[Senate Hearing 110-1014]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 110-1014


    TURMOIL IN THE U.S. CREDIT MARKETS: EXAMINING RECENT REGULATORY 
                               RESPONSES

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

                                HEARING

                               before the

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

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

     THE STEPS THE REGULATORS HAVE TAKEN TO IMPLEMENT THE HOPE FOR 
   HOMEOWNERS ACT, WHICH PASSED AS PART OF THE HOUSING AND ECONOMIC 
  RECOVERY ACT (HERA), AND THE TROUBLED ASSETS RELIEF PROGRAM (TARP), 
WHICH WAS AUTHORIZED AND FUNDED BY THE EMERGENCY ECONOMIC STABILIZATION 
    ACT OF 2008 (EESA), BOTH WITH REGARDS TO PROVIDING CAPITAL AND 
 LIQUIDITY TO THE FINANCIAL SYSTEM AND PREVENTING FORECLOSURES THROUGH 
                THE EXERCISE OF THE AUTHORITIES PROVIDED


                               __________

                       THURSDAY, OCTOBER 23, 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

                      Amy S. Friend, Chief Counsel

                    Mark Osterle, Republican Counsel

                       Dawn Ratliff, Chief Clerk
                      Devin Hartley, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor









                            C O N T E N T S

                              ----------                              

                       THURSDAY, OCTOBER 23, 2008

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Johnson..............................................     5
    Senator Schumer..............................................     5
    Senator Menendez.............................................     7
    Senator Corker...............................................     9

                               WITNESSES

Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation..    10
    Prepared statement...........................................    61
    Response to written questions of:
        Senator Dodd.............................................   105
        Senator Enzi.............................................   112
Neel Kashkari, Interim Assistant Secretary for Financial 
  Stability, and Assistant Secretary for International Affairs, 
  Department of the Treasury.....................................    12
    Prepared statement...........................................    77
    Response to written questions of:
        Senator Dodd.............................................   113
Brian D. Montgomery, Federal Housing Commissioner, and Assistant 
  Secretary for Housing, Department of Housing and Urban 
  Development....................................................    14
    Prepared statement...........................................    82
    Response to written questions of:
        Senator Dodd.............................................   123
James B. Lockhart, III, Director, Federal Housing Finance Agency.    16
    Prepared statement...........................................    86
    Response to written questions of:
        Senator Dodd.............................................   137
Elizabeth A. Duke, Member, Board of Governor of the Federal 
  Reserve System.................................................    18
    Prepared statement...........................................    99
    Response to written questions of:
        Senator Dodd.............................................   149
        Senator Enzi.............................................   160
        Senator Menendez.........................................   161

 
                  TURMOIL IN THE U.S. CREDIT MARKETS: 
                      EXAMINING RECENT REGULATORY 
                               RESPONSES

                              ----------                              


                       THURSDAY, OCTOBER 23, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:08 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.
    Let me, first of all, thank our witnesses and my colleagues 
for being here, and thank the audience that has joined us here 
this morning for this hearing. This hearing is entitled 
``Turmoil in U.S. Credit Markets: Examining Recent Regulatory 
Responses,'' and I am very grateful to all of you for taking 
the time out. I know you have other matters to be doing, so we 
are going to try and move along as rapidly as we can. I 
particularly want to thank Sheila Bair and Neel Kashkari. We 
have got you working overtime, obviously, and so we don't want 
to tie you up all day here with this. We will try and move 
along as quickly as we can.
    With that in mind, I am going to make a quick opening 
statement, turn to Senator Shelby for any opening comments, and 
then I would ask my colleagues if they could be very brief in 
their opening comments. Sheila Bair has her board meeting today 
in town, and so we want to be able to get her back to that 
meeting, and I understand that, but we have some very important 
questions.
    Senator Shelby. It could be an important meeting.
    Chairman Dodd. It could be important. So I will ask my 
colleagues if they could be very brief or reserve their opening 
statements for the questioning period when they get to it as a 
way to get right to our witnesses and have a chance to hear 
from them, which is critically important to all of us.
    With that, let me begin with some brief opening comments 
and then turn to Senator Shelby.
    This morning, we consider the recent regulatory responses 
to the ongoing turmoil in our national and global credit 
markets. Those responses have included a series of measures 
that are in many respects without precedent in our Nation's 
history. These measures began, for the most part, with the 
decision in March of this year to commit $30 billion in 
taxpayer-backed funds to facilitate the acquisition of Bear 
Stearns by JPMorgan Chase.
    They also include the decision by the Federal Reserve 
through the spring, summer, and fall to establish various 
facilities and initiatives to promote liquidity in the markets, 
including in the commercial paper markets. They include the 
takeover of the Nation's largest insurer, AIG, committing over 
$120 billion to this effort thus far. They include the decision 
to put Fannie Mae and Freddie Mac into conservatorship and 
provide them with $200 billion in Federal backstop.
    They include the decisions to guarantee non-interest-
bearing deposit accounts at insured depository institutions and 
to guarantee senior unsecured bank debt for a period of 3 
years. And, most recently, they include the decision to invest 
$250 billion into lending institutions, including some $125 
billion in just nine large lenders, in an effort to promote 
financial stability and liquidity.
    According to one report, decisions taken or implemented by 
Federal regulators in the past 7 months have committed no less 
than $5 trillion in taxpayer money to stemming the tide of the 
credit crisis. Five trillion dollars--that is an astounding 
sum, equivalent to roughly one-third of our annual economy. 
Taken together, these decisions have made the American taxpayer 
a guarantor, owner, and shareholder in the financial sector of 
our economy to a degree never before seen in our Nation's 
history and rarely seen in any free market economy.
    Certainly in recent months, no one can accuse Chairman 
Bernanke, Secretary Paulson, Chairman Bair, and others of 
timidity in the face of this crisis. Nearly 15 months ago, 
Chairman Bernanke pledged to me that he would use all of the 
tools at his disposal to maintain order, in a meeting we had in 
my office in August of 2007, in order to maintain order, 
stability, and liquidity in our capital markets. He has been 
true to his word. Likewise, Secretary Paulson, Chairman Bair, 
and Chairman Cox have all acted aggressively in recent weeks. 
And while the jury is still out regarding the ultimate impact 
of their actions, few if any doubt that those actions have 
forestalled the worst-case scenario of a complete seizure in 
the financial markets.
    Nevertheless, one cannot escape hard truths about these 
regulatory actions. First and foremost is the truth that they 
have largely addressed the symptoms of the credit crisis rather 
than its cause. For nearly 2 years, since I became Chairman of 
this Committee, I have urged forceful and definitive action to 
reverse the rising tide of foreclosures that began to wash over 
our economy in 2007. I have not been alone in this call. 
Colleagues on both sides of the political aisle here have been 
sounding that same note for almost the same period of time. So 
have economists and analysts from across the political 
spectrum, including such distinguished individuals as former 
Carter and Reagan Fed Chairman Paul Volcker, Nobel Prize 
winners Joseph Stiglitz and Paul Krugman, former Reagan Chief 
Economic Adviser Martin Feldstein, and Chairman of President 
Bush's Council of Economic Advisers Glenn Hubbard, and American 
Enterprise Institute Resident Fellow Alex Pollock.
    These and other experts all agree that the key to our 
Nation's economic recovery is the recovery of the housing 
market, and that the key to the recovery of the housing market 
is to reduce foreclosures. Without a solution to this central 
problem, the record-setting foreclosure rate, more Americans 
will continue to lose their homes and see the value of their 
largest asset plummet to the point where homeowners owe more on 
their mortgages than their homes are worth. Declining home 
values, vacant properties, and reduced revenues will 
destabilize more and more neighborhoods. As economist Mark 
Zandi noted in March of this year, and I quote him, ``Only if 
more homeowners are able to remain in their homes will the 
negative cycle of foreclosures begetting house price declines 
begetting more foreclosures be short-circuited. This in turn is 
necessary to ending the downdraft in the housing market that is 
weighing so heavily on the economy and financial system.''
    Without addressing the cause of the crisis as swiftly, 
aggressively, and decisively as the administration has tackled 
the symptoms of the crisis, house prices will continue to fall 
or stagnate, and the value of assets based on mortgages, 
trillions of dollars of which are on the books of our major 
financial institutions, will continue to be virtually 
unknowable. To date, with few exceptions, we have not seen, in 
my view, the required dedication.
    The longer we allow foreclosures to erode family wealth, 
neighborhood stability, and financial market liquidity, the 
longer our economy will take to recover from this crisis. The 
result will be the continuation of volatility and paralysis 
that our regulatory leaders are working so feverishly to 
address today.
    A number of us have been working very hard on this problem. 
The Hope for Homeowners Initiative that we created in the 
Housing Economic Recovery Act was a good start. Ultimately, it 
holds the promise of helping as many as 400,000 to a million 
more Americans obtain safe, secure, affordable mortgages. 
Similarly, the Emergency Economic Stabilization Act, which was 
signed into law October 3rd, obligates the Treasury to 
implement a plan to prevent foreseeable and avoidable 
foreclosures. Very importantly, Section 109 of that legislation 
authorizes the Secretary to use loan guarantees and credit 
enhancements to facilitate loan modifications to prevent 
avoidable foreclosures. This slender provision alone could help 
countless deserving Americans escape the foreclosure trap set 
up by predatory lenders.
    This morning we look forward to asking our witnesses what 
steps they are taking to implement these and other provisions 
designed to stop the hemorrhaging in our housing markets that 
has bled out into the wider economy of our country and across 
the globe.
    We also look forward to asking them what steps they are 
taking to ensure that the American taxpayer is not just 
bankrolling the banking industry, but benefiting as well in the 
form of expanded lending activity. It is beyond troubling to 
read in recent news reports that those lenders who will be 
receiving billions of dollars from U.S. taxpayers are 
considering using those dollars not to make loans but, rather, 
to pursue some acquisition opportunities and to create a 
capital cushion, on which they will comfortably sit while the 
American consumer and small business person struggles. Reading 
such a report, it is no surprise that a majority of Americans 
surveyed in a CNN/Opinion Research Corporation poll this past 
weekend disapproved of the regulators' actions that focus on 
the banking industry. Doing more for homeowners is the one 
policy solution that a majority of those Americans said they 
would support. If there were ever a time that demanded that we 
think anew, this is it. Now that the administration has taken 
strong measures to stabilize financial institutions, it is 
absolutely imperative, in my view, that we apply the same sharp 
and urgent focus to help the individual homeowners whose plight 
is at the root cause of this crisis and to the small business 
owners who are valiantly struggling to stay afloat in these 
times.
    We are very fortunate, as I said at the outset, to have a 
very distinguished panel of witnesses with us this morning. We 
look forward, as always, to hearing their thoughts on what 
steps we can and must take to turn from the failed policies and 
flawed thinking of the past and instead turn to our hopeful and 
prosperous future for our country.
    With that, let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    I believe today's hearing provides an important opportunity 
for this Committee to conduct much needed oversight of the 
administration's efforts to address the considerable problems 
in our financial markets. Foremost among these efforts is the 
Treasury Department's Troubled Asset Relief Program, or TARP. 
When first announced, this program was to be used to purchase 
troubled assets from financial institutions. As market 
conditions have changed, however, the program has evolved 
considerably.
    On October the 14th, the Department of the Treasury 
announced that it was going to use $250 billion from the 
program to purchase equity stakes in financial institutions. 
Half of this amount has already been used to take positions in 
nine of the largest domestic financial companies. The remaining 
$125 billion, it is my understanding, has been set aside and is 
available for use by thousands of other smaller financial 
institutions. And while we all recognize that markets move with 
incredible speed and that circumstances can change 
dramatically, in purchasing equity stakes in publicly held 
companies Treasury has deviated significantly from its original 
course.
    We need here to examine closely the reason for this change 
and to understand how and why the nine specific firms were 
chosen to receive the initial $125 billion. We also need to 
understand here in this Committee how the remaining funds are 
going to be made available to the thousands of firms who may be 
eligible to receive them. Finally, we must also ensure, I 
believe, that the appropriate oversight scheme is in place 
because hundreds of billions of dollars of taxpayer money are 
at risk here.
    The hearing here also gives us an opportunity to examine 
other recent initiatives intended to address the troubled 
marketplace. Senator Dodd has already mentioned Hope for 
Homeowners, but I can tell you--I believe he is on point here--
that unless we do something or can do something to address the 
underlying fundamentals of dealing with the mortgage 
foreclosures and real estate, we are going to be wasting 
perhaps a lot of money.
    Mr. Chairman, I look forward to the hearing, and I 
appreciate your calling it.
    Chairman Dodd. Thank you very much.
    Let me turn to Senator Johnson.

                STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Chairman Dodd, for holding this 
important hearing. In addition to the passage of the Emergency 
Economic Stabilization Act, there has been a rash of other 
actions by the Treasury, Fed, FDIC, and others to stabilize our 
economic situation. Today, we will take a closer look at these 
actions.
    There is a common thread between all of the actions taken 
in recent weeks: they are temporary. While I believe the 
Government's actions should be ``emergency'' measures, these 
are no small efforts. Within a few months, our country will 
have a new administration, and within a year these measures 
will expire. These actions make significant changes to our 
financial services regulatory structure, and this Committee 
needs to know what the end game is for these steps.
    Going forward, it is important to begin reviewing the 
structure of our financial system and developing regulation to 
create the kind of transparency, accountability, and consumer 
protection that now is lacking. I will continue fighting for 
good, effective regulation that balances consumer protection 
and sustainable economic growth.
    I am concerned we are not yet at the end of the road in 
terms of financial difficulties, but I am hopeful that the many 
actions taken in the past weeks will help stem our economic 
troubles.
    Chairman Dodd. Thank you very much, Senator.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman. As you 
have requested, I will withhold until the question period.
    Chairman Dodd. I thank you for that.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Chairman Dodd, for holding this 
important hearing to focus on the financial crisis and the 
administration's response.
    As we made clear in our negotiations with the 
administration over the Emergency Economic Stabilization Act, 
congressional oversight is essential in order to make sure the 
taxpayers' money is being used well and wisely, and these 
hearings are a vital and important element of that oversight, 
and I salute you for having them in a timely way.
    The unfortunate truth is that the financial crisis we are 
facing today is not the result of an act of God or a natural 
disaster, some completely unforeseeable set of entirely 
unpredictable circumstances. It is the product of two 
completely avoidable failures: the failure of regulatory 
agencies to do their job and properly oversee the industries 
and firms under their purview, and the failure of banks, 
mortgage brokers, rating agencies, and other financial 
institutions to appropriately measure risk and to act 
accordingly.
    The collapse of the housing bubble, which is at the root of 
all of this, as Senator Dodd has mentioned, was not the shock 
that many people want to make it out to be. There was plenty of 
evidence we were in the midst of a bubble and plenty of warning 
from a lot of smart people that it was going to pop sooner or 
later. But what it comes down to is that too many people were 
making too much money too easily and too quickly. Mortgage and 
financial firms started to behave like spoiled teenagers whose 
parents were on vacation. Once the party started, they didn't 
want it to end. And if they trashed the house in the process, 
well, maybe the maid would come and clean it up tomorrow. And 
they were right about one part of it. Their parents weren't 
home, because with the exception of Chairwoman Bair, who has 
been the adult voice in all of this, the regulators who should 
have put a stop to all of this nonsense before it got out of 
hand were nowhere to be found.
    This was not an accident. The problem at its root was the 
lack of regulation. Certainly the Government can overregulate 
and snuff out all entrepreneurial vigor for which this country 
is known. But that was not the problem of this administration. 
The explicit policy of this administration for the last 8 years 
has been the view ``Deregulate, deregulate, deregulate.'' The 
administration even appointed an SEC Commissioner and tried to 
elevate him to Chairman of the FTC who wanted to repeal New 
Deal regulations. And when that is not possible, the 
administration tries not to enforce the regulations that are on 
the books all too often.
    We need thoughtful, smart, tough, and more unified 
regulation, which I know under Chairman Dodd and Senator 
Shelby's leadership we will endeavor to put in place early next 
year.
    Now, of course, we know who is stuck with the cleaning bill 
for this mess: the American taxpayers. If each of us was left 
to our own devices, each of us would have designed a different 
rescue plan. Unfortunately, when left with the choice between 
acting on this package or doing nothing, there wasn't really a 
choice at all. We had to act. And Secretary Paulson, Chairman 
Bernanke, and Chairwoman Bair all deserve credit for not 
letting the ideology of do nothing, complete laissez-faire, get 
in the way of working to bring us back from the brink of 
absolute disaster.
    But that does not mean my colleagues and I are happy about 
what we have had to do, nor does it mean we do not have serious 
questions remaining about how we are proceeding. I applaud 
Secretary Paulson for recognizing, despite his initial 
opposition, that the best approach to this crisis is the direct 
injection of capital into banks. I have argued from the very 
beginning that this is clearly the most effective way to 
support the banks and the financial system more generally. The 
history of our own Depression Era agency, the RFC, as well as 
experiences of both Japan and Sweden in the past decades have 
shown that, when done properly, capital infusions provide the 
best bang for the buck.
    But doing it properly is the key, and I continue to have a 
number of serious questions about how this program is being 
implemented. I remain especially concerned that in the 
Treasury's zeal to make the capital injection program easily 
digestible for the banks, we are feeding them a little too much 
dessert and not making them eat enough of their vegetables.
    Though you and I have spoken about this, Mr. Kashkari--and 
I very much appreciate your position and your rising to take 
this job at this crucial time--I am still not convinced that it 
makes much sense for banks that accept capital from the 
Government to continue paying dividends on their common stock. 
There are far better uses of taxpayer dollars than continuing 
the dividend payments to shareholders. And the program will 
only be effective if it is put to good use.
    With that in mind, I, along with my colleagues Senator Jack 
Reed and Senator Menendez, have been urging the Treasury 
Department to issue guidelines--not hard rules, not legal 
regulations, but standards that will help guide institutions' 
behavior now that taxpayer money has been invested. First and 
foremost, I believe there should be guidelines on the use of 
this capital. I would like the Treasury to set out goals, 
perhaps based upon an institution's previous lending history, 
for the amount of lending that each institution that receives 
capital injection should be doing. This will help prevent 
institutions from hoarding Government capital against future 
losses and get the money quickly out to Main Street, which has 
been our stated goal all along.
    On the flip side of that coin, I think Treasury and the 
financial regulators should issue guidance to discourage 
institutions from using this funding to engage in the kinds of 
risky and exotic financial activities that got us into this 
mess. We are not investing in these institutions just to see 
the financial wizards go back to playing their high stakes 
game, this time with some taxpayer money.
    Third, and finally, stronger standards of care for loan 
modifications are needed. Chairman Bair has led the charge on 
this front, and the rest of the regulators and Treasury should 
follow her lead. There should be a requirement that any 
institution receiving assistance under the TARP should have to 
adopt a systematic and streamlined approach to loan 
modifications, modeled on the approach that the FDIC has 
utilized in institutions that it controls. Declining home 
prices are the root cause of this economic crisis, and avoiding 
foreclosures through loan modifications is perhaps the single 
greatest step we can take to alleviate the current situation.
    Finally, last but not least, I would like to see stronger 
guidance issued to companies with regard to executive 
compensation. Even under the rules issued by Treasury, in some 
cases a great deal of discretion is left in the hands of the 
compensation committees of each institution. The Treasury 
Department should provide clarification and oversight for the 
implementation of its own rules and also begin the process of 
determining compensation best practices on a broader scale.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator.
    Senator Hagel.
    Senator Hagel. No, sir.
    Chairman Dodd. Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    You know, Mr. Chairman, I woke up this morning and read a 
quote from Secretary Paulson that said, ``I could have seen the 
subprime problem coming earlier, but I am not saying I would 
have done anything differently.''
    Not done anything differently.
    As one of the Members on this Committee who in March of 
last year said at a hearing that you held we are going to have 
a tsunami of foreclosures and the administration said that was 
an exaggeration, I am concerned now that we are not dealing 
with this much differently. The spark that led to this economic 
fire was the housing market, and unless we attack it at its 
root, it is not going to stop the wildfire that we are in.
    In the month of August, over 9,800 homes entered 
foreclosure every day. If this statistic was that 9,800 Wall 
Street jobs were being lost every day, we would have ended this 
a long time ago.
    And today we learn that the number of foreclosure filings 
grew by more than 70 percent in the third quarter of this year 
compared with the same period in 2007. And, unfortunately, Mr. 
Chairman, in New Jersey the news was even worse. It rose to 95 
percent in foreclosure filings in the same period.
    I believe, Mr. Chairman, we can no longer sit back and hope 
that lenders do the right thing. We can no longer simply 
encourage loan modifications. That clearly does not work. We 
cannot ask them nicely to do this. That does not work. I had 
one case in which a community development entity went to save a 
home of someone. There was $175,000 owed on it. They made an 
offer to the bank for $160,000. The bank turned it down. They 
went to the foreclosure sale with the $175,000 check, certified 
check to pay it off in full, and the bank bid it up to 
$180,000.
    The Securities and Exchange Commission expected Wall Street 
to regulate itself and got burned. Now we are expecting lenders 
to modify loans on their own. Do we really expect a different 
result?
    I do not believe Treasury is doing what is necessary to 
modify loans in exchange for the infusion of taxpayer dollars. 
And I think banks have to understand that these funds are not a 
gift. If they do not want to play by our rules, then they 
certainly do not need to cash the check. That is one set.
    And then, finally, Mr. Chairman, the other set is people 
and businesses on Main Street are counting on the banks to use 
their capital that we have infused to free up lending, to 
prevent foreclosures, and to stimulate the economy. If used 
correctly, they are going to help small businesses stay open, 
keep their employees on the payroll, help students get college 
loans, families get auto loans, and homeowners modify 
mortgages. But if, in fact, they do not use it as we hope and 
unless we give them direction, if they stuff it under the 
mattress, then ultimately we may have made a CEO's sleep at 
night comfortable where we have done nothing about stimulating 
Main Street.
    Finally, Mr. Chairman, I do appreciate Mr. Kashkari's 
efforts on minority participation here. I think it is 
critically important, and we are going to continue to monitor 
that.
    And, last, I am gravely concerned about a situation where 
banks are taking advantage of AIG's low credit rating to make a 
windfall off of transactions they have with the Nation's mass 
transit agencies. And we are asking Treasury--and we will 
submit a question for the record, but because of the urgency of 
it--to have someone senior work with our Nation's transit 
agencies to make sure that they and the taxpayers' money are 
being protected.
    And with that, Mr. Chairman, I look forward to the 
witnesses.
    Chairman Dodd. Thank you very much, Senator.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Mr. Chairman, I will honor the not making a 
long statement. I am troubled by some of the comments that I 
have heard. I do appreciate the way some of the witnesses have 
interacted with us over time, and I do not think we would be 
having these hearings if it was solely because the housing 
market had collapsed, which any reasonable person would have 
expected that to do. The exuberance here was ridiculous. I 
think it is because of the financial wizardry, and I hope that 
we will not move off of focusing on that and try to focus on 
the wrong things.
    I am very concerned about many of the statements that have 
been made, and I hope this hearing will shed light on the 
direction that we ought to be going. But thank you very much 
for having this hearing.
    Chairman Dodd. I thank you, Senator.
    Let me thank our colleagues, by the way, on both sides of 
the aisle for making the effort to be here today, too, as well, 
only 12 days away from our national election. The fact that 
people are back from their States and participating in this 
very important hearing is something I appreciate, taking time 
away from their campaigns in the case of several people, 
actually candidates on a ballot. So being here is something 
that I am deeply grateful to my colleagues for as well.
    With that, Sheila, we will begin with you, and let me just 
briefly introduce everybody so we can move quickly. Sheila 
Bair, as everyone knows, is the Chair of the Federal Deposit 
Insurance Corporation, no strange to this Committee at all. As 
Chair of the FDIC, she has taken a very proactive and very 
helpful role. I think several Members have made this point, and 
I want to add my words as well. Everyone has been working very 
hard, but in addition to hard work, you have been very creative 
and imaginative, I think, in terms of ideas that are coming 
forward, and I am going to be focusing my questions to you on 
the ideas you have, talking with Mr. Kashkari as well, about 
Treasury's response, the legislation we adopted, the 
authorities given. So just to have you be thinking about this, 
there are a lot of issues, and Bob Corker is absolutely 
correct. That is not the only subject matter. But certainly in 
my view, dealing with foreclosure issues is a critical one, so 
we thank you very, very much for being here.
    Neel Kashkari is the Interim Assistant Secretary for 
Financial Stability and Assistant Secretary for International 
Affairs at the U.S. Department of the Treasury. That is a long 
title, for the fact that you have been asked to sort of handle 
this large issue and the Troubled Asset Relief Program, the 
TARP program. And I want to note that Mr. Kashkari played a 
very critical role in negotiating the details of these. We 
spent a lot of hours together over 13 days beginning on 
September 17th to October 1. The 13 days of September are ones 
that none of us will ever forget in terms of what happened, and 
you were very influential and supportive of those efforts that 
Senator Schumer has talked about earlier this morning.
    Our next witness is the Honorable Brian Montgomery, again, 
no stranger to the Committee--Brian, we thank you for being 
here--the Federal Housing Commissioner and Assistant Secretary 
at the U.S. Department of Housing and Urban Development. Mr. 
Montgomery is currently responsible for the FHA program, which 
creates stable homeownership opportunities. He oversees 
FHASecure and Hope for Homeowners as well, designed to help 
families avoid foreclosure. I spoke yesterday to the Bristol, 
Connecticut, Chamber of Commerce, and several people stood up 
and had great reviews to say about the modernization of FHA and 
how FHA is working today. So people out in the street across 
the country are reacting to what has been going on. So we thank 
you for your work as well.
    Jim Lockhart is the Director of the Federal Housing Finance 
Agency, assumed that position with the signing of the Housing 
and Economic Recovery Act in July of this year; and prior to 
that, he was the Director of the Office of Federal Housing 
Enterprise Oversight, or OFHEO. I would be remiss if I did not 
mention that Mr. Lockhart is also a native of Connecticut. 
Politics is always local, Mr. Lockhart, right? I welcome you 
here.
    And our last witness, Elizabeth Duke, is the Governor of 
the Board of Governors of the Federal Reserve System. She took 
her office on August 5, 2008, and is serving out a term that 
expires on January 31, 2012, and we thank you as well, Ms. 
Duke, for being with us this morning.
    We will begin with you. All statements, all supporting 
documents will be included in the record, and we welcome your 
statements.

    STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT 
                       INSURANCE COMPANY

    Ms. Bair. Thank you, Mr. Chairman, Senator Shelby, and 
members of the Committee. I appreciate the opportunity to 
testify on recent efforts to stabilize the Nation's financial 
markets and to reduce foreclosures.
    Conditions in the financial markets have deeply shaken the 
confidence of people around the world in their financial 
systems. The events of the past several weeks are 
unprecedented, to say the least. The Government has taken a 
number of extraordinary steps to bolster public confidence in 
the U.S. banking system.
    The most recent were the measures last week to recapitalize 
our banks and provide temporary liquidity support to unlock 
credit markets, especially interbank lending. These moves match 
similar actions taken in Europe. Working with the Treasury 
Department and other bank regulators, the FDIC is prepared to 
do whatever it takes to preserve the public's trust in the 
financial system.
    Despite the current challenges, the bulk of the U.S. 
banking industry remains well capitalized. What we now face is 
a confidence problem, largely caused by uncertainty about the 
value of mortgage assets, which has made banks reluctant to 
lend to each other, as well as to consumers and businesses.
    Our efforts at the FDIC have been focused on liquidity. 
Last week, the FDIC Board and the Federal Reserve Board 
recommended that the Secretary of the Treasury invoke the 
``systemic risk exception,'' which he did, after consulting 
with the President. The FDIC Board then used the authority to 
create a Temporary Liquidity Guarantee Program. This program 
has two features. The first guarantees new, senior unsecured 
debt issued by banks and thrifts and by most bank and thrift 
holding companies. This will help the banks fund their 
operations. Both term and overnight funding of banks have come 
under extreme pressure in recent weeks, with interest rates for 
short-term lending ballooning to several hundred basis points 
over the rate for comparable U.S. Treasuries. The guarantee 
will allow banks to roll maturing senior debt into new issues 
fully backed by the FDIC.
    The second feature of the new program provides insurance 
coverage for all deposits in non-interest bearing transaction 
accounts at participating institutions. These accounts are 
mainly for payment processing, such as payroll accounts used by 
businesses. Frequently, they exceed the $250,000 insurance 
limit and many smaller, healthy banks had expressed concerns 
about major outflows from these accounts. This guarantee, which 
runs through the end of next year, should stabilize those 
accounts and help us avoid having to close otherwise viable 
banks because of deposit withdrawals.
    This aspect of the program allows bank customers to conduct 
normal business knowing that their cash accounts are safe and 
sound. This is the fundamental goal of deposit insurance, 
safeguarding people's money, and it is vital to public 
confidence in the banking system.
    It is important to note that the new program does not use 
taxpayer money or the Deposit Insurance Fund. Instead, it will 
be paid for by direct user fees.
    We also remain focused on the borrower side of the 
equation. Everyone agrees that more needs to be done for 
homeowners. We need to prevent unnecessary foreclosures and we 
need to modify loans at a much faster pace. Preventing 
unnecessary foreclosures will be essential to stabilizing home 
prices and providing stability to mortgage markets and the 
overall economy.
    As you know, a number of steps have already been taken in 
this direction, but I think it is clear by now that a 
systematic approach is needed to help us finally get ahead of 
the curve. The FDIC is working closely and creatively with 
Treasury on ways to use the recent rescue law to create a clear 
framework and economic incentives for systematically modifying 
loans. The aim is for loan servicers to offer homeowners more 
affordable and sustainable mortgages.
    In sharing ideas with Treasury, we have drawn from the 
program that we are using for modifying loans at IndyMac 
Federal Bank since we took control of that bank in July. We 
have introduced a streamlined process to systematically modify 
troubled home mortgages owned or serviced by IndyMac. As we 
have done in some past bank failures, we initially suspended 
most foreclosures in order to evaluate the portfolio and to 
identify the best ways to maximize the value of the 
institution.
    Through this week, IndyMac has mailed more than 15,000 loan 
modification proposals to borrowers. More than 70 percent have 
already responded to the initial mailings in August. More than 
3,500 borrowers to date have accepted the offers and thousands 
more are being processed.
    The hope is that our mortgage relief program can be a model 
and a catalyst to spur loan modifications across the country. 
It is a process that most servicers can use under existing 
legal arrangements.
    In conclusion, the FDIC is fully engaged in preserving 
trust and stability in the banking system. The FDIC remains 
committed to achieving what has been our core mission since we 
were created 75 years ago in the wake of the Great Depression, 
protecting depositors and maintaining public confidence in the 
financial system.
    Thank you very much.
    Chairman Dodd. Thank you very much.
    Mr. Kashkari.

  STATEMENT OF NEEL KASHKARI, INTERIM ASSISTANT SECRETARY FOR 
 FINANCIAL STABILITY AND ASSISTANT SECRETARY FOR INTERNATIONAL 
                AFFAIRS, DEPARTMENT OF TREASURY

    Mr. Kashkari. Chairman Dodd, Senator Shelby, and members of 
the Committee, good morning and thank you for the opportunity 
to appear before you today.
    I would like to provide you with an update on the Treasury 
Department's progress implementing our authorities under the 
Emergency Economic Stabilization Act of 2008. My written 
testimony includes a much more detailed description of where we 
are, but I am going to give a summary right now.
    Every American depends on the flow of money through our 
financial system. They depend on it for car loans, for home 
loans, for student loans, and to meet their basic family needs. 
Employers rely on credit to pay their employees. In recent 
months, as you know, our credit markets froze up and lending 
became extremely impaired.
    Congress, led by this Committee and others, recognized the 
threat the frozen credit markets posed to Americans and to our 
economy as a whole. Secretary Paulson is implementing the 
Department's new authorities with one simple goal: to restore 
capital flows to the consumers and businesses that form the 
core of our economy.
    The Treasury has moved quickly since enactment of the bill 
to implement programs that will provide stability to our 
markets, protect the taxpayers to the maximum extent possible, 
and help our financial institutions to support our consumers 
and businesses across the country.
    Since the announcement of our capital purchase program, we 
have seen numerous signs of improvement in our markets and in 
the confidence of our financial institutions. While there have 
been recent positive developments, our markets remain fragile.
    I would like to spend just a quick few moments outlining 
steps we have taken to implement the TARP. We have seven policy 
teams driving forward and they are making rapid progress.
    First, our mortgage-backed securities purchase program. We 
selected the Bank of New York Mellon to serve as a custodian 
and expect to hire asset managers in the coming days. A 
Treasury team has been working around the clock to design the 
auction, identify which mortgage-backed securities to purchase, 
and to determine how best to reach the thousands of financial 
institutions who may be bidding.
    Two, whole loan purchase program. This team is working with 
bank regulators to identify which types of loans to purchase 
first, how to value them, and which purchase mechanism will 
best meet our policy objectives. They also expect to hire asset 
managers very soon.
    Third, insurance program. We are establishing a program to 
insure trouble mortgage-related assets. We have submitted a 
request for comment to the Federal Register and are seeking the 
best ideas on structuring options for that program.
    Four, equity purchase program. Treasury worked very closely 
with the four banking regulatory agencies to design and 
announce a voluntary capital purchase program to encourage U.S. 
financial institutions to raise capital to increase the flow of 
financing to U.S. businesses and consumers and to support the 
U.S. economy. Treasury will purchase up to $250 billion of 
senior preferred shares on standardized terms. This is an 
investment. The Government will not only own shares that we 
expect will result in a reasonable return, but will also 
receive warrants for common stock in participating 
institutions.
    The program is available to qualifying U.S. depository 
institutions. We are working very hard to publish the legal 
documentation required so that private banks can participate on 
the same terms as public institutions. We have allocated 
sufficient capital so that all qualifying banks can fully 
participate.
    Treasury and the banking regulatory agencies have announced 
a streamlined and systematic process to apply for the capital 
program. Financial institutions should first consult with their 
primary Federal regulator and then use the single standardized 
application form that's available on their regulator's website. 
Once the regulator has reviewed the application, they will send 
the application to the Treasury Department. Treasury will give 
considerable weight to the recommendations of the regulators 
and decide ultimately whether or not to make the capital 
purchase. All completed transactions will be announced to the 
public within 48 hours, but we will not announce any 
applications that are withdrawn or denied.
    No. 5, homeownership preservation. We have begun working 
with the Department of Housing and Urban Development and HOPE 
NOW to maximize the opportunities to help as many homeowners as 
possible while also protecting the taxpayers. We have hired 
Donna Gambrell, who is the Director of the Community 
Development Financial Institution Fund and former Deputy 
Director of Consumer Protection and Community Affairs at the 
FDIC to oversee this effort and serve as our interim Chief of 
Homeownership Preservation.
    When we purchase mortgages or mortgage-backed securities, 
we will look for every opportunity possible to help homeowners.
    No. 6, executive compensation. Companies participating in 
Treasury's programs must adopt the Treasury Department 
standards for executive compensation and corporate governance.
    And No. 7, compliance. Treasury is committed to 
transparency and oversight in all aspects of this program. We 
have been meeting regularly with the Government Accountability 
Office to monitor the program and GAO is establishing an office 
onsite at Treasury. The Financial Stability Oversight Board has 
already met several times and they selected Chairman Bernanke 
to serve as Chairman of the Oversight Board. The Administration 
is also working to identify potential candidates to serve as 
Special Inspector General. In the interim, Treasury is working 
with our own Inspector General to monitor our progress.
    Now let me spend just a moment on procurement. Our approach 
to procurement is based on the following strategy: first, in 
order to protect the taxpayers, we will seek the very best 
private sector expertise to help us execute this program.
    Second, to the extent possible, opportunities to compete 
for contracts and to provide services should be available to 
small businesses, veteran-owned businesses, minority, and 
women-owned businesses.
    And third, we are taking appropriate steps to mitigate and 
manage potential conflicts of interest. Firms competing to 
provide services must disclose their potential conflicts of 
interest and recommend specific steps to manage those 
conflicts. Treasury will only hire firms when we are confident 
in our ability and their ability to successfully manage those 
conflicts. Our Chief Compliance Officer will be responsible for 
making certain that firms comply with the agreed upon 
mitigation steps.
    Chairman, as you can see, we have accomplished a great deal 
in a short period of time, but our work is only beginning. A 
program as large and complex as this would normally take months 
or even years to establish. But we do not have months or years. 
Hence, we are moving to implement the TARP as quickly as 
possible while working to ensure high quality execution.
    Thank you.
    Chairman Dodd. Thank you very much, Mr. Kashkari.
    Mr. Montgomery.

STATEMENT OF BRIAN MONTGOMERY, FEDERAL HOUSING COMMISSIONER AND 
     ASSISTANT SECRETARY, DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    Mr. Montgomery. Chairman Dodd, Senator Shelby, members of 
the Committee, thank you for the opportunity to address you 
this morning on the role of the Department of Housing and Urban 
Development and, more particularly, the Federal Housing 
Administration, in addressing the mortgage crisis.
    I would like to focus my brief remarks this morning on the 
recently launched Hope for Homeowners program, as well as a 
counter cyclical role that FHA plays in the market, starting 
with the latter.
    It was just 2 years ago that FHA was viewed as all but 
irrelevant. Subprime and Alt-A loans were the products of 
choice and we at FHA were left standing on the sidelines, 
hoping that the first time home buyers, who would have been 
better served by FHA, would find the means to survive the risky 
and costly products they chose instead.
    As you well know, we voiced our concerns throughout this 
period, publicly asserting that families who could not qualify 
for prime rate mortgage products should access market rate 
financing through the FHA rather than paying more in their 
interest rates.
    As you know, unfortunately, the crisis overtook the market 
and FHA became important once again as a result of the overall 
tightening and private conforming and the evaporation of non-
prime products.
    As a result of this contraction, in just the last 2 years 
FHA's market share has grown from 2 percent to 17 percent of 
the mortgage market. That is overall mortgage market. Specific 
to new construction, our market is now 25 percent. Let me put 
this increase in perspective with real numbers. In fiscal year 
2007, we endorsed about 425,000 single family loans, including 
purchase loans, by the way, and refis. In fiscal year 2008, we 
endorsed more than 1.2 million, including 632,000 purchase 
loans. If you think about it, in the middle of this turmoil, we 
did 632,000 purchase loans last fiscal year.
    In other words, our overall business has more than doubled 
this year. And we project that next year that number will be 
about 1.4 million. In fact, we have pumped close to $200 
billion of much needed liquidity into the mortgage market 
during that time.
    Let me just also say that our application rate is on a 
trajectory of 3 million applications a year, and these are 
levels that we have not seen in more than 10 years.
    A lot of this business has been coming in through the 
FHASecure product, which many of you are familiar with. I 
remember testifying before this Committee about a year ago that 
I thought we might reach 240,000 borrowers in fiscal year 2008. 
I was off with that estimate. Since we announced the FHASecure 
product a little more than a year ago close to 400,000 families 
have refinanced out of a burdensome mortgage into a safe, 
affordable FHA product. We think that number will push close to 
500,000 by the end of the calendar year.
    Let me just talk briefly about what we have done to help 
our FHA-insured borrowers who are experiencing troubles. In 
fiscal year 2008, FHA servicers completed more than 100,000 
loss mitigation actions. Of these, 96,500 are currently 
retaining homeownership. This is an 11.5 percent increase in 
homeownership retention over 2007. And overall the expected 
retention rate of these borrowers is 87 percent. In fact, our 
loss mitigation efforts by HUD have helped more than 300,000 
families over the last 3 years.
    I am happy to say that we also now have the Hope for 
Homeowners refinance rescue product available. The Oversight 
for H4H, as we call it, composed of the agencies represented 
here today, accomplished the goal of getting this program up 
and running by October the 1st, only 60 days after passage of 
the law.
    As a result of this tremendous team effort, we now have the 
additional rescue program available to the lending community 
and to borrowers alike.
    I'm sure you are wondering when we will see the first loan 
insured, the first family saved, and another tool to help us 
see the beginning of the end of this crisis. Let me say that I 
know that all of us up here today testifying before you feel 
the same sense of urgency. But it will take time for the 
lending community to get the program up and running. The unique 
statutory requirements make the program very different from any 
other FHA product and require lenders to take additional time 
and care to set up the program and the operations in a way that 
supports the program fully.
    We have devoted a lot of resources over the last 2 weeks, 
reaching out and educating the lending community and counselors 
about this program. This is what we have heard from them: while 
they are all very interested in offering the product, they need 
to be vigilant and want to be vigilant about the implementation 
process. Lenders and counselors alike need to train staff. They 
need to change protocols, modify systems, and take other steps 
to ensure that their companies are complying with the terms of 
the new program.
    In addition, lenders must modify their internal IT systems 
and protocols to ensure that they support the product fully 
before they move to full implementation. This kind of activity 
is time consuming and we should all embrace the efforts by the 
lending community to handle this program in a way that ensures 
its success.
    I feel very confident that FHA will continue to play a 
critical role in helping families in need of refinance loans to 
save their homes, and also families who need safe market rate 
financing to purchase a home.
    I thank you for the opportunity to testify here today.
    Chairman Dodd. Thank you very much, Mr. Montgomery.
    Mr. Lockhart.

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

    Mr. Lockhart. Chairman Dodd, Senator Shelby, and members of 
the Committee, thank you for the opportunity to testify on the 
Federal Housing Finance Agency's response to the turmoil in the 
credit markets.
    I will begin by talking about our activities as the 
regulator of Fannie Mae, Freddie Mac, and the Federal Home Loan 
Banks, and then turn to TARP.
    There is no doubt that the mortgage market pendulum swung 
extremely widely toward easy credit, poor underwriting, risky 
mortgages, and even fraud. The market had to correct. But we 
need to prevent the pendulum from swinging too far in the other 
direction. Fannie Mae, Freddie Mac, and the 12 Federal Home 
Loan Banks have played a critical role in dampening that 
pendulum swing.
    In mid-2006, their market share of all new mortgage 
originations was less than 40 percent. With the demise of the 
private label mortgage-backed security market, their share is 
now 80 percent.
    On September 6th, FHFA placed Fannie Mae and Freddie Mac 
into conservatorship. Market conditions, compounded by a weak 
regulatory capital structure, meant that they were unable to 
fulfill their mission of providing stability, liquidity, and 
affordability to the mortgage market.
    A critical component of the conservatorship was the three 
Treasury facilities that were put in place. The most important 
one is a Senior Preferred Agreement, which ensures that the 
Enterprises always will have a positive net worth. These $100 
billion each facilities, which have not been withdrawn on yet, 
are well over three times the statutory minimum capital 
requirements and last until all liabilities are paid off. 
Effectively, it is a government guarantee of their existing and 
future debt in mortgage-backed securities. Both can grow their 
portfolios by over $100 billion, which will further support the 
mortgage market, as will Treasury's mortgage-backed security 
purchase facility.
    Treasury has also provided the Enterprises and the Federal 
Home Loan Banks credit facilities to provide liquidity if 
needed. The Federal Home Loan Banks counter-cyclical capital 
structure has allowed them to play a critical role in 
supporting financial institutions and mortgage lending over the 
last year. Their secured advances to financial institutions 
have just reached $1 trillion, which is about 58 percent up 
from June of last year.
    The new legislation added the Enterprises affordable 
housing goals and mission enforcement to the responsibilities 
of the agency. I have instructed both CEOs to examine their 
underwriting standards and pricing. Earlier this month, Fannie 
Mae and Freddie Mac canceled a planned doubling of an adverse 
market delivery fee. I expect future changes to reflect both 
safe and sound business strategy and attentiveness to their 
mission.
    A critical component of stabilizing the mortgage market is 
assisting borrowers at risk of losing their homes by preventing 
foreclosures. Keeping people in their homes is critical, not 
only for the families and the neighborhoods, but for the 
overall housing market.
    Through August, the Enterprises have done $130,000 in loss 
mitigation activities, but they have to do a lot more. A more 
systematic approach to loan modifications is essential. Well 
before the conservatorship actions, we had asked the 
Enterprises to accelerate their loan modifications with 
features that included potential principal write downs and 
forbearance. We encouraged them to join the FDIC's IndyMac loan 
modification program. I expect loan modifications to be a 
priority, both as a matter of good business and supporting 
their mission.
    During this difficult time in our financial markets, the 
FHFA has been working with the Treasury, the Fed, the SEC, and 
the Federal banking agencies to monitor market conditions and 
coordinate regulatory activities. We have been assisting the 
Treasury Department as it develops ideas for the TARP. I also 
serve as a Director on the Financial Stability Oversight Board.
    Foreclosure mitigation is an important objective under the 
TARP program. The objective applies to all Federal agencies 
that hold troubled assets, including FHFA as conservator of 
Fannie Mae and Freddie Mac. In support of the TARP, and as a 
Federal property manager, FHFA will work to ensure the 
successes of these foreclosure minimization programs.
    In conclusion, FHFA and the housing GSEs have a critical 
role in returning the mortgage market to stability and 
preventing foreclosures. It will take time but I believe the 
many steps that have been taken will provide a much more solid 
foundation for creating a stable future for the mortgage 
markets and, most importantly, American homeowners, renters, 
workers, and investors.
    I look forward to working with the Committee and all of 
Congress in achieving this goal.
    Thank you.
    Chairman Dodd. Thank you very much, Mr. Lockhart.
    Ms. Duke, welcome to the Committee.

STATEMENT OF ELIZABETH A. DUKE, GOVERNOR, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Ms. Duke. Thank you.
    Chairman Dodd, Senator Shelby, and other members of the 
Committee, I appreciate this opportunity to discuss recent 
actions taken to stabilize financial markets and foreclosure 
prevention efforts. My oral remarks today all focus primarily 
on actions taken by the Federal Reserve. My colleagues are all 
focusing on other important initiatives at their agencies.
    Financial markets have been strained for more than a year, 
as house prices declined, economic activity slowed and 
investors pulled back from risk taking. These strains 
intensified in recent weeks. Lending to banks and other 
financial institutions beyond a few days virtually shut down. 
Withdrawals from money market mutual funds and prospects that 
net asset values would fall further severely disrupted 
commercial paper and other short-term funding markets. Longer 
term credit became much more costly as credit spreads for bonds 
jumped and interest rates rose.
    These problems and increasing concerns about the economy 
caused equity prices to swing sharply and decline notably. 
Policymakers here and in other countries have taken a series of 
extraordinary actions in recent weeks to restore market 
functioning and improve investor confidence.
    The Federal Reserve has continued to address ongoing 
problems in interbank funding markets by expanding its existing 
lending facilities and recently increased the quantity of term 
funds at auctions to banks and accommodated greater demand for 
funds from banks and primary dealers.
    We also increased our currency swap lines with foreign 
central banks. To alleviate pressure on money market mutual 
funds and commercial paper issuers we implemented several 
important temporary facilities, including one to provide 
financing to banks to purchase high quality asset-backed 
commercial paper for money funds, and another to provide a 
backstop to commercial paper markets by purchasing highly rated 
commercial paper directly from businesses at a term of 3 
months.
    On Tuesday of this week we announced another program in 
which we will provide senior secured financing to conduits that 
purchase certain highly rated commercial paper and certificates 
of deposit from money market mutual funds.
    The financial rescue package recently enacted by Congress, 
the Emergency Economic Stabilization Act (EESA), provides 
critically important new tools to address financial market 
problems. EESA authorized the Troubled Asset Relief Program 
(TARP), which allows Treasury to buy troubled assets, to 
provide guarantees, and to inject capital to strengthen the 
balance sheets of financial institutions. As provided in the 
Act, the Federal Reserve Board and its staff are consulting 
with Treasury regarding the TARP and Chairman Bernanke serves 
as Chairman of the Oversight Board for TARP.
    Last week the first use of TARP funds was announced. The 
Treasury announced a voluntary capital purchase program and 
nine of the Nation's largest financial institutions agreed to 
participate. A second complementary use of TARP funds will be 
used to purchase mortgage assets in order to remove uncertainty 
from lenders' balance sheets and to restore confidence in their 
viability.
    Another objective is to improve the modification efforts of 
services on these loans to prevent more avoidable foreclosures.
    The Federal Reserve System is also working to develop 
solutions to rising foreclosures. For example, the Federal 
Reserve has worked with other agencies to put in place the 
standards and procedures for the new Hope for Homeowners 
program, and I serve on that Oversight Board. These loans can 
help borrowers who might otherwise face foreclosure because the 
new loan payments are affordable and the homeowner gets some 
equity in their homes. Lenders and servicers are analyzing 
their borrowers for good candidates for the H4H program. The 
FHA and its authorized lenders are poised to process 
applications.
    We do appreciate the additional flexibility provided in the 
program by Congress in EESA, in particular allowing up front 
payments to junior lien holders that agree to release their 
claims.
    In addition, the Federal Reserve System is strategically 
utilizing its presence around the country through its regional 
Federal Reserve Banks and their branches to address 
foreclosures. We have employed economic research and analysis 
to target scarce resources to the communities most in need of 
assistance.
    The Federal Reserve System has sponsored or cosponsored 
more than 80 events related to foreclosures since last summer, 
reaching more than 6,000 lenders, counselors, community 
development specialists, and policymakers. For example, we 
sponsored five ``Recovery, Renewal, Rebuilding'' forums this 
year in which key experts discuss the challenges related to REO 
inventories and vacant properties and explored solutions.
    We also cosponsored an event at Gillette Stadium in August 
that brought together more than 2,100 borrowers seeking help 
with servicers and housing counselors.
    In conclusion, the Federal Reserve has taken a range of 
actions to stabilize financial markets and to help borrowers 
and communities. Taken together, these measures should help 
rebuild confidence in the financial system, increase the 
liquidity of financial markets, and improve the ability of 
financial institutions to raise capital from private sources.
    Efforts to stem avoidable foreclosures, I believe, will 
also help homeowners and communities. These steps are important 
to help stabilize our financial institutions and the housing 
market and will facilitate a return to more normal functioning 
and extension of credit.
    Thank you.
    Chairman Dodd. Thank you, Ms. Duke.
    We have been joined on the Committee by Senator Bob Casey 
of Pennsylvania as well. Bob, we thank you for being here this 
morning.
    I will begin the questioning here. I want to have the clock 
on for 5 minutes, so we will try to be brief in our questions 
here so everyone gets a chance to participate, knowing full 
well we have got a couple of people who are going to have some 
other demands.
    Let me begin. I want to pick up--Bob Menendez, I thought--
whether anyone wants to agree with his conclusions or not, I 
think the fact that he has framed it well in terms of getting 
action, getting things moving. We have had a lot of strong 
rhetoric, a lot of urging. As my colleague from New Jersey will 
recall on this Committee, this is the 76th hearing, by the way, 
we have had, a third of which have been on this subject matter 
alone in the last 20 months, but sitting here urging people to 
meet, having meetings, in fact, in this room with stakeholders, 
urging them to do workouts when it came to mortgage foreclosure 
issues. And as he points out, we have not seen as much as we 
would like.
    I appreciate the testimony that there still is some 
movement, and others may disagree. But I have felt for the last 
20 months, since this effort began, that the foreclosure issue 
is still very much at the heart of all of this, that we have 
got to get to the bottom of this. Until you find that bottom, 
while credit is beginning to move, it is still going to be 
timid, to put it mildly. And so this is really an essential 
element, in my view, of this effort.
    So I want to focus a little bit on that. It is not the only 
issue, obviously, and there are other questions we have to get 
to. But I want to start with this one, if I can. And let me 
begin with you, Ms. Bair, if I can.
    You note in your testimony that EESA grants authorization 
to Secretary Paulson to use loan guarantees and credit 
enhancements to facilitate loan modifications. In fact, this is 
not just--this is Section 109 of EESA. We cannot always say 
this. I am familiar with it because we wrote it, you and I did. 
As the author of the language specifically, I know exactly what 
I intended with that language.
    One of the concerns we had at the time in writing the bill 
on September 20th, 24 hours after receiving the bill on 
September 19th, was to make sure that, in addition to the 
accountability questions, dealing with the golden parachutes, 
dealing with taxpayer protections, was the foreclosure issue. 
What could we write in this bill that would give the authority 
to get more than just rhetorical response to the foreclosure 
issue?
    And so Section 109 was written to give that kind of power 
and authority, broad authority, which is what we intended with 
this bill. One of the things we all felt strongly about was to 
make sure we gave the needed regulatory agencies the broad 
authority and the resources they needed in order to respond, 
without Congress trying to write them for them. That certainly 
is beyond our capacity as an institution of 535 members to 
start dictating specifically. But wrote the language 
specifically for broad authority here.
    And so I feel very strongly about that language because I 
know how important you felt it was and I felt it was to include 
it as part of the bill.
    So I wonder if you might, first of all, since you have been 
talking about this over the last couple of days, just answer 
some very quick questions on this. One, could you describe 
briefly, if you can, how the program might work? Do you think 
the FDIC has the capacity to get such a program up and running 
quickly? And would the FDIC be willing to take on this task?
    And then, Mr. Kashkari, I want to come back to you. I spoke 
with the Secretary of the Treasury this morning, as you may 
know, about this very matter, and, again, understanding there 
are some details to be worked on, but I certainly was left with 
the impression that Treasury likes this idea, would like to get 
it going. And I am going to make some comments about Section 
102 in a minute because I know there is some pushback on that 
section of the bill, which I am also very familiar with. But 
the idea that Section 102 relates to Section 109 of the bill is 
baloney, in my view. But, nonetheless, would you please respond 
to my questions?
    Ms. Bair. Well, we are having very good discussions with 
Treasury, and I think Treasury is doing their due diligence, 
and we are sharing some ideas. And they are looking at some 
other things as well, and we want to respect that process and 
adhere to that process because, at the end of the day this 
would be a Treasury program, an Administration program. It 
would not be an FDIC program, though we are certainly willing 
to serve as contractor, under another provision of the bill. 
And, consistent with discussions we had earlier during the 
consideration of this legislation, yes, we think credit 
enhancements certainly should be looked at as a policy option 
because you can leverage them. With whole loan purchases, you 
have got to buy the whole loan. With some type of credit 
enhancement program, you can perhaps leverage your resources to 
reach a broader array--reaching a larger number of loans by 
providing incentives for modifications.
    We think, in looking at credit enhancements, one area to 
look at in particular is uncertainty regarding the redefault 
rate, and that gets a little bit into the weeds of the loan 
modification process. But, based on our experience at IndyMac, 
we are finding a lot of investor pushback, and some of the 
economic analysis that servicers do to justify loan 
modification is complicated by uncertainty about redefaults. So 
once they modify the loan, what happens if the borrower still 
defaults on payments subsequently? And then they have to try to 
liquidate, and the losses are greater. So I think that is one 
area where greater certainty could be provided, which would 
make the economic decision to modify a lot more powerful, if 
not irresistible. So that is one area.
    And I think this kind of authority should be coupled with a 
systematic infrastructure to do this. I think another 
impediment to private servicers doing these loan modifications 
is--they are just doing it ad hoc. They are doing it borrower 
by borrower. There is no industry-wide framework. I think with 
the IndyMac protocols we have helped that along, and the 
Countrywide-Bank of America agreement with the State Attorneys 
General is a protocol very similar to ours. So I think we have 
a workable model.
    Also, I think another reason to look at credit enhancements 
is because a lot of these loans are in securitization trusts. 
Under the REMIC rules, I am not sure you can buy the whole loan 
out. So for portfolio lenders, perhaps whole loan sales or 
purchases would be more of an option. For loans in 
securitization trusts, however, you can refinance them out, 
which is the FHA program, but this approach has got some 
limitations. You have to try to provide incentives to get these 
loans modified while they stay in the trusts. It is very 
difficult to buy them out.
    So, those are the general areas we are looking at. Again, I 
think we are having very good discussions with Treasury. 
Treasury and the Administration want to be careful with this, 
but I know Secretary Paulson is very committed. And I do not 
want to speak for him. Neel can. But I know from my discussions 
with him, he is concerned about this as much as anybody. He 
wants to leverage resources to the extent he can to prevent 
unnecessary foreclosures. I think the entire Administration 
feels that way. So there is a policy process underway. I think 
it will happen quickly, and hopefully we will be able to make 
some public announcements in the not too distant future.
    Chairman Dodd. You have the resources to do this, and FDIC 
is willing to do this.
    Ms. Bair. Yes, we would be happy to serve as contractor, 
absolutely.
    Chairman Dodd. Now, let me just--because I wanted to make 
that record. In talking about--I want to talk about 109 and 
102. You can glaze over the eyes of people, but just to make it 
clear what we are talking about. Section 109 of the bill was to 
use loan guarantees and other credit enhancements to facilitate 
loan modifications. It is very separate and apart, in my view, 
from Section 102. The 102 provision was intended to serve as a 
potential alternative to the old idea of purchasing toxic 
assets. The provisions of this section were not meant to apply 
to the authority provided in 109. As the author of the loan 
modification provisions, I want to make it clear that this was 
not the intent of the law, nor do we read it as the letter of 
the law. So in terms of at least for legislative history, for 
those of us engaged in the crafting of it, those two sections 
were very separate. One came much later. Section 102 came 
afterwards, 109, in the order of how these were brought up. So 
I raise that with you.
    Now, Mr. Kashkari, let me--and, again, I do not believe in 
revealing details of conversations I have had with the 
Secretary, but, nonetheless, we talked about this, this morning 
at some length. And as I understand it--and you have heard Ms. 
Bair say this as well--it is the intent of the Treasury to get 
this program up and working. There are things you need to work 
through. I am not suggesting that is done yet. But is that the 
position of the Treasury Department?
    Mr. Kashkari. Chairman, we are passionate about doing 
everything we can to avoid preventable foreclosures and 
encouraging loan modifications. We are, I would call us at this 
stage, in a policy process, understanding the proposal, 
understanding the details. As you know, this Committee played a 
real leadership role in the Hope for Homeowners program. We 
need to understand how this new proposal would interact, for 
example, with existing programs that are in place to make sure 
we have a thoughtful, comprehensive solution.
    So we are in a policy process. We are moving very quickly, 
and we are looking very hard at it at this point.
    Chairman Dodd. We are still getting around 10,000 
foreclosures a day, so every day we wait, another 10,000 
families end up in tough shape. So I appreciate wanting to do 
it carefully, but there is a sense of urgency that I think 
needs to be demonstrated here in order to get this really 
moving.
    I am not asking you not to be lacking prudence in all of 
this, but I hope there is a deep appreciation of what is 
happening far removed from this city alone, across this 
country, and we need to get moving on this to get to the heart 
of all of this.
    Mr. Kashkari. Absolutely, Chairman. We share your sense of 
urgency.
    Chairman Dodd. Now let me jump quickly to the issue of 
the--the banks issue. On October 20th, Monday, the Secretary 
said that the infusion of capital through preferred stock--
talking about the equity investment here--``to increase the 
confidence of our banks''--I am quoting him now--``so that they 
will deploy not hoard their capital, and we expect them to do 
so.''
    Many have assumed that this new capital would be used to 
make more loans which are necessary to enable business to 
operate. However, recently the press has reported that several 
banks receiving the taxpayers' money intend to use it to buy 
other banks. The Washington Post reported, and I quote, 
``JPMorgan Chase, BB&T, and Zions Bancorporation have all said 
in recent days that they are considering using some of their 
Federal money to buy other banks. About 10 financial 
institutions belonging to the Financial Services Roundtable, 
which represents 100 of the Nation's largest financial services 
firms, are also considering making acquisitions with the 
money.''
    Now, I don't want to rule out acquisition as a step, and I 
think the word ``hoarding'' is the word that I sort of glomp 
onto. I appreciate the Secretary's comments because I can just 
tell you there will be a vehement response up here if that is 
what is perceived with these dollars is hoarding this money, 
providing that kind of cushion. So I appreciate the comments, 
but I think Senator Menendez said it well.
    What can you tell us, what guarantees, what assurances, 
what commitments are Treasury going to extract from these 
lending institutions that they are not going to do this other 
than rhetorically begging them not to do it? I think we need 
more than just begging at this point.
    Mr. Kashkari. Chairman, we share your view. It is a very 
important point. We want our financial institutions lending in 
our communities. It is essential. And so if you look at some of 
the details--terms around the preferred stock purchase 
agreement, there are specific contractual provisions on how 
they can and cannot use the capital.
    As an example, we are preventing increases in dividends 
because we do not think it is appropriate to take Government 
capital, the taxpayers' money, and then increase dividends. 
That does not increase capital in the financial system, so that 
is prohibited.
    Second, share repurchases are also prohibited. We do not 
want to put Government capital in and then boost the stock 
price by buying back a bunch of shares. That is contractually 
prohibited.
    In addition, we have got other language in there focusing 
on commitments around increasing lending, working hard to help 
homeowners. Some of them are contractual provisions. Others are 
more guidance in nature. But we share your view 100 percent. We 
want these institutions in our communities lending.
    Chairman Dodd. Are we going to insist upon it, not want it?
    Mr. Kashkari. Well, we are insisting upon it through all of 
our actions, through all of our--every dialog we have with 
these institutions. If you take the example of mergers and 
acquisitions that people have raised in the past week or so, we 
should look very carefully at that, because if we have a small 
bank, a failing bank in a community, that bank is not in a 
position to write loans for its small businesses, its 
homeowners. If a larger bank, a stronger bank, is able to 
acquire that and capital is put into that combined entity, that 
community is now better served. And so we have to be very 
careful about not discouraging prudent acquisitions because 
that can actually help us get through this troubled time that 
we are in right now.
    Chairman Dodd. I agree. They said that. I am not ruling out 
acquisitions. The hoarding notion is the one that really is 
distracting.
    Senator Shelby.
    Senator Shelby. Thank you.
    Secretary Kashkari, why did Treasury not attach a 
requirement to increase lending as a price for receiving the 
Government money? In other words, we are talking about lending 
to keep our economy going, are we not?
    Mr. Kashkari. We are, Senator. Again, we completely agree 
with the spirit of that, and we want our banks to lend. But we 
also did not want to be in a position of micromanaging our 
banks. We wanted to create a program where thousands of 
institutions across our country would volunteer to participate, 
and if we came in with very specific guidance on ``you must do 
this, you must do that,'' we were afraid that we would 
discourage firms, discourage healthy institutions from 
participating. And it is the healthy institutions that we want 
to take the capital because they are going to be in the best 
position to lend.
    Senator Shelby. One of the big rationales from Treasury in 
injecting this money into these nine large banks was to make 
them perhaps more solvent and have more capital to lend. Is 
that central to the whole scheme here?
    Mr. Kashkari. It is central, Senator.
    Senator Shelby. So if it is central to the whole scheme, 
why aren't you insisting on in a macro sense that they not 
hoard the money, as Senator Dodd said?
    Mr. Kashkari. I would return, Senator, to the provisions I 
talked about, about prohibiting share repurchases and 
increasing dividends. If you put a bunch of capital in a bank 
and they cannot return the capital through a share repurchase 
or dividend----
    Senator Shelby. We understand.
    Mr. Kashkari [continuing]. The return on capital reduces. 
There are strong economic incentives for them to take that 
capital and put it to good use. Their own shareholders will 
demand it; otherwise, their own returns are going to come down. 
So we feel that the provisions we put into the agreements 
provide the economic incentives for them to lend.
    Senator Shelby. Another question. It is my understanding 
under the capital program nine banks will receive a total of 
$125 billion. Is that correct?
    Mr. Kashkari. That is correct.
    Senator Shelby. The remainder of the $250 billion that 
Treasury intends to spend on capital purchases is to be 
allocated among the thousands of other banks.
    Mr. Kashkari. That is correct.
    Senator Shelby. It has been suggested that some of the 
banks receiving funds under the program of the $125 billion do 
not need it and did not want it. Was requiring participation by 
the nine banks simply a symbolic gesture intended to mask the 
financial weaknesses of some of the banks? In other words, why 
would you want to push money on people that did not need it? In 
fact, if they did need it, that is what the program was about.
    Mr. Kashkari. Well, Senator, if you will allow me to say a 
couple points, first of all, the terms for the first nine are 
identical for the terms for number 10, number 100, and number 
1,000. There is a range of capital that a firm can take down, 1 
percent of risk-weighted assets up to 3 percent of risk-
weighted assets.
    Senator Shelby. OK.
    Mr. Kashkari. So the 125 seems like a lot for nine 
institutions, but those nine institutions have 50 percent of 
the deposits in the country. So it is the same proportion for 
the first nine and number 4,000. There is no preference, first 
of all.
    Second, again, this is a program, we want healthy 
institutions to use the capital. And we encourage the 
institutions to participate so that there would be no stigma. 
The healthy institutions who were in a strong position today 
can become even stronger and make even more loans. That is 
better for our system as a whole, Senator.
    Senator Shelby. But the Comptroller of the Currency, FDIC, 
the Federal Reserve--we have Governor Duke here--these are all 
regulators of the banking system. When one bank acquires 
another one, you have to get approval from the regulator. So 
you still have that whip in there to deal with any acquisition 
of any bank, either kind of suggested, forced, or voluntary, do 
you not? All of you. Is that fair, Chairman?
    Allowing firms to fail, Mr. Secretary, over the past year, 
Treasury, the Fed, and FDIC have devised a broad array of 
programs to help prevent the failure of various financial 
institutions, including banks, money market funds, broker-
dealers, and insurance companies. To what extent have these 
programs propped up insolvent firms and prolonged the current 
economic crisis by delaying their inevitable failure? Because 
some firms are going to fail whatever you do to them. How long 
can we--the Government, the taxpayer--continue to prop up so 
many institutions? And at what point does it become more cost-
effective to allow firms to fail? Chairman Bair, you have to do 
that from time to time, and you have. First, you.
    Ms. Bair. Well, we do, and it is always a difficult 
decision, and the primary federal regulator actually is one 
that makes the decision. We have back-up authority to close 
banks, but we almost always defer to the primary regulator. The 
primary regulator makes the decision.
    I think banks are a little different than other sectors of 
the financial services system. I think it needs to be repeated, 
reiterated that banks overall are very well capitalized. Yes, 
we have some banks with some challenges, but the vast majority 
are well capitalized. This is not a solvency crisis along the 
lines of what we saw during the S&L days. We are dealing with 
liquidity issues right now, and liquidity issues are harder. 
Sometimes the liquidity issue is the market signaling a longer-
term capital solvency problem. But as the confidence problem 
has grown and grown, irrational fear has overtaken us somewhat. 
So we see institutions that otherwise are viable being 
threatened with closure because they cannot meet their 
obligations.
    So that is the balancing act we are trying to strike here. 
With the additional liquidity guarantees and the additional 
capital infusion, we are trying to keep banks, that are 
otherwise viable, healthy and lending and to prevent 
unnecessary closures because of liquidity drains for 
institutions that otherwise have plenty of capital.
    Senator Shelby. But there are still going to be plenty of 
failures out there----
    Ms. Bair. There will be.
    Senator Shelby [continuing]. Whatever you do. Correct?
    Ms. Bair. And we agree with you, Senator. When it is there 
and it is clear, we want them closed early, because if we wait 
it will increase our resolution costs. We absolutely agree with 
that.
    Senator Shelby. Secretary Kashkari, as the Treasury moves 
assets from institutions by way of the TARP program, the 
participating institutions will have already taken out 
insurance on those assets in the form of credit default swaps. 
Will Treasury allow firms to retain the credit default swaps 
that they have used to hedge the securities that they sell to 
the Government?
    Mr. Kashkari. Senator, at this point we do not have a firm 
policy on what to do with any hedges associated with the 
assets. I think that those are complex issues that we are 
working through with the regulators. Once we identify exactly 
which assets we are going to buy and the purchasing mechanism, 
those are important details that we are going to work through.
    Senator Shelby. But the firms that sell their assets to the 
Government under the plan you are talking about, TARP, they 
would stand to profit if those assets default under the credit 
default swaps, would they not?
    Mr. Kashkari. That is true in the credit default swap 
market broadly. Many participants are writing insurance 
contracts on assets they may or may not own. So I think that 
that is a very important issue that we are sensitive to. I 
think it is an issue that we all need to wrestle with more 
broadly.
    Senator Shelby. Last question. What specific factors will 
the Treasury consider when determining whether it will make an 
equity purchase in a bank? What types of banks do you expect to 
be the best candidates for equity purchases? Those with solid 
balance sheets? Those with a high percentage of trouble assets? 
And will insolvent banks be prohibited from participating in 
your program?
    Mr. Kashkari. Senator, we have spent a lot of time working 
with the four banking regulators for them to come up with a 
standardized process that they are going to be reviewing 
applications and then making a recommendation to the Treasury 
Department. The regulators in many cases have their 
professionals in these institutions and have been working with 
them for years. So the regulators are best positioned to judge 
the viability of an institution and how healthy it is. 
Ultimately, it will be the Treasury Department's determination, 
but we are going to rely very heavily on the judgment of the 
regulators.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Johnson.
    Senator Johnson. Ms. Bair, thank you for coming by my 
office to discuss deposit insurance issues yesterday. 
Throughout the next year, Congress will have to make some 
decisions on permanent changes regarding deposit insurance 
coverage. Should the new $250,000 level be made permanent? And 
will banks be able to afford the higher premiums?
    Ms. Bair. That is a very good question. Congress sets our 
deposit insurance limits, and the base limit has been 
temporarily increased by Congress to $250,000 through the end 
of 2009.
    I think that we will need to gauge the situation at that 
point. I am concerned if we still are working through our 
challenges that we would not want to create a cliff effect 
where there would be a massive exodus of money because of the 
drop down. So I think that is an issue that is going to have to 
be handled very carefully. If Congress would like to take it 
back down perhaps it should be done in a phased approach. But 
certainly I think if you keep the higher limit it needs to be 
built into the premium structure, and we can do that over a 
period of time to ease the premium impact. While we are 
industry-funded, we do have wide latitude to borrow from 
Treasury for short-term liquidity needs if we need it. We have 
not had to do that, and I hope we will not have to do that. But 
I think to maintain the principle of industry funding, it 
should be built into the premium structure if Congress decides 
to make the $250,000 permanent.
    Senator Johnson. Continuing on, we have seen over a million 
loans reworked by HOPE NOW, and efforts are underway for the 
Hope for Homeowners program. But there are some concerns that 
these programs are not making a large enough difference for 
those facing foreclosure. How would you change what the 
Government and institutions are currently doing to make 
modifications more meaningful?
    Ms. Bair. I think we have been having excellent discussions 
with Treasury and our fellow bank regulators and the housing 
authorities about this. I think there are lots of authorities 
to explore. One which Chairman Dodd mentioned earlier, using 
credit guarantees or credit enhancements, may be an additional 
tool we should use. But we are behind the curve. There has been 
some progress, but it has not been enough. We need to act, and 
we need to act quickly and dramatically to have wide-scale 
systematic modifications with standard industry metric applied 
across the board. And if economic incentives need to be 
provided to help make the economics of those modifications 
work, especially for these loans that are in securitization 
trusts, then I think that is what we need to do.
    It can be done. I think we are showing at IndyMac it can be 
done. I am very grateful that the Bank of America settlement 
also uses a protocol similar to ours. The trick is to provide 
the appropriate incentives, the carrots and the sticks, if you 
will, to make sure it is done on a more industry-wide basis.
    Senator Johnson. This is a question for all the panel. 
Beginning to restructure the financial services regulatory 
structure is a complicated undertaking. What do each of you 
believe is the starting point for restructuring? What is the 
No. 1 structural regulatory deficiency in your opinion that 
needs to be corrected by Congress? Ms. Bair?
    Ms. Bair. At the top of my list would be regulatory 
arbitrage, which I think has taken a number of forms. There is 
uneven regulation. And it is true with mortgage lending 
standards. We did not have across-the-board mortgage lending 
standards, and we ended up seeing negative competition, with 
non-banks being very aggressive with their loan originations 
and that created competitive pressure on the banks to start 
doing the same.
    I think another area is capital standards. We have had 
relatively strong capital standards for insured depository 
institutions, less so with other parts of the financial 
services sector. Where you are seeing the most profound 
distress at the institutional level is with the institutions 
that are most leveraged. So, again, ending that uneven 
regulatory treatment and having some consistency across the 
board and leverage constrained is another area that I hope 
Congress will be looking at next year. We need to have more 
even regulation applying to a wide range of institutions, and 
we also need to have resolution mechanisms--which we have for 
banks, but currently not for these other institutions. This is 
why Treasury and the New York Federal Reserve Bank had to 
develop a process for the Lehman Brothers and AIGs of the 
world, because the process for it right now just does not 
exist.
    Senator Johnson. Mr. Kashkari, can you add anything to 
that?
    Mr. Kashkari. I agree with Chairman Bair and would add two 
things. One is, in March, the Treasury Department published a 
comprehensive proposal on how to restructure the regulatory 
system. It is a long-term approach.
    I would also add to what she said and comment on mortgage 
origination standards, not just in the banks but mortgage 
brokers, which right now it is not done on the national level 
and there is not consistency. And I think bringing some type of 
national Federal oversight and consistent would be helpful.
    Senator Johnson. Mr. Montgomery?
    Mr. Montgomery. Yes, sir. While not a banking regulator, I 
can say going forward that reform of the Real Estate Settlement 
Procedures Act--RESPA, as it is known--which, after a 6-year 
effort, we are on the verge of getting that out in the next 2 
to 3 weeks, I think that will bring more closely into the light 
of day what consumers pay at the closing table, what are the 
terms of their loans, what are the settlement costs, things of 
that nature. And we think that will definitely help the process 
going forward.
    Senator Johnson. Mr. Lockhart?
    Mr. Lockhart. I certainly support the Treasury blueprint 
and, actually, Congress in July, when they passed the law 
combining OFHEO with the Federal Housing Finance Board and also 
taking the HUD mission, it was a major step forward in the 
housing area of pulling the regulators together and having a 
much more comprehensive approach.
    One thing that was left off in that legislation, as it 
moved through, was we were going to be put on as a member or a 
participant with the financial regulators and their FFIEC 
activity. I believe that that should be added at some point.
    Senator Johnson. Ms. Duke?
    Ms. Duke. I think I would echo the need to draw regulation 
more widely, to look at probably the business models as they 
will develop, because I don't think the business model that we 
used in the past of originate to distribute will continue; but 
to make sure that all participants in the financial transaction 
chain are regulated in the same manner. Also, I think 
supervision and enforcement in addition to regulation are key 
pieces of it. And I would echo the need to have some resolution 
protocols for institutions that fall outside of the insured 
depositories. I think it is an important point that we have a 
mechanism for insured depositories, but we did not have 
anything for those that were outside of it. And the bankruptcy 
court did not seem to be the right place to try to deal with 
some of those issues.
    Senator Johnson. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Sheila Bair, I just could not resist that idea of that 
across-the-board regulation, and for those of us who were 
involved in 1994 with the crafting of the HOEPA legislation, 
that legislation required all lenders--State-chartered, 
federally chartered institutions--to apply standards against 
deceptive and fraudulent practices. Not a single regulation was 
ever promulgated under that law for 15 years. And more than any 
other single thing I can think of, had that regulation been 
promulgated and someone enforcing them on lenders across the 
board, I think we would be in a very different place today.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Mr. Kashkari, I want to direct my first question to you, 
and I want to follow up on the line of questioning that our 
Chairman and our Ranking Member went into with regard to the 
$250 billion of liquidity that has been provided to the banks. 
Their focus there was to make sure that those dollars were not 
hoarded and that the actual result would be the lending that we 
would like to see happening. And I understand that, and I 
appreciate your answers with regard to that part of the 
program.
    The question I have goes to the toxic asset purchase issue. 
It seems to me that the plan to utilize these resources that 
Congress has provided for the purchase of toxic assets has the 
opposite impact. In other words, it creates an incentive for 
investors to stay on the sidelines for a while and watch what 
the Government is going to do and then maybe step in at some 
later date and either buy or finance purchases from the 
Government. And I just wonder what your thoughts are on that 
aspect of the proposal.
    Mr. Kashkari. Senator, thank you for the question. The 
question you ask is fundamental to the design of the program. 
The program is intended not only to buy troubled assets, but in 
doing so to provide price transparency to the market, because 
our view is that there is a lot of money on the sidelines who 
are interested in investing in our institutions and in these 
assets themselves. And our hope is that by the Federal 
Government taking the first step through a very open, 
transparent process, that will encourage private capital to 
come in. That is the exact intention of the program. So we 
agree with the spirit that you raise.
    Senator Crapo. But isn't the fact that the Federal 
Government is going to step in in such a major way going to 
create just the opposite result, namely that the private 
capital will sit back, stay on the sidelines, and watch for a 
while to see what will develop?
    Mr. Kashkari. I think it is a very good question, and I 
think there is some merit to that point up until we get 
started. And that is why we are moving as fast as we can. But 
once we get started--and we are going to get started slowly, 
methodically, let people and let the markets see what we are 
doing. We expect them to understand it very quickly and then 
start to come in.
    Senator Crapo. All right. Thank you.
    Chairman Bair, I also am concerned that the direction we 
are heading with this, particularly with the numbers of 
guarantees that we are now seeing put into place, has 
essentially driven us far down the road toward a situation in 
which financial institutions are basically becoming 
disconnected from the risk of lending. Could you address that?
    Ms. Bair. I agree with you. These guarantees make me 
uncomfortable. We had a compressed timeframe to make a 
decision. We evaluated the pros and cons, the risks and the 
benefits. But at the end of the day, especially given what was 
going on in Europe, we did not think we had an alternative. We 
needed to move ahead.
    I am aware of the additional moral hazard, obviously, with 
expanded guarantees. We have in place a heightened supervisory 
process on the use of these, and very tight controls over 
weaker institutions using these, if they use them at all. So we 
can compensate through the supervisory process for some of the 
additional moral hazard. The other key is to make sure they are 
temporary. And, believe me, I am determined that these will be 
temporary. And we are charging a premium, I would hasten to 
add. This is not just something we are providing. We are 
charging a premium for it.
    Senator Crapo. Your point on the temporary nature I think 
is very important. In fact, one of my questions was going to 
be, How do you take the guarantee away?
    Ms. Bair. Well, we are. We are out there now saying that it 
is going away June 30th. And I understand there might be some 
pressure to continue it. I do not think anybody should assume 
it is going to be continued. It is not. My every expectation is 
that it will go away.
    There are things, if you needed to have some type of phased 
process as opposed to a clipped process, I think you can do 
that by reducing the cap, ratcheting up the premiums, so there 
are ways to ease out if we want to have a slower process. But I 
am resolved to end these expanded guarantees because of the 
additional moral hazard that they create for us.
    Senator Crapo. Thank you.
    And, Mr. Kashkari, back to you. With regard, again, to the 
toxic asset purchase--and I am focusing now on the underlying 
mortgages and the question I have is: How will the servicing of 
the loans be handled? Will it be handled by the current 
servicing managers? Or are we going to create a new system or a 
new--I was going to say ``bureaucracy''--a new set of managers 
and re-create the system that we have now?
    Mr. Kashkari. At this point, Senator, our intention is, 
where possible, to keep the servicing with the existing 
servicer, but send to them very specific instructions, a plan 
on how we want them to conduct the servicing consistent with 
our objectives.
    Senator Crapo. All right. Thank you. And another question I 
have is I appreciate the fact that Treasury has submitted a 
request for ideas on how we can establish the insurance program 
that was involved in the legislation that we had. And as you 
know, the liquidity crisis is not limited to the residential 
mortgage arena. It is expanding into a number of other areas, 
and the one I am thinking of right now is the commercial 
mortgage arena.
    Has Treasury considered using the insurance program to 
provide a Government guarantee or an insurance for the safest 
part of or for some part of the commercial mortgage market?
    Mr. Kashkari. Senator, that is a very good point. We have 
heard a lot of the same perspectives that you raise, both from 
the banking regulators and from individual institutions. If you 
look out in the regional bank market, in particular, they have 
a lot of mortgages, whole loans, commercial mortgages on their 
balance sheets. So we think that the insurance program may well 
be applicable there, and these are just the very ideas that we 
are soliciting right now.
    Our initial focus is on residential, but we are very aware 
of and focused as a second step on commercial
    Senator Crapo. All right. Thank you very much. And one last 
question I wanted to ask is you had talked a moment ago about 
credit default swaps and the fact that there are a number of 
those in which one of the swapping parties does not have an 
ownership interest in the underlying asset. That has been an 
issue that we have discussed in hearings in the Agriculture 
Committee on derivatives. And the question I have is: Is there 
no purpose for those types of swaps? I understand one of the 
arguments that is being made is that even though the swapping 
parties may not have an ownership interest, they may have a 
very strong financial interest in the outcome of--or in the 
strength of the company that is engaged in the underlying 
transaction, or some other type of reason for wanting to be 
sure that that transaction is insured.
    Mr. Kashkari. Senator, I will say, first of all, I am not 
an expert in the credit default swap market, so let me just set 
expectations. But I think you are right. I think that there are 
many reasons why financial institutions or financial 
counterparties may want to hedge certain risks that they may or 
may not own directly the underlying asset. So I think that is 
right, and I think that we need to have the experts take a hard 
look at that.
    Senator Crapo. All right. Thank you very much.
    Chairman Dodd. Thank you, Senator. Good questions. I 
appreciate it very much.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman.
    My first question is for Mr. Kashkari. I would just like to 
follow up on my opening statement. I know Senator Dodd talked a 
little bit about this, to ensure that the capital that TARP 
provides to banks is effective in achieving the joint goals--
stability in the financial markets, but also the unfreezing of 
the credit markets to deal with Main Street. So I have asked 
you for a while, and Senators Reed and Menendez joined me in 
this. What about the idea of setting some guidelines? If you 
have public guidelines out there--now, I realize you cannot do 
one size fits all, nor do I think you can mandate these things. 
But the idea of guidelines to help importune banks which are 
sensitive institutions to public--given that they are a 
regulated industry to public pressure would make sense. Can you 
please tell us if you intend or Treasury intends to put out 
such guidelines on, first of all, a general, a ballpark figure 
of how much of this capital should be lent out? You know, 
obviously, it would accelerate--there is a multiplier effect 
because for every dollar of capital you can, obviously, more 
than a dollar or two of lending.
    Mr. Kashkari. Well, Senator, as you and I have discussed, 
we share the spirit of your question completely and want these 
institutions to lend and provide credit to our communities. In 
fact, it is not published yet, but when the final purchase 
agreement is put out there between the Treasury and the 
individual institutions, there is specific language in the 
purchase agreement about lending and about taking aggressive 
steps on foreclosure mitigation. It is not a legally binding 
contract.
    Senator Schumer. Right.
    Mr. Kashkari. Neither would guidelines be. But it does 
considerably more----
    Senator Schumer. Is it more than just a general 
exhortation?
    Mr. Kashkari. Well, forgive me, I am not an attorney so I 
cannot tell you----
    Senator Schumer. I am not asking you as an attorney. I am 
just saying if it says we encourage the banks to lend the 
money, it is not going to be much. If we say, you know, for 
every dollar of capital they get, we would expect there would 
be two or three or four--you know, something like that, we 
would expect, not mandate.
    Mr. Kashkari. Again, we do expect, but we are hesitant to 
put a specific dollar figure because these financial 
institutions--again, as you know, Senator, we are talking about 
very large financial institutions and very small. One size fits 
all is----
    Senator Schumer. What are you going to do for banks that do 
not increase their lending at all that take this capital?
    Mr. Kashkari. Sure. As I mentioned previously, Senator, I 
think that the provisions on preventing dividend increases and 
stopping share buybacks provides very strongincentive for these 
institutions to want to lend again.
    Senator Schumer. But we have had a couple of leading 
executives talk about they think that the banks--and they were 
talking not about their own specific institution alone--are 
going to just sort of hoard the money for a while, and they 
thought was in their best interest, and that worries me.
    Mr. Kashkari. It worries us, too. We want these 
institutions to lend, absolutely, but also recognize the 
situation we are all in right now is the situation of 
unprecedented lack of confidence in the system.
    Senator Schumer. Understood
    Mr. Kashkari. And so the immediate reactions may be more 
reserved. I think as things--as the markets begin to sort 
themselves out, I would expect to see these institutions 
lending.
    Senator Schumer. I would urge you to consider putting out 
these guidelines. And then there is one that may be easier. 
What about guidelines inveighing against new investments in 
these exotic financial instruments that brought so many of the 
institutions down to begin with? That is an easier one for you 
to write.
    Mr. Kashkari. It is a very good point, and we certainly do 
not want institutions taking undue risks. But, candidly, 
Senator, I think that my banking regulator colleagues are 
probably in the best position to help guide their regulated 
entities in the actions and steps that they should be taking.
    Senator Schumer. Well, that is about all institutions. I am 
talking specifically about institutions that are benefiting 
from the capital injection.
    Mr. Kashkari. Yes, and, again, I think our perspective has 
been we want as many institutions as possible to participate 
and not wanting to be overly prescriptive in keeping away the 
healthy----
    Senator Schumer. I know. But as I said, I think you are 
leaning too far in giving them dessert and not enough in making 
them eat their vegetables. So I hope you will consider that.
    For Ms. Bair--you know, as I mentioned in my opening 
statement, I have tremendous respect for you. Here is something 
that befuddles me. We have for a year been sort of chasing our 
tail in terms of relieving the foreclosure problem with all 
these kinds of voluntary programs. And they just do not work, 
by and large. If the institution has the whole mortgage, they 
work. But for the majority of mortgages and the majority of 
subprime and all these that are chopped up in 40 pieces, you 
have the problem of one of the tranche holders--probably the 
riskiest piece--saying, ``I am not going to participate.'' And 
we have tried and tried--Secretary Paulson, I salute Senator 
Dodd and Chairman Frank for their efforts. But everyone will 
agree none of them are really going to work. And yet we still 
come back to this exhortation process, and then 3 or 4 months 
later, we are disappointed that it has not worked.
    Isn't it really true--and help me understand this--that the 
only way we are going to make major, major progress in limiting 
foreclosures and getting refinancings is changing the 
bankruptcy law, which is the only constitutional way to require 
that 40th tranche holder to come to the table and say, ``Hey, 
under bankruptcy, I will get zero, so I will negotiate for 5 
cents on the dollar or 10 cents on the dollar,'' or whatever. I 
am befuddled by the fact that that fact, which seemed so 
obvious to me, is not governing our actions on this. It seems 
almost--you know, I forgot who said, but it is hope over 
reality if you do it the other way in any kind of voluntary 
way.
    Could you please address that for me?
    Ms. Bair. Well, I would agree, I think some of the 
voluntary efforts have helped, but they have clearly not helped 
enough. We are falling badly behind.
    Senator Schumer. As you said.
    Ms. Bair. And more needs to be done. I would agree with 
that. I think there are authorities in EESA that can be used 
with a carrot as well as a stick approach to getthis done on a 
more broad-scale basis.
    We have not taken a position on the Bankruptcy Code change.
    I do think, though, that whether that is or is not a good 
tool to put into the arsenal, hopefully we would also have a 
process that, prior to a borrower having to threaten bankruptcy 
or go into bankruptcy, we could get that loan modified.
    Senator Schumer. Do you have any hope for--I am sorry. My 
time is up. Just a last question. Do you have any hope for a 
voluntary model? I do not.
    Ms. Bair. No. No, there needs to be a package of carrot and 
stick incentives. I agree with that.
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Dodd. And let me say to my colleague from New 
York, I mentioned this before, but we may end up in a lame-duck 
session, and there may be various proposals. I think we have 
come to the point once again where I think legislatively we 
have to try this again as part of some other ideas. And so I am 
putting together a package of ideas that I will ask my 
colleagues to take a look at, obviously all of us here in 
November, as part of--whether it is a stimulus package or 
whatever else, but some steps we might take instead of waiting 
until after January to get back to maybe deal with some of 
these issues. And that is one of them.
    Senator Hagel.
    Senator Hagel. Thank you, Mr. Chairman.
    Secretary Kashkari, in your statement you noted that 
Treasury announced recently a streamlined, systematic process 
for all banks wishing to assess the $250 billion infusion 
program. And you further noted that qualified and interested 
publicly held financial institutions will use a single 
application form. You talked a little bit about that. You will 
factor in the recommendations of the regulators, and you will 
publish the required legal documents so private banks can 
participate as well as the same economic terms as the public--
on the same economic terms as public banks. And you talk about 
allocating sufficient capital, which you believe $250 billion 
is enough, so that all qualifying banks can participate.
    My question is, then: What is the criteria that you are 
going to use? Because as I understand it, it will get down to a 
final judgment, essentially an arbitrary judgment. You are 
factoring in qualifications to start with. You are factoring in 
input from the regulators. But, in essence, it will be yours or 
Paulson's or someone at Treasury's decision who gets the money 
and who does not. So here are a couple of the points that I 
would hope that you could address for me.
    Do all the qualifying banks that apply, will they get into 
the program? If they qualify, will they get in? Is bank 
consolidation a factor when you start deciding who gets the 
money? For example, bank consolidation could be used as a 
lever, it could be used as a threat to force consolidation. 
Will you take those first two issues and give us what you can 
on this? Thank you.
    Mr. Kashkari. Yes, Senator, thank you for the question. The 
regulators are going to be the first screen for institutions, 
so, for example, a bank may send an application to the FDIC as 
an example, and the FDIC may review that application and 
determine that this bank is not a good candidate for a capital 
purchase program and may send that back to the institution, and 
Treasury will never see that application.
    For the applications that we see with the recommendations 
of the regulators, in most cases I would imagine, we are going 
to take the guidance of the regulators because they are the 
ones who know these institutions very well.
    There could be other factors that are also considered. So, 
for example, if an institution had a private capital raising at 
the same time that they were also seeking public capital, that 
would also weigh into our analysis as wedetermine is this a 
good use of taxpayer resources.
    At the end of the day, this is a program that is meant for 
healthy institutions. We want them to lend. And so working very 
closely with our colleagues in the regulatory agencies, we 
think that that is the right approach.
    To the point of consolidation, I do not think we have any 
specific program focus on consolidation. Again, I think it will 
be a case-by-case analysis with our regulatory colleagues. The 
example I gave I think is a good one. If you had a small 
failing institution that was being acquired by a much 
healthier, stronger institution, the idea of putting 
Government/taxpayer dollars into that combined entity, we think 
that is a good use of taxpayer dollars because that community 
is well served now by that combined stronger institution.
    Senator Hagel. Could you envision a scenario, with the 
regulator or without the regular, where you would offline in 
private conversations--because I suspect there will be some 
private conversations on these things. I have been told, as a 
matter of fact, that there have been by banks inquiring, 
checking in, how do we apply, on what basis are you going to 
make these determinations. Could you envision a situation where 
you say to a bank if you would be willing to seriously look at 
consolidation on whatever terms with whichever institutions, 
then we might well look favorably on your participation in the 
program?
    Mr. Kashkari. I would imagine that those types of 
conversations may happen between the regulators and the 
entities, but I would defer to my regulatory colleagues more so 
than----
    Senator Hagel. Chairman Bair, can you help us on this?
    Ms. Bair. Well, as Neel alluded to earlier, I think you 
need to distinguish between an acquisition that stabilizes a 
bank having some challenges versus using the additional capital 
to build your empire, as opposed to making loans. The former I 
think is something we want to encourage, and I think there may 
be some institutions where, on a stand-alone basis, it may not 
be a good investment for the Treasury, but on an acquisition 
basis, it might be very good. So I think that kind of healthy 
acquisition activity is something that should be encouraged. 
And, again, to the extent it would prevent failures or the risk 
of failure for institutions later on, that can help protect the 
deposit insurance fund.
    Senator Hagel. When do you think that this program will 
actually be in place so that you will start to make some 
decisions?
    Mr. Kashkari. It is in place now.
    Senator Hagel. Aside from the nine big banks.
    Mr. Kashkari. On Monday, the regulators posted application 
forms on their websites.
    Senator Hagel. So the banks, the institutions are now 
filling out the application, three pages, is that right?
    Mr. Kashkari. It is two or three pages.
    Senator Hagel. Filling out applications, working through 
their regulators. They are now coming into your office.
    Mr. Kashkari. And then the regulators have already begun 
submitting recommendations to us today on institutions that we 
are going to evaluate and make decisions.
    Senator Hagel. Have you made any discussions beyond the 
nine big banks?
    Mr. Kashkari. I do not believe at this point we have made 
any.
    Senator Hagel. I have not seen any. Have you made any--when 
would you make the next group of decisions?
    Mr. Kashkari. We are in the process within Treasury of 
formalizing our review process and procedures and finalizing 
those and begin processing those applications immediately. But 
I will also comment, the announcement that I talked about 
within 48 hours is when the contracts are finally signed. An 
initial approval to an institution will not trigger the 
official announcement. It is only when we get further down the 
process and we are actually signing contracts with the 
institutions. That is what will triggerthe formal announcement 
within 48 hours.
    Senator Hagel. When would you think that the first 
additional banks beyond the first nine might be announced? A 
week? Two weeks?
    Mr. Kashkari. Well, announcement, again, forgive me, 
announcements of the actual transaction----
    Senator Hagel. Well, just get me to where we need to be, 
and that is, money on the street. When will they get their 
money?
    Mr. Kashkari. Our goal is to have the $250 billion out the 
door by the end of the year.
    Senator Hagel. But give me a better answer than that. You 
tell me the process is already underway. You are accepting 
applications. When, then, can you tell this Committee that we 
will have some money in the hands of this next series of banks? 
A week? Two? You will make decisions. Contracts, whatever the 
process is. Not your intent, your hope.
    Mr. Kashkari. Understood.
    Senator Hagel. But where are we?
    Mr. Kashkari. My expectation is a few weeks because it will 
take time for the banks themselves to do their work, work with 
their attorneys, meet with their boards as necessary, before 
they are in a position to sign the final contracts with 
Treasury. So we are going to give them initial indications very 
quickly so they can do all the legal work they need to do on 
their end before we can fund these transactions.
    Senator Hagel. But you are looking at a few weeks at best 
before the final deal is made. Then I assume that that means 
the bank gets the money?
    Mr. Kashkari. Correct.
    Senator Hagel. Over the next few weeks.
    Mr. Kashkari. I think it will be a few weeks before the 
next batch are actually funded.
    Senator Hagel. Thank you.
    Chairman Dodd. Thank you for that, Senator. I appreciate 
it.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman, and thank you 
all for your service, and I hope you all understand the 
questions and the line--we all have a common goal here, and 
maybe some of us are trying to spur you to look at some things 
that either you are looking at but maybe not with the intensity 
that many of us think you should, in fact, look at it. And so I 
hope you are taking them in that spirit.
    Mr. Kashkari, you said in your statement you expect that 
all participating banks--expect all participating banks to 
continue to strengthen their efforts to help struggling 
homeowners avoid preventable foreclosures. We expect that, too, 
but that has not happened. And we have servicers who seem to be 
incentivized in a different direction. My office has been 
dealing with a whole host of people in foreclosure, and the 
servicers--you know, we have one case in which one servicer 
said, ``Absolutely not, can't do anything to help you,'' and 
then we called back and got a different entity within that 
servicing entity, and they offered a deal that actually was 
something that could save the home. We have other that seem to 
be incentivized to go to foreclosure.
    So, you know, I have a real problem in saying that we 
expect as we are infusing large amounts of capital. What would 
be wrong with, for example, Treasury promulgating guidelines on 
loan modifications for institutions that are participating in 
the capital purchase program, you know, similar to what the 
FDIC's existing loan modification program is?
    Mr. Kashkari. Well, Senator, we share your concern and your 
focus on this issue. I personally have spent the past 14 months 
working with servicers and with counselors to try to reach 
homeowners and encourage loan modifications, and we have made a 
lot of progress. The industry is now at a pace of around 
200,000 workouts a month, which is a huge increase from where 
they were when we started. But we agree with you, it is not 
enough. We need to do more.
    So I think that the actions that we have taken and 
wecontinue to take working with these companies and with servicers, we 
continue--we just need to press them and push them to do everything 
that they can.
    The hardest part about a loan modification is not the 
calculation. A first-year finance student could do the calculus 
of which is better. It is getting to the homeowner. It is 
getting them to pick up the phone and call. And we have worked 
very hard.
    For example, if you will indulge me for a moment, if there 
is any homeowner out there that is concerned about losing their 
home, the worst thing they can do is do nothing. They should 
pick up the phone. We have got a hotline, a national hotline, 
888-995-HOPE. They should call.
    Chairman Dodd. Mr. Secretary, could I interrupt you 1 
second? Why can't the lender make that call, too? They know 
they have got a customer, a borrower in trouble. They know 
that. Why don't they pick up the phone and call that borrower 
and try and track them down. Why doesn't it work that way as 
well?
    Mr. Kashkari. Well, they absolutely are, and we are pushing 
them to do that. In fact, over the summer--I believe it was in 
June----
    Chairman Dodd. Sorry, Bob. I didn't mean to----
    Mr. Kashkari [continuing]. We worked with the servicers and 
the counselors together in HOPE NOW to create guidelines and 
standards for loss mitigation for the industry that said 
exactly that, Chairman. They need to be sending letters in 
advance of rate resets. They need to be making these phone 
calls in advance of borrowers going in delinquency. A lot of 
times what you will find is there is a real challenge we have. 
The bank is doing their duty to their investors by making calls 
saying, ``You are behind in your payments. You are behind in 
your payments.'' That is the collection----
    Senator Menendez. But what about--Mr. Secretary, I hate to 
have all my time eaten up by this, but let me just ask you 
this: What about the bank that I told you about? And this is--
we have a lot of people coming to seek help. I tell you, my 
office is inundated. We have had five foreclosure clinics that 
I have conducted myself in the State of New Jersey. We have got 
a lot of people seeking help, so maybe there are some who are 
hiding or afraid and in the bunker. But we have got a lot of 
people seeking help. And so we have got Reverend Soaries in New 
Jersey who does a very good job through a community development 
financial institution, and he is trying to help constituencies 
to be able to keep their homes. He goes and offers the bank 
$160,000 out of $175,000. They say no. He goes to the 
foreclosure with a full certified check, and then the bank bids 
up. Tell me how that is in keeping with the spirit that we are 
trying to work out these mortgages. It is not. And so I do not 
quite understand what is wrong with issuing guidelines by 
Treasury, particularly for those participating in these 
programs, that does similar to the FDIC.
    And, second, you know, about hoarding the money, I am 
concerned about it. I know that you say that the inability to 
buy back shares or to issue dividends is enough an incentive. 
But, you know, they are going to pay--what?--5 percent dividend 
in the shares that we have purchased from them--I mean that we 
have lent to them. So I am not quite sure that that is the 
incentive to ultimately not sit on their money as they build 
their overall standing. I think you need to have some set of 
very clear guidelines. They are not mandatory. But it is the 
expectation. You know, I cannot judge an employee if I do not 
tell them what the standards are. And I cannot tell the banks 
whether or not they have fairly used the collective money of 
the people of the United States in achieving the goal that we 
all want for them and to create liquidity in the marketplace, 
particularly for Main Street, if I do not give them a set of 
standards of what I am looking for to accomplish. I do not 
quite understand what the reticence of that is.
    Mr. Kashkari. Senator, we share your perspective, and we 
want these banks to lend, and I do not think we havereticence 
to it. I think we will look at this with our regulatory colleagues. 
Ultimately, the regulatory----
    Senator Menendez. Why not set a standard, then? Why not set 
a set of standards by which people could judge by?
    Mr. Kashkari. Again, I think a set of standards could be a 
very useful tool. We need to be careful not to be too 
prescriptive. Again, we are trying to strike the right balance, 
not just getting the big banks to participate, but getting the 
1,000th bank, the 3,000th bank in our communities to 
participate. And setting a one-size-fits-all standard may not 
be the right approach, but we need to look at it.
    Senator Menendez. All right. One last question. It goes to 
both you and Governor Duke. You know, we gave AIG $85 billion 
and then--lent it, I should say, not gave it. And then we 
further agreed to extend an additional $38 billion in credit. 
Now, our Nation's public transit agencies are potentially 
liable in payments in the hundreds of millions of dollars to 
banks due to the downgrading of AIG through LILO and SILO 
leverages leases.
    Does the Treasury and the Fed think it appropriate for 
these banks to be in a position to make a windfall at the 
expense of these public agencies which ultimately would have a 
huge consequence--a huge consequence--to the ridership and to 
the States that ultimately operate these public agencies? 
Without action by the Treasury's banks, you know, to intervene, 
they stand to gain all of the benefits the IRS has declared to 
be inappropriate and, you know, it seems to me that we have a 
very huge and pending challenge here. And I hope that both the 
Federal Reserve and the Treasury Department are going to look 
at this, or else we are going to see a very huge consequence to 
hundreds of public transit agencies across the country, and 
that would be devastating at a time in which we are seeking to 
move more people into the opportunities that exist today in the 
marketplace, that we are trying to do something about our 
energy questions, and at a time in which State entities would 
ultimately be faced with even greater amounts of moneys that 
have to come up front. I think it is wrong, and certainly the 
banks that we are lending to here should not take advantage at 
the same time that we are propping up AIG.
    Mr. Kashkari. Senator, this is an issue that came to my 
attention very recently, and my colleagues and I at the 
Treasury are going to look at it. I would be happy to get back 
to you on it.
    Senator Menendez. I appreciate it. If you would get back to 
me, I would be very interested.
    Mr. Kashkari. Absolutely.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Corker? And let me just say for the record, too, I 
want to thank Bob Corker. During those 13 days, there were a 
number of people--obviously, everyone was involved, but some 
more adamantly and directly than others, and Bob Corker was one 
of them. I just say, we would not have gotten to that final 
result without your help and support, so I appreciate it 
personally and I want to say publicly how much I appreciate 
your involvement.
    Senator Corker. Thank you, Mr. Chairman. I very much 
enjoyed it and want to work with other Members of this 
Committee all the way through this process. I know the 
implementation is equally important to the legislation, and 
then coming back in January to regulate appropriately. We have 
a 20th century regulatory system and I think we understand that 
and we will be focused on the 21st. I look forward to being 
hopefully equally constructive, and I thank you.
    I do want to maintain the focus on the fact that certainly 
housing prices have shown problems in our financial industry. I 
think the exuberance, if you will, that we had in the housing 
industry for so many years, you know, most people could 
probably see that at some point, this had to fall. I mean, it 
was crazy, what was happening,especially in some of the States 
like California and others where people were paying three and four 
times just over a few years what they were paying before.
    We knew there was going to be a decline, and I hope we will 
maintain our focus on the fact that, really, this whole issue 
around foreclosures today has to do with the way financial 
markets work now. It is no longer the case of people going into 
their local financial institution and having a loan with their 
local banker that they see at the Rotary Club or other places 
and maintaining that relationship, and if they get behind, they 
have the opportunity to talk with them about that. That just 
doesn't exist now, and so that is one of the frustrations, I 
know.
    The other huge issue, obviously, are these exotic 
derivatives and other kinds of things that exist that no one 
knew existed, and candidly, we wouldn't be having this hearing 
today, I don't think, if it weren't for that. So that is 
really, when we are talking about the root of the problem, it 
is sort of the chicken and egg, I guess, but I hope that that 
is where we will maintain our focus over the next year or so.
    Now, having said that, this foreclosure issue, I listened 
to Senator Schumer's comments, and candidly, in fairness, I do 
think most of what we are doing is hope. I mean, the way the 
disconnect exists right now between the borrower and the lender 
is so confusing that the average citizen who gets up every day 
having to work and raise kids, I mean, it is hope, and I 
understand that, and I think at some point we will be looking 
at this in a different way than we are right now.
    I appreciate so much your efforts, Ms. Bair. In the 
conversations we have had, I think you have addressed the FDIC 
insurance issues appropriately all the way through. I did hear 
you mention stabilizing. I think foreclosure is a problem and I 
think we need to figure out a way to deal with that. 
Stabilizing, I don't know. That bothers me some. I think, 
unfortunately, there is a ways for that to fall now. We still 
have not hit bottom and I think anything we do that is 
stabilizing in ways that don't make sense really just caused 
the market to be sluggish for a long, long time.
    And I am wondering if just very briefly you might respond 
to that. Maybe you were just talking about foreclosures. 
Stabilizing--the word ``stabilizing'' bothers me some because I 
think we move into a prolonged time of sort of fictitious 
prices that don't allow us to hit bottom as quickly as we 
should, and I wonder if you might expand on that.
    Ms. Bair. Yes. The markets need to correct. We do need to 
find the bottom. And markets will eventually find the bottom. 
What I am concerned about is that we are going to overshoot 
because we are in this self-reinforcing cycle now where 
economic decisions to modify loans are not being made. It may 
be in everyone's economic self-interest to modify that loan, 
but it is still going into foreclosure because of skewed 
economic incentives, in large part stemming from the different 
interests in the securitization trust. So loans that 
economically should not be going into foreclosure are, which is 
creating more downward pressure on home prices, which is 
creating more distress in the housing market, which is creating 
more need for foreclosures----
    Senator Corker. So it is really more on the foreclosure 
point----
    Ms. Bair. It is absolutely.
    Senator Corker. OK.
    Ms. Bair. That is exactly right.
    Senator Corker. And I think we have had a lot of 
discussions. I know even Chairman Dodd alluded to some of the 
meetings we had. There are some politically--there have been in 
the past some politically unacceptable ways of dealing with 
that for both sides to come together, but I think at present, 
we all understand even prescriptive things are not going to 
solve this until we get to a point where the lender has some 
ability to quickly deal with this issue, and I don't want to 
expand on that right now. We might do that some more privately.
    Ms. Duke, we are going to be dealing with a lot of 
unintended consequences. I mean, at the end of the day, any 
time there is government intervention, there are unintended 
consequences, and I think that is going to be one of the 
biggest issues we deal with during implementation and even 
beyond.
    I know you have already been asked one question about that 
from Senator Menendez, but we are having some issues where, let 
us face it, manufacturing is a very important part of our 
country's employment. We have had stress on manufacturing for 
years now. We have actually had a little bit of a breakthrough 
over the last 6 or 8 months just because the value of the 
dollar is changing some now.
    But at the end of the day, you all are doing some good 
things and you are taking A1/P1 paper here, I think, beginning 
very shortly. You have just set up a facility to do that. What 
that means is that manufacturers that have A2/P2 paper are 
getting nailed, and all of a sudden, they have got like a 500 
basis point problem that they are dealing with. I have talked 
to Chairman Bernanke about that.
    I wonder if you could just bring us up to date as to what 
might be happening, because we have one manufacturer that has 
A1/P1 and all of a sudden they are good because you are taking 
them. We have A2/P2, and all of a sudden they are at a 500 
basis point disadvantage and basically getting ready to lay 
people off. And I am sure you have some way of solving that 
very soon. I am looking forward to hearing what that is.
    Ms. Duke. Senator, I wish I could tell you I had a way to 
solve it immediately. The objective behind the commercial paper 
programs and the A1/P1 are to get the markets for commercial 
paper moving again. The objective is that once they start 
moving, then that will move the other parts of the market, as 
well. But we are monitoring all parts of the financial markets 
and looking for ways to unclog the pipes, if you will, on all 
parts of the market. We are aware of A2/P2. We are aware of a 
number of different markets where they are having difficulty.
    The other thing I would say, unfortunately, for many years, 
risk was not priced, and so I think for all borrowers and all 
issuers, even when financial flows return to normal, pricing is 
going to be higher than it was a couple of years ago, but we 
are working----
    Senator Corker. For both A1/P1 and A2/P2?
    Ms. Duke. For all borrowers. And as I said, we are watching 
them. We are operating within our own restrictions in terms of 
credit risk that we can take. We are addressing that in terms 
of collateral that we take at our discount window borrowings in 
every way that we can.
    Senator Corker. We think you have the ability to take the 
A2/P2. I hope that very soon you will figure out a way to deal 
with that appropriately, and I very much understand what you 
are saying about the risk and I think it is very good that you 
send that signal out now, that at the end of the day, risk 
wasn't being priced and borrowing costs probably are going to 
have greater spreads in them than they have had in the past.
    Just briefly with Mr. Montgomery, I know we are running out 
of time and Ms. Bair has a board meeting. Mr. Montgomery, I 
think it is really great that we are increasing through FHA the 
amount of lending that is occurring. I hope that that is not 
occurring because banks are dumping their worst loans on the 
FHA and that we are going to have another hearing down the road 
dealing with that. I don't know if you would take 15, maybe 10 
seconds to respond to that, but I just want to throw that flag 
out there and thank you for your actions but hoping that you 
are not taking us down the road of other problems down the 
road.
    Mr. Montgomery. Well, that is one of ten things that wake 
us all up in the middle of the night. The reason why FHA didn't 
take part in the boom, there are a lot of them. One is we did 
not lower our underwriting criteria. We had this crazy notion 
that people should verify their income. They should produce tax 
returns. They needed to have atleast 2 years with their current 
employer. And we have not lowered those standards. And our ratios, our 
front-end ratios, our back-end ratios exist for a reason. I think 
because of that, I think you will see FHA continue to perform admirably 
over here on the long term.
    If I could just interject one thing here real quick, sir, 
on the servicing, FHA, and I referenced this number before, the 
last 3 years, we have saved 300,000 FHA borrowers from 
foreclosure, 300,000. That is a number you have not read 
anywhere. You don't see that, and it is because our loss 
mitigation program, which Congress put into place 10 years ago, 
is working, and the main reason it works is because we require 
it. Lenders and servicers know this. The borrowers know this. 
The investors know this. They are required to do loss 
mitigation. If they don't do that, they face treble damages 
from FHA and I think that is one of the keys to why this has 
been successful. You have not read about those borrowers going 
to foreclosure because they have not been.
    Senator Corker. Thank you, and if I could just--we have all 
traveled a long ways to be here and we thank you for having 
this hearing.
    Mr. Kashkari, I have to tell you that the concern about 
the--first of all, thank you for what you are doing and I 
appreciate the conversations that we have had. I do think the 
concern about the loans is somewhat unfounded. I mean, at the 
end of the day, people are paying 5 percent for this money. I 
know it raises at some point to 9 percent. At some point, the 
banks have to make a profit. I mean, they can't just hoard 
cash. I mean, it is pretty self-evident, is it not, that the 
way that money is going to be made is lending that money, and 
while there may be an initial hoarding, at some point, this 
money has to go out. Otherwise, these enterprises are not 
making money. I mean, that is just sort of self-evident.
    I wonder if you could just take maybe 10 seconds to address 
that issue. It concerns me. Obviously, I supported this measure 
and was involved in it. One of the things in the back of my 
mind was, once the camel nose goes under the tent and you get a 
bunch of Senators and a bunch of House members involved in the 
business of banking, all of a sudden, we are telling the banks 
what to do, which, let us face it, part of our problem with 
Fannie and Freddie, and I don't want to go into that now, we 
will deal with it after the election, but was that very thing, 
OK. And so I am very concerned about us making prescriptive 
arrangements with these banks. I don't think you are going to 
get many participants in that regard, but we are going to 
destroy our banking system if we do that.
    I appreciate the balance you are trying to create, but is 
it not self-evident that with paying for these through 
dividends--it is basically a loan, let us face it, that they 
can show as equity--they have got to make loans to make money 
and be in business. Is that a yes or no answer?
    Mr. Kashkari. Yes. I think the economic incentives are 
strong and clear.
    Senator Corker. OK. So I understand it is nice to raise 
these concerns. Let me just, speaking of sort of the camel nose 
under the tent, and none of us know what is going to happen 
into the future. We don't know who the next Treasury Secretary 
is. Hopefully, it will be someone who understands what 
derivatives are and mortgage-backed securities and all of that.
    But the allocation process today as you see it going 
forward, you are talking about $250 billion for senior 
preferred. Do you have any sense now--I know we talked 10 days 
or so, maybe a week or so ago about this--do you have any 
greater sense of the allocation of this $700 billion today? And 
the second part of the question, since I am way over time, how 
much of it do you think may be actually spent by January 20 or 
so?
    Mr. Kashkari. Senator, obviously, we have already allocated 
$250 billion. We have sent a notification to Congress for 
another $100 billion to take us to $350 billion. The allocation 
has not been determined betweenmore equity or mortgage-backed 
securities or whole loans at this point. We are trying to design the 
tools and we will use them and adjust them as we go forward. And there 
has been no determination made on when any notification would be sent 
to Congress on the final $350 billion. We would work with the committee 
at the appropriate time to look at that.
    Chairman Dodd. Thank you, Senator.
    Senator Corker. Thank you. I think if I were in your case, 
I would probably be vague on that, too. I would, offline, like 
to get a better sense of what you think that may actually be. I 
will not repeat it publicly if you tell me that.
    Mr. Chairman, thank you for this hearing and thank you for 
letting me play a role in the shaping of this.
    Chairman Dodd. Not at all, and let me just say to my 
colleague from Tennessee, we raise these issues about--the word 
``hoarding'' was used by the Secretary of the Treasury. That 
wasn't my word, it was his word, and I didn't raise it to be 
nice. There have been articles about it. And I don't disagree 
with the acquisition notion. I don't want to prohibit that. But 
there is a concern, not to just sit on it--obviously, that is 
not going to happen--but how those dollars are being used. 
There are a number of ways you can use the dollars, and 
obviously lending is critical and that is what we are looking 
for here. But that is not the exclusive use of the money. We 
want to make sure we channel that to the extent we can 
encourage that is part of the goal in mind.
    Let me turn to Senator Casey.
    Senator Casey. Mr. Chairman, thank you for calling this 
hearing in the midst of both an election and a financial crisis 
for the country. I want to thank our witnesses for your 
testimony and your work, your public service.
    There are a lot of ways to describe the challenge we have 
with regard to foreclosures. The numbers keep coming in. We saw 
today in one story that foreclosure filings for the third 
quarter are up 71 percent. In Pennsylvania, the third quarter 
foreclosure filings were up 73 percent from the 2007 third 
quarter to 2008. Maybe the most difficult number for 
Pennsylvanians to look at with regard to this is Pennsylvania 
filings rose 18 percent from second quarter to third quarter of 
this year, whereas the national number was a lot lower than 
that, 3.5 percent.
    I was struck by a number of parts of the testimony. 
Chairman Bair, this probably describes this better than 
numbers, your statements about the impact of foreclosures, and 
these are descriptions that others have used and said in 
different ways, but I thought it was important to highlight 
them, and I am quoting from page eight. ``Foreclosure is often 
a very lengthy, costly, and destructive process that puts 
downward pressure on the price of nearby homes.'' Later on page 
eight, you say, ``Foreclosures may result in vacant homes that 
may invite crime and create an appearance of market distress, 
diminishing the market value of other nearby properties.'' Well 
said.
    I guess in light of that problem that we have, which is a 
foundational problem for why we are all here, I wanted to ask 
Assistant Secretary Kashkari about Section 109 that our 
Chairman pointed to earlier. Section 109(a) of the Emergency 
Economic Stabilization Act has a ``shall'' and a ``may.'' The 
shall part says the Secretary shall implement a plan that seeks 
to maximize assistance for homeowners and use the authority to 
encourage the servicers of the underlying mortgages to take 
advantage of Hope for Homeowners, the program we have to modify 
mortgages. Section 109(a) also says the Secretary may use loan 
guarantees and credit enhancements to facilitate modifications.
    I am struck by the contrast between especially the 
mandatory language, the ``shall implement a plan'' language of 
109, versus your testimony where--and I am being critical here, 
but I don't want to be casual about this--your testimony is 
about four-and-a-half pages. You cover what you have a 
responsibility to implement, principally theTroubled Asset 
Relief Program, and I realize that is a difficult challenge for anyone 
and any group of people.
    But the homeowner preservation section is one small 
paragraph. You talk about maximizing opportunities to help as 
many homeowners as possible. You talk about appointing an 
interim Chief of Home Ownership Preservation. That is good. We 
appreciate that you did that. And looking for other 
opportunities to help homeowners. I am summarizing a brief 
paragraph.
    But I am struck by the contrast between that seeming, at 
least in the testimony, the verbiage of the testimony, the 
seeming deemphasis or lack of detail on home ownership 
preservation versus the mandatory language of 109. I want to 
just get your reaction to my assessment of that.
    Mr. Kashkari. Thank you, Senator. As I have said 
previously, we are very, very focused on this issue of avoiding 
preventable foreclosures. The testimony was written in a manner 
to give an update to the Congress, to this committee, and to 
the people on our progress, and different paths identified 
seven work streams, have made further progress, and others, 
there is a lot of work being done but we haven't made major 
announcements yet. So most of the testimony is focused on the 
capital program because we have already announced that program 
and are executing it.
    We have a team of people working interagency on the home 
ownership preservation piece led by Donna Gambrell, and when 
their work product is complete, we are going to come out in 
just as much detail as we did on the capital program.
    Senator Casey. Let me ask you this, a couple of very 
specific questions. The statute says that you shall implement a 
plan. Tell me when you think that plan will be completed and 
what progress you are making toward that, when the plan will be 
completed and when will it be implemented.
    Mr. Kashkari. The plan is under development now with Donna 
and our team working with HUD, with the FDIC and others to look 
at these different alternatives. The first implementation of 
that plan is going to be put into place when we have bought 
mortgages and mortgage-backed securities as instructions that 
we are going to be sending to the servicers. So that is going 
to be the vehicle for implementing that plan.
    Senator Casey. And when would that be?
    Mr. Kashkari. As soon--we are running--working around the 
clock to get these programs up and running. I think it is 
weeks, it is not days, but it is also not several months. So we 
are working very hard to get that up and running.
    Senator Casey. So you are talking about weeks in terms of 
implementing the plan contemplated by Section 109(a)?
    Mr. Kashkari. I think it is weeks in terms of when we are 
going to have mortgages and mortgage-backed securities, and 
then we will be submitting detailed instructions to the 
servicers of those loans on the aggressive loss mitigation 
techniques we want them to take.
    Senator Casey. I want to get back to you in a second. I 
also want to ask Chairman Bair, with regard to the ``may'' 
section, may use loan guarantees, I am assuming that the 
language that is in 109--on page 11 of your testimony, you 
speak to, in the last paragraph under the foreclosure section, 
loan guarantees could be used as an incentive for servicers to 
modify loans. The government could establish standards for loan 
modifications. You go on from there.
    I am assuming you are saying, A, that there is authority 
under Section 109(a) to do this, and B, that you would 
recommend it, is that right?
    Ms. Bair. Yes, our lawyers think there is authority to do 
it, and yes, we definitely think it is a policy option. We are 
in discussions with Treasury. There is a policy process 
underway. But yes, we think there are a number of advantages in 
combination with other tools, especially for loans that are in 
securitization trusts, to use a guarantee as leverage to get 
the loans modified. It is also advantageous to implement 
systemwide protocols to streamline this process and get it 
going on a much broader scale.
    Senator Casey. And I think people around the countryare 
happy that you are discussing this. Tell me--either of you can answer, 
or both--tell me, what is the time line for the completion at least of 
discussions which may lead to the implementation of a loan guarantee 
strategy?
    Ms. Bair. Well, I understand--quickly. I think there are 
meetings and discussions actively going on right now and----
    Senator Casey. When you say ``quickly,'' do you mean weeks?
    Ms. Bair. The Treasury Department is the implementor of the 
TARP program, so we are sharing ideas with them about this 
particular aspect. It is an Administration process and we want 
to be respectful of that, but I really think that Neel and 
Secretary Paulson are very committed to this and moving in a 
very timely way.
    Senator Casey. Mr. Assistant Secretary, is that an accurate 
characterization of the Treasury Department's position at this 
point, that you are in agreement with what Chairman Bair has 
proposed on page 11 of her testimony with regard to loan 
guarantees?
    Mr. Kashkari. We are looking at it very closely and working 
with our colleagues around the administration to understand the 
plan, understand how it would be implemented, what effect we 
think it would have, and how it would interact with the other 
programs. And so it is something we are very seriously 
considering.
    Senator Casey. When will we know the results of your 
serious consideration?
    Mr. Kashkari. It is hard to give a specific date, Senator. 
We are working on it, as the Chairman said, Chairman Bair said, 
in real time right now, and as soon as decisions are made and 
we are in a position to make any announcements, we will do so.
    Senator Casey. So are we talking weeks in terms of this 
determination you have to make?
    Mr. Kashkari. Again, Senator, I am not trying to be 
evasive. It is hard to predict the policy process. I don't know 
if it is days or if it is weeks. It is something we are very 
focused on right now.
    Senator Casey. Well, I would urge you and I would urge the 
administration to move with dispatch, because one thing, as 
Senator Dodd has said and others, is that there is a sense of a 
lack of urgency. I realize this stuff takes--this work, I 
should say, takes a lot of close examination and it is not easy 
to develop new programs. But when you juxtapose the foreclosure 
filing reality, the impact that is having on neighborhoods, the 
jobless rate numbers, which keep spiking up--we are headed to 
maybe a million job losses this year. In Pennsylvania, we have 
got 67 counties, almost half of them have unemployment rates 
above 6 percent. About 15 of them have unemployment rates above 
seven as of the last monthly county-by-county number.
    And then you also have a lot of taxpayers looking to 
Washington and they don't--and I am just saying this as an 
opinion of mine, but I think it is shared by a number of 
people--they don't have a lot of confidence in the current 
President to be able to deal with this. We have two candidates 
for President, neither of which has the authority to deal with 
this. They look to the Congress and they are not sure they can 
identify one person there.
    So what Treasury does and what every institution 
represented at this table does is critically important in any 
context, but especially in the context of the juxtaposition of 
big problems in people's lives and a vacuum or a lack of 
leadership that is focused on a singular person or a single 
institution. So your actions and your decisions and your sense 
of urgency is critically important to inspiring--I know you 
have got to worry about market confidence, but I think also 
taxpayer confidence has worn pretty thin.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Casey.
    Let me underscore the point that Senator Casey has made, 
and Bob, I think maybe before you walked in, this wasthe very 
first issue I raised, as well, in a conversation between Sheila Bair 
and Neel Kashkari, and I talked to the Secretary of the Treasury this 
morning about this, as well. And again, we don't need to go back and 
forth on asking you specific questions and trying to get it, but I 
think you leave here--I hope you leave here--I left the conversation 
this morning, as I heard, without getting into the details of it, that 
the Secretary of the Treasury is determined to get this program up and 
running. Now, that is what I was left with. Again, I know there are 
things to work out, but I want you to go back, Mr. Assistant Secretary, 
and convey the reactions here about our determination to get this up. 
It is very important.
    And I didn't raise this earlier, but when you ran down your 
list of priorities, one through ten or 11 or whatever it was, 
No. 5 was foreclosure mitigation. I wrote it down here on my 
notepad. None of us want to sit here and go back and flyspeck, 
and this may seem trivial, but to people out there with that 
10,000 a day losing their homes, it is not trivial at all. And 
the idea that that is No. 5 on our list--I understand you have 
got a lot of things to do. It would help a lot to have a 
heightened sense of urgency about this issue, and there is a 
plan. We wrote it into the law specifically.
    We worked hard to write 109 into the law. That was not just 
throw-away language. It was very specifically written. And I 
know where 102 comes from and I know what that was intended to 
do. I was involved in every dotted ``I'' and crossed ``t'' in 
that bill, as you know, and as Sheila Bair knows. And so when 
people come back to me and say, well, 102 impacts on 109, no, 
it doesn't. I know the history of that. That is a ruse to delay 
the import of Section 102, in my view.
    So I would really hope that having heard this, you will go 
forward.
    I have one question before we let both of you go, and then 
I have got a couple of questions for our remaining panelists. 
It was raised by Senator Corker--I will give you a chance to 
respond to my last point, Secretary, if you want to, as well--
and that is this idea, the auction process and the taking 
equity position, and again, I am not going to ask you to give 
me an exact percentage, but I was sort of left with the 
impression as of the beginning of last week when there was a 
shift and it was the source of the major headlines in the 
country that we were moving toward the capital infusion idea 
and moving further away from the auction idea, not abandoning 
it at all.
    And, in fact, I know in my conversations with the Treasury 
Department, I think there was a deep appreciation that when we 
wrote the legislation, the EESA legislation, we wrote a lot of 
flexibility and broad authority. The original proposal which 
you sent up to us that Saturday on the 19th of September only 
allowed the auction process, the authority for that. And we 
responded by saying, that is not the only idea. There are 
others. We have other ideas. We ought to give you broader 
authority. That is where that language came from.
    I was left with the impression that there has been a major 
shift at least away from the auction process toward the equity 
side of this. Am I wrong in reading that, without apportioning 
a percentage to how the 350 gets used?
    Mr. Kashkari. Mr. Chairman, we, first of all, agreed with 
you and worked very hard with you to design that flexibility, 
and I think that as the Secretary has said, we moved toward the 
capital program first because markets deteriorated much more 
quickly than we had expected, and putting in capital was a 
faster way--buying equity was a faster way to put capital in 
the system.
    Nonetheless, we think that there are multiple complementary 
tools to get at this fundamental capital problem and purchasing 
assets, whether it be through an auction mechanism or it is 
buying whole loans, is another important complementary tool, 
especially to attract private capital to come in and help 
capitalize our system.
    So, again, as you said, we are not going to putpercentages 
on each, but we are pushing very hard on all fronts so that we have all 
the tools available as we need and deem appropriate.
    Chairman Dodd. I think the reason was raised--and, again, 
you have spent your adulthood working on these issues. But the 
old idea, in the auction process you are getting a dollar one 
for in, you buy an asset for one dollar, you get a dollar value 
out of it--or hopefully you do; whereas in the equity side you 
put that dollar in, you may leverage $10 or $100 off that. And 
so it seems like a more attractive idea if the goal is here to 
excite the capital markets to begin moving. And as between the 
two--and I understand the value of having the option of dealing 
with the auction process. But in terms of the overall goal to 
provide that kind of--that shock, the electro-shock to the 
system, to get that circulatory process working, the auction--
excuse me, the equity position seems to be more designed to do 
that than the auction process.
    Mr. Kashkari. Well, there is no question, Senator. A dollar 
of equity goes a lot further than a dollar of asset purchases.
    Chairman Dodd. Right.
    Mr. Kashkari. That is why we started there. But we think 
that they all have a complementary role to play.
    Chairman Dodd. Yes, I agree with that as well. You both 
have been very, very--the last one I wanted to make to you on 
this, and it goes back to the question of Senator Menendez. I 
just want to read you something. This is from a lawyer in 
Staten Island. I should probably have let Senator Schumer read 
this because it is from his constituent. But we worked with 
this family regarding the mitigation problems, and this is just 
a quote. He said, ``One of the biggest hurdles''--this is a 
lawyer representing some people on foreclosure. ``One of the 
biggest hurdles we encounter is the lenders'' inability to 
respond to our requests in a timely manner. The other problem 
is the lenders assign new negotiators and loan mitigation 
specialists several times over the course of the negotiations, 
thereby starting the review process all over again. Our office 
has a staff working on these files 7 days a week, and it may 
still take us months to get any sort of response from lenders. 
It is virtually impossible for homeowners to deal with these 
negotiations on their own. The lenders are creating such a time 
constraint that by the time they issue the approval, the buyer 
has walked away from the deal. The system is designed to 
fail.''
    Now, again, this is one we worked on, and they spend their 
law firm doing this. Again, I just want you to take that kind 
of back with you, because I presume it is not an isolated case 
of what is going on, the practicalities of this. And that is 
why I think it is so important that that lender--you mentioned 
earlier--I did not mean to jump in a sense, but obviously the 
borrower should step up. I agree with you. But also that lender 
needs to understand that that borrower in that situation of a 
highly distressed mortgage probably has 20 other problems going 
on. They may be in the process of losing their job. They have 
got all sorts of other things occurring. It is not sort of a 
stovepipe; I have got just a foreclosure problem. I will almost 
guarantee you that family has a lot of other issues they are 
grappling with.
    And so the idea that they are going to kind of pick up that 
phone casually as if somehow it is as if they need a new set of 
tires on their care I think is different. And I think the 
borrower--or the lender, rather, has to understand that. If we 
are really going to get at this, it seems to me there has to be 
a deeper appreciation of what is going on with that family that 
is about to lose their home. So I would hope you would just 
take that back and work on that.
    Let me ask, Tim, do you have any questions for either 
Sheila or--or, Bob, do you have any quick questions for either 
one before the----
    Senator Johnson. For the entire panel, do you think our 
economy needs another economic stimulus? Yes or no. Sheila.
    Ms. Bair. Well, that is a little bit outside my bailiwick. 
I think I will defer on that. It is really not a type of issue 
that the FDIC really weighs in. I think you probably have much 
greater expertise than I in making----
    Senator Johnson. The President and the Fed Chairman have, 
as you know, said yes to the concept. Neel.
    Mr. Kashkari. Respectfully, Senator, I also am not an 
expert on that. I am spending 100 percent of my time on 
implementing the TARP, so I would defer to some of my 
colleagues.
    Senator Johnson. Brian.
    Mr. Montgomery. I assume we are going down the line here. A 
little out of my world. I can assure you we have our own 
economic stimulus that we are doing through FHA. You heard some 
of the numbers I referenced earlier.
    Thank you, sir.
    Mr. Lockhart. What we need to me from the mortgage markets 
in particular is to get the capital markets working again, and 
that is the bank liquidity being put in. We need to be able to 
bring down mortgage rates. We need to be able to borrow longer 
term for some of these financial institutions. The key thing to 
me is to stimulate the financial institutions so they can start 
lending again.
    Ms. Duke. And given that it is my turn to defer, I will 
defer to the Chairman of the Federal Reserve, who on Monday did 
express support.
    Senator Johnson. Mr. Lockhart, what guidance have you given 
Fannie Mae and Freddie Mac regarding loan restructuring? And 
what efforts are being made by Freddie and Fannie to 
restructure loans?
    Mr. Lockhart. We have been extensively talking with----
    Chairman Dodd. Could I just interrupt just for 1 second? I 
promised Sheila Bair I would get her out an hour ago, and it is 
an hour, and I apologize to you. Also, Neel, we have held you 
up now. It is 2\1/2\ hours, and we are grateful for your being 
here. Let me underscore the points that were made by Bob 
Menendez. Our questions are not--if there seems to be an edge 
on them, it is only because that is what our constituents and 
the country are feeling. And so it is not pointed at anyone 
except a sense of urgency that people are feeling about all of 
this. But we are very grateful to all of you for the work you 
are doing and grateful to have you here this morning.
    Do you mind, Tim, if they----
    Senator Johnson. Yes.
    Chairman Dodd. I promised them they could go. So thank you 
both very much.
    Mr. Kashkari. Thank you, Chairman.
    Chairman Dodd. Go ahead, Tim. I am sorry.
    Senator Johnson. Mr. Lockhart, that was the last question I 
had.
    Mr. Lockhart. Do you want me to continue answering the 
question, Mr. Chairman?
    Fannie and Freddie have loan servicers working on their 
loans. They hold over $30 million loans in this country, so 
they have probably have the majority of the loans in this 
country. The good news is that their book of business is 
significantly better than the average book of business. Their 
delinquencies are less. But just because of the amount of loans 
that they have, there is a tremendous amount of activity going 
on in loan modifications and foreclosure prevention.
    We are continuing to work with them. Fannie Mae just 
announced a program earlier this week called ``Second Look,'' 
where the idea is to contact the people that are about ready to 
be foreclosed and give them one more chance to work it out.
    A key thing here is really to get to the people, and it may 
be more than a phone call. You may have to actually go to the 
door of the house to find these people. It really is critical 
to contact the people and work with them. They are going to 
continue to do that, and they will be cranking that effort up 
significantly.
    Senator Johnson. Thank you.
    Chairman Dodd. Thank you very much.
    Let me ask just a couple of quick questions. Mr. 
Montgomery, I want to compliment you again as well. Keeping 
those underwriting standards may have been a painful process. 
Everyone was probably saying, ``Why aren't we doing more to get 
more of this business?'' But we are all very grateful you stuck 
to the principles on that. And you are rightly proud as well to 
have been able to launch the Hope for Homeowners plan in such a 
short time. That is really rather amazing going from July to 
October 1, and I want to commend you for it. And I hope it is 
just more than hope as well, but we have plan here that could 
really make a difference with some people.
    In the end, of course, the goal is to help homeowners. 
Please just update us on what you are doing to maximize the use 
of this program. What steps have you taken to sign up lenders? 
What steps have you taken to ensure borrowers know about the 
program? And what impediments do you see in the use of this 
program?
    And let me just add anecdotally, again, going back to 
people we are hearing from, when they make that call, the first 
advice is ``Call your lender.'' Now, I appreciate that, but too 
often what happens then is you get into that calling your 
lender and you end up along the lines that lawyer in Staten 
Island talked about, representing a number of people facing 
foreclosure. So would you please respond to those?
    Mr. Montgomery. Absolutely. We are proceeding on a hundred 
different fronts as far as outreach, between our call center, 
between direct mail, homebuyer events across the country, 
working with our lenders. You know, certainly I suppose we 
could always use more funds for it, but luckily the H4H program 
did give us some funds to do education and outreach, and I can 
assure you we are using those funds.
    As to the impediments, we hosted a roundtable on Monday 
with lenders, and they told us some of the impediments they are 
hearing about. I would say probably the one at the top would be 
the cost of it. The 3-percent up-front premium, the 1.5-percent 
annual premium, just to put that 1.5-percent annual premium in 
perspective, on a $180,000 loan that is about $225 a month. And 
by the time--the other concern they had is explaining the 
shared equity and explaining the shared appreciation. This is 
something a lot of them do not have experience in doing. They 
are concerned with consumers, and this is to my earlier point 
about the training. They take it very seriously. They want to 
get the training correct. But imagine sitting down with a 
consumer and trying to explain the shared equity, that they 
would owe 50 percent of that, and also explaining the shared 
appreciation that in year 7 and year 20 and year 25, you will 
still owe Uncle Sam at least 50 percent of the appreciation on 
that loan.
    That is not to say it cannot be workable. That is not to 
say that we do not want to continue to work with you on some 
fixes, because we do. But I am just letting you know from their 
perspective, this is what lenders are telling us.
    Chairman Dodd. I appreciate that, and that is not easy and 
so we thank you. We want you to keep us--we will be working 
with you as well, and if you have these kinds of concerns, we 
ought to stay in close touch, the Committee staff and others, 
with you.
    Let me, if I can, Ms. Duke, let me ask you, we talked about 
all the other Federal entities that own a significant number of 
mortgages that are receiving resources and backing. In the 
financial rescue legislation that Congress passed, we require 
each of your agencies to actually work to modify mortgages 
here. Governor Duke, the Fed owns a significant number of these 
mortgages, many of which are subprime and delinquent as a 
result of the $30 billion of the assets that the Fed acquired 
from Bear Stearns back in March. And yet I notice that you do 
not mention those mortgages in your testimony.
    What specific steps has the Fed undertaken to conduct 
mortgage workouts of those loans that the Fed acquired as a 
result of the Bear Stearns issue? And how many of the loan 
modifications or workouts have been done?
    Ms. Duke. Mr. Chairman, I am going to have to confess I do 
not know about the assets that are in that $30 billion 
portfolio. It is my understanding that they are pledged as 
collateral and that they would be actually mortgage-backed 
security assets. If I could respond to you in writing?
    Chairman Dodd. I appreciate that, but I was a little 
disappointed that we did not get something on that. This is, 
again, one of these--that was the first step back in March, and 
that $30 billion is out there. And, again, a lot of it is hope, 
and in the long term, there will be a payback on that. But in 
the meantime, it seems to me these loan modifications are 
critically important as well.
    Last, I want to ask you about the oversight of AIG. Senator 
Martinez of this Committee and Senator Feinstein were the 
authors of a provision in the legislation dealing with the 
licensing of brokers as part of the bill. Last week, the Wall 
Street Journal reported, and I quote, ``Even after receiving an 
emergency loan that gave the Government an 80-percent ownership 
stake, AIG is spending money to lobby States to soften new 
controls on the mortgage industry. AIG is currently working to 
ease some provisions in the new Federal law establishing strict 
oversight of mortgage originators.''
    Now, I presume they are referring to the provision here 
dealing with the licensing requirements in the bill that was 
passed in July, the Housing and Economic Recovery Act, signed 
into law in late July.
    So the question I have for you is this: Has the Federal 
Reserve taken any action to suspend AIG's lobbying activities 
and other activities of the company, such as the spa trip, 
which was detailed in the press? And I want to ask the other 
panelists as well, what has been done to ensure that entities 
receiving Federal assistance and are continuing to lobby 
against--and I should have asked this, of course, of Mr. 
Kashkari, but I will ask him in writing--against the important 
protections for borrowers? And did we put any lobbying 
restrictions in all of these activities?
    This is the kind of thing that just sends the American 
public through the ceiling, the idea that they are using their 
tax money all of a sudden to turn around and undermine a 
provision in the law specifically designed to try and plug up a 
gaping hole that allowed an awful lot of these bad lending 
practices to go forward. And the idea that any part of taxpayer 
money is being used to undermine the very provisions which did 
not exist that contributed significantly to this problem is, to 
put it mildly, infuriating.
    Ms. Duke. I absolutely understand that concern, and we have 
had conversations with management of AIG. We do not manage AIG 
day to day. We have had those conversations, and I believe 
yesterday or the day before, management of AIG has come out 
with a series of steps that they have taken to curb that sort 
of spending, to set up a special governance committee, and to 
limit their lobbying activities to monitoring of legislation 
rather than active----
    Chairman Dodd. Well, I appreciate what AIG--but what is the 
Fed doing? I need to know what you are doing. Are we insisting 
upon this? We do not have to have the stories come out, but it 
seems to me that rather than reading about this, why isn't 
there some demand occuring even before that happens?
    Ms. Duke. I understand that frustration. The loan to AIG 
came up very quickly. It is not something that we were 
accustomed to doing. We have had people inside AIG primarily 
monitoring the financial flows and the valuation of assets. In 
the last couple of weeks, we have actually stepped up our 
conversations with management, which is new management, as you 
know, and they are very much concerned about this as well, and 
take----
    Chairman Dodd. Well, staff reminds me that the second loan 
was made after the spa story. It would seem to me that that 
story might have been enough to provoke the Fed to take some 
action, that second tranche was at least going to be 
conditioned better than it was. Well, I wish you would carry 
this back.
    Ms. Duke. I will. I will
    Chairman Dodd. Because this is really important, again.
    Ms. Duke. Yes, sir.
    Chairman Dodd. We are trying to build public confidence in 
the direction we are trying to head, and it doesn't help--let 
me put it to you very bluntly here. The confidence of the 
American public that we are on the right track with all of us 
this is going to be critical. And if they hear their money is 
being used for these kinds of things, we lose that confidence, 
and that makes this all the more difficult to move forward on.
    Well, again, I thank you for--the GSE loan modifications 
you sort of addressed with Senator Johnson's question, Mr. 
Lockhart. Did you want to add anything to that at all? What 
steps has FHFA taken to require enterprises to do these loan 
modifications?
    Mr. Lockhart. It has been an ongoing activity. We are now 
putting out a quarterly report, which will move to a monthly 
report. This will put a lot of transparency around that. 
Everybody will be able to tell what is going on in their 
modifications.
    Up to now, it has not been as rigorous as we would have 
hoped. Now that they are in conservatorship, these activities 
will increase significantly. As I said in my testimony, they 
are working with the FDIC IndyMac program so that they are 
looking at that technique. They are actually running an 
experiment where they are doing some on their program and some 
on the FDIC program to see which are more successful.
    They have a whole series of different loan modification 
activities going on. It is critical to prevent those 
foreclosures. The new CEOs have made it a very high priority. 
As I said, Fannie Mae has this new Second Look program that 
before they move to foreclosure, they are opening up those 
files again, trying to contact the people in the houses, and 
seeing if there is anything they can do to prevent 
foreclosures.
    We will be working very closely with them. We are a Federal 
property manager under the legislation. We are going to be 
appointing people within the organization to have that specific 
duty to work in the conservatorship.
    Chairman Dodd. I should have asked the others this 
question, too, but I will ask it of you and submit it in 
writing to the others. Are you lacking any authority that you 
would otherwise need from us here? Are there existing statutory 
or regulatory provisions you have that would make it possible 
for you to demand more accountability in this area?
    Mr. Lockhart. In that we are the conservator now over 
Fannie and Freddie, we have the authority, yes, sir.
    Chairman Dodd. Well, we are going to have you back up here 
in a few weeks. This is not the last time we are going to see 
each other on these matters. So when you come back up again, at 
least as one Member of the Committee, I want to hear more about 
what we are expecting and more of what is happening.
    Mr. Lockhart. I will be more than happy to.
    Chairman Dodd. I appreciate that.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you. I appreciate the 
opportunity to ask a few additional questions.
    Ms. Duke, on the AIG issue, I know there has been a lot of 
consternation about the fact that AIG is paying--look, by the 
way, I agree with all the concerns that have been raised about 
their behavior and think it is reprehensible based on where 
they are. But then on the flip side of that, as far as moving 
them away from Government, I know there has been a lot of 
speculation about actually this is a pretty usurious 
arrangement in some ways and that they might be better off, if 
you will, either in bankruptcy or seeking other ways out of 
this.
    Any sense of where we are? They are a public company. You 
are a public entity. I am sure you can talk about those pretty 
freely with us. Where are we as it relates to anexit strategy 
and moving them away from where they are today?
    Ms. Duke. AIG has a plan and had from the very beginning a 
plan to sell assets to repay the loans from the Federal 
Reserve----
    Senator Corker. And let me just ask you, I mean, I 
understand about selling assets so, in essence, you end up with 
sort of nothing left. There is a growing concern there. I would 
love any editorial comments as to whether that is even the best 
result or whether seeking equity in other ways at this point, 
now that people can ascertain what the real risk is and have 
had time to do that, I would love editorial comments as to 
whether their plan is even the right plan.
    Ms. Duke. Let me try to answer your question without 
getting into any non-public information about the company. We 
have been working with them ever since the loan was made. First 
of all, the reason the loan was made originally was a concern 
about systemic risk and risk to the financial markets. And we 
did not at that time fully know or understand exactly where all 
of those risks might be and what the magnitude of them might 
be. And so we are spending a lot of time trying to understand 
exactly what the risk is. If we are going to hold up the tent, 
if you will, we want to find out exactly what the risk is that 
we are protecting against. And then what steps it will take to 
get us to the other side. How quickly are those risks 
unwinding? And also what steps will it take to bring this to a 
conclusion to have AIG take the steps that it needs to take to 
repay the----
    Senator Corker. And is the best step for them to sell off 
all the parts? Or is the best step for them, now that people 
have a better sense of what the real risk is, a different type 
of equity injection?
    Ms. Duke. I think our best effort is to make sure that the 
overall outcome to the public is the best outcome to the 
financial markets generally, not necessarily for the single 
institution.
    Senator Corker. And I understand that, and that is why we 
are all up here. So I guess what you are saying is your are 
semi-agnostic in that regard, and if selling assets pays the 
$85 billion back plus the additional injection you just made, 
or the other, either way, that we get away from the immediate 
taxpayer risk, but then on top of that, maybe even more 
importantly, or equally important--I should not say ``more''--
is the system risk.
    Ms. Duke. The systemic risk is the key to it, and while we 
are certainly mindful of having our loan repaid, it is not just 
a pure credit decision. This is also one of trying to monitor 
the----
    Senator Corker. And since you can't give publicly some of 
the discussions that you are having, is there a sense that 
there is something working right now that will move them away 
from your institution and into a different scenario that does 
alleviate that systemic risk?
    Ms. Duke. The sense is that there are an awful lot of 
people working toward that end, and the company is so large and 
there are so many subsidiary companies, and the markets in 
which they operate are so complex that I think it is going to 
take quite a bit of working through to that conclusion.
    Senator Corker. Thank you.
    Mr. Lockhart, I just could not resist with you being here. 
How much time is left in your term?
    Mr. Lockhart. The law passed in July made me the Director 
of FHFA until another Director was nominated and approved by 
the Senate.
    Senator Corker. It could be long, could be short.
    Mr. Lockhart. It could be long, could be short.
    Senator Corker. It is my goal that--or it is my hope that 
you will work yourself out of a job pretty quickly. I know the 
biggest part of your portfolio is Fannie and Freddie; the 
others sort of lesser, if you will.
    Is there any need for--I have a strong prejudice in this 
regard, but is there any need for Federal involvement in Fannie 
and Freddie? My sense is absolutely not. I knowwe have had some 
conversations in our office about that, and I am just wondering what 
your answer to that might be. And if not, if the markets can deal--I 
mean, housing finance is not particularly complex. It really is not. 
Any sense as to how soon we might be out of the business, if you will, 
of having these Government-sponsored entities and you maybe being on 
the beach someplace?
    Mr. Lockhart. That would be nice. Certainly, there needs to 
be Federal involvement from the standpoint of there needs to be 
supervision.
    Senator Corker. No doubt supervision. I am glad you finally 
have the ability to supervise and have powers to do that.
    Mr. Lockhart. Right, and we obviously did not, before the 
law was passed, have strong enough powers. Going forward, it is 
going to be up to Congress to make a decision about what the 
future of these companies should be.
    Senator Corker. Of course, but is there any need for that--
I know Congress likes to play in these things, and that is what 
has created the problem.
    Mr. Lockhart. There is a need for a secondary mortgage 
market player in this country. There is a very significant 
need. Hopefully, it could be provided by the private sector. 
The private label security market failed in doing that, in 
fact. I am hopeful it will be re-created over time.
    Senator Corker. And also the GSEs failed in that, too, 
right? So both the public and private sector failed, if you 
will----
    Mr. Lockhart. The GSEs continued to provide liquidity in 
the secondary mortgage market.
    Senator Corker. Because of us.
    Mr. Lockhart. They failed because they had an inadequate 
capital structure and an inadequate regulatory structure. The 
law that set up our old agency was not strong enough. Their 
structure, no doubt, Senator, needs to be rethought going 
forward. Whether it should be a GSE structure or a purely 
private sector structure, I believe is a very important issue 
that should be addressed.
    Senator Corker. Senator Dodd, Mr. Chairman, if you need to 
go to lunch or something, we need to close this out. Please let 
me know. Or I will chair the meeting for a while if you wish. 
[Laughter.]
    Senator Corker. I would never do that.
    Chairman Dodd. We are in a pro forma session. You may 
decide to do something here. I have got to keep an eye on you.
    Senator Corker. Is there any need for the Federal 
Government whatsoever to be involved in the secondary market? 
It is a simple, easy--I mean, it makes our exotic derivatives 
look like, you know, elementary stuff. Is there any reason 
whatsoever for the Federal Government to be involved in the 
secondary market?
    Mr. Lockhart. First, they are through FHA. My colleague to 
my right----
    Senator Corker. Through the GSEs. Through the GSEs. Is 
there any reason whatsoever for the Federal Government to be 
involved in--other than we like to be, some of us like to be.
    Mr. Lockhart. The mortgage structure in this country is 
built around a 30-year mortgage. There needs to be some 
mechanism to bring a 30-year mortgage to the marketplace. That 
can again be through a GSE structure. It could be through a 
private sector structure. The secondary mortgage market is 
extremely important to get these mortgages off balance sheets 
of the banks so that they can relend money going forward and 
liquify themselves. There needs to be a mechanism to bring them 
off the banks' balance sheets and spread them out to investors 
around the world. Again, that can be done through a private 
sector mechanism or a government mechanism.
    Senator Corker. From what you are saying in your 
supervisory role, almost as a bystanding for some timebecause 
you did not really have the authority you needed; now you have it. 
And----
    Mr. Lockhart. We took some authority we did not have, 
actually, and we kept their capital requirements much higher 
than the law said. We kept their portfolios shrunk.
    Senator Corker. Since, in fact, there are ways for the 
private sector to deal with 30-year mortgages, and since, in 
fact, there is a way for there to be a secondary market totally 
through the private sector, is there any real sense that the 
borrower has benefited really that much from the slightly lower 
rate, if you will, the GSEs get because of this implied 
backing--and as it has turned out, real backing--that the 
Federal Government has given? Has there been really enough of a 
benefit there for us to be mucking it all up by being involved 
in the way we are?
    Mr. Lockhart. There have been studies and there is back and 
forth in those studies, as most academic studies are. There is 
debate. I really haven't seen the definitive answer on the 
question.
    Senator Corker. Well, if you, the regulator and the 
supervisor and now the conservator--that is a pretty stunning 
comment to make, and I hope the world is listening to you at 
this moment. I understand there are some other interesting 
hearings happening, but that is a pretty stunning comment.
    Mr. Lockhart. What they do do, and this is the important 
thing, is that they provide liquidity to the mortgage market. 
Without them, our mortgage market would be in total chaos.
    Senator Corker. But they monopolize, and obviously if they 
were not in the business, somebody would be filling that 
vacuum. But the question I asked----
    Mr. Lockhart. In this market, I am not so sure.
    Senator Corker. Well, maybe not in this market----
    Chairman Dodd. Who fills the vacuum? Where would it be 
today without this right now? You just said it. I would like to 
repeat that. What would happen if this did not--what condition 
would we be in today in the absence of that?
    Mr. Lockhart. They are providing 80 percent of----
    Chairman Dodd. And in the absence of that, what would this 
be like?
    Mr. Lockhart. In the absence of that, we would have an 
extremely, extremely serious problem providing liquidity. We 
would just have to buildup a much, much bigger TARP.
    Chairman Dodd. So while theoretically talking about some 
alternative is a great idea, but, nonetheless, the suggestion 
somehow that we would be better off today without it I think 
needs to be emphasized.
    Mr. Lockhart. They do hold over $5 trillion worth of 
mortgages in this country. There would have to be some other 
mechanism. At this point, it is not there.
    Senator Corker. If I could, since the Chairman jumped in on 
my questioning--and I appreciate that. The fact is, though, 
that there is nothing to--there is no reason to believe that 
other private entities that were in the middle of this right 
now that were not, on the other hand, dealing with all these 
other issues we are talking about would not continue to be 
doing the same thing. There is no reason not to believe that. 
But I think the most stunning comment that has been made, if I 
understand it correctly, is the supervisor, the Director now of 
this new organization, does not--he cannot really tell whether 
there is any benefit whatsoever to the borrower. That is pretty 
stunning to me, and that the purpose of this was to allow these 
two GSEs to borrow money less expensively in order to make 
homeownership more affordable. And I guess--and this is, I am 
sure, an ongoing dialog we will have in the ensuing years.
    What worries me is that by having these organizations, we 
probably did encourage, because we were sponsoring them, if you 
will, we encouraged them to do things that were not good. And 
at the same time, we had that ability--excuse me,Congress had 
that ability, but really the borrower was not necessarily benefiting 
from lower rates. OK? We will talk about this at another time, but I 
thank you for----
    Chairman Dodd. Well, in fairness to Mr. Lockhart, as I 
understood you to say, you were talking about the academics.
    Mr. Lockhart. Right.
    Chairman Dodd. There was division back and forth. And I 
think what you were saying and suggesting is that there has 
been a debate about that particular question.
    Mr. Lockhart. That is what I was saying.
    Chairman Dodd. That is the way I thought you answered the 
question.
    Mr. Lockhart. Right.
    Chairman Dodd. Is there any other----
    Senator Corker. Well, he himself has not been able to 
discern as to whether the borrowers had benefited in any way. 
That to me is a pretty strong----
    Chairman Dodd. That is called a diplomatic answer to your 
question.
    Senator Corker. Well, I do not think it is diplomatic. We 
have had meetings in our office. I think it is a realistic 
answer. But I would love for him to answer for himself since we 
are doing a good job of answering for him.
    Mr. Lockhart. I think the Chairman is right that there are 
some dueling academic studies on the issue and, frankly, I have 
not spent a lot of time on that issue. I have been really full 
out trying to regulate them and trying at this point to 
rehabilitate them.
    I believe it is critical at this point that we need to fix 
them up. We need to get them out of conservatorship. It is a 
very critical, important issue that you raise, Senator, what 
the future of these two companies should be. I feel that will 
be a debate in Congress. We will certainly provide all the 
information we can to help that debate.
    Senator Corker. Well, I think--and I can tell by the body 
language of the Chairman out of the corner of my eye it is time 
for this meeting to end. But let me just say we have worked 
together on numbers of things very constructively. I know that 
on this issue in particular we probably have a philosophical 
difference----
    Chairman Dodd. Not necessarily
    Senator Corker. But I do hope that as you are working 
through this and there is transition occurring, I do hope there 
is a vision in the very, very near future that these two 
organizations have nothing whatsoever to do with Government. 
And I hope that is at least one of the plans that we are 
working on. I know a lot of people like to attribute everything 
that is happening to this. That is obviously unfair. But the 
fact is that this is--as we move ahead, we have the camel's 
nose under the tent here already, and obviously, the camel 
occupies the tent now because of where we are. We have the 
camel's nose under the tent occurring right now with the--I 
guess we are calling it ``the rescue plan'' now. I hope that we 
will not edge into areas that we are not supposed to be edging 
into there, and I look forward to your leadership as hopefully 
we move these organizations off, cause them to be lofted on 
their own into the future and we figure out other ways for the 
private sector to deal with the secondary market. And I hope 
that finds you retired very soon.
    Thank you for your service.
    Mr. Lockhart. Thank you.
    Chairman Dodd. Well, thank you. Let me just end on that 
note. As you point out, Mr. Lockhart, a lot of our problems was 
the private secondary market here that contributed 
significantly to bad lending practices. Clearly, we need to 
change this notion. But as I understand it, the only country in 
the world that has provided a 30-year fixed-rate mortgage was 
the United States. I do not know of any example around the 
world. And to attribute all of the problems, in fact, as you 
point out, in the absence of the liquidity provided today by 
this, we would be in a very, very difficult, far more difficult 
situation than we are in.
    Now, clearly, we are going to change. We are going forward. 
What replaces this? That will be a debate. There are various 
ideas on how to do it. But one of the things I take exception 
to is the notion somehow that it has been a bad idea to take 
relatively poor people and make it possible for them to get 
into homeownership. We have greatly benefited as a country, 
what it has meant to a family, a neighborhood, what it has 
meant to our economy. And as long as you have got good, strong, 
underwriting standards that demand accountability by that 
borrower in the process, it has worked. And I hope we do not 
retreat from that. It has been a great wealth creator for many 
millions of people in this country over the years, and 
providing the means by which we do it.
    Now, there are a variety of means by which you can do it, 
but one of my fears will be, as we see here, the assumption 
somehow because there is a Government-sponsored enterprise of 
one kind, whether it is a utility idea, as Secretary Paulson 
has suggested, or others, clearly the present model does not 
work. And that has to change without any question whatsoever. 
And there is a legitimate debate about whether or not--which 
side you replace it with. But I just want to point out that we 
would not be in the mess we are in today were it not for the 
fact that there was an improper or lack of regulation in that 
private secondary market as well. So I want to be careful 
before people jump to that option without some serious 
considerations as well as the way we are headed.
    This has been a very worthwhile hearing, and we thank you. 
We are going to come back again and again, obviously, on this, 
and some of the issues involving foreclosure we want to 
continue to raise with you as well. But I am very grateful to 
all of you, and I appreciate the work that you are doing.
    The Committee will stand adjourned.
    [Whereupon, at 1:10 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



 RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM SHEILA C. 
                              BAIR

Q.1. Please provide the legal justification for establishing 
the Temporary Liquidity Guarantee Program under the systemic 
risk exception in the Federal Deposit Insurance Act.

A.1. The legal authority for establishing the Temporary 
Liquidity Guarantee Program (TLGP) is set forth in 12 U.S.C. 
1823(c)(4)(G). Based on information regarding the unprecedented 
disruption in credit markets and the resulting effects on the 
ability of banks to fund themselves and the likelihood that the 
FDIC's compliance with the least-cost requirements of the 
Federal Deposit Insurance Act (12 U.S.C. 1823(c)(4)(A) and (E)) 
would have serious adverse effects on economic conditions or 
financial stability by increasing market uncertainty, the Board 
of Directors of the FDIC and the Board of Directors of the 
Federal Reserve System made written recommendations to the 
Secretary of the Treasury that the FDIC's creation of the TLGP 
program to guarantee bank depositors and senior unsecured 
creditors against loss under certain described circumstances 
would avoid or mitigate such effects. After consultation with 
the President, as required by the statute, the Secretary of the 
Treasury made the systemic risk determination that provided the 
FDIC with the authority to implement the TLGP.

Q.2. According to press reports, the emergency actions taken by 
the FDIC to guarantee unsecured senior debt issued by FDIC-
insured depository institutions has had the unintended 
consequence of driving up the costs of borrowing for Fannie 
Mae, Freddie Mac and the Federal Home Loan Banks (FHLBs). Was 
this taken into account as a possible consequence as you 
formulated this course of action?

A.2. As noted in the press, the spread of debt issued by 
Government-sponsored enterprises (GSEs), including Fannie Mae, 
Freddie Mac and Federal Home Loan Banks (FHLBs), over 
Treasuries increased considerably in October and November 
although the overall cost of funding declined. According to 
Merrill Lynch data on U.S. bond yields, the spread between AAA-
rated agency debt and Treasuries increased by nearly 40 basis 
points between September and November 2008. We believe these 
developments primarily reflect broad financial market 
uncertainty and a generally unfavorable market sentiment 
towards financial firms. In fact, the spread of debt guaranteed 
by the FDIC under the Temporary Liquidity Guarantee Program 
over Treasuries is larger than the spread on GSE debt.
    Financial firms, including those with a AAA-rating, saw 
their borrowing costs increase sharply, both in absolute terms 
and relative to Treasury yields, during the same two months, 
even as the Federal Reserve continued to lower the federal 
funds target rate. Merrill Lynch data show that the effective 
yield on AAA-rated corporate debt issued by financial firms 
increased by 140 basis points between September and October, 
before declining somewhat in November. Lower-rated corporate 
debt experienced even more significant increases over the same 
period of time.
    The primary purpose of the FDIC's Temporary Liquidity 
Guarantee Program is to provide liquidity in the inter-bank 
lending market and promote stability in the long-term funding 
market where liquidity has been lacking during much of the past 
year. While the FDIC's action was focused primarily on helping 
to restore a stable funding source for banks and thrifts, we 
believe that such liquidity can, in turn, help promote lending 
to consumers and small businesses, which would have a 
considerable benefit to the U.S. economy, in general, and 
financial firms, including mortgage lenders and GSEs. 
Nevertheless, partly to mitigate any potential effect of the 
FDIC guarantee on funding costs for GSEs, the federal banking 
agencies have agreed to assign a 20 percent risk weight to debt 
guaranteed by the FDIC (rather than the zero risk weighting 
that is assigned to debt guaranteed by a U.S. Government agency 
that is an instrumentality of the U.S. Government and whose 
obligations are fully and explicitly guaranteed as to the 
timely repayment of principal and interest by the full faith 
and credit of the U.S. Government).

Q.3. The FFIEC has proposed a rule that would lower the capital 
risk weighting that banks assign to Fannie Mae and Freddie Mac 
debt from 20 to 10 percent, but does not change the treatment 
for FHLB debt. Has any consideration been given to giving the 
same treatment to FHLB debt? Will FDIC-guaranteed unsecured 
bank debt have a comparable risk weight?

A.3. On September 6, 2008, the Treasury and Federal Housing 
Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into 
conservatorship, administered by the FHFA. The next day, 
September 7, 2008, the Treasury announced the establishment of 
the Government Enterprise Credit Facility and entered into 
senior preferred stock purchase agreements (the Agreements) 
with Fannie Mae and Freddie Mac. These Agreements are intended 
to ensure that Fannie Mae and Freddie Mac maintain a positive 
net worth and effectively support investors that hold debt and 
mortgage-backed securities issued or guaranteed by these 
entities.
    On October 27, 2008, the Federal Deposit Insurance 
Corporation, Board of Governors of the Federal Reserve System, 
Office of the Comptroller of the Currency, and Office of Thrift 
Supervision (together, the Agencies) published in the Federal 
Register a Notice of Proposed Rulemaking that would permit a 
banking organization to reduce to 10 percent from 20 percent 
the risk weight assigned to claims on, and the portions of 
claims guaranteed by, Fannie Mae and Freddie Mac (the NPR).\1\ 
As proposed, the NPR would permit a banking organization to 
hold less capital against debt issued or guaranteed by Fannie 
and Freddie. The preferential risk weight would be available 
for the duration of the Treasury's Agreements.
---------------------------------------------------------------------------
    \1\73 Fed. Reg. 63656.
---------------------------------------------------------------------------
    The NPR requested comment on the proposed regulatory 
capital treatment for debt issued or guaranteed by Fannie Mae 
and Freddie Mac and whether the Agencies should extend this 
capital treatment to debt issued or guaranteed by other 
government-sponsored entities (GSEs), such as the Federal Home 
Loan Banks (FHLBanks). The comment period for the NPR closed on 
November 26, 2008, and the Agencies received more than 200 
public comments. Most of the commenters support lowering the 
risk weight for debt issued or guaranteed by the FHLBanks to 
narrow the credit spread between Fannie Mae and Freddie Mac 
debt and FHLBank debt. TheAgencies are reviewing the comments 
and determining whether a 10 percent risk weight is appropriate for a 
banking organization's exposure to a GSE.
    On November 26, 2008, the FDIC published in the Federal 
Register a final rule implementing the Temporary Liquidity 
Guarantee Program.\2\ Under the Temporary Liquidity Guarantee 
Program, the FDIC will guarantee the payment of certain newly 
issued senior unsecured debt issued by banking organizations 
and other ``eligible'' entities. Consistent with the existing 
regulatory capital treatment for FDIC-insured deposits, the 
Agencies will assign a 20 percent risk weight to debt 
guaranteed by the FDIC.
---------------------------------------------------------------------------
    \2\ 73 Fed. Reg. 72244.

Q.4. I commend you for aggressively pursuing loan modifications 
of the IndyMac loans that the FDIC now services. Please 
elaborate on the following three points that you make in your 
testimony that I want to explore further:
Q.4.a. You state that you have established a program to 
systematically modify troubled loans that IndyMac serviced. 
Please give us more details about this approach and how it 
differs from modifying loans on a case-by-case basis. Is there 
really such a thing as a systematic approach to loan 
modification, or do you have to touch every loan as you would 
on a case-by-case basis?

A.4.a. The FDIC's loan modification program at IndyMac provides 
a streamlined and systematic approach to implementing 
affordable and sustainable loan modifications. By establishing 
clear guidelines for loan modifications determined by an 
affordability metric based on mortgage debt-to-gross income, 
the loan modification program allows servicers to apply the 
model to thousands of mortgages quickly, while defining for 
each loan how to achieve the targeted DTI. By using a waterfall 
of three basic loan modification tools--interest rate 
reductions, term or amortization extensions, and principal 
deferment--it is relatively simple to run thousands of loans 
through a computerized analysis of the necessary combination of 
tools needed to achieve an affordable and sustainable payment. 
A standardized net present value analysis, also computerized, 
allows IndyMac to ensure that its modifications provide a 
better value to the FDIC or investors in securitized or 
purchased loans. All IndyMac modifications are based on 
verified income information from third party sources such as 
the Internal Revenue Service or employers.
    This is very different from the loan-by-loan approach used 
by most servicers, which seeks to gather detailed financial 
information from borrowers--usually based on verbal 
statements--and get the highest possible monthly payment while 
leaving the borrower with a set amount of `disposable income.' 
While this approach may appear to offer a more customized 
approach, it has often meant that servicers relied on stated 
income and stated expenses to achieve a short-term solution 
that continued to place the borrower in a precarious and 
unsustainable payment. The difficulty with this approach is 
demonstrated by the high redefault rates reported by some 
servicers.
    The FDIC Loan Modification Program at IndyMac achieves an 
affordable payment through a three step waterfall process:

      Interest Rate Reduction: Cap the interest rate at 
the Freddie Mac Weekly Survey Rate for the balance of the loan 
term and, if needed to reach the DTI target, reduce the 
interest rate incrementally to as low as 3 percent and re-
amortize the principal balance over the remaining amortization 
term. The interest rate charged will not be greater than the 
current Freddie Mac Weekly Survey Rate at the time of 
modification. The reduced rate remains in effect for at least 5 
years.

    If the target debt-to-income ratio has not been achieved, 
proceed to the next step.

      Extended Amortization Term: For loans with 
original terms of 30 years or less, re-amortize the principal 
balance at the reduced interest rate (3 percent floor) over an 
extended amortization term of 40 years from the original first 
payment date.

    If the target debt-to-income ratio has not been achieved, 
proceed to the next step.

      Partial Principal Forbearance: Defer a portion of 
the principal balance for amortization purposes, and amortize 
over a 40-year period at the reduced interest rate (3 percent 
floor). The remaining principal balance remains as a zero 
interest, zero payment portion of the loan. The repayment of 
the deferred principal will be due when the loan is paid in 
full.

    Of the loan modification offers made at IndyMac thus far, 
73 percent required rate reduction only, 21 percent required 
rate reduction and term extension, and 6 percent required rate 
reduction, term extension, and principal forbearance.

Q.4.b. Your testimony says that modifications are only offered 
where they are profitable to IndyMac or investors in 
securitized or whole loans. Are you finding that most 
modifications are profitable, and if so, please explain how you 
determine that they are more profitable than foreclosures?

A.4.b. Yes. While there are always some proportion of 
delinquent mortgages where a modification will not provide the 
best alternative to preserve value for the mortgage, many 
mortgages can be modified successfully while gaining the best 
value compared to foreclosure. One illustration of this fact is 
the net present value comparisons between the modified mortgage 
and foreclosure for the more than 8,500 completed modifications 
at IndyMac. To date, on average, the net present value of 
completed modifications at IndyMac has exceeded the net present 
value of foreclosure by $49,918 for total savings compared to 
foreclosure of more than $423 million.
    As conservator, the FDIC has a responsibility to maximize 
the value of the loans owned or serviced by IndyMac Federal. 
Like any other servicer, IndyMac Federal must comply with 
itscontractual duties in servicing loans owned by investors. Consistent 
with these duties, we have implemented a loan modification program to 
convert as many of these distressed loans as possible into performing 
loans that are affordable and sustainable over the long term. This 
action is based on the FDIC's experience in applying workout procedures 
for troubled loans in a failed bank scenario, something the FDIC has 
been doing since the 1980s. Our experience has been that performing 
loans yield greater returns than non-performing loans.
    The FDIC's Loan Modification Program at IndyMac is 
primarily based on four principles:

    (1)  Affordable and sustainable modifications generally 
provide better value than foreclosure to lenders and investors, 
and to the IndyMac conservatorship and the FDIC's Deposit 
Insurance Fund. Modifications that exceed the net present value 
of foreclosure generally are consistent with servicing 
agreements and protect the interests of investors in 
securitized mortgages.

    (2)  Sustainable loan modifications must be affordable for 
the life of the loan. As a result, the Loan Modification 
Program is based on a first lien mortgage debt-to-gross income 
ratio ranging from 38 percent to 31 percent. The modifications 
use a combination of interest rate reductions, term extensions, 
and principal deferment to achieve affordable payments. The 
interest rate on the modified mortgages is capped at a prime 
conforming loan rate reported by the Freddie Mac Weekly Survey. 
The interest rate can be reduced to as low as 3 percent for 
five years in order to achieve an affordable payment followed 
by gradual interest rate increases of 1 percent per year until 
the Freddie Mac Weekly Survey rate is reached.

    (3)  All modifications should be based on verified income 
information, not stated income. This is essential to establish 
affordability.

    (4)  A streamlined and systematic modification process is 
essential to address the volume of delinquent mortgages in 
today's market. The FDIC, along with many mortgage servicers, 
has adopted a more streamlined process focused on modifying 
troubled mortgages based on a simple debt-to-income ratio since 
it is easy to apply and avoids costly and unnecessary 
foreclosures for many more borrowers.

    The Program results in a positive outcome for investors and 
borrowers as investor loss is minimized and the borrower 
receives a sustainable long-term modification solution. The 
Program requires full income documentation in order to minimize 
redefault and ensure the affordability standard is uniformly 
implemented. The gross monthly income for all borrowers who 
have signed the mortgage note must be supported by either the 
prior year's tax returns or recent pay stubs.

Q.4.c. You state that securitization agreements typically 
provide servicers with sufficient flexibility to apply the 
modification approach you are taking for the IndyMac loans. 
Given this flexibility, why are so few loan modifications being 
made?

A.4.c. While the securitization agreements do typically provide 
servicers with sufficient flexibility, many servicers have been 
reluctant to adopt the streamlined modification protocols 
necessary to stem the rate of unnecessary foreclosures due to 
concerns about challenges from investors, a tendency to 
continue prior practices of focusing on loan-by-loan customized 
modifications, and by staffing limitations.
    At IndyMac, of the more than 45,000 mortgages that were 
potentially eligible for modification, IndyMac has mailed 
modification offers to more than 32,000 borrowers. Some 
proportion of the remainder do not pass the NPV test and others 
must be addressed through more customized approaches. So far, 
IndyMac has completed income verification on more than 8,500 
modifications and thousands more have been accepted and are 
being processed and verified.
    As the FDIC has proven at IndyMac, streamlined modification 
protocols can have a major impact in increasing the rates of 
sustainable modifications. However, even there, challenges in 
contacting borrowers and in getting acceptance of the 
modification offers can inhibit the effectiveness of 
modification efforts. These are challenges that we have sought 
to address by working closely with HUD-approved, non-profit 
homeownership counseling agencies, such as those affiliated 
with NeighborWorks. In addition, we have sought to reach out to 
local community leaders and provide cooperative efforts to 
contact borrowers at risk of foreclosure. These efforts, which 
many servicers are starting to pursue, should be a focus of 
efforts by all servicers going forward.
    In addition, servicers' concerns over challenges from 
investors makes adoption of a national program to provide 
incentives from federal funds a critical part of the strategy 
to achieve the scale of modifications necessary to address our 
housing crisis. To address conflicting economic incentives and 
fears of re-default risk, the FDIC has proposed that the 
government offer an administrative fee to servicers who 
systematically modify troubled loans and provide loss sharing 
to investors to cover losses associated with any redefaults. 
These financial incentives should make servicers and investors 
far more willing to modify loans. This proposal addresses the 
biggest disincentive to modify troubled mortgages--the 
potential for greater losses if a modified loan redefaults and 
foreclosure is necessary some months in the future in a 
declining housing market. As a result, the FDIC proposal is 
designed to cover a portion of the losses that could result if 
the modified mortgage redefaults. This will provide practical 
protection to servicers by allowing easier proof for the value 
of the modification and eliminate investors' primary objection 
to streamlined modifications. We have estimated the costs of 
this program to be about $25 billion. To protect taxpayers and 
assure meaningful loan modifications, the program would require 
that servicers truly reduce unaffordable loan payments to an 
affordable level and verify current income, and that borrowers 
make several timely payments on their modified loans before 
those loans would qualify for coverage. This proposal is 
derived from loss sharing arrangements the FDIC has long used 
to maximize recoveries when we sell troubled loans. We believe 
this or some similar program of financial incentives is 
necessary to achieve loan modifications on a national scale to 
halt the rising tide of foreclosures and the resulting economic 
problems.

Q.5. Each agency represented at the hearing has aggressively 
used the tools at their disposal in dealing with the crisis. 
However, sometimes the use of those tools has led to unintended 
consequences. For instance, when the Treasury Department 
guaranteed money market funds, it led to a concern on deposit 
insurance and bank accounts. When the FDIC guaranteed bank 
debt, it had an effect on GSE borrowing costs, which in turn 
directly affects mortgage rates.
    Acknowledging that there is often a need to act quickly in 
these circumstances, please explain what steps and processes 
you have employed to inform other agencies about significant 
actions you undertake to ensure that there are not serious 
adverse unintended consequences and that your actions are 
working in concert with theirs.

A.5. The FDIC's Temporary Liquidity Guarantee Program was 
created during intensive discussions between the FDIC, the 
Department of the Treasury and the Federal Reserve over the 
Columbus Day weekend (October 11-13) and announced on October 
14. Over the next several weeks, the FDIC adopted an Interim 
Rule, an Amended Interim Rule and a Final Rule. The FDIC's 
Interim Final Rule adopted on October 23 specifically requested 
comments on the Temporary Liquidity Guarantee Program and the 
FDIC received over 750 comments, including comments from other 
government agencies. During this process, the FDIC had frequent 
discussions with the Treasury, the Federal Reserve, the Office 
of the Comptroller of the Currency and the Office of Thrift 
Supervision about various aspects of the program and its 
potential consequences.
    With regard to concerns that the actions by the FDIC to 
guarantee bank debt had an effect on GSE borrowing costs, as 
discussed above, the spread of debt issued by Government-
sponsored enterprises (GSEs), including Fannie Mae, Freddie 
Mac, and Federal Home Loan Banks (FHLBs), over Treasuries 
increased considerably in October and November although the 
overall cost of funding declined. According to Merrill Lynch 
data on U.S. bond yields, the spread between AAA-rated agency 
debt and Treasuries increased by nearly 40 basis points between 
September and November 2008. We believe these developments 
primarily reflect broad financial market uncertainty and a 
generally unfavorable market sentiment towards financial firms. 
In fact, the spread of debt guaranteed by the FDIC under the 
Temporary Liquidity Guarantee Program over Treasuries is larger 
than the spread on GSE debt.
    Financial firms, including those with a AAA-rating, saw 
their borrowing costs increase sharply, both in absolute terms 
and relative to Treasury yields, during the same two months, 
even as the Federal Reserve continued to lower the federal 
funds target rate. Merrill Lynch data show that the effective 
yield on AAA-rated corporate debt issued by financial firms 
increased by 140 basis points between September and October, 
before declining somewhat in November. Lower-rated corporate 
debt experienced even more significant increases over the same 
period of time. The primary purpose of the FDIC's Temporary 
Liquidity Guarantee Program is to provide liquidity in the 
inter-bank lending market and promote stability in the long-
term funding market where liquidity has been lacking during 
much of the past year. While the FDIC's action was focused 
primarily on helping to restore a stable funding source for 
banks and thrifts, we believe that such liquidity can, in turn, 
help promote lending to consumers and small businesses, which 
would have a considerable benefit to the U.S. economy, in 
general, and financial firms, including mortgage lenders and 
GSEs. Nevertheless, partly to mitigate any potential effect of 
the FDIC guarantee on funding costs for GSEs, the federal 
banking agencies have agreed to assign a 20 percent risk weight 
to debt guaranteed by the FDIC (rather than the zero risk 
weighting that is assigned to debt guaranteed by a U.S. 
Government agency that is an instrumentality of the U.S. 
Government and whose obligations are fully and explicitly 
guaranteed as to the timely repayment of principal and interest 
by the full faith and credit of the U.S. Government).
                                ------                                


 RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM SHEILA C. 
                              BAIR

Q.1. I was happy to note in your testimony that you discussed 
the need to stop unnecessary foreclosures. You mentioned the 
FDIC's work as conservator of IndyMac and your participation in 
the Hope for Homeownership program as recent examples of your 
effort. Does the FDIC plan to develop a new program to extend 
loan modifications to a broader pool of mortgages than those 
held by IndyMac? How would such a program work and what would 
its impact be on mortgage investors? Where would the FDIC 
derive authority for such a program?

A.1. In mid-November, the FDIC announced a new proposal for 
loan modifications that is similar to the program we developed 
at IndyMac. Both target borrowers who are 60 days or more past 
due, and both seek to apply a consistent standard for 
affordable first-lien mortgage payment. The new FDIC proposal 
has a 31 percent debt-to-income ratio, whereas IndyMac 
modifications are designed to achieve a 38 percent debt-to-
income ratio, but can go as low as 31 percent.
    The FDIC's proposal is designed to promote wider adoption 
of systematic loan modifications by servicers through the use 
of payment incentives and loss-sharing agreements, and thus 
reach more troubled borrowers. Specifically, to encourage 
participation, funds from the Troubled Asset Relief Program 
(TARP) would be used to pay servicers $1,000 to cover expenses 
for each loan modified according to the required standards. In 
addition, TARP funds would be used to provide guarantees 
against the losses that lenders and investors could experience 
if a modified loan should subsequently redefault. The guarantee 
would be paid only if the modification met all prescribed 
elements of the loan modification program, if the borrower made 
at least 3 monthly payments under the modified loan, and if the 
lender or servicer met the other elements of the program.
    The impact of this new proposal will be less costly than 
the lengthy and costly alternative of foreclosure, where direct 
costs can total between 20 and 40 percent of a property's 
market value. We expect about half of the projected 4.4 million 
problem loans between now and year-end 2009 can be modified. 
Assuming a redefault rate of 33 percent, this plan could reduce 
the number of foreclosures during this period by some 1.5 
million at a projected program cost of $24.4 billion.
    We believe that Section 109 of the EESA provides authority 
for this proposal. Section 109 provides that ``the Secretary 
may use loan guarantees and credit enhancements to facilitate 
loan modifications to prevent avoidable foreclosures.''

Q.2. Has the FDIC given any further consideration to the FDIC's 
own Home Ownership Preservation Loan program? I believe this 
program is a good way to avoid foreclosures and severe mortgage 
modifications at the same time. If this program is no longer 
being considered, why?

A.2. When the FDIC proposed the Home Ownership Preservation 
(HOP) Loan program in May 2008, we noted that congressional 
action would be required to authorize the Treasury Department 
to make HOP loans. We believe that the HOP Loan program could 
be an important tool for avoiding unnecessary foreclosures in 
combination with other tools. As the housing market and home 
prices have continued to decline, we have suggested the loss 
guarantee approach discussed above as a way of streamlining and 
increasing the scale of loan modifications.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 
                       FROM NEEL KASHKARI

Q.1. On October 20, 2008, Secretary Paulson said that 
Treasury's infusion of capital in financial institutions 
through the purchase of preferred stock is intended ``to 
increase the confidence of our banks, so that they will deploy, 
not hoard, their capital. And we expect them to do so.'' I 
share that expectation. As I indicated at the hearing, I feel 
that Treasury should ask banks that receive these capital 
infusions provided by the taxpayers to make more loans to 
entities in the community and to not hoard the money. You said 
Treasury shares this view and that you ``want our financial 
institutions lending in our communities.'' Within our 
communities, small private colleges serve important roles and 
many of them have borrowing relationships with banks. The 
credit crisis has made some creditworthy schools concerned that 
the banks from which they have borrowed in the past will be 
unwilling to lend to them on reasonable terms in the future.

Q.1.a. Does Treasury believe that banks which receive capital 
injections should be encouraged to continue to lend to the 
creditworthy customers, including small private colleges and 
universities, with which they have done business in the past? 
If so, will Treasury encourage such lending?

A.1.a.  Treasury believes that the banks that received 
investments from the Capital Purchase Program (CPP) should 
continue to make credit available in their communities. By 
injecting new capital into healthy banks, the CPP has helped 
banks maintain strong balance sheets and eased the pressure on 
them to scale back their lending and investment activities. 
However, we expect banks to continue their lending in a safe 
and sound manner and that institutions must not repeat the poor 
lending practices that were a root cause of today's problems. 
To that effect, we firmly support the statement by bank 
regulators on November 12, 2008 to that effect. The statement 
emphasized that the extraordinary government actions taken to 
strengthen the banking system are not one-sided; all banks--not 
just those participating in CPP--have benefitted from the 
government's actions. Banks, in turn, have obligations to their 
communities to continue to make credit available to 
creditworthy borrowers and to work with struggling borrowers to 
avoid preventable foreclosures.

Q.1.b. What specific conditions or assurances has Treasury 
required to ensure that banks do not hoard the capital?

A.1.b. The Treasury has not imposed specific conditions on how 
banks can use funds obtained from the CPP. The purpose of the 
CPP is to stabilize financial markets and restore confidence, 
including by strengthening banks' balance sheets so that they 
can better weather the deleveraging process associated with the 
current economic downturn. The CPP funds were not costless to 
the recipient institutions: the preferred shares carry a 5 
percent dividend rate and the recipients will need to put those 
funds to a productive use or they will lose money. The banks 
will have strong economic incentives to deploy the capital 
profitably. Banks are in the business of lending and they will 
provide credit to sound borrowers whenever possible. They may 
also use the capital to absorb losses as part of loan write-
downs and restructurings. If a bank doesn't put the new capital 
to work earning a profit or reducing a loss, its returns for 
its shareholders will suffer.
    However, Treasury did design important features into our 
investment contracts to limit what banks can do with the money: 
one, Treasury barred any increase in dividends for 3 years; 
two, Treasury restricted share repurchases. Increasing 
dividends or buying back shares would undermine our policy 
objective by taking capital out of the financial system.
    In addition, Treasury has been working with the banking 
regulators to design a program to measure the activities of 
banks that have received TARP capital. We plan to use quarterly 
call report data to study changes in the balance sheets and 
intermediation activities of institutions we have invested in 
and compare their activities to a comparable set of 
institutions that have not received TARP capital investments. 
Because call report data are collected infrequently, we also 
plan to augment that analysis with a selection of data we plan 
to collect monthly from the largest banks we have invested in 
for a more frequent snapshot.
    Thus, Treasury does not believe that banks will ``hoard'' 
the capital, but rather utilize this additional capital in a 
safe and sound manner. We expect communities of all sizes to 
benefit from the investments into these institutions, which now 
have an enhanced capacity to perform their vital functions, 
including lending to U.S. consumers and businesses and 
promoting economic growth. The increased lending that is vital 
to our economy will not materialize as fast as many of us would 
like, but it will happen much faster as a result of deploying 
resources from the TARP to stabilize the system and increase 
capital in our banks.

Q.1.c. What assurances have you received from these banks that 
they will employ the capital to prevent foreclosures?

A.1.c. Treasury believes that banks will employ this additional 
capital in a manner that best benefits their communities. Some 
institutions may use the funds to continue lending to community 
institutions (such as private universities), while other 
institutions may employ the funds to originate new residential 
mortgages or to restructure existing mortgages. In our private 
conversations with bankers receiving CPP funds, many 
institutions have stated that preventing foreclosures is a high 
priority for them.

Q.2. In implementing the Capital Purchase Program (CPP), what 
steps has the Treasury Department taken to ensure that all 
financial institutions that participate will receive similar 
accounting treatment in the determination of the value of the 
institution's risk weighted assets?

Q.2.a. What specific steps is the Treasury Department taking to 
coordinate the assessments by the various primary regulators?

A.2.a. The federal banking agencies, working in conjunction 
with the Treasury, developed a common application form that was 
used by all qualified financial institutions to apply for CPP 
funds. In addition, the Treasury worked closely with the bank 
regulators to establish a standardized evaluation process, and 
all regulators use the same standards to review all 
applications to ensure consistency.
    Applications are submitted to an institution's primary 
federal regulator. Once a regulator has reviewed an 
application, it will take one of the following three actions: 
(1) for applications it does not recommend, it may encourage 
the institution to withdraw the application; (2) for 
applications it strongly believes should be included in the 
program, it directly sends the application and its 
recommendation to the TARP Investment Committee at the 
Treasury; (3) for cases that are less clear, the regulator will 
forward the application to a Regulatory Council, made up of 
senior representatives of the four banking regulators, for a 
joint review and recommendation.
    The Treasury TARP Investment Committee reviews all 
recommendations from the regulators. This committee includes 
our top officials on financial markets, economic policy, 
financial institutions, and financial stability, as well as the 
Chief Investment Officer for the TARP, who chairs the 
Committee. This is a Treasury program and Treasury makes the 
final decision on any investments. The Investment Committee 
gives considerable weight to the recommendations of the banking 
regulators. In some cases, the Committee will send the 
application back to the primary regulator for additional 
information, or even remand it to the Regulatory Council for 
further review. At the end of the evaluation process, Treasury 
notifies all approved institutions.

Q.2.b. What lessons learned can you report from the assessment 
process for the first nine institutions which participated in 
the CPP?

A.2.b. This process has worked well. Each institution that has 
received CPP funds has been thoroughly scrutinized. Although 
the process is very labor and time intensive, the Treasury 
believes it is necessary to fully protect the interests of the 
taxpayer.

Q.3. A stated legislative purpose of EESA is that the Treasury 
Department use the funds' in a manner that preserves 
homeownership and promotes jobs and economic growth.'' What 
specific steps has the Treasury Department undertaken to ensure 
that the funds are being used to accomplish this objective?

A.3.  The purpose of the EESA was to stabilize our financial 
system and to strengthen it. It was not a panacea for all our 
economic difficulties. The crisis in our financial system had 
already spilled over into our economy and hurt it. It will take 
a while to get lending going and to repair our financial 
system, which is essential to economic recovery. However, this 
will happen much faster as the result of TARP actions.
    The most important thing Treasury can do to mitigate the 
housing correction and reduce the number of foreclosures is to 
stabilize financial markets, restoring the flow of credit and 
increasing access to lower-cost mortgage lending. The actions 
we have taken to stabilize and strengthen Fannie Mae and 
Freddie Mac, and through them to increase the flow of mortgage 
credit, together with the CPP, are powerful actions to promote 
mortgage lending. Treasury is working actively to stabilize 
housing markets and reduce preventable foreclosures, and has 
succeeded by undertaking the following initiatives:

      HOPE NOW: In October 2007, Treasury actively 
helped facilitate the creation of the HOPE NOW Alliance, a 
private sector coalition of mortgage market participants and 
non-profit housing counselors. HOPE NOW servicers represent 
more than 90 percent of the subprime mortgage market and 70 
percent of the prime mortgage market. Since inception, HOPE NOW 
has kept roughly 2.9 million homeowners in their homes through 
modifications and repayment plans, and it is currently helping 
more than 200,000 borrowers per month.

      Stabilizing Fannie Mae and Freddie Mac: Treasury 
took aggressive actions in 2008 to stabilize and strengthen 
Fannie Mae and Freddie Mac, and prevent the collapse of two 
institutions with $5.4 trillion in debt and mortgage-backed 
securities held by investors and financial institutions 
throughout the United States and the world. The systemic 
importance of these two enterprises, and the systemic impact of 
a collapse of either, cannot be overstated. Treasury's efforts 
to stabilize them by effectively guaranteeing their debt has 
increased the flow of mortgage credit and insulated mortgage 
rates from the rapid increases and fluctuations in the cost of 
other credit.

      Hope for Homeowners: On October 1, 2008, HUD 
implemented Hope for Homeowners, a new FHA program, available 
to lenders and borrowers on a voluntary basis that insures 
refinanced affordable mortgage loans for distressed borrowers 
to support long-term sustainable homeownership.

      Streamlined Loan Modification Program: On 
November 11, 2008, Treasury joined with the FHFA, the GSEs, and 
HOPE NOW to announce a major streamlined loan modification 
program to move struggling homeowners into affordable 
mortgages. The program, implemented on December 15, creates 
sustainable monthly mortgage payments by targeting a benchmark 
ratio of housing payments to monthly gross household income 
(38%). Additionally, on November 20, Fannie Mae and Freddie Mac 
announced that they would suspend foreclosure sales and cease 
evictions of owner-occupied homes from Thanksgiving until 
January 9th to allow time for implementation of the 
modification program.

      Subprime Fast-Track Loan Modification Framework: 
Treasury worked with the American Securitization Forum to 
develop a loan modification framework to allow servicers to 
modify or refinance loans more quickly and systematically. 
Subprime ARM borrowers who are current but ineligible to 
refinance may be offered a loan modification freezing the loan 
at the introductory rate for five years.

Q.4. If there were a troubled asset that threatened the 
viability of critically important public infrastructure 
systems, would EESA provide theTreasury Department the 
authority to purchase such a troubled asset? Would you interpret such a 
purchase to be consistent with the purposes of the Act?

A.4. According to the EESA, the Secretary of the Treasury may 
purchase from a financial institution any financial instrument, 
that he determines, after consultation with the Chairman of the 
Board of Governors of the Federal Reserve System to be 
necessary to promote financial market stability. In such an 
instance, the Secretary must transmit such a determination to 
the appropriate committees of Congress. The Secretary will make 
those decisions on a case-by-case basis.

Q.5. During the discussions leading to the passage of the 
Emergency Economic Stabilization Act of 2008, Treasury asked 
for $700 billion primarily to purchase troubled assets at 
auction. Secretary Paulson testified that ``This troubled asset 
purchase program on its own is the single most effective thing 
we can do to help homeowners, the American people and stimulate 
our economy.'' [Senate Banking Committee hearing on September 
23, 2008.] Days after enactment of the law, Treasury changed 
its main focus from asset purchases and decided to first infuse 
capital in large financial institutions. Please describe the 
analysis that supported the initial Treasury plan and identify 
the assumptions that later proved to be inaccurate, causing 
Treasury to abruptly change the principle focus of the TARP to 
buying preferred stock.

A.5. In the discussions with the Congress in mid-September 
during consideration of the financial rescue package 
legislation, Treasury focused on an initial plan to purchase 
illiquid mortgage assets in order to remove the uncertainty 
regarding banks' capital strength. At the same time, Treasury 
worked hard with the Congress to build maximum flexibility into 
the law to enable Treasury to adapt our policies and strategies 
to address market challenges that may arise.
    In the weeks after Secretary Paulson and Chairman Bernanke 
first went to the Congress, global and domestic financial 
market conditions deteriorated at an unprecedented and 
accelerating rate. One key measure Treasury assessed was the 
LIBOR-OIS spread--a key gauge of funding pressures and 
perceived counterparty credit risk. Typically, 5-10 basis 
points, on September 1, the one-month spread was 47 basis 
points. By September 18th, when Treasury first went to 
Congress, the spread had climbed 88 basis points to 135 basis 
points. By the time the bill passed, just two week later on 
October 3, the spread had climbed another 128 basis points to 
263 basis points. By October 10, LIBOR-OIS spread rose another 
75 basis points to 338 basis points. During this period, credit 
markets effectively froze. The commercial paper market shut 
down, 3-month Treasuries dipped below zero, and a money market 
mutual fund ``broke the buck'' for only the second time in 
history, precipitating a $200 billion net outflow of funds from 
that market.
    Given such market conditions, Secretary Paulson and 
Chairman Bernanke recognized that Treasury needed to use the 
authority and flexibility granted under the EESA as 
aggressively as possible to help stabilize the financial 
system. They determined the fastest, most direct way was to 
increase capital in the system by buying equity in healthy 
banks of all sizes. Illiquid asset purchases, in contrast, 
require much longer to execute and would require a massive 
commitment of funds.
    Treasury immediately began designing a capital program to 
complement the asset purchase programs under development. Since 
launching the program on October 14, 2008, Treasury has 
invested $192.3 billion of the $250 billion Capital Purchase 
Program in 257 institutions in 42 states across the country, as 
well as Puerto Rico.
    Following that, as Treasury continued very serious 
preparations and exploration of purchasing illiquid assets, 
scale became a factor; for an asset purchase program to be 
effective, it must be done on a very large scale. With $250 
billion allocated for the CPP, Treasury considered whether 
there was sufficient capacity in the TARP for an asset purchase 
program to be effective. In addition, each dollar invested in 
capital can have a bigger impact on the financial system than a 
dollar of asset purchase; capital injections provide better 
``bang for the buck.''
    It also became clear that there was a need for additional 
capital for non-bank financial institutions and support of the 
non-bank financial market. A large contingency also arose that 
threatened the financial system, as Treasury had to restructure 
the Federal Reserve's loan to AIG, using $40 billion of TARP 
funds. This action was taken to prevent the collapse of a 
systemically significant financial institution and the impact 
such a collapse would have on the system and economy. In 
addition, Treasury was required to use TARP funds to support 
Citigroup.
    Treasury also realized that it would have to take actions 
to support the non-banking market, a critical source of funds 
for consumers and small and large businesses, by supporting the 
securitization market. Such measures would help bring down 
interest rates on auto loans, credit cards, student loans and 
small business loans and could be achieved with a more modest 
allocation from the TARP. Therefore, Treasury committed to 
provide $20 billion of TARP resources in support of a $200 
billion Federal Reserve facility--the Term Asset-Backed 
Securities Loan Facility (TALF).
    As such, Treasury's assessment at this time is that the 
purchase of illiquid mortgages and mortgage-related securities 
is not the most effective way to use TARP funds.

Q.6. The conservatorship of Fannie Mae and Freddie Mac has 
resulted in the unintended consequence of increasing the 
borrowing costs for the Federal Home Loan Banks (FHLBs) since 
the markets apparently now view them as having a more distant 
relationship to the government than the GSEs in 
conservatorship. Additionally, the decision by the FDIC to 
guarantee senior debt of financial institutions has raised 
funding costs for Fannie Mae and Freddie Mac because the market 
apparently does not view the $200 billion backstop provided to 
the enterprises as an equivalent guarantee. Given the stated 
purpose of putting the enterprises in conservatorship--to 
ensure a stable housing market, to lower mortgage interest 
rates, and to make sure the enterprises could actively purchase 
agency MBS--what steps is the Treasury considering to address 
these problems?

A.6. Treasury, working in concert with the Federal Reserve and 
FHFA, has been closely monitoring financial markets, 
particularly credit markets in terms of the impact and 
consequences of our actions. While the GSEs and not the Federal 
Home Loan Banks were placed into conservatorship with access to 
$100 billion through the senior preferred purchase agreement, 
all three entities have access to the GSE Credit Facility which 
Treasury established at the time of conservatorship. As a 
result, all three entities, including the FHLB, have access to 
enormous liquidity limited only by the amount of collateral 
which they have on their balance sheet. This credit facility 
was established specifically to level the playing field for the 
FHLBs. Furthermore, Treasury's purchases of MBS of FRE and FNM 
since September, also set up after the conservatorship, have 
instilled confidence in the overall mortgaged-backed securities 
(MBS) markets. The recent actions by the Federal Reserve Bank 
of New York to purchase the debt and MBS of the GSEs have also 
added confidence, thus lowering borrowing costs across the 
board, including those of FHLB. In fact, since the 
conservatorship was announced, the spread on FHLB 2-year debt, 
a benchmark issue, has declined from nearly 86 basis points 
above the comparable two-year Treasury to less than 45 basis 
points--in line with that of FNM and FRE--an enormous 
difference in borrowing costs and a primary result of the joint 
actions of Treasury and the Federal Reserve.
    With regard to the FDIC guaranteed debt portfolio, while 
these securities have an explicit FDIC guarantee, they still do 
not possess the liquidity and depth of the GSE Agency or 
Treasury markets. Hence, some large institutions cannot be as 
actively involved in these markets since they need to purchase 
in very large size. As an example, about $115 billion of FDIC 
bank debt has been issued, while the agencies have over $3 
trillion in debt outstanding. Partially as a result of this, 
the GSEs are able to borrow at a lower spread to Treasuries 
than FDIC backed debt. In fact, as mentioned above, 2-year 
benchmark FDIC backed debt on average trades 60 basis points 
above comparable 2-year Treasuries while GSE debt trades about 
45 basis points above such Treasuries--i.e. the GSE borrowing 
costs are cheaper. Moreover, the life of the senior preferred 
agreement is in perpetuity for any debt issued between now and 
December 31, 2009 and for any tenor, while the FDIC debt 
program is limited to debt issued out three years and expires 
June 30, 2009--a major difference.

Q.7. As you know, since it was rescued by the Federal Reserve, 
AIG was engaged in lobbying activities at the state level. 
Specifically, the company was lobbying against certain 
requirements for mortgage brokers. The company subsequently 
promised to stop these activities. What steps has the Treasury 
Department taken to make sure that the entities receiving 
federal assistance are not engaged in lobbying, particularly in 
lobbying against important protections for borrowers? Did the 
Treasury Department consider putting any lobbying restrictions 
on the entities that it funds under the TARP?

A.7. As part of the agreement with AIG announced on November 
10, 2008, AIG must be in compliance with the executive 
compensation requirements of Section 111 of EESA. AIG must 
comply with the most stringent limitations on executive 
compensation for its top five senior executive officers, and 
Treasury is requiring golden parachute limitations and a freeze 
on the size of the annual bonus pool for the top 60 company 
executives. Additionally, AIG must continue to maintain and 
enforce newly adopted restrictions put in place by the new 
management on corporate expenses and lobbying as well as 
corporate governance requirements, including formation of a 
risk management committee under the board of directors.

Q.8. I commend the Administration for following through with 
Section 112 of EESA by convening an international summit on 
November 15. In announcing the summit yesterday, the White 
House explained that leaders of the G20 and key international 
financial institutions will review progress on measures taken 
to address the financial crisis and to discuss principles for 
reform of regulatory and institutional regimes going forward. 
Please describe what the Treasury and Federal Reserve intend to 
accomplish through this summit and the subsequent working group 
meetings that will follow the summit--specifically, what types 
of principles for regulatory and institutional modernization 
will the United States pursue in the international community? 
Will these principles include protections for consumers and 
households which form the foundation of economic prosperity in 
our country as well as other countries?

A.8. The international summit was extraordinarily successful. 
It resulted in a five-page statement by the participating 
leaders as well as a 47-point action plan of quite specific 
actions, both in the near term and in the longer term. There 
were six key takeaways from the summit. First, there was broad 
agreement on the importance of the countries of the G20 taking 
and implementing pro-growth investment--pro-growth policies to 
stimulate our economies. Second, the leaders pledged to improve 
our regulatory regimes so to ensure that all financial markets, 
all financial products, and all financial market participants 
are subject to appropriate regulation or oversight. Related to 
this was a pledge of enhancing international cooperation among 
regulators and between regulators and international financial 
institutions. Third, one of the significant reforms that was 
agreed on was the need to reform international financial 
institutions to give greater representation to emerging market 
and developing economies. Fourth, there was an affirmation of 
free market principles, and, also importantly, the leaders 
expressly rejected protectionism. The final takeaway was a 
recognition and commitment to address the needs of the poorest, 
both by honoring our aid commitments, and by ensuring that the 
World Bank and IMF are adequately resourced so that they can 
help developing countries through this crisis. And here note 
was taken of the new liquidity facilities of the IMF, as well 
as the recent very large package announced by the World Bank, 
to support needs for trade finance and promote infrastructure 
development.

Q.9. The Treasury announced plans to invest $250 billion to 
strengthen the balance sheet of banks and the rest of the TARP 
money to provide relief to banks struggling with troubled 
assets. How much money will Treasury devote to provide relief 
for the millions of Americans struggling with troubled 
mortgages?

A.9. The existing TARP programs have exhausted the $350 billion 
in TARP funds that already have been authorized by Congress. 
Not all of those funds have yet been disbursed, and given the 
unpredictability and severity of the current financial crisis, 
Treasury believes it is prudent to reserve some of our TARP 
capacity to maintain not only our flexibility in responding to 
unforeseen events, but also that of the next Administration.
    Separately from the TARP, Treasury has acted aggressively 
to keep mortgage financing available and develop new tools to 
help homeowners. Specifically, Treasury has achieved the 
following three key accomplishments:

      To support the housing and mortgage market, 
Treasury acted earlier this year to prevent the failure of 
Fannie Mae and Freddie Mac, the housing GSEs that affect over 
70 percent of mortgage originations.

      October 2007, Treasury helped establish the HOPE 
NOW Alliance, a coalition of mortgage servicers, investors and 
counselors, to help struggling homeowners avoid preventable 
foreclosures.

      Treasury worked with HOPE NOW, FHFA and the GSEs 
to achieve a major industry breakthrough in November 2008 with 
the announcement of a streamlined loan modification program 
that builds on the mortgage modification protocol developed by 
the FDIC for IndyMac.

Q.10. What is your position on the use of funds by financial 
institutions under the CPP to acquire other institutions? Does 
your position depend on whether the other institution is 
healthy or failing?

A.10. The Treasury believes that banks and their management and 
shareholders are in the best position to determine whether 
acquisitions or mergers make sense. Acquisitions and mergers in 
the banking industry are also reviewed by the appropriate 
Federal banking agencies, which must consider the impact on the 
relevant communities as well as financial and managerial 
information. As noted above, the purpose and the focus of the 
CPP is the stability of the financial system. The program is 
not designed to, nor does it focus on, encourage or discourage 
acquisitions or mergers.
    More generally, Treasury believes that when failing bank is 
acquired by a healthy bank, the community of the failing bank 
is better off than if the bank had been allowed to fail. 
Branches and financial services in that community are usually 
preserved. Costs to the taxpayers via the FDIC deposit fund are 
also lower than had the bank been allowed to fail. Prudent 
mergers and acquisitions can strengthen our financial system 
and our communities, while protecting taxpayers.

Q.11. We have received reports that insurance companies are in 
talks with Treasury to allow access to the TARP program.

Q.11.a. Has any decision been made about whether insurance 
companies may take part in the TARP program, and what is the 
rationale for inclusion?

A.11.a. The Treasury Department is analyzing the inclusion of 
insurance companies, including how to apply the CPP to bank 
holding companies and thrift holding companies with insurance 
company subsidiaries.

Q.11.b. Given that insurance companies are not federally 
regulated (at least, not on their insurance business), what 
exact oversight will be done to ensure safety and soundness of 
the companies?

A.11.b. Regulation of insurance companies is undertaken at the 
state level, not by the Treasury Department, and Treasury does 
not interfere in these regulatory-supervisory matters. Treasury 
also does not regulate the institutions which have chosen to 
participate in the voluntary CPP program, as they are regulated 
by their primary Federal regulators.
    Separately, in March of 2008, Treasury published an 
extensive Blueprint for a Modernized Regulatory Structure that 
proposes a framework and many specific recommendations for 
reforming our financial regulatory system, including in the 
area of insurance. However, Treasury is using TARP to stabilize 
the financial system today, while regulatory modernization will 
likely take several years to complete.

Q.12. Each agency represented at the hearing has aggressively 
used the tools at their disposal in dealing with the crisis. 
However, sometimes the use of those tools has led to unintended 
consequences. For instance, when the Treasury Department 
guaranteed money market funds, it led to a concern on deposit 
insurance and bank accounts. When the FDIC guaranteed bank 
debt, it had an effect on GSE borrowing costs, which in turn 
directly affects mortgage rates. Acknowledging that there is 
often a need to act quickly in these circumstances, please 
explain what steps and processes you have employed to inform 
other agencies about significant actions you undertake to 
ensure that there are not serious adverse unintended 
consequences and that your actions are working in concert with 
theirs.

A.12. Throughout the financial crisis, the Secretary has been 
in very close contact with the other members of the President's 
Working Group on Financial Markets (the Federal Reserve, the 
SEC, and the CFTC) and the heads of the FDIC, OCC, and OTS. To 
the maximum extent possible, programs have been developed 
cooperatively among these different agencies.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD FROM BRIAN D. 
                           MONTGOMERY

Q.1. You are rightly proud to have been able to launch the HOPE 
for Homeowners plan in so short a period of time, and I thank 
you and the other agencies involved for your efforts. In the 
end, of course, the goal is to help homeowners. Please provide 
the Committee with information regarding your outreach efforts 
to lenders, housing counselors, and borrowers. What steps have 
you taken to sign up lenders? How many lenders are currently 
participating? What steps have you taken to ensure borrowers 
know about the program?

A.1. FHA conducted the first national training session for 
lenders and counselors in Atlanta, Georgia, on November 13 and 
14. Approximately 600 industry representatives attended the 
session. FHA staff provided a comprehensive overview of the 
program, explaining everything from borrower eligibility 
criteria to servicing requirements to FHA's monitoring 
practices on HOPE for Homeowners loans. The attendees were very 
attentive, asking excellent questions and engaging in 
substantive dialogue.
    The next national FHA training session will be at the 
Neighborworks Training Institute, to be held in Washington, DC, 
from December 8th through December 12th. Additional counselor-
specific training will be conducted in an on-line course 
offered by Neighborworks as well. Other lender and counselor 
training sessions will be performed on a smaller scale, at the 
local and regional level.
    FHA has posted a calendar of training and outreach events 
on the FHA.gov Web site, to provide consumers, counselors, and 
lenders with a tool to look up events by date, location, 
sponsor, and intended audience. The listing of events will be 
updated on a regular basis, as the Board agencies continue to 
work with industry partners to set up additional sessions. At 
each of the events, staff from one or several of the HOPE for 
Homeowners Board agencies will present information on the 
program. The Web-based calendar of events can be found at 
www.fha.gov. As of November 20, 56 sessions had been scheduled. 
The national training schedule and a description of the events 
held by headquarters staff are included as attachments.
    Recognizing that timely outreach from the lender community 
to struggling consumers is critically important, a form has 
been added to the Web site for FHA-approved lenders to sign up 
for the H4H program. There are currently more than 200 brokers 
included on the list, which is available for consumers on 
FHA.gov. Unfortunately, we have had very few originating 
lenders sign up for the program to date. The lending community 
not only needs time to understand the unique statutory 
requirements of the H4H Program but also to modify their 
protocols and practices, train their staff and update their 
technology systems before they can responsibly offer it to 
consumers. Consumers are strongly encouraged to contact their 
servicing lender and any subordinate lien holders since their 
participation is vital for a refinance into a HOPE for 
Homeowners mortgage.
    With regards to borrower outreach, FHA and our partner 
agencies are executing an integrated consumer advertising 
campaign across a variety of media including radio, print, and 
the Internet. We are engaging HUD's target audiences through 
various online channels, while maintaining the FHA.gov portal 
in support piece in a variety of our marketing activities 
communications channel. We have also leveraged HUD's field 
network and industry partners to expand reach. Two online 
applications are being developed by the Federal Reserve to post 
on the FHA Web site. FHA also developed an online training 
course for housing counselors with Neighborworks that will be 
posted on the Web sites of both organizations.

Q.2. What impediments do you see to the use of the HOPE for 
Homeowners program?

A.2. There are a number of specialized requirements that make 
this program very different from, and more difficult than, any 
other mortgage product the lending community has offered and/or 
helped consumers to access.
    FHA fully recognizes the challenging policy decisions that 
the Congress and the Administration had to make to ensure that 
any program designed to serve homeowners in need did not place 
undue financial burden on American taxpayers. Nevertheless, the 
lending community has consistently cited several key 
shortcomings and expressed concern that the program was 
unnecessarily complicated. The primary concerns raised 
repeatedly are that the program:

          1. imposes excessive costs on consumers

          2.  directs unfair payments to the Federal 
        government, at the expense of both lenders and 
        consumers

          3.  restricts eligibility so severely that few 
        homeowners in need can qualify

    In line with these general concerns, FHA makes the 
following specific recommendations for Congressional actions 
needed to modify the program to increase uptake.

     Eliminate SEM and SAM altogether

      Permit subordinate liens to be placed behind HOPE 
for Homeowners mortgages

     Reduce 1.5% annual premium

     Remove restrictive eligibility criteria, 
including:

         No intentional defaults

         No false information on previous loan

         No fraud over previous 10 years

         No ownership of other residential real estate

         March 1, 2008 DTI affordability measure

     Remove 1st payment default provision

    FHA looks forward to providing Congress with a full account 
of the concerns we have been presented to begin the dialogue 
about additional legislative changes that would improve program 
participation.

Q.3. As you note in your testimony, FHA's loan volume has 
skyrocketed over the past two years. Its market share has grown 
from 2 percent to 17 percent. Please explain how FHA has 
handled this huge increase in volume without compromising the 
quality of the loans it has insured. Please provide the 
Committee data on the types of loans insured (purchase money, 
term refinance, cash out refinance, and others); the 
characteristics of the loans (LTVs, sources of downpayments, 
terms, and other relevant data); characteristics of the 
borrowers (credit scores and other relevant data); and any 
other information you think the Committee could use to evaluate 
the new book of business.

A.3. The attached report provides statistics on FHA's increased 
loan volume.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


Q.4. Each agency represented at the hearing has aggressively 
used the tools at their disposal in dealing with the crisis. 
However, sometimes the use of those tools has led to unintended 
consequences. For instance, when the Treasury Department 
guaranteed money market funds, it led to a concern on deposit 
insurance and bank accounts. When the FDIC guaranteed bank 
debt, it had an effect on GSE borrowing costs, which in turn 
directly affects mortgage rates.
    Acknowledging that there is often a need to act quickly in 
these circumstances, please explain what steps and processes 
you have employed to inform other agencies about significant 
actions you undertake to ensure that there are not serious 
adverse unintended consequences and that your actions are 
working in concert with theirs.

A.4. Developing a risk-oriented business plan early in the H4H 
Program's implementation was an essential element designed to 
assist the Oversight Board to ensure that the processes, 
procedures, and communication requirements are put in place to 
do what Congress has directed it to do. The H4H team has 
developed a business plan that builds on the considerable work 
already completed by the agencies to develop the Program. It is 
a living document with a key purpose to assist the Oversight 
Board and its member agencies to sufficiently: (1) identify and 
prioritize Program risks, and to (2) develop action plans and 
strategies to sufficiently mitigate the highest Program risks.
    In developing this business plan the agencies operated 
under the key assumptions: (1) HUD is operating the program, 
(2) there is a strong preference to leverage HUD's existing 
processes, and (3) to appropriately assess risk and provide 
risk mitigation strategies, it is critically important to focus 
on elements that are unique to the H4H program as these areas 
may pose the highest risks to the Program and agencies 
administering the Program. This includes identifying the new or 
adapted business processes that will be required. The risk 
identification also includes externalities that may be outside 
of the agencies' control.
    As the HOPE for Homeowners Program moves from its Startup 
Phase (July 30-October 1) into its Implementation Phase 
(October 1-December 31), the staffs of the Treasury Department, 
FDIC, and Federal Reserve have less need for active involvement 
in the day-to-day matters of the Program. Other than resources 
contributed to unfinished implementation of the Program's 
implementing regulations and mortgagee letters, these staff 
efforts will shift to a monitoring role over this transitional 
period. By the end of this Implementation Phase, FHA management 
and staff will be expected to operate the program, and the 
Oversight Board and its member agencies will together monitor 
program performance, make recommendations for refinements or 
enhancements based on feedback from the Program's results and 
(if relevant) changes in the economic and housing market 
environment, and their own analyses. Staffs from the agencies 
will continue to communicate regularly and coordinate Oversight 
Board meetings and affairs, including required monthly reports 
to Congress. The Treasury Department, FDIC, and Federal Reserve 
will of course be responsive to requests for resources and 
assistance if needed, including but not limited to possible 
exigent circumstances in the economy and/or housing market.
    To facilitate this transition and to put in motion the 
changed roles, the four agencies will initiate a more formal 
set of staff structures and processes aimed at fulfilling these 
responsibilities and maintaining attendant controls and 
information flows. The chart below summarizes these structures 
and processes. 

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



----------------------------------------------------------------------------------------------------------------
                                                                                                   Number of
              Date                       Event            Description          Audience            attendees
----------------------------------------------------------------------------------------------------------------
10/1............................  FHA Conference      Introductory        Industry;           600+
                                   Call.               conference call     Consumers.
                                                       to announce
                                                       program roll out.
10/1............................  Inside Mortgage     Conference call on  Industry..........  300+
                                   Finance.            FHA modernization
                                                       included
                                                       questions on H4H.
10/2............................  Federal Reserve...  H4H briefing......  Consumer affairs    12 regional banks.
                                                                           office and
                                                                           outreach staff.
10/6............................  National Council    H4H briefing......  State Finance       30 states.
                                   of State Housing                        Agencies.
                                   Finance Agencies.
10/7............................  FHA Conference      H4H briefing......  Counselors........  200+
                                   Call.
10/8............................  Housing summit....  2 sessions on H4H;  Government          600+
                                                       general overview    officials;
                                                       and more in-depth.  lenders;
                                                                           counselors.
10/14...........................  American Bankers    H4H briefing......  ABA members.......  250+
                                   Association (ABA).
10/15...........................  FHA Conference      H4H briefing        Industry;           500+
                                   Call.               targeted to top     government
                                                       30 FHA lenders      officials.
                                                       and FHA liaisons.
10/15...........................  FHA Conference      H4H briefing and    Counselors........  100+
                                   Call.               discussion of
                                                       outreach efforts.
10/16...........................  National Council    H4H briefing......  State Finance       20 states.
                                   of State Housing                        Agencies.
                                   Finance Agencies.
10/27...........................  FHA Field Briefing  Field briefing for  Government          100+
                                                       FHA and HUD staff   officials.
                                                       who perform
                                                       outreach
                                                       activities.
10/30...........................  Inside Mortgage     H4H briefing......  Industry..........  200+
                                   Finance.
11/5............................  FHA Conference      H4H briefing......  Industry..........  200+
                                   Call.
11/6............................  Federal Housing     H4H briefing......  Government          100+
                                   Finance Agency.                         officials.
11/13-14........................  National H4H        National 2-day      Industry;           600+
                                   Training            extensive           Counselors.
                                   Conference.         training program
                                                       on H4H.
11/19...........................  National Press      Sec. Preston        Media.............  100+
                                   Club Event.         announces
                                                       programmatic
                                                       changes to H4H
                                                       product.
11/20...........................  Mortgage Bankers    Issues with         Industry..........  100+
                                   Association.        implementing H4H.
12/4............................  Independent         H4H briefing......  Industry..........  300+
                                   Community Bankers
                                   of America.
12/5............................  Neighborworks.....  Taped three hour    Counselors........  n/a
                                                       online training
                                                       course.
12/8-9..........................  Neighborworks.....  Two day training    Counselors........  tbd
                                                       event.
----------------------------------------------------------------------------------------------------------------

                                ------                                


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

Q.1. There has been significant confusion in the marketplace 
regarding the status of debt offered by Fannie Mae and Freddie 
Mac. Specifically, there is confusion as to whether or not that 
debt is guaranteed by the federal government. Your revised 
testimony makes it clear that the federal government is not 
directly guaranteeing the debt. Rather, the government has 
provided a $100 billion capital backstop to each enterprise 
with which it can pay all its debts.
    However, the failure to extend this guarantee has had a 
number of unintended consequences in light of the government's 
decision to explicitly guarantee senior debt for other 
financial institutions. For example, the press reports that the 
cost of raising debt for both Fannie Mae and Freddie Mac has 
gone up significantly since the latter decision. In addition, 
the two enterprises have apparently been unable to raise 
anything but short-term funding. This leads to a number of 
questions:
Q.1.a. Was FHFA consulted in the deliberations regarding 
guarantee of bank debt? If so, was any consideration given to 
the possibility that such a guarantee might undermine the 
ability of the enterprises to fund themselves effectively?
Q.1.b. Is any thought being given, or are any discussions 
underway regarding providing the enterprises with the same 
guarantee as has been given to other financial institutions?
Q.1.c. One outcome of these increased funding costs is an 
increase in mortgage interest rates. According to the Wall 
Street Journal (October 30, 2008; ``Mortgage Plan Isn't Cutting 
Rates''), rates for 30-year fixed rate mortgages have climbed 
to 6.64%, up from the prior week's 6.24%. Given the fact that 
one of FHFA's stated purposes for putting the enterprises into 
conservatorship was to support the housing market, including 
with increased purchases of agency MBS, what can be done about 
these higher funding costs? Is this funding problem undermining 
the ability of the enterprises to meet its mission of 
maintaining a stable and orderly housing market?
Q.1.d. Please provide the Committee with data showing the 
change in funding costs for the enterprises from just prior to 
the conservatorship to the announcement of the guarantee for 
senior debt of financial institutions to the present. Please 
provide data on the associated mortgage rates over the same 
period of time.

A.1.a-d Getting mortgage rates down more in line with declines 
in Treasury yields has the potential to provide significant 
benefit to troubled housing markets. As the attached chart and 
tables show, the establishment of the conservatorships was 
accompanied by a quick drop in mortgage rates of more than 40 
basis points, and spreads of Enterprise yields above Treasury 
yields fell comparably. Those gains appeared to erode over the 
next few weeks, with continued bad news about financial 
institutions and the economy. The announcement of FDIC 
insurance for senior debt of insured depository institutions 
coincided with further widening of yield spreads and higher 
mortgage interest rates. However, it is important to note that 
yields on GNMA mortgage-backed securities (MBS), which are 
guaranteed with the full faith and credit of the U.S. 
Government performed comparably with yields on MBS guaranteed 
by the Enterprises. FHFA received a pre-announcement 
notification of the senior debt guarantees. We are unaware of 
any plans to extend those guarantees to the Enterprises, 
something that might require legislation. Subsequently, the 
Fed's announcement of $500 billion of MBS purchases and $100 
billion of GSE debt purchases caused a significant decline in 
Enterprise yields spreads and in mortgage rates, bringing 
interest rates on 30-year fixed-rate loans to their lowest 
level in the nearly 38 years' history of Freddie Mac's survey.

Q.1.e. In addition, the funding for the Federal Home Loan Banks 
(FHLB) has also been rising. In fact, it is our understanding 
that FHLB debt is even more expensive than debt issued by the 
enterprises. What is being done to address this problem?
Q.1.f. All the housing GSEs are increasingly dependent on short 
term financing. What challenges will it pose if the GSEs are 
increasingly forced to depend on short-term financing to carry 
on their operations?

A.1.e-f: Debt of the Federal Home Loan Banks initially 
benefitted similarly to that of the Enterprises following the 
establishment of the Enterprise conservatorships. Shortly 
thereafter, however, Bank yields rose relative to Enterprise 
yields. While debt yields of all GSEs had been very close, 
differentials of as much as 60 basis points opened up at 2, 3, 
and 5-year maturities. While HERA gave Treasury authority to 
buy unlimited quantities of debt from any of the housing GSEs, 
the preferred stock agreements were only made with Fannie Mae 
and Freddie Mac because the Banks did not need that kind of 
support. Nonetheless, the market seemed to view them as less 
protected. Since the Fed's debt purchase plans were announced 
in late November, though, yields spreads among the different 
GSEs have tightened and returned to near normal amounts. All of 
the housing GSEs, and especially the Enterprises depend to some 
extent on their ability to issue intermediate-term debt. That 
was nearly impossible in the fall, but recently increased 
investor interest has permitted GSE issues of debt with 
maturities of as long as five years. Conditions are still far 
from satisfactory, but improving. In the meantime, purchases by 
the Treasury under its GSE MBS Purchase Facility have augmented 
those of the Enterprises and the Fed.

Q.1.g. In a recent story, Business Week reported that FHFA was 
requiring enterprises to buy troubled mortgage assets. Is this 
true? If so, what is the policy rationale for doing this?

A.1.g The story was unfounded. We did not require the 
Enterprises to buy troubled assets. We believe they can best 
serve the housing and mortgage markets primarily by using their 
resources to maintain a liquid secondary mortgage through 
purchasing and guaranteeing new loans. In addition, we have 
been encouraging them to reduce foreclosures and mitigate 
losses by aggressively modifying their own troubled loans and 
setting a standard for others.

Q.2 Section 110 of the Emergency Economic Stabilization Act of 
2008 (ESA) requires FHFA to ``Implement a plan that seeks to 
maximize assistance for homeowners'' in order to avoid 
preventable foreclosures. Please describe in detail your 
agency's plan in this regard, and any steps that have already 
been taken to implement this plan.

A.2.
    a. FHFA Expertise: FHFA employs examiners and executives 
who have expertise and/or experience in default management, 
non-performing loans, loss mitigation and REO management. These 
individuals provide supervision and oversight of both 
enterprises in these areas.
    b. Enterprise Internal Controls. For the last 18-months, 
FHFA has focused on the loss mitigation and REO management 
areas. FHFA has reviewed the enterprises' internal policies and 
procedures, seller/servicer guides, bulletins and 
announcements, as well as the internet sites and published 
materials to support servicers' loss mitigation efforts, 
activities and reporting.
    c. Enterprise Reporting. FHFA consistently receives 
internal monthly and quarterly management reports for non-
performing loans that include loss mitigation efforts. To 
compliment these internal reports, starting in 2008, FHFA 
required the enterprises to submit a monthly report on loss 
mitigation activities. Data from those reports are aggregated 
with results posted to FHFA's website. FHFA's Foreclosure 
Prevention Report (formerly, Mortgage Metrics Reports) provides 
the most comprehensive data on loss mitigation efforts (in 
comparison to HOPE NOW and the OCC/OTC reports), and 
continuously reports on the loss mitigation performance ratio. 
This ratio has clearly brought transparency to and focus on the 
enterprises' efforts in assisting borrowers.
    For 2009 reporting, FHFA has enhanced reporting 
requirements effective with data for January loss mitigation 
actions. The additional data elements relate to expanded 
modification types ( as required by EESA), the reason/s for 
default, default status (e.g., bankruptcy, military indulgence, 
government seizures, probate), property condition, and 
occupancy status.
    d. FDIC Loan Modification Program. FHFA worked with the 
FDIC and the enterprises to pilot the FDIC/IndyMac loan 
modification program, announced August 20, 2008. FHFA initiated 
work on this effort in August 2008. Both enterprises initiated 
the pilot in October.
    e. Streamlined Modification Program (SMP). FHFA became 
actively involved with HOPE NOW Alliance members and the 
enterprises in October with the goal of rolling out a 
streamlined modification program. The program was announced 
November 11th and rolled out December 15th. To enhance the 
success of this program, both enterprises suspended the 
scheduling of and scheduled foreclosure sales on occupied 
properties for the period November 26th to January 31st. The 
suspension allows borrowers in foreclosure the opportunity to 
cure the serious delinquency with a loan modification.
    f. Loss Mitigation Programs. The enterprises, offer other 
loss mitigation programs to assist borrowers in saving their 
homes--forbearance plans, payment plans, a standard loan 
modification and a delinquency advance program (e.g., Fannie 
Mae's HomeSaver Advance program.) For borrowers who are unable 
to make a payment at the most liberal modified terms, both 
enterprises offer short sales, deeds-in-lieu and charge-offs in 
lieu of foreclosure.
    g. Loan Modification Issues. FHFA has worked with both 
enterprises in reviewing accounting, trust and capital issues 
that may disincent the enterprises from being aggressive with 
modifications. Those issues have been addressed. The 
enterprises have a solid understanding of FHFA's desired 
objective of keeping borrowers in their homes. In particular, 
Fannie Mae announced major changes to its trust that allow for 
more flexibility with loan modifications.
    h. Interagency Efforts. FHFA has continued to work with 
HOPE NOW Alliance members, the OCC, OTS, HUD, FDIC and Treasury 
to discuss industry issues and concerns, and the enterprises' 
in particular. Results of this communication have allowed FHFA 
to obtain third party views on how well the enterprises are 
doing, and what they could be doing better or differently.
    i. Non-Agency Investments. FHFA has taken an active role in 
communicating with PLS servicers, trustees and investors to 
encourage them to adopt the SMP program, or a comparable 
program acceptable to all PLS investors and in compliance with 
PLS pooling and servicing agreements. FHFA has supplemented 
these conversations with meetings with American Securitization 
Forum (ASF) officers. Doing so has not only helped borrowers 
whose loan are in PLS securities, but also the enterprises who 
own 20% of PLS securities.

Q.3. Discussions with a number of entities, from major lenders 
and servicers to housing counselors, reveal that Fannie Mae and 
Freddie Mac are resisting efforts to do loan modifications. 
Please describe the efforts being undertaken by the two 
enterprises, and the FHLBs, to engage in loss mitigation. 
Specifically, what are the loss mitigation policies of the 
GSEs? What barriers do you see in these policies to moving 
toward a more systematic approach to loan modifications?

A.3.
    a. Loan Modification Efforts. FHFA's oversight and 
supervision of the enterprises doesn't confirm the view that 
the enterprises are resisting efforts to do loan modifications. 
In fact, since the early 1990s, both enterprises have been 
leaders in the loss mitigation area, and set the standards for 
what is best practice for the industry.
    In discussing this observation with both enterprises, two 
points were made. First, many servicers were unaware of the 
authority the enterprises had delegated to them to review and 
approve loan modifications in their behalf. Second, the 
enterprises strongly believed the proper way to assist a 
borrower and modify the loan is through the standard rather 
than the streamlined process. The standard process requires a 
customized approach to working with the borrower and his/her 
circumstances based on a cash-flow budget. The streamlined 
process requires an approach that is less borrower-specific, 
and makes assumptions about the borrower's ability to pay at 
modified terms based on a ratio analysis.
    Initially, the enterprises resisted efforts to adopt a 
streamlined modification program, because it wouldn't 
necessarily address the individual borrower's unique situation. 
Because of rising delinquencies, the increase in properties in 
the foreclosure process, and servicers' capacity limitations, 
the enterprises worked actively with HOPE NOW Alliance members, 
and agreed to SMP program guidelines.
    b. Communication from External Parties. When an external 
party has contacted FHFA regarding the enterprises' actions, we 
follow up with the enterprise on the specific concern. As a 
result, either FHFA and/or the enterprise contacts the external 
party. In addition, FHFA will discuss the situation and 
circumstances, and determine if there is a more general or 
broader issue that requires attention. Recently, a housing 
counseling agency contacted FHFA regarding concerns around 
Fannie Mae's decisions on loan modification requests. FHFA met 
with the counseling agency, and asked it to provide specific 
examples (cases) where borrowers had requested modifications 
that were not approved by Fannie Mae. Fannie Mae was very open 
to this and agreed to do so. Generally, FHFA has found it to be 
more beneficial and productive to work with specific examples 
and instances, than to address broad generalizations.
    c. Loss Mitigation Performance. As reported in FHFA's 
monthly and quarterly Foreclosure Prevention Reports through 
September 2008:
    1.  Loss Mitigation Performance Ratio. The enterprises' 
loss mitigation ratio has fluctuated from 46.9 percent to 64.8 
percent from January to September, and averaged 54.6 percent. 
That ratio measures the number of borrowers who were helped 
versus those who needed help (were destined for foreclosure.) 
FHFA's 2009 performance goals target a 25 percent increase in 
loan modifications over 2008 actuals.
    2.  Loss Mitigation--Borrower Retained Property. Loss 
mitigation actions that allowed the borrower to retain his or 
her property represented 93 percent of all loss mitigation 
actions--139,381 in total. Of that number, 49,128 were 
completed payment plans, 45,179 were delinquency advances, and 
44,458 were loan modifications.
    3.  Completed Foreclosures. Completed foreclosures as a 
percent of new foreclosures initiated averaged 32.7 percent for 
the enterprises, but 41.5 percent for OCC/OTS servicers and 
42.8 percent for HOPE NOW servicers.
    d. Loss Mitigation Policies, Procedures and Processes. Both 
enterprises have internal policies and procedures, seller/
servicer guides, and bulletins and announcements, as well as 
internet sites and materials to support servicers' loss 
mitigation efforts and activities. To compliment those, the 
enterprises provide training materials and training (on-line 
and classes) in loss mitigation.
    e. Barriers. Reported barriers to effective loan 
modifications are not an outgrowth of enterprise policies. They 
are:
    1.  Subordinate liens. There are a high number of loans 
with subordinate second liens. A successful workout often 
requires the cooperation of the second lien holder, who may/may 
not be represented by the first mortgage servicer.
    2.  Unable to Contact/Locate. Servicers are often unable to 
assess the borrower's financial position and/or get him or her 
to commit to a loan modification because the borrower can' be 
contacted, is evading the servicer's calls or letters, and/or 
has abandoned the property. In many cases, the properties were 
purchased as investment properties. The borrowers never 
intended to live in them. If the property looses value and/or 
the borrower has trouble renting the property, the borrower is 
inclined to walk away from a bad investment.
    3.  Bankruptcy. Borrowers in bankruptcy cannot be contacted 
directly by the servicer for a workout--even though they may 
take this action in an effort to save their homes. Therefore, 
the population of borrowers who can be solicited for a loan 
modification is reduced.
    4.  Fraud/Misrepresentation. Given that some loans were 
originated under low or no documentation programs, a review of 
the defaulted borrower's situation may reveal that the borrower 
never made the income to support the mortgage in the first 
place. Efforts to modify the loan may be unsuccessful as the 
borrower may have no ability to pay at even the most favorable 
terms.

Q.4. Each agency represented at the hearing has aggressively 
used the tools at their disposal in dealing with the crisis. 
However, sometimes the use of those tools has led to unintended 
consequences. For instance, when the Treasury Department 
guaranteed money market funds, it led to a concern on deposit 
insurance and bank accounts. When the FDIC guaranteed bank 
debt, it had an effect on GSE borrowing costs, which in turn 
directly affects mortgage rates.
    Acknowledging that there is often a need to act quickly in 
these circumstances, please explain what steps and processes 
you have employed to inform other agencies about significant 
actions you undertake to ensure that there are not serious 
adverse unintended consequences and that your actions are 
working in concert with theirs.

A.4. We meet frequently with other agencies to discuss policy 
issues and planned significant actions. HERA specifically 
provided for consultation with the Federal Reserve on 
implementation of new powers and sharing of information about 
the condition of our regulated entities. It also created the 
Federal Housing Finance Oversight Board, which meets at least 
quarterly and includes the Secretaries of Treasury and HUD, as 
well as the Chairman of the SEC. The Senior Preferred Stock 
Purchase Agreements signed between the Enterprises and Treasury 
ensure consultation or agreement with the Treasury on many 
aspects of the Enterprises activities. The EESA created the 
Financial Stability Oversight Board, which includes the same 
members as the FHFA Oversight Board plus the Federal Reserve 
Chairman. It has met seven times, and staff have met 
frequently. In addition, we have met informally with these 
agencies and others numerous times in the past few months to 
discuss issues, policies, and planned actions. We worked 
closely, for example, with the Treasury and HUD, and consulted 
with the FDIC, in developing the Streamlined Modification 
Program adopted by the Enterprises and a majority of the 
portfolio lenders participating in the private sector alliance 
HOPE NOW to reduce foreclosures.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR DODD 
                     FROM ELIZABETH A. DUKE

AIG

Q.1. Former AIG CEO Hank Greenberg recently wrote a letter that 
was reported in the Washington Post as saying, ``Unless there 
is immediate change to the structure of the Federal loan [to 
AIG], the American taxpayer will likely suffer a significant 
financial loss.'' (Washington Post, November 3, 2008). However, 
in the Federal Reserve Board's report to the Senate Banking 
Committee about the Fed's actions with respect to AIG under 
Section 13(3) of the Federal Reserve Act, the Board told the 
Committee that it does not expect the loans to result in any 
losses to the Federal Reserve System or the taxpayer. Can you 
please explain why Mr. Greenberg is incorrect?

A.1. Outstanding advances to AIG under the credit facility 
initially provided to AIG on September 16, 2008 (the Revolving 
Credit Facility) are secured by the pledge of assets of AIG and 
its primary non-regulated subsidiaries, including AIG's 
ownership interest in its regulated U.S. and foreign 
subsidiaries. AIG has announced a comprehensive and global 
divestiture program to raise funds to repay the Revolving 
Credit Facility. These dispositions will include subsidiaries 
that rank among the largest and most prominent businesses in 
the industry.
    As part of our oversight activities arising from our role 
as a lender to AIG, Federal Reserve staff, assisted by expert 
advisers that we have retained, reviews this divestiture 
program and closely monitors the company's progress in 
implementing the divestiture program's objectives on an ongoing 
basis, as well as cash flows and financial condition. The 
Federal Government's restructuring of its financial 
relationship with AIG announced on November 10, 2008, which 
includes the acquisition of $40 billion in newly issued Senior 
Preferred Stock of AIG by the U.S. Treasury, and the 
modification of some of the initial terms of the Revolving 
Credit Facility, should enhance AIG's ability to repay the 
Facility by, among other things, providing additional time to 
execute its asset disposition plan. Given the substantial 
assets of AIG and the senior and secured position of the 
Revolving Credit Facility, the Board expects that the Revolving 
Credit Facility will not result in any net loss to the Federal 
Reserve or taxpayers.
    Advances to Maiden Lane II LLC (ML II) and to Maiden Lane 
III LLC (ML III) under the credit facilities established to 
partially fund the acquisition of certain AIG-related assets by 
these special purpose vehicles are secured by a lien on all of 
the assets held by ML II and ML III respectively. Given the 
expected amounts to be realized from the cash flows produced by 
these assets as well as the proceeds from disposition of these 
assets over time, and the subordinated positions of AIG in ML 
II and ML III, the Board does not expect any net cost to the 
taxpayers as a result of the failure to repay the credit 
extended by the Federal Reserve to ML II and ML III.

Q.2. What is the total sum of money the Federal Reserve System 
has lent to AIG through any and all actions undertaken by the 
Federal Reserve, including the Commercial Paper Funding 
Facility (CPFF)? What process was used to determine AIG's 
eligibility to participate in the CPFF? Did the Federal Reserve 
consider the fact that AIG was already subject to special Fed 
lending when deciding AIG's eligibility to participate in the 
CPFF?

A.2. As initially structured in September 2008, the Revolving 
Credit Facility allowed AIG to borrow up to $85 billion. From 
inception of this Facility to November 5, 2008, the total 
aggregate amount of borrowings were approximately $77.0 
billion, of which approximately $16.0 billion was repaid on or 
before that date. In connection with the U.S. Treasury's 
announcement that it would acquire $40 billion in AIG Senior 
Preferred Stock in November, the proceeds of which were used to 
repay amounts outstanding under the Facility, the total amount 
of credit permitted to be outstanding under the Facility was 
reduced to $60 billion. As of December 31, 2008, AIG had 
approximately $38.9 billion in advances outstanding under the 
Facility.
    Four AIG affiliates, AIG Funding, Inc., International Lease 
Finance Corporation, Curzon Funding LLC, and Nightingale 
Finance LLC, have borrowed from the CPFF. Under the terms of 
the CPFF, these four affiliates may borrow an aggregate amount 
of up to approximately $20.9 billion from that Facility. As of 
November 5, 2008, these four affiliates had borrowed an 
aggregate amount of approximately $15.2 billion under the CPFF. 
By its terms, the CPFF is available to any U.S. issuer of 
commercial paper that meets the eligibility requirements of the 
Facility. Among other requirements, the commercial paper 
financed through the CPFF special purpose vehicle must be rated 
A-1/P-1/F-1 by a major nationally recognized statistical rating 
organization. The fact that a particular issuer may be eligible 
to borrow under; or be affiliated with an eligible borrower 
under, other credit facilities established under section 13(3) 
of the Federal Reserve Act does not disqualify the issuer under 
the terms of the CPFF. For example, affiliates of primary 
dealers that have access to the Primary Dealer Credit Facility 
are not ineligible to borrow under the CPFF. The four AIG 
affiliates that are borrowers from the CPFF meet the 
eligibility criteria of that Facility.
    The Federal Reserve Bank of New York (FRBNY) is authorized 
to provide up to $22.5 billion in senior secured credit to ML 
II to partially fund its acquisition of approximately $40 
billion (par value) in residential mortgage-backed securities 
from AIG. As of December 31, 2008, the FRBNY had lent $19.5 
billion to ML II. As a result of the ML II credit facility, on 
December 12, 2008, the Securities Borrowing Facility for AIG, 
through which the FRBNY could lend up to $37.8 billion in cash 
to AIG in exchange for collateral in the form of investment 
grade securities that were being returned by AIG's securities 
lending counterparties, was terminated. On November 5, 2008, 
before the Securities Borrowing Facility was terminated, AIG 
had borrowed approximately $19.9 billion under that Facility. 
All borrowings under the Securities Borrowing Facility were 
repaid in full when the facility was terminated on December 12, 
2008.
    The FRBNY is authorized to provide up to $30 billion in 
senior secured credit to ML III to partially fund its 
acquisition of approximately $69 billion (par value) of multi-
sector collateralized debt obligations (CDOs) protected by 
credit default swaps (CDS) and similar contracts written by 
AIG. As of December 31, 2008, FRBNY had lent $24.3 billion to 
ML III.

Q.3. What is AIG's market capitalization? Is the present value 
of AIG's equity and assets (using mark-to-market accounting) 
greater than AIG's liability to the Federal Reserve?

A.3. As explained in response to Question 1, advances under the 
Revolving Credit Facility are to be repaid with the proceeds of 
asset sales by AIG, including the disposition of many of its 
major U.S. and foreign insurance subsidiaries. The shares of 
the insurance subsidiaries of AIG are not themselves publicly 
traded or valued on a mark-to-market basis. Based on its recent 
common stock price, as of year-end 2008, AIG's market 
capitalization was approximately $4.2 billion. However, current 
market capitalization is not necessarily a reliable indicator 
of the value that the purchasers of AIG's businesses, which 
rank among some of the most prominent in the industry, will pay 
for these assets and thus the amount of proceeds that will be 
received from the disposition of these businesses. As stated 
above, in light of the substantial assets of AIG and the senior 
and secured position of the Revolving Credit Facility, the 
Board expects that the Revolving Credit Facility will not 
result in any net loss to the Federal Reserve or taxpayers.

Q.4. How has AIG used the funding the System has provided, and 
what analysis have you done to conclude that the loans will be 
repaid?

A.4. Consistent with the terms of the Revolving Credit 
Facility, AIG has used the proceeds of advances under the 
Revolving Credit Facility for general corporate purposes, 
including as a source of liquidity to pay obligations as and 
when they become due. Since the establishment of the Facility, 
a significant portion of the Facility proceeds has been used to 
meet continued cash requirements associated with AIG's 
securities lending program and for collateral calls related to 
its portfolio of CDS and similar contracts AIG had written on 
multi-sector CDOs. In the future, draws on the Revolving Credit 
Facility are not expected to be used for these purposes to a 
significant extent because the credit facilities provided to ML 
II and ML III are designed to address the liquidity pressures 
on AIG related to these factors. Draws on the Facility going 
forward may continue to be used for other general corporate 
purposes, such as to repay maturing debt obligations and 
provide operating funds, loans or capital to the company's 
subsidiaries.
    See the answer to Question 1 for a description of the steps 
Federal Reserve staff is taking with regard to assessing 
whether outstanding advances under the Revolving Credit 
Facility will be repaid.

Q.5. Has the Federal Reserve put any restrictions on the 
lobbying activities of AIG?
      Have any other restrictions been placed on AIG's 
business or other activities?

A.5. As is usual in commercial lending transactions involving 
distressed borrowers, the Federal Reserve has certain rights as 
a creditor under the loan documentation relating to the 
Revolving Credit Facility, such as the right to require that 
overall corporate governance be acceptable to the Federal 
Reserve. Other provisions in the loan documentation include a 
prohibition, while the Federal Reserve Facility is outstanding, 
on making certain types of shareholder distributions, such as 
payment of dividends on common stock, and a requirement to 
submit to the Federal Reserve as lender a significant number of 
financial statements and reports that address a broad range of 
topics relating to the financial condition and future prospects 
of AIG. Regarding restrictions on its business, AIG may not 
make material changes to its business activities without the 
consent of the Federal Reserve, and may not enter into new swap 
transactions except under policies approved by the Federal 
Reserve or to hedge or mitigate risks.
    Although the Federal Reserve loan documentation does not 
specifically address AIG's lobbying activities, as a condition 
of the Treasury's acquisition of $40 billion in Senior 
Preferred Stock under the Troubled Assets Relief Program 
(TARP), AIG must maintain and implement a written policy on 
lobbying, governmental ethics, and political activities that, 
among other things, applies to AIG and all of its subsidiaries 
and affiliated foundations. This policy may not be materially 
amended without the prior written consent of the Treasury.

Q.6. While financial problems in AIG Financial Products have 
been detailed by the Federal Reserve and the press, 
specifically regarding credit default swaps, Board staff has 
indicated that the life insurance company held by AIG may also 
have financial problems. Please detail these financial 
problems. Please indicate whether any of the loans, and if so, 
what amount, has been spent in the life insurance, and other 
insurance companies.

A.6. During the first three quarters of 2008, AIG reported 
significant losses arising primarily from other-than-temporary-
impairment charges on its investment portfolio, which was the 
result to a significant extent of declines in the market values 
of mortgage-backed securities AIG held in connection with the 
securities lending program operated by AIG's regulated 
insurance subsidiaries. To address the losses from this 
activity during the period from inception of the Federal 
Reserve's Revolving Credit Facility to November 5, 2008, AIG 
had used about $19 billion of advances from the Facility to 
make capital contributions to its insurance companies or to 
repay obligations to the securities lending program. The ML II 
credit facility was designed to help AIG address these 
positions. ML II acquired from AIG's insurance subsidiaries, in 
return for cash, the residential mortgage-backed securities 
that these subsidiaries held as part of the securities lending 
program. These actions allow ML II to manage and realize the 
underlying value of these securities over the longer term, and 
relieve AIG and its insurance subsidiaries from the short-term 
volatility in the mark-to-market value of these assets in the 
current economic environment. These actions also were designed 
to enhance the safety and soundness and overall financial 
condition of the insurance companies.

Q.7. In return for the Federal Reserve loan, the federal 
government now controls almost 80 percent of AIG.
      What federal entity is/will control this large 
share of AIG?
      What decisions have been made about how this 
control will be exercised?
      How many Federal Reserve or other federal staff 
are currently on-site at AIG? Please detail the roles of these 
staff.

A.7. Under the terms of the Revolving Credit Facility as 
amended, AIG will issue shares of perpetual, non-redeemable 
convertible preferred stock to a trust that will hold the stock 
for the benefit of the U.S. Treasury. The preferred stock is 
convertible into 77.9 percent of AIG's outstanding common 
stock. Decisions regarding the exercise of any voting rights 
associated with this preferred stock and regarding any 
disposition of the stock to third parties will be made by the 
independent trustees of the trust. In addition to this equity 
interest, the Treasury Department, in connection with its 
acquisition of $40 billion of senior preferred stock of AIG 
under the TARP, also received warrants to purchase 2 percent of 
the common stock of AIG. Control over these instruments is 
exercised by the Treasury Department in compliance with the 
rules and conditions applicable to the TARP.
    A team of approximately 10 Federal Reserve staff, led by a 
Senior Vice President of the FRBNY, has primary responsibility 
for managing and implementing the oversight of AIG provided for 
in the loan documentation relating to the Revolving Credit 
Facility. Federal Reserve staff are on-site at AIG to monitor 
the company's funding, cash flows, use of proceeds, and 
progress in pursuing its divestiture plan. Federal Reserve 
representatives are also in regular contact with AIG senior 
management and attend all AIG board meetings and board 
committee meetings.

Q.8. Board staff has indicated that the Federal Reserve has not 
taken a close look at the solvency of the insurance companies 
held by AIG because those activities are regulated at the state 
level. Is this correct? Has the Federal Reserve done a thorough 
analysis of AIG's insurance companies, including their 
solvency?

A.8. Under the existing statutory framework, the relevant state 
insurance regulatory authorities have the primary 
responsibility for determining the financial condition of AIG's 
insurance company subsidiaries. This includes the authority to 
take action to resolve regulated insurance companies that fail 
to meet the state regulator's capital, solvency, and other 
regulatory requirements. As a lender to MG, the Federal Reserve 
closely monitors the cash flow, earnings, and general financial 
condition of the company on a consolidated basis, which 
includes reviewing financial information on all of the 
company's major subsidiaries, including the insurance 
subsidiaries. In carrying out this oversight responsibility, 
the Federal Reserve coordinates on an ongoing basis with the 
appropriate state insurance authorities.

EESA

Q.9. What actions has the Board taken to implement a plan under 
Section 110 of the Emergency Economic and Stabilization Act of 
2008 with respect to foreclosure mitigation for mortgages or 
mortgage-backed securities held, owned, or controlled by or on 
behalf of a Federal Reserve Bank?

A.9. Section 110 of the Emergency Economic Stabilization Act 
directs Federal property managers, to the extent that they 
hold, own, or control mortgages, mortgage-backed securities, 
and other assets secured by residential real estate 
(residential mortgage assets), to ``implement a plan that seeks 
to maximize assistance for homeowners and use its authority to 
encourage the servicers of the underlying mortgages, and 
considering net present value to the taxpayer, to take 
advantage of the HOPE for Homeowners Program under section 257 
of the National Housing Act or other available programs to 
minimize foreclosures.'' Section 110 generally provides that 
the Federal Reserve Board (Board) is a Federal property manager 
with respect to any mortgage, mortgage-backed securities, or 
pool of such securities (residential mortgage assets) held, 
owned, or controlled by or on behalf of a Federal Reserve Bank 
other than residential mortgage assets that are held, owned, or 
controlled by or on behalf of a Federal Reserve Bank ``in 
connection with open market operations under section 14 of the 
Federal Reserve Act (12 U.S.C. 353), or as collateral for an 
advance or discount that is not in default.''
    The Board is currently not a Federal property manager for 
any residential mortgage assets within the scope of section 
110. To the extent that residential mortgage assets are held, 
owned or controlled by the Federal Reserve Banks, these assets 
are held, owned or controlled in connection with open market 
operations or as collateral for advances or discounts that are 
not in default, such as the credit extended to Maiden Lane 
LLC.\1\
---------------------------------------------------------------------------
    \1\ Maiden Lane LLC is the limited liability company to which a 
portfolio of assets was transferred in connection with a loan by the 
Federal Reserve Bank of New York, which facilitated the acquisition of 
The Bear Stearns Companies Inc. by JPMorgan Chase & Co.
---------------------------------------------------------------------------
    Nonetheless, the Board is in the final stages of developing 
a foreclosure mitigation policy for use by the Federal Reserve 
Banks. In addition to applying this policy in situations 
required by section 110, the Board will consider whether there 
are situations in which it is appropriate and feasible for the 
Board to apply the policy voluntarily.
    In developing this policy, the Board has consulted with the 
Federal Deposit Insurance Corporation, the Federal Housing 
Finance Agency, and other governmental and industry 
representatives, and has carefully considered recent 
developments and changes to industry protocols relating to 
foreclosure mitigation. The Board expects to finalize and vote 
on this policy soon and will promptly submit a copy of its 
policy once approved to Congress. The goal of the policy will 
be fully consistent with the requirements and goals of section 
110 to offer distressed homeowners a sustainable loan 
modification when such action would result in a higher expected 
net present value (NPV) than would be expected through 
foreclosure.
      Specifically, what goals has the Board 
established for the number or percentage of mortgages that 
should be modified to comply with the Act?
    Any portfolio that becomes subject to the Board's 
foreclosure mitigation policy will contain unique 
characteristics, such as the number of whole residential 
mortgage loans versus residential mortgage-backed securities, 
the percentage of senior mortgage loans versus subordinate 
mortgage loans, and the number of performing loans versus non-
performing loans. To account for these variables, the Board 
does not expect to establish a pre-set number or percentage of 
loans that must be modified under its policy.
    However, as noted above, the Board's over-arching goal 
under the policy will be to try to keep consumers in their 
homes by offering sustainable loan modifications when the 
expectedNPV of a loan modification would be greater than the 
expected NPV of the net proceeds to be received through foreclosure.
      What process has the Board established to 
communicate the plan, including modification goals, to Maiden 
Lane or the regional Federal Reserve Bank that would serve as 
the agent for the Board in carrying out its duty under the law?
    As noted above, the Board is in the final stages of 
developing a foreclosure mitigation policy to guide the Federal 
Reserve Banks in the event that the Board becomes a Federal 
property manager. The Board will transmit that policy to the 
Reserve Banks and require that the Reserve Banks, and any 
agents they may hire to assist in the management or servicing 
of the mortgage portfolios subject to section 110, abide by the 
policy.
      How many Bear Stearns loans have been modified to 
date and what were the terms?
    Wells Fargo & Company (Wells Fargo) and EMC Mortgage 
Corporation currently act as the servicers of the whole 
residential mortgages that serve as collateral for the loan to 
Maiden Lane LLC. Both Wells Fargo and EMC Mortgage are members 
of the HOPE NOW Alliance and utilize industry standard 
protocols for loan modifications that are consistent with the 
standards and guidelines established by the HOPE NOW Alliance. 
Loan modifications for mortgages that serve as collateral for 
the loan to Maiden Lane LLC have been offered to delinquent 
borrowers who are facing other-than-temporary economic 
hardships, but who may have the capacity to perform on the loan 
following a modification of terms that provides an expected NPV 
greater than what would be expected through foreclosure. 
Workout plans, which are not formal loan modifications, are 
offered to borrowers with temporary problems and need 
assistance bringing their account current through short-term 
modifications to their payments.
    The ability to offer loan modifications and workout plans 
for loans that serve as collateral for the extension of credit 
to Maiden Lane LLC is contingent on whether the subject assets 
are whole mortgage loans rather than mortgage-backed 
securities. Because mortgage-backed securities are pools of 
mortgages in which the Federal Reserve Bank only holds a 
fractional interest along with other investors, the Reserve 
Bank does not have direct control over the servicing of those 
residential mortgage assets. The majority of residential 
mortgage assets that serve as collateral for the loan to Maiden 
Lane LLC are in the form of residential mortgage-backed 
securities. Moreover, all of the residential whole loans in the 
portfolio were performing as of March 14, 2008, when Maiden 
Lane LLC acquired the portfolio.
    As of November 30, 2008, slightly more than 11 percent of 
the residential mortgage whole loans that serve as collateral 
for the loan to Maiden Lane LLC and that were both 
nonperforming and more than 60 days past due had been 
permanently modified through a reduction in interest rate, an 
extension of term, a deferral or reduction in the principal 
balance, or a combination of such actions. Typically, permanent 
loan modifications initially are considered when borrowers 
become 60 days or more past due.
    The number of permanent loan modifications is expected to 
increase in the coming months. A significant portion of the 
loans currently 60 days or more past due only reached this 
stage recently and, as you know, the loan modification process, 
even under the best of circumstances, can take time, as the 
borrower must be contacted and appropriate analysis conducted 
to confirm that a modification is both appropriate and 
sustainable. Moreover, the loan modifications currently offered 
to borrowers for the loans backing the credit extension to 
Maiden Lane LLC become permanent only after a borrower makes 
three timely payments under the modified terms. Therefore, the 
number of permanently modified loans is expected to increase as 
more delinquent borrowers are contacted and finish the 
negotiation process and as borrowers that are in their three-
month verification period fulfill their obligations and receive 
permanent loan modifications.
    In addition, many delinquent borrowers are receiving 
flexible terms and assistance that may lead to loan workouts in 
forms other than formal loan modifications--for example, short 
sales or in the case of borrowers facing temporary financial 
hardships, a repayment plan. These workouts are not included in 
the stated percentage of loan modifications.

Q.10. I commend the Administration for following through with 
Section 112 of EESA by convening an international summit on 
November 15th. In announcing the summit, the White House 
explained that leaders of the G20 and key international 
financial institutions will review progress on measures taken 
to address the financial crisis and to discuss principles for 
reform of regulatory and institutional regimes going forward. 
Please describe what the Federal Reserve and Treasury 
Department intend to accomplish through this summit and the 
subsequent working group meetings that will follow the summit--
specifically, what types of principles for regulatory and 
institutional modernization will the United States pursue in 
the international community? Will these principles include 
protections for consumers and households which form the 
foundation of economic prosperity in our country as well as 
other countries?

A.10. In a statement released following their November 15 
meeting, the G-20 Heads of State articulated five key 
principles that will govern efforts by the official sector to 
reform the global financial system. These principles include 
strengthening transparency and accountability of financial 
markets and financial institutions, enhancing sound regulation, 
promoting integrity in financial markets, reinforcing 
international cooperation, and reforming international 
financial institutions. These efforts are constructive and 
should help to make the global financial system more robust and 
resilient. The Federal Reserve is working with its counterparts 
in the G-20 to identify and implement specific measures that 
will contribute to achieving these five principles. Initiatives 
to protect consumers and households are central to these 
efforts. The statement from the G-20 Heads of States emphasized 
that bolstering consumer protection is an essential step toward 
protecting the integrity of global financial markets. Consumers 
and households benefit both directly and indirectly as the 
financial system becomes stronger, better regulated, and more 
transparent.

Commercial Paper Funding Facility

Q.11. What real assets are securing loans made under the CPFF 
to special purpose vehicles?

A.11. The loans made under the CPFF to the special purpose 
vehicle (SPV) are collateralized by the highly rated commercial 
paper purchased by, and the fees collected by, the SPV.

Q.12. What has the Federal Reserve done to clarify the effect 
of the CPFF on the daily rates reported in the Board's H-15 
data release?

      What has the Board done to make clear that the 
support provided by the CPFF has altered the overall commercial 
paper rate?
      Does the H-15 data still represent an actual 
market rate, without credit enhancement by the CPFF or any 
other recent government action?
A.12. On November 5, 2008 we added the following footnote to 
the H-15 release:
    Financial paper that is insured by the FDIC's Temporary 
Liquidity Guarantee Program is not excluded from relevant 
indexes, nor is anyfinancial, nonfinancial, or asset-backed 
commercial paper that may be directly or indirectly affected by 
one or more of the Federal Reserve's liquidity facilities. Thus 
the rates published after September 19, 2008, likely reflect 
the direct or indirect effects of the new temporary programs 
and, accordingly, likely are not comparable for some purposes 
to rates published prior to that period.
    The commercial paper rates published on the H-15 release 
have and continue to be a reflection of actual transactions 
that take place in the U.S. commercial paper market. We have 
never screened out transactions with third-party credit 
enhancements.

Q.13. What analysis has the Federal Reserve undertaken to 
determine which markets usually use the 90-day commercial paper 
rate in conducting their business?
      Which of the markets, if any, did the Fed 
determine use this rate regularly in their business operation?
      What steps, if any, has the Federal Reserve taken 
to assure that the actions to lower the costs of issuing 
commercial paper are not having an adverse impact on other 
markets which are pegged to the 90-day financial commercial 
paper?
      Was a similar analysis conducted with respect to 
possible implications for markets that use other short term 
(under 365-day) commercial paper as a result of the 
establishment of the CPFF?
      What steps, if any, has the Federal Reserve taken 
to assure that the actions to lower the costs of issuing 
commercial paper is not having an adverse impact on those other 
markets?

A.13. By law, the reimbursement rates on student loans are tied 
to the 90-day financial CP rate. In addition, dealers report 
that some financial contracts (e.g., derivatives) settle on 
certain CP rates published by the Federal Reserve.
    The link of the reimbursement rate on student loans to the 
90-day financial CP rate has become problematic for student 
lenders, because their cost of funds tends to be tied to Libor, 
and the spread between Libor and the fmancial CP rate has moved 
against them. Importantly, the wider spread likely reflects 
pressures on the Libor rate as well as the CP rate. In 
addition, this spread first widened a few weeks before the CPFF 
began operation.
    To ensure that market participants fully understand our 
methodology for calculating CP rates, we published the 
following announcement on the Federal Reserve's commercial 
paper website on November 5, the first paragraph of which was 
also added (as already mentioned in our response to Question 
11) as a footnote to the Federal Reserve's H-15 release:

    CLARIFICATION OF CRITERIA CONSIDERED FOR COMMERCIAL PAPER RATES

    Financial paper that is insured by the FDIC's Temporary 
Liquidity Guarantee Program is not excluded from relevant 
indexes, nor is any financial, nonfinancial, or asset-backed 
commercial paper that may be directly or indirectly affected by 
one or more of the Federal Reserve's liquidity facilities. Thus 
the rates published after September 19, 2008, likely reflect 
the direct or indirect effects of the new temporary programs 
and, accordingly, likely are not comparable for some purposes 
to rates published prior to that period.
    Through November 4, the documentation on the ``About'' page 
of this release indicated that paper issued under ``credit-
enhanced programs'' was excluded from the samples of issues 
used to calculate reported rates. This wording was intended to 
convey that asset-backed commercial paper was excluded from the 
calculation of financial rates. Indeed, consistent with that 
intent, the Federal Reserve has, since 2006, published a 
separate rate series for asset-backed commercial paper. To 
avoid confusion, the reference to ``credit-enhanced programs'' 
will be dropped.

Too Big to Fail

Q.14. When Chairman Bernanke testified before this Committee in 
support of emergency legislation to stabilize the economy, he 
acknowledged that we have a ``serious `too big to fail' problem 
in this country,'' and that ``it is much worse than we thought 
it was coming into this crisis.'' Ironically, as Gary Stern, 
President of the Federal Reserve Bank of Minneapolis points 
out, ``The too-big-to-fail problem . . . has been exacerbated 
by actions taken over the past year to bolster financial 
stability.'' In surveying the financial landscape, one is 
struck by the fact that we are seeing increased consolidation 
of financial institutions--not just of commercial banks, but 
including enormous combinations of commercial and investment 
banks. In fact, news-reports indicate that a number of the 
institutions that received capital injections are using them to 
do additional acquisitions.
      Are such consolidations increasing our ``too big 
to fail'' problem, thereby increasing the problem of moral 
hazard? If so, what do we do about it?

A.14. Working with the Treasury, the FDIC, and other agencies, 
the Federal Reserve believes that we must take all steps 
necessary to minimize systemic risk. We are also concerned 
about actions that increase moral hazard. As the Federal 
Reserve has previously noted, the acquisition of a troubled 
financial institution by a healthy firm can significantly 
mitigate risks to the financial system as a whole, preserve 
banking services in affected communities, and reduce the costs 
to taxpayers. Although preserving market discipline and 
avoiding moral hazard are extremely important, in exceptional 
circumstances it may be necessary for the government to 
intervene to protect financial and economic stability by taking 
steps to avoid the threat that could result from the failure of 
a major financial institution when financial markets are 
already quite fragile. The problems that result from moral 
hazard and the existence of institutions that are ``too big to 
fail'' must be addressed through prudent decisionmaking by 
government agencies, regulatory changes, improvements in the 
financial infrastructure, and other measures designed to 
prevent reoccurrence of threats to overall financial stability. 
Reforming the system to address these problems should be a top 
priority for lawmakers and regulators.

Q.15. Each agency represented at the hearing has aggressive!), 
used the tools at their disposal in dealing with the crisis. 
However, sometimes the use of those tools has led to unintended 
consequences. For instance, when the Treasury Department 
guaranteed money market funds, it led to a concern on deposit 
insurance and bank accounts. When the FDIC guaranteed bank 
debt, it had an effect on GSE borrowing costs, which in turn 
directly affects mortgage rates.
    Acknowledging that there is often a need to act quickly in 
these circumstances, please explain what steps and processes 
you have employed to inform other agencies about significant 
actions you undertake to ensure that there are not serious 
adverse unintended consequences and that your actions are 
working in concert with theirs.

A.15. For many years, the Federal Reserve has worked with other 
government agencies--including the Treasury Department, the 
Securities and Exchange Commission, the Commodity Futures 
Trading Commission, and the other banking agencies--through the 
President's Working Group on Financial Markets and in other 
forums, to foster the safety and soundness of financial 
institutions and the stability of financial markets. During the 
financial crisis, this collaboration has increased greatly, and 
includes regular conference calls at the principals' level as 
well as formal and informal staff contacts with a range of 
other agencies to exchange information on financial 
developments and to discuss possible policy responses.
    Such interactions have contributed importantly to the 
policy response to the crisis. Indeed, in some cases joint 
decisions by multiple agencies are required to take particular 
policy steps. For example, in order for the FDIC to invoke the 
systemic risk exception to the general requirement for least-
cost resolution of a troubled insured depository institution, 
both the FDIC and Federal Reserve Boards must recommend such a 
step by two-thirds majorities and the Secretary of the 
Treasury, in consultation with the President, must determine 
that a least-cost resolution would have serious adverse effects 
on economic conditions or financial stability, and that a non-
least-cost resolution would avoid or mitigate such adverse 
effects. This process, which involves considerable interaction 
between the three agencies at both the staff level and the 
principals' level, has been undertaken three times this fall, 
in connection with the difficulties of Wachovia and Citibank 
and with the establishment of the FDIC's Temporary Liquidity 
Guarantee Program. Similarly, some other policy actions have 
involved more than one agency, and so by necessity have 
required extensive inter-agency consultation. An example is the 
Term Asset-Backed Securities Loan Facility, which calls for an 
equity investment by the Treasury Department and credit 
provided by the Federal Reserve. Even when joint action not 
been formally required to adopt a particular policy, the 
Federal Reserve has found it useful to exchange views regarding 
the possible policy in order to benefit from the assessments of 
other agencies. In many cases such consultations have been 
organized by Treasury Department and have included a wide range 
of government agencies.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM ELIZABETH A. 
                              DUKE

Q.1. As someone with extensive background in the banking 
industry, what is your opinion of the recent action taken by 
the SEC and FASB to clarify mark-to-market accounting 
regulations? Do you feel such clarification was beneficial for 
our banking industry? What about the financial market as a 
whole?

A.1. As the question indicates, the SEC and FASB issued a press 
release on September 30, 2008 containing certain clarifications 
related to the fair value accounting guidance contained in FASB 
Statement No. 157, Fair Value Measurements, for the benefit of 
auditors and preparers of financial statements. Subsequently, 
the FASB issued FASB Staff Position No. FAS 157-3, Determining 
the Fair Value of a Financial Asset When the Market for That 
Asset Is Not Active. Those formal actions were supplemented by 
a number of roundtable sessions and other meetings and 
presentations during which SEC and FASB staff discussed 
practical challenges involved in performing fair value 
measurements in markets that have become significantly less 
active.
    Generally, guidance was helpful to banks and financial 
markets because it addressed some of the challenges of 
measuring fair values in inactive markets. However, this 
guidance did not significantly reduce the uncertainties around 
the quality of fair value measurements that users and investors 
are experiencing. This may indicate that additional information 
and guidance may be necessary to address these uncertainties. 
The Federal Reserve is supportive of further efforts by the SEC 
and the FASB to clarify existing fair value accounting 
guidance.
    In addition, as the SEC completes its study of ``mark-to-
market'' accounting by January 2, 2009 as required by the 
Emergency Economic Stabilization Act of 2008, we will review 
the report and consult with the SEC regarding additional steps 
that may be deemed necessary in light of recent market events. 
If necessary, such steps could range from modifications of 
accounting requirements to additional clarification of existing 
guidance. Combined with steps that have already been completed 
to provide clarifying guidance, we trust that actions taken in 
response to the SEC study will benefit both the banking 
industry and the financial market as a whole.

Q.2. It is possible this committee will be revisiting the 
regulation of credit default swaps (CDS) and other previously 
unregulated derivative contracts in the near future. Do you 
believe the proper entity to regulate such financial products 
is the Federal Reserve? If not, which regulator is best suited 
to oversee these financial products in your opinion?

A.2. On November 14 the President's Working Group on Financial 
Markets (PWG) announced a broad set of policy objectives to 
guide efforts to address the full range of challenges 
associated with CDS and other OTC derivatives, including 
improving the transparency and integrity of the CDS market, 
enhancing risk management of OTC derivatives, further 
strengthening the OTC derivatives market infrastructure, and 
strengthening cooperation among regulatory authorities. The 
Federal Reserve believes that this cooperative approach to 
these issues, which draws on the strengths and broad existing 
authority of the various federal agencies, is likely to be more 
effective at addressing these concerns than assigning authority 
to oversee CDS to the Federal Reserve or any other single 
agency.
                                ------                                


    RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM 
                       ELIZABETH A. DUKE

Q.1. I am gravely concerned, about a situation whereby banks 
are taking advantage of AIG's low credit rating to make a 
windfall off of transactions they have with our nation's mass 
transit agencies. Is the Treasury willing to appoint a senior 
official to work with the Fed, the IRS, and these public 
transit agencies to make sure taxpayer money is protected? 
Given the urgent nature of this situation I would like an 
answer to this question by Tuesday October 28. (Please contact 
my staffer Hal Connolly at 202-224-4744 if you have any further 
questions)
Q.2. Our nation's public transit agencies are potentially 
liable for payments in the hundreds of millions of dollars to 
banks due to the downgrading of AIG through LILO/SILO leveraged 
leases. Does the Treasury and the Fed think it appropriate that 
these banks are in a position to make a windfall at the expense 
of these public agencies? Without action by the Treasury banks 
stand to gain all of the benefits the IRS has declared to be 
inappropriate. Has the IRS backed away from its previous 
position on these leases?

A.1.-A.2. As you indicate, a number of transit authorities have 
issued obligations that were guaranteed in whole or in part by 
American International Group, Inc. (MG) as part of complex, 
tax-driven lease transactions.
    It was precisely for the purpose of limiting the potential 
adverse effects on the economy of the failure of AIG that the 
Federal Reserve, on September 16, 2008, extended a line of 
credit to AIG in the amount of $85 billion. The Federal Reserve 
was concerned that the disorderly failure of MG during the 
current period of economic turmoil and fragile markets would 
have wide-ranging systemic effects and exacerbate the already 
troubled economic situation.
    Since that time, the Federal Reserve, working with the 
Department of the Treasury, has taken additional actions to 
help restore confidence in AIG to allow it to maintain its 
credit ratings and conduct its business while it engaged in an 
orderly restructuring. On November 10, 2008, the Federal 
Reserve restructured its credit facility and agreed to provide 
two additional liquidity support facilities to AIG. At the same 
time, the Department of the Treasury provided an emergency 
injection of capital to the company.
    While the Federal Reserve has used its authority to provide 
liquidity to AIG, the Federal Reserve does not have authority 
to cure the potential technical defaults on the transit 
authority bonds, which are based on the credit ratings of MG. 
The credit ratings for AIG are not established by the Federal 
Reserve, though the actions of the Federal Reserve and the 
Treasury in providing funding to MG have helped to stabilize 
those ratings. We understand that the transit authorities are 
in discussions with lenders to find mutually agreeable ways to 
cure the potential defaults.
    We recognize the importance of mass transit to communities, 
both as a matter of the economic contribution that mass transit 
makes to urban communities in particular and in the effects it 
has on the lives of users of mass transit. This is an important 
issue that we are monitoring carefully.
