need--and it is 
a key part of the legislation, as many Members have mentioned--
is to give the regulator power to look at minimum and risk-
based capital.
    Chairman Dodd. Well, I appreciate you getting back on 
message here. That is important here. Let me try the question 
again. What do you think about the possibility of utilizing 
that capital?
    Mr. Lockhart. As I said, we are working with the two 
companies' management teams to start to free up that capital, 
and we will as we see progress on these operational issues.
    Chairman Dodd. OK. Mr. Nason, let me ask you, if I can, 
Secretary Steel was here last week, as you know, talking about 
the Hope Now Alliance, and I mentioned at that time that it was 
about a year we met in this very room with stakeholders to try 
and encourage workouts with the people, owner-occupied homes 
that would fall into delinquency or, worse, into foreclosure. I 
think he heard considerable concern from Members up here 
regarding the responsiveness of the industry for the need for 
quick action. And we heard from some housing counselors working 
with borrowers, from servicers and other advocates, that the 
GSEs' policies are making it more difficult to get loan 
modifications done prior or immediately after a delinquency. As 
you know, getting borrowers early is very important. It 
obviously makes some sense.
    I wonder if it is your view or the view of the Department 
here that the GSEs are being as helpful--or not helpful--as 
possible in the effort to get these loan modifications worked 
out.
    Mr. Nason. Thank you for that question. I think it is safe 
to say that the GSEs are trying to be helpful. Both the GSEs 
are members of the Hope Now Alliance, and they have been 
supportive of our efforts. So I think it would be a safe 
assumption to say that they have been a force for good in 
trying to work on the situation, although the comments that 
Senator Schumer made earlier about whether or not the GSEs 
could be helpful in helping lenders write down loans faster, 
that is something that is certainly worth exploring.
    One of the things that is holding up a significant amount 
of modifications and refinancing from occurring is whether or 
not lenders are willing to take the fair value on these loans, 
and whether or not the GSEs could provide some leadership in 
that area is something definitely worth exploring.
    Chairman Dodd. Let me ask you, Mr. Rosenfeld, the American 
Banker reported on Tuesday that the Board of Directors of the 
Federal Home Loan Bank of Dallas and Chicago voted to approve a 
merger of the two banks. As I understand it, there has never 
been a voluntary merger. You can correct me, historically, if I 
am wrong about this, but our information is that there has 
never been a voluntary merger in the home loan bank system. And 
the last merger, which was not undertaken voluntarily, was done 
some 60 years ago.
    This proposed merger raises some very serious questions, 
and the statute under which you operate does not specifically 
address voluntary mergers. But you may correct me on that. 
There may be someplace here you will tell me otherwise.
    I wonder what standards are going to be used to decide 
whether or not to approve the merger. And do you expect to 
follow an open process, allowing for comment by the other banks 
and their members, who are, after all, jointly and severally 
liable under the statutes here for the debt issued by the 
Dallas and Chicago banks?
    Mr. Rosenfeld. Senator Dodd, the Chicago bank and the 
Dallas bank have been engaged in merger conversation. Our 
responsibility will be to review the safety and soundness of 
whatever may be ultimately proposed. An application for merger 
has not come forth to us, so at this time we have not addressed 
that issue.
    The single most significant element in our deliberations 
will be the safety and soundness of the banks and, of course, 
the overall system. I think it is public knowledge that the 
Chicago bank is currently operating under a consent cease and 
desist order which prevents it from stock redemptions and 
dividends and so on. So suffice it to say, that institution has 
a somewhat long history of having some distress in its 
operations. The Dallas bank has been very well run, number-one-
rated bank, and we have very high regard for that institution.
    As I have said on other occasions, although there are 12 
home loan banks, there is no particular reason there has to be 
12 home loan banks. If two banks for their own reasons decide 
they want to combine and it meets our standards of safety and 
soundness, I think that is the ultimate test.
    In terms of the process, we have not determined the process 
that we will utilize because, quite frankly, that issue is not 
ripe at this time, although I will tell you that I think it is 
fundamentally a matter between the two banks involved. I think 
that without question, if it were to occur, a very important 
element would be the judgment that it enhances the safety and 
soundness of all the--of the two banks and, of course, the 
entire system. So that would be----
    Chairman Dodd. Well, I appreciate that. As I point out, 
there is a joint--and I am going to move on because I have gone 
over my time already, but the joint and several liability issue 
raises some additional questions. I appreciate your point. And 
also, just to be--and I would ask you to do it in writing, the 
statutory background that would--I was just unclear since there 
have not been any historically. Is there something that we 
ought to be concerned about here in terms of the authority of 
the board to make that decision?
    Mr. Rosenfeld. There has never been a voluntary merger.
    Chairman Dodd. Right.
    Mr. Rosenfeld. There was an event in 1946 where the bank 
moved, and two banks actually got together and then moved. That 
was involuntary. It resulted in some lawsuits, and ultimately 
the move was sustained.
    We believe, based upon the advice of our counsel, that we 
do have the authority to merger two banks if that were deemed 
appropriate, if it were requested and deemed appropriate.
    Chairman Dodd. OK. Thank you.
    Senator Shelby.
    Senator Shelby. Some of the basic principles for GSE 
regulatory reform--and I will start with you, Mr. Lockhart. In 
your opinion, what are the most important components in any 
reform measure that we undertake here?
    Mr. Lockhart. There are several important components. A key 
one will be to combine the three GSE regulators into one entity 
to give it the power and the prominence and the breadth that it 
needs. Critical also will be the capital one I just discussed 
with the Chairman and the portfolio, to make sure that they are 
focused on mission and the risk of those portfolios.
    Senator Shelby. Talk just for a minute about the systemic 
risk that Chairman Greenspan, Chairman Bernanke, and others 
have spoken of, the systemic risk of the GSEs to the whole 
financial system, to the taxpayers, considering the thin 
capital that they have.
    Mr. Lockhart. I believe systemic risk is an issue of any 
safety and soundness regulator, and these two in particular. As 
you can see in that market share chart we had up earlier, they 
have become the system for secondary mortgages in this country. 
If either one of them had any serious troubles, it would really 
have a major impact on the mortgage markets in this country and 
potentially the financial markets.
    We have to be very careful as we add more risks to them 
that we also give the regulator much stronger powers.
    Senator Shelby. And product approval?
    Mr. Lockhart. Product approval is also an important issue, 
and the whole bank-like regulatory powers are needed too.
    Senator Shelby. Are very important. Do you agree with that, 
Secretary Nason?
    Mr. Nason. I do. I agree with Director Lockhart on that.
    Senator Shelby. Mr. Rosenfeld.
    Mr. Rosenfeld. Yes, sir.
    Senator Shelby. Secretary Nason, in negotiating a stimulus 
package, the administration--you are part of it--indicated its 
intent to target the package to those with the greatest 
financial need. The administration also previously indicated to 
a lot of us--Secretary Paulson very explicit about it--
indicated that the GSE loan limit would not be increased absent 
comprehensive reform. Now we are looking at a package that 
includes the increase without reform.
    Given that the only people who could qualify for those 
high-end mortgages have incomes well over $100,000 a year, how 
does this square with the administration's stated goal for 
fiscal stimulus? And why is it important that we help the jumbo 
portion of the home mortgage market when the current $417,000 
limit is already 2.3 times the national median home price for 
the U.S. of $223,800? Was that a political decision? Sure it 
was. You cannot say, but----
    Mr. Nason. As you know, Senator, this was a package 
negotiated by my boss, Secretary Paulson, and----
    Senator Shelby. After he told us he was not going to do 
this in conference. He met with Republicans. I asked him the 
question, was he and the administration soft, going soft on GSE 
reform, and he said, ``Absolutely not.'' I asked him the 
further question, was he going to negotiate the limits, upper 
limits. He said, ``Absolutely not.'' Two hours later, he did 
it. I have not met him lately, but we will see each other 
again. [Laughter.]
    Mr. Nason. I am sure you will, Senator Shelby. I guess what 
I would say is two things.
    First, in no way does this being part of the stimulus 
package undercut the Secretary's commitment to comprehensive 
GSE reform.
    And, two, I think the Secretary was quite----
    Senator Shelby. It does not undercut it? Now, how do you 
square that? I want you to explain that.
    Mr. Nason. Well, I think the importance of us being here 
right now is suggesting how important it is for us to have GSE 
reform, and the Treasury Secretary is committed to that.
    And then, second, I would just like to say----
    Senator Shelby. But how committed is he?
    Mr. Nason. Well, he said right after the--or at the 
discussions on the stimulus package that this is not something 
that he was strongly advocating.
    Senator Shelby. Well, I know Mr. Lockhart is committed to 
it, and I know Mr. Rosenfeld is. But I am not sure about 
Secretary Paulson. You know, he says one thing and does 
another.
    Mr. Nason. The Secretary is committed to comprehensive GSE 
reform, sir.
    Senator Shelby. I have not seen it yet. I hope you are 
right, but I doubt it.
    How will you, Mr. Lockhart, as the safety and soundness 
regulator, ensure that these additional risks are well managed 
by the GSEs? In other words, as we run the loan limit up, how 
are you going to manage that? Because there is a lot more risk 
there. If Fannie Mae and Freddie Mac, for example, had been 
more active over the past 2 years, had had the jumbo loans, in 
States like California and others, which have the largest price 
declines in recent months, what do you believe would have been 
the impact on the financial condition of Freddie Mac and Fannie 
Mae if their loans that they bought went down in the price--the 
houses?
    Mr. Lockhart. Certainly, many of the jumbo loans were done 
on a relatively risky basis. People were reaching to get into 
houses. There was a lot of floating rate, adjustable rate 
mortgages, interest only, and negative amortization done. Very 
few, actually, 30-year fixed were in the jumbo market. Probably 
only 50 percent. They were, yes, much riskier. They had credit 
risk. They had significantly more prepayment risk. And it could 
have had a serious impact.
    Overall, as you will hear from the two CEOs, the books that 
they took on in late 2005, 2006, and early 2007 were much 
riskier even in the conforming area. It could have had a 
serious impact.
    We are going to work very closely with the two management 
teams as they look at this. There are significantly more risks 
that they are taking on, and they need new risk management 
systems, new pricing models, and internal controls. They have 
new product processes in place. We will watch them and work 
with them to do this.
    But this is complex. By using the FHA standards, there 
could be hundreds of different mortgage limits around the 
country, much more than there were in the original House bill. 
It is also going to cover a lot more people than the original 
House bill in that it could cover people----
    Senator Shelby. More people, more risk?
    Mr. Lockhart. More people, more risk. It could go down to 
an area with a median house price of $335,000, so well below 
the conforming, and bring it above the conforming. And as you 
said, it could also go up to $730,000.
    Senator Shelby. Mr. Rosenfeld, tell us again how important 
is it that we include in any reform of the GSEs the Federal 
home loan bank system? Why is it important to tie that into it?
    Mr. Rosenfeld. Senator, I believe it is important for a 
number of reasons beyond what I mentioned in terms of working 
together and having greater expertise. I think one of the 
reasons that it is very important is the history of the Federal 
Home Loan Bank Board. I believe that I was the ninth Chairman 
in 14 years. That suggests something of a lack of stability in 
that structure.
    Some years ago, the American Banker was frequently 
reporting on food fights at board meetings. We do not have that 
today. Actually, today, Senator, we are having, I think, an 
excellent working relationship between the colleagues on the 
Board. I can tell you personally I like my colleagues and I 
respect them. I think we are working very hard addressing the 
problems we have to deal with today. But this is a relatively 
unique period in the history of the Federal Home Loan Bank 
Board, and I would suggest that there are some problems with 
its basic structure. You have basically five--you have five 
directors, four of whom sit probably within 50 feet of each 
other, each having an assistant and an administrative 
assistant. And we regulate 12 banks. It gets a little bit 
awkward.
    I think another----
    Senator Shelby. Are 12 banks too many?
    Mr. Rosenfeld. Pardon?
    Senator Shelby. The 12 banks, is that too many?
    Mr. Rosenfeld. No.
    Senator Shelby. Not necessarily?
    Mr. Rosenfeld. Oh, maybe we could do with less, but if they 
are cooperative--they are owned by the members. If they choose 
to have 12, there will be 12. We have no intentions of creating 
any mandatory rule that there be less than 12. If banks decide 
to get together, we would, you know, look at it at that time.
    Senator Shelby. Or if some of them get real shaky?
    Mr. Rosenfeld. Then they may find themselves closer 
together.
    Senator Shelby. And do you have the power to do that?
    Mr. Rosenfeld. We believe we do. And one other thing which 
has just come up, which I think is incredibly important. Given 
the serious chaos in the mortgage finance world, it became very 
apparent to me that if any of the major players in the 
industry, the major banks, mortgage companies, were to have a 
serious, serious problem, Fannie and Freddie and the home loan 
banks would find ourselves having a very common concern in 
terms of what the hell do we do with the situation now. And it, 
I think, would be a much stronger source of protection for all 
of us if, in fact, we had one regulator to deal with what is 
fundamentally the same business that we are both in, which is 
the mortgage business.
    Senator Shelby. But you do not need a regulator unless the 
regulator has power, do you?
    Mr. Rosenfeld. Well, absolutely. And I think another factor 
that you got me to think about is the fact that if you are 
going to attract really top people to a world-class 
organization, they have to have an organization that is 
structurally world class. And I think that would be an 
extraordinarily significant step in getting the kind of folks 
or people to run this combined regulator.
    Senator Shelby. And a regulator that is above politics, if 
you can find such a person in Washington, D.C., right?
    Mr. Rosenfeld. I think that you can, Senator.
    Senator Shelby. As much as you can.
    Mr. Rosenfeld. I think you can find some very fine people, 
but you have to give them the opportunity to really do their 
job without the interference that may come from an 
appropriation process or such things.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Above politics?
    Senator Shelby. Yes.
    Chairman Dodd. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman. Gentlemen, welcome. 
It is good to see all of you. Thank you for being here today 
and for your testimony.
    I think what I would like to do is just start off by going 
through the things I think you agree on, all right? And one of 
those is, as I have listened to your testimony, I believe I 
heard you essentially say that you agree that the House-passed 
bill is a real good starting point for us in the Senate. Is 
that pretty much how you feel?
    Mr. Lockhart. Yes, Senator.
    Senator Carper. Thank you. I believe that each of you have 
said that you feel that we do not need two regulators, we need 
one regulator, both for Fannie Mae and Freddie Mac and for the 
Federal home loan banks. Do you agree on that?
    Mr. Nason. I do.
    Mr. Lockhart. Yes.
    Senator Carper. OK. We have heard you say that you believe 
the regulator should be independent and independently and not 
have to depend on annual appropriations. Is that correct?
    Mr. Nason. Yes.
    Mr. Lockhart. That is correct.
    Senator Carper. All right. I believe we have heard you say 
that the regulator ought to be able to set minimum risk-based 
capital requirements, not have those statutorily but have 
that----
    Mr. Nason. Yes.
    Mr. Lockhart. Yes.
    Senator Carper. OK. And that the regulator should have 
enhanced enforcement authority, I think you said that.
    Mr. Lockhart. Yes.
    Mr. Nason. Yes.
    Senator Carper. Talk to us about SEC registration. I think 
Fannie is on track. I believe all the 12 Federal home loan 
banks have been registered. But just give us your thoughts on 
that. It is not clear to me.
    Mr. Lockhart. You would like me to?
    Senator Carper. All three.
    Mr. Lockhart. OK. I could start out.
    Mr. Nason. Sure.
    Mr. Lockhart. We believe SEC registration is critical. All 
12 Federal Home Loan Banks are. Fannie is registered and they 
are hopefully going to become timely when they file at the end 
of this month, and hopefully they also will become Sarbanes-
Oxley compliant at that point.
    Freddie Mac, on the other hand, has never been registered 
with the SEC. It is starting the process. And after it files 
its statements in February, it will start the process, and 
hopefully by the middle of this year it will be SEC registered 
and by the beginning of next year, Sarbanes-Oxley compliant.
    Senator Carper. All right.
    Mr. Nason. I would share that view. I would say that making 
them file like any other private company is an indication that 
they are not a different type of corporation, and more 
disclosure to investors that are investing in their debt and 
stock is always a positive thing from our perspective. So we 
would be supportive of that.
    Senator Carper. OK. I believe we have heard you say that, 
unlike the situation now where you have--the regulator has 
authority over financial operations and so forth, but HUD has 
responsibility and oversight over the program, that we should 
consolidate those two into a single entity. We are in agreement 
on that, are we not?
    Mr. Nason. Yes.
    Mr. Lockhart. That is very important to me. All the other 
regulators have that. By fragmenting the new product authority 
from safety and soundness and mission, you can lead to a lot of 
tensions that do not make a lot of sense.
    Senator Carper. OK. There is another--Senator Martinez--
from time to time I ask him to put on his old HUD hat as HUD 
Secretary, and we talk about a path forward on GSE reform. And 
one of the things that he and I have talked about in the last 
week or so is this--this is really the issue that Senator 
Shelby has raised, and that is, whether we should include in 
the stimulus package--which I think we are going to be voting 
on later today. Should we include in the stimulus package a 
limit on--a portfolio loan limit up to about $730,000 for 
Fannie and Freddie? And in the legislation that we are 
contemplating, it would provide for a 1-year extension or a 1-
year grant of that authority. That would take us to either the 
end of the year or the early part of next year.
    My fear--I believe in the old adage that work expands to 
fill the amount of time we allocate to do a particular job. And 
we have a way around here, if we get into early October and we 
have not done it, there is a pretty good chance we are not 
going to do it this year. And we will kick it off into a new 
administration, into next year and a new Congress, and then 
hopefully not start all over but we could, and then just delay 
it further.
    Senator Martinez and I have talked about maybe we are going 
to include a provision in the stimulus package to allow this 
increase in the conforming loan limit, that we make it for 6 
months rather than for 12. Would you have any thoughts along 
those lines?
    Mr. Lockhart. As you all know, I believe strongly that if 
you are going to increase the conforming loan limit, it is 
critical to give the regulator more powers. And that is why 
hopefully we can do this legislation very quickly. One 
incentive might be to shorten the time of the increase. It may 
take several months for the two entities to install the kind of 
systems and have the right kind of culture and risk management 
around these products. So it may take 2 or 3 months to get 
there to begin with. The key thing is that we need to get GSE 
reform so that by the time they are in place and ready to start 
doing these jumbo loans, we actually have a stronger regulator. 
And that is what I humbly ask every Member of this Committee to 
work on.
    Senator Carper. Any other thoughts on this?
    Mr. Nason. I would echo the Director's comments about the 
need for GSE reform, but the Administration supports the 
current stimulus legislation.
    Senator Carper. Thank you. A question for Mr. Lockhart, if 
I could. We have talked about the affordable housing fund, 
something that Senator Reed has championed, and certainly I 
strongly support. It has been a point of some contention in the 
past, as you know.
    If the affordable housing fund that is included in the 
House bill were enacted today, any idea what would be, just 
roughly, the annual contributions from Fannie or Freddie maybe 
this year or next year, maybe even the year after that?
    Mr. Lockhart. The annual contributions as done in the House 
bill are a percent of their whole book of business. I believe 
it is 1.4 basis points. It is about half a billion and growing.
    Now, obviously, with the companies both losing money, there 
are some issues around that, but that is what the numbers are 
at the moment.
    Senator Carper. But given where the companies are 
financially now, what would you estimate the housing fund 
contributions would be for maybe this year and at least----
    Mr. Lockhart. Because it is on the whole book of business, 
it would be that half a billion dollars. The only issue we 
would have to think about is how to put that in place given 
that they are already losing a significant amount of money.
    Senator Carper. All right. Thanks very much.
    Thanks, Mr. Chairman.
    Chairman Dodd. Senator Hagel.
    Senator Hagel. Thank you, Mr. Chairman.
    Director Lockhart, I noticed in Mr. Mudd's testimony, which 
we have received--and the Chairman noted part of this in his 
beginning questions to you--that in that testimony, and I will 
quote, Mr. Mudd says, ``Only one hurdle remains for us to fully 
comply with the 81 recommendation measures called for in our 
2006 consent order with OFHEO. That hurdle is the filing of our 
fully audited 2007 results with the SEC, which we will have 
done at the end of the month.''
    Is that accurate?
    Mr. Lockhart. Well, there are a handful of ones that we are 
still looking at, so we have not signed off on. In addition, 
about 45 of the 81 included plans, and so we have to look that 
they are implementing those plans. They have presented the 
plans, but we want to make sure that they are implementing 
them. Just putting out a plan, does not help unless you are 
implementing it. We are reviewing that as well.
    There are issues that we need to continue to work on like 
operational risk capital, and economic capital. There are a 
whole series of issues that need to continue to be worked on.
    Senator Hagel. So would it be a fair assessment that Mr. 
Mudd took some liberty with that statement?
    Mr. Lockhart. I believe it is technically correct, but I 
especially if you are talking, as the Chairman was, about 
removing the 30 percent capital, there are significant other 
issues that still have to be addressed before we get to that. I 
am hopeful that they can get it done quickly, and we are 
working with them on that list of what needs to be done.
    Senator Hagel. And how many issues would you say out of the 
81 that they are still working on?
    Mr. Lockhart. I do not know. I cannot give you a number. 
But it is probably in the single digits.
    Senator Hagel. What specifically can you tell us regarding 
internal control and risk management recommendations?
    Mr. Lockhart. Certainly they have some ongoing internal 
control issues in both companies. They have done a lot. As I 
said, Fannie will be Sarbanes-Oxley compliant. But that 
requires a lot of manual activities and they need to get more 
systematic about them. Freddie is not Sarbanes-Oxley compliant 
and, again, they need to work a lot on their internal controls.
    On the risk management side, we all agree that they need to 
adopt a new economic capital framework, and that is part of the 
legislation. We are all working together on that, but that is 
going to take a while. I think that is critical going forward 
that we make sure that their capital grows when the risks grow. 
And that is going to take some significant work.
    Senator Hagel. For both Fannie and Freddie.
    Mr. Lockhart. For both Fannie and Freddie, yes, Senator.
    Senator Hagel. Thank you. You responded to some questions 
from Senator Carper regarding the SEC and registration with the 
SEC. And I want to quote from a letter I received recently from 
Chairman Cox and then ask a question. And I had inquired with 
the SEC Chairman on some of these matters, and he responded as 
part of that letter, ``I firmly believe that because GSEs sell 
securities to the public, have public investors, and do not 
have the full faith and credit of government backing of 
government securities, GSE disclosure should comply with the 
disclosure requirements of the Federal securities law.'' And, 
of course, you agree with that, and I assume your colleagues at 
the table agree with that.
    Here is the question: In your opinion, should Fannie and 
Freddie be required to register their debt and mortgage-backed 
securities as well as their common stock with the SEC?
    Mr. Lockhart. That is a good question. I agree 
wholeheartedly with the Chairman that they need to adopt full 
disclosure, and probably even more disclosure, given the 
significance of their size and their importance to the American 
economy.
    Registering their debt has some pluses and minuses. It will 
raise the cost of debt somewhat. If they have a full 
registration with the SEC for their common stock, that is 
probably enough in most circumstances.
    Senator Hagel. So would you see value or not value in 
registering----
    Mr. Lockhart. There would be some value, but not 
significant value added there. I would think there are other 
places to put their resources at this point.
    Senator Hagel. Well, let me ask it this way: In light of 
the question that has been presented and the environment of the 
market today, confidence, as we know, drives markets.
    Mr. Lockhart. Right.
    Senator Hagel. Would this enhance confidence, do you 
believe, or not?
    Mr. Lockhart. On the margin, it probably would enhance 
confidence somewhat, yes.
    Senator Hagel. Mr. Nason, would Treasury have a position on 
this?
    Mr. Nason. Yes, I would agree with that. More information 
about the companies disclosed to the public would be beneficial 
at the margin. I think a full equity registration statement 
would provide a significant amount of information about how 
they operate, but at the margin, I think it would be helpful.
    Senator Hagel. Well, also, all of the other institutions, 
companies in the marketplace are required, are they not, to 
make those disclosures with the SEC?
    Mr. Nason. Yes.
    Senator Hagel. Why then would we exempt the GSE?
    Mr. Nason. That was what I was trying to say earlier to 
Senator Carper's question, which is exempting them from the 
registration requirements just conveys more special status on 
them, and that is something that we would not be supportive of. 
So additional registration would be fine. I was just trying to 
say how much additional information you would get from the debt 
registration requirements.
    Senator Hagel. Would you like to add anything to that, 
Director Lockhart?
    Mr. Lockhart. No. That is right. More disclosure is better. 
I think one of the issues is that they are very large debt 
issuers and a lot of their debt looks very similar. So the 
process of more of a shelf-type structure would make sense.
    Senator Hagel. Thank you.
    Mr. Chairman, thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Mr. Lockhart, I was very much interested in your chart 
depicting how Fannie, Freddie, and the home loan banks have 
stepped into the breach, and I agree with your conclusion it 
shows the critical role they are playing. But isn't this a 
rapidly contracting market? And might some of this 71 percent 
be a function not so much of super activity as the fact that 
everybody else has left and the market is getting much smaller?
    Mr. Lockhart. It is a combination. The market is not 
growing as much as it has in previous years, obviously, but 
their growth has been dramatic. In fact, probably more than in 
any previous year. So, yes, they are growing a lot. The market 
is not growing as much as it had historically done. So, it is a 
combination. But the point is that all that risk is coming on 
them where it used to be spread through many other mechanisms.
    Senator Reed. But I think one of our challenges, frankly, 
stepping aside from simply the regulatory issues, is to expand 
that market once again at a dramatic rate. You know, one of the 
reasons why they are taking up all this risk is that--and we 
have been through this debate about capping their participation 
because the private sector really should be able to get in 
there and get the job done. A lot of these private actors 
turned out to be predatory lenders in the subprime market, 
standards that now we see are just--we are horrified about, 
securitizations based upon very weak analysis by credit 
agencies, et cetera.
    So, I mean, I think the point is that part of this debate 
we have heard time and time again has not just been about 
giving you the ability to set regulatory capital, which I 
think--and risk capital, which is absolutely important; it is 
also putting limits upon the growth of these entities in 
addition to that.
    So let me ask the question. Do you think if you had as a 
financial regulator, most other financial regulators, the 
ability to set appropriate levels of capital, risk capital as 
well as basic capital, and you had access to the portfolios, to 
examine their portfolios, et cetera, that that would be 
sufficient without any type of arbitrary limits on the size of 
their portfolios?
    Mr. Lockhart. I believe that the portfolio should be 
focused on the mission and a major portion of it now is just 
buying their own securities. Seventeen percent of all the 
securities they issue they have in their own portfolios, and 
that is really not needed.
    I believe that the House bill does required regulation that 
makes sense and does lay out some criteria, not all of which we 
agree with, but pretty much. And I think that makes a lot of 
sense, focus them on their mission of stability, liquidity, and 
affordability. We need to do that with their portfolios.
    They have been growing very rapidly this year at 16 
percent. One of the things we also need is to get the private 
sector back in, and that will take some confidence building. 
You may not know this, but about a quarter of their portfolios 
were those securities that Wall Street was issuing that you 
were talking about.
    Senator Reed. That raises another issue, which is, you 
know, they are a private enterprise in the marketplace. They 
are literally competing. And one could argue that maybe it was 
a race to the bottom, that some of their competitors were 
putting together securitization products which now look deeply 
suspicious in terms of their due diligence, in terms of, even 
worse accusations are being floated around, and that as we told 
them, frankly, to get into this market and as they went to the 
market and started competing, they were sort of pulled down.
    I think there is an opportunity, particularly with Fannie 
and Freddie, either through your good offices or your 
colleagues, that if they can establish--raise the standard, you 
know, no prepayment penalties during reset periods, full 
documentation, et cetera, all those things--we can drive the 
market up. But my sense is--and maybe it was unintended 
consequences of the debate we have had over the last several 
years about reining in the GSEs, is we gave full rein to a 
bunch of actors right now that have--many have already entered 
bankruptcy or left the scene, and the damage is being sort of 
calculated and trying to be rectified.
    Mr. Lockhart. There is no doubt that over the last 2 or 3 
years underwriting standards fell dramatically, and Fannie and 
Freddie to a certain extent had to chase that because they had 
the affordable housing goals, the mission to do it. The good 
news is because of some of the controls we had on them, they 
could not do too much in this area, and also because the 
managements realized that there were problems in the 
marketplace.
    Going forward, one of the things we did is the bank 
regulators put together a non-traditional mortgage guidance and 
a subprime guidance. We made Fannie and Freddie adopt that for 
everything they buy, not only for mortgage-backed securities in 
their portfolios, but also if they buy private-label mortgage-
backed securities. They now have to make sure every mortgage in 
that package complies with that guidance, which hits many of 
the things you were talking about. We are trying to help them 
instill a much higher standard than the market----
    Senator Reed. And I commend you for that, and I think the 
activities over the last several years that OFHEO has 
undertaken, mostly through consent, have been effective in, I 
think, providing a much higher standard that we need going 
forward. Now the challenge is if we get these standards 
aligned, if we give you, I think, the authority certainly to 
regulate appropriate capital, both risk-based capital and other 
capital, and then the next challenge is to deploy this reform, 
these entities, into the marketplace to start once again 
expanding originations, expanding access to loans. Because from 
the macroeconomic level, you know, if it keeps declining, that 
is not good news for anyone.
    Mr. Lockhart. As I said, they are expanding. They have 
expanded 16 percent this year.
    Senator Reed. And you do not have any problems in terms of 
that as an issue of safety and soundness?
    Mr. Lockhart. No. We even encouraged them to do mortgage-
backed securities. Obviously, we had restraints on their 
portfolios, but at this point, they could grow their portfolios 
by about $100 billion for the next 6 months and not hit our 
constraints. We have not been constraining them through this 
year.
    Senator Reed. In fact, I would presume--may I presume that 
you would encourage them as a stimulus to the economy to keep 
expanding up to their capital limits?
    Mr. Lockhart. In a safe and sound manner.
    Senator Reed. Absolutely.
    Mr. Lockhart. That is the critical issue here.
    Senator Reed. Absolutely.
    Mr. Lockhart. Unfortunately, I go back to--on message 
again, if I may, but we need GSE reform to really be able to 
make sure that they have that safety net.
    Senator Reed. I do not think anyone is arguing about that, 
but I think, you know, we should stop and give you credit and 
your colleagues credit and because of, I think, obviously, 
self-interest, the entities, is that they took some prudent 
steps over the last few years to rein in some of the excesses 
that were quite obvious in the private sector.
    Mr. Lockhart. Yes. Thank you.
    Senator Reed. Thank you.
    Chairman Dodd. Let me just, before we turn to our next 
Senator, I just want to thank Senator Reed. That is a very 
important exchange that just went on.
    Staff gave me a note here that Fannie and Freddie's share 
has gone up by 30 percent from the second quarter of 2007 to 
the fourth quarter in mortgage originations, while the market 
has declined from $730 billion to $450 billion. But for Fannie 
and Freddie, we would be looking at a very, very different 
situation.
    Senator Reed. And the lights would be out.
    Chairman Dodd. Yes. And, candidly, look, I mean, I--Jack 
said it well in a sense, and I will raise it myself later. You 
know, it was not just that underwriting standards got lax. They 
were not in place, despite legislation adopted in a bipartisan 
fashion by this Congress 13, 14 years ago. The concentration of 
the GSEs is important, but the suggestion somehow that the 
problem we are facing today was a GSE problem I think is to 
miss the point dramatically. Now, I am for a strong regulator 
and all of that, but the suggestion we are in the mess we are 
in today because of that is to miss the whole point. What has 
happened here, you know, we are now awash in sovereign wealth 
coming into the country with these bankers going around 
shopping all over the world to bring capital in to bail them 
out.
    Mr. Lockhart. No, I did not mean to suggest that they--that 
they are the problem. In fact, they are part of the solution.
    Chairman Dodd. Absolutely.
    Mr. Lockhart. A big part of the solution.
    Chairman Dodd. Well, we have to make that clear. It is very 
important to make that clear here, I think.
    Mr. Lockhart. I believe that and that is why I took this 
job, because I thought that they had such an important role to 
play in this economy. At the same time, we have to make sure 
that they continue to play that role in a safe and sound 
manner.
    Chairman Dodd. I agree. Thank you, Jack, very much for 
that.
    Let me turn to Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    I would like to pursue the question of whether we should 
roll the Federal home loan banks into the system a little bit 
further. Mr. Rosenfeld, we have testimony from other of the 
Finance Board members who argue that they do not believe that 
is the right decision. I guess it is fair to say that the 
Finance Board itself is mixed on this issue. Is that correct?
    Mr. Rosenfeld. Yes, sir.
    Senator Crapo. One of the questions I have is that as we 
have been looking at the need for a strong, independent 
regulator, the types of things we are looking at are the need 
for a regulator that is able to independently finance itself so 
that it is not dependent on congressional appropriations; the 
ability for the regulator to place a GSE into receivership or 
conservatorship; the ability to have authority to approve new 
and existing businesses and business products that may come 
forth, or activities; the ability to set minimum capital 
levels; and things like that.
    Does the Finance Board not already have all of those 
authorities?
    Mr. Rosenfeld. Yes. We have quite extensive authorities. I 
think there are some--unquestionably, there are some things 
that would improve our situation, but what you have just 
mentioned, we have those authorities. Yes, sir.
    Senator Crapo. Well, the concern that I have is that there 
are clearly differences between the Federal home loan bank 
enterprises and the Fannie and Freddie enterprises. And any 
legislation that we pass would have to accommodate those 
differences in some way.
    Mr. Rosenfeld. I agree completely.
    Senator Crapo. And as I see those differences, it appears 
we have different capital structures, different board 
structures, different approaches to the stockholder return and 
to the pricing for customers and so forth. And we also have a 
major difference in the fact that, as you say in your own 
testimony, the Federal home loan bank's business is secured 
lending, where most of the collateral is mortgage loans. The 
Federal home loan banks do not securitize mortgages, and direct 
mortgage holdings are only 7.2 percent of their total assets.
    With these kinds of differences, how would we write 
legislation so that we would create one regulator that would 
regulate enterprises that have such significantly different 
structural approaches?
    Mr. Rosenfeld. Well, I think for reasons which I attempted 
to articulate a few moments ago, I think that one regulator is 
the preferred way to do. Now, keep in mind that one regulator 
may have--for example, hypothetically you may have two or three 
people in charge of the organization as opposed to one. 
Director A may have primary responsibility over the home loan 
banks, Director B over Fannie and Freddie.
    The question of how you regulate both seems to me to be the 
subsidiary question to the more important one, that there be 
one regulator for the GSEs who speaks with a common voice and 
executes a common fundamental policy, because at the end of the 
day, it is the Federal Government who provides this implicit 
guarantee for both of them. And I commend my colleagues on the 
Board for bringing to your attention as well as others' the 
differences between the enterprises and the home loan banks. 
And they are clearly there, and they clearly have to be honored 
and respected. But that to me is not a basis for not having a 
better overall regulatory structure that we have today.
    And, furthermore, again, as I said in response to a 
question by Senator Shelby, I think that a more significant 
structure for the regulation would, in fact, over time provide 
unquestionably better leadership for both.
    Senator Crapo. Mr. Lockhart, do you want to comment on that 
at all?
    Mr. Lockhart. First of all, there are a lot of 
similarities. They are both dealing in the mortgage market. 
They are dealing with the same customers. They are borrowing 
money from the same people. They are dealing with the same 
risk. They both have examination teams. All firms are following 
the same accounting principles. There is a tremendous amount of 
similarities and synergies by combining these two groups and 
getting to a bigger, more prominent position, as well as a more 
significant place at the regulator's table. We are not involved 
in the bank regulators' Examination Council. There are a whole 
series of things, because we are so small, that we are not part 
of. So that is important.
    As to the structure, the House bill has Deputy Directors 
for Fannie and Freddie and a Deputy Director for the 12 Federal 
Home Loan Banks. There are significant differences, as you 
said, and I think that combination structure will make it a 
very effective regulator going forward.
    Senator Crapo. Mr. Nason, I assume you agree with this, but 
you are welcome to pitch in if you would like.
    Mr. Nason. Sure. The Treasury has very strong feelings that 
this is an effective structure. There are more symmetries that 
would bring a lot of utility to having a single regulator. And, 
frankly--of course, with all due respect to my colleagues--a 
stature increase in the regulators would be very beneficial for 
such very large, complex organizations that are very, very 
important to a critical part of our capital markets, which is 
the mortgage market.
    Senator Crapo. Just a last point on this, and that is, with 
regard to the Finance Board's activities in this current crisis 
that we have as well as the ongoing operations, nobody is 
suggesting that the Finance Board has had a failing or a lapse 
in some way, or a lack of power to deal with the issues that 
have come forth to this point, are they?
    Mr. Rosenfeld. I think that we have exercised our 
authorities appropriately. I think that, as I said a moment 
ago, we do have the authorities for the most part that we need 
to conduct our affairs and keep the banks in a safe and sound 
situation. I do think that on behalf of my colleague, Mr. 
Lockhart, that OFHEO certainly needs strengthening in the areas 
which we have discussed at great length this morning.
    Senator Crapo. Thank you.
    Mr. Lockhart. To take an example of how they work together, 
some of the big banks are customers of both institutions. For 
instance, we see Citibank and Countrywide taking big advances 
over there. They are also some of the biggest customers of 
Freddie and Fannie. We may see, as we pass this conforming loan 
limit provision, that some of the advances they have been 
making will now come from them and come back to Fannie and 
Freddie as they take the jumbo mortgages that they are 
financing with the Federal Home Loan Banks and sell them to 
Fannie and Freddie.
    There are a lot of synergies between these two, and one 
regulator looking over the structure makes a lot of sense.
    Senator Crapo. Well, thank you. I see my time has expired, 
so I cannot pursue it any further. But I would like to work 
with you on this issue as we move forward to be sure we can get 
it right.
    Thank you, Mr. Chairman.
    Chairman Dodd. Yes, thank you very much, Senator.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. And thank you 
all for your testimony.
    Mr. Lockhart, let me ask you, do you believe that the GSEs 
not only have an important role to play in the subprime crisis, 
but is there anything--do you think there is more that they 
could do to help? And are there any restrictions currently in 
place that are holding them back from helping more homeowners?
    Mr. Lockhart. They have a very important role to play in 
the subprime area, and the whole housing market, as we have 
been discussing. What their role has been is really helping 
people that maybe should have never been in subprime or are in 
better quality subprime and get into better mortgages, less 
risky mortgages. They have been doing that in a big way from 
refinancing those mortgages, and we are encouraging them to do 
that.
    They have also been very involved in the Hope Now process 
and are trying to encourage modifications of loans to keep 
people in their houses.
    As Senator Schumer mentioned, the whole idea of partial 
writedowns makes a lot of sense. We will be working with the 
two enterprises on that issue.
    They have an important role to play, and they are going to 
continue to play it, but they also have to make sure that they 
do not take too high a risk. There are certainly a lot of 
subprime borrowers where the risk level is too high for them to 
buy those mortgages.
    Senator Menendez. Is there any restriction that you as a 
regulator look at and say, well, these restrictions are 
stopping them from playing the vigorous role that we want them 
to play?
    Mr. Lockhart. They develop their own underwriting 
standards, and we review the underwriting standards. We have 
not asked them to tighten the underwriting standards, but we 
continue to review them to make sure that they are safe and 
sound.
    Senator Menendez. Let me ask you this: Considering the 
missions of the GSEs to help low- and moderate-income families 
get affordable financing, do you think that--for example, this 
whole issue of new products as an essential part of reaching 
low-income and particularly minority communities, if we 
overregulate the process of getting new products to the market, 
aren't we essentially slowing down that process? And, second, 
as you answer that question, are we creating a disadvantage if 
we tell the world--if I were in the universe of lending money 
and I tell the world this is a new product that I am going to 
offer that may have some unique perspectives to it that would 
be attractive that I might want to offer it, and I tell the 
world 30 days before I put it out on the marketplace, am I not 
ultimately undercutting my ability by forecasting to all those 
in the universe who might give this and had not thought about 
it themselves?
    Mr. Lockhart. They really compete with each other more than 
anybody else, so it is really notifying Fannie, notifying 
Freddie and vice versa, because the banks themselves are the 
ones that are going to develop these products for them. They 
have to tell the banks what they are looking at for a new 
product.
    There are issues whether it should be proprietary and not 
necessarily should it be exposed to the public right away. 
Certainly ones that have a significant public impact, there 
should definitely be an exposure. Certainly ones that are sort 
of at the edge of their mission, there should be an exposure. 
Certainly if they are looking at trying to get into the primary 
mortgage market, that should very much be subject to comment 
because they are not allowed to.
    Senator Menendez. All right. One last question. You made a 
statement with reference to capital levels for the GSEs that 
the level is too low. In the 1992 reform legislation and the 
recently passed House bill, they reaffirmed the congressionally 
mandated minimum capital levels for the GSEs. Can you elaborate 
upon that in terms of----
    Mr. Lockhart. What I was referring to is the minimum 
capital, which is 2.5 percent for assets and 45 basis points 
for their MBSs. In fact, in the House bill, what they did is 
they did what I think makes sense because it is what the bank 
regulators have. They gave the regulator the power to look at 
those, both the minimum capital and the risk-based capital, and 
adjust over time. And that is what really should be done. So 
what the House bill did was actually do what I was asking for, 
which is provide some flexibility on capital.
    Fifteen years ago, when the law was passed, I do not think 
people were envisioning what has happened in the mortgage 
market today; that is, the credit risk we are seeing today. To 
me, that means that maybe those numbers were too low, and we 
may have to adjust them, especially in times like this.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    I apologize to Senator Martinez. I have my list here, and I 
went to Senator Crapo, and----
    Senator Martinez. Quite all right.
    Chairman Dodd. Please forgive me. Senator Martinez.
    Senator Martinez. No problem. Thank you very much, Mr. 
Chairman.
    First of all, I want to, Secretary Nason, associate myself 
with the comments that Senator Shelby made. I think that I am 
suffering also under greatly diminished credibility from the 
Secretary of Treasury because to direct point-blank questions, 
the answers came back that, yes, he wanted to insist on a 
strong regulator, and, no, he was not in favor and would not be 
part of stimulus to have higher loan limits, conforming loan 
limits, for the GSEs. Within a matter of a few hours of that 
conversation, that is exactly what he did.
    What I would like to ask you is: How does doing that 
enhance the safety and soundness? And what concerns does that 
raise in your mind as to the safety and soundness of the GSEs 
when it is not coupled with a regulator that, going back to the 
days that Secretary Snow and I were working together for a 
stronger regulator, before Fannie and Freddie showed us that 
they did not know how to bookkeep--that is before they had 
their crises. How is it that we are to feel more comfortable 
and more confident that the taxpayers of America are not at 
greater risk by increasing the conforming loan limits of Fannie 
and Freddie without a corresponding stronger regulator?
    Mr. Nason. The way that I would answer that, Senator, is I 
think our strong preference would be to couple it with strong 
GSE regulation, and I think that the discussion of the stimulus 
package suggests that there were exigent circumstances in the 
mortgage market. It was crafted to be temporary. And I think 
that that does strengthen the case. Allowing the GSEs to move 
into a new line of business on a temporary basis does increase 
the need for a GSE reform package. And we are certainly hopeful 
and supportive that we will get one.
    Senator Martinez. Mr. Lockhart, let me ask you, as you look 
at the increase in the conforming loan limits--and, first of 
all, let me just say, Mr. Lockhart, I think you have done an 
exceedingly great job at OFHEO under extremely difficult 
circumstances. I would liken it to being in the circus main 
ring with a lion and a tiger and maybe something else thrown in 
there, with a hand tied behind your back and maybe with a 
weight around your left leg, and doing an admirable job.
    Mr. Lockhart. Thank you.
    Senator Martinez. So I commend you and I thank you. But 
what concerns come to your mind as we increase the loan limits, 
but not your ability to more carefully regulate these entities?
    Mr. Lockhart. We are adding more risk to companies that are 
already pretty well stretched, and to me that means that we 
need to make sure that we have a good capital regime, that we 
have the ability to make sure that what they are putting in 
their portfolio makes sense.
    Another thing that concerns me is it is going to lessen 
their ability to meet their affordable housing goals. You know, 
a jumbo mortgage takes 3 times as much capital as their normal 
mortgage. So that is a concern to us.
    But from a safety and soundness standpoint, the key thing 
is they are going to have to build models, they are going to 
have to put in rigorous discipline, because these are different 
risks that they have never dealt with before.
    And so I think it is critical that we have all the powers 
of a strong regulator, not only to make sure they do this 
properly, but to make sure everybody else believes that they 
can do it properly.
    Senator Martinez. By giving them additional loan limits, we 
are enhancing their risk in an area where they have no 
expertise.
    Mr. Lockhart. That is correct.
    Senator Martinez. So that would make it even riskier than 
their normal line of business, would it not?
    Mr. Lockhart. That is correct. It is also a very 
concentrated risk too, in that over 50 percent is in 
California.
    Senator Martinez. Now, I know the housing goals are set by 
HUD, which is one of the problems. We need to do it all under 
the same roof. But why are housing goals important to GSEs?
    Mr. Lockhart. I believe one of the key roles GSEs play is 
for affordable housing. They have a lot of benefits being 
GSE's--no State income tax and being able to borrow more and 
cheaper than other AAAs. As such, there need to be goals. The 
goals have to be set realistically, and they have to be stretch 
goals. We need to make sure that they focus on them going 
forward, and that is a key reason why I think we need to relook 
at the portfolios as well.
    Senator Martinez. So affordable housing and loan limits in 
excess of $700,000 may not be equally compatible, even, 
frankly, in markets like Miami.
    Mr. Lockhart. The bill out of the House suggested that they 
were going to remove that from the calculation, but it still 
takes capital that could be put into affordable housing.
    Senator Martinez. So, in other words, they will have to 
skew their investments into areas of non-affordable and to the 
detriment of affordable, which may, in fact, make it impossible 
for them to meet the housing goals that have been set for them 
that are what their mission is about.
    Mr. Lockhart. Yes. I think that if you talk to the two 
CEOs, they would tell you they are going to have an extremely 
hard time this year meeting their housing goals.
    Senator Martinez. They used to tell me every year to tell 
me how difficult it was going to be to meet their housing goals 
when they were having their loan limits where they were, even 
lower than they are now.
    What is important about the new product requirements? I 
understand the Senator from New Jersey was asking questions 
about the delay and maybe tipping the hand. At the end of the 
day, both of these entities are Government chartered for the 
purpose of enhancing affordable housing. And so at the end of 
the day, their competitiveness may not be the No. 1 overriding 
reason of why they exist. But why is the idea that new product 
ought to be reviewed by the regulator prior to the time when 
they just embark upon a new product?
    Mr. Lockhart. I agree wholeheartedly. It should be reviewed 
before and it should be reviewed from the mission standpoint 
and the safety and soundness standpoint together, to make sure 
that the product is both. Today, we only can do it from safety 
and soundness and, frankly, we are trying to do more and more 
going forward in that area. But, again, this legislation would 
help us do that in a much more systematic way.
    Senator Martinez. Thank you, Mr. Chairman. My time has 
expired, but I thank the chair.
    Chairman Dodd. Well, thank you very much.
    Let me--I do not consider my role here to be defending the 
Secretary of the Treasury, but I--we have a tendency to 
stovepipe these issues. And while certainly they are very 
legitimate issues and we all, I think, agree here about the 
importance of a strong regulator, we are in a major economic 
crisis. The face of that crisis is the housing crisis, and the 
face of the housing crisis is the foreclosure crisis. And 
certainly there are very legitimate issues to be raised, in my 
view, about raising these limits to include some of these jumbo 
loans. We have a liquidity issue, and we are trying to respond 
to that here.
    You could make a strong case that this stimulus package is 
not as strong as it ought to be, but it is going to be 
critically important, and we need to address the housing 
problem as part of this larger economic crisis.
    And so I do not want to get in the middle of obviously what 
was said in rooms that I was not in, and I appreciate Senator 
Shelby's concerns and my friend Senator Martinez's concerns. 
But we have a major problem in this country, and we are acting 
as if things are relatively normal around here and we are just 
going to kind of deal with this thing in sort of technical 
perspective.
    We have got a major, major problem in our country, and it 
is global, in effect, and we have got to act. And this is one 
of the places you have got to do not only to stimulate 
spending, but you need to address the underlying issue, and 
that is housing and foreclosures. And by getting more liquidity 
in the market by raising these loan limits I think helps in 
that regard.
    The other issues are not illegitimate. I respect them. But 
given the balance between the two, I think it makes more sense 
at this juncture to try and do something about that to try and 
address this underlying problem that we have got to confront. 
That does not minimize the important points you are making, Mr. 
Lockhart, about this, but I think in fairness to the Secretary 
and others who are trying to do something about housing and 
dealing with the foreclosure problem, this is one of the ways 
in which you can get liquidity in the market. Don't you agree 
with that?
    Mr. Lockhart. Yes, I do, and it will help the market, and 
we need to make sure that Fannie and Freddie are strong enough 
to do it.
    Chairman Dodd. Well, we cannot separate these issues out 
like we are just sort of talking about a purely academic 
exercise.
    Mr. Lockhart. Hopefully, we can do them together. 
Hopefully, this bill can move quickly.
    Chairman Dodd. Well, that is why we are here today, and 
that is what I have told the Secretary. He raised the 
questions. I should let my colleagues know when I met with him. 
He asked the question whether or not we are going to move. I 
said we are having the hearing today, we are going to move on 
this, and we are going to get this done. But that does not mean 
you should hold up and not address the underlying problem that 
is having a major impact on our country, and a global impact. 
And the suggestion somehow we ought to wait on doing that I 
don't think is responsible.
    Mr. Lockhart. Yes, Mr. Chairman. What I was trying to say 
is that at this point we do need to strengthen them at the same 
time on different tracks. I sincerely believe that President 
Bush and Secretary Paulson strongly believe that we need GSE 
reform, and they want to do it as quickly as possible. And I 
certainly agree with that.
    Senator Martinez. Mr. Chairman, may I----
    Chairman Dodd. Senator Schumer.
    Senator Martinez. Mr. Chairman, just a quick comment.
    Chairman Dodd. Yes.
    Senator Martinez. I share your concern for the urgency of 
doing something about housing, and I understand and I agree 
with you that this package of stimulus may not do enough in the 
area of housing. However, I think to increase the risk of the 
GSEs may not be a smart way in the long term to increase 
liquidity and confidence in the market.
    So my point would be that there are a number of other 
strategies that could be employed, perhaps safer, that would, 
in fact, get at the housing market, like the incredible 
inventory that exists.
    So I share the concern on housing. I am not ignoring the 
problem.
    Chairman Dodd. No, no. Thanks.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman.
    First, I fully agree with Chairman Dodd here. We have a 
crisis. We have debated GSE reform for a year. We have sort of 
been deadlocked. And to say, to use this huge housing crisis as 
hostage to move GSE reform, which is important but one is a 
mountain, and one is not a molehill, one is an average size 
hill, and it is backward priorities.
    I think Secretary Paulson did the responsible thing, and I 
would say to my colleague from Florida, there are a lot of 
places where the conforming loan limit is just average, for 
average middle--Long Island, the average house costs $440,000, 
and that means the majority of homes are not right now 
available to the protections of Fannie and Freddie. And I do 
not think raising the conforming loan limit dilutes the safety. 
It is sort of a political shell game to say do not do the one 
before you do the other.
    Again, I do not know the promises that Secretary Paulson 
made, but on the policy, he is doing exactly the right thing. I 
worked hard to see the conforming loan limits be put in, and 
they should be. We should do GSE reform, of course. But when 
you have a crisis--and, you know, it is sort of what I said 
about Fannie. When the house is burning, you do not say, well, 
I am not going to hose down the house until I sort of clean up 
the front yard. And that is what the problem is, in my 
judgment.
    I would like to go to you, Mr. Lockhart. The issue of the 
30-percent capital surcharge, don't you agree that allowing 
some flexibility in their capital will give the GSEs more 
ability to help struggling homeowners? I mean, that is sort of 
irrefutable.
    Mr. Lockhart. Giving them more flexibility in their capital 
will certainly help them do more mortgages. What we have to 
worry about, is not only the short term but the long term. We 
have to make sure that they are going to be there not just 
today and tomorrow but a year from now. It may take that long 
for us to get through this.
    There have to be judgments and as I said to the Chairman, 
we will be looking at potentially releasing some of that 30 
percent going forward as they continue to meet the goals and--
--
    Senator Schumer. And do you have--because they have been 
meeting the goals. They have been good on this. And as I 
understood it, we were planning to do some release.
    Let me ask you this, though: Do you have----
    Mr. Lockhart. There are two different things. On the 
portfolio limits, it is pretty clear from the agreements that 
we had imposing them, they will be released, assuming they get 
their financials out.
    Senator Schumer. Right.
    Mr. Lockhart. But the capital was about their overall 
operational problems.
    Senator Schumer. No, I understand. But let me ask you this: 
Let us assume we feel we can deal with the 30-percent capital 
surcharge and allow some flexibility. Do you have any comment 
on requiring--I mean, as I said in my opening statement, I 
would want some flexibility on the 30-percent capital 
surcharge, but only if Fannie and Freddie take that new room 
and use it to help aid the crisis. And at this point, given 
their reluctance to do that--they are always saying I will only 
do it this way but not that way or this way, I have lost some 
faith in Fannie and Freddie.
    Do you have any problems sort of importuning them or even 
requiring them, if they got their capital flexibility that they 
very much want, to put some of that money into the kinds of 
things we need where there is a shortage of money and there is 
a capital crisis?
    Mr. Lockhart. As you know, we did loosen the----
    Senator Schumer. Yes.
    Mr. Lockhart. We had discussions with you about that.
    Senator Schumer. We did. You and I did, yes.
    Mr. Lockhart. We did loosen the portfolio limits in 
September. As part of that, we did ask them to fulfill their 
commitment for the $20 billion each on subprime. And they have.
    Senator Schumer. Yes. Well, I am talking now about the 
capital requirement and giving that in exchange for more.
    Mr. Lockhart. Again, I think it has to be done in a safe 
and sound manner.
    Senator Schumer. I agree.
    Mr. Lockhart. And that is the critical thing. But, yes, 
they can do more on affordable housing, and I think that is 
critical. And they can do more in subprime, not only in the 
refinancing area but in----
    Senator Schumer. So you do not have an initial adverse 
reaction to some kind of either importunation--if that is a 
word--or requirement that they take this new-found flexibility 
and use it for helping relieve the crisis in one way or 
another?
    Mr. Lockhart. I am not sure that we have the powers to 
require it.
    Senator Schumer. Well, what about us?
    Mr. Lockhart. They are government-sponsored enterprises.
    Senator Schumer. Yes, and importunation works.
    Mr. Lockhart. It does.
    Senator Schumer. OK. I want to go to just--you know, Mr. 
Nason mentioned the idea of GSEs playing a role in pushing 
lenders to accept fair market value for loans. Could you just 
elaborate a little bit on that?
    Mr. Nason. Sure, Senator. What I was saying is one of the 
biggest road blocks to refinancings and modifications are you 
have a significant class of borrowers that their LTVs are too 
high, they are underwater. So the problem with getting those 
folks into a mortgage product that is sustainable would require 
a lender to take a writedown. And lenders have not been that 
willing to take a writedown.
    Senator Schumer. Right. My time is running out, but you 
think basically this would work and be a very positive thing?
    Mr. Nason. I think that getting lenders to take a writedown 
would be a very positive thing.
    Senator Schumer. One final question, quickly, of Mr. 
Rosenfeld. Why hasn't the Federal Housing Finance Board joined 
its regulator colleagues in adopting the subprime mortgage 
lending guidance and holding collateral to the same standards 
that Fannie and Freddie have? As you know, I have had serious 
problems with what the Atlanta bank did, and I think I have 
been vindicated by the fact that they actually reduced the 
value of the collateral that they were holding, required more 
collateral for a smaller amount of lending. I do not understand 
why Atlanta was involved with Countrywide. I do not understand 
what the regulations were. I do not understand how careful they 
were. And if you would put these regulations into effect, we 
could make sure that things were much better done. So why won't 
you implement them?
    Mr. Rosenfeld. We did. Senator Schumer, we have told all of 
the banks not to make--to accept loans or accept loans as 
collateral, or buy MBS that has loans, mortgage loans in it 
that does not conform to the FFIEC. We did not do it perhaps as 
quickly as we might have, but we have now done it. And I will 
tell you that most all the concerns you articulated about the 
conduct of the Atlanta bank and referring to Countrywide, I can 
tell you that we are confident that----
    Senator Schumer. But you have not publicly adopted the 
regulations, have you?
    Mr. Rosenfeld. We have told the banks.
    Senator Schumer. But why don't you publicly adopt the 
regulations? This is not a game of whispering.
    Mr. Rosenfeld. I am not----
    Senator Schumer. Would you consider doing that?
    Mr. Rosenfeld. Yes, we would consider doing that.
    Senator Schumer. Thank you.
    Thank you, Mr. Chairman. I know I went over my time.
    Chairman Dodd. No, not at all. Thank you, Senator Schumer, 
very much. Very good questions.
    Senator Bennett.
    Senator Bennett. Thank you very much.
    Sitting here through all of this, I do not have much new to 
add, but I think I have a slightly different perspective that I 
would like to pursue.
    If I am a shareholder in either Fannie or Freddie, I have 
watched my share value drop from a price in the 50s down to a 
price in the 20s. I get my financial reports, whether they are 
completely compliant with SEC requirements or not, that tell me 
that Fannie lost $1.4 billion in the third quarter, and 
Freddie, $2 billion in the third quarter; both expect to lose 
money in the fourth quarter.
    All of this talk about the contribution that the GSEs have 
made to stabilizing the market is terrific, and I agree with 
it. But are they going to survive? Two billion dollars in a 
quarter is not a trivial amount of loss, even for a company the 
size of Freddie Mac. And are we doing things in urging them to 
solve this problem and get into this area and take on this 
additional burden that might, in fact, cause these companies to 
go under?
    Mr. Lockhart. Certainly, we are very concerned about their 
safety and soundness. One of the good things that both of them 
did is raise significant capital in the fourth quarter and, 
unfortunately for their shareholders, cut their dividends. But 
it was a safe and sound thing to do.
    Senator Bennett. Yes.
    Mr. Lockhart. From the standpoint of the stock, for better 
or worse, a lot of other financial firms are having----
    Senator Bennett. I am not worried about the stock. I use 
that just to illustrate.
    Mr. Lockhart. Right.
    Senator Bennett. These are publicly held companies whose 
management, in addition to the mission and all of the other 
things we talk about, have a fiduciary responsibility to their 
shareholders. And as we push them--we, speaking generically of 
public officials--to perform all of these missions that are 
good for dealing with the problem, we are--are we--I am asking 
the question. Are we creating a tension there that would cause 
the CEO to wonder why he took the job? Because he has got his 
fiduciary responsibility to his shareholders, and if he does 
not meet that, he is not in a position to meet his social 
responsibility to the Government. And is there a tension 
between those two that we need to be aware of as we address 
this whole question?
    Mr. Lockhart. Certainly, there is some tension between 
being a public-owned company and a GSE. There are some benefits 
and there are some tensions.
    From our standpoint, the pushing should only be done in a 
safe and sound manner. The whole idea of stretching them too 
far one direction or the other does not make any sense.
    These companies have to earn an adequate return, or they 
are not going to survive long term. Certainly, as their 
regulator, one of the things we look at is their capability to 
have a decent return and decent earnings. And certainly that is 
a concern that we share with you, and we want to make sure--and 
hopefully this legislation will help--that if they are pushed 
to do more in one area, that they have the capital and powers 
to do it.
    Senator Bennett. Let us go to the underlining problem. It 
is the overhang, inventory overhang of housing in this country. 
We saw human behavior repeat what it has done for centuries. 
This is Tulip Time. When we had the tulip mania in Holland, it 
destroyed their economy for over 100 years when it finally 
shook out as people were spending an enormous amount for tulip 
bulbs, and then suddenly discovered that the greater fool that 
was going to buy the tulip for a higher price than they paid 
for it no longer existed, and the whole economy of Holland 
collapsed over tulip mania.
    But the same human impulses that produced Tulip Time have 
produced one bubble after another. We had the bubble of 
overbuilding shopping centers that led to the savings and loan 
collapse. We had the bubble of the high-tech dot-com that 
produced the collapse in the early 1990s. And now we have had 
the housing bubble, and we can decry it all we want, but human 
beings are going to continue to do that, and there will be 
additional bubbles that will continue to come. They only work 
themselves out when the excess inventory is taken care of.
    Are the kinds of things we are urging the GSEs to do now 
contributing to working down the overhang of inventory that is 
in the housing market?
    Mr. Lockhart. Certainly, there is an overhang and there is 
no doubt about it and, as you know, part of it is being 
corrected by less building and other things that are painful 
for the economy, and that will continue.
    I think part of the role that the GSEs can play is to make 
sure that there is a mortgage market out there so the market 
does not overcorrect. I think what we need to do is obviously 
have this correction, but have it in a very orderly fashion and 
come out of it in an orderly fashion. And I think the role of 
Fannie and Freddie should be to add the stability as we go 
through this process. And, again, that is critically important 
that they stay that way and they stay safe and strong to help 
there.
    They can help, as was discussed earlier, on loan 
modifications----
    Senator Bennett. Specifically, because my time is gone, 
would the increase in the limits that is in the House bill, 
that is in the stimulus package we are debating, contribute to 
that smoothing that you are describing?
    Mr. Lockhart. Potentially so in some markets. Some of the 
higher-cost markets, it gets very hard, but it might actually 
slow down some of the correction too. There is a tradeoff 
always. Some people say that--and I am not sure I believe 
this--if you go to these markets, you might prop up the housing 
prices and make it harder for it to be affordable. And part of 
what is happening here is we are correcting the affordability 
issue. We are getting house prices back to where people can 
afford to live in them, and certainly my children, who will be 
buying houses in the next 5 years, will probably benefit from 
some of this. But overall, I think the critical role that they 
play is to provide the stability and help smooth out going 
forward.
    Senator Bennett. Thank you.
    Chairman Dodd. Let me just, if I can, I wanted to--Senator 
Bennett always adds valuable input to any conversation we have 
in these matters, but just the numbers he is talking about. I 
suspect the witnesses know these, but just for the record, the 
current housing market is, of course, the worst since the Great 
Depression according to many. But the inventory of existing 
homes for sale stands at nearly 4 million units, almost double 
the number in January of 2005. This is equal to about 10 months 
of supply. The number of vacant homes for sale equals 2.6 
percent, or 2.1 million homes of the stock of owner-occupied 
homes compared to the longstanding historical rate of 1.6 
percent. In 2007, as a whole, single-family home sales fell 13 
percent; new-home sales fell 40.7 percent, year over year in 
December. The weakest performance since 1981, just to add. That 
is our problem, a huge issue.
    And I do not know whether we are doing this or not. I 
should check on this. I think part of the stimulus package has 
some tax incentives that might actually exacerbate this 
problem, which is not an easy thing to talk about, because 
obviously we are talking about a lot of jobs involved in this 
area. But it is one issue of supply and demand. Normally market 
forces would correct this, and if you are not going to have--if 
you are going to be exacerbating the supply and demand issue 
and then relying on a market response to this thing, I think a 
lot of----
    Senator Bennett. Stimulating and building additional 
housing is not necessarily a good idea.
    Chairman Dodd. No, and it is difficult, obviously, for 
people out there whose jobs and families depend on this stuff. 
It is a complicated issue. But we are not getting--the idea 
that the market is going to correct this problem with this 
continuing to exacerbate here--anyway, I do not mean to----
    Senator Bennett. No. Thank you.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. I think it is going to correct the problem 
with pain and some suffering, as it always does. That is the 
market. But allow these house prices, as they fall, is going to 
create a market, too. Not maybe what a lot of people want. Is 
that right, Mr. Rosenfeld?
    Mr. Rosenfeld. Senator Shelby, this is my third major 
credit crisis of my career, and I must tell you that the 
solutions to them are always the same. It is time and 
liquidity. And one of the biggest things we have to fear is 
falling house prices. It is certainly important. I think what 
we need to do is stabilize housing prices through the efforts 
of people like Chairman Bernanke and provide things 
specifically, and we will get out of this.
    Senator Shelby. I want to get into bond insurance. Mr. 
Lockhart, the bond industry has been under significant 
financial pressure, as we know. While the GSEs' charter 
indicate that the GSEs should purchase 80 percent loan-to-value 
mortgages, they can purchase higher LTV mortgages, loan-to-
value mortgages, that carry private mortgage insurance. Is that 
correct?
    Mr. Lockhart. That is correct.
    Senator Shelby. Should the private insurers face further 
difficulties or downgrades, which we are all concerned about, 
are the GSEs adequately reserved for any possible losses here? 
And going forward, will the difficulties in the private 
insurance, that is the bond, affect the GSEs in terms of their 
ability to purchase higher loan-to-value mortgages?
    Mr. Lockhart. That is a very good question. Both Fannie Mae 
and Freddie Mac are spending a lot of time, and certainly we 
are, at looking at the financial condition of the bond insurers 
and the mortgage insurers.
    Senator Shelby. Explain just to the audience--I am sure a 
lot of them are very sophisticated--what loan-to-value, LTV 
mortgages mean. What does that mean?
    Mr. Lockhart. It means that the value of the house is 
$100,000 that they only can lend $80,000 against it. And what 
happened the last 2 or 3 years is almost everybody was 
borrowing much more than $80,000, in some cases all the way up 
to 100. So, they had to rely on credit enhancement under their 
charters, and that credit enhancement came from the mortgage 
insurers or----
    Senator Shelby. Private insurers.
    Mr. Lockhart. Private insurers.
    Senator Shelby. That a lot of us are concerned about their 
capital at this time.
    Mr. Lockhart. We are concerned about their capital. They, 
too, have taken on a lot of risk. In fact, to do a lot of the 
jumbos, they will probably need those mortgage insurers because 
many people will not be able to afford that 80 percent loan-to-
value.
    Senator Shelby. Director Lockhart, of the $1.4 trillion 
portfolios retained by Fannie and Freddie, almost a fourth is 
in the form of private-label mortgage-backed securities. Is 
that correct?
    Mr. Lockhart. That is correct. More in Freddie than Fannie, 
but on average, a quarter.
    Senator Shelby. What do you believe is the GSEs' primary 
reason for holding such a significant amount of private-label 
mortgage-backed securities on their balance sheet?
    Mr. Lockhart. Most of them are subprime. About two-thirds 
are subprime and about a third are Alt-A. Most of them, or a 
lot of them had affordability characteristics, and they got 
credit toward the HUD goals for doing that.
    Senator Shelby. Isn't that a big risk there? What is the 
value of that portfolio? You know, it is not what is stated, 
obviously.
    Mr. Lockhart. When they got into that business, one of the 
things that they agreed to with us is they would only do AAAs. 
Now, some of them are no longer AAAs, but the vast majority 
still are AAAs. Yes, there is risk. Yes, the value is 
significantly less than 100 at this point, and it is something 
we are monitoring.
    Senator Shelby. Do private-label, non-agency mortgage-
backed securities represent a unique risk to the GSEs that is 
different from the risk of holding their own mortgage-backed 
securities in portfolio? Is there a difference here? If so, 
explain the difference. I think there is some.
    Mr. Lockhart. Underlying their own and other people's 
mortgage-backed securities are mortgages. They did not do a lot 
in the subprime directly, so these mortgages under the private 
label are more risky than the ones they normally buy. On the 
other hand, there was this credit enhancement and other ways--
at the AAA level they are somewhat cushioned so that the lower 
levels will take the hits first. But, yes, there is significant 
risk.
    Senator Shelby. You may be familiar with this, but a recent 
analysis by Credit Suisse raised some troubling numbers with 
respect to the GSEs' portfolios. Fannie Mae and Freddie Mac, 
according to Credit Suisse, held over $230 billion in 
securities backed by Alternate-A and subprime mortgages at the 
end of the third quarter of 2007.
    Based on market prices for subprimes and Alternate-As, 
Credit Suisse estimated that Freddie Mac could face an $8 
billion to $11 billion writedown and Fannie Mae an impairment 
of a writedown of $2.25 billion to $5 billion.
    As the safety and soundness regulator--you, Mr. Lockhart--
do these numbers square with your understanding of the risk 
posed to the GSEs from these holdings?
    Mr. Lockhart. A lot is based on how you price these 
securities. Unfortunately, at the moment they are not trading, 
so it is very hard to price them. There is a very wide bid-ask, 
if you will, and that concerns us significantly.
    Certainly on a fair value basis----
    Senator Shelby. Well, sooner or later, they will be priced, 
won't they?
    Mr. Lockhart. We are hoping that the market does come back 
and people will start trading these securities. But, yes, it is 
an issue we are looking at. I think the Credit Suisse numbers 
are too high, but we are certainly looking at it. Certainly, 
they will price them as they look at their fair value. Whether 
they will have to take an impairment charge or not on these 
securities is something that they are looking at right now.
    Senator Shelby. Chairman Rosenfeld, as I understand it, 
bank advances can be offered using jumbo mortgages as 
collateral. What role have the Federal home loan banks played 
in providing liquidity to the jumbo market?
    Mr. Rosenfeld. They do not buy them to be held in their 
portfolios. They only take them as collateral.
    I am sorry. They do not buy jumbo mortgages to be held in 
their portfolios----
    Senator Shelby. But they will take them as collateral, 
though.
    Mr. Rosenfeld. They take them as collateral. Yes, sir.
    Senator Shelby. Is that a significant difference? They take 
them as collateral but they do not buy them.
    Mr. Rosenfeld. Well, but in the sense that they take them 
as collateral, they do provide liquidity for jumbo mortgages.
    Senator Shelby. OK.
    Thank you, Mr. Chairman.
    Chairman Dodd. First of all, I want to thank all of our 
witnesses here. You have been very generous with your time here 
this morning. I am not going to engage in a second round right 
now, but I am going to leave the record open. We have got, 
obviously, Mr. Syron and Mr. Mudd to testify. And we will ask 
members to submit questions to you that they would have 
otherwise raised in a second round. Let me mention just a 
couple of things.
    Mr. Dinallo, who is the Insurance Commissioner of New York, 
is going to be here tomorrow. Staff will be meeting with him to 
talk about what steps are being taken in New York dealing with 
the bond insurance issue.
    Senator Shelby and I will be preparing a letter to go to 
the Treasury as well as to others that would have some direct 
relationship to this issue to ask what steps are being taken, 
what thoughts they want to share with us, whether or not there 
are any steps we ought to be taking here to deal with this 
issue that Senator Shelby has raised, I have raised, as well as 
others. This is a serious issue, as we all know, and it has got 
to be handled carefully. And obviously language we use needs to 
be judicious in this because that can have its own effects on 
the issue. So we are going to do that carefully.
    And with that, I thank--we are going to move on this. I 
told Secretary Paulson and others, certainly Senator Shelby, 
that we are going to try and get this GSE bill done. There are 
some differences here, but I do not think that they are that 
wide. I think we care about some of the very basic things that 
are secure on. Senator Shelby and I have a long record of 
working well with each other, and I anticipate that is going to 
continue with this bill as well. So we will be looking forward 
to your input in the coming days here, but we intend to get 
this done. It is one piece of this, but I want to just go back 
to what Senator Schumer said as well. I think we need to keep 
it in proportion here and not have the tail wagging the dog 
here. We have got another issue in front of us here that 
demands some action immediately here if we are going to stem 
this tide of the present economic crisis. And this is 
important, and it is going to be an important piece in the long 
term as well as the short term of moving forward. And we intend 
to do that. Mr. Chairman, I will get the job done.
    I thank all three of you for being here.
    Mr. Lockhart. Thank you, Mr. Chairman.
    Chairman Dodd. Let me invite Richard Syron and Dan Mudd to 
join us. I think the audience here is well known to both these 
individuals. Richard Syron is Chairman and CEO of Freddie Mac. 
He joined Freddie Mac in December of 2003 after a long and 
varied career in the financial services sector, including as 
Chairman and CEO of the American Stock Exchange, President of 
the Federal Reserve Bank of Boston, and the Federal Home Loan 
Bank of Boston.
    I want to note that Freddie Mac helped lead the market with 
its decision last year to stop buying the 228 subprime ARM 
loans that have led to so much trouble, both for homeowners and 
the mortgage markets as a whole. That is the kind of leadership 
we expect the GSEs to continue to show as we continue to work 
our way through the current crisis.
    Dan Mudd is President and CEO of Fannie Mae. He has worked 
at Fannie Mae since 2000, where he also served as Chief 
Operating Officer. Mr. Mudd was an officer in the U.S. Marines, 
with decorated combat service in Beirut, Lebanon, and we thank 
both of you for being with us. Good to see you this morning.
    I am going to have you start in the order that I have 
introduced you. I am going to step out of the room for a 
second, but I will be right back. I have read the testimony so 
I know what you are going to say. So why don't you begin, Dick?

 STATEMENT OF RICHARD F. SYRON, CHAIRMAN AND CEO, FEDERAL HOME 
            LOAN MORTGAGE CORPORATION (FREDDIE MAC)

    Mr. Syron. Thank you, sir.
    Chairman Dodd, Ranking Member Shelby, and members of the 
Committee, I greatly appreciate the opportunity to appear 
before you today.
    The last time I testified before this Committee was in 
2005. It was obviously a very different time. House prices were 
robust and rising. Today they are falling. Housing was a strong 
contributor to GDP growth, adding another percentage to growth. 
Today, many fear we are headed into a recession.
    Back then, markets were flush with liquidity and banks were 
reporting large profits. Now a number of lenders have gone out 
of business and we are in a global credit contraction, noted in 
today's Wall Street Journal in the case of U.K.
    One bright spot is the conventional conforming market. The 
GSEs are one of the only sources of capital to invest in the 
mortgage market, which is exactly what is needed now. Senator 
Dodd brought early attention to the unfolding subprime crisis 
last spring and we responded with our commitment to buy $20 
billion of subprime product. Today I am pleased to report we 
have bought about $42 billion in prime rate mortgages that 
finance people largely who found themselves before in subprime. 
This effort follows a period and a tradition of working to 
improve subprime practices by combating predatory lending.
    As Senator Dodd noted, we were the first ones. Senator 
Dodd, I was just saying, as you noted, we were the first ones, 
actually a year ago right now, to put in place the anti-
predatory features of lending.
    As we all consider how to deal with the current subprime 
crisis, I am reminded of the lessons learned during the New 
England credit crisis in the early 1990s when I was heading the 
Boston Fed. During that time of economic distress, it was 
critical to find a way to balance the need for maintaining 
safety and soundness, while at the same time assuring adequate 
credit flows.
    I would respectfully say we are in the same position today. 
And just so people know I am not a Johnny-come-lately since I 
have joined Freddie Mac on this issue, I have appended to my 
written statement, Mr. Chairman, testimony I gave before this 
Committee actually 17 years ago, which raised the same points 
on how these balances--particularly in the case of capital--had 
to be worked out.
    This experience is very relevant to the debate we have 
today. Finding the right balance between preserving capital and 
providing liquidity is not easy and there are legitimate 
differences in view. But we all need to acknowledge that 
tradeoffs and balances are required. I know it may not be 
popular to mention shareholders in this context. But we have to 
keep in mind, and Senator Bennett noted this, that they are the 
first line of protection for the taxpayers. And without an 
expectation of a reasonable return, investors in the GSE system 
may just decide to take their money elsewhere. And that would 
be a very bad outcome for all of us, particularly the U.S. 
taxpayer.
    Freddie Mac does support GSE reform and I want to underline 
that. We just want to be sure it strengthens the GSEs and the 
ability to meet their mission, particularly at this point in 
time, while keeping investors in the game.
    As I described in my written testimony, there are two areas 
in particular that warrant the Committee's attention: capital 
and the affordable housing component of our mission. The 
subprime crisis set into motion a destructive cycle in which 
falling housing prices have exacerbated credit problems and 
generated losses. These losses, in turn, have eroded capital. 
One repercussion has been a wave of capital infusions, I might 
say from domestic and foreign sources. We have substantially 
added to our capital, as well.
    To ensure that we can consistently provide liquidity in 
both good times and in bad--and we are needed more in bad--
capital levels need to be consistent with the inherent risks 
that an institution's assets hold. If required capital is too 
high, the returns may be so diluted we would not be able to 
attract capital that does provide the taxpayer. If they are too 
low, they would threaten safety and soundness. It is a 
balancing act.
    As for affordable housing, there needs to be greater 
flexibility to assure that the GSEs can meet its housing goals 
and all proposed commitments in all economic environments. We 
need to ensure that the goals, however well-intended, do not 
result in overstimulation of mortgage credit that leads to a 
situation like we are today, let's stimulate predation.
    We look forward to working with the Committees and others 
to ensure we put families into homes they can keep.
    In closing, let us remember that it was not long ago that 
many said the U.S. financial markets had matured to the point 
where we did not need GSEs. The street was going to take care 
of everything. This past year reminded everyone that we not 
only still need them, but we need them to be strong and 
vibrant. To do that, they have to have capital tied to their 
inherent risk and affordable housing obligations that make 
sense over the long run.
    If I may say so, Mr. Chairman and Mr. Ranking Member, there 
were a number of, I thought, very good points raised by the 
previous witnesses and all of you in your questions. I think 
what they highlight is that people need to get together and 
work to resolve the tradeoffs that are inherently involved in 
that.
    And excuse that, I do not mean that as an editorial 
comment.
    Thank you very much for the opportunity to appear today, 
and I very much look forward to your questions.
    Chairman Dodd. Thank you very much.
    Dan, thank you for being here.

  STATEMENT OF DANIEL H. MUDD, PRESIDENT AND CHIEF EXECUTIVE 
  OFFICER, FEDERAL NATIONAL MORTGAGE ASSOCIATION (FANNIE MAE)

    Mr. Mudd. Thank you, Mr. Chairman. Thank you, Ranking 
Member Shelby, for the opportunity.
    We are committed to supporting your efforts to pass reform 
legislation in this Congress. Let me repeat that: we are in 
favor of regulatory reform legislation.
    Fannie Mae has undergone significant change in recent 
years. At the same time, the mortgage and the housing markets 
have themselves undergone significant change. Fannie Mae has 
new management, and a completely revamped corporate governance 
and internal control environment. Only one hurdle remains, the 
filing of our 10-K later this month, for Fannie Mae to meet the 
81 remediation measures called for in our 2006 consent order 
with OFHEO.
    We believe that the internal improvements that we have made 
since 2005 have helped us meet an external challenge, which is 
maintaining liquidity, stability, and affordability in the 
prime conventional conforming mortgage market during this, a 
period of extraordinary stress. While the subprime and the 
jumbo market and other non-conforming markets have shrunk or 
shut down completely, the center of the markets where the GSEs 
have a large presence has performed relatively well.
    Having said that, we are not immune. We are not immune from 
the disruptions in the market and we will take our lumps. In 
fact, as pointed out, we had a GAAP loss in the third quarter 
and we saw more difficult headwinds in the fourth quarter. And 
we expect 2008 to be some tough sledding.
    Yes indeed, these are tough times, and that is when you 
want a Fannie Mae around. The GSEs have an important role to 
play in helping the market through these problems. Both 
companies are doing loan workouts and foreclosure prevention on 
a large scale. Chairman Dodd, you mentioned this in your 
opening remarks. Through our HomeStay initiative, Fannie Mae 
has successfully refinanced 68,000 subprime borrowers into 
safer prime fixed-rate loans. We continue to maintain a stable, 
liquid center of the mortgage market so that borrowers can 
access safe and affordable mortgages.
    This market and our response are worth considering, I 
believe, as Congress and the Administration take up the issue 
of reforming the regulatory regime of the GSEs. The choices you 
make now should be durable and stand the test of time. We 
support the creation of a strong, independent bank-like 
regulator. Strength and independence, I think, are clear 
enough. Bank-like means we do support stronger power than our 
regulator has now. But at the same time, such powers and the 
skills that go with those powers should be comparable to and on 
a par with those of other modern regulators.
    Our view of the principles that should guide regulatory 
reform has remained unchanged since I first testified before 
this Committee on April 20th, 2005. The dramatic changes in the 
housing market only reinforce our views of the key elements of 
regulatory reform. One, capital, Congress has established a 
statutory minimum capital standard for Fannie Mae and Freddie 
Mac that reflects the unique role of the Government-sponsored 
enterprises and the importance of capital in meeting their 
liquidity, stability, and affordability missions.
    We support this Committee's reaffirmation of our minimum 
statutory capital requirement in S. 190 from the 109th Congress 
and the House's more recent reaffirmation in H.R. 1427. We also 
support the regulator's ability to increase our capital 
requirements when necessary to meet a clearly articulated 
safety and soundness concern. When such concerns are absent, 
legislation should enable our capital requirements return to 
the levels established by Congress. The normal capital levels 
established by Congress for normal times should be the norm.
    Two, on portfolio oversight, we support regulation ensuring 
that the GSEs' mortgage portfolios are managed in a safe and 
sound manner. But regulation should not impose arbitrary 
limits, including a so-called systemic risk standard that does 
not exist anywhere else in bank supervision. To that end, we 
support legislation clearly identifying the bank-like safety 
and soundness factors that would guide regulatory oversight of 
our portfolio.
    In the new product area, third, the bank regulation model 
also offers a guide. Banks keep regulators apprised of their 
new business initiatives through the examination process and by 
regular communication with their examiners. So should the GSEs. 
Particularly during times of extraordinary disruption and 
change, such as now, the GSEs have to move quickly to address 
the pressing needs of the primary market. A cumbersome pre-
approval process, and public notice and comment, would be a 
step backwards.
    Fourth, reform legislation should reinforce the GSEs' 
affordable housing mission. The GSEs' strong new regulator 
should set and oversee streamlined goals that reflect current 
market data and adapt to changing market conditions.
    Fannie Mae also supports the creation of an affordable 
housing fund to be funded from GSE net income and integrated 
into a new, affordable housing goals framework. We should 
manage the fund, and we should be held accountable for the 
results.
    In conclusion, Mr. Chairman, the housing and mortgage 
markets need certainty and stability at this time, and 
strengthening the oversight will provide an additional measure 
of confidence that the GSEs will be here to do our job now and 
in the long-run.
    Thank you.
    Chairman Dodd. Thanks very much. Thanks to both of you. I 
will leave the record open, obviously, for the other members 
who were not able to stay around, so they will be able to raise 
some questions with you, as well.
    Let me begin, if I can, Mr. Mudd, with you. In a 
presentation labeled ``preferred offering roadshow'' available 
on the website of Fannie, you noted that your market share is 
rising, your delinquencies are lower than the industry average. 
Your book of business has significant credit enhancements, and 
you are enjoying wider spreads on mortgage acquisitions.
    And yet, Fannie appears to be designating whole counties, 
the so-called declining markets, for higher pricing, a practice 
some have called redlining in the past here, and a practice of 
also increasing charges to subprime borrowers who need access 
to your credit more than ever.
    One, will these changes translate into higher rates for the 
borrower, in your mind? Will these changes, particularly those 
dealing with the declining markets, actually exacerbate 
downward pressure on prices by making credit harder to come by?
    And obviously, the basic question here, and that is the 
GSEs, the very reason for their existence here, in part not 
only to serve an affordable housing issue, but to be counter 
cyclical at moments like this. It seems to me the very 
constituency we are talking about that is struggling right 
here, what you are suggesting, it seems to me, in the website 
is to exactly walk away from that very constituency and it 
raises serious alarm bells.
    Mr. Mudd. Thank you, Mr. Chairman.
    Two pieces. One piece is that on the adjustment for markets 
that are declining, what happens is that when our underwriting 
system detects a loan being underwritten in a market that is 
declining, it sends a message back to the primary lender that 
says take a look at this and get another appraisal.
    The purpose of that is to make sure that in a declining 
market you do not put a borrower into a home that is under 
water on day one. So it is a piece of prudent underwriting, in 
our judgment.
    I appreciate your comment, in the sense that it is very 
important to us to be sensitive to providing the liquidity in 
these markets. But the driver of it is the safety of the 
borrower and the driver of it is the safety of the loan, rather 
than anything else.
    On the pricing, we are making sure that in a market where 
everyone would agree that there is more risk than there was 
before, that the pricing reflects the risk that is actually out 
there. And there is, I think we would all agree, more risk in 
the current market.
    Chairman Dodd. The self-fulfilling prophecy notion of all 
of this is troubling to me. You get into that downward spiral 
and trying to reverse that becomes terribly difficult and I am 
concerned about it.
    You may have heard, and I will raise this with both of you 
here, that there were several of us here that raised the idea--
Senator Schumer as well as myself--the idea of using your 30 
percent capital surcharge. I think collectively it is around 
close to $20 billion, I think, between the two of you here, to 
actually provide those resources to assist this subprime 
borrowers to be able to have some workouts here that would 
allow them to stay in their homes.
    These are owner-occupied. I am not interested in the 
speculating community at all. I mean, I am interested in that 
owner-occupied.
    You may have heard me say, in fact I will be there on 
Monday. But in Bridgeport, Connecticut, the new mayor of that 
city indicated to me the other day that he may have 6,000 
foreclosures in that city of less than 100,000 people. Needless 
to say, in a city--as so many are--that is struggles anyway 
economically to have that kind--and Richard, you will know, 
coming from New England you know what I am talking about here, 
that that can mean.
    Anyway, share with us your thoughts on this and understand 
where we are coming from in this and the importance of engaging 
in this. What is your reaction to that request?
    Mr. Syron. Senator, Mr. Chairman, if I might, I think you 
raise the key question of how regulators should act, how 
lending institutions should act, and the reason that you have 
Freddie Mac and Fannie Mae. Quite honestly, if you look back a 
few years, there was enormous private sector participation in 
the market. Whether all of that was salutary in the end or not, 
pure private sector, is a matter for some dispute.
    But we are there to be there in good times and bad. It is 
the only business line we are in. And we should act in a 
counter cyclical way.
    But as part of that acting in a counter cyclical way--and I 
am sorry to be Johnny-one-note on this, but as you know, you 
were on the Committee when I testified before, 17 years ago. It 
is important that capital treatment not be pro-cyclical either. 
It is not a very good idea if you start to unreasonably raise 
capital on these institutions at a time when you need them to 
do more because the only thing they can do--if you want to have 
private shareholders, and never mind that, just to meet the 
capital--is to be more restrictive in lending.
    Chairman Dodd. Of course, to be the devil's advocate, the 
argument is, of course, if not requiring those capital 
standards in difficult times, you do not have the resources to 
participate.
    Mr. Syron. Well no, but I think the story is that for all 
financial institutions what you should do is husband and build 
capital in good times and have it there so you are able to meet 
more difficult times.
    Chairman Dodd. I agree with that.
    Mr. Mudd. I would say, Senator, just to emphasize Dick's 
point, I think it is a balance, obviously, between making sure 
you are providing liquidity and maintaining safety and 
soundness. I look at the problem as having three groups, with 
respect to subprime. The top group is basically refinanceable 
into safer, fixed rate mortgages. We have done a lot of that.
    There is a group at the bottom that is not going to be able 
to stay in their homes. And there are a number of things that 
can be done and a number of things that we have done to 
encourage people to do that as a workout on a peaceable, non-
damaging to the consumer basis.
    It is the middle group that requires the toughest thinking. 
How do you modify those loans to try to keep people in their 
homes? Our experience is that it is really a matter of trying 
to bridge them through this period. There are five or six 
different efforts that are underway--Hope Now could be one of 
them--that basically holds those payment levels constant so 
that homeowners can make their payments through the period of 
time until incomes go up, until home prices recover. We doing 
our part to make sure that we are making it as easy as possible 
for the servicers and the lenders to do those modifications is 
kind of the lever that we should be pulling on at Fannie Mae, 
certainly.
    Chairman Dodd. Why should I be anymore optimistic about 
this Hope Now Alliance, given the experience of--you were both 
in the room a year ago, or almost a year ago. We sat in this 
very room with the stakeholders and talked about what would 
need to be done in order to try to get these workouts moving. 
And yet, we hear reports of only a fraction of those numbers 
actually moving.
    What should make me feel any more confident that I am going 
to see any more reaction now than I have seen over the last 
year?
    Mr. Mudd. I will answer the question as directly as I can, 
which is that I think that it took the industry a while to gear 
up, to be able to move from a world that said that moving 
quickly through foreclosure was the right answer to a world 
that said foreclosure was absolutely the wrong answer. And it 
took the industry a while to get its processes turned around on 
that.
    I do not think that the Hope Now answer, or the Fannie 
answer, or the Freddie answer is the magic bullet to this 
problem. Each is one piece of it that applies to a certain 
subset of borrowers and puts that key in that lock. There are 
many other things that could be done to give you, I think, 
Senator, more hope and encouragement that we are going to make 
progress.
    Mr. Syron. Senator, excuse me, Mr. Chairman, if I might add 
on to that. First, I agree with everything that Dan said.
    Second, I think some of the ideas that have been put 
forward, the idea that you have raised for some sort of entity 
to deal with the bottom end of the market, I think a harsh 
reality we have to realize--because Senator Bennett talked 
about overhang in the market. There is an overhang in the 
market from units that have never been sold or are for sale.
    But there is also kind of a second overhang. And that 
second overhang is we have got to admit we have put some people 
into houses, unfortunately, that probably did not belong in 
them and need to be renters.
    Now the entity that you discussed could be, it seems to me, 
useful in that in converting to get through this process some 
of those units--we have a match. We have people that want to 
live in units and we have the units. But convert them for a 
period of time back into rental units with maybe a lease-to-buy 
type of process.
    Chairman Dodd. Mm-hmm.
    Mr. Syron. That is one thing I think could be pursued.
    What Senator Schumer talked about on dealing with the 
seconds sort of issue, or dealing with avoiding foreclosure, I 
think is something that needs to be pursued. It is absolutely 
clear that when you foreclose on a unit there is a dead weight 
loss of 20 percent to 30 percent that everyone suffers from.
    Chairman Dodd. You know, there was--I was speaking to 
someone in the last couple of days who is fairly knowledgeable 
in this area and indicated to me that you were running into a 
significant--I think, a significant number of people who were 
not even able to meet the teaser rates because of what has 
happened to incomes, wages, and the like.
    Are you seeing any evidence of this in your own data?
    Mr. Syron. Yes, sir. I think, unfortunately, we are headed 
into a period of economic softening. Whether it meets the test 
of a full recession or not is something that people can argue 
about later. But I think that there are people that are having 
trouble meeting teaser rates.
    Now fortunately, the actions of the Federal Reserve will 
make, for some people, when the teaser rate ratchets up, less 
of a ratchet than it would have been before.
    Chairman Dodd. Let me just say, Director Lockhart noticed 
that your companies were both constrained from entering the 
subprime market over the past several years with the 
unfortunate exception of your purchases of private label 
securities because lending standards had gotten too lax and you 
could not compete for the business.
    Now, however, the subprime market has all but ground to a 
halt, as we know. This creates an opportunity for the 
enterprises to enter the subprime market and establish a set of 
strong lending standards such as fully indexed loans without 
prepayment penalties, yield spread premiums, balloon payments, 
and the like.
    I want to urge you to take advantage of this opportunity 
and I want you to comment on the possibility of doing that.
    I should point out, by the way, and I think in the case of 
Freddie--I am not sure of Fannie--you led the way, in some 
ways, in terms of setting some of these standards of the 
underwriting requirements, and I applaud you for that. But give 
me some response to this set of suggestions.
    Mr. Syron. Senator--excuse me, Mr. Chairman, if I could, I 
think that we can buy originations. As you said, there have not 
been a lot of them so far. And we are in a tight situation, I 
will admit, at least our institution, for capital. That is why 
I think some of the issues you raised about the 30 percent are 
certainly well worth thinking about.
    But we would be very willing to buy mortgages that met the 
new standards. Because I think to not meet the new standards 
would be irresponsible for the people--towards the people that 
were there before.
    If I could quickly add one thing: on the ABS mortgages we 
bought into our portfolio, the subprime mortgages, we bought 
them in really to aid that market and to meet our goals. We do 
not, at this time, expect to take any losses on those 
mortgages. This is a market that does not trade. A lot of this 
is priced to different ABX indices, it gets very esoteric.
    But when we look at the--no one can forecast the future. 
But when we look at what we expect in terms of foreclosure 
rates and what they call transition rates and difficulty rates, 
we do not expect to take losses on those.
    Mr. Mudd. Mr. Chairman, my observation would be that there 
is nothing the matter with being a subprime borrower in this 
country. Certainly the notion is--a subprime borrower is 
somebody with a credit blemish. And if the notion is that if 
you have ever had a credit blemish in America, you are never 
going to be able to own a home in America, I do not think that 
is a place that we want to go.
    So the question is under what standards should subprime 
lending be done? There are subprime borrowers that we have lent 
money to and we have put them in safe products, 30-year, fully 
amortizing fixed-rate loans. That is where the focus ought to 
be.
    I think one of the reasons that these troubles started in 
the subprime market was that there were really no standards. 
The standard was do what needs to be done in order to get the 
loan made and at least get the person in the door for the first 
payment.
    Chairman Dodd. And then bundle them and sell them and get 
them out the door and you do not have any accountability.
    Mr. Mudd. And not retain any of the risk, which is very 
different than the way these two companies operate.
    The observation I would make, just as a corollary to your 
comment, was I think one of the other things we could do in 
this market is clean up the disclosures. It is hard enough for 
Dick and I to understand all the documents and all the 
provisions in our mortgages. But for first-time subprime 
borrowers that we have admitted already have a problem, we 
could certainly do worlds better in terms of disclosing clearly 
what they are getting into.
    Chairman Dodd. I want to turn to Senator Shelby, but I want 
to come back to you, Dick, on this, because the financial 
literacy issues, Fannie Mae seems to be walking away from some 
of that. And in light of this, I wonder whether they are going 
to come back to the earlier requirements for financial 
literacy, which was an important element in all of this.
    Let me turn to Senator Shelby.
    Senator Shelby. I agree with both of you, that there is 
always going to be a subprime market, and there should be a 
subprime market. We have got to come up with some standards, or 
you have. And I know you have tightened some of the stuff.
    Did I hear it right, I think Mr. Syron, you said that, that 
your subprime portfolio is working? It is performing, and so 
forth?
    Mr. Syron. Yes, sir. What we have in sub----
    Senator Shelby. If that is true, that is good. Go ahead.
    Mr. Syron. I am sorry.
    Senator Shelby. Do you have a subprime portfolio?
    Mr. Syron. We have about $100 billion in AAA rated subprime 
securities.
    Senator Shelby. And are they AAA rated because of private 
insurance?
    Mr. Syron. Some yes, and believe me, we look at that all 
the time. I was on the phone----
    Senator Shelby. We think about it, too, up here.
    Mr. Syron. But so far, actually--and as I said, anyone 
would be foolhardy to make promises about the future. But so 
far we have had good experience on that. And we are heavily 
subordinated. And so we think that all or almost all this is 
going to be money good.
    Senator Shelby. What about you, Mr. Mudd?
    Mr. Mudd. Subprime represents----
    Senator Shelby. Are they subprime----
    Mr. Mudd [continuing]. Less than 1 percent of our book. We 
do have----
    Senator Shelby. Are they performing?
    Mr. Mudd. Yes, sir, they are.
    Senator Shelby. That is good.
    Mr. Mudd. We have--we look at those very closely in terms 
of their performance. We look very closely at where they are 
rated but we do have our own separate rating system. There is 
credit enhancement, mortgage insurance, other forms of 
protection there. But we also stress test that and discount 
that, as need be.
    We are watching it very closely. I think it is apt for you 
to point out that this is one of the risk areas in the market 
that we are in right now.
    Senator Shelby. Well, we want it to work.
    Jumbo mortgages purchases. Congress, we have been talking 
about, is moving in the direction of allowing your companies to 
play a larger role in higher cost markets, such as California 
and others. According to an OFHEO analysis, mortgages 
associated with these higher cost properties may well pose 
greater credit risk, on average, than loans now purchased by 
the GSEs. These jumbo loans have different default rates, 
prepayment rates, and are more geographically concentrated.
    Given the significant, if they are, operational risk your 
companies have recently had to fix in relation the plain, 
vanilla conforming loan market, how prepared do you believe the 
GSEs, Fannie and Freddie, will be to deal with these new and 
additional risks of jumbo loans?
    Mr. Mudd. Thank you, Senator.
    If you separate out the jumbo market and treat it as a 
distinct market from the prime, conventional conforming market, 
you can get very different answers. So the beginning of my 
response would be any participation in that market for us would 
be a continuation of the standards and the routines and the 
controls and the governance that we put around the prime 
market. I am sure you know that there are higher cost limits 
for us in Alaska, Hawaii, Guam. I am not sure how that 
happened. It was before my time, certainly.
    But we looked very closely at that book, the same book, the 
same sort of working family type borrower, just in geographies 
that had more expensive homes. And we found out that by 
applying those same standards to the higher loan limits in 
those areas, their performance was largely indistinguishable.
    So your point to me would be do not be doing vacation homes 
and mountaintop homes and all that. That is not, I think, what 
would be helpful to this market. A continuation of applying our 
standards to those areas of the near conforming market, you 
might say, that are relevant, I think we could provide some 
help there.
    Senator Shelby. With substantial down payments or whatever?
    Mr. Mudd. With the very conservative credit standards that 
we know and love, Senator.
    Mr. Syron. Senator, might I just add to that?
    Senator Shelby. Sure.
    Mr. Syron. As an economist, I have to candidly admit that I 
think this is a good part of a stimulus package. I want to be 
clear, though, that this is not a boon in any way for the GSEs. 
Because, as people have noted, there could--may or may not be 
different credit characteristics. We would have to set up, at 
least in our case, different systems because you would not 
have--at least for the contiguous 48 States--the same loan 
limit. And that is kind of a bear to do and will cost us a lot 
of money to set up.
    And to do all of this for a program that is going to only 
last a year, you know, we will do it because I think it is good 
for the country. But it is not going to be a great boon for us.
    Senator Shelby. Let me ask you this, I have been told that 
a $500,000 mortgage owned or guaranteed by either one of your 
companies would require twice as much capital for regulatory 
purposes as a $250,000 mortgage. And even if the GSEs 
securitized these jumbo loans, that also requires capital that 
would otherwise be used to support the purchase of a larger 
number of smaller loans.
    Is this true? And would this cause you to look at it, as 
you have just referenced, a little differently?
    Mr. Mudd. I think the capital would certainly be adjusted 
for the size and the risk of the loan.
    One of the points to make, Senator, is that our average 
loan size is now, with a $417,000 loan limit, the average size 
is $140,000. So one of the impacts of this would not be that 
all of the loans would all of a sudden be $600,000. The average 
might move somewhat.
    But I would feel that it would be very important for us to 
balance that out with a continued focus on the cheaper end of 
the market, the smaller end of the market.
    Senator Shelby. I will ask you both this. Does this recent 
increase in guaranty fees reflect your companies' reassessment 
of future credit risk or so forth?
    Mr. Syron. Yes, sir. The answer is yes.
    Mr. Mudd. Yes, we can. [Nodding head.]
    Senator Shelby. Portfolio activities. Since the peak of the 
housing market in 2005, your companies have experienced a net 
increase in mortgage-backed securities outstanding of over $1 
trillion, while your retained portfolios have been basically 
flat. Is that correct?
    Mr. Syron. Yes, sir.
    Senator Shelby. More or less?
    Mr. Mudd. [Nodding head.]
    Senator Shelby. Have your companies been able to meet the 
liquidity demands in the mortgage market through your 
securitization activities? Or do you believe there remains 
considerable volatility in the conforming loan market?
    Mr. Mudd. I would characterize it not as an either/or. Yes, 
we have been able to do some work providing continued 
liquidity. But we have had to make some tradeoffs and choices 
for products, residential apartments, military housing, that 
type of thing, that do not have a securitization market and so 
would need to be put into the portfolio. And we have had to 
make some choices about not doing some of those.
    Mr. Syron. Senator, if I could----
    Senator Shelby. Yes, sir. Go ahead.
    Mr. Syron. I might just add on, this becomes very 
applicable to the question you just asked about the jumbo 
loans.
    Senator Shelby. Sure.
    Mr. Syron. Because if we wanted to say very early, after 
whatever legislation is passed to do jumbos, by far the most 
practical way to do it--but it costs a lot of capital--would be 
to put them into the portfolio because you do not have to have 
developed all those things for the securitization machine. And 
we have been told by the dealers and people we sell to that 
these cannot be securitized into the packages that we have now 
because they have different characteristics. So we have to 
develop a whole new market.
    And so just the point that, as I said, I think this is good 
policy economically. But it is not easy to do.
    Senator Shelby. Well, both of you have got your challenges 
here, have you not? Assuming this passes Congress?
    Mr. Syron. I would say so, sir.
    Senator Shelby. Mr. Mudd, in the fourth quarter of last 
year, Fannie Mae purchased--I have been told--just over $200 
billion in mortgages. I understand that a fourth of those 
purchases were from Countrywide, who is a big mortgage banker. 
Given Countrywide's recent financial problems and loan 
performance, do you have any concerns as to the quality of 
those purchased? Do you review those accordingly? You all have 
your own standards, do you not?
    Mr. Mudd. Yes, sir, we do. We review them. We review them 
very carefully. And as somebody becomes a larger counterparty 
of ours, we review them even more carefully.
    In the case of most of those big institutions, we actually 
have staff that are onsite supervising and auditing the 
process. So we have a good deal of confidence in that 
portfolio.
    We also think it is probably--it is positive, as a general 
matter, that the net counterparty strength between the Bank of 
America and Countrywide looks to be strengthened by this 
transaction.
    Senator Shelby. At least they have deeper pockets, do they 
not? Sure.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Let me just ask a couple of final questions, if I can, to 
both of you.
    Mr. Mudd, on January 29th of this year the American Banker 
reported the following: it said ``servicers claimed Fannie, in 
particular, adheres to restrictive rules that reduce the number 
of loans that may be modified. They say Fannie will not agree 
to a modification of a loan it has securitized until a loan has 
been delinquent for 4 months.''
    I wonder if you might explain if that is an accurate 
statement, this policy which seems to fly directly in the face 
of the direction everyone else is heading in.
    Mr. Mudd. It was a fair criticism, absolutely, Mr. 
Chairman. We paid attention to it. It had a number of--it was 
kind of a Gordian knot to try to solve.
    We have a product that we will be rolling out in a matter 
of a few days, which is called Home Saver Advance, which will 
enable us to work with the servicers to get in and rescue those 
loans, work with the borrowers long before they get in trouble.
    So yes, your statement is accurate. It was an issue. We 
have paid attention to it. It will be fixed.
    Chairman Dodd. You know, we sat down together here a year 
ago and tried to talk about how we were going to get these 
things worked out. I am a little disappointed--I really was 
under the impression your people were really going to work at 
this thing over the last 10 or 12 months and discover here I am 
going through 4 months of delinquency. It is pretty clear what 
is happening here.
    Mr. Mudd. That is not the first move that we have made, Mr. 
Chairman. We worked with our servicers. There were--we made a 
number of liberalizations in terms of the modification policy, 
let it work for a period of time, and then sat down with our 
seller servicers and discussed what was working, what was not. 
They gave us a list of an additional 18 things that they would 
like done. We said yes to all 18.
    So we are focused on this. We are working on it and will 
continue to do more.
    Chairman Dodd. Let me ask you, as well, here, there are 
some observers of the markets' recent turns have suggested that 
one reason for what has occurred here is that loan down payment 
lending to moderate, low and low-income people is bad business 
for the lender, for the investor, and of course for the home 
buyer. I wonder if you agree with that statement?
    Mr. Mudd. Senator?
    Chairman Dodd. Low down payment.
    Mr. Mudd. Low down payment?
    Chairman Dodd. Yes.
    Mr. Mudd. There is certainly more risk in a low down 
payment loan than a loan that has more equity in it on day one. 
But I view those types of loans being done prudently as an 
important part of our mission and an important part of our 
business.
    Chairman Dodd. Have you learned any lessons from doing this 
at all?
    Mr. Mudd. I think the stress that we have seen in the 
market here suggests that at the front end of the system there 
was an underwriting assumption that was made that said home 
prices are going to go up always by some percent forever. It 
turns out not to be true. And a lot of people have learned 
lessons from that part of the process.
    We have always, as you know, adhered to a standard that 
says if there is not 20 percent equity in the home on day one 
then some other form of credit enhancement is required. I think 
that is a recognition of the fact that that grubstake in the 
home is an important piece of it. But it also enables us to get 
to those borrowers that do not have that amount of capital when 
they enter into a mortgage.
    Chairman Dodd. One of the things you pointed out earlier, 
and I agree with you on this, and I think all of us do here. 
Obviously if any one of us, even those of us who sit up here 
and write a lot of this legislation, I suspect every time 
someone goes to a closing who is a Member of Congress they ask 
themselves whether or not they voted for this stuff that only 
an accountant or a lawyer could possibly understand. You made 
that point a few minutes ago, how common--even the two of you, 
as people who spend all of your days dealing with this stuff, 
this is complicated.
    Fannie had a requirement for many years requiring 
counseling, particularly to first-time home buyers. And you 
stopped it. How does that square with this, all that we are 
talking about here, given the importance of that and 
understanding what it can mean to people going in? It seems to 
me that is, again, walking in the opposite direction of where 
we should have been going here to avoid the kind of pitfalls 
that many borrowers got themselves into.
    Mr. Mudd. I think it is important, and I think there is an 
opportunity to put it back in. It is a good idea.
    What happened was that when we put in the requirement, all 
the business went away from us. It is sort of like if you want 
to get car insurance you have to go to driver's ed, but you can 
get insurance from these guys without driver's ed. Everybody 
goes to the insurer that does not require driver's ed.
    So now we are in a market where you can actually require 
counseling because, as was pointed out in the earlier panel, 
more of the business is coming our way. So we are working with 
a number of counseling organizations and others to make sure 
that people are more ready for this obligation.
    And I think it ties in to the comment I made a minute ago, 
that better disclosure would also be helpful because you cannot 
guarantee that people pay attention during driver's ed.
    Senator Shelby. Mr. Chairman.
    Chairman Dodd. Yes, certainly. Go ahead.
    Senator Shelby. Can I ask----
    Chairman Dodd. Sure.
    Senator Shelby. With mortgage rates down right now, if you 
had good credit and a high interest rate, wouldn't this be a 
good time to looking to refinance your mortgage in America?
    Mr. Mudd. I would recommend that to all our listeners 
today.
    [Laughter.]
    Senator Shelby. Do you agree with that, Mr. Syron?
    Mr. Syron. Yes, I do, Senator. And I think that, you know, 
there is nothing wrong with the old fashioned fixed-rate 15- to 
30-year mortgage with a decent down payment----
    Senator Shelby. Absolutely.
    Mr. Syron [continuing]. And somebody knowing what their 
obligations are going to be as they go forward.
    Senator Shelby. And those are what we call performing loans 
in the portfolio, aren't they?
    Mr. Syron. You got it.
    Senator Shelby. You got it, both of you.
    If we stick to high standards or higher standards, we have 
fewer problems in the long run, do we not?
    Mr. Syron. Absolutely right.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. It is an interesting point because I am 
trying to recall this now from memory. But as I recall, 
something like 40 percent of the non-performing loans were not 
first mortgages, were not first time home buyers. These are 
refinances. Is that correct? Am I right about those numbers 
roughly? Was it 40 percent?
    More than 50 percent.
    Mr. Syron. I think they were, but quite honestly, it may 
not be popular to say but what happened during the most of the 
go-go days, a lot of people developed products that might be 
attractive for the lender, did not end up being attractive for 
the borrower over the longer run. And they went out and they 
called people.
    We have all been at dinner and been called by someone. I 
get called all the time about do I need another mortgage. And 
people were sold mortgages that were not to their advantage and 
because they were able to take out a lot of cash or do 
something else, it was a refi. But it was not to their 
advantage in the long run.
    Chairman Dodd. Senator Reed made the point earlier, Jack 
Reed did, and I agree, and I think Senator Schumer did, and I 
have, as well, that the irony, we are sitting down talking. I 
think all of us agree here, I have heard you say it as well, a 
strong regulator. There is no debate about that. I think we are 
going to get a good bill here.
    But the irony is here, we are talking about a crisis now, 
with a highly regulated market out there--allegedly highly 
regulated--that collapsed in many ways because cops were not on 
the beat.
    Mr. Syron. Well, sir. Excuse me, Mr. Chairman, I think what 
happened is that a lot of the market moved away from the highly 
regulated----
    Chairman Dodd. I agree. I mean that, supposed to be highly 
regulated, the notion that it is highly regulated.
    Mr. Syron. Right.
    Senator Shelby. Mr. Chairman.
    Chairman Dodd. Yes.
    Senator Shelby. A lot of those people who moved into the 
other market are paying an awful price, are they not?
    Mr. Syron. They certainly are, sir.
    Senator Shelby. Investors and others.
    Mr. Syron. Yes, sir.
    Senator Shelby. Thank you.
    Chairman Dodd. But the borrower pays the ultimate price.
    Senator Shelby. Oh yes.
    Chairman Dodd. Those guys all get golden--most of them are 
leaving their jobs with $125 million golden parachutes. That 
person who is living in that house in Bridgeport does not get a 
golden parachute.
    Senator Shelby. We agree.
    Chairman Dodd. They just lost their home or are about to 
lose it. And that is the great tragedy. And these numbers are 
going to be in that million, several million range.
    Mr. Syron. Those people get a lead anchor.
    Chairman Dodd. Yes.
    Thank you both. Appreciate it.
    Mr. Syron. Thank you.
    Mr. Mudd. Thank you.
    Chairman Dodd. To be continued.
    [Whereupon, at 1:22 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM DAVID G. 
                             NASON

    One of the areas that I believe needs more debate and 
vetting is the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund. Fannie and Freddie have affordable housing goals, 
the Federal Home Loan Banks have an affordable housing program, 
and the House passed GSE reform legislation would establish a 
new housing fund with goals. The most recent GSE reform 
legislation that passed the Senate Banking Committee did not 
have a housing fund.

Q.1. What are the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund like the House approach?

A.1 All three approaches have similar goals of ensuring that 
government sponsored enterprises undertake activities that are 
consistent with a public purpose mission.
    Affordable housing goals for Fannie Mae and Freddie Mac 
under the existing regulatory structure were originally 
required by the Federal Housing Enterprises Financial Safety 
and Soundness Act of 1992 and established by the Department of 
Housing and Urban Development (HUD). The current goals were set 
by HUD in 2004. The goals are specified in terms of low- and 
moderate-income housing, special affordable housing, and 
underserved areas housing. HUD's current affordable housing 
goal regulation sets the goals at levels that require Fannie 
Mae and Freddie Mac to be market leaders in the housing goal 
categories. Affordable housing goals focus more on broad market 
segments and the GSEs' relationship to overall market activity.
    The Federal Home Loan Bank (FHLBank) System's Affordable 
Housing Program (AHP) and the affordable housing fund contained 
in H.R. 1427 are similar approaches in that a portion of the 
GSEs' income is redirected toward affordable housing 
activities. Unlike Fannie Mae and Freddie Mac, the FHLBank 
System does not have a specific statutory mission. Instead, the 
FHLBanks generally support housing finance by virtue of the 
nature of their authorized activities. The FHLBanks' AHP was 
mandated by the 1989 thrift legislation and established by 
regulation in 1990.
    Some key structural differences between the FHLBank's AHP 
program and affordable housing fund contained in H.R. 1427 
include the basis and amount for the assessment, and the 
administration of the fund. The FHLBanks' AHP requires 10 
percent of net income (since the FHLBanks do not pay Federal 
taxes, this is comparable to 10 percent of before tax income of 
other companies), while the trust fund requires 1.2 basis 
points for each dollar of the average total mortgage portfolio 
of each enterprise during the preceding year. Disbursement of 
funds from the FHLBanks' AHP is administered by the FHLBanks, 
through member financial institutions, while the disbursement 
of funds from the affordable housing fund contained in H.R. 
1427 is administered by the Director of the new housing GSE 
regulator in consultation with the Secretary of HUD and is 
based on regulations. The latter feature regarding 
administering the trust fund is intended to prevent the fund 
from being used for political purposes. The funds are granted 
to states or state agencies for distribution.

Q.2. If we go down the track of creating a housing program or 
housing trust fund for Fannie and Freddie, what is the 
appropriate amount of resources that should be spent, who 
should allocate the funds, and how should the funds be spent?

A.2. We strongly oppose the establishment of an affordable 
housing fund for Fannie Mae and Freddie Mac. This proposal 
would create an undue and counterproductive reliance on Fannie 
Mae and Freddie Mac by tying the potentially unlimited growth 
of an affordable housing fund to the annual amount of the GSEs' 
mortgage business. In addition, such an affordable housing fund 
could be susceptible to political influences that could 
compromise the goals of assisting as many low income families 
in need as possible. If an affordable housing fund is going to 
be part of this legislation, the fund must be controlled by the 
Federal government (not by Fannie Mae and Freddie Mac), 
temporary, and capped.

Q.3. Does it make sense to have both housing goals and a 
housing program for Fannie and Freddie?

A.3. Housing goals can provide a broad focus to the overall 
business of a GSE, while affordable housing programs can 
provide assistance to more specific projects.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR BAYH FROM JAMES B. 
                          LOCKHART III

A.1. OFHEO responded to the egregious accounting errors and 
serious systems and operational risk management failures at 
Fannie Mae and Freddie Mac by ensuring the replacement of 
senior managers and outside auditors, the hiring of competent 
staff, the development of GAAP compliant accounting policies 
and of operational control systems throughout the Enterprises, 
transparent public disclosures, and fundamental changes in 
their corporate cultures. The fines paid by Fannie Mae and 
Freddie Mac to OFHEO and the SEC were a strong signal to their 
Boards, management, shareholders and debt and MBS investors 
that this behavior would not be tolerated in the future. The 
fines amounted to an average of half of one percent of core 
capital after tax, not enough to materially affect their safety 
and soundness. Of considerable consequence, though, was our 
decision to raise capital requirements at both Enterprises by 
30 percent and to restrict asset portfolio growth and insist on 
adequate controls for new product development. Without these 
actions, I seriously doubt that either Enterprise would be 
playing a constructive role in mortgage finance markets today.

A.2. During normal times, the Enterprises perform their 
principal function by guaranteeing mortgage-backed securities 
(MBS). Purchasing their own MBS and issuing debt to finance the 
purchase generally provides little additional benefit. While 
the Enterprises' debt and MBS are not perfect substitutes, both 
have been highly sought after by investors around the world. 
Yields on the two types of securities generally are closely 
related, with differences reflecting their different payment 
structures. In the current environment, the two markets are 
less well integrated. Because of that, and because both 
Enterprises have finally completed most of their remediation, 
we have reached agreements with the Enterprises that eliminated 
their portfolio restrictions, lowered their required capital 
requirements and assured that they will each raise more capital 
so that they can better fulfill their missions. That is what is 
required in these difficult market conditions. Legislation 
should provide the regulator with the ability to adjust 
portfolios according to the circumstances. Any size limitations 
on these portfolios would be pursuant to notice and comment 
rulemaking.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM JAMES B. 
                          LOCKHART III

Q.1. What are the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund like the House approach?

A.1. The Affordable Housing Program (AHP) of the Federal Home 
Loan Banks (FHLBs) was established in the 1989 law that created 
the Federal Housing Finance Board (FHFB). The AHP is expressed 
in terms of monetary contributions by the FHLBs, and mandated 
contributions reflect the relative profitability of each FHLB. 
The AHP most often works in conjunction with other (non-FHLB) 
forms of housing assistance to make individual affordable 
housing projects viable. The AHP is generally seen as an 
effective form of affordable housing assistance. The funds are 
relatively well-targeted, but the size of the program is 
limited. The program is in addition to the primary programs of 
the FHLBs.
    The affordable housing goals now in effect for Fannie Mae 
and Freddie Mac are outlined in the 1992 law that created 
OFHEO. The goals are established by regulation by the HUD 
Secretary, and compliance is monitored and enforced by HUD. The 
underlying rationale for the 1992 goals is Congress' view that 
the Enterprises ``have an affirmative obligation to facilitate 
the financing of affordable housing . . . consistent with their 
overall public purposes.'' The goals, which are expressed as a 
percentage of each Enterprise's overall business, are intended 
to affect the way the Enterprises carry out their primary 
programs. In practice, the goals have proven important in 
directing Enterprise activity, but are less nimble as a result 
of being set in statute. Both H.R. 1427 and S. 2391 revise the 
framework for the goals, but the framework remains fairly 
rigid.
    H.R. 1427's affordable housing fund was structured to 
ensure a steady monetary contribution by the Enterprises to 
affordable housing. In the House-passed bill, annual funding is 
based on the Enterprises' books of business (as opposed to 
being expressed as a percentage of profits). A similar fund is 
created under S. 2391. There are significant differences 
between the House and Senate measures, but both mandate a 
monetary contribution that is allocated among qualifying 
entities. Both bills allow for temporary suspension of 
contributions for reasons related to financial instability or 
inadequate capital. Creating a new constituency dependent on 
Enterprise earnings could add pressure to increase business at 
the expense of safety and soundness.

Q.2. If we go down the track of creating a housing program or 
housing trust fund for Fannie and Freddie, what is the 
appropriate amount of resources that should be spent, who 
should allocate the funds, and how should the funds be spent?

A.2. If Congress makes a judgment to create an affordable 
housing fund, it is important that the funds raised not be so 
large as to raise safety and soundness concerns, and I think 
the fund would work more effectively if it receives a 
relatively stable flow of funds from year to year. Finally, I 
think it is important that any new housing fund should not be 
controlled by the Enterprises, since such control greatly 
increases the potential for allocations based on what is in the 
Enterprises' best interests, rather than on what will best 
address affordable housing needs. It should also be subject to 
a sunset test to ensure that it is working.

Q.3. Does it seem to make sense to have both housing goals and 
a housing program for Fannie and Freddie?

A.3. This decision will reflect Congress' view about the degree 
to which the balance between the Enterprises' public mission to 
support affordable housing and each company's need to retain 
shareholder support. Affordable housing goals and an affordable 
housing fund can function in complementary ways, but a 
combination of the two is undeniably a greater burden for the 
companies than either obligation alone would be. One approach 
might be to reflect in their affordable housing goals the 
impact of affordable housing grants.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM RONALD A. 
                           ROSENFELD

         POTENTIAL MERGER OF DALLAS AND CHICAGO HOME LOAN BANKS

    Chairman Rosenfeld, as we discussed at the hearing, the 
American Banker reported on February 5 that the boards of 
directors of the Federal Home Loan Banks of Dallas and Chicago 
have voted to approve a merger of the two Banks. You stated 
that the merger application has not yet been presented to the 
Finance Board and that therefore you have not developed 
standards or processes for deciding whether to approve that 
merger. You also stated that in your view, this is simply a 
matter between the two Banks. I would appreciate your response 
to the following additional questions:

Q.1. What is the statutory authority under which two Banks may 
voluntarily merge? Which specific statutory provisions address 
the Finance Board's authority to approve or disapprove a merger 
between two Banks?

A.1. Section 26 of the Federal Home Loan Bank Act (Bank Act) 
authorizes the Finance Board to liquidate or reorganize any 
Federal Home Loan Bank (FHLBank) ``[w]henever the Board finds 
that the efficient and economical accomplishment of the 
purposes of [the Bank Act] will be aided by such action.'' The 
term ``reorganize'' is not defined by the Bank Act, but it is 
my view that it includes an acquisition of one FHLBank by 
another FHLBank, whether the acquisition is structured as a 
merger, a purchase and assumption transaction, or otherwise. 
The statute expressly provides that one FHLBank may acquire 
assets and assume liabilities of another FHLBank, either in 
whole or in part.
    This provision of the Bank Act represents a substantial 
delegation of authority to the Finance Board. It requires only 
that the action must ``aid'' the achievement of the statutory 
purposes. It does not require a finding of insolvency or severe 
financial distress. This construction of section 26 is 
consistent with other provisions of the Bank Act, such as 
section 3, which gives the Finance Board broad discretion to 
reduce the number of Bank districts to as few as eight, and 
section 25, which provides that ``each [Bank] shall have 
succession until dissolved by the Finance Board or by act of 
Congress.''
    The predecessor to the Finance Board exercised the 
authority conferred by section 26 on one occasion, in 1946, 
when it merged the Los Angeles Bank into the Portland Bank, and 
relocated the successor FHLBank to San Francisco. That action 
was taken over the objection of the Los Angeles Bank. In Fahey 
v. O'Melveny & Myers, 200 F.2d 420 (9th Cir. 1952), the United 
States Court of Appeals for the Ninth Circuit rejected a 
challenge to the merger, confirming the broad delegation 
reflected in section 26.

Q.2. Given that the Banks are all jointly and severally liable 
for each other's debt, the other 10 Banks have a clear interest 
in the financial condition of the Dallas and Chicago Banks. 
Furthermore, any standards that are developed as part of this 
process could set a precedent for the future. Therefore I do 
not believe that this is merely a matter between the two Banks. 
Since the hearing, what consideration have you given to the 
standards you would use to review a merger application?

A.2. With regard to the financial condition of the Dallas and 
Chicago Banks, all of the FHLBanks have registered with the 
Securities and Exchange Commission under the Securities 
Exchange Act of 1934, and all of them are current in their 
filings with the SEC. Before the end of March, I expect that 
the Chicago and Dallas Banks will file their annual reports, on 
Form 10-K, with the SEC. Form 10-K filings include a full set 
of audited financial statements, which will provide all 
interested parties an opportunity to evaluate the current 
financial condition of the Dallas and Chicago Banks. By 
requiring the FHLBanks to register with the SEC, the Finance 
Board sought to promote uniform financial disclosure that would 
allow each of the FHLBanks, as well as any other interested 
parties, to evaluate the financial condition of any of the 
FHLBanks.
    With regard to the standards for approving any merger of 
two FHLBanks, the general standards are set by statute. Under 
Section 26 of the Bank Act, as noted above, the Finance Board 
may order or approve a ``reorganization'' of an FHLBank if it 
determines that the ``efficient and economical accomplishment 
of the purposes of [the Bank Act] will be aided by such 
action.'' The purposes of the Bank Act are reflected in the 
statutory duties imposed by Congress on the Finance Board in 
Section 2A of the Bank Act. The Finance Board has the primary 
statutory duty of ensuring that the FHLBanks operate in a 
financially safe and sound manner. To the extent consistent 
with this primary duty, the Finance Board is also required to 
ensure: (1) that the FHLBanks remain adequately capitalized and 
able to raise funds in the capital markets; and (2) that the 
FHLBanks carry out their housing finance mission.
    Accordingly, if the Chicago and Dallas Banks submit a 
merger proposal, the Finance Board would evaluate the proposal 
in light of those standards. The Finance Board's paramount 
concern would be to determine whether the resulting FHLBank 
would be able to operate in a safe and sound manner following 
the merger. The Finance Board also would evaluate whether the 
resulting FHLBank would remain adequately capitalized and able 
to raise funds in the capital markets after the transaction had 
closed. Finally, the Finance Board would evaluate whether the 
resulting FHLBank would be able to meet the housing finance 
needs of all of its members to the same degree, or better, than 
the Chicago and Dallas Banks are doing at present.

Q.3. It seems to me that the decision confronting the Finance 
Board when the merger application is submitted is sufficiently 
significant that the process must be transparent and the impact 
of the decision on the System as a whole must be recognized. 
What do you believe are the elements necessary to ensure a 
transparent decision-making process?

A.3. I believe that the process will be transparent at several 
levels. If the Dallas and Chicago Banks enter into a definitive 
agreement and submit it to the Finance Board for approval, I 
expect that they will file a Form 8-K with the SEC to announce 
that development, and will include key details and information 
about the transaction. Thus, once that event has occurred, any 
interested party will be able to analyze the terms of the 
transaction and determine how they may be affected by the 
merger.
    It is also my expectation that the Dallas and Chicago Banks 
would develop a joint disclosure document along the lines of a 
SEC-compliant proxy statement. They would provide that 
document, which would describe in detail the terms of the 
proposed merger and the effect on the members, to all of the 
members of both FHLBanks. I further expect that they would 
conduct a number of member outreach meetings to inform the 
members as to the terms of the transaction and the reasons why 
the board of directors of each FHLBank has determined that the 
transaction is in its best interest. Although the Bank Act does 
not authorize the members to vote on such a transaction, the 
information in the disclosure documents would allow them to 
evaluate the transaction and express any concerns they might 
have to their respective FHLBank's board of directors.
    In considering the merits of any merger proposal, I believe 
that the Finance Board must evaluate how the proposed merger 
may affect the safety and soundness, capital adequacy, and 
mission achievement aspects of not only the Dallas and Chicago 
Banks, but of the other ten FHLBanks as well.

                      PROBLEMS AT THE CHICAGO BANK

Q.4. The Home Loan Bank of Chicago is now operating under a 
cease and desist order issued by the Finance Board on October 
10, 2007. The cease and desist order supersedes the Supervisory 
Agreement issued by the Finance Board on June 30, 2004. The 
2004 agreement was itself issued as a result of the Chicago 
Bank's failure to address items identified in the Bank's 2003 
examination. Given that the problems identified at the Chicago 
Bank over four years ago have yet to be remedied, what steps is 
the Finance Board taking to ensure that the Bank's problems do 
not pose a risk to the System as a whole? If the Chicago Bank 
and the Dallas Bank merge, how will the Finance Board ensure 
that the resulting entity addresses these problems?

A.4. On October 10, 2007, the Finance Board placed the Federal 
Home Loan Bank of Chicago under a cease and desist order 
(Order). That action was taken to ensure that the Chicago 
Bank's problems are addressed by current management in a timely 
manner and that they do not ``spill over'' to threaten the 
System as a whole. Among other things, the Order prevents the 
Chicago Bank from repurchasing or redeeming capital stock, or 
from paying dividends, without the prior written approval of 
the Finance Board's Director of the Office of Supervision. The 
Order also requires the Chicago Bank to improve its risk 
management practices and to maintain a minimum ratio of capital 
stock, retained earnings, and subordinated debt to total assets 
of at least 4.5 percent. Although the specific provisions of 
the Order are intended to reduce the Chicago Bank's risk 
exposures, the Order itself cannot ensure that the Chicago 
Bank's management and board of directors will succeed in 
addressing its problems effectively and in a timely manner. 
Thus, we are closely monitoring the Chicago Bank's financial 
condition, performance, and activities to ensure that it is 
progressing satisfactorily.
    It is incumbent upon the Dallas and Chicago Banks to 
demonstrate to the satisfaction of their respective 
stakeholders and the Finance board that the proposed merger 
will succeed. The Finance Board will carefully review the terms 
and conditions of the proposed merger once they are finalized 
to ensure that the supervisory issues concerning the Chicago 
Bank will be fully addressed. The Finance Board will also 
assess the financial and managerial resources and earnings 
prospects of the resulting entity.

        FEDERAL HOME LOAN BANKS' RESPONSE TO THE HOUSING CRISIS

    Our nation is currently in the midst of a housing crisis, 
with record numbers of Americans facing foreclosure. The 
Federal financial regulators have issued guidance regarding the 
underwriting of nontraditional and subprime mortgages. These 
guidelines require underwriting that more effectively 
establishes a borrower's ability to repay the mortgage being 
made.

Q.5. When did the Finance Board adopt these standards for 
determining what mortgages are eligible collateral for the Home 
Loan Banks to accept for advances or are eligible to be 
purchased as acquired member assets?

A.5. The Finance Board, through its Office of Supervision, 
issued Advisory Bulletin 2007-AB-01, ``Nontraditional and 
Subprime Residential Mortgage Loans,'' on April 12, 2007. This 
advisory bulletin requires, in part, that each FHLBank adopt 
and implement policies and risk management practices as part of 
its credit risk management program that establish appropriate 
risk limits for, and appropriate mitigation of, credit exposure 
on nontraditional and subprime mortgage loans. We evaluate each 
FHLBank's compliance with this advisory bulletin through our 
examination program, taking into consideration market 
conditions and guidance issued by the Federal bank regulatory 
agencies.
    Additionally, in November 2007, we issued an internal 
bulletin to our examiners that provided guidance on assessing 
credit and reputational risks associated with investing in 
private-label MBS that are backed by subprime and 
nontraditional residential mortgage loans. This bulletin 
instructed examiners to, in part, determine whether the 
FHLBank's private-label MBS investments have increased since 
the Federal Financial Institutions Examination Council (FFIEC) 
agencies issued their guidance on nontraditional mortgage 
product risks in October 2006 and, if so, whether additional 
investments in private-label MBS with underlying subprime and 
nontraditional mortgage loans consist of loans that conform to 
FFIEC agency guidance.
    In December 2007, as part of our ongoing supervisory 
efforts and, in particular, those ensuing from Advisory 
Bulletin 2007-AB-01, our Examiners-in-Charge contacted each 
FHLBank to express our expectations that FHLBank policies and 
processes regarding subprime and nontraditional mortgages 
should include requirements that the FHLBank will not include 
in its collateral coverage calculations loans that do not 
comply with FFIEC guidance on subprime and nontraditional 
mortgages for those loans originated after the FFIEC guidance 
was issued. We are preparing an advisory bulletin to formalize 
this communication, as well as our expectations that loans that 
underlie private-label MBS investments or that are purchased 
through the FHLBanks acquired member assets programs should 
similarly comply with FFIEC guidance. We expect that this 
advisory bulletin will be issued within 30 days.

Q.6. Were these types of loans eligible collateral prior to 
that guidance being adopted? If so, what has the Finance Board 
done to ensure that such loans are no longer being used as 
collateral, and how much collateral has been affected?

A.6. As regulator of the Federal Home Loan Banks, our 
supervisory efforts consider the conditions in the financial 
marketplace and the FHLBanks' mission. The FHLBanks provide 
financial products and services to members and housing 
associates, including, but not limited to, advances that are 
used to assist in financing single-family and multi-family 
housing for consumers at all income levels. The use of 
nontraditional and subprime residential mortgage loans, when 
appropriately underwritten, may have provided and may continue 
to provide consumers with greater credit options for purposes 
of home ownership. However, when inappropriately marketed, 
underwritten, and managed, these loans often are associated 
with increased credit or reputational risk for financial 
institutions and an increased propensity for financial 
difficulty for the borrowers.
    As a general matter, we have not taken exception to the 
FHLBanks accepting appropriately underwritten subprime and 
nontraditional mortgages as collateral for advances provided 
that they have adopted adequate policies and procedures for 
doing so. As noted in our response to the preceding question, 
in December 2007 we contacted each FHLBank to express our 
expectations that FHLBank policies and processes regarding 
subprime and nontraditional mortgages should include 
requirements that the FHLBank will not include in its 
collateral coverage calculations loans that do not comply with 
FFIEC guidance on subprime and nontraditional mortgages for 
those loans originated after the FFIEC guidance was issued. We 
are preparing an advisory bulletin to formalize this 
communication, as well as our expectations that loans that 
underlie private-label MBS investments or that are purchased 
through the FHLBanks acquired member assets programs should 
similarly comply with FFIEC guidance.

Q.7. What additional steps do you believe the Home Loan Banks 
can take to ensure that they are doing all they can both to 
stop abusive lending practices and to help keep people in their 
homes?

A.7. The Finance Board, through its Office of Supervision, 
issued Advisory Bulletin 2005-AB-08, ``Guidance on Federal Home 
Loan Bank Anti-Predatory Lending Policies,'' on August 25, 
2005. This advisory bulletin required each FHLBank to adopt 
comprehensive anti-predatory lending policies to govern the 
FHLBank's purchasing of mortgages and calculating the level of 
advances that can be made to its members. The guidance requires 
that the FHLBanks' policies preclude purchasing mortgages that 
violate applicable federal, state, or local predatory lending 
laws or including such loans when calculating the level of 
advances that can be made to a member. The guidance also 
requires that the FHLBanks' policies address such features as 
mortgages subject to the Home Ownership and Equity Protection 
Act (HOEPA); prepaid single-premium credit life or similar 
insurance; prepayment penalties beyond the early years of the 
loan; and mandatory arbitration. Each FHLBank has developed 
written procedures and standards for verifying member 
compliance with its anti-predatory lending mortgage purchase 
and advance policies. The FHLBanks can help curb abusive 
lending practices by vigorously ensuring compliance with these 
policies. Our examination program includes monitoring the 
FHLBanks' adherence to their policies and practices.
    The FHLBanks can help keep people in their homes by 
fulfilling their mission, including making advances that assist 
and enhance their members' financing of housing, including 
single-family and multi-family housing serving consumers at all 
income levels. Since liquidity in the housing and financial 
markets faltered last year, advances at the FHLBanks have 
increased substantially. Between June 30, 2007 and February 13, 
2008, advances increased by $234 billion, providing liquidity 
to members and, in turn, the housing finance market.
    In addition, the FHLBanks can further assist with 
homeownership stability by using their affordable housing and 
community lending programs in innovative ways. For example, the 
Federal Home Loan Bank of San Francisco, after receiving 
certain regulatory waivers from the Finance Board, is 
establishing a program under which it will provide Affordable 
Housing Program grant subsidies on a noncompetitive basis to 
refinance or restructure low- or moderate-income borrowers' 
existing nontraditional adjustable rate mortgage loans that are 
held by members or their affiliates of the FHLBank. The program 
applies to all such loans when they have become unaffordable to 
those households, or are projected to become unaffordable, 
because of increased payments resulting from adjustments in the 
interest rates or loan principal that occur subsequent to 
origination. The Finance Board has initiated a review of the 
AHP regulation to consider changes to the regulation that would 
allow other FHLBank similar authority.
    Further, the Federal Home Loan Bank of Indianapolis (FHLBI) 
has created a $100 million lending initiative, HomeRetain, to 
help FHLBI financial institution members assist families facing 
foreclosure. HomeRetain is a part of the FHLBI's Community 
Investment Program. Through HomeRetain, FHLBI will make 
available funding to its member financial institutions at the 
FHLBI's cost of funds, plus a small administrative markup. 
Member financial institutions can then use the funds to help 
homeowners at risk of foreclosure to refinance their homes or 
modify their mortgages on more favorable terms. Additionally, 
last year, the Federal Home Loan Bank of Cincinnati started a 
HomeProtect Program, which makes available $250 million in 
advances to member financial institutions at its cost of funds 
for purposes similar to the Indianapolis Bank's HomeRetain 
program.

                  FINANCE BOARD'S REVIEW OF COLLATERAL

Q.8. What is the Finance Board's process for reviewing the 
collateral pledged by the Banks' members? Does the Finance 
Board review collateral pledged by individual institutions to 
see if they are pledging housing-related assets and are not 
simply pledging Treasuries, for example? To what extent does 
the Finance Board monitor the characteristics of mortgage loans 
that are pledged as collateral, such as borrower income levels, 
geographic distribution, etc.?

A.8. The Finance Board uses two processes to monitor collateral 
pledged by the FHLBanks' members. First, our examiners evaluate 
collateral operations during on-site examinations, which we 
conduct annually for each FHLBank. Specifically, the examiners 
assess the adequacy of the Banks' monitoring of collateral 
pledged by members. In this regard, we expect the FHLBanks to 
obtain collateral information from their members, on a 
quarterly basis, that shows the volume and types of loans 
pledged. Our examiners also evaluate the FHLBanks' oversight 
process, in which the FHLBanks assess their members' compliance 
with pledging requirements. The second process is the Finance 
Board's annual collateral survey, which is used to gather 
information on the FHLBanks' collateral management practices, 
including the types of collateral accepted, the characteristics 
of that collateral, and the discounts, or ``haircuts,'' the 
FHLBanks apply to collateral to ensure that collateral values 
exceed credit exposures.
    Under the Bank Act, all advances to members must be fully 
secured by collateral. The FHLBank must obtain and maintain a 
security interest in ``eligible collateral'' which includes: 
(1) whole first mortgages on improved residential property (not 
more than 90 days delinquent), or securities representing a 
whole interest in such mortgages; (2) securities issued, 
insured, or guaranteed by the United States Government or any 
agency thereof; (3) cash or deposits of a Federal Home Loan 
Bank; (4) other real estate related collateral acceptable to 
the Bank, if such collateral has a readily ascertainable value 
and the Bank can perfect its interest in the collateral; and 
(5) in the case of any member that qualifies as a ``community 
financial institution'', secured loans for small business, 
agriculture, or securities representing a whole interest in 
such secured loans. If the collateral securing an advance is 
insufficient to fully secure the advance, the member must 
reduce the advance promptly and prudently in accordance with a 
schedule determined by the FHLBank.
    Most FHLBanks use a ``blanket lien'' to secure their credit 
exposures to members. Blanket lien agreements differ among the 
FHLBanks in terms of the assets of the member that are covered 
by the blanket lien. For example, a blanket lien may cover all 
assets of a member, only the financial assets of a member, or 
it might cover only 1-4 family residential mortgage loans. As a 
matter of practice within the FHLBank System, when a blanket 
lien is used to secure collateral, the blanket lien will, at a 
minimum, cover all 1-4 family mortgage loans.
    In lieu of a blanket lien, an FHLBank may require a 
``specific listing'' of collateral from a member. Some FHLBanks 
view a listing requirement as a stronger form of collateral 
control than a blanket lien. FHLBanks often use a listing 
requirement for members that exhibit a higher than normal risk 
profile. Under a listing requirement, an FHLBank obtains loan 
level information from the member on all collateral that is 
pledged. The information is typically updated on a quarterly 
basis.
    FHLBanks can also take possession of a member's collateral 
by requiring the member to ``deliver'' any collateral securing 
an advance. Delivery is generally required if securities are 
used to secure an advance or if the risk profile of the member 
is a matter of concern. FHLBanks can require delivery of 
collateral to the FHLBank's premises or to a third party 
custodian.
    When examiners review the collateral that a member pledges 
to secure an advance, the focus is on whether the collateral 
that is pledged is ``eligible collateral'' and whether the 
value of the collateral is sufficient to fully secure the 
advance. Because Treasury securities are eligible collateral 
for advances under the Bank Act, an FHLBank may accept them as 
collateral if it wishes to do so; the Bank Act does not require 
an FHLBank to prefer housing-related collateral over Treasury 
securities.
    As a general rule, examiners do not monitor the 
characteristics of mortgage loans that are pledged as 
collateral, such as borrower income levels or geographic 
distribution. Again, the primary focus is on whether the 
collateral pledged is eligible collateral and whether the value 
of the collateral is sufficient to fully secure the advance. 
However, where examiners are concerned about the value of 
collateral securing a particular advance, they would review the 
characteristics of the mortgage loans that are pledged as 
collateral to ensure that the collateral is not overvalued by 
the member.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR BAYH 
                    FROM RONALD A. ROSENFELD

Q.1. I have reviewed the decision making process of regulatory 
boards and commissions and believe that a board structure 
results in much better regulatory decision making than a single 
person regulator. In your experience at FHFB, have you had 
experiences where the interplay with your colleagues on the 
Board of Directors has resulted in better decision making than 
would have been the case if there were only a single regulator?

A.1. Both models, organizations with a board of directors and 
those with a single person regulator, can work. Each has its 
benefits and costs and there are times and circumstances when 
one model may be better than the other. The decision making 
process in a board or commission model benefits from the 
different perspectives brought to the table. A drawback might 
be that a board is not always able to act as quickly as 
circumstances might require. Often it is the strength and 
abilities of the individual or individuals that make an 
organization effective and efficient, and less about the 
structure.
    Having said that, from my experience as Chairman of the 
Federal Housing Finance Board, I have been a party to decisions 
where the collaboration of members of the board made the 
process better. I would say our rule making process, for 
example, benefits as much from the collaboration of the board 
members before a rule is proposed as it does from the comments 
we receive from the public stakeholders before making the rule 
final.
    With respect to government sponsored enterprise (GSE) 
reform, the more critical question is whether a full-time board 
is necessary for an organization whose regulated entities would 
number only 14, all of which are in the same basic business of 
furthering housing finance. I believe the policy making and 
stewardship responsibilities in such an organization can be 
carried out effectively through an advisory board, as proposed 
in the House of Representatives-approved GSE legislation, H.R. 
1427 (H.R. 1427). The bill calls for a single agency 
responsible for the supervision and regulation of the Federal 
Home Loan Banks, Fannie Mae, and Freddie Mac. A single 
regulator would lead the agency, acting with the benefit of 
guidance from an advisory board comprising the Secretary of the 
Treasury, the Secretary of Housing and Urban Development (HUD), 
and the Chairman of the Federal Reserve Board. The advisory 
board would establish the governing principles and standards 
critical to carrying out the responsibility of overseeing the 
housing GSEs.

Q.2. In reviewing the statutory authorities of the FHFB and 
OFHEO it appears that the FHFB has all of the authorities and 
independence needed of a strong regulator, and OFHEO is 
seriously deficient. Why did you not simply suggest that the 
regulation of Fannie Mae and Freddie Mac be moved to the FHFB 
and subject the enterprises to the FHFB statute?

A.2. I do not believe that there is a simple way, such as 
subjecting Fannie Mae and Freddie Mac to the Federal Home Loan 
Bank Act, to address GSE reform. Any reconfiguration of the 
regulatory structure for the oversight of Fannie Mae, Freddie 
Mac, and the Federal Home Loan Banks will require extensive 
amendments to the key regulatory statutes, i.e., the Bank Act 
and the Federal Housing Enterprises Financial Safety and 
Soundness Act of 1992 (Housing Act), as well as conforming 
amendments to the Federal National Mortgage Association Charter 
Act and the Federal Home Loan Mortgage Corporation Act. This 
would be true regardless of whether the Finance Board, Office 
of Federal Housing Enterprise Oversight (OFHEO), or a newly 
created agency were to be charged with supervising all of these 
entities.
    The Administration has advocated the creation of a new 
agency headed by a single director and would use the Housing 
Act as the primary vehicle to achieve that result. The GSE 
reform bill passed by the House of Representatives, H.R. 1427, 
followed that same approach. I see no reason to question the 
wisdom of that approach, nor do I believe that using the Bank 
Act as the vehicle for a new regulatory structure would 
necessarily result in a more effective regulatory agency.
    Moreover, I believe that H.R. 1427 includes provisions that 
would enhance the supervisory and enforcement authority of the 
new agency over the powers the Finance Board has under current 
law. For example, the Finance Board's enforcement powers are 
conferred by Section 2B of the Bank Act, which generally 
incorporates by reference the enforcement powers that Congress 
has conferred on OFHEO. In other words, the enforcement powers 
that the Finance Board has today are, with only minor 
exceptions, derived from the OFHEO statute. To the extent that 
the OFHEO statute is amended to enhance its enforcement powers, 
the new agency would have somewhat greater powers than the 
Finance Board has today. In addition, H.R. 1427 would give the 
new regulatory agency enhanced conservatorship powers and 
detailed receivership powers (both of which would apply to the 
FHLBanks, as well as Fannie Mae and Freddie Mac), which would 
improve upon the existing authority that the Finance Board has 
to liquidate or reorganize an FHLBank.
    In addition, I do not believe that any existing statute is 
sufficient to accommodate the oversight of both the FHLBanks 
and the Enterprises. The Bank Act, which was enacted in 1932, 
is specific to the Federal Home Loan Bank System, and the 
Housing Act is specific to the oversight of Fannie Mae and 
Freddie Mac. Those statutory differences reflect fundamental 
differences in the structure and operation of the three housing 
GSEs. For example, the FHLBanks are member-owned cooperatives, 
whereas Fannie Mae and Freddie Mac are shareholder owned 
entities whose stocks are traded in the capital markets. That 
difference manifests itself in different capital structures, 
different board structures, and different orientations toward 
shareholder expectations and product pricing. Further, the 
principal business of the FHLBanks is secured lending to their 
members, whereas the principal business of Fannie Mae and 
Freddie Mac (Enterprises) is the securitization of mortgage 
loans.
    A single unified housing GSE regulator would be a more 
efficient and effective regulator. As I stated in my prepared 
testimony, what is important is that the new regulator have the 
ability to fund itself through assessments and be out of the 
appropriations process; it should have the ability to place a 
GSE into receivership or conservatorship; it should have the 
authority to approve new and existing business activities; and 
it should have the power to set and adjust minimum capital 
standards. All of these matters can be accomplished by 
legislation that recognizes the differences between the 
FHLBanks and the Enterprises. In so doing, the Congress will 
assure that the important distinctions between the FHLBanks and 
the Enterprises are preserved.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER FROM RONALD A. 
                           ROSENFELD

Q.1. The Federal Home Loan Bank System currently holds $88 
billion in private-label MBS and only $4 billion in retained 
earnings. Fifty-eight of these securities are on negative 
watch. Given market conditions, is it possible that all or most 
of the System's retained earnings could be used to write down 
the private-label MBS?

A.1. The FHLBanks own more than 1,650 private-label mortgage-
backed securities (MBS), so it is difficult to generalize about 
potential losses. Deal structures, including credit support 
structures, subordination, and pool composition are key 
determinants of potential losses. We monitor the FHLBanks' 
private-label MBS portfolios and are working to ensure that the 
FHLBanks maintain retained earnings at appropriate levels.
    As of February 19, 2008, the FHLBanks held 24 downgraded 
private-label MBS and 53 private-label MBS under negative watch 
by one or more rating agencies. The securities that have been 
downgraded or placed on negative watch represent approximately 
two percent of the FHLBanks' private-label MBS. The remainder 
of the FHLBanks' MBS is currently rated triple-A with a stable 
outlook. However, given the volatility in this market, the 
ratings of these securities could change.
    In general, the FHLBanks purchase triple-A ``tranches'' of 
private-label MBS. The performance of a particular tranche 
depends on the performance of the underlying loans and the 
structure of the particular security. The structure of a 
security dictates how the cash flows are prioritized among the 
security's tranches. The problems in the private-label MBS 
market are serious, but the problems do not affect all 
securities the same way. For example, losses to an investor 
would be unlikely if the underlying pool of mortgages is 
experiencing low delinquencies or has very high levels of 
credit support.
    While many private-label MBS are thought to have a market 
value below their book value, specific accounting rules govern 
whether unrealized losses need to be recognized through 
earnings. The overwhelming majority of the FHLBanks' MBS are in 
held-to-maturity accounts. Accounting rules require losses to 
be recognized on such assets when the losses are deemed to be 
``other than temporary.'' Factors bearing on whether a loss is 
other than temporary include, among other things:

      The length of the time and the extent to which 
the market value has been less than cost;

      The financial condition and near-term prospects 
of the issuer, including any specific events which may 
influence the operations of the issuer, such as changes in 
technology that may impair the earnings potential of the 
investment or the discontinuance of a segment of the business 
that may affect the future earnings potential; or

      The intent and ability of the holder to retain 
its investment in the issuer for a period of time sufficient to 
allow for any anticipated recovery in market value.

    If the FHLBank determines that an MBS in a held-to-maturity 
account is likely to recover its market value losses over time, 
and if the FHLBank has both the intent and ability to hold that 
security to maturity, then it need not record a loss.

Q.2. What are you doing about this and when can we expect the 
Finance Board to issue a proposed rule on retained earnings?

A.2. In August 2003, the Office of Supervision issued Advisory 
Bulletin 03-08 that called on each FHLBank to assess the 
adequacy of its retained earnings in a systematic fashion. This 
guidance was a part of a continuing supervisory focus on the 
adequacy of retained earnings. At the end of June 2003, 
retained earnings were $746 million or 0.09 percent of assets. 
By the end of 2007, retained earnings had increased to $3.7 
billion or 0.29 percent of assets.
    We expect the FHLBanks to continually assess the adequacy 
of their retained earnings in light of market conditions and 
adjust their retained earnings accordingly. We shortly will be 
giving instructions to each FHLBank to prepare a substantive 
analysis of the credit risk exposure stemming from MBS. We will 
expect them to prepare and submit that analysis to us within 30 
days. We will then consider these submissions when we determine 
the adequacy of each FHLBank's retained earnings.
    Although the Finance Board, in 2006, issued a proposed rule 
governing the minimum amount of retained earnings each FHLBank 
should have, we deferred any action on the proposed rule. A 
revised retained earnings proposed rule is not currently under 
active consideration by the Finance Board.

Q.3. Also can you provide this committee with a list of the 
downgraded securities?

A.3. The MBS holdings of individual FHLBanks are obtained as 
part of the supervisory process and are confidential bank 
supervisory information. I can, however, provide an overview of 
the downgraded securities in the FHLBanks' MBS portfolios. As 
of February 19, 2008, the FHLBanks held:

      14 MBS that had been downgraded to single-A, from 
triple-A, with a book value of $88.8 million; of these, 10 
securities with a book value of $16.8 million remain on 
negative watch;

      10 MBS that had been downgraded to double-A with 
a book value of $413.9 million; of these, 8 securities with a 
book value of $373.9 million remain on negative watch; and

      53 MBS securities rated triple-A with a book 
value of $1.2 billion, were placed under negative watch by one 
or more rating agencies.

    The securities that have been downgraded and/or that are on 
negative watch constitute two percent of the FHLBanks' private-
label MBS holdings. All their remaining private-label MBS are 
currently rated triple-A, and are not on negative watch. 
However, given the volatility in this market, the ratings of 
these securities could change.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM RONALD A. 
                           ROSENFELD

    One of the areas that I believe needs more debate and 
vetting is the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund. Fannie and Freddie have affordable housing goals, 
the Federal Home Loan Banks have an affordable housing program, 
and the House passed GSE reform legislation would establish a 
new housing fund with goals. The most recent GSE reform 
legislation that passed the Senate Banking Committee did not 
have a housing fund.

Q.1. What are the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund like the House approach?

A.1. Affordable housing goals, the Affordable Housing Program 
(AHP), and an affordable housing fund provide alternative 
mechanisms for addressing affordable housing problems and 
needs. The affordable housing goals applicable to Fannie Mae 
and Freddie Mac establish targets for their purchases of 
mortgages in three categories: low- and moderate-income 
households; housing located in central cities, rural areas, or 
other underserved areas; and a special affordable category 
covering low-income households in low-income areas or very low-
income households. The AHP requires that each FHLBank use 10 
percent of its net income to operate an affordable housing 
program. The proposed affordable housing fund would require 
Fannie Mae and Freddie Mac to contribute annually an amount 
equal to 1.2 basis points of their prior year's total mortgage 
portfolios, to be allocated by the HUD Secretary to states and 
Indian tribes for affordable owner-occupied and rental housing, 
and for targeted economic and community development. The first 
two approaches, affordable housing goals and the AHP, have 
operated for well over a decade. The proposed affordable 
housing fund would be new and includes some features analogous 
to those of the AHP, such as the contribution of earnings to 
fund the subsidy. As Chairman of the Federal Housing Finance 
Board, I am most familiar with the AHP and can best provide 
insights on the operation and characteristics of this program.
    The AHP subsidizes the cost of owner-occupied housing for 
individuals and families with incomes at or below 80 percent of 
the area median income (AMI), and rental housing in which at 
least 20 percent of the units are reserved for households with 
incomes at or below 50 percent of AMI. The subsidy may be in 
the form of a grant or a below-cost or subsidized interest rate 
on an advance. Each FHLBank funds its own AHP annually by 
contributing 10 percent of its previous year's net income after 
the Resolution Funding Corporation payment. In 2007, the 12 
FHLBanks contributed a combined $295 million to the AHP; since 
1990, the FHLBanks have contributed about $3.2 billion to 
assist eligible affordable owner-occupied and rental housing.
    The FHLBanks award AHP funds through a competitive 
application program and a homeownership set-aside program. In 
the competitive program, members submit applications on behalf 
of one or more sponsors of eligible housing projects. Projects 
must meet certain eligibility requirements and score 
successfully in order to obtain funding. Under the 
homeownership set-aside program, an FHLBank may allocate up to 
the greater of $4.5 million or 35 percent of its AHP funds each 
year to assist low- and moderate-income households purchase or 
rehabilitate homes, provided that at least one-third of the 
FHLBank's homeownership set-aside allocation is made available 
to assist first-time homebuyers. Members obtain the AHP set-
aside funds from the FHLBank and then use them as grants to 
eligible households. Homeownership set-aside funds may be used 
for down payment, closing cost, counseling or rehabilitation 
assistance in connection with the household's purchase or 
rehabilitation of an owner-occupied unit. Each FHLBank sets its 
own maximum grant amount, which may not exceed $15,000 per 
household.
    The structure and operation of the AHP exhibit a number of 
strengths on which I elaborate in my response to the question 
below. I believe that key lessons we have learned are that 
program flexibility and local decision-making are preferable to 
a prescriptive, centralized Washington-defined and driven 
program, but that a strong supervisory foundation should 
accompany program flexibility. The Bank Act has provided 
flexibility to the Finance Board as regulator to adjust the AHP 
as conditions warranted; the Finance Board has amended the AHP 
regulation a number of times, including substantively in 1998 
and 2006. The Finance Board has strengthened its AHP 
examination program and completed the development of a 
modernized AHP database to provide enhanced measurement of 
program outcomes.

Q.2. If we go down the track of creating a housing program or 
housing trust fund for Fannie and Freddie, what is the 
appropriate amount of resources that should be spent, who 
should allocate the funds, and how should the funds be spent?

A.2. The AHP offers one model of a successful program to 
support affordable housing. The AHP's design ensures that the 
funds are used for eligible purposes to meet the statutory 
requirement that the preponderance of the subsidy directly 
benefits very low, low- and moderate-income households. In the 
case of the AHP, the FHLBanks bear the administrative costs of 
the program as well. The flexibility of the program allows it 
to respond to local housing conditions and needs, adapt to 
evolving market conditions and capitalize on innovations in 
affordable housing finance. Program decision-making and 
eligibility requirements are transparent and not subject to 
political or corporate influence in the use and distribution of 
funds.
    The following seven program features contribute to the 
efficient and effective use of program funds and help to 
protect the AHP's integrity:

        Basic Eligibility Requirements--Regulatory and 
        statutory eligibility requirements are clear and 
        public. Under the competitive program, any rental or 
        homeownership project that meets the eligibility 
        criteria may apply regardless of corporate or political 
        affiliation. Under the homeownership set-aside program, 
        households that meet the eligibility requirement may 
        apply to a member lender for down payment, closing cost 
        or rehabilitation assistance, typically on a first-
        come-first-served basis.

        Competitive Scoring System--The scoring system is 
        transparent and accessible to the public. Applicants 
        receive points based on the extent to which the 
        projects meet defined, largely objective criteria. In 
        each funding round, the FHLBanks must fund the highest 
        scoring applications in the order of their ranking by 
        points until the available amount of subsidy is 
        exhausted. Applications are not judged on any merits 
        outside of the scoring system, and ``lobbying'' for 
        certain applications or projects has no effect on the 
        scoring outcome or the decision to fund the project.

        Timely Awarding of Funds--Each FHLBank's annual 
        contribution of AHP subsidies must be used by or 
        committed to eligible projects within that year. 
        Consequently, the FHLBanks announce the successful 
        applications within a few months of receiving the 
        applications. Funding decisions are clear, quick, and 
        public.

        Recapture of Misused or Unused AHP Subsidies--If a 
        project sponsor or household receives AHP subsidy that 
        it does not use for the duration of the affordability 
        retention period or does not use in accordance with the 
        AHP requirements, the FHLBank must recapture the amount 
        of AHP subsidy. Recapture ensures that AHP funds that 
        are not used properly are repaid to the AHP and used 
        for subsequent projects and are not ``lost'' to the 
        program. This liability for recapture is a financial 
        incentive for the FHLBanks to operate the program in 
        strict conformance with the requirements of the statute 
        and regulation.

        Conflicts of Interest Policies--The FHLBanks establish 
        and adhere to conflicts of interest policies that are 
        applicable to FHLBank directors, to management and 
        staff, to FHLBank member lenders, and to Advisory 
        Council members.

        Oversight by a Public Advisory Council--Each FHLBank 
        has an Advisory Council comprising housing and 
        community investment practitioners and experts. These 
        councils advise their respective FHLBanks on affordable 
        housing needs in the district and the use of AHP 
        subsidies, set and review scoring criteria, and 
        evaluate the outcomes of funding rounds.

        Oversight by the Federal Regulator--The Federal Housing 
        Finance Board conducts examinations of the FHLBanks' 
        AHPs. These examinations cover both the FHLBanks' 
        compliance with the operational requirements of the 
        AHP, and the FHLBanks' oversight of projects' 
        compliance with the low-or-moderate-income targeting 
        and affordability requirements of the program.

Q.3. Does it make sense to have both housing goals and a 
housing program for Fannie and Freddie?

A.3. The existing housing goals and the affordable housing fund 
proposed in the House-approved GSE reform legislation operate 
in different ways, may reach different beneficiary groups or 
fulfill different purposes, and need not be mutually exclusive. 
The housing goals focus on the operation of the basic business 
of the enterprises--purchasing mortgages on the secondary 
market--and provide benefits indirectly. The 1992 legislation 
initially establishing the affordable housing goals for the 
Enterprises referred to their ``. . . affirmative obligation to 
facilitate the financing of affordable housing for low- and 
moderate-income families in a manner consistent with their 
overall public purposes, while maintaining a strong financial 
condition and a reasonable economic return.'' One effect of the 
housing goals could be to extend the reach of the private 
market to lower income groups while also contributing 
positively to the bottom line of the enterprises. An affordable 
housing fund or program would use funds earned by the 
Enterprises to provide an explicit subsidy to affordable 
housing projects or initiatives that meet established criteria. 
The specific focus for any funding cycle could change to 
reflect current market conditions and needs and would not 
necessarily be connected to the secondary market.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM RICHARD F. 
                             SYRON

    One of the areas that I believe needs more debate and 
vetting is the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund. Fannie and Freddie have affordable housing goals, 
the Federal Home Loan Banks have an affordable housing program, 
and the House passed GSE reform legislation would establish a 
new housing fund with goals. The most recent GSE reform 
legislation that passed the Senate Banking Committee did not 
have a housing fund

Q.1. What are the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund like the House approach?

A.1. There are many factors that impact the availability of 
affordable housing including, for example, the availability of 
mortgage credit and the physical supply of housing. There are 
also different policy tools that are designed to address those 
factors. As discussed below, housing goals, a duty to serve, 
and an AHF have varying strengths and weaknesses in their 
ability to address affordable housing needs.

                             HOUSING GOALS

    A key strength of the affordable housing goals is that they 
help ensure the availability of mortgage credit to low- and 
moderate-income families and families living in underserved 
communities by requiring that certain percentages of the 
enterprises' mortgage purchases finance mortgages made to these 
families, or finance affordable rental housing. Housing goals 
thus leverage the ability of the enterprises to provide 
liquidity to the secondary mortgage market, and also produce a 
measurable policy outcome.
    However, goals and subgoals set in excess of what the 
primary market originates should be avoided to prevent adverse 
unintended consequences, such as over-extension of mortgage 
credit that can in turn result in increased borrower 
foreclosures and credit losses. In fact, a disproportionate 
share of our credit losses is attributable to loans that 
qualify for one of HUD's affordable housing goals. These loans 
incur losses approximately two times the rate of non-goal 
qualifying loans.
    To be effective, the GSE regulator must consider prevailing 
market conditions in making a determination with respect to 
goals achievement and must have responsibility to recalibrate 
the goals in response to changes in market conditions. Finally, 
the number of goals and subgoals should be limited; when market 
conditions are volatile and, as the number of goals increase, 
so too does the likelihood that all goals and subgoals are not 
concurrently feasible. A mix of feasible and infeasible goals 
that are equally enforceable will create unintended market 
distortions.
    A key weakness of the housing goals is that they can only 
address the availability of mortgage credit and not other 
issues that are important to enhancing sustainable home 
ownership, such as the supply of affordable housing.

                             DUTY TO SERVE

    In addition to numerical goals, the GSE reform bill passed 
by the House of Representatives in May 2007, H.R. 1427, and the 
bill introduced by Senator Reed in November 2007, S. 2391, 
would create an explicit duty to serve underserved markets that 
would require the enterprises to increase investments in 
products and develop credit policies that promote lending in 
certain affordable housing areas that policymakers designate as 
underserved by the market. The duty to serve also would be 
fully enforceable in the same manner as the housing goals.
    Given the imprecise nature of a duty to serve, we believe 
that the regulator should have flexibility to assess an 
enterprise's compliance with a duty to serve and that 
enforcement should not be punitive. For example, the regulator 
should not be required to automatically subject an enterprise 
to the full panoply of cease-and-desist and civil money penalty 
enforcement tools for failure to achieve a single aspect of the 
duty to serve.
    Finally, any duty to serve must be limited in number, 
duration, and total financial burden to ensure that the duty 
does not impair the enterprises' additional mission 
responsibilities to provide liquidity and stability to the 
market or impair the enterprises' safety and soundness. Unless 
the regulator must review these underserved designations 
periodically, there is a significant risk of imposing a 
continuing legal duty on the enterprises even after the policy 
basis for such a designation ceases to exist.
    An alternative means to focus the enterprises' attention on 
certain housing markets, is through establishing a bonus points 
incentive system, within, not in addition to, the numerical 
goals framework.

                        AFFORDABLE HOUSING FUND

    A principal strength of an AHF is that it directly 
increases the supply of affordable housing by subsidizing the 
construction or preservation of such housing. Because an AHF 
targets the construction and preservation of affordable housing 
and mandates spending funds for such purposes, it helps ensure 
that affordable housing will be built or preserved. If the 
objectives and management of an AHF are sufficiently flexible, 
direct subsidies can also be combined with other federal, local 
or private money to leverage the effect of the subsidies and 
provide an even greater supply of affordable housing. An AHF 
analogous to the affordable housing program (AHP) that the 
FHLBs must establish, could encourage investments and 
innovations that complements the core affordable 
responsibilities of the enterprises.
    A principal weakness of the AHF model with respect to the 
enterprises is that it does not leverage our expertise in 
providing liquidity and stability to the residential mortgage 
market. The enterprises are designed to provide a secondary 
market in support of mortgage finance, not provide direct 
subsidies to particular forms of affordable housing.
    We believe that the establishment of an AHF should not be 
viewed in isolation, but rather in the context of our overall 
affordable housing mission and other regulatory requirements. 
With this perspective in mind, if GSE reform legislation that 
includes an AHF is crafted appropriately, it could be an 
effective means through which we advance our affordable housing 
mission.

Q.2. If we go down the track of creating a housing program or 
housing trust fund for Fannie and Freddie, what is the 
appropriate amount of resources that should be spent, who 
should allocate the funds, and how should the funds be spent?

A.2. Freddie Mac believes that if the enterprises are required 
to fund an AHF, the enterprises' contributions must be tied to 
profitability, rather than based on a poll tax on each 
enterprises' total portfolio, as in H.R. 1427, or new mortgage 
purchases, as in S. 2391. In this way, the success of the fund 
would be more closely tied to the success of the enterprises. 
This type of alignment has been successful for the FHLBs' AHP, 
on which the AHF is modeled.
    There are sound policy reasons for linking AHF 
contributions to profitability. Congress created the 
enterprises to harness private capital to bring liquidity, 
stability and affordability to the nation's housing finance 
system in all economic environments--a vital role, as current 
market conditions demonstrate. When markets are calm and 
business is profitable, the enterprises can make a reasonable 
AHF contribution without significant damage to the residential 
mortgage market. However, a contribution formula based on 
volume of business would not adequately take into account 
adverse economic times--when the enterprises are most needed. 
For example, had either H.R. 1427 or S. 2391 been in effect in 
2007, the enterprises' 2008 AHF contribution would have been 
about $550 million. The resulting decrease in the enterprises' 
capital bases would remove about $17 billion of liquidity from 
the mortgage finance system in 2008.
    In the event the enterprises continue to be subject to 
numerical housing goals and are also required to fund an AHF, 
we believe that allocations to the AHF should be limited in 
recognition of the financial impact of numerical goals.
    If an AHF is created by Congress, we support the approach 
taken in H.R. 1427 and S. 2391 whereby the enterprises' 
regulator would be responsible for the AHF's administration. 
The enterprises do not possess the requisite expertise for 
making grants on a large-scale and for monitoring compliance 
with the terms under which funds would be provided to housing 
and community organizations.
Q.3. Does it make sense to have both housing goals and a 
housing program for Fannie and Freddie?

A.3. We do not believe the enterprises need both housing goals 
and a housing program to help meet the affordable housing needs 
of low- and moderate-income families and families living in 
underserved communities that the housing goals are intended to 
help. In the event legislation includes both provisions, we 
would urge the Congress to take into account the full impact of 
any expansion of the enterprises' affordable housing 
obligations including multiple and potentially overlapping 
housing goals and subgoals, creation of an enforceable duty to 
serve, and establishment of an AHF.
    In summary, it is important that the enterprises have 
objective affordable housing goals to which they are held 
accountable. However, we must ensure that we do not end up with 
too many goals that are too confusing and with too much 
potential to have perverse, if unintended consequences.
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM DANIEL H. 
                              MUDD

    One of the areas that I believe needs more debate and 
vetting is the strengths and weaknesses between affordable 
housing goals, affordable housing programs, and an affordable 
housing fund. Fannie and Freddie have affordable housing goals, 
the Federal Home Loan Banks have an affordable housing program, 
and the House-passed GSE reform legislation would establish a 
new housing fund with goals. The most recent GSE reform 
legislation that passed the Senate Banking Committee did not 
have a housing fund.

Q.1. What are the strengths and weaknesses between the 
affordable housing goals, affordable housing programs, and an 
affordable housing fund like the House approach?

A.1. To achieve the affordable housing goals, Fannie Mae has 
devoted more than half of its business to serving underserved 
families and communities. At the very minimum, the housing 
goals have helped to ensure that the GSEs' effort and 
performance in serving the housing finance needs of low- and 
moderate-income households and underserved areas lined up with 
the performance of the market. More than that, Fannie Mae's 
affordable housing initiatives--including our voluntary 
minority lending stretch goals--may well have helped to 
transform the market. Clearly, more needs to be done because 
too many families and communities remain underserved by housing 
finance, and the current housing correction is hitting 
underserved families harder and threatening the nation's 
progress. But we believe the objective of the affordable 
housing goals has been achieved, as the GSE commitment--and 
achievement--of the goals has promoted significant innovation 
in sustainable affordable housing finance and helped to advance 
homeownership.
    Along the way, a hidden strength of the GSEs' regulatory 
regime was the way in which the goals were integrated into the 
business practices of the two enterprises. The goals provided 
their intended incentives; they encouraged the GSEs to harness 
their human capital, technology, standardization, risk 
management expertise, product development and innovation, and 
capital market access on behalf of the housing finance needs of 
low- and moderate-income families and underserved areas. The 
housing goals encouraged the GSEs to use private-sector 
skills--the skills needed to succeed as a for-profit, 
shareholder-owned company competing in a highly-competitive 
global market--to serve the targeted populations.
    The affordable housing goals are an important part of our 
mission, and Fannie Mae has worked hard to achieve the goals. 
However, we believe that any new legislation should address 
several weaknesses in the current goals regime.
    First, the goals have now exceeded the available market 
opportunities presented to the GSEs. The current housing and 
mortgage market correction, tightened lending standards and 
collapse of lending to borrowers with imperfect credit has 
vastly reduced the supply of loans in the market that meet 
current HUD goals. We recognize that increasing the goals has 
prodded GSEs to do more to meet the nation's affordable housing 
needs and expand homeownership to underserved families and 
communities, and to play a leadership role in the market by 
creating a source of capital for loans that might not otherwise 
have been made. We embrace--and pursue--those objectives in our 
business activities every day. But when the market for goals-
related loans falls below the goal requirements, in spite of 
our best efforts to promote more affordable lending, then the 
goals can encourage market-distorting activities.
    In particular, when the goals exceed actual market 
opportunities, meeting them requires the GSEs to pay a premium 
over market prices--often a substantial premium--for loans that 
meet goals requirements. We are concerned that may promote 
unsustainable lending. One alternative would be to reduce our 
participation in loans that do not meet the housing goals, 
including lending to middle-class families, thus reducing the 
denominator of the goals calculation. That, of course, would 
contradict the liquidity mission for which the GSEs were 
chartered by Congress.
    Second, over time, managing compliance with the goals has 
become increasingly complex. In the 2004 rule-making, HUD added 
three home purchase subgoals to the existing three goals and an 
existing multifamily special affordable subgoal. This new layer 
of complexity has added to the administrative challenges of 
measuring, tracking, and reporting goals performance and 
complying with other aspects of the regulations. The complexity 
has also created situations where the goals and subgoals can 
conflict with one another. For example, because the goals and 
subgoals are measured as a percent of our total business, 
efforts to close a gap in our performance on the low- and 
moderate-income subgoal would make it harder to meet the 
special affordable housing subgoal--unless the purchased loan 
met both subgoals simultaneously.
    Third, the goals are not aligned with the affordable 
housing requirements of other regulated financial institutions 
that participate in the mortgage market--those that have such 
requirements; many do not. For example, the Community 
Reinvestment Act, which applies to banks and thrifts, has rules 
and incentives that differ significantly from the GSE 
affordable-housing goals. Likewise, Fannie Mae and Freddie Mac 
must meet affordable housing goals, while the Federal Home Loan 
Banks, also GSEs, are required only to operate an Affordable 
Housing Program (AHP) that makes grants in support of 
affordable housing developments and first-time homebuyer 
programs. H.R. 1427 contemplates that Fannie Mae and Freddie 
Mac would also be required to contribute to a program similar 
to AHP (though unlike the FHLB program, H.R. 1427 would not 
permit the GSEs to manage the fund). Fannie Mae would encourage 
that legislation to improve GSE affordable lending requirements 
align the goals and incentives of all the players in the 
primary and secondary mortgage market.
    Fourth, recent legislative proposals have included a 
provision that would impose a new duty on the GSEs to serve 
certain underserved markets by increasing the liquidity of 
mortgage investments and improving the distribution of 
investment capital available for mortgage financing for these 
markets. Specifically, the GSE would be required to lead the 
industry in developing loan products and flexible underwriting 
guidelines to facilitate a secondary market in at least three 
specified markets--manufactured housing, affordable housing 
preservation, and rural housing. This new duty to serve 
underserved markets would be in addition to the GSEs' 
continuing commitment to meet affordable housing goals and the 
GSEs' new commitment to contribute to an affordable housing 
fund.
    Fannie Mae stands ready to address the specific housing 
needs identified by Congress as part of a new mission 
framework. However, we are concerned that if this new 
requirement is crafted as an enforceable subgoal and defined in 
a quantitative manner, it would create a burdensome 
inefficiency in our business. We would support Duties to Serve 
that were articulated and enforced in a manner that is flexible 
and consistent with market opportunities, encouraged the GSEs 
to lead the industry with both quantitative and qualitative 
contributions, and that did not impose any additional 
unintended costs on our business to meet these requirements.
    Finally, regarding the strengths of affordable housing 
programs and an affordable housing fund, we believe they 
appropriately provide critical subsidy dollars to the 
affordable lending equation. Absent some form of subsidy, the 
private sector GSE or otherwise cannot reliably finance housing 
that is affordable to the very lowest-income families.
    However, we would offer that a principal weakness currently 
in the nation's housing programs is that affordable housing 
developers need to seek subsidies from multiple sources in 
order to make their projects succeed. The layering of subsidies 
and the complexity of meeting different rules and program 
requirements in the development of affordable housing increases 
``soft'' costs that eat up too much of the scarce subsidy 
dollars. Certainly, the consideration of a new federal program 
financed by GSE dollars would need to address--or at least 
avoid exacerbating this problem.

Below is a brief description of how the housing goals work 
today.

      By statute, a percentage of Fannie Mae's mortgage 
purchases every year must serve targeted segments of the home-
buying public: low- and moderate-income families, families with 
very low incomes, and families living in underserved 
communities. The Department of Housing and Urban Development 
(HUD) sets those goals by regulation. HUD's current 
regulations, promulgated in 2004, increased the housing goals 
levels for 2005-2008, increased the special affordable 
multifamily subgoal, and created new home purchase subgoals.

      For 2007, the annual housing goals were as 
follows: 55 percent of the dwelling units financed by Fannie 
Mae's mortgage purchases must be affordable to low- and 
moderate-income families (families with incomes at or below the 
area median income); 25 percent must be affordable to very low-
income families (families with incomes less than 60 percent of 
area median income) or low-income families living in low-income 
areas; and 38 percent must be affordable to families living in 
underserved areas.

      In addition, the multifamily special affordable 
subgoal sets a minimum dollar volume of qualifying multifamily 
mortgage purchases that Fannie Mae must meet annually. The most 
recent goal was set at $5.49 billion.

      The home purchase subgoals are expressed as 
percentages of the total number of mortgages purchased (rather 
than dwelling units financed by mortgage purchases) by Fannie 
Mae that finance the purchase (not refinance) of single-family, 
owner-occupied properties located in metropolitan areas. For 
2007, the subgoals were as follows: 47 percent of Fannie Mae's 
purchases of home purchase mortgages on single-family, owner-
occupied properties in metropolitan areas must serve low- and 
moderate-income families, 18 percent must serve very low-income 
families or low-income families living in low-income areas, and 
33 percent must serve families living in underserved areas.

Q.2. If we go down the track of creating a housing program or 
housing trust fund for Fannie and Freddie, what is the 
appropriate amount of resources that should be spent, who 
should allocate the funds, and how should the funds be spent?

A.2. Fannie Mae supports the creation of an affordable housing 
fund calculated from net income that is aligned with the 
objectives of the affordable housing goals and strengthens our 
public mission. We believe the most effective approach to such 
a fund would be to link our contribution to our net income, 
rather than the size of our book of business or new loan 
acquisitions. In addition, we believe there should be 
provisions that permit a GSE to suspend payments to the fund if 
the payments would risk a depletion of capital to a level that 
is inconsistent with the GSEs' established capital management 
practices or--since the contribution is based on net income--if 
we were not able to achieve a profit in the previous year.
    Fannie Mae has also stated that we believe the GSEs should 
manage the affordable housing fund, rather than transferring 
company resources to the government or a third party to 
administer the funds. While on the face of it, enabling the 
GSEs simply to ``write a check'' would free us from the 
administrative costs and requirement of managing the fund, we 
believe the most efficient and effective use of the funds would 
be to harness them to enhance our ongoing affordable housing 
efforts including, but not limited to, the goals. In 
particular, if managed by the GSEs, the affordable housing 
funds would permit us to marry this subsidy with our private 
capital investments to more effectively serve underserved 
families and communities. This approach provides a unique 
opportunity to promote affordable housing efforts that are 
scalable and replicable, consistent with the GSE business 
model. GSE management of an Affordable Housing Fund would 
permit--and encourage--us to work directly with, and assist, 
the network of state and local affordable housing partners we 
have built over the years of community investment work. We 
believe the GSEs should manage the fund in regular consultation 
with Congress and our regulator, including filing an annual 
plan and report on our efforts. We should manage the fund, and 
we should be held accountable for the results.
    Conversely, we are concerned that if a separate affordable 
housing program is created with GSE contributions but not GSE 
management, the result would be another federal program--in 
essence, yet another layer of federal affordable housing 
subsidies with its own set of rules. The new program would 
certainly provide more resources for affordable housing, but 
would also increase transaction and other ``soft costs'' that 
would dilute the impact of the new dollars.

Q.3. Does it make sense to have both housing goals and a 
housing program for Fannie and Freddie?

A.3. This is an important issue because of the potential for 
the two combined--meeting the affordable housing goals and 
supporting an affordable housing fund--to impose an inordinate 
and unsustainable cost to the GSEs, ultimately undermining 
their ability to serve the market as a private enterprise. If 
Congress does wish to retain both requirements, Fannie Mae 
believes that housing goals requirements and an affordable 
housing program could exist side-by-side under these 
conditions:

      The combined cost of the affordable housing goals 
and the affordable housing program does not hinder the ability 
of the GSEs to succeed as privately-owned companies in a highly 
competitive market, or impede their core missions of providing 
liquidity and stability to the broader housing finance system;

      The housing goals requirements are consistent 
with the realistic market opportunities for the secondary 
market, such that the goals do not impose inordinate costs on 
the companies in addition to the amount required to support the 
affordable housing fund; and

      The requirements are integrated: That is, the 
GSEs should be able to apply the affordable housing fund 
resources to help the companies to address the other mission 
requirements established by Congress in the legislation.

    Ultimately, we believe that in establishing GSE affordable 
housing requirements--housing goals and/or housing fund, or 
otherwise--it is important to recognize that we fulfill our 
public charters through private enterprise. That means 
permitting the enterprises to harness and pursue private sector 
efficiencies, strategies, innovations. It also means 
recognizing that market forces are an important consideration. 
Finally, it means bearing in mind the trade-offs that are 
inherent in the use of private capital in lieu of public 
funding to achieve a national policy goal. To be specific, the 
requirements of private enterprise include marshaling, 
conserving and deploying capital wisely; maintaining a high 
degree of financial safety and soundness; managing business and 
financial risk; being competitive; and being profitable in 
order to provide a return to shareholders who finance the 
enterprise.
    Fannie Mae is deeply committed to our affordable housing 
mission, and we recognize that fulfilling that mission requires 
us to operate as a successful, ongoing enterprise. We believe 
that Congress has a unique opportunity to modernize our 
affordable housing requirements for the betterment of both the 
GSEs and low- and moderate-income homeowners and renters. We 
look forward to working with you to achieve that goal, and 
thank you for the opportunity to share our views.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


      REFORMING THE REGULATION OF GOVERNMENT-SPONSORED ENTERPRISES

                              ----------                              



                        THURSDAY, MARCH 6, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The committee met at 10:05 a.m., in room 538, Dirksen 
Senate Office Building, Hon. Christopher Dodd, chairman of the 
committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The committee will come to order. I am told 
that Senator Shelby will be here at some point, but has an 
Appropriations Committee hearing this morning and so will be a 
little bit delayed. I see Senator Reed and Senator Corker are 
here, and I appreciate my colleagues' participation. I want to 
thank all of our witnesses, as well.
    The committee this morning is holding our second hearing on 
the topic of reforming the regulation of the government-
sponsored enterprises. In February, we heard from the Treasury 
Department and regulators from the two enterprises. Today, we 
will hear from the Government Accountability Office as well as 
a host of interested and knowledgeable parties with 
considerable housing expertise.
    As I mentioned at our last hearing, under the very able 
leadership of Senator Richard Shelby, this committee 
established a very substantial record on the GSE issue over the 
course of the previous two Congresses, and I want to reiterate 
what I have said previously about Senator Shelby and his work, 
having been a member of those committees, obviously, and how 
important those hearings were.
    This hearing adds, I think, to the significant body of work 
that we have accumulated on this subject matter, and as I said 
at the last hearing, the current crisis in the mortgage markets 
underscores the need to have strong and healthy housing GSEs. 
The FHA and conforming conventional markets are the only parts 
of the mortgage market system that in my view are operating 
effectively today.
    Both Fannie Mae and Freddie Mac, each of whom have just 
recently brought their financial reporting up to date, 
announced serious losses for 2007. In 2007, Freddie Mac 
experienced its first ever annual loss, and Fannie announced 
its first annual loss in over 20 years. Despite these problems, 
however, and in part because of improved oversight by OFHEO, 
both of these bodies are doing one of the important jobs for 
which they were created, and that is maintaining liquidity in 
the mortgage markets.
    Unfortunately, some recent announcements by the enterprises 
raise questions as to how committed these institutions are to 
continue to meet this obligation going forward. Both Fannie Mae 
and Freddie Mac have announced plans to raise costs or limit 
access to credit in areas that may be in most need of 
affordable credit. Again, I know I am going to hear about 
safety and soundness, and that is very, very important, but 
these institutions were created for unique purposes here, and 
the fact that we are maybe not addressing some of the 
underlying areas raises questions in this Senator's mind. These 
kinds of plans will exacerbate, in my view, the credit cycle 
rather than mitigate its negative effects. In my view, this is 
a curious policy for a government-sponsored enterprise to 
pursue.
    In any case, there is broad agreement that we need a strong 
single regulator for all the housing GSEs with the authority 
over safety and soundness and mission, with the power to set 
capital commensurate with the risk, to issue cease and desist 
orders, to require prompt correction action, and to correct 
unsafe practices or conditions. We also need a strengthened 
commitment to housing affordability for low-income families as 
well as middle-class families, for renters as well as 
homeowners, and for homeowners at risk of losing their homes 
because of the terrible lending practices that we have seen 
over the past several years. It is my hope to move legislation 
to achieve all of these outcomes as soon as we possibly can.
    Before turning to my colleagues, I want to take brief note 
of the speech given by Federal Reserve Chairman Bernanke 
earlier this week. Chairman Bernanke has now advocated for the 
kind of bold action that I and others have been arguing for as 
needed to address the housing crisis that has spread more 
broadly to the capital markets, causing significant damage to 
the rest of our economy. As all of you know, or many of you 
know, I am drafting legislation to put part of these ideas, a 
plan in action. There is nothing that is written in marble 
about these ideas, or concrete, but I commend Chairman Bernanke 
for recognizing that just assuming market forces can somehow 
straighten all of this out is probably naive and that we need 
to step forward with some bolder ideas. I welcome the speech he 
gave in Florida just a few days ago, and obviously I look 
forward to working with all of my colleagues here on trying to 
develop some ideas that we can go forward on.
    I am disappointed that we have been unable over the last 
couple of weeks here to come forward with some ideas that I 
thought would enjoy pretty broad bipartisan support. I 
recognize to try and come up with something that may be novel 
or unique or relatively unique would probably be more than the 
institution could tolerate in a short amount of time, but my 
hope is in some of these other areas, we might have been able 
to move forward. I am still hoping that will be the case before 
we adjourn for the March break, but I am not terribly 
optimistic that is going to happen.
    I also want to invite, of course, Chairman Bernanke to work 
with us on this committee to get the kind of legislation that I 
think could make a difference in the foreclosure crisis area, 
and I want to urge Secretary Paulson to join the effort, as 
well, and I intend to ask today's witnesses about their views 
and the best way to address the current crisis in the question 
and answer period.
    With that, Senator Shelby is not here, but let me turn to 
Senator Corker. You were here and arrived earlier, so let me 
ask you if you have any opening comments you would like to 
make, and if not, Senator Bennett, and then we will turn to 
Senator Reed.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Mr. Chairman, thank you. I think this is a 
great hearing, again, and as usual, I really don't have any 
opening comments. I like to hear the witnesses.
    But I will tell you, I do hope that as it relates to the 
housing issue, that we can do something in regular order and 
really work something out that maybe tries to really focus on 
the problem. The things that we have seen come forth informally 
have been a hodgepodge of things that focus on irrelevant parts 
of the problem, and I just want you to know that certainly I 
would look forward to sitting down and focusing on targeted 
efforts that really are aimed at solving a problem versus those 
that just are a collage of things that bail out various 
industries that have nothing whatsoever to do with the actual 
credit problem itself.
    But with that, I thank you and look forward to these great 
witnesses testifying.
    Chairman Dodd. I appreciate it. By the way, as I have said 
both privately and publicly about Senator Corker, we are 
delighted to have you as a new Member of this Committee, 
someone who has spent a good part of his life engaged in this 
business, and so brings some very practical and solid 
background in dealing with questions. Having, I think, the 
10,000 low-income housing units that exist in Chattanooga, 
Tennessee today, for a variety of reasons not the least of 
which there was someone named Bob Corker who made a difference 
in leading that effort, so he cares about these issues and has 
a long history of being involved in them.
    So we welcome your knowledge and your background and 
expertise, and obviously focusing on the problem is the 
critical question. Also trying to mitigate the effects of the 
problem is something we need to look at, as well, and I know 
the Senator cares about that as much as I do.
    Senator Corker. Thank you.
    Chairman Dodd. So I thank you very much.
    Senator Reed, any opening comments?

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you, Mr. Chairman. Thank you for 
holding this hearing along with Senator Shelby, and I want to 
welcome all the witnesses. We rely extensively on your 
expertise, your experience, and your profound interest in these 
issues. I am particularly pleased to see Nancy Andrews here 
from the Low Income Investment Fund, and we will talk a little 
bit about affordable housing funds, I hope.
    We have made progress in terms of establishing, I believe, 
the consensus that the Chairman reflected that we do need a 
strong independent regulator. The question of details is still 
being sorted out, but that is a position I think we all share.
    But within the context of this legislation, I think we also 
have to commit ourselves to affordable housing. The House has 
taken, I think, a very substantial movement in this direction 
and I hope we can match it.
    What we are seeing is historic foreclosures taking place. 
In fact, I think the Mortgage Bankers are releasing a report. 
Unfortunately, we are setting a record, and we are also setting 
a record in those people falling behind in their payments so 
foreclosure is 1 month or 2 months away for many.
    One of the ironies here is it is putting additional 
pressure on the rental housing market. As people are thrown out 
of their homes, where do they go? And in my State of Rhode 
Island, I think it is not uncommon, Connecticut and elsewhere, 
we don't have a situation where we have got these huge track 
homes that were overbuilt, like in California, Florida, or 
Nevada, et cetera. We have a defined base of houses, 
residences. What has happened, we have a credit bubble. The 
price has been driven up and now it can't be afforded. And so 
you are throwing people out of homes into rental situations and 
there is not an expansion of the rental property market. It is 
the perfect storm.
    So I think we can't, as we move forward with GSE reform, 
neglect our obligation to continue to provide affordable 
housing through renovation, construction, expansion of the 
rental market particularly, and some home ownership.
    I hope we can make progress. There are several things we 
must do. I think at the very top of the list is GSE reform with 
an affordable housing component. I look forward to the 
testimony.
    Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Mr. Chairman, you and I have been on this 
committee long enough to know that the GSE soap opera has gone 
on for far too long. We have had the hearings on the restating 
of earnings. We have had some conversation that comes close to 
being public flogging of some of the executives of the GSEs. 
And then ironically when the subprime crisis hits, the GSEs 
emerge as the heroes because they are the only ones that have 
any money left to make it possible for people to refinance or 
hang on to their homes. It is time we brought the soap opera to 
a close, created the strong regulator that we have been saying 
for years we need, and I salute you for your determination to 
do that.
    With that, I look forward to the witnesses.
    Chairman Dodd. Well, thank you very, very much, and let me 
introduce our witnesses briefly and then I will ask you to try 
and limit your comments to somewhere around 5 to 7 minutes, if 
you could.
    Let me just inform all of my colleagues as well as our 
witnesses that all of your testimony and any supporting 
documentation you think would help us understand your testimony 
better will be included as part of the record. So even though 
your remarks may be relatively brief and your prepared 
testimony may exceed that time, I want to make sure that it is 
going to be included in the record of the committee's hearing 
this morning.
    Our first witness is Bill Shear. Bill, we thank you for 
being with us. He is Director of Financial Markets and 
Community Investment of the U.S. Government Accountability 
Office. Mr. Shear has directed substantial bodies of work 
addressing the Small Business Administration, the Federal 
Housing Administration, regulation of the housing GSEs, the 
Rural Housing Service, and Community and Economic Development 
Programs, and brings a wealth of experience and knowledge to 
the subject matter.
    Vince Malta is the Chairman of the Public Policy 
Coordinating Committee of the National Association of 
REALTORS. He is also a co-owner of Malta and Company, located 
in San Francisco. He has received numerous awards, including 
the Wall Street Journal Award for his leadership in business 
and REALTOR of the Year for San Francisco in 1996 and for the 
State of California in 2006.
    Mr. Kieran Quinn is our third witness, a good friend, 
Chairman of the Column Financial, a Credit Suisse mortgage 
lending subsidiary for multi-family and commercial properties 
based in Atlanta, also the Managing Director of Credit Suisse. 
Mr. Quinn is Chairman of the Mortgage Bankers Association, and 
Kieran, we thank you for being with us this morning.
    Jerry Howard is the Executive Vice President and Chief 
Executive Officer of the National Association of Home Builders. 
Prior to joining NAHB, Jerry served as the chief lobbyist for 
the National Council of State Housing Agencies, where he was 
instrumental in the development of low-income housing tax 
credits as part of the Tax Reform Act of 1986. He came to this 
area as tax counsel in 1988 and served in a variety of roles, 
including the chief lobbyist for the Home Builders. Jerry was 
promoted to Executive Vice President and Chief Executive 
Officer in 2001, so he has had a long history. Jerry, I am 
pleased to see you again. You have been very helpful in the 
past.
    And finally, Nancy Andrews. Nancy, we thank you for being 
here, as well, this morning. She is President and Chief 
Executive Officer of the Low Income Investment Fund. It is low 
income investments in capital and technical assistance 
activities that have supported the development of 54,000 
affordable homes for families and children, 47,000 spaces of 
child care, and 41,000 spaces in school facilities for low-
income communities across the country. This Low Income 
Investment Fund targets the poorest of the poor, and you have 
been very successful and we commend you for your efforts and 
look forward to hearing from you this morning, as well.
    With that, Bill, we will hear from you first, then work 
down the line, and after that we will begin our questioning.

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL MARKETS AND 
     COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Shear. Mr. Chairman and Members of the Committee, I am 
pleased to be here this morning to discuss Federal oversight of 
the housing Government-Sponsored Enterprises. Fannie Mae, 
Freddie Mac, and the Federal Home Loan Bank System continue to 
play a critical role in the nation's housing finance system. In 
this oral statement, I will focus on the second section of our 
written statement, addressing the current GSE regulatory 
structure. Simply put, I will emphasize why the establishment 
of a single Federal regulator with adequate authorities to 
oversee all housing GSE activities is critical to helping 
ensure that the housing GSEs' financial soundness is secure 
while they continue to provide housing opportunities for 
American families.
    The current housing GSE regulatory structure is fragmented 
and not well equipped to oversee their financial soundness or 
their housing mission achievement. The Office of Federal 
Housing Enterprise Oversight, called OFHEO, is responsible for 
safety and soundness oversight of Fannie Mae and Freddie Mac, 
while the Federal Housing Finance Board is responsible for 
safety and soundness and mission oversight of the Federal Home 
Loan Bank System. Both regulators lack key statutory 
authorities to fulfill their safety and soundness 
responsibilities as compared to the authorities available to 
Federal bank regulators.
    Moreover, HUD, which has housing mission oversight 
responsibilities for Fannie Mae and Freddie Mac, faces a number 
of challenges in carrying out its responsibilities. In 
particular, HUD may not have sufficient resources and technical 
expertise to review sophisticated financial products and 
issues.
    Creating a single housing GSE regulator could better ensure 
consistency of regulation among the GSEs. A single regulator 
would be better positioned to consider potential tradeoffs 
between mission and safety and soundness.
    While critics of combining safety and soundness with 
mission have voiced concerns that doing so could create 
regulatory conflict for the regulator, we believe that a 
healthy tension would be created that would lead to improved 
oversight. In addition, a single regulator could be more 
independent, objective, efficient, and effective than separate 
regulatory bodies and could be more prominent than either one 
alone. We also believe that valuable synergies could be 
achieved and expertise in evaluating GSE risk management could 
be shared more easily within one agency.
    Finally, I want to emphasize that to be effective, the 
single regulator must have all the regulatory oversight and 
enforcement powers necessary to address unsafe and unsound 
practices, respond to financial emergencies, assess the extent 
to which the GSE's activities benefit home buyers and mortgage 
markets, and otherwise ensure that the GSEs comply with their 
very important public missions.
    Mr. Chairman, it is a privilege to be here. I would be 
happy to respond to any questions.
    Chairman Dodd. Thank you very much, Mr. Shear.
    Mr. Malta, for the record, thank you for being here.

 STATEMENT OF VINCENT E. MALTA, CHAIR, NATIONAL ASSOCIATION OF 
        REALTORS, PUBLIC POLICY COORDINATING COMMITTEE

    Mr. Malta. Chairman Dodd, Senator Shelby, and Members of 
the Committee, thank you for inviting me to testify on the 
important issue of Government-Sponsored Enterprise reform. My 
name is Vince Malta and I am the broker owner of Malta and 
Company, a San Francisco-based real estate sales and management 
firm. I am also the 2008 Chair of the Public Policy 
Coordinating Committee of the National Association of 
REALTORS, and I serve voluntarily on Fannie Mae's National 
Housing Advisory Council.
    Today, I am here to share the views of more than 1.3 
million REALTORS who engage in all aspects of the real estate 
industry. Fannie Mae and Freddie Mac are our partners in the 
real estate industry. We want to keep them strong and sound.
    REALTORS support H.R. 1427, the Federal Housing Finance 
Reform Act of 2007, which overwhelmingly passed the House of 
Representatives on May 29, 2007, and we are eager for the 
Senate Banking Committee to pursue similar GSE reform 
legislation focused on several key elements which are detailed 
in my written testimony.
    In the interest of time, my remarks will focus on two 
points. First, the GSEs need a strong regulator and strong 
corporate governance. Oversight of Fannie Mae, Freddie Mac, and 
the Federal Home Loan Banks should be transferred to a new 
regulator which has the authority to set capital standards, 
liquidate a financially unstable enterprise, and approve new 
programs and products. The regulator also should understand and 
support the GSEs' vital housing finance mission and the role 
housing plays in supporting the national economy.
    Second, REALTORS ask that Congress permanently raise the 
GSE loan limits. While we greatly appreciate the loan limit 
increase included in the economic stimulus package, it will not 
be in place long enough to alleviate the current credit crisis. 
NAR urges the Senate to permanently increase the national 
conforming loan limit to $625,500 or higher. In addition, for 
high-cost areas, the conforming loan limit should be 
permanently increased to 125 percent of the local median home 
sales price, but not exceed $729,750.
    Increasing the national GSE loan limit to $625,500 with an 
additional increase of 125 percent of the local median home 
sales price in high-cost areas would boost the housing market 
and the economy in a number of ways. More affordable loans will 
help bolster home buyer confidence and bring people back into 
the marketplace. That can mean as many as 348,000 additional 
home sales, lower inventories, and a two to 3 percent increase 
in home prices. A boost in home prices could reduce the number 
of foreclosures by as many as 210,000 by making it easier for 
consumers to refinance or sell.
    According to our estimates, the new limits would enable 
more than 500,000 borrowers with loans above $417,000 to 
refinance to lower interest rates. While jumbo mortgages may be 
associated with luxury housing in some parts of the country, 
they have become the primary option for large numbers of 
working-class people who live and work in more expensive areas 
of the country, like my home State in California.
    There is precedent for regional adjustments for high-cost 
areas. In 1980, Congress designated Alaska, Hawaii, Guam, and 
the U.S. Virgin Islands as high-cost areas. The conforming loan 
limit in these statutory high-cost areas is 50 percent higher 
than the rest of the nation. However, housing prices in many 
areas of the country now exceed those in Honolulu, for 
instance. Additional increases in the loan limits in such areas 
will ensure that borrowers and homeowners across America have 
access to the same low-cost mortgages. Let us not forget that 
by raising the GSE loan limits, we could stimulate $44 billion 
in additional economic activity.
    Again, REALTORS urge the Senate to increase the national 
conforming loan limit to no less than $625,500 and to make the 
conforming loan limit increase for high-cost areas as provided 
in the economic stimulus legislation permanent.
    In conclusion, Fannie Mae and Freddie Mac are vital to the 
housing sector for providing liquidity and stability in the 
mortgage market. Targeted reforms should strengthen and expand 
their presence in the housing finance system, especially now 
when we need them the most. The National Association of 
REALTORS pledges to work with the Senate to enact GSE reform 
legislation that achieves our mutual goals and protects the 
vibrancy, liquidity, and stability of the housing finance 
system today and for many years to come.
    Thank you again for the opportunity to testify and I will 
be happy to answer any questions.
    Chairman Dodd. Thank you very much, Mr. Malta. We 
appreciate it very much.
    Kieran, we thank you for being here. I don't know if you 
have the MBA data that is coming out this morning, if you have 
that with you already----
    Mr. Quinn. I have some highlights. We don't release it 
until 10, even to me.
    [Laughter.]
    Chairman Dodd. It is already on the website here, but 
welcome. We are happy to hear your delinquency rates are--the 
numbers I am getting are 5.82 percent for all loans. That is an 
all-time high since MBA has collected data, I am told, on 
delinquency rates. Loans in foreclosure, 2.04 percent. That is 
another record high. Fourteen-point-forty-four percent of 
subprime loans are either seriously delinquent or in 
foreclosure, an increase of over 3 percent for the third 
quarter and nearly double for last year. Those are some notes I 
have received. Welcome.

   STATEMENT OF KIERAN P. QUINN, CHAIRMAN, MORTGAGE BANKERS 
                          ASSOCIATION

    Mr. Quinn. Thank you. Mr. Chairman and Members of the 
Committee, thank you for the opportunity to testify for the 
Mortgage Bankers Association today.
    First, I would like to thank Congress and the 
administration for the swift action on the stimulus package 
last month. The temporary increase in loan limits for FHA, 
Fannie Mae, and Freddie Mac will help consumers by increasing 
mortgage financing options and will particularly help restart 
the securitization market for higher-cost housing markets like 
California and parts of New England and New York.
    Fannie Mae and Freddie Mac, the GSEs, are critically 
important in mortgage financing. MBA strongly supports the role 
the GSEs play in maintaining and improving liquidity and 
stability in the secondary mortgage market. For these reasons, 
MBA has long advocated regulatory reform to ensure that GSEs 
are operating in a safe and sound manner, engaging in 
activities consistent with their charter purposes, and are 
subject to reasonable affordable housing goals that do not 
distort the market.
    My written statement is comprehensive, so I will touch on a 
few highlights here.
    There seems to be general agreement on the fundamental 
tools the new regulator will need. MBA is particularly 
interested in the powers of the regulator related to the review 
and approval of GSE activities, ongoing and new. The new 
regulator should be given the explicit authority and direction 
to ensure the GSEs' activities are permitted by their charters 
and other applicable law. Though MBA would suggest a few 
improvements, we believe the product approval and activity 
review language in the House-passed bill is an improvement over 
current law and heads in the right direction to satisfy 
industry concerns that the GSEs remain true to their missions 
and authorities.
    We support the creation of an Affordable Housing Fund and 
appreciate the provision in the House-passed bill that would 
calculate the amount of the GSEs' contribution to the 
Affordable Housing Fund on the size of its portfolio rather 
than its net income. This approach would make it more difficult 
for the GSEs to pass the costs of their contribution on to 
mortgage lenders and to consumers. It would also establish a 
monetary connection between one of the benefits derived by 
their government sponsorship, lower capital costs, to their 
charter-based affordable housing obligations. If the funds are 
distributed by formula to State and local agencies to 
administer, MBA recommends a process similar to the HOME 
program be used so that both cities and States receive an 
allocation and have the ability to target those funds to areas 
of greatest need.
    MBA maintains the GSE portfolios are important tools that 
augment their ability to help stabilize mortgage markets and 
encourage affordable housing. Because these markets are so 
dynamic, the GSEs need flexibility to adjust their portfolios 
in response to changing conditions and marketplace needs.
    Similarly, the GSEs' regulator also must have sufficient 
flexibility to adjust to changes in the GSEs' risk profile or 
other market circumstances as it regulates GSEs' portfolios. 
The House-passed bill's treatment of portfolio regulation is 
consistent with MBA policy.
    Another important tool is the ability of the regulator to 
set and adjust minimum and risk-based capital levels for GSEs. 
MBA supports a flexible bank-like regulator approach to capital 
regulation.
    Finally, Congress should strengthen both the secondary 
mortgage market and the Federal Home Loan Banks by expressly 
affirming the banks are authorized to securitize mortgage 
loans.
    Thank you, Mr. Chairman, and we look forward to continuing 
to work with you and this committee on this important matter.
    Chairman Dodd. Thank you, Kieran, very much.
    Mr. Howard.

  STATEMENT OF GERALD M. HOWARD, EXECUTIVE VICE PRESIDENT AND 
 CHIEF EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Howard. Chairman Dodd, Members of the Committee, thank 
you for the opportunity to testify here today. I think you are 
hearing overall consensus that we need swift action on GSE 
regulatory reform.
    The GSEs are critical components of the nation's housing 
finance system. Their mission is to play a vital role in 
maintaining mortgage market liquidity and stability and 
promoting affordable housing. It is important, therefore, that 
the GSEs remain financially safe and sound and focused on their 
Congressionally chartered purposes.
    The GSEs offer tremendous potential to relieve the 
liquidity problems in the nation's mortgage markets and bring 
immediate benefit to the overall economy. With the U.S. housing 
market experiencing the most severe downturn since the Great 
Depression, the benefits of the housing GSEs are needed more 
than ever. Unfortunately, the GSEs are not currently fulfilling 
their potential due both to corporate reticence and 
deficiencies in the current regulatory framework.
    NAHB believes that Fannie Mae and Freddie Mac have not 
accomplished as much as they should, particularly in the area 
of the subprime mortgages. Rather than aggressively pursuing 
market solutions, they are hunkering down in a defensive 
position far from the front lines of mission achievement. In 
addition, both companies are imposing a multitude of additional 
fees that will raise mortgage borrowing costs for the very 
individuals and families who are the most in need of the GSEs' 
benefits. Fannie's and Freddie's response to the mortgage 
credit crisis should be activities to stabilize markets and 
fill funding gaps, not take steps to tax already struggling 
mortgage borrowers.
    Fannie Mae and Freddie Mac are confined by their charters 
to the conforming loan limit and thus have not been able to 
provide assistance to the jumbo market. NAHB appreciates the 
recently signed economic stimulus package that provides for a 
temporary increase in the conforming loan limit in high-cost 
markets. Expanding the dimensions of the conforming market is 
an important step toward restoring the stability and liquidity 
in the broader mortgage markets.
    However, the bifurcated system for regulating Fannie Mae 
and Freddie Mac will remain a major impediment to effective 
mission pursuit by the GSEs. This convoluted system is simply 
not working. Until last week, OFHEO maintained restrictive 
limits on the portfolio purchases of Fannie and Freddie and 
OFHEO continues to impose a 30 percent capital surcharge on 
both companies. These restrictions have hamstrung the 
enterprise.
    Further, there is poor or nonexisting coordination between 
OFHEO and HUD. There is also indifferent mission oversight from 
HUD, which should be requiring more, not less, in the present 
dire market circumstances. Clearly, regulatory reform is long 
overdue and urgently needed.
    To that end, NAHB appreciates this committee's commitment 
to enacting legislation to improve and bolster the regulatory 
framework for the housing GSEs. Although there are a myriad 
array of factors and ingredients to consider in the current 
reform debate, given the time here, I will leave NAHB's 
detailed views to my written statement.
    Nevertheless, NAHB believes this process can be a success 
without undercutting the GSEs' housing mission if the following 
areas are addressed. One, balancing housing with safety and 
soundness concerns. Two, maintain the GSEs' flexibility to 
respond promptly within their charters to market needs. Three, 
extend the increase of conforming loan limits in high-cost 
areas. Four, focus and enhance the GSE benefits to expand 
affordable housing opportunities. Five, employ capital as the 
precise instrument of risk management. And six, preserve the 
GSE portfolios as tools for achieving liquidity and affordable 
housing mission.
    Single-family housing starts are already down by 60 percent 
from their peak in the beginning of 2006 and the bottom is not 
yet in sight. Moreover, this dramatic contraction has exacted a 
heavy toll on economic growth and employment during the past 2 
years and is now pushing the U.S. toward the brink of 
recession. With decisive and appropriate action on behalf of 
this committee, Congress, and the administration, passage of a 
comprehensive GSE reform bill has the ability to greatly 
relieve liquidity and inventory pressures in the mortgage 
credit markets, help stabilize housing prices, and bolster 
consumer confidence and thus bring benefit to the overall 
economy.
    Mr. Chairman, NAHB congratulates you for your leadership in 
this regard and we look forward to working with you and I am 
prepared to answer any questions.
    Chairman Dodd. Excellent testimony. I appreciate it very 
much, as well.
    Ms. Andrews.

   STATEMENT OF NANCY ANDREWS, PRESIDENT AND CHIEF EXECUTIVE 
              OFFICER, LOW INCOME INVESTMENT FUND

    Ms. Andrews. Thank you, Chairman Dodd and Members of the 
Committee. My name is Nancy Andrews. I am the President and the 
CEO of the Low Income Investment Fund. We are a national 
Community Development Financial Institution, a CDFI, and our 
mission is poverty alleviation.
    I have three points that I want to make. First, having 
safe, sound, and strong GSEs focused squarely on the mission of 
affordable housing is essential.
    Second, deeply targeted affordable housing must be a part 
of any GSE reform effort, and the creation of the Affordable 
Housing Fund will accomplish this.
    And finally, the formation of the Capital Magnet Program as 
envisioned by Senator Reed will have the greatest impact for 
leveraging capital to serve deep-reach projects in very low-
income communities.
    The need for affordable housing is tremendous. We see it 
every day in the communities that we work in and it is growing. 
The National Low Income Housing Coalition estimates that there 
is a deficit of over five million units affordable to very low-
income families. We respond to this problem by providing 
capital when banks cannot or will not lend. Three-fourths of 
everything we do serves families that are below 50 percent of 
median income. That is very low-income families. And yet over 
two decades of work, we have suffered capital losses of less 
than one-tenth of 1 percent.
    The track record of my organization is not unique. It is 
mirrored by Community Development Financial Institutions all 
over the country, and in my written testimony, I have included 
examples in each of the States for the members on this 
committee so that you can see what is being done in your area.
    My very first point is a belief that a strong and sound GSE 
system is essential to healthy housing markets, but we also 
support strengthening the goals, the affordable housing goals, 
particularly multi-family and refinance goals proposed by 
Senator Reed. GSEs must lead the market and they must also lead 
us in tackling the subprime problem.
    There is a part of the housing production spectrum, 
however, that they have not yet been able to reach well, and 
that is producing affordable rental housing and ownership 
housing for very low and extremely low-income families, and 
this leads to my second point. We support Senator Reed's 
proposal to create an Affordable Housing Fund, requiring the 
two agencies to set aside 4.2 basis points of each dollar of 
new business. This does not include the Federal Home Loan Banks 
because they already have their own program. But 65 percent of 
this set-aside would go into an Affordable Housing Block Grant 
Program that would be distributed to the States by formula, and 
in its first year would be dedicated to the subprime crisis. 
After that, it would support the production of deeply 
affordable housing for very low-income and extremely low-income 
families.
    My third point is to endorse the Capital Magnet Fund as 
proposed by Senator Reed with the set-aside of the remaining 35 
percent of the Affordable Housing Fund. The purpose of this 
fund would be to leverage private dollars with GSE dollars and 
expand housing opportunities and economic opportunities in very 
low-income communities.
    CDFIs across the country leverage $19 for every one dollar 
of Federal support that they receive. We would use the Capital 
Magnet Fund to use the resources that GSEs earn, partly on the 
strength of their special relationship with the government, and 
we would put them to work more effectively than Freddie or 
Fannie can do independently serving these deep-reach 
populations.
    So in conclusion, we believe that the GSEs can and must 
play a stronger role supporting housing that is deeply 
targeted. They must also be financially sound, and this comes 
first. But working with the GSEs, we believe that we can draw 
private investment into projects that they would not otherwise 
be able to support. We can do this safely, we can do it 
soundly, and we can multiply the impact of their investment 
many times over. It is the combination of strengthened goals 
with the Affordable Housing Block Grant Program and the Capital 
Magnet Fund that we believe will create a formula of success, 
allowing the GSEs to reach more deeply than ever before.
    Thank you, and I will be happy to take questions.
    Chairman Dodd. Thank you very, very much for your 
testimony. I thank all of you for your testimony and the 
brevity. You did a good job at getting through that as well.
    I will set the clock here for about 7 minutes per member. 
There are few of us here, so we should be able to move around 
fairly quickly on all of this.
    Let me, if I can, just let me begin with something I raised 
early on, and that was the issue of this whole question of what 
has gone on recently with the GSEs regarding providing their 
worth in the current crisis. The discriminatory pricing system 
is of some concern to me, usually with regards to certain 
cities and ZIP codes. Doesn't it at least partially undermine 
the benefit of the GSEs--some of you raised this issue and it 
is of concern to me and I want all of you to comment, if you 
could, on it, if you are interested--by raising prices and/or 
credit standards in neighborhoods where credit may already have 
disappeared?
    These are Government-Sponsored Enterprises. The very notion 
here was for them to be in areas where traditional market 
opportunities are not going to be there, and to the extent they 
are tightening up in the very areas we are looking for help in 
here sort of undermines the very purpose, or at least one of 
the purposes of their existence. I wonder if anyone wants to 
comment on that, as well. My concern is Fannie and Freddie are 
designed to help alleviate some of these problems and in a 
sense we are making it worse in certain areas rather than 
contributing to the benefit.
    Mr. Malta.
    Mr. Malta. Senator, we agree wholeheartedly. Our members 
are greatly concerned about the effect this will have on the 
market when we need Fannie and Freddie the most. NAR believes 
these policies will make home buying less affordable, and we 
have questioned the disparate impact of the policies on 
minorities in low-income areas, especially when the average 
down payment for first-time home buyers are 2 percent in those 
instances. NAR raised our concerns with the GSEs. We will be 
talking with them some more. Doing it by ZIP code is wholly 
inadequate. Properties should be based on their own merit by 
property and not by ZIP code.
    Chairman Dodd. Are we getting near a redlining sort of 
approach here that has occurred in the past?
    Mr. Malta. We have heard those arguments, but again, we 
believe a property-by-property analysis, not done on ZIP code. 
In my area, one block makes a huge difference as to whether a 
market is declining or not for a variety of reasons--views, 
schools, et cetera.
    Mr. Howard. The Home Builders agree with that, Mr. 
Chairman. I have to tell you that we are appalled at the 
increases that Fannie and Freddie are putting on home buyers at 
just the absolute worst time. We think it is total disregard 
for their mission statement.
    But on the other hand, it also, I think, evidences the 
failure in the current regulatory system. Their safety and 
soundness regulator has been so strident, so aggressive in his 
regulatory efforts while the counter-regulator for housing 
mission has not been as aggressive. It shows the failure in the 
system and the need for the instant legislation.
    Chairman Dodd. Does anyone else want to comment on this 
issue?
    Mr. Shear. I would like to add to that. It is a classic 
conflict, even without commenting directly on the risk-based 
pricing that is involved, it is a classic conflict between 
mission achievement and safety and soundness. This is one of 
the reasons why we think that the current inability to look at 
these sophisticated corporations in a whole way, and why a 
single regulator that does deal with that conflict is so 
important.
    Chairman Dodd. Let me bring up--Mr. Howard raised an issue 
here that is one of the contentious points in this legislation 
as we look at it. Everyone is for a strong regulator. There are 
certain matters we all agree on here. There is no debate about 
it. It is when you get into the details here that you find some 
divisions occurring, and one of the areas of some division is 
to what extent with innovative products you have to get a 
comment period, this concern that if we are going to require 
that, you are going to limit the ability of the GSEs to respond 
promptly to new ideas and that many of these ideas aren't 
terribly new in many ways.
    Mr. Howard, in your testimony, you seemed to indicate, at 
least part of your testimony as I listened to you and read the 
testimony here, you are concerned that this may limit the 
ability of GSEs to be creative and innovative. And yet others 
seem to be arguing somehow that this is exactly the kind of 
thing we want to limit, in effect, from the GSEs. Do I 
understand your testimony correctly----
    Mr. Howard. Yes, sir.
    Chairman Dodd [continuing]. Your concern about that? And 
how do you feel about that, Mr. Shear? This is new program 
approval, is what I am talking about.
    Mr. Shear. I know, and we think new program approval is a 
very important function because the GSEs are meant to serve a 
public mission and they have certain charter responsibilities. 
Having said that, what we are looking for is a regulatory 
framework that really treats what is a new program by making 
the distinctions as to whether it is contributing to the 
mission or causing the GSE to go outside of its mission 
boundaries.
    So there has to be a reasonableness in terms of how we 
define a new program or activity. I don't think anyone is 
saying that changing underwriting standards a little bit 
results in a new program or a new activity, but there has to be 
a balance that is created to allow some innovation without 
allowing the GSEs to go outside their charter boundaries.
    Chairman Dodd. On page nine of your testimony here, you 
listed the areas where you thought these powers ought to be, 
the cease and desist authority, removal and prohibition 
authority related to officers and directors, prompt corrective 
action authority for inadequate capital and other unsafe and 
unsound conditions, authority to resolve critically 
undercapitalized GSEs. You sort of left out this area that I 
just talked about.
    I don't disagree at all with what you are just saying, but 
the question is whether or not we are going to give 
extraordinary power to the new regulator here that would 
somehow make it more difficult for the new approval process to 
go forward. Am I am reading you correctly? If you have got a 
strong regulator, you are less worried about specifically 
requiring that kind of comment period and so forth that is 
being suggested by some?
    Mr. Shear. The comment period, we haven't evaluated the 
comment period, but I will just make the observation that in 
many cases, you don't want a period that goes on too long. So 
we really don't have a position on the comment period, but we 
are very mindful of the idea that when introducing innovation 
in a marketplace sometimes there is a need for response. There 
is some accommodation of that in the current authority that HUD 
has, but as you know, we have concerns about HUD as a mission 
regulator. As to safety and soundness, there has to be an 
accommodation there, too, a reasonable accommodation. Many of 
those authorities you mention pertain to safety and soundness 
issues.
    But part of this, in having a single regulator, what we are 
envisioning is a regulator that would be subject to using the 
rulemaking process so there would be an expert regulator with 
discretion in using those powers. But beyond Congressional 
oversight, you would have a system through the promulgation of 
rulemaking processes that would bring some transparency and 
accountability to how oversight that was addressed.
    Mr. Quinn. Senator, in our testimony, we try to separate 
the secondary market and the primary market----
    Chairman Dodd. Right.
    Mr. Quinn [continuing]. And anything that the GSEs would do 
to create more liquidity in the secondary market, we are all 
for. We just--we believe we have a very competitive primary 
market today and we like to keep the focus on their activities 
in the secondary market.
    Chairman Dodd. Mr. Howard.
    Mr. Howard. Mr. Chairman, I just want to point out that the 
impact of the current economic stimulus package is going to be 
greatly diminished by the regulatory process that the GSEs have 
to go through. If OFHEO takes some of the time that they have 
taken on past new product approval to approve the increase in 
the conforming loan limits, the statutory deadline of December 
31 of this year will come and go before it can even happen. So 
it underscores, again, the importance of getting this done and 
setting the regulator up to be able to approve new programs in 
a timely way so that they can respond to market conditions.
    Chairman Dodd. Let me jump--there are a lot of questions 
here. Let me jump to the conforming--the loan limit issue, and 
Mr. Malta, you raised the issue that 417 is just too low. Now, 
you are from California and San Francisco and no one is going 
to argue with you about 417 in San Francisco. But I suspect if 
Senator Shelby were here, he would say, ``Well, I live in 
Alabama,'' and a very different real estate situation than 
exists in your State and particularly the city in which you 
reside. I live in Connecticut. I can make a case on either side 
of this issue, as you can obviously in California.
    Let me be the devil's advocate. Why would we be talking 
about raising this thing? Some have suggested $700,000, 
$600,000. I mean, basically we are talking about an upper 
income category here, getting beyond the mission statement of 
the GSEs to set loan limits at that high of a level when they 
ought to be focusing their attention on those who really need 
the resources going to areas where people are struggling to get 
into the greatest wealth creator they are ever going to have 
for them, is being able to purchase that home, develop and to 
build that equity in it to provide for their long-term 
financial security and the like. You are going to move this 
whole program into an area here that goes far beyond what was 
ever intended by the GSEs. What is your answer to that?
    Mr. Malta. Well, Senator, we did some analysis based on 
what HUD has posted as those counties that are over 417 and 
there are 249 counties in the country that are over 417, which 
spread over to 19 States and, of course, your State of 
Connecticut. Utah is included. Tennessee is included as well as 
other States that are familiar high-cost areas. Income in those 
high-cost areas just have not kept up to pace with the home 
prices.
    In San Francisco, for instance, as you have pointed out, 
$805,000 buys the median house in San Francisco. With 20 
percent down at today's current jumbo rate loans, a person has 
to make over $214,000 to qualify to buy that median-priced 
home. Census statistics show that the median household income 
in San Francisco is $65,000 and jumbo loans are getting more 
expensive. They have gotten more expensive during this crisis. 
So income has not kept pace with home prices in a lot of these 
areas.
    Chairman Dodd. Do you want to comment on this, Nancy?
    Ms. Andrews. I do. I think in many ways what this does is 
really underscore the points I made in my testimony, which is 
the need for a different way of approaching deeply targeted 
households. Incomes simply have not kept up with the cost of 
housing. When the housing costs are taken into account, people 
are literally thrown into poverty because of it and we need to 
find ways to respond to that, and that is why we believe 
special attention to the Affordable Housing Fund is very, very 
important, particularly in this climate right now.
    Chairman Dodd. Let me----
    Mr. Quinn. Senator, in your opening comment, you talked 
about Fannie, Freddie, and the Federal Home Loan Banks. They 
are the market today.
    Chairman Dodd. I know that.
    Mr. Quinn. We supported the 50 percent increase up to the 
629 to cover all States, because we met with members in Utah 
last Friday who wished that they had that availability because 
there are sections in Salt Lake that could have used the higher 
loan limit, across the board, all 50 States.
    Chairman Dodd. Well, I am being a bit of a devil's advocate 
in raising the question here. As you point out, in my own 
State, we are one of those 19 States--certain parts of my State 
obviously are. But there is a case to be made and obviously the 
point of having a strong affordable housing feature to this 
bill would mitigate a lot of these problems we are talking 
about as you do both. So it needs some adjustment. I am not 
suggesting as high as you are possibly in favor of, Mr. Malta, 
but I certainly think an increase is warranted here to reflect 
the realities of what is going on in the marketplace.
    Do you want to comment on that? I am sorry.
    Mr. Malta. Senator, by creating a market for these jumbo 
loans, it could free up money----
    Chairman Dodd. I understand that----
    Mr. Malta [continuing]. That could go toward----
    Chairman Dodd. I made that argument, not with any great 
success, by the way, over the last year or so.
    [Laughter.]
    I have got to address, Kieran, the question of these 
numbers coming out from the mortgage bankers. I would be 
remiss, quickly here, if we didn't ask you to comment on what 
you see in all of this. I just will mention here again, this is 
a handwritten note, so I am presuming these numbers are 
correct, as I look back at my staff here. The data this morning 
from the Mortgage Bankers Association has delinquency rates are 
getting close to 6 percent for all loans, and again, to put it 
in perspective, that is apparently an all-time high. I don't 
know how long MBA has been collecting data, but for however 
long you have been collecting it, that is a high.
    Mr. Quinn. A long time.
    Chairman Dodd. Loans in foreclosure, again, in excess of 2 
percent. That is another record high. Fourteen-and-a-half 
percent, roughly, of subprime loans are either seriously 
delinquent or in foreclosure. That is an increase of over 3 
percent for the third quarter and nearly double from last year.
    I am going to tell you, I have wonderful conversations with 
my good friend from Tennessee who likes to try to remind me to 
keep this in perspective here, these numbers. And so while 
these numbers are record-setting numbers, in the context of 
everything else that is going on out there, there needs to be a 
perspective about it, and I am sure he will articulate this 
point when he gets to you, but tell me, what is your read on 
all of this? This is the last question I will have for you 
here, any thoughts you have, the panel here, that you think the 
administration, the Treasury, the Fed, we up here--obviously, 
we know about GSEs, we know about FHA, we are working hard to 
get that done. Anything else you would be recommending here for 
us to take into consideration?
    [Ringing telephone.]
    Chairman Dodd. That is my phone going off there.
    [Laughter.]
    Any thoughts you would have for us up here as we are 
looking at a variety of ideas to be constructive, to be 
responsible in terms of doing what is necessary for us?
    [Ringing telephone.]
    Chairman Dodd. This is a persistent caller here.
    Mr. Quinn. Senator, I will remind everyone that the study 
is effective----
    Chairman Dodd. I am not Rudy Giuliani, by the way.
    [Laughter.]
    We were in the same office, but I never tried that trick, I 
can tell you.
    [Laughter.]
    Mr. Quinn. The study is effective 12/31/07. Your numbers 
are entirely correct. The Hope Now Alliance was really kicked 
into gear on or around December 1. We saw a dramatic increase 
since the 500,000 letters went out in the month of December. 
The frustration we have had all along, and it has been verified 
by every major regulator, 50 percent of the cases where a home 
goes to foreclosure, we can't get in touch with the person 
living in that home. They have either left ahead of time or 
just don't feel that there is a hope. So your hearing today 
does a great job of expanding the knowledge and the awareness 
of the Hope Now Alliance, the 1-888 number, HOPE NOW number.
    The one number that came out of this study, they told me on 
the way out, is in the Midwest where this all started, we are 
starting to see some stabilization. That is just a start. We do 
believe foreclosures will continue to increase this year.
    There are several things, though. You have done the 
stimulus package. You have raised the limits. We would like to 
see the FHA modernization. That is where----
    Chairman Dodd. We are going to get that done. I mean, we 
are very, very close. I reported yesterday, said last evening, 
Senator Shelby, his staff, our staff, Barney Frank and his and 
other members were--literally, my hope is that literally in the 
next few days, we will have an agreement on that bill and can 
move forward. We are down to basically one issue, and I won't 
bother getting into that in a public setting, but we are very 
close to getting that done.
    Mr. Quinn. That is equally a key part of our legislation.
    As far as some of the ideas, we don't have any current 
policy on sort of the--I call it the Resolution Trust 
Corporation. Chairman Bernanke mentioned it yesterday to some 
of the community bankers.
    Chairman Dodd. Right.
    Mr. Quinn. But we are willing to come in and talk about 
that at any time.
    Chairman Dodd. Does anyone else want to comment here on 
that open-ended question, just some ideas about--yes, Mr. 
Malta.
    Mr. Malta. Senator, the REALTORS support the Affordable 
Housing Fund that has been talked about.
    Chairman Dodd. Right.
    Mr. Malta. On the House of Representatives side, it was in 
H.R. 1427. We supported that. We supported the stand-alone bill 
that Chairman Frank had. We would suggest respectfully that you 
examine that as a stand-alone bill, as well, because of the 
contentious manner of that issue, as important as it is, 
though, so that we don't slow the work that you are doing in 
GSE reform.
    Mr. Howard. Beyond the jurisdiction of this committee, and 
I guess evidence of the complexity of the housing finance 
system itself, within the tax code, there is the expansion of 
the Mortgage Revenue Bond Program that could be a very big 
help.
    Chairman Dodd. Yes.
    Mr. Howard. There is the notion of a tax credit, either 
temporary in nature to help stimulate home buying----
    Chairman Dodd. You would do that--Johnny Isakson has been 
talking about that idea, and as I understood his original 
proposal, it was to provide that credit to people who would 
move into foreclosed properties.
    Mr. Howard. That is correct.
    Chairman Dodd. Is that correct? It wasn't open-ended to 
just anyone.
    Mr. Howard. That is the Isakson proposal. In 1975 and 1976, 
President Ford and the Congress worked together on a proposal 
to stimulate purchases of new homes and reduce the overhang in 
inventory and thus stimulate the economy. That is another 
concept that we think has merit.
    Chairman Dodd. I am very intrigued by that idea, and, in 
fact, welcoming of that idea. Obviously, as you point out, it 
is a Finance Committee issue, but you will understand my 
concern. I would like to avoid that as much as possible and 
make it possible for people in their homes to stay in their 
homes.
    Mr. Howard. Sure.
    Chairman Dodd. But if that fails, then obviously having 
some means by which you put that property back into private 
hands where they are generating tax revenues and creating 
wealth for the family that has moved in. But to the extent I am 
able to avoid that from happening is something we are looking 
at, as well, and that is where some of these other ideas are 
emerging.
    Ms. Andrews. If I may, Mr. Chairman, I would like to urge 
you to continue to include the Affordable Housing Fund in this 
legislation because of the obligation that we believe that the 
GSEs do have. They can do something very unique. They can touch 
a part of the population that is not being served by any other 
program that we have. And missing this opportunity within this 
legislation, I think, would be a terrible waste.
    Chairman Dodd. I hear you, Ms. Andrews, and my intention 
here is to do everything possible to keep that as a part of 
this package, as well.
    I have taken a lot more time than I said I would and I 
apologize. Bob.
    Senator Corker. Actually, since I know we have gotten off 
the initial focus here, which I think is a good thing, by the 
way, and I want to do the same, but since Senator Bennett has 
had such a history with the primary focus of this, I am going 
to go ahead and let him go first and then follow up.
    Chairman Dodd. That is a new Senator, very smart on the 
seniority system.
    [Laughter.]
    I was never that--when I sat in that chair down there, 
Jefferson was President when I was actually sitting there, it 
was that long ago.
    [Laughter.]
    Senator Bennett. You are assuming I am totally prepared.
    Mr. Howard, you have talked about the expiration date that 
is in the current legislation with respect to the change in the 
mortgage level. What is wrong with making it permanent?
    Mr. Howard. Well, we had been very supportive of making it 
permanent, Senator, but just to show the severity of the dire 
consequences to our industry right now, we would settle for any 
extension of it. We have been working with some of the largest 
banks and the Financial Services Roundtable and have come up 
with a proposal to extend it for another 2 years. Any extension 
would be welcome, and permanency, of course, is something that 
we would very much like.
    Mr. Quinn. Senator, our members would support the increase 
with GSE reform. That was the one caveat they gave us. Mandate 
to go temporary increases, but if you get GSE reform, we would 
be willing to go for a permanent increase.
    Senator Bennett. I don't think the housing market, as we 
work our way through this particular problem, is ever going to 
go back to a period where the lower rate makes a lot of sense. 
Yes, housing prices have spiked at, what, 50 percent, whatever, 
depending on what you take as your base to get the spiked 
amount, but in terms of the long-term trend going up, even 
coming down from the high, it is within the band of the long-
term upward movement and therefore a permanent increase in that 
rate makes sense in the long term to me.
    Now, Ms. Andrews, you testified to the shortage of low-
income housing, and that is one of the factors here that we 
have talked about, we talked about in the previous hearing. If 
we take the overall numbers of the inventory overhang, it looks 
like our big problem is we have too much housing and we have to 
wait until the inventory is sold off. But if you segment the 
market, there is no overhang in the area where you are 
particularly concerned, and that gives rise to the possibility 
of somehow splitting the incentives and saying that the people 
who worked to create our problem--they didn't do it to create 
the problem, but the people who created the problem by buying 
houses in the hot markets in the hope that they could flip them 
and thereby created demand in the hot markets to the point 
where there is the overhang in Miami and California and other 
places, let them take the consequences of their actions.
    I like the comment that is in the Washington Post where 
they say in their editorial, these decisions were made by 
grown-ups who were hoping to profit enormously, and when it 
turns out the market went the other way, they should pay the 
price for having bet incorrectly.
    The people you represent are not in that circumstance, and 
as the whole building system, the home builders, Mr. Malta, are 
seized up by lack of credit, what could we do to increase lack 
of credit making money available for home builders to deal with 
the undersupply of housing in the area that Ms. Andrews 
represents so that they can go back to building homes while at 
the same time those who speculated for the vacation homes or 
the second or third home, the hot part of the market, pay the 
economic price of having made the wrong decision, but we don't 
impose that market discipline on the part of the market that 
needs home builders?
    Here is a perfect supply and demand situation that is being 
interrupted by the availability of credit. Ms. Andrews' 
constituents need homes. Your constituents want to build homes. 
Why aren't we doing it? Because the money isn't available. The 
credit isn't available to have people buy it. Solve that 
problem for us, any of you.
    Ms. Andrews. I would be happy to take a crack at it. I 
think the perfect solution really is in the proposed Affordable 
Housing Fund. This would provide a combination of subsidies 
that would allow the prices to be affordable to people at the 
bottom end of the income spectrum and therefore would help the 
production folks, and it would provide leveraged support that 
would allow lenders to get involved in that equation.
    So, for example, our organization would be able to do the 
very early stage front-end stuff that is hard for the banks to 
do, get the projects ready for the private sector, and then 
have private money, construction funds and permanent funds, 
come in and take these out. So this is a perfect ramp, if you 
will, between that market segment and the private sector, both 
the building community and the lending community.
    Mr. Howard. Senator, from the home builders' perspective, 
we are seeing now a lack of credit not only on the mortgage 
end, but on the acquisition, development, and construction end, 
as well.
    Senator Bennett. Right.
    Mr. Howard. So from our perspective, the first thing that 
has to be done is to stabilize the financial markets as a whole 
through the tax credits, through FHA modernization. Even GSE 
reform sends the right message to the capital markets and to 
the consumers and will shore up confidence. That has got to 
happen before we could avail ourselves of anything in the 
Affordable Housing Fund, because right now, the builders are 
not getting credit themselves to even begin the development 
process.
    Senator Bennett. Let us take Johnny Isakson's idea and 
apply it to this particular problem. Johnny Isakson's idea is 
to deal with those properties that are going into foreclosure. 
Is there a tweak that could be made in tax incentives that 
would go in this direction, or Mr. Howard, are you saying that 
that is not the problem and that wouldn't be helpful?
    Mr. Howard. This problem is so severe that that is a step 
in the right direction and would be helpful, but it is not 
going to be the panacea, I am afraid, that many believe it 
could be. So we would have to tweak it and I would have to have 
some time to get with some of our analysts and experts and even 
bring in people from the capital markets themselves and give 
you a more thorough answer, Senator.
    Senator Bennett. OK. Mr. Malta, you----
    Mr. Malta. Senator, yes. Johnny Isakson's proposal, 
REALTORS applaud the proposal and we see it both for new 
construction, for first-time buyers, for the credit applying 
for buying foreclosed property, et cetera. We see that 
liquidity in the market is absolutely essential to jump-start 
the market and buyers need an incentive to go out and buy 
property. They feel that next year, they could buy it at a 
lower price, so why get out there and do it? So these 
incentives in the marketplace, I think would be key to jump-
start that.
    Senator Bennett. Anyone else? I see a perfect way to get 
home builders going, get REALTORS getting commissions, and 
solving the problem that seems to be, as you say, Mr. Howard, 
blocked by the fact that people can't get a hold of money. That 
is very interesting.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you. What I will do here is Senator 
Carper is on his way back. We have a vote going on. So we will 
take a 2-minute recess, but as soon as Senator Carper comes 
back, he will start the questioning, so we will just pause for 
a minute here until he comes back. I would normally stay, but 
the second bells have rung here, so we probably want to get 
over and vote.
    We will be in recess for a couple of minutes.
    [Recess.]
    Senator Carper [presiding]. Senator Dodd has gone to vote. 
He was good enough to allow me to reconvene us and we can 
continue to save some time. Thank you all for being here.
    I apologize for arriving a little late. My oldest son is a 
senior in high school and we were making a college campus visit 
this morning and so I had my ``Dad'' hat on. That is the most 
important thing in my life, but the GSE regulatory reform is--
maybe not a close second, but second or third, so it is 
important to me, and I think it is important to our country. We 
appreciate very much your input and your testimony today.
    We had some other folks--actually, we had a lot of banking 
regulators before us earlier this week and I sort of reviewed 
with them a list of the issues that I think over the last 
several years we have come to agreement on with respect to 
regulatory reform for GSEs. No. 1 is the idea of combining 
OFHEO, combining the Federal Finance Board into one entity.
    Second would be the independence of the regulator, the idea 
of having a regulator that is independent of the appropriations 
process, much as the other regulators are.
    Third is the notion that instead of having to go through 
the Justice Department for litigation, this regulator would be 
independent and have independent litigation authority as other 
regulators do on receivership. This independent regulator for 
GSEs would have the power to put a GSE in receivership if it 
was ever needed. Hopefully, that won't happen.
    The idea of combining mission oversight and new product 
authority into one world class regulator, we all seem to agree 
on. Flexibility for the regulator to set capital standards, 
whether they might be risk-based or minimum capital, there is 
sort of general consensus on that. And there is some agreement 
on restriction of the size of GSE portfolios.
    But there are a couple of areas, maybe four or so, that we 
don't necessarily see eye-to-eye on. The House has been able to 
find common ground, but we have not, and I wanted to try to 
focus on some of those and to follow up on Senator Dodd's 
questioning.
    We have been joined by Senator Jack Reed of Rhode Island, 
who has worked long and hard, and Jack, before you were here, 
Ms. Andrews and others were talking about your good work and 
hoping and encouraging us to ensure at the end of the day we 
pass a regulatory reform measure for the GSEs and that we 
include in it an Affordable Housing Fund.
    There are at least three ideas out there for how to fund 
it, and Senator Reed has one of those. I want to ask--and I 
think there is a different approach in the House bill and I 
think there is yet a different approach for creating affordable 
housing through Federal Home Loan Banks, and I think their 
approach under law is 10 percent of net income. I think that is 
a requirement. I think there is a fund that is actually set up 
for that purpose and is a repository for those dollars.
    What I would like for us to do is to focus on the three 
ideas, the existing practice that is within--the practice of 
the Federal Home Loan Banks under law; second, the proposal of 
Senator Reed which Ms. Andrews has alluded to; and the third is 
the approach in the House bill with respect to how to fund an 
Affordable Housing Fund.
    Let me just ask any of you to comment for or against, 
favorably or unfavorably, about any of those three options, 
please. Ms. Andrews, would you just kick it off?
    Ms. Andrews. Sure. Well, first----
    Senator Carper. Let me just say, one of the things that I 
have heard about the idea of having what I call a transaction 
fee that would simply go into an Affordable Housing Fund as 
opposed to some percentage of net income is that you may have 
years like this year, like last year, where the GSEs, Fannie 
Mae and Freddie Mac lost a lot of money and yet they would 
still be required to put money into the Affordable Housing 
Fund. Safety and soundness concerns have been raised about 
that. A lot of years, they made a bundle of money, so it wasn't 
much of a concern, but last year it may have been a concern.
    So that is sort of setting the stage for a little 
discussion here and let us just have it. Ms. Andrews, why don't 
you kick it off.
    Ms. Andrews. Yes. The first thing I should say is we would 
be happy to consider all of those ideas and to think through 
all of those ideas. The key thing is to get this going and to 
find a way that everyone can agree that it should be funded.
    We endorse the approach that Senator Reed has proposed, 
which is a small amount on the ongoing annual business, and we 
do that and he has proposed it in the context of making sure 
that there is safety and soundness and that the regulator has 
the judgment and the opportunity and the power if there is a 
financial--a year that poses financial difficulty, to cease the 
contributions going into that fund. So we feel that aligning it 
with the expansion of business, with the expansion of the GSEs' 
ability to do work, profitable work in our neighborhoods and in 
our communities is really the way to go about it with a strong 
regulator that can exercise judgment.
    Senator Carper. OK. Thanks so much.
    Let me hear from others, please.
    Mr. Quinn. Senator, we suggested a tax on the portfolio. 
They use their borrowings to support the portfolios. That is 
where they get the greatest advantage in the capital markets, 
so we thought that would be much more direct. We are very 
concerned with a net income or a fee on a transaction that gets 
passed directly over to the consumer.
    Senator Carper. Help me. The approach in the House bill--is 
that the approach they use in the House bill?
    Mr. Quinn. I thought it was in Senator Reed's bill----
    Ms. Andrews. The House bill, if I may, the House bill 
imposes a 1.2 basis point tax, if you will, on the stable book 
of business.
    Mr. Quinn. On the portfolios.
    Ms. Andrews. Senator Reed has proposed on the business 
flow.
    Mr. Quinn. On the portfolios.
    Senator Carper. So you are suggesting----
    Mr. Quinn. The House----
    Senator Carper [continuing]. The House approach. OK. Let me 
hear from some others, please.
    Mr. Howard. I guess from our perspective, first and 
foremost, I agree with Kieran that we certainly don't want to 
see the GSEs pass on the cost of this to the ultimate consumers 
and raise housing costs. Given their recent practice of 
increasing fees, I think that is something we really need to 
protect against.
    Second, as representing those who would be building these 
affordable housing units, there has to be some sort of a 
safeguard to ensure that even in a bad year, the fund doesn't 
go down to zero and projects that are in the pipeline and have 
already had significant dollars put into them aren't cut off. 
So that has to be examined very carefully to make sure that 
there is going to be a continuity of effort and that this 
program is not interrupted by bad years.
    Senator Carper. OK. Good point. Thanks. Other thoughts, 
please.
    Mr. Shear. I will first thank you for so well summarizing 
the position we have on the single regulator, which we have had 
for some time now. So I will thank you for just----
    Senator Carper. You guys have been staying on message for 
some time. Good work.
    [Laughter.]
    Mr. Shear. Thank you. When we have talked about it among 
ourselves--this is not an evaluation we have conducted but we 
have discussed the idea of a broader based fee, in terms of 
basis points applied to the enterprises' book of business. If 
you are going to have an Affordable Housing Fund, you are 
moving in a direction such as the Federal Home Loan Bank's 
Affordable Housing Program, and there is a cost of doing that. 
You have to recognize this cost in setting the numeric goals. 
It would change the paradigm.
    But we like the broader-based fee based on the idea that we 
don't want to create incentives for the GSEs to change their--
how much they use retained portfolio versus securitization to 
achieve certain targets.
    Senator Carper. All right. Thank you. Yes, sir?
    Mr. Malta. Thank you, Senator. We, too--REALTORS would 
have concerns if it were done on a per transaction basis for 
obvious reasons, as the speakers have already spoken on. Thank 
you.
    Senator Carper. Thanks very much.
    The other question I want to ask, and I will ask you just 
to be real brief in responding on this point, the same general 
subject. The issue is Affordable Housing Fund. In my State, and 
I am sure in Rhode Island and other States, we benefit from the 
good work of, in Delaware, the Pittsburgh Bank, but we have 
these Federal Home Loan Banks around our country. They 
contribute, I think, 10 percent of their net income to 
affordable housing. I think they actually have a repository 
into which, or a trust fund into which the money actually 
flows.
    My question is, if we are going to have an Affordable 
Housing Fund that goes out of Fannie Mae and Freddie Mac, and 
my hope is that we will--I am strongly supportive of Senator 
Reed's efforts generally in that direction--but if we are going 
to have it, should we simply--do we need to reinvent the wheel? 
Do we need to come up with another trust fund in which to be a 
repository, in this case for monies that might flow from 
activities of Fannie Mae or Freddie Mac, or should we simply 
use the repository that is already there?
    Yes, ma'am.
    Mr. Howard. May I get to that?
    Senator Carper. And I would ask you to be brief, everyone 
to just be brief because my time has expired.
    Mr. Howard. We certainly support and think that the 
Affordable Housing Program that the Federal Home Loan Banks has 
developed is a good one and it is a step, but it really doesn't 
go far enough. These grants from the Affordable Housing Fund 
amount to about $5,000 on a per unit basis. It is very, very 
shallow from a subsidy point of view, does not produce that 
much with the way of deeply affordable housing, and the income 
standards are still very high.
    I think what is important about the Affordable Housing 
Fund, the block grant program and the Capital Magnet Program, 
is that it is targeting very deeply, and that is something we 
have not had in these programs in many, many years.
    Senator Carper. Thank you. Let me hear from others, please.
    Mr. Quinn. Senator, we are fine with the funds being there 
with the regulator. We want to make sure that it goes after--we 
are seeing a shortage of multi-family apartments, also, that 
serve the very lowest incomes. It is going to be people are 
moving from foreclosed homes back to this multi-family. They 
are going to be staying in those multi-family properties longer 
because it is going to be harder to qualify for a loan. So we 
want to see--the home program that you use now, we think is a 
great vehicle and we want to see it go to cities and States.
    Senator Carper. Thanks very much. Others, please.
    Mr. Malta. Senator, coming from California where these 
funds tend to get raided a lot, we would like to see whatever 
vehicle is best that protects those funds, that those funds go 
directly to what it was intended.
    Senator Carper. All right. Thank you. Anyone else? No? OK.
    Senator Reed. Thank you all.
    Senator Reed. Thank you very much, Senator Carper. Senator 
Carper has been a relentless advocate for the GSE reform bill 
and a very effective one, and so if we--and I hope we do get it 
through. Much of the credit for keeping it moving goes to you, 
so thank you. Thank you very much.
    I want to thank all the panelists not only for your 
testimony today, but your insights over several years in your 
professional capacities have been extremely helpful to me and 
also to the committee.
    One point that I was thinking about, Senator Carper raised 
a very interesting line of questioning about how you assess a 
fee or a levy to support an Affordable Housing Trust Fund, and 
one of the concerns about that being passed through. But it 
raises a question of mine is, it is very difficult in a 
business when you know you have a cost or taxes not to think of 
ways to pass it on to your customers. The real question might 
be how easy it is to pass on or what percent you can pass on 
given these different transaction fees versus net income 
assessment.
    So in that line, let us begin with you, Ms. Andrews, on 
that, to ask people, my sense is that any organization would 
try to pass on costs to consumers if they could get away with 
it, so the form of the assessment, that might be the critical 
issue.
    Ms. Andrews. I agree. I don't think that that is really the 
critical issue. We know and we believe that whatever impact 
this will have, it will not be a material one on the 
shareholders. It is well within the range of the two agencies 
to absorb this and to do it in a way that really is not going 
to impact their stock, their shareholders, or their ability to 
capitalize themselves.
    Senator Reed. I guess, and I want to ask everybody else to 
respond, but to me, again, the most obvious would be to put 
some type of basis point levy on every transaction because it 
looks like a sales tax or excise tax or something and it could 
be attributed directly. That is why I think one of the--we were 
thinking more in lines of a levy on net income, which is less 
specific to individualized transactions.
    Mr. Howard.
    Mr. Howard. I guess, Senator, from my perspective, what 
this again is evidence of is the importance of having a 
regulator of safety and soundness as well as the mission 
regulator at one place talking with each other and they can 
make sure that the appropriate balance would be reached on how 
to raise the money and how to make sure at the same time it is 
not increasing costs of housing somewhere else in the market.
    Senator Reed. Thank you. Mr. Quinn, please.
    Mr. Quinn. Senator, it is very difficult to hide an 
additional cost and not pass it through, but a fee on a 
transaction would be direct and would jump up.
    Senator Reed. Yes.
    Mr. Quinn. We went to the portfolios. That is where they 
get their savings. We thought that was a direct----
    Senator Reed. No, I mean, the good news is the House has an 
Affordable Housing Fund component in their bill. We could add 
to that good news by passing legislation in the Senate. Then we 
would get to conference and we would have to have a very 
detailed discussion based upon a whole set of issues, and one 
which you have both highlighted is to what extent would this be 
passed on and inhibit activity of the consumers or the services 
of Fannie and Freddie, so I think this is a very fair point. 
But my hope is we have this discussion in conference and we 
resolve it.
    Mr. Malta, do you have comments?
    Mr. Malta. Thank you, Senator. I would just be echoing the 
comments that were already made.
    Senator Reed. Mr. Shear.
    Mr. Shear. I would be echoing the comments. A lot of times, 
the devil is in the details and we are not going to resolve it 
at this table.
    Senator Reed. No, but your insights are very, very helpful 
and I thank you for that.
    One of the aspects of the proposal that I have made with 
respect to affordable housing is to provide 35 percent of the 
funds to Community Development Finance agencies to match with 
private funds, et cetera. Ms. Andrews, you are deeply engaged 
in the CDFI effort. Can you tell us how you would use it, how 
much funds you think you can leverage, and anything else you 
think is relevant?
    Ms. Andrews. Sure, I would be delighted. One of the 
proposals that is on the table for this and actually is being 
worked on by one of our groups now, it is called Self-Help in 
North Carolina, is to create a pool of funds that would be 
leveraged through something like this that would be available 
for the purchase of foreclosed and abandoned property for the 
rehabilitation and stabilization of that property, and then to 
make those new properties available to very low-income people. 
So that is a great example of the kind of thing that we could 
do.
    If I may, I will give you one more concrete example.
    Senator Reed. Sure.
    Ms. Andrews. We have--my organization just in the last few 
weeks provided a $10 million loan to the Elva McZeal Apartments 
in Brooklyn, New York. This is a 142-unit building that is 
occupied entirely by very low-income families. Most of them are 
single female-headed households. We were able to take funds 
from our fund and then leverage in funds from the United 
Methodist Pension Fund that created a stable mortgage, a fixed 
rate, a 30-year mortgage that allowed this building to 
stabilize, and the mostly women, female-headed households, to 
become homeowners. That is another example of how we would 
leverage.
    Senator Reed. And the concept embedded in the legislation 
we are talking about is that funds flowing out to CDFIs would 
always have to be matched----
    Ms. Andrews. Absolutely.
    Senator Reed [continuing]. And therefore, we get a bigger 
bang for the dollars that we are directing your way.
    Ms. Andrews. Absolutely. We are, as a group across the 
country, on average, leveraging $19 of private money for every 
single dollar of Federal money that we get.
    Senator Reed. One other point in response to your 
discussions about acquiring foreclosed property, et cetera. I 
had a very interesting discussion with the head of our Rhode 
Island Housing Mortgage Finance Corporation and there is a real 
fear all across the country that these foreclosures are leaving 
properties abandoned which very quickly are being stripped of 
piping. So if we don't move dramatically, we are going to have 
to go ahead and rebuild affordable housing that has been 
destroyed through the foreclosure process. That is a very 
disturbing process, and so unfortunately, I think the funds 
like this would be very useful.
    But I would invite any comments about this magnet funds. 
Mr. Shear, perhaps I will start with you. Have you had a chance 
to review this, or----
    Mr. Shear. We have had some discussion of the Affordable 
Housing Fund along the lines of financing it, the need to have 
controls in place and the need to have the right incentive 
structure. We have also discussed how it might affect the 
paradigm of how the numeric goals might play out, but I don't 
have anything more specific than that.
    Senator Reed. Thank you. Mr. Malta, any comments?
    Mr. Malta. We supported similar legislation on the House 
side and we look forward to working with you in the future on 
what you are working on.
    Senator Reed. Thank you very much.
    Mr. Quinn. The benefit of that single regulator is he can 
work with different people over time to see what is working.
    Senator Reed. You are absolutely right and I think that is 
one concept I think we are all keen on. The details, as we have 
talked about, are critical.
    I would also echo your point, Mr. Quinn, about really the 
increased demand for multi-family housing. Many times, that is 
exactly what these local agencies are doing, as Ms. Andrews has 
pointed out in terms of that apartment complex in Brooklyn.
    Mr. Howard, any comments?
    Mr. Howard. Well, we always believe, Senator, that passing 
and giving the responsibility at the most local level of 
government is definitely the most effective way to get anything 
done. We would also like to point out that we firmly believe 
that there should be a competitive process by which the 
construction is awarded to the most cost-efficient professional 
means of building the affordable units.
    Senator Reed. Thank you very much. Good comments.
    One final question and I would invite anyone if they wanted 
to comment about it, that part of the legislation we have 
proposed has new affordable housing goals which would direct 
Fannie and Freddie to serve, we hope more effectively, 
underserved markets, including some of those underserved 
markets of manufactured housing, affordable housing 
preservation efforts, subprime borrowers who are facing 
immediate foreclosure. We talked about CDFIs, rural markets. Is 
there anything in that list or additions that we should 
consider in terms of the goals of Fannie and Freddie? Mr. 
Shear, do you have a comment, or does anyone have a comment?
    Mr. Shear. I think you have a very good list and I would 
just bring it back to basically our proposal and what has been 
echoed here. It is very important to have a regulator that can 
look at both sides of the issue in a very independent and a 
very sophisticated way and we would love to work with you and 
the committee in trying to move forward on that.
    Senator Reed. Thank you very much. Nancy.
    Ms. Andrews. Yes. Senator Reed, one of the things--we agree 
with the list in the duty to serve language. We think that is a 
fine list and it is good. One of the things that you have done 
and that we endorse very much is to ensure that the goals pull 
out the deep targeting that we are looking for, that they look 
closely at very low-income and extremely low-income households. 
So we would encourage that.
    Senator Reed. Thank you. Mr. Quinn.
    Mr. Quinn. I would echo the lower income on the affordable 
housing goals.
    Senator Reed. Thank you very much. Gentlemen and Ms. 
Andrews, thank you very much for your testimony. Your ongoing 
assistance and advice to us is very, very useful. Thank you.
    Chairman Dodd [presiding]. Thank you, Senator Reed.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I want to thank 
all of you for your testimony. I think this is a----
    Chairman Dodd. Bob, if you want to come up and sit up a 
little closer, you don't have to feel that estranged from----
    Senator Corker. I have got my notes all spread out, but if 
we continue, I will move up right beside you and it will be a 
tremendous honor, but----
    [Laughter.]
    Chairman Dodd. I want to keep you close here.
    Senator Corker. I understand, and I do, Mr. Chairman. I 
know that we sometimes have differing points of view, but I 
think it is all very, very constructive, and as I told you on 
the elevator going to vote, I think you have had some 
outstanding hearings and I am really honored to be on this 
committee. I think we are addressing some really, really 
important issues right now and I think these panelists and the 
ones we have had in the past have been just really constructive 
in that process.
    Chairman Dodd. Thanks.
    Senator Corker. I find it interesting that the markets 
create differing opportunities and differing problems as we 
move through the cycle. I know that Nancy has focused on making 
sure that people have affordable housing, and that is something 
that all of us need to focus on, there is no question. I know 
that as we have had this housing bubble, if you will, just a 
few years ago, we were really, really focused on just the high 
cost of housing. I know some of the testimony earlier was that 
it really--while in some ways, those who owned it were 
benefiting from a growth in equity, those who were just trying 
to get by were really having a difficult time.
    So I just want to point out that we do have these dilemmas 
and sometimes we in the Senate and House try to focus on the 
problem, but in essence, the fact that housing prices are 
declining some, for those people who are financially 
struggling, that is a good thing. I just want us to keep that 
in mind. I mean, we have had an incredible increase in housing 
prices. Places like California basically cause middle-income 
people in some cases not to be able to afford housing. I just 
think as we move through trying to focus on this problem, we 
ought to keep those kind of things in perspective.
    At the same time, I know there was some comment, and I am 
not totally familiar with Senator Reed's legislation, that a 
way of providing affordable housing would be to charge 4.2 
basis points on transactions to create the funds necessary for 
low-income housing. I would just like for some of the market-
based folks that are dealing with other areas--I guess that, in 
fact, would inflate the cost or the loan cost to all borrowers 
across the country, is that correct?
    Mr. Howard. [Nodding head.]
    Senator Corker. OK. And I think, and while I absolutely 
applaud the efforts to do that, and I probably wouldn't be in 
the Senate today if it hadn't been for my involvement civically 
in similar kinds of issues, as far as the market-based folks 
are concerned, is that the best way to deal with it, meaning 
that we basically are jacking up, if you will, the cost for 
people all across America to borrow money and own homes? Is 
that the best way to deal with affordable housing, or would a 
more surgical approach, where we allocate resources in a 
different way, would that be a different--of course, all 
taxpayers, in fact, pay for that, too. I am just wondering if 
there is any competing philosophy there as it relates to how we 
deal with low-income housing.
    Mr. Malta. Senator, there is no best way to tackle the 
affordable housing issue. It is a multi-prong approach that it 
is going to take to deal with that issue and to get us through 
this crisis and beyond.
    We believe that we have got to get the market stabilized, 
and that is why we are coming out so very strongly in relation 
to our comments in relation to the jumbo market, et cetera, 
which does impact the affordability overall. We are not just 
talking luxury properties. We are talking about the market as a 
whole. So, again, the fund is one component of many prongs that 
you need to move this whole legislation forward and work on it.
    Mr. Quinn. It is exactly that, one component that doesn't 
exist today. If it is targeted to low- and moderate-income 
people, it will be excellently received out in the marketplace. 
It is very hard to distinguish a tax, a cost. It is going to 
raise the cost of financing, and to what degree. But we echo 
also the message to the capital markets today for passing this 
legislation could go a long way to sort of free up some 
gridlock all across the capital markets. There are a number of 
different things you can do for foreclosures and to stir up the 
economy. You have passed the bills up to date, but this is just 
one major signal. I can't underestimate that enough.
    Ms. Andrews. Senator Corker, if I may, this is a tax, if 
you will, that amounts to about a half-a-penny. It is less than 
a half-a-penny and it grows and it shrinks based on the 
strength of business. It can be stopped. It can be ceased at 
the point that there is a financial problem that the GSEs face. 
So if we are trying to think of how do we equitably do this, 
this approach is as good, I think, as almost anything else that 
we can come up with.
    Mr. Howard. Senator, I would agree with that. I guess my 
underlying point right now would be, however, that the housing 
economy is in such bad shape that adding any cost right now is 
a potentially troubling situation. If the GSEs were going to 
keep the costs themselves and keep them in-house, that is one 
thing. But as was pointed out by Senator Reed, that almost 
never happens in business, and right now, those who are trying 
to finance the construction of new homes at every level of the 
market are struggling mightily, and adding any cost right now 
is something that we would be concerned about.
    Senator Corker. What I would like to do then is follow that 
line of thinking, and that is I know that each of you have 
focused on some of the components in this last stimulus 
package, and those were the ones that actually cost nothing 
immediately. I mean, in essence, we raised the GSE limits and 
that is what--I just would like to point out, that is what all 
of you have focused on. The other part of sprinkling money 
around America and getting people to spend it obviously was a 
huge part of the cost and yet does nothing to really focus on 
the crisis, if you will, or the correction or whatever we want 
to call it that we are dealing with right now.
    So I know we are going to be dealing with some other 
legislation and since we have this awesome panel of folks here 
to talk about it, what are the things that surgically deal with 
this problem? We have got such a collage of ideas out there, 
and I actually would like to focus first on the home builders. 
Instead of having a 2-year loss carry-forward, you go back 5 
years. It is a cost to the Treasury of $17 billion, OK. I know 
Nancy has a lot she could do with $17 billion, and all of you 
do. It is a $17 billion cost, and yet it does absolutely 
nothing, if you will, as it relates to dealing with the credit 
issue.
    That is what I have been trying in my own one of 100 focus 
to do, is to make people realize that it is going to do nothing 
whatsoever other than shore up home builders that are in 
trouble. It shores up every industry, but that is really not 
the problem today. I mean, the problem is that we have a credit 
issue, and since the home builders are the ones who are going 
to benefit from that most of this group, anyway, I would love 
for you to respond.
    Mr. Howard. Well, sir, I guess it would be difficult for 
many home builders to be able to avail themselves of stability 
in the credit markets if they go out of business, and 
unfortunately, the circumstances are such that many home 
building concerns throughout the nation, in fact, in your State 
as well as others, are in a position where being able to carry 
back their net operating losses, or carry forward their net 
operating losses would enable them to infuse capital into their 
own businesses and keep people employed and keep businesses 
open.
    You are right, it doesn't address the credit issue 
immediately, but it keeps people at work and in business and 
that is why we think it is important, and that is how dire this 
situation is for the home building concerns around this 
country.
    Senator Corker. I guess all the framers and plumbers and 
electricians and all that would just deal with the next home 
builder that was solvent, is that not correct? I mean, it is 
not like--when you talk about the employment issue, home 
builders don't really employ that many people. It is all the 
subcontractors that actually work under that umbrella----
    Mr. Howard. Senator, as one who just went through the 
process of building my home and is very intimately involved in 
the business, as much as I applaud the work of the 
subcontractors, you need a general contractor to oversee 
everything. If they go out of business, it will make the home 
construction process significantly more difficult.
    Senator Corker. Yes, and I am certainly not saying that you 
can do that without a general contractor. So you would see that 
as spreading that net loss carry-forward out to every industry 
in America, not just home builders, every----
    Mr. Howard. That is correct, sir.
    Senator Corker. You understand, I mean, that is every 
company in America----
    Mr. Howard. I do understand that----
    Senator Corker [continuing]. And that is a $17 billion 
expenditure. You think that is an important factor to solving 
the credit problem that we are dealing with today?
    Mr. Howard. I don't think it is an important factor to 
solving the credit problem, sir. I think it is an important 
factor to keep many of America's small businesses open with 
their doors open, and Senator, not to be disrespectful, but I 
had not heard $17 billion. I thought it was a $7 billion cost.
    Senator Corker. Seventeen billion was the number we were 
given yesterday.
    All right. There is another, I guess, another piece of this 
that is the $10 billion--expanding the State governments' 
ability to use their own bonds, tax-free bonds, to help people 
with subprimes. It is a $1.7 billion cost. I am wondering if 
anybody might comment on the efficacy of that particular 
proposal, which does seem like it at least gets it down at a 
level where people actually know what is happening on the 
ground and might actually deal with people they know, but I 
would love for you all to respond to that.
    Mr. Quinn. Senator, we support that wholeheartedly. I think 
it does two things. It gets capital out in the markets and gets 
it into many States. There are three States in the Upper 
Midwest, California, Florida, Nevada, that are having the more 
serious problems. So it is a very targeted solution. So we 
applaud that.
    Senator Corker. So we have a targeted solution that costs 
$1.7 billion that actually addresses the credit problem. We 
have a $17 billion issue that helps some home builders--and by 
the way, I understand the problem, but it also scatters 
throughout the entire economic base in our country that has 
nothing whatsoever to do with this credit issue.
    I think you may have a comment.
    Mr. Malta. In the same, the National Association of 
REALTORS came out and supported the mortgage revenue bonds, as 
well.
    Senator Corker. So surgically, that, in fact, does help us. 
What I find interesting about this entire stimulus issue is 
that there are so many things that we can do legislatively that 
cost the taxpayers almost nothing, and I am talking about the 
GSE jacking the rates up, creating some freedom through the FHA 
modernization, the $1.7 billion--which is a lot of money, don't 
get me wrong, but compared to the $160 billion we just spent 
and what is now being proposed--very, very small amounts of 
money and some legislative freedoms can do huge things to solve 
this problem versus, if you will, spending billions and 
billions and billions that have nothing whatsoever to do with 
the problem.
    I would just like some expansive conversation. Was there 
another comment? Yes, Nancy.
    Ms. Andrews. I did want to say with a little humor that I 
feel like I am offering you the best deal on the block. We are 
talking about a program that is 4.2 basis points. It is about 
$800 million a year. We are going to leverage it 19 times over. 
The stimulative effect of that is very profound. It just pales 
by comparison with the other numbers that you are describing.
    Mr. Howard. I guess, Senator, from the perspective of our 
organization and our industry, which as recently as 2 years ago 
was 16 percent of the GDP and is now about 14 percent, a 2 
percent drop-off, we are feeling that we are heading 
precipitously toward a recession, that there are two different 
philosophies on how to address it, how to stimulate the 
economy. One is do you stimulate the consumers, as the bill 
that just passed did, or do you look at the industries, and if 
home building concerns are important to the economic health of 
this country, then it would seem to us that keeping them viable 
is equally as important.
    And so I think you have to debate and it is really the 
decision of you all on that side of the dais to determine what 
is the most effective way to do it. But we can make a very 
solid case for net operating losses, for mortgage revenue 
bonds, even for the 1975-76 President Ford tax credit at this 
point in time, and we believe that the situation is so dire 
that any and all of these things need to be discussed, but 
ultimately that some action needs to be taken very, very soon.
    Mr. Quinn. We are with him on the tax credit idea, new 
homes and homes coming out of foreclosure.
    Senator Corker. The Johnny Isakson--I think that is a $13 
billion--it is somewhere from a $9 to $13 billion cost, and 
that everybody at the table agrees is something that ought to 
occur.
    Mr. Malta. Yes.
    Senator Corker. OK. Mr. Chairman.
    Chairman Dodd. Well, thank you very much, Senator.
    A couple of other items were included in this idea. One was 
the Community Development Block Grant approach, targeted 
resources to go to counties and municipalities to assist county 
supervisors and mayors and others where you had foreclosed 
properties, to mitigate against the adverse effects of that, 
not as a revenue sharing program but as some assistance. The 
counseling idea, Senator Kit Bond and I offered $180 million 
back some months ago and resources to go to various counseling 
organizations. We are told there is a greater need for that.
    Again, Senator Corker's point, I would say that there are 
three clusters of issues here that we are grappling with. There 
are a lot of moving parts in all of this. One is what do we do 
to make sure that this doesn't happen again, and there are a 
lot of ideas. We have introduced some legislation. I have 
talked with Kieran and his group and others about various 
things that we have to do, and we are going to get to that. But 
at this juncture here, that isn't as immediate an issue as is 
the current, I call it crisis, problem. So that is the first 
cluster.
    The second cluster is what can we do to minimize the 
impacts of this on people who are being adversely affected by 
it, those who are facing foreclosure, the costs to communities 
and the like to try and mitigate. It doesn't deal with the 
problem, it just deals with the problems that have been created 
by the problem, in a sense.
    And the third cluster is obviously what do you do about the 
problem, in a sense, of loosening up this credit, looking at 
this whole issue of moving again. That is the third group of 
issues, and the most important one in many ways, because if you 
could help solve that--and I don't think the two are entirely 
separate. I think there is a correlation between building the 
kind of confidence and optimism, that intangible quality that 
has an awful lot to do with the issue of people once again 
taking risks, stepping up to the plate. I don't want to 
overestimate the importance of that, but I think to sort of 
stovepipe it and just say these are totally separate issues, I 
think is to miss the point.
    While I agree with Senator Corker, some of these things 
don't really address the issue of how we get this back on track 
again, I think there is a value in that and in providing some 
level of confidence and hope. And obviously to the extent you 
can keep people in their homes can make a huge difference to 
me. I mean, that is just dealing with the problem. I would much 
rather keep someone in their home than the question of having 
to offer a $13 billion tax credit to provide someone with the 
opportunity to buy that foreclosed property.
    It seems to me to the extent we can minimize this cost--and 
when we tried this idea in the past of actually setting up a 
corporation to take highly distressed mortgages and buy them in 
bulk and then offer them at a discount cost and a fixed rate 
over a period of time, the Federal Government made $10 billion 
off that program. It was not neutral, it was a money maker. 
Now, they could argue whether or not that would work today 
given the differences that existed earlier, but like that idea 
or the one that Chairman Bernanke talked about yesterday, but 
the idea that we would try and put people in a position who are 
owner-occupied--I am not talking about the speculating 
community, but to give that constituency an opportunity to 
remain in their homes with a cost that they could afford.
    My concerns are that right now, we are talking about people 
who have had credit problems in the past, are in some trouble, 
but it is beginning to move into a more secure constituency, as 
well. The estimates are that we can be starting to talk about 
not 2.5 million homes, but as many as 40 to 50 million homes 
that are underwater or could be underwater in the sense of what 
the value of that property is and the cost of that mortgage. 
And then if these problems create larger economic issues, the 
ability of that individual to sustain those payments until the 
value of that property begins to exceed the cost of that 
mortgage get more difficult. Then the problem becomes a lot 
larger than 2.5 million. And, of course, when you have a 10 to 
15 percent decline in housing values, there are some reports 
that indicate there is a $2 trillion effect in our economy, and 
those are staggering numbers.
    So again, I am, as you can sense, I have a sense of 
frustration in trying to get some ideas on how we deal with 
this and I am certainly going to get the FHA and the GSE bill, 
and Kieran, I don't disagree, I think those are important 
issues to send, but they go back in a sense to Senator Corker's 
point. To some degree, FHA will provide some help, but I think 
it would be a mistake to exaggerate what FHA reform is going to 
do here. I am worried that people are going to think that is 
going to solve the problem. It doesn't. It can offer some 
amelioration to it, but it isn't going to solve the underlying 
issue.
    So this has been a great panel and obviously important. I 
just have two quick questions I want to raise regarding the 
GSEs.
    There have been some who have suggested that instead of 
having a singular regulator, we ought to look at like the SEC 
model or FDIC. Is there any appeal to that, or is it far better 
to--Mr. Shear, do you have a notion on that at all, whether you 
would like the--I think the single regulator is what people are 
talking about. That makes more sense. Is there any appetite for 
a board like the SEC or FDIC?
    Mr. Shear. No.
    Chairman Dodd. No?
    Mr. Shear. No, we do not favor having regulatory agency, 
with a board, that shares oversight responsibilities with other 
regulatory entities. With respect to whether the single 
regulator should have a board or director structure, the 
director model has certain advantages while a board structure 
has others. As stated in our written statement, we favor a 
single regulatory agency with either a board or what we call a 
hybrid board structure where a director is in charge of the 
agency.
    Chairman Dodd. Ms. Andrews, any----
    Ms. Andrews. No, I am sorry. That is not an area----
    Chairman Dodd. And then whether or not you would be subject 
to--the regulator would be subject to the appropriation process 
for its funding. Any thought on that one at all? That gets 
rather into the weeds here, but have you given any thought to 
that? I see you shaking your head.
    Ms. Andrews. No, I have not considered that.
    Chairman Dodd. All right.
    Mr. Shear. We have considered it and there can be some 
tradeoffs involved, but we see many of the benefits that other 
financial regulators have had being outside of the 
appropriations process. So we are very concerned about HUD not 
only being in the appropriations process, but not being paid 
for by the GSEs, and there are certain benefits in terms of 
independence, the ability to plan, a number of other benefits 
of removing the GSE regulator from the appropriations process.
    Chairman Dodd. All right. Well, those are the kind of 
issues when we start marking up a piece of legislation, you can 
imagine we will have some debates about some of these matters.
    I am told by staff that the $10 billion number that I 
mentioned a moment ago that the Federal Government made as a 
result of a similar program tried a number of years ago may be 
an inflated number, but I may be right and you may be wrong, so 
we will check that out.
    [Laughter.]
    And the Senator is always right.
    [Laughter.]
    We will revise and extend the remarks a little later, as we 
used to say.
    Senator Carper, do you have any additional questions?
    Senator Carper. The Senator is always right, except at home 
with our spouses.
    [Laughter.]
    My staff was good enough to provide a list of four items 
where we are sort of hung up. I mentioned, Mr. Chairman, I 
mentioned at the beginning of my questioning of the panel all 
the areas where we found common ground with one another and I 
think with the administration. There are, as I understand it, 
about four areas where we may still be looking for consensus.
    One of those deals with the issue of new products and the--
--
    Chairman Dodd. The approval of new products.
    Senator Carper. The approval of new products.
    Chairman Dodd. I raised that earlier.
    Senator Carper. I want to go back to that just for a 
moment, if I can.
    Chairman Dodd. Can I just say, by the way, I mean, I should 
have made the point earlier, in your testimony, the list on 
page nine of your testimony, I think is a very good list, by 
the way. As Chairman here, I am very encouraged by those series 
of suggestions. I think they are very sound. Sorry.
    Senator Carper. Was that directed to Mr. Shear?
    Chairman Dodd. Yes.
    Senator Carper. The one and only Billy Shear?
    [Laughter.]
    All right. Thank you for an excellent list. One more thing 
to be grateful for.
    Product approval. The House, a I understand the House 
proposal, if one of these GSEs comes up with--now this would 
just be for Fannie Mae or Freddie Mac. This would not, as I 
understand it, it would not pertain to the Home Loan Banks. But 
if Fannie Mae or Freddie Mac would come up with a new product 
idea, they have to go through a process where they lay out an 
idea, maybe there is a 30-day notice or some kind of comment 
period, a 30-day comment period. It is a process that can take 
an extended period of time.
    I think Senator Sarbanes when he was our Chair or Ranking 
Member, I think he had a different approach and that was to say 
that for existing products, that changes for existing products 
wouldn't have to go through the notice, the approval process 
for changes to existing products, but for new products, they 
would have to go through this kind of notice and comment 
period.
    And then there is the idea that a third alternative would 
be basically to treat, for new products, treat Fannie Mae and 
Freddie Mac much as the Home Loan Banks are treated now, and 
that is they don't have to go through the extended notice and 
comment period.
    Chairman Dodd may have raised this when I was out of the 
room, I ran to vote earlier in the hearing, but where is a 
reasonable compromise on this and why? Anybody?
    Mr. Shear. I will try to repeat my answer from earlier. It 
is important--I don't think anybody is saying that if there are 
changes in underwriting or other approaches that that is a new 
product, but there has to be a lot of attention paid and a 
reasonable compromise on how you define a new product or 
activity, and it is important to balance the need to keep 
Fannie Mae and Freddie Mac consistent with their charters and 
contributing to the housing mission. There also is a need to be 
able to adapt products that might be consistent with that 
vision in a reasonable amount of time. So a lot of it, I think, 
gets into how do you define a new product or a new activity.
    Senator Carper. All right.
    Mr. Quinn. Senator, we are very focused on giving the 
regulators sort of broad latitude to define a new program. 
Clearly, if it is supporting liquidity in the secondary market, 
we think he can recognize that very clearly and I think he can 
also agree when it is interfering with the primary market and 
the competitive nature of that market. So we give in many 
cases, and certainly on portfolio caps, we want to give the 
regulator broad latitude in both areas.
    Senator Carper. Some other thoughts, please? Yes, sir?
    Mr. Malta. Senator, yes. Our concerns are more broad. We 
just don't want to see them derailed from being able to do 
their mission, creating an undue process for them that would 
not--or would stifle them from being able to create new 
programs in the marketplace, especially now when it is so great 
is the need.
    Senator Carper. Anyone else?
    [No response.]
    Senator Carper. One of the other differences of opinion 
that we appear to have deals with capital authority, and I 
think in the House bill, Mr. Chairman, I think there is 
something called a snap-back provision. I don't know if that 
rings a bell with you. But I think the House bill gives a 
regulator the authority to unilaterally raise the minimum 
capital standard requirement, but requires the capital return 
back to the normal level after some kind of incident of concern 
has passed and they call it a snap-back provision. I understand 
there are some who don't like that, maybe some on this 
committee, who don't like the snap-back provision.
    I was trying to think through and talk it over with my 
staff member behind me, trying to think through what might be a 
reasonable alternative or compromise there. The snap-back could 
be, instead of for a limited period of time, it could be 
stretched out over a longer period of time, so it would be a 
slow snap-back, but there might be some other ideas, as well.
    Does anybody have a thought on how to thread the needle on 
this particular difference of opinion? Mr. Shear.
    Mr. Shear. I will go back to how we envision this 
regulator. It would be a regulator that would have broad 
authority. It would be subject to not just Congressional 
oversight, but also to promulgating rules and regulations 
through a well-defined public comment process. We think that 
those types of considerations basically should be left to the 
rulemaking process surrounding the authorities given to the new 
regulator.
    Mr. Quinn. Senator, OFHEO had to go to cease and desist 
orders after the last crisis. A bank-like regulator has much 
more flexibility to raise capital or lower capital 
requirements. That is the model we have been espousing, also.
    Senator Carper. Yes.
    Mr. Howard. And we like the snap-back provisions that are 
in the House bill, but if it had to go to something less----
    Senator Carper. Less heavy? Less snappy?
    [Laughter.]
    Mr. Howard [continuing]. Less snappy, then I guess we would 
be in favor of a periodic review by the regulator and possibly 
even by Congress to make sure that over-zealous regulators 
aren't impeding the GSEs' ability to achieve their mission. And 
again, going back to Mr. Shear's comments, a regulator that has 
responsibility for both safety and soundness and the housing 
mission, I think will go very far toward achieving that.
    Senator Carper. OK. All right. Mr. Chairman, this has been 
a good hearing and I applaud you for bringing this group 
together and putting this issue on the fast track. Thank you so 
much.
    Chairman Dodd. I thank you, and I think we have sort of 
exhausted. When you spend 10 minutes on snap-back, I think we 
have kind of reached a----
    [Laughter.]
    We have really gotten down to the weeds on this one, I will 
tell you. This will be the last hearing we are going to have on 
the GSE issue here and we are going to try and mark up a bill 
here pretty quickly, if we can. My hope is we will use some 
good common sense here.
    I know there are those who, frankly, have been hostile to 
the GSE whole idea, and I am not one of those. I agree with 
those of you here. I think had we, in fact, adopted some of the 
legislative ideas earlier, we might be in a very different and 
more difficult situation today. It is one of those things where 
taking a little time--time can be an ally, and thinking things 
through, and in this case here, had we acted expeditiously on 
this matter earlier, the problem today, as serious as it is, I 
think it would be a more serious one. The liquidity provided by 
the GSEs here has been a lifesaver, at least at this point. So 
we don't want to miss that opportunity and understand the value 
and the mission statement of Fannie and Freddie and the Home 
Loan Banks.
    I am very grateful to all of you for being here this 
morning, grateful to Senator Shelby for his work he has done as 
Chairman of this committee in this area, as well, and to let 
you know that both on FHA and this issue, we are going to try 
and get something done as soon as we can. But again, we are 
looking for ideas, as well, on how to deal with the problem of 
keeping people in their homes if we can, those who deserve to 
be kept in their homes and can have the ability to do that.
    And the affordable housing issue, Ms. Andrews, you should 
know, I think you heard up here there is a lot of interest in 
it and you make a strong and wonderful case. That constituency 
is very lucky to have you as an advocate. You make an eloquent 
case for the issue.
    Senator Corker. Mr. Chairman, if I can make a comment----
    Chairman Dodd. Yes, Senator Corker.
    Senator Corker [continuing]. Since I know you are going to 
hit the gavel here soon, I, too, would like to thank the panel. 
I think that Senator Carper said there is actually a lot of 
agreement that we really need to--it looks like to me we just 
need to move ahead and solve this particular issue as far as 
the regulation and increased limits. I want to thank the panel 
for their testimony.
    To the Home Builders, I do want you to know that I are one, 
if you will. I made a living being a general contractor and I 
meant no disrespect as far as what you do. You are the same 
group that I have worked with for years in many different 
capacities who generally wants government off your back and 
really hates, if you will, so many of the things that we do 
with such a broad brush.
    My attempt here is really just to figure out a focused way, 
if you will, to deal with the home issues instead of such a 
broad-brush approach, and I hope you understand that. I think 
in many other ways, you respect that, but in this particular 
issue, I know it hits you right in the heart. I just have been 
a little disappointed in the way we have tried to stimulate the 
economy over the last month and I am trying to bring a narrower 
focus to that, so I just want you to understand that but I 
thank you for what you do.
    Mr. Howard. Thank you, Senator. We do understand.
    Senator Corker. OK.
    Chairman Dodd. Thank you, Senator Corker. Senator Carper, 
thank you.
    The committee will stand adjourned.
    [Whereupon, at 12:06 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]

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