[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]

                       THE PRESENT CONDITION AND
                      FUTURE STATUS OF FANNIE MAE
                            AND FREDDIE MAC



                               BEFORE THE


                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                              JUNE 3, 2009


       Printed for the use of the Committee on Financial Services

                           Serial No. 111-38

52-394                    WASHINGTON : 2009
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
WM. LACY CLAY, Missouri                  Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

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

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

                            C O N T E N T S

Hearing held on:
    June 3, 2009.................................................     1
    June 3, 2009.................................................    79

                        Wednesday, June 3, 2009

Berman, Michael D., CMB, Vice Chairman, Mortgage Bankers 
  Association (MBA)..............................................    48
Lockhart, Hon. James B. III, Director, Federal Housing Finance 
  Agency; accompanied by Mr. Edward J. DeMarco, Chief Operating 
  Officer and Senior Deputy Director for Housing Mission and 
  Goals, Federal Housing Finance Agency, and Mr. Christopher 
  Dickerson, Deputy Director for Enterprise Regulation, Federal 
  Housing Finance Agency.........................................    11
Morrison, Hon. Bruce A., Chairman, Morrison Public Affairs Group.    40
Myers, Frances Martinez, Senior Vice President, Fox & Roach/
  Trident, LP, on behalf of The National Association of Realtors 
  (NAR)..........................................................    46
Robson, Joe, Robson Companies, and Chairman of the Board, 
  National Association of Home Builders (NAHB)...................    50
Wachter, Hon. Susan M., Richard B. Worley Professor of Financial 
  Management, The Wharton School, The University of Pennsylvania.    42
White, Lawrence J., Arthur E. Imperatore Professor of Economics, 
  Leonard N. Stern School of Business, New York University.......    47


Prepared statements:
    Kanjorski, Hon. Paul E.......................................    80
    Garrett, Hon. Scott..........................................    82
    Price, Hon. Tom..............................................    84
    Berman, Michael D............................................    85
    Lockhart, Hon. James B. III..................................   135
    Morrison, Hon. Bruce A.......................................   158
    Myers, Frances Martinez......................................   163
    Robson, Joe..................................................   169
    Wachter, Hon. Susan M........................................   179
    White, Lawrence J............................................   186

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    McClatchy Newspapers article entitled, ``Private sector 
      loans, not Fannie or Freddie, triggered crisis''...........   197
    Letter from the Independent Community Bankers of America, 
      ICBA, dated June 2, 2009...................................   201
    Letter from the Manufactured Housing Association for 
      Regulatory Reform, with attachments, dated June 3, 2009....   203
    Letter from the National Association of Federal Credit 
      Unions, NAFCU, dated June 3, 2009..........................   223
Manzullo, Hon. Donald:
    Letter to the Honorable James B. Lockhart, III, Director, 
      Federal Housing Finance Agency, dated April 30, 2009.......   225
    Response letter from the Honorable James B. Lockhart, III, 
      Director, Federal Housing Finance Agency, dated May 8, 2009   228
Royce, Hon. Ed:
    Restricted Fannie Mae Report from 2005.......................   230
Lockhart, Hon. James B.:
    Responses to questions submitted by Hon. Steve Driehaus, Hon. 
      Alan Grayson, and Hon. Donald Manzullo.....................   300

                       THE PRESENT CONDITION AND
                      FUTURE STATUS OF FANNIE MAE
                            AND FREDDIE MAC


                        Wednesday, June 3, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:07 p.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, McCarthy of New 
York, Baca, Miller of North Carolina, Scott, Klein, Perlmutter, 
Carson, Speier, Foster, Adler, Grayson, Himes; Garrett, Price, 
Castle, Lucas, Manzullo, Royce, Biggert, Capito, Hensarling, 
Barrett, Campbell, Neugebauer, McCarthy of California, Posey, 
and Jenkins.
    Also present: Representatives Miller of California and 
    Chairman Kanjorski. The committee will come to order. This 
hearing of the Subcommittee on Capital Markets, Insurance, and 
Government Sponsored Enterprises will be in order.
    I ask unanimous consent that Ms. Kaptur have permission to 
participate in today's hearing.
    Pursuant to a prior agreement with the ranking member, each 
side will have 15 minutes for opening statements today. Without 
objection, all members' opening statements will be made a part 
of the record. I yield myself such time as I may consume.
    We meet today to examine the present condition and future 
status of Fannie Mae and Freddie Mac, which together have lost 
more than $150 billion since the third quarter of 2007. This 
hearing is not only the first hearing in the 111th Congress on 
the two Government-Sponsored Enterprises, but is also the first 
in a series that the Capital Markets Subcommittee will convene 
to review these matters.
    Last summer, Congress completed work on an 8-year project 
by enacting the Federal Housing Finance Reform Act. Shortly 
thereafter, the new Federal Housing Finance Agency placed 
Fannie Mae and Freddie Mac in conservatorship.
    Since then, the Treasury Department has purchased $85.9 
billion in senior preferred stock at the two Enterprises. This 
investment could ultimately grow to as much as $200 billion per 
institution under current agreements.
    In recent months, the Treasury Department has supported 
Fannie Mae and Freddie Mac in other ways as well, by purchasing 
$5 billion of their mortgage-backed securities in 2008, and 
requesting $249 billion more in 2009.
    In addition, the Federal Reserve now has a sizeable 
interest in the success of the two companies, holding more than 
$71 billion of their bonds and $365 billion of their mortgage-
backed securities. In total, these growing taxpayer commitments 
are quite sizeable, if not staggering.
    They have also led many to conclude that the implicit 
government guarantee toward the Enterprises has now become an 
explicit one. Our hearing today will therefore examine the 
government's financial support for Fannie Mae and Freddie Mac, 
and explore the options for the future of their relationship 
with the government.
    From my perspective, the emergency actions taken to date by 
the Federal Housing Finance Agency, the Treasury Department, 
and the Federal Reserve were needed to ensure the continued 
functioning of our Nation's housing finance system during this 
period of considerable economic turmoil. With all of these 
problems and imperfections, Fannie Mae and Freddie Mac have 
ensured that millions of Americans can continue to purchase and 
own their homes.
    While the existence at this time of Fannie Mae and Freddie 
Mac is essential for our Nation's economic recovery, this is 
also an appropriate moment to begin to consider how we might 
modify their mission, operations, and ventures going forward.
    As former Treasury Secretary Henry Paulson has observed, we 
need to use this period while Fannie Mae and Freddie Mac 
stabilize to decide what role they should play in the markets. 
I must, however, caution everyone that this debate will be a 
long-distance relay between Congresses, not a 100-meter sprint 
within the 111th Congress.
    This debate over what roles and functions Fannie Mae and 
Freddie Mac should perform has, of course, raged for many 
years. Many good reform ideas have started to come to light in 
recent months, and we should study them closely.
    Some of our choices include: reconstituting the Enterprises 
as they were before the conservatorship decision; splitting 
them into smaller operating companies like we did with AT&T; 
regulating the prices they charge, like a utility; creating 
cooperative, nonprofit ventures; or revolving them back into 
the government.
    Many have also called for privatizing Fannie Mae and 
Freddie Mac, and there is some precedent for such actions. In 
the 1990's, for example, we enacted a law that allowed Sallie 
Mae to graduate from the school of Government-Sponsored 
Enterprises. While we could do the same here, we ought to move 
    We created Fannie Mae and Freddie Mac because of a market 
failure, and we ought to ensure that any new system of housing 
finance continues to provide a stable source of funding and 
long-term credit to help people to purchase homes.
    In short, we must keep our minds open to all reform 
proposals, and refrain from drawing lines in the sand about 
what each of us will or will not support until we have had the 
chance to consider the pros and cons of the many different 
    That being said, I will use one key factor in my 
examination of these choices: Namely, I want to ensure that 
community banks and retail credit unions continue to have 
access to a neutral source of affordable funding to help them 
compete against large institutions.
    These mortgage providers are important participants in our 
markets, and we must ensure that they continue to have an 
opportunity to help hard-working families to achieve the 
American dream of homeownership.
    In sum, this hearing is timely. Congress has a 
constitutional responsibility to conduct effective oversight of 
the work of the Federal Housing Finance Agency to make sure 
that it is operating as we intended. We also have an obligation 
to ensure that the Executive Branch is effectively allocating 
Federal tax dollars and helping as many people as possible to 
remain in their homes.
    Finally, Congress needs to begin to think about how it will 
structure the government's relationship with Fannie Mae and 
Freddie Mac once we emerge from this financial crisis. I look 
forward to a vibrant debate on these important issues.
    I recognize the gentleman from New Jersey, Mr. Garrett, for 
5 minutes.
    Mr. Garrett. Thank you, Mr. Chairman. I also want to thank 
the chairman for your comments, saying that you are open to 
different ideas with regard to restructuring our mortgage 
finance system. I think the one agreement is that doing right 
and keeping the status quo is unacceptable.
    You know, Fannie and Freddie played a leading role in 
adding fuel to the mortgage finance fire that burned down a 
good portion of our financial system and the economy as a 
whole. By financing roughly 36 percent of the subprime housing 
market, and increasing their leverage, they really used the 
governmental-granted advantages in the marketplace, and then 
ran up a bill to the taxpayers of $85 billion and counting.
    The total bailout costs of Fannie and Freddie are expected 
to climb much higher. When the Housing and Economic Recovery 
Act was passed, an arm-twisted CBO scored the GSE titles of the 
bill as $25 billion, and said there was less than a 50 percent 
chance that a bailout authority would ever be used, and less 
than a 5 percent chance that the costs would ever run over $100 
    Now, the chairman of this committee, Chairman Frank, 
chastised Republicans on the Floor who said that the costs 
would likely go well over the CBO estimates. He said, ``It is 
the most inflationary arithmetic I ever heard.'' Of higher cost 
estimates being used by Republicans, he stated, ``These numbers 
that are being thrown around are simply inaccurate and 
    Well, speaking of inaccurate and misleading, the CBO 
recently updated their scores, and the cost estimates have 
increased by over 1,500 percent. So as we begin this month with 
a more formal debate over regulatory restructuring and 
providing the government with an explicit bailout authority, I 
think it is essential that any conversation begins and ends 
with GSEs, and any regulatory reform that does not include GSEs 
is not true reform.
    Fannie and Freddie were a large part of the problem, and 
reforming them should be a large part of the solution. Also, I 
am very worried that proposals being discussed by the 
Administration and some others to create a so-called systemic 
risk regulator will actually create what amounts to another new 
set of government-sponsored entities.
    By creating a new systemic risk regulator, we could 
essentially establish a dozen new Fannies and Freddies that 
will be too-big-to-fail and have the inherent market advantage 
that will come with that distinction. As our distinguished 
ranking member from Alabama points out, privatizing profits and 
socializing risk is a bad business model, and we should learn 
from our past mistakes and not repeat them.
    So going forward, I do believe it is very important that we 
have a viable and liquid secondary mortgage market to provide 
additional funding so that people can experience the American 
dream of owning their own homes. And one tool that I believe 
that we can do that with--and I may have talked about it here 
before--is covered bonds.
    You know, covered bonds are debt instruments offered by 
financial institutions. They are backed by a collateralized 
pool of mortgages. Investors purchase these bonds, and the pool 
of mortgages are treated as secured collateral.
    Investors also continue to have a full recourse on the 
institution in case there is a failure. This type of 
securitization is widely used in Europe to provide liquidity 
over there, and I believe we can do it here in the United 
States as well.
    I also want to thank Chairman Frank for his comments some 
time ago when he said he would hold a hearing on this important 
topic. And I do look forward to working with him and all my 
colleagues as we continue to move forward on this.
    So I want to again thank the chairman, and thank the 
witnesses as well for coming forward. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Garrett.
    We will now hear from Mr. Scott for 3 minutes.
    Mr. Scott. Thank you, Mr. Chairman. I want to thank the 
chairman and the ranking member for holding this important 
hearing concerning the state of Fannie Mae and Freddie Mac. 
This continues to be of utmost concern to our economy.
    The collapse of these two mortgage giants had a profound 
impact on our markets and total economy. And I am interested to 
hear more details and opinions about the risk of a prolonged 
economic slump, and how long the GSEs plan to proceed in the 
future as well as access their current conservatorship 
    I am further interested to hear what the Federal Housing 
Finance Agency has to say about the future of GSEs, and what 
this Agency believes they should or will look like down the 
line, especially as mortgage markets continue to face turmoil.
    There are many ideas and proposals regarding the direction 
that GSEs should take: making them a government entity or 
absorbing them into another government entity such as the FHA; 
splitting them up into multiple GSEs; or privatization, simply 
eliminating all implicit and explicit government backing for 
mortgage-related instruments.
    The Fannie/Freddie fallout not only affected the economy 
overall, but it affected Main Street as well. Many of our 
Nation's community banks have been hard hit because they have 
held some 85 percent of lenders that held Fannie and Freddie 
    Our community banks are the backbone of communities across 
this country. And this is especially true in my State of 
Georgia, as we are currently experiencing a very large number 
of bank closures. This whole situation is helping to reduce 
bank capital and impede upon the ability of banks to make new 
loans and renew existing ones.
    And I just want to mention one particular situation that 
has raised big questions. When Freddie Mac ignored the two 
leading rating agencies, Moody's and Standard & Poor's, on 
rating the market's securitization in 9 months, relying instead 
on the market's two small agencies, Fitch and Canadian agency 
Dominion Bond Rating Services, that $1 million deal has led to 
AAA ratings. Some close to the deal claim that Moody's and S&P 
lost the Freddie mandate as their rating method used was 
considered too rigorous.
    So the question that has to be answered and dealt with 
today is this: Is it not the role of these agencies to be more 
vigilant in their rating process after getting chastised by 
Congress and the media over the handling of AAA ratings on 
complex securities that began to falter when home buyers could 
no longer pay their mortgages?
    And of course the flip side of that, is that the big credit 
rating agencies may be making some of these institutions jump 
through hoops that aren't necessary.
    Serious questions, and a very timely hearing. I look 
forward to hearing from our witnesses. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Scott.
    We will now hear from Mr. Baca for 3 minutes.
    Mr. Baca. Thank you, Mr. Chairman. I appreciate you 
convening this hearing.
    Congress established Fannie Mae during the New Deal to make 
homeownership more affordable. And they created Freddie Mac 
with a similar purpose in 1970. Neither provides home loans. 
Instead, their purpose is to increase the funding available for 
home mortgage financing, either by providing credit guarantees 
on mortgage-backed securities or by directing investing in 
mortgages and mortgage-related securities through their 
retained mortgage portfolios.
    To further their missions, the GSEs' congressional charters 
granted them unique privileges, shielding them from many of the 
financial standards and tax burdens imposed upon their 
competitors. These benefits created a perception that Fannie 
and Freddie were backed by the U.S. Government, and this 
implicit guarantee also provided them a funding advantage over 
private sector participants.
    Not surprisingly, over time, the GSEs' advantages enabled 
them to dominate the secondary mortgage market. Today they have 
more than $5 trillion in obligations outstanding, an amount 
that is nearly 40 percent of the size of the entire U.S. 
    The systemic risk posed by the size of these entities was 
only magnified by investor perceptions that GSE securities were 
backed by the full faith and credit of the U.S. Government. In 
September, those perceptions became reality.
    On September 7, 2008, shortly after Congress passed the GSE 
regulatory reform legislation, the Federal Government placed 
Fannie and Freddie into conservatorship. That rescue was one of 
the most extraordinary Federal interventions into the private 
sector, and is on track to become one of the most expensive, if 
not the most expensive.
    As part of the GSEs' conservatorship agreement, Treasury 
committed up to $200 billion to purchase preferred stock from 
each company through December 31, 2009. In exchange, Fannie and 
Freddie provided the Treasury with $1 billion in senior 
preferred stock and warrants to acquire 80 percent of each GSE.
    In addition to Treasury purchases of preferred stock, both 
the Treasury and the Fed are also scheduled to purchase 
trillions of dollars' worth of GSE debt in mortgage-backed 
securities. As of May 29th, Treasury has purchased $167 billion 
of GSE MBSs using authority granted under the HERA Act of 2008. 
The CBO estimates in March that the GSEs' titles will cost $384 
billion. The Fed currently holds $81 billion of GSE debt, and 
$507 billion of agency MBS.
    On March 18th, the Fed announced its purchases of agency 
MBSs will total $1.25 trillion by the end of the year. Finally, 
the Treasury has also initiated a credit facility for both GSEs 
to provide liquidity.
    Mr. Chairman, in conclusion, the magnitude of the trillion-
dollar GSE bailout demands our full engagement about the future 
of the GSEs. Congress must work to develop a new model for 
housing finance. Some, like former Treasury Secretary Hank 
Paulson, have endorsed a utility model. Others, myself 
included, have proposed shrinking and privatizing the GSEs.
    Whatever the GSEs' ultimate fate, we can agree that the 
GSEs cannot continue as before. Socializing risk and 
privatizing profit, as Mr. Garrett said, must end. The American 
people demand an end to the bailouts. Any discussion of the 
long-term future of the GSEs must include a bailout exit 
    I would like to thank our witnesses for appearing today, 
and look forward to the hearing and their ideas for a 
transition period for the GSEs. And I yield back the balance of 
my time.
    Chairman Kanjorski. Thank you very much.
    We will now recognize the gentleman from Illinois, Mr. 
Foster, for 2 minutes.
    Mr. Foster. I would like to follow up on Ranking Member 
Garrett's expression of interest in covered bonds. I think we 
should all show some humility in our current situation and look 
laterally at countries that have systems that did not get into 
this mess.
    And in particular, the American Expertise Institute has 
recently had some public presentations and meetings on 
converting the present GSE-based system and mortgage-backed 
security-based system to a variant of covered bonds that is 
known as the Danish system for mortgage origination, which I 
personally think has tremendous potential.
    It has provided an efficient and liquid model for housing 
finance ever since the Great Fire of 1795 in Copenhagen, 
survived numerous booms and busts, and as I say, I can't see 
what is wrong with it.
    There is a fairly worked-out scenario in these 
presentations for actually transitioning Fannie and Freddie 
into this system. And I would be very interested in pursuing 
this, if not in this hearing, in subsequent hearings and 
    Thanks you. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Foster.
    And now we will hear from the gentleman from Delaware, Mr. 
Castle, for 1\1/2\ minutes.
    Mr. Castle. Thank you, Mr. Chairman, and thank you, Mr. 
Garrett, for holding today's hearing.
    I believe debating the future of Fannie Mae and Freddie Mac 
is of importance as these entities have tremendous impact on 
our housing and finance markets. I also believe that we cannot 
neglect talking about the future of other elements of the 
housing market. While the GSEs are important, we also need to 
consider other aspects of housing finance and their role in the 
market moving forward.
    The events that began unfolding last summer have led many 
to believe the public/private business model of Government-
Sponsored Enterprises is inherently flawed. Does this model 
invoke moral hazard, where entities backed by the government 
take unnecessary risks all because they know they will be 
provided a lifeline if things go really bad?
    On the other hand, does this argument apply to all public/
private partnerships, even though some of these partnerships 
have worked well? Perhaps it is not necessarily the model it 
bought, but perhaps some of the practices adopted by the GSEs 
themselves that are in need of reform.
    So the question is raised: What do we do with Fannie and 
Freddie in the future? Should they return to GSE status after 
we have exhausted the conservatorship role? Should they become 
an official government entity? Or do we privatize them and 
eliminate the government backing role altogether?
    I am looking forward to the testimony of the panel before 
us to try and hash out this issue. I also hope that the experts 
before us today will be able to address the future of the 
housing and mortgage market in general, as Fannie and Freddie 
are simply parts of the greater debate this committee needs to 
    Thank you, and I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Castle.
    And now we will hear from the gentleman from California, 
Mr. Royce, for 1\1/2\ minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    I think I have warned 16 times in this committee about the 
danger of government involvement in the market with respect to 
GSEs. The goal of government should be to be a regulator. What 
we did was we replaced political pull with market forces.
    And in 2003, I introduced the first legislation to bring 
Fannie and Freddie under one regulator. In 2005, I got the 
amendment onto the House Floor, frankly, that would allow the 
GSEs' regulator to control for systemic risk, to actually step 
in--which is exactly what the regulators wanted to do. But 
political pull and the lobby by Fannie and Freddie prevented 
this from happening.
    Now we have $6 trillion worth of a mortgage market out 
there. And basically what we did was we allowed a quasi-
political Government-Sponsored Enterprise here to borrow at a 
much lower rate in the market. We allowed them to form a system 
in which they could arbitrage and in which they could build up 
a portfolio of $1.5 trillion.
    And then forces in Congress forced the majority of that 
loan portfolio to be in subprime and Alt-A loans. And when we 
called attention to this repeatedly, we were told, there is no 
risk, or we are going to roll the dice on this risk.
    Well, the consequences have been not only to drive up a 
balloon in the housing market, but with the collapse, to lose 
billions of dollars for stockholders; but more importantly, to 
lose for those who were involved in the housing market, and the 
side effect that this has had on housing prices in the United 
    So the observation I would make first is, I would get ahold 
of any member who is interested in this debate. I would get 
ahold of economist Thomas Sowell's new book, ``The Housing Boom 
and Bust,'' and see the role that Congress played in terms of 
helping create this crisis. And second, I would think long and 
hard in the future about creating political manipulation into 
the market. We should be the regulators. We shouldn't be tying 
the hands of the regulator.
    In 1989, we had, from Freddie Mac, the chairman of that 
organization come up here and say it would risk safety and 
soundness to allow these kinds of portfolios to develop. And 
instead, we allowed a 101 to 1--a 101 to 1 leverage out of 
these institutions, and the resulting collapse, and the 
systemic risk. And we ignored the very institutions and 
regulators that tried to warn us, and we tied the hands of 
those regulators.
    That is the debate we should be having today, and we should 
be learning a lesson from it. I thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Royce.
    We will now hear from the gentlelady from West Virginia, 
Ms. Capito.
    Mrs. Capito. Thank you, Mr. Chairman. I would like to thank 
you for holding this hearing today. It is my hope, as others 
have shared, that this will be the first in a series of 
discussions on the future of the GSEs, Fannie and Freddie.
    As we are all too well aware, the long debate over whether 
or not the GSEs' Federal guarantee was explicit or implicit was 
resolved last fall; due to an overabundance of risk on their 
portfolios, Fannie and Freddie were placed in conservatorship 
by the Treasury and the Federal Housing Finance Agency.
    Since then, the government has set up new management teams 
within the two GSEs to control day-to-day operations, but 
remains in tight control of other overall operations. I look 
forward to hearing the Director of FHFA--did I get that 
right?--on the current status of the GSEs, the role they 
continue to play in the mortgage markets, and the future of the 
two entities.
    The current situation is not ideal, and it is my hope that 
we can return the GSEs to the private markets as quickly as 
possible. What shape or form this will take is unknown at this 
time, but it is clear that the previous business model was not 
sustainable as it allowed the GSEs to take on too much risk, 
leaving the taxpayers to step in when the losses became too 
great. There are many proposals out there for the future, and 
our witnesses will be elaborating upon them.
    One issue that does concern me, and that I have heard from 
numerous constituents throughout the last several months, is 
the effect that adverse market fees from the GSEs are having on 
my constituents' abilities to purchase a home. In some cases, 
these additional fees are actually pricing home buyers out of 
the market.
    I look forward to hearing the Director speak on the genesis 
of these fees and their effect on liquidity in the mortgage 
markets. I look forward to hearing from all of our witnesses 
today, and I want to thank the chairman for holding the 
    I yield back.
    Chairman Kanjorski. Thank you very much, Ms. Capito.
    And now we will hear from the gentleman from Florida, Mr. 
Klein, for 3 minutes.
    Mr. Klein. Thank you, Mr. Chairman. Thank you for holding 
this hearing, and I thank Ranking Member Garrett as well.
    The current downturn has certainly showed weaknesses at 
Freddie and Fannie, and it is important to determine the proper 
structure and goals of these programs going forward. However, 
it is equally important to ensure that FHFA is currently doing 
everything possible to stabilize the mortgage market and 
prevent foreclosures.
    I am particularly concerned about the current condition of 
housing markets where I come from in south Florida, 
particularly because of the lack of the quantity of staff at 
Freddie Mac and Fannie Mae servicing Florida. I have heard from 
plenty of loan modification specialists, law firms, and other 
distressed asset management in my district and throughout 
Florida, that are ready to assist Fannie with the vastly 
increased caseload of foreclosures, modifications, and 
refinancings, yet they are having trouble being approved by 
Freddie and Fannie because of red tape.
    My concern is that foreclosures are occurring because there 
isn't enough staff to do proper loan modifications. And we also 
understand it is unacceptable--and we all know it is 
unacceptable--for families to lose their homes to foreclosure 
because there isn't enough staff to do proper loan 
    I would just like to point out, as I said, that we have had 
some conversations, and we certainly recommend and ask that as 
we work through this difficult time period, that we have the 
staff and support to get these modifications working through 
the process.
    I look forward to hearing the comments and I look forward 
to working with all of our members and the representatives to 
accomplish this. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Klein.
    And now we will hear from the gentleman from Texas, Mr. 
    Mr. Hensarling. Thank you, Mr. Chairman. From my 
perspective as a member of this committee, and as a member of 
the Congressional Oversight Panel for the TARP program, I 
believe there are a number of ``but for'' causes of our 
economic recession.
    None loom larger than the monopoly powers that were granted 
to Fannie and Freddie, coupled with the so-called housing 
mission, that essentially mandated they loan money to people to 
buy homes that ultimately they could not afford to stay in.
    Many of you have said, though, that under H.R. 1427, passed 
in May of 2007, that somehow this situation has been rectified. 
Since that legislation has passed, the conforming loan limits 
have increased to $729,000, increasing taxpayer liability. The 
portfolio limits of the GSEs have been increased to $900 
billion, more taxpayer exposure.
    Their share of new mortgages have gone from 50 percent to 
90 percent, more taxpayer exposure. Taxpayers have now been 
forced to invest almost $87 billion through the preferred stock 
agreements. They are exposed to up to $400 billion under those 
particular agreements.
    The Congressional Research Service has estimated the cost 
of the conservatorship to be $384 billion, at a time when 
Americans are struggling to pay their taxes and keep their 
    I am glad, Mr. Chairman, that you are holding this hearing 
since certainly H.R. 1427 hasn't taken care of the worst of 
Fannie and Freddie. Ultimately, we need to see this 
conservatorship have a time certain to end, and transition 
these Enterprises back to the private market and get the hand 
of government out of this Enterprise that has caused this 
taxpayer debacle for generations to come.
    Thank you, and I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Hensarling.
    Now we will hear from the second gentleman from Texas, Mr. 
Neugebauer, for 1\1/2\ minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I look forward to 
the testimony of our witnesses today.
    And I believe the task ahead for this committee and for 
Administrator Lockhart and his team is, number one, stop the 
bleeding. As obviously you are going to testify, the American 
taxpayers have had to put an extremely large amount of money 
into this entity, and it looks like we are going to have to put 
    Number two, as we go down the road, is how do we keep this 
from happening again? Because certainly we want to take steps 
in the future that do not put us back in the position that we 
are in now.
    Number three, making sure that we develop an exit strategy 
that protects the money that the taxpayers have already 
invested in these entities.
    And number four, while we are doing all of this, though, we 
have to ensure that there is a substitute, another entity, 
another way to ensure that there is not a major disruption in 
housing finance in this country.
    If we do not have a way to transition to a housing finance 
source that will take up the slack--because what we are going 
to see is testimony that basically, the only game in town now 
is Freddie and Fannie and FHA--if we do not have entities in 
place to take up that slack, we will cause another major 
disruption in the housing market at a time when American 
families have already lost a substantial part of their equity. 
We do not want to be in a situation where we are creating that.
    So it is easy to identify the problems that need to be 
addressed. Obviously, many people have reasons why we got here, 
but more importantly, the important question is, where do we go 
from here? I look forward to hearing from the witnesses today 
as to where do we go from here.
    Thank you, and I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Neugebauer.
    And now we will introduce the panel, if I may. I want to 
thank you for appearing before the committee today, and your 
written statement will be made a part of the record.
    Today, the Honorable James B. Lockhart, Director of the 
Federal Housing Finance Agency, will present a single statement 
on behalf of the Agency. Also joining him at the table are two 
of his Deputy Directors: Mr. Edward DeMarco, Chief Operating 
Officer and Senior Deputy Director for Housing Mission and 
Goals; and Mr. Christopher Dickerson, Deputy Director for 
Enterprise Regulation. These two individuals have the 
responsibility for regulating Fannie Mae and Freddie Mac.
    Mr. Lockhart, you are recognized for such time as you may 
consume to make your remarks.


    Mr. Lockhart. Thank you, Mr. Chairman. Chairman Kanjorski, 
Ranking Member Garrett, and committee members, thank you for 
inviting me to speak today about Fannie Mae, Freddie Mac, their 
future, and Federal involvement in the housing finance system.
    With almost $12 trillion in outstanding mortgage debt, 
housing finance is critical to the U.S. economy. As the 
conservator, FHFA's most important goal is to preserve the 
assets of Fannie Mae and Freddie Mac. That is our statutory 
    As the regulator, FHFA's mission is to ensure the 
Enterprises provide liquidity, stability, and affordability to 
the mortgage market in a safe and sound manner. That is also 
our statutory responsibility, as it is the public purpose that 
Congress gave the Enterprises.
    The Enterprises own or guarantee 56 percent of the single-
family mortgages in this country, for a total of $5.4 trillion. 
Given that massive exposure, the best way to preserve their 
assets and fulfill their mission is to stabilize the mortgage 
market and strengthen their safety and soundness.
    Working with the Federal Reserve, the Bush and Obama 
Administrations, and other regulators, that has been our top 
priority since the conservatorship began, and will continue to 
be so. Supporting mortgage modifications and refinancings for 
homeowners into safer mortgages are an important element of 
stabilizing the housing market, and thereby the U.S. economy.
    The form in which Fannie Mae and Freddie Mac exit from 
conservatorship once the housing market is stabilized should be 
addressed by Congress and the Administration, and I think it is 
a great first step to have this hearing.
    FHFA continues to classify Fannie Mae and Freddie Mac as 
critical supervisory concerns. As there were significant risks 
that they would be unable to fulfill their missions, we placed 
them into conservatorship last September. Since then, the 
Treasury Department has purchased $86 billion in their senior 
preferred stock.
    The Enterprises' short-term financial outlook remains poor, 
which will result in additional requests for preferred stock 
investment from the Treasury Department. However, both 
Enterprises have stress-tested their capital or shortfalls, and 
expect the Treasury's commitment to fund up to $200 billion in 
capital for each of them to be sufficient.
    The senior preferred stock purchase agreements have given 
investors confidence that there is an effective guarantee of 
GSE's obligations. In addition, the combined financial support 
of the Treasury Department and the Federal Reserve of over 
three-quarters of a trillion dollars to date for housing GSE 
debt and MBS have ensured they remain liquid.
    Because of this support, both Enterprises have been able to 
maintain a critically important presence in the secondary 
mortgage market. Their combined share of mortgage originations 
in the first quarter of 2009 and also in 2008 was 73 percent. 
That was double the 37 percent in 2006.
    While the Enterprises have continued to support the 
secondary mortgage market, new senior management teams have 
worked with FHFA to establish and implement comprehensive 
remediation programs. The Enterprises have made progress, but 
they face numerous, significant challenges to their operations. 
The staffs of the Enterprises and FHFA have been working hard 
to help to strengthen their safety and soundness.
    In the current mortgage crisis, the Enterprises have 
focused on mortgage availability, mortgage affordability, and 
foreclosure prevention. Loan modifications undertaken for their 
own book of business are critical for eliminating their own 
credit losses and, even more importantly, stabilizing the 
mortgage market.
    The Enterprises and FHFA worked closely with the 
Administration to develop the Making Home Affordable Program. 
Both Enterprises have undertaken a home affordable refinance 
initiative to enable homeowners who are current on their 
Enterprise-owned or guaranteed mortgages to refinance at lower 
rates. FHFA expects both modifications in the refinance 
program, which is expected to really ramp up rapidly by late 
    In my written testimony, I summarize what went wrong in the 
housing and mortgage markets. I identified some lessons learned 
and raised basic questions that policymakers face at this 
    I will now focus on my thoughts on the potential roles for 
the Federal Government in the housing finance market, and some 
principles that I think should guide policy choices going 
    The starting point has to be the future role of the 
secondary mortgage market, which connects global investors to 
local lenders and borrowers. Doing so helps to lower borrowing 
costs for home buyers, in part because large institutional 
investors may be better able to fund mortgages and manage the 
risk in those mortgage portfolios. Whatever options are chosen, 
the country's financial system will continue to require a 
vibrant secondary mortgage market, including the functions 
performed by the Enterprises.
    There are three specific roles in the secondary mortgage 
market. The first role is that of a liquidity provider to the 
secondary mortgage market for mortgage-backed securities. The 
second role is that of a structurer and/or insurer of the 
credit risk of conventional mortgage-backed securities. Private 
firms are limited in their ability to ensure against 
catastrophic events, but government insurance comes with 
significant risks and moral hazards.
    A third role is to alter the allocation of resources by 
providing subsidies to attempt to increase the supply or reduce 
the cost of mortgage credit to targeted borrowers. Such a role 
has really been central to all the housing GSEs, not just 
Fannie and Freddie but the Federal Home Loan Banks, which we 
now regulate. Unfortunately, as the present crisis shows, it 
has had some mixed results.
    With these roles in mind, I would like to turn to what I 
consider are some of the basic principles you have to consider 
as you are looking at the future of the mortgage market and 
Fannie and Freddie.
    The first principle is these institutions should have well-
defined and internally consistent missions, missions that do 
not encourage excessive risk-taking.
    A second principle is that there must be a much clearer 
demarcation of the responsive roles of the Federal Government 
and the private sector in the secondary mortgage market. Any 
Federal risk-bearing should be provided explicitly and at an 
actual, real cost. The old hybrid model, as many of you said, 
of private, for-profit ownership underwritten by an implicit 
Federal guarantee poses a large systemic risk to the U.S. 
economy, as we found out.
    The third principle is to base any organization that 
provides mortgage guarantees or insurance on sound insurance 
principles. That requires strong underwriting, strong capital 
positions, risk-based pricing, and flexibility to react to 
changes in the marketplace.
    The fourth principle is to create a regulatory and 
governance structure that ensures risk-taking is prudent. From 
nearly the first day on my job 3 years ago, I pointed out the 
folly of allowing the Enterprises to have such large 
portfolios, which we did cap, and also the folly of allowing 
them to be legally leveraged on mortgage credit by over 100 to 
1. And of course many others, including many in this room, did 
as well. Congress did provide a strong regulatory structure of 
the housing GSEs as part of HERA last July. But unfortunately, 
it was much too late.
    The fifth and final principle is that the housing finance 
should be subject to supervision that seeks to contain both the 
riskiness of individual institutions and the systemic risk 
associated with housing finance. The latter type of supervision 
would include countercyclical capital and policies that counter 
the private sector's tendency to generate lending booms and 
    With those principles in mind, there are really three basic 
structures for the future of Fannie Mae and Freddie Mac: a 
government agency; a hopefully much improved GSE; and a fully 
privatized firm.
    The first option would be the equivalent of nationalizing 
the Enterprises, which I am opposed to because I believe 
government insurance programs are particularly high risk and 
rife with moral hazards.
    The second alternative would be to keep the Enterprises as 
GSEs, building upon HERA. They could be a public utility or a 
cooperative structure. They could continue with Treasury net 
worth protection or government reinsurance for catastrophic 
risk. But extreme care would have to be taken to prevent the 
inherent conflict always present in the GSE model.
    A third option is to establish purely private sector firms 
to supply liquidity to mortgage markets with or without some 
form of government catastrophic reinsurance. Private firms 
could offer greater competition and improve operational 
efficiency. However, to maintain the level of liquidity the MBS 
market has enjoyed under Fannie Mae and Freddie Mac, a high 
degree of standardization and quality control across firms 
would be necessary.
    I would like to close with a few personal thoughts. Having 
worked at several private sector insurance companies and having 
advised many others, and actually run several government 
insurance programs, I can tell you government insurance 
programs are high risk. They invite the private sector to shift 
risk to the government.
    Among other issues, it is often difficult in a political 
environment to calculate or charge an actuarially fair price. 
It is difficult to resist pressure to broaden the mission and 
prevent inadequately compensated increases in risk-taking.
    Nevertheless, government has an important role to play in 
providing certain types of insurance, especially reinsurance 
against catastrophic risk. But again, that insurance has to be 
prefunded and then actuarially sound, and that is difficult in 
the government.
    The Enterprises and the Federal Home Loan Banks are playing 
a vital role in helping to stabilize housing in the economy 
today. Fannie Mae's and Freddie Mac's participation and leading 
role in the Making Home Affordable Program is extremely 
important in helping to stabilize the mortgage market and their 
own books. As Congressman Neugebauer said, that will help stop 
the bleeding if we can make this program work.
    As markets and the Enterprises stabilize, there will be a 
need to address the complex issues I have outlined in this 
testimony. It is important to get the mortgage market model 
right and the restructuring of the GSEs right for the U.S. 
economy and also for all present and future American homeowners 
and renters.
    I will be happy to answer any questions, as will my 
colleagues. Thank you.
    [The prepared statement of Mr. Lockhart can be found on 
page 135 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Lockhart.
    Mr. Lockhart, you know, part of the problem that we have, 
and I would probably like to clear it up very early, is we have 
never had a definitive set of hearings or a commission 
appointed to designate what the cause of the disaster, the 
economic crisis over the last year, year-and-a-half, has been.
    And I hear many of my colleagues, as I hear other 
commentators throughout our economy, asserting that it was 
caused for several reasons, and quite extreme reasons. I never 
knew that CRA was so extensive within our system that they 
brought down the whole system, but I have heard some people 
make that charge.
    I have also heard people make the charge that Fannie Mae 
and Freddie Mac brought down the system. And I guess I want to 
ask you the question: Is that your opinion? I can express mine, 
that Fannie and Freddie fell after the credit crisis occurred. 
And the credit crisis basically occurred more in the 
securitization in the private markets, particularly of subprime 
loans, than of Fannie and Freddie. They followed in the 
destruction of credit in the country.
    Is that relatively true?
    Mr. Lockhart. There are many, many factors and lots of 
people guilty over this bubble we had in the economy and, in 
particular, the housing market.
    There was excess liquidity. As former Secretary Paulson 
used to say, risk was mispriced, not only in the housing market 
but across financial markets and across financial institutions.
    Certainly, in the housing market, underwriting standards 
fell dramatically and, in particular, the subprime and Alt-A 
market. Most of that did go into the private label securities. 
I have to admit that Fannie and Freddie were big buyers of 
those securities, but only the AAA ones. They and everybody 
else, including the rating agencies, did not do enough analysis 
on those securities.
    Certainly, to keep some market share--and their market 
share actually dropped over about a 3-year period, from over 50 
percent to about 33 percent--they did lower their standards in 
2006 and 2007. They didn't lower them as far as the rest of the 
market, but they did lower their standards.
    I do not think Fannie and Freddie were the cause. As I 
said, there were a lot of reasons for what happened, including 
the poor regulatory structure that OFHEO had. We didn't really 
have the powers to stop them from being 100-to-1 leveraged. We 
actually had an extra capital charge on them. We froze their 
portfolios, and still there were problems.
    There were a lot of different reasons. Regulations: We were 
too slow to get the new legislation. The housing market bubble 
was caused by worldwide financial issues and not just Fannie 
and Freddie.
    Chairman Kanjorski. And as you know, the reform 
legislation, to correct your present agency and give you the 
powers of a world-class independent regulator, that started 
considerably before it actually became law. If I remember, in 
2005 we put that legislation forth and it failed to get Senate 
confirmation, and therefore did not proceed to the President 
for his signature.
    But after that, it was not enacted, either. And not to 
place blame, because I think that is the worst mistake we can 
make in placing blame. It was a Republican Administration, a 
Democratic Administration, a Republican Congress, a Democratic 
Congress. But so we do entertain the facts that at all times 
during this immediate runup to this crisis, that is the 4 or 5 
years of the real estate bubble, the Senate and the House were 
in the control of the other party than they are now, that is, 
the Republican party. Is that correct?
    Mr. Lockhart. Yes, sir.
    Chairman Kanjorski. And the Presidency of the United States 
was in the control of a Republican. Is that correct?
    Mr. Lockhart. That is correct. And that Republican was 
asking for reform from almost to the day he took the job. Yes, 
    Chairman Kanjorski. And his party's Congress did not 
respond. Is that correct?
    Mr. Lockhart. As I understand the history, and I wasn't 
here in 2005 so you will have to bear with me, but they wanted 
stronger legislation than was passed.
    Chairman Kanjorski. There is no question that he wanted 
stronger legislation. But the people who controlled the House 
and the Senate were his own party. Is that correct?
    Mr. Lockhart. That is correct.
    Chairman Kanjorski. Now, I do not want to place blame.
    Chairman Kanjorski. I think if we could leave today's 
hearing--I enjoin my colleagues on the other side that they 
appreciate my attempts here--I think we have to finally draw 
the lines on finding fault. It is not going to get us anywhere.
    The one thing that does disturb me, though, as we talk 
through that, there is a tendency to think that maybe if this 
had been done totally in the private market and government had 
not been involved.
    Do you see that as a viable alternative, that we can just 
let Fannie Mae and Freddie Mac dry on the vine, become prunes, 
and forget about them and let the private market go on? Or will 
there be a negative impact in the United States in terms of 
real estate, ownership of real estate?
    And so that history is correct, Fannie and Freddie were not 
instrumentalities forced upon the American people even though 
one of them was done in the depressionary times. It was to fill 
a void that the private market was not filling. We did not have 
a secondary market in real estate until government took the 
responsibility of establishing Fannie Mae. Is that correct?
    Mr. Lockhart. That is correct. In the recent decade, the 
private market through these private label securities did 
increase their market share pretty dramatically from Fannie and 
Freddie and from the FHA, for that matter.
    Chairman Kanjorski. And they did it--
    Mr. Lockhart. And unfortunately, they did it in an 
unregulated and an unsafe and unsound fashion.
    Chairman Kanjorski. I just want to say, they did not do it 
in a very superior way, did they?
    Mr. Lockhart. That is correct.
    Chairman Kanjorski. If we had to say anything in making the 
comparison between the government agency of creating a 
secondary market and Wall Street left to its own designs, Wall 
Street those last 2 or 3 years became an absolute disaster
    Mr. Lockhart. Right. And I think going forward we need a 
private sector of the market, though. There is a lot of 
activity going on--
    Chairman Kanjorski. Okay. We are going to try Wall Street 
    Mr. Lockhart. A much reformed version with much more 
transparency and much stronger underwriting. One of the things 
we did in 2007 is we told Fannie and Freddie that they couldn't 
buy any more private label securities unless they conformed to 
the nontraditional mortgage guidance, the subprime guidance. 
Those kinds of rules have to come forward so that we do have 
much better transparency.
    Chairman Kanjorski. Last night, I had an interesting dinner 
with an interesting gentleman, and members of the committee 
were there--Mr. Simon, who is a financier, and quite renowned 
in the United States.
    He made a proposal to us, and I think it merits 
consideration. I would like your opinion of what it roughly is. 
He feels that one of the major blows to the securitization 
market was the failure of the rating systems, the institutions 
that were there to rate and did in fact create all these AAA 
ratings that we found out much later on were nonsense.
    And his suggestion and opinion was that we should take up 
forming a nonprofit, governmentally sponsored and supervised, 
super rating agency that does not make money from the issuer, 
but gets paid independently and separately, either through an 
assessment or a fee; and that it have to rate all of these 
bundled securities or securitized operations.
    Have you given any consideration to that type of thought?
    Mr. Lockhart. There is no doubt that the rating agencies 
failed. If you look at the AAAs that Fannie and Freddie bought, 
about 60 percent of them are now junk and only 5 percent are 
still AAA, not on downgrade. So there is no doubt that they 
failed and there is no doubt that they should be reformed.
    I had not really thought about that. There is somewhat of 
an analogy in the insurance world, where the NAIC does rate for 
insurance companies. Whether that works or not, I am not sure. 
It is something that could be considered.
    More importantly, we need to reform the rating agency, and 
we need to get them back to rating and not consulting and 
getting fees for structuring bonds.
    Chairman Kanjorski. Thank you, Mr. Lockhart. I have already 
run over my time. And now I would like to recognize Mr. Garrett 
of New Jersey to proceed with his time.
    Mr. Garrett. Thank you, and I too will not try to lay blame 
or be partisan on any of these things. I appreciate the fact 
that you are just laying out the history of things, that it 
was--the reforms did get through the House. They were requested 
by--well, you were here sometimes. Other people during the Bush 
Administrations were here. I remember Secretary Snow was here 
and a number of people pushing for limitations on portfolio, 
and other limitations as well.
    We were able to get it through the House. It did go to the 
Senate, and then Senator--not President--Obama, I guess, was in 
the Senate at that time, and not being partisan one way or the 
other, just saying that we just couldn't get cloture, as I 
recall, to be able to get that piece of legislation to the 
President's desk.
    Had we done it at that time, perhaps we wouldn't be sitting 
here today looking back to say, why didn't the world-class 
regulator do the job? Because the world-class regulator 
potentially could have been doing the job.
    I also find interesting your comment with regard to whether 
the GSEs or other Federal regulations were part and parcel of 
the cause of it. Just very quickly, you ran down--you said it 
was excess liquidity. I guess that is in part and parcel--
although I am not an economist--due to the excess by the Fed on 
monetary policy.
    You talked about lowering of underwriting standards. And I 
guess that is part and parcel again of the Fed and the Boston 
Fed and others, which instructed Wall Street to lower their 
underwriting standards. And also with regard to the GSEs, I 
appreciate your candor saying that those standards themselves 
were actually lowered at a period of time.
    And so we can't say that this one factor was the cause of 
it. But certainly we can say that this one factor helped to 
exacerbate a problem when they bought up some of these bad 
securities that had bad underwriting standards.
    With that all said, one of my objectives has been to try to 
lower the risk that the GSEs have posed to the taxpayer. Both 
Enterprises have a significant amount of interest rate risk due 
to their hedging practices, with a limited number of 
    We have discussed this before, just a handful that you are 
able to deal with. These interest rate swaps really are 
basically standardized, bilateral transactions to help you 
manage your portfolio and hedge the risk.
    Now, there are new clearinghouses that have been popping 
up, if you will, being established, and they have the potential 
to significantly reduce the counterparty risk posed to the 
Enterprises through these transactions if you were just to 
funnel them through. And of course, you know how that works.
    So could you elaborate how you are working to try to reduce 
the risk to the taxpayer with their counterparty risk through 
clearinghouses like this for these swaps?
    Mr. Lockhart. Counterparty risk is a big issue in the 
financial markets today. There has actually, over the last 
year, been a concentration of counterparties as there have been 
mergers and acquisitions, whether it is the mortgage market, 
the deposit market, or other areas.
    Certainly as the quality of some financial institutions has 
suffered, that has meant that Fannie and Freddie and many 
others have had to concentrate their derivatives activity. 
Fannie and Freddie both hold well over $1 trillion of 
derivatives, as do the Federal Home Loan Banks.
    So one of the concerns we have about counterparty risk is 
what can be done about it. We have certainly talked to them, 
and they are looking very seriously about starting to move some 
of their business into clearinghouses and exchanges to 
diversify the risk and lower the risk.
    Mr. Garrett. The product here is basically a standard 
product that we are dealing with. Right?
    Mr. Lockhart. Right. Fannie and Freddie hedged the interest 
rate risk and the prepayment risk, basically. They used swaps 
to a large extent. Sometimes they used more exotic instruments, 
but they do a lot of interest rate swaps.
    Mr. Garrett. Is there something holding you back, then, or 
is there a timeline that--
    Mr. Lockhart. As you said, these are relatively new 
vehicles. We are looking at them. We want to make sure that 
they are done in a safe and sound manner.
    Mr. Garrett. On another note, with regard to the portfolio, 
which is one of the areas that there was a request 4 years ago 
to try to rein them in, what is the purpose of keeping the 
portfolio where it is now?
    Actually, it has gone up since this whole problem began. I 
know it is supposed to begin to run down starting in 2010, next 
year. But why don't we just begin running that down right now 
and then just say, we are going to eliminate that?
    Mr. Lockhart. The key thing that the portfolio has been 
used for since the conservatorship is to support the mortgage-
backed securities market. Now, obviously, the Treasury has been 
buying a lot. The Fed has been buying a lot. And that is 
extremely important to getting those mortgage rates down.
    Since the conservatorship, we have seen mortgage rates drop 
about 150 basis points, 1\1/2\ percent, to about 5 percent from 
6\1/2\ percent. And part of that has been the Treasury, the 
Fed, and also Fannie and Freddie buying those mortgage-backed 
    Obviously, the Fed and Treasury have much more firepower. 
And at this point, the portfolios are relatively stagnant.
    Mr. Garrett. They are stagnant. But are you actually--well, 
they went up over the course of--
    Mr. Lockhart. They went up, and now they are coming down.
    Mr. Garrett. And so can you give us a timeline projection, 
then, on when they will be--
    Mr. Lockhart. Well, a lot of it will depend on what happens 
in the mortgage market. I mean, to be perfectly honest, what we 
need to do is to stabilize this mortgage market, and then we 
need to figure out, you know, what to do with the portfolios.
    The key job, the number one job, is to stabilize the 
mortgage market. And that is by bringing mortgage rates down. 
It is by modifications. It is by refinancing.
    Mr. Garrett. And I guess that is my last question, if you 
will, is that your overall job--and this is one of your opening 
comments, is what is the job of the conservator. And you said 
it was to preserve the assets of the GSES. What you didn't say 
in any sentence or paragraph after that, and balance it against 
the interest to the taxpayer.
    Do you see that actually--are you charged with that or you 
see that as part of your role?
    Mr. Lockhart. Oh, very much so. If the assets of Fannie and 
Freddie go down, that means more money from the taxpayer.
    Mr. Garrett. Absolutely.
    Mr. Lockhart. So part of the job is to try to, over time, 
limit the draws from the Treasury Department. In my view, the 
best way to do that again is to stabilize the mortgage market 
through modifications and refinancings.
    Mr. Garrett. Yes. And we have had correspondence in the 
past with regard to the last point, and that is as far as the 
statutory authority to the GSEs to enter into these 
modifications. Some outside experts have said that there is not 
that statutory authority to enter those modifications, and in 
fact that doesn't actually inure to the benefit to the taxpayer 
as well as a side issue as well.
    I just want to comment on your statutory authority to 
engage in what--
    Mr. Lockhart. Right. You are asking about the modifications 
that are higher than an 80 percent loan-to-value.
    Mr. Garrett. Right. Right.
    Mr. Lockhart. Our view is that these are the risks that 
they are already holding. They already hold these mortgages. 
And by lowering the payment through a refinancing, they are 
lowering their risk and therefore helping the taxpayer, 
potentially, going forward.
    The guarantee fees on these new mortgages tend to be higher 
than the ones they are replacing. So it is really a benefit to 
the third party.
    Mr. Garrett. My understanding is that Fannie Mae's 
financial statement indicated that would actually increase risk 
for the GSE.
    Mr. Lockhart. Not on refinancings. I think what they may 
have said is that modifications could potentially have the 
impact of increasing short-term losses. But my view is, over 
the long term, they will be a benefit to the GSEs and to the 
    Mr. Garrett. What is your foreclosure rate now?
    Mr. Lockhart. The foreclosure rate is relatively low at 
Fannie and Freddie at the moment. We are talking about 100,000 
    Mr. Garrett. That is on everything. I am just talking about 
what we are talking about here, on the refinance side.
    Mr. Lockhart. On the refinance side it is too early for 
these new refinancings to--
    Mr. Garrett. Oh, really?
    Mr. Lockhart. They haven't missed a payment let alone re-
default. Yes.
    Mr. Garrett. So the figure that I was, I guess, thinking 
about, the 70 percent figure, that is--
    Mr. Lockhart. If you are talking about the historical 
redefault rate at Fannie and Freddie--
    Mr. Garrett. Yes.
    Mr. Lockhart. --it has actually been relatively low, around 
30 percent. But in the last year, it has been raising quite 
rapidly with the downturn in the economy.
    Mr. Garrett. Right. But that is what we are talking about 
with these--with this provision, as far as the modifications.
    Mr. Lockhart. Again, these new modifications are 
significantly deeper than the ones even a year ago. I just saw 
a chart that a year ago in the first quarter, only 2 percent of 
the modifications had payment reductions of 20 percent. This 
quarter, the first quarter of this year, it was 52 percent.
    The modifications have changed so dramatically over the 
last year that it is really hard to use those historical 
numbers to say that we are going to have those high redefaults.
    Now, the economy still has troubles. And certainly the 
reasons for the default tend to be lost jobs, lower income--
    Mr. Garrett. Right.
    Mr. Lockhart. --and the things that are affected by the 
    Mr. Garrett. I appreciate it.
    Mr. Lockhart. Thank you.
    Chairman Kanjorski. We are in the midst of four votes right 
now. They should take probably 30 minutes. And we will recess 
until that time.
    Chairman Kanjorski. The committee will reconvene. And we 
probably will get interrupted very shortly for another vote, 
but we are going to continue questioning while we can.
    Mr. Campbell, you are recognized for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman, and thank you, 
Director Lockhart.
    There is a Bloomberg report out today about a letter from 
then-SEC Chairman Christopher Cox written to you, I guess, in 
January of this year with a number of subjects, including 
suggestions that perhaps Fannie and Freddie are being 
encouraged to make loans that might not be in the best 
interests of the profitability of that entity, or something.
    Are you familiar with this letter?
    Mr. Lockhart. We don't comment on correspondence from Board 
members. I can tell you that Chairman Cox was a member of the 
new Board that was created out of HERA. I can also tell you 
that we worked closely with Chairman Cox over the 3 years that 
I was at OFHEO, and now FHFA, where he was very involved, 
actually, in the Fannie fines that we did about 3 years ago.
    The issue as reported, and I will comment on the issue as 
reported in the Bloomberg article, and the issue, I think, if 
you want to sum it up, is: Does modifying mortgages and 
refinancing them cause damage to Fannie and Freddie? And in my 
view, as I think I said earlier, they sit on $5.4 trillion of 
mortgages. That mortgage book is so large and so important that 
what they can do to stabilize the market will be good.
    Now, one of the problems is, from an accounting standpoint, 
when you modify a loan, they have to take it out of their 
mortgage-backed securities and they have to write it down as if 
it wasn't modified. There is a large deduction.
    There is a short-term cost. My view is if it goes into 
foreclosure, the costs will be worse on that mortgage, but more 
importantly, it will be worse than the neighborhood and it will 
be worse for their $5.4 trillion book.
    So the view I have had, and I share it with the management 
of Fannie and Freddie, is that their number one job at the 
moment is to help try to stabilize the mortgage market.
    Mr. Campbell. Even if that, maybe in the short term or 
whatever, is not the best thing for the financial result of 
Fannie and Freddie?
    Mr. Lockhart. It is really a very short-term negative on 
the financial result because they get to take it back in. In 
fact, that accounting is going to change January 1st of next 
year with the consolidation of all their mortgage-backed 
securities. It is an extremely short-term effect, and then some 
of that actually may be written back.
    Mr. Campbell. Let me ask you, Director Lockhart, if I can, 
could we, the members of this committee, see this letter?
    Mr. Lockhart. I don't think that is appropriate, but I will 
check with my lawyers.
    Mr. Campbell. Okay. Yes. Because I don't--Mr. Chairman--
    Mr. Lockhart. I think it was an SEC letter so it may be 
better to ask the SEC.
    Mr. Campbell. Okay. Mr. Chairman, there was a letter 
written from then-SEC Chairman Christopher Cox to Director 
Lockhart in January. And so that is something I think the 
committee members should be able to see.
    And I will just say I would have a hard time understanding 
why members of the committee, given that Fannie and Freddie are 
under receivership--
    Mr. Lockhart. Conservatorship.
    Mr. Campbell. Conservatorship, sorry; you are correct, my 
bad--would not be allowed to see this letter. But I would hope 
that the chairman and the committee would support that 
    Mr. Lockhart. I can tell you this letter has been discussed 
at the first meeting of the new Board, as the new Secretaries 
came in. We have gone through the contents, and we are 
continuing to look at those issues. And we will continue to 
work through those issues.
    It is an advisory board and they have been very helpful. I 
think it is very useful to have that kind of dialogue. But I 
think to the extent that dialogue gets out into the public, it 
is not as helpful and we may not have as much dialogue in the 
    Chairman Kanjorski. It is a very confidential letter. The 
only people that I know who have it are the press.
    Mr. Campbell. I guess that probably makes my point for me. 
Thank you, Mr. Chairman. I think since we have an oversight 
responsibility, we should be seeing that letter.
    But another question is that I believe the SEC--I think 
your belief, sir, is that we have about $150 billion in risky--
Fannie and Freddie have about $150 billion in risky outstanding 
mortgages. But the SEC believes that it is closer to $1.7 
    How do you reconcile that difference, or why do they feel 
it is so dramatically higher than, I believe, if I have the 
numbers right, that you believe?
    Mr. Lockhart. I don't know where the $150 billion came 
from. It might be that they have about $170 billion in private 
label securities, which are risky. There is no doubt about it.
    They also have the rest of their book, which is well over 
$5 trillion. There are obviously higher-risk mortgages in that 
book. There is some subprime, not a lot, but there are Alt-A 
mortgages, interest-only mortgages, option ARMs and a series of 
other things.
    Mr. Campbell. That add up to about--
    Mr. Lockhart. They don't add up to $1.7 trillion. The SEC 
double-counted some of the mortgages. The number, I would say, 
is about 1.4 out of the 5.4.
    Mr. Campbell. Okay. I would love to ask more questions, but 
I believe my--well, then I will ask a question we discussed 
    It is my understanding that some of the early default 
rates, first payment default, that sort of thing, on loans made 
since the first of the year--so in other words, long after we 
knew about this crisis--at Fannie and Freddie are equivalent to 
some default rates that were done before all of the subprime 
stuff kind of became out there.
    Is that true? And if so, is that part of the strategy of 
helping the housing market by continuing to make loans to 
subprime and other lower-qualified buyers and lower 
underwriting standards?
    Mr. Lockhart. It does no one any good and it is one of the 
lessons we really learned in the last 2 years. To make a loan 
that we think they are gong to default on, or Fannie and 
Freddie think they are going to default on, hurts the 
individual. It hurts the neighborhood. It is just terrible. It 
is certainly not part of the strategy to make loans that we or 
Fannie and Freddie think there are going to be defaults on.
    Fannie and Freddie have tightened their credit standards 
over the last year, since the conservatorships. Frankly, they 
have gotten grief from many groups for doing that. I think it 
is appropriate. You have to take a balanced look at the credit, 
and it certainly does no one any good to make a loan that 
someone is going to default on.
    Mr. Campbell. Do you know what the first payment default 
rate is?
    Mr. Lockhart. I don't have the number in front of me. I can 
provide it to you. It is not only a function of the loan, but 
it is a function of the economy. It also, as I told you 
earlier, can be a function that the underwriting was poorly 
done. In that case, Fannie and Freddie have the right to return 
it to the financial institution that sold it to them.
    Mr. Campbell. Thank you for your forbearance there, Mr. 
    Mr. Garrett. Will the gentleman yield on that--
    Mr. Campbell. I am happy to yield whatever time the 
chairman will allow me to have.
    Mr. Garrett. Maybe, actually, it would be--along the 
analogy that there may be some costs involved short-term on 
some of the aspects of things, but in the long term, the 
overall goal, overarching goal, is just to stabilize the 
marketplace, maybe it is not a bad thing--from that analysis, 
it may not be a bad thing to say, we are going to underwrite 
loans on rates--at terms that aren't necessarily likely to get 
paid back because it will prop up the economy over the long 
term. I am just--
    Mr. Lockhart. Again, Congressman, a default doesn't help 
anything, and it certainly doesn't help individuals, 
neighborhoods, and--
    Mr. Campbell. Particularly a first payment default, if that 
information that I have is correct.
    Mr. Lockhart. Right.
    Chairman Kanjorski. We have two votes. We will take a 
recess that will probably consume at least 15 minutes, and then 
we will reconvene. The committee stands in recess.
    Chairman Kanjorski. The subcommittee will reconvene.
    We will recognize Mr. Hensarling of Texas for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Lockhart, in your testimony, you stated that, ``As 
conservator, FHFA's most important goal is to preserve the 
assets of Fannie and Freddie. But as regulator, FHFA's mission 
is to ensure liquidity, stability, and affordability in the 
mortgage market.''
    It seems to me that kind of gets to the crux of the matter. 
How do you reconcile these two missions? How are you serving 
two masters?
    Mr. Lockhart. We actually reconcile it pretty easily 
because the safety and soundness that you left out of that 
statement is also important on the mission side. And certainly 
conserving assets is a safety and soundness principle.
    What my view is, and this is critical, is that the best way 
to conserve assets for Fannie and Freddie is to be able to be 
aggressively modifying loans, refinancing loans, and ensuring 
the liquidity in the mortgage market. They sit on $5.4 trillion 
of mortgages and, if the market continues to fall, those losses 
will continue to mount.
    The best way to conserve assets is for them to continue to 
fulfill their mission of providing liquidity, stability, and 
affordability to the housing market.
    Mr. Hensarling. Under what scenario would you recommend an 
alteration of the status from conservatorship to receivership? 
Already we are at about $85 billion of taxpayer exposure--$400 
billion has been authorized. But yet Uncle Sam is 80 percent 
owner of the GSEs, ostensibly really on the hook for $5.3 
trillion, I believe.
    Is there a scenario under which you say conservatorship 
simply is not working?
    Mr. Lockhart. We had looked at receivership versus 
conservatorship last August and September as we considered what 
to do with Fannie and Freddie, and we weighed the pluses and 
minuses. It was our view that conservatorship was the better 
alternative for the mortgage markets and for the U.S. economy, 
and that is still my view. If we are going to stabilize the 
mortgage markets, receivership might have the wrong impact and 
might destabilize the markets.
    At this point, we are not contemplating receivership. I 
really don't see the advantage of receivership versus 
    Mr. Hensarling. Is the taxpayer on the hook for the $5.3 
trillion or not?
    Mr. Lockhart. The taxpayer is on the hook for the senior 
preferred facility that the Treasury Department negotiated, 
which is $200 billion each to Fannie and Freddie.
    Mr. Hensarling. But the $5.3 trillion, the Federal 
Government is an 80 percent owner. Correct? Of the GSEs?
    Mr. Lockhart. The Federal Government has an 80 percent 
warrant. It has never exercised that warrant, but it has the 
right to exercise that warrant. It is a common warrant. And as 
you know, if you are a shareholder, you are not responsible for 
the debts of a company.
    Mr. Hensarling. Well, it is a very unique shareholder at 
the moment.
    It seems to me that part of the problem that was created 
was the whole implicit versus explicit guarantee. And we know 
that one of the reasons that Fannie and Freddie seemingly are 
the only game in town, and their market share of new mortgages 
is roughly doubled, is because of that guarantee.
    Is there any scenario where you would recommend that the 
full faith and credit of the United States be behind all $5.3 
trillion of MBS?
    Mr. Lockhart. The implicit guarantee was a problem. We 
talked about it in this room many times, and other places, that 
there was no market discipline for these two companies because 
of that. And we didn't have the powers as others regulated to, 
for example, control their growth, and the market wasn't doing 
it, either.
    My view is that there is no reason at this point to make 
that explicit. I think the $200 billion senior preferreds give 
an effective guarantee, and I think that is all that is 
necessary at the moment. Certainly, there are buyers of their 
debt and mortgage-backed securities--
    Mr. Hensarling. Don't you think the buyers of this paper 
think that, once again, Congress would come to the rescue and 
bail them out?
    Mr. Lockhart. The buyers of this paper think that there is 
strong support from the U.S. Treasury through the senior 
preferred, yes.
    Mr. Hensarling. So what is the exit strategy?
    Mr. Lockhart. The exit strategy is partially the new 
structure we have been talking about here today. And you can't 
do that, in my mind. You can't bring them out of 
conservatorship until the market is stabilized and you can see 
a profitable future.
    There may be a portion, as in receivership, that gets left 
behind in what you might call a bad bank, if you will, that is 
protected by the senior preferred. And then there is a bridge 
to a new organization.
    Mr. Hensarling. Thank you. I see I am out of time.
    Chairman Kanjorski. The gentlelady from Illinois, Mrs. 
    Mrs. Biggert. Thank you, Mr. Chairman.
    I have several questions, Director Lockhart, so if we could 
run through them rather quickly in my time allotted.
    Mr. Lockhart. Okay.
    Mrs. Biggert. Number one is many consumers in my district 
are thinking long and hard about purchasing a condo based on 
all of the new GSE requirements, which are also causing strain 
for home builders and community bankers. You know, so many 
people start and then they say, well, I am just not going to go 
through the process when they get into that.
    Could you comment on that?
    Mr. Lockhart. The GSEs have historically had standards for 
a new condo that 70 percent has to be pre-sold. During the 
period when they lowered the credit standards in many areas, 
they lowered the credit standard there as well. Now, they have 
restored that old standard.
    In some markets, there is a big issue of very empty condos. 
Again, it doesn't make sense to make a loan that might go into 
default. So, they continue to work with condo developers, and 
to the extent that they see that it is a good project, they can 
bend and change those rules. But it is something that they 
think, from a safety and soundness standpoint, makes sense.
    Mrs. Biggert. So it is a waiver, or just bending the rules?
    Mr. Lockhart. It would be a waiver. Bending the rules is 
probably not the right phrase. Basically, they look at 
projects, and to the extent that they see that it is a good, 
sound project, they will make the loans.
    Mrs. Biggert. Thank you. And why is it that nonprofit 
social services in--this is in Illinois--who provide housing to 
very-low-income people and families with disabilities can't 
qualify for lower refinancing rates? You know, these are multi-
family houses or homes that are now considered commercial 
versus home-occupied properties. And why is that designation 
for them?
    Mr. Lockhart. I am not sure about that. I am going to have 
to look into that. I really had not heard about that issue 
    Mrs. Biggert. Okay. Would you get back to me? Thank you. 
Then another Illinois issue is why is it that Fannie and 
Freddie still have a policy, for example--in the State of 
Illinois, they only permit a handful of law firms, and I think 
in Illinois it is two, to handle foreclosures? And this 
continues to bottleneck the system, it is anti-competitive and, 
I think, a disservice to lenders and sellers and borrowers.
    Mr. Lockhart. I am not sure about the situation in 
Illinois. But I know in some other States, they are trying to 
expand their legal representation. Historically, there weren't 
a lot of foreclosures. Now that we are seeing, unfortunately, a 
pretty rapid growth in them, they too will be looking at how to 
more expeditiously work through the issue.
    Mrs. Biggert. Is that something--is there any regulation on 
this, or is it just--
    Mr. Lockhart. Not that I'm aware of. We will certainly go 
back to ask Fannie and Freddie about that issue.
    Mrs. Biggert. Okay. Then why is it that the home valuation 
code of conduct has been implemented without the traditional 
public scrutiny and review? It seems like this new policy 
wasn't vetted through Congress, but only on a side deal made 
with the officials from the State of New York.
    You know, I think it really is a dramatic policy that could 
severely impact many small businesses, in my district and 
    Mr. Lockhart. The new appraisal code actually is by Fannie 
and Freddie and they have historically had appraisal codes. 
This is a strengthening of that code and it was done after a 
lot of comment. They received many comments from a whole series 
of different groups and they made significant changes in the 
appraisal code from what they had originally agreed to.
    It is really designed not to hurt small businesses. What it 
is designed to do is in many ways the opposite, that is, to 
take pressure off appraisers to do bad appraisals or to do too 
high an appraisal.
    There were a lot of problems that went on in the last 3 or 
4 years in the housing market, and one of them was appraisal 
fraud. This code was designed to help reduce that. Chairman 
Kanjorski has obviously been working on--
    Mrs. Biggert. Right. He is head of--yes.
    Mr. Lockhart. --a companion piece of legislation as well, 
and we applaud that effort. Certainly, Fannie and Freddie will 
comply with it.
    Mrs. Biggert. Then just quickly, what is the compelling 
reason to increase consumer fees?
    Mr. Lockhart. If you are talking about the fees related to 
guarantee fees that Fannie and Freddie have in place, they have 
a 25 basis point adverse market fee that they have had for a 
while. They were going to raise that another 25 basis points 
after the conservatorship. They decided not to.
    They have also done some risk-based pricing. So where they 
have raised fees is because the risks are higher. This is the 
balance of trying to conserve assets versus helping the 
mortgage market. There are things that have to be done there.
    We have watched what they have done, and certainly we have 
talked to them about what they have done. We are trying--and 
they are very much trying--to achieve balance between safety 
and soundness and mission.
    Mrs. Biggert. Well, thank you. There is no question that we 
need a GSE reform package. I don't know that we want to have 
the taxpayers eternally bailing out all of these various 
companies, including the mortgage giants. So thank you very 
much for being here.
    Mr. Lockhart. I agree with you, Congresswoman.
    Chairman Kanjorski. Thank you very much, Mrs. Biggert.
    And now we will hear from Mr. Adler from New Jersey for 5 
    Mr. Adler. Thank you, Mr. Chairman.
    Mr. Lockhart, I want to follow up on some questions on some 
of the dialogue I heard earlier. My sense is that mortgage 
insurers lack the capital to underwriting new mortgages. I am 
wondering what you suggest the FHFA could do to solve that 
problem for America.
    Mr. Lockhart. That is a good question. As you know, Fannie 
and Freddie cannot write mortgages above 80 percent loan to 
value so they have relied historically on mortgage insurers. In 
the more recent past, there was something called piggyback 
mortgages, but those have totally disappeared.
    They have relied on mortgage insurers to make greater than 
80 percent loan to value mortgages. The mortgage insurers, like 
many other players in the mortgage market, have suffered some 
very significant losses, and their capital has been depleted. 
And that has meant that they can do less mortgage insurance 
than they have in the past, and rightfully so. They have 
tightened their standards as a result.
    And that has meant that Fannie and Freddie can make less 
loans in that space, which historically has been an affordable 
space. And we have been working with the mortgage insurers, 
``we'' being FHFA. Fannie and Freddie have also worked with the 
mortgage insurers. FHFA in particular has been working with the 
Treasury Department, and we are looking at whether there is 
some mechanism under the TARP funding to help them get back 
into the marketplace and help bring some more liquidity to the 
mortgage market.
    Mr. Adler. Do you think the TARP is a proper vehicle to 
achieve more--
    Mr. Lockhart. It is certainly well within the philosophy of 
the TARP that was related to mortgages and housing as one of 
the key target markets for the TARP funds. We have been talking 
to Treasury to see how it is structured because it is 
    The TARP banks all have Federal regulators. The insurance 
companies, as you know, do not have Federal regulators. It was 
the Federal regulators that made the recommendations to the 
Treasury team. We are working our way through the various 
issues there.
    Mr. Adler. Leaving aside TARP for a second, are there other 
governmental solutions, congressional solutions, you would seek 
for us to consider that would try to right the situation?
    Mr. Lockhart. My view is that the better mechanism would be 
TARP. It is difficult to see, as these are State-regulated 
entities, what Congress could do to help.
    Mr. Adler. I think there is enormous concern that Fannie 
and Freddie are big, and maybe too big. There is some 
discussion that maybe we need to have a few smaller entities to 
provide the GSE service that Fannie and Freddie have 
traditionally provided. Do you have any view on that?
    Mr. Lockhart. I have always said that their portfolios are 
too big. One way to shrink them would be to shrink their 
portfolios over time, and that is part of the senior preferred 
agreement. I don't think it should be done right away. I think 
we need to get through this crisis first.
    There are proposals on the table that say maybe there 
should be more GSEs or more players in the secondary mortgage 
market space. I think that is something that has to be looked 
at. I really have not formed an opinion one way or the other, 
but it definitely should be looked at.
    Mr. Adler. I am sure we are going to look at it. Thank you 
very much. I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Adler.
    And now we will hear from the gentleman from California, 
Mr. Royce.
    Mr. Royce. Thank you very much, Mr. Chairman.
    I think when we look at the factors that created this 
economic catastrophe here, I don't think anybody says there was 
a sole cause.
    I think most economists believe that one of the major 
causes--besides Fannie Mae and Freddie Mac--one of the major 
causes was the Fed funds rate in Europe and here in the United 
States, the central banks setting a negative interest rate when 
adjusted for inflation for 4 years running. There is no way 
that wouldn't cause a housing bubble.
    But the question about the involvement in Fannie and 
Freddie purchasing subprime, purchasing Alt-A loans, purchasing 
the instruments that otherwise would not maybe find ready 
buyers out there, that is unique. And that is a part of their 
role as Government-Sponsored Enterprises, really, that they 
evolved into.
    And as I said, originally in 1989, they wouldn't go near a 
lot of these practices, and especially wouldn't go near the 
idea of buying these things for their own portfolio. But then 
that process changed, and politics took over.
    What I wanted to ask about--and I will mention a couple of 
other factors as well.
    I don't think anybody says it was solely Fannie and 
Freddie. But a number of economists worry about the amount of 
bullying of the market that went with CRA in terms of the 
direction of loans to be made.
    There is a lot of worrying about what we placed in statute 
in terms of the NRSROs, in terms of the credit-rating agencies, 
in the way in which we replaced by statute what otherwise would 
have been done by market discipline.
    The implication there was that because these were 
government-sponsored, or because the government was engaged in 
setting up these standards, that it removed market discipline 
from the equation. And that helped compound the problem. This 
is the root of my question, and I wanted to ask this of Mr. 
Lockhart and Mr. Dickerson.
    I think one of the most telling statements of the GSEs' 
impact on the entire mortgage market came, for me, from a 
former Freddie Mac employee, who mentioned that the executives 
at the company understood that when they began purchasing junk 
mortgage-backed securities, as he called them, based on 
subprime and Alt-A mortgages, they were sending a clear message 
to the market that these were in fact safe investments.
    In other words, if the duopoly that controls most of the 
market is now going out and buying this from Countrywide, it is 
a message to the market that these have been analyzed as safe.
    As you know, prior to that, Fannie and Freddie were 
exclusively known for buying more conserve conforming loans. So 
when they began purchasing junk mortgage-backed securities, it 
was a clear deviation from their prior endeavors.
    Do you believe the executives at Fannie and Freddie 
understood the message they were sending when they began to 
invest in junk mortgages, and especially at such a large scale?
    Mr. Lockhart. They were investing in these private label 
securities that had subprime, Alt-A, option ARMs, and other 
higher risk mortgages that were nontraditional mortgages. There 
is no doubt about it. They stayed in the AAA space. As it 
turned out, they and the rating agencies' models failed 
    Yes, they probably had some endorsement factor by buying 
them. There is no doubt about that. Whether the management 
realized it or not, I cannot speak for them. I can tell you, to 
pick up your other point, that they did get affordable housing 
goals credit from HUD for buying these securities. They thought 
they were profitable. They were buying them because they 
thought they were profitable. It also did help them to get 
those credits.
    Mr. Royce. I wanted to go to something that the Treasury 
Secretary mentioned; former Secretary Paulson actually said 
this. And this has to do with the three objectives that he 
thought we should have in terms of a reformed GSE structure. I 
will ask Mr. Dickerson about this, too.
    These three objectives are: no ambiguity as to government 
backing; a clear means of managing the conflict between public 
support and private profit; and a strong regulatory oversight 
of the resulting institution, taking politics out of the 
regulatory oversight function, and allowing the regulators to 
actually do their job.
    Now, going forward, do you agree that these three 
objectives should be achieved? And what do we risk if we fail 
to meet that task in the future?
    Mr. Lockhart. I definitely agree with the three objectives. 
I believe I incorporated them in my five principles as well. It 
is extremely important to get it right. The ambiguity between 
public and private and the ambiguity between mission and safety 
and soundness helped cause some of the problems we have today.
    As we go forward, we are going to have to really 
concentrate on what I said were five principles and what he 
said were three, to make sure that we can recreate the 
secondary mortgage market in this country in a safe and sound 
    Chris, do you want to--
    Mr. Dickerson. Right. I would agree with that. Certainly, 
the need for strong regulatory oversight is going to be a need 
that we will need to continue, with no ambiguity as far as the 
    Mr. Royce. Thank you very much.
    Chairman Kanjorski. Mr. Manzullo, for 5 minutes, please.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Mr. Lockhart, I personally want to thank you for the phone 
conversation that we had several weeks ago concerning the home 
valuation code of conduct. But I am very disappointed in the 
answer that I got to our letter dated April 30th under your pen 
on May 8, 2009.
    The ostensible purpose of the home valuation code of 
conduct, as set forth in your news release of December 23, 
2008, is to improve the reliability of a home appraisal. My 
question to you is: If a homeowner gets an appraisal that he 
doesn't like, what is his remedy?
    Mr. Lockhart. If a homeowner gets an appraisal he doesn't 
    Mr. Manzullo. That is correct. What is his remedy?
    Mr. Lockhart. His remedy is to try to get another 
    Mr. Manzullo. That is not correct. If you take a look at 
    Mr. Lockhart. And a different lender.
    Mr. Manzullo. Well, he would be forced to go to a different 
    Mr. Lockhart. Yes.
    Mr. Manzullo. Well, that--
    Mr. Lockhart. The lender has the right to make the decision 
whether they want to make--
    Mr. Manzullo. No. I understand that. But what if the lender 
is open to another appraisal?
    Mr. Lockhart. What if the lender is open to another--
    Mr. Manzullo. That is correct.
    Mr. Lockhart. My view is that the lender cannot shop around 
for appraisals.
    Mr. Manzullo. That is not--
    Mr. Lockhart. That is one of the big problems we had in the 
last 2 or 3 years.
    Mr. Manzullo. Right. I understand. The other problem is 
this: I would refer you to page 3, no. 9. We discussed this at 
length on the telephone and you gave me no answers in the 
written inquiry:
    ``If an appraisal comes back that is an error, the only way 
that you can get another appraisal, second or subsequent 
appraisal, is if there is a reasonable basis to believe that 
the initial appraisal was flawed or tainted, and such basis is 
clearly and appropriately noted in the loan file; or unless 
such appraisal or automated valuation model is done pursuant to 
written, pre-established, bona fide pre- or post-funded 
appraisal review or quality,'' etc., etc.
    Your inability to understand my question and the inability 
to answer is based upon the fact that I don't think that your 
organization knows anything about real estate closings.
    You know, the people who came up with this rule--
    Mr. Lockhart. The people who came up with this rule are the 
biggest mortgage lenders in this country.
    Mr. Manzullo. Well, that is interesting.
    Mr. Lockhart. It is Fannie and Freddie that came up with 
the rule.
    Mr. Manzullo. I understand. I understand that. But my 
    Mr. Lockhart. The point is that if there is a mistake, the 
mistake can be--
    Mr. Manzullo. Not under your rules. If you read--
    Mr. Lockhart. If there is a problem, every State has an 
appraiser regulatory board. They can go to that.
    Mr. Manzullo. So here we are. We are trying to close a real 
estate sale and there is a big problem with an appraisal. Let 
me give an example.
    In a townhouse area that I know, end units are selling for 
$500,000 and inside units for $470,000. And an end unit just 
sold for $350,000 because the party had died and it was out-of-
State heirs and they were in a hurry in order to get that sale 
    So the appraisal comes in at $350,000. And the guy who 
wants to sell a townhouse that is an end unit that should be 
selling for around $500,000, under these rules--I mean, these 
are your own rules here--he has to either go to another lender, 
which is absurd under the circumstances, or he has to show a 
reasonable basis to believe that the original appraisal was 
flawed or tainted.
    I mean, your rules can purposely devalue a home that 
somebody is trying to sell because you have so much bureaucracy 
tied up in it.
    Mr. Lockhart. If the appraiser is a professional, he will 
have looked at the circumstances of that $350,000 sale.
    Mr. Manzullo. Ah, that is not correct. That is not correct 
because you may have somebody who may not know that the 
original owner died, and that it was a fire sale.
    I mean, my whole point here is if your job is to come up 
with a fair appraisal, which you say to improve the reliability 
of home appraisals, there is no recourse in here for the 
homeowner. And the homeowner doesn't choose who the mortgage 
company will be to say, let's get another appraisal. Somehow 
you think that is collusion. And I think that is just a lack of 
foresight on the part of the people who came up with the 
    Mr. Lockhart. A lot of this regulation is based on the 
USPAP, as you know, and that--
    Mr. Manzullo. Based on the what?
    Mr. Lockhart. The U.S. appraisal practices that have been--
    Mr. Manzullo. Well, I understand that. But that is a 
methodology of doing it, in fairness. But I am just talking 
about--it is a very simple situation that I brought up.
    Mr. Lockhart. I would be happy to see your proposal. We 
will certainly forward it to Fannie and Freddie.
    Mr. Manzullo. I would like you to answer my letter, number 
one. And number two, we asked in there the number of banks that 
actually own these appraisal--
    Mr. Lockhart. We tried to answer your questions in the 
letter. If there are some areas that you feel that we didn't--
    Mr. Manzullo. I would like to submit this under the 
authority of the Chair, if it is okay with Mr. Kanjorski, and 
force you to answer my questions. I mean, one of the basic 
questions in there--
    Mr. Lockhart. I think we tried to answer your questions.
    Mr. Manzullo. If I may finish.
    Mr. Lockhart. If there are some that you feel we haven't 
answered as well as--
    Mr. Manzullo. Well, you haven't answered. I mean, just take 
a look at my questions and your answers to them. One of my 
questions was very simple: How many banks actually own AMCs? 
And you said, well, we don't know. Well, would you consider--
    Mr. Lockhart. We don't know, but we will try to find out 
for you.
    Mr. Manzullo. Yes. Well, that is not what you told us in 
the letter.
    Mr. Lockhart. Well, that is what I am telling you now.
    Mr. Manzullo. Well, then, I would like--would you consider 
regulations forcing any bank that owns an AMC to disclose that 
so that you can avoid any collusion, which is the purpose of 
this document? Would you consider regulations to that effect?
    Mr. Lockhart. We don't have powers over banks. We only have 
powers over Fannie and Freddie.
    Mr. Manzullo. Oh, no. You could make the suggestion, or you 
could even put it into an amended rule if your whole purpose is 
to stop collusion. Wouldn't you agree with that?
    Mr. Lockhart. Excuse me?
    Mr. Manzullo. I mean, you could amend your rule here, 
couldn't you?
    Mr. Lockhart. It is Fannie and Freddie's code, not--
    Mr. Manzullo. No. I understand that. But you are the 
regulator for them.
    Mr. Lockhart. As I said earlier, Congressman Kanjorski is 
working on legislation in this area. If there is something that 
you feel that Fannie and Freddie did not do properly, what 
Fannie and Freddie were trying to do, and I think it is an 
extremely important role that, frankly, they didn't do as well 
the last two or three, is set better standards in the 
    Mr. Manzullo. No. I understand. But what--
    Mr. Lockhart. And that is what we are really trying to do 
here. And to the extent--
    Mr. Manzullo. But what you gave here was banks--you gave 
banks the sole authority to pick the appraisers. That is what 
you did.
    Mr. Lockhart. No. I don't think that is what we did at all.
    Mr. Manzullo. Well, that is what you did because it is the 
bank that chooses the appraiser either through an in-house 
appraisal company that the bank owns or through picking 
somebody else.
    Mr. Lockhart. What we tried to do is definitely separate 
the lending officer from the person who was choosing the 
    Mr. Manzullo. Well, that is like asking people to go to 
separate restrooms. I mean, that doesn't work. You know that 
doesn't work. I mean, if you had the opportunity to stop 
collusion, you would say, look, the banks cannot own these 
AMCs. Wouldn't you agree that would be the better way to do 
    Mr. Lockhart. Again, it is up to the bank regulators as to 
the ownership of AMCs.
    Mr. Manzullo. No. I know. But you could have made that 
suggestion, could you not?
    Mr. Lockhart. We can make suggestions, but it wouldn't have 
the power of a regulation.
    Mr. Manzullo. No. I understand that. But I mean, do you 
understand what I am trying to get at here?
    Mr. Lockhart. I certainly understand your concern in this 
area, and certainly will try to respond. We will be happy to 
have another meeting with you to go through these issues to 
figure out what you think should be changed in the code that 
would make it more responsive to your needs.
    Mr. Manzullo. Fair enough. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Manzullo.
    And if I may recognize for a motion Mr. Royce.
    Mr. Royce. Just for a second, Mr. Chairman. I would like to 
introduce for the record a highly confidential restricted 
report from 2005 that Fannie Mae staff presented to management 
at that time which showed the tradeoffs between staying the 
course and maintaining strong credit discipline in the company 
versus accepting higher risk, higher volatility, and higher 
credit losses in order to drive up profits for their 
    Chairman Kanjorski. Without objection, it is so ordered.
    And now we will recognize the gentleman from California, 
Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Kanjorski. And I 
have great respect for the chairman. We just happen to disagree 
on this one issue, which is very unusual.
    I did write you a letter, and I appreciate your response. 
But I have read the letter several times, and it basically 
boils down to one sentence, your response: ``Business practices 
have been adjusted, and each market participant can adapt to a 
more responsible system that avoids coercion of appraisers and 
reduces the opportunity for fraud.''
    And I guess the problem I have with this is I know a lot of 
Realtors and mortgage brokers and appraisers--I have been in 
the real estate business since I was in my early 20's--who are 
really good people. And it seems like we have struck a deal 
here between the attorney general of New York--and perhaps 
fraud is prevalent in New York; I don't know--and your Office 
that impacts 80 percent of all the loans made in this country, 
    It didn't go through the Administrative Procedures Act or 
the Regulatory Flexibility Act, which I think normally it 
should have. And I am really bothered that we are in a very 
difficult real estate market--I mean, most of the people I know 
are somewhat involved in development or real estate; I was a 
real estate broker and a developer since I was in my early 
20's--and everybody I know is doing pretty badly out there.
    I know banks are suffering out there because they are 
having to foreclose homes and they are having to shove them on 
the marketplace, which is further declining the value of homes 
out there that are for sale. And I think it is problematic and 
ever reaching a real bottom in the market so the market can 
somewhat recover.
    And if we are going to look and say, what can we do that 
really helps consumers? What can we do that is really fair to 
business people and everybody in a broad base? It seems like we 
are going in the wrong direction. This is just my opinion.
    You could have a mortgage broker who has a client, and they 
are really trying to shop for the best loan that they possibly 
can. But they can't even shop for the best loan and provide an 
appraisal associated with it that lenders can look at, and 
where they can determine where they can really get the best 
deal for their client because now we solely have to rely on the 
bank to do the appraisal.
    Now, when I was a developer, building subdivisions, that 
was very common. You would go a bank and the bank would do 
their appraisal on your subdivision. But a subdivision is 
altogether different and much more complicated than making a 
loan on an existing single-family home or a new home that has 
just been completed and you can establish some reasonable fair 
market value.
    One has much broader pitfalls and more areas that can go 
wrong for a lender when you are dealing with a subdivision than 
when you are dealing with an individual home.
    And I just--I am really concerned that--we are dealing with 
a very difficult marketplace. We are dealing with consumers who 
are having very difficult times even getting loans today, as 
you know. They have to have stellar credit to get a good loan, 
and if GSEs weren't in the market, they would be making no 
loans in California, to be quite honest with you, because they 
are the only ones really willing to lend, especially in a 
jumbled marketplace. Most lenders can't make a fixed 30-year 
loan and sit on that loan for that period of time because they 
don't have the liquidity to do it.
    So when you have consumers out there who go to their 
Realtor or they go to their local mortgage broker, who is 
trying to package a loan for them, and go out and shop that 
loan in the marketplace, it seems like we are making it much 
more difficult and hamstringing them in more ways by saying 
that an agreement that perhaps works in New York--and maybe it 
is the best thing for the State of New York; I don't know--but 
I can say it doesn't seem to be the best thing for the State of 
California and for many other parts of this Nation, to make it 
much more difficult and place much more control in the hands of 
one bank rather than having an individual being able to shop a 
loan with numerous banks.
    Because the problem is, if you go approach a bank with a 
loan, they are going to do the appraisal. You can't take that 
to another bank because the appraisal is propriety property of 
the lender.
    And I don't know why we are going in this direction. So 
maybe you can tell me--I mean, I understand fraud. But we can 
deal with fraud. If you have appraisals, writing improper or 
fraudulent appraisals, you can hold that appraiser accountable, 
and it is very easy to do. That is why we have laws in this 
country and there are laws against that.
    And it seems like we have all these laws on the books that 
prohibit coercion and prohibit fraud, and yet we are saying, 
yes, that we might have laws, but that is not good enough. We 
are just going to make it illegal altogether.
    Could you--I mean, I would like to understand the benefit 
of why we are doing this.
    Mr. Lockhart. I certainly agree with you that we don't need 
to make life more difficult for the housing market at this 
point. I think you are right on there. On the other hand, we 
also want to make sure things are done on a safe and sound 
    The mortgage broker can take an appraisal ordered by one 
bank and use it for the other banks. That is certainly--
    Mr. Miller of California. It is a propriety appraisal in 
many cases, where they prohibit that package from being 
    Mr. Lockhart. As I understand it, the bank regulators do 
permit the transfer of that--
    Mr. Miller of California. Well, they permit them, but the 
banks donate necessarily, is the problem. They paid for the 
appraisal, the bank did. That is like I am not allowed to go to 
use--I am not trying to interrupt you. I am saying I am not 
allowed to go--without authorization, I am not allowed to use 
somebody else's appraisal because somebody paid for the work 
    Mr. Lockhart. Yes, you will have to get another appraisal 
from another bank. There may be some occasions where more than 
one--another bank will order its own appraisal. Unfortunately, 
there is a little extra friction in the system that could 
    The idea was that in too many cases, brokers were getting 
inflated appraisals during that period that so many things went 
wrong in the mortgage market. And I think it is--
    Mr. Miller of California. Well, let me back up. What went 
wrong in the mortgage market was GSEs did a great job of 
bundling mortgage-backed securities for years. They really did.
    Mr. Lockhart. Yes.
    Mr. Miller of California. And if a loan that they bundled 
went bad, they would replace that loan. And then a lot of these 
other private sector lenders said, that is a really good idea 
because look at all the money coming from Wall Street.
    And they started making loans, just forgoing normal 
underwriting standards and appraisals and to see if a person 
had a job. I mean, we can go back to predatory versus subprime 
and we can really define what went wrong in this marketplace. 
And I can blame the lenders who made that amount of business 
today who made a fortune bundling mortgage-backed securities, 
making loans that were not even junk bond quality because they 
never even confirmed the person had a job.
    But I don't want to go back and blame my local mortgage 
broker and Realtor who didn't participate in that fraudulent 
act and say, perhaps there are a few bad apples out there, so 
let's overturn the entire bucket. And I am not trying to argue 
with you. I just--I don't think we have thought that particular 
process through.
    I think we are lumping--and I agree there was a lot of 
fraud. But I can point to a few people out there who made it, 
that caused a lot of this problem, that I don't need to 
publicly point out because a lot of them are gone today. They 
have been bought by other groups.
    But we know who bundled these, and we know who made a 
fortune bundling them and who left the investors holding the 
bag who bought the junk. But we seem to be going after a sector 
of the marketplace that was not responsible for that, and 
drawing--I would just ask you--I am not--I am trying to be 
polite in this.
    Mr. Lockhart. I appreciate it.
    Mr. Miller of California. I am not trying to argue with 
you, and I not trying to be rude and cut you off. I have the 
greatest respect for Mr. Kanjorski. I really do. We just don't 
agree on this one issue.
    I would really hope that you would just take a moment and 
have somebody go back and review the process that normally took 
place, how we would deal with this. Look at the existing laws 
that are on the books if modifications need to be made as far 
as corrupt brokers and corrupt mortgage brokers and corrupt 
appraisers or whatever, that we deal with that effectively 
without taking and turning the entire cart over.
    Because an agreement between one State and your Office that 
perhaps--maybe there is a real problem in the State of New 
York. I don't know. Maybe there is a real reason why the 
attorney general would come to you saying, there is such 
rampant fraud within our housing market here that we need to 
turn the laws over.
    Perhaps they need to shine a light on their own problem. 
But I think we have done it nationally and impacting 80 percent 
of the marketplace in a very, I think, negative way at the 
worst time.
    And I would just ask that you please take a moment and 
revisit this and say, did we really do the right thing? I 
understand what you were trying to get at, and I applaud you 
for that, for getting the bad apples out of the marketplace.
    But what caused us to get in this problem we are in today 
are not the people I believe who are being impacted by it. I am 
just asking you if you would take time--and Mr. Kanjorski, you 
have been very generous with your time on something you hate 
for me to talk about.
    So I want to thank you for being generous and granting me 
more time. But we are good friends, and I have great respect 
for the individual. And Mr. Lockhart, I have a great respect 
for you, and I am asking that--and you did mention something 
earlier that--for years, I think we sent five bills to the 
Senate that were really good, fighting a strong regulator over 
GSEs and changing the way they could do business.
    We never accomplished that, but we tried hard. And I would 
just ask you to please revisit with earnestness what we have 
done here because I think we are going at the wrong people, 
trying to resolve a legitimate problem.
    Mr. Lockhart. Yes. There is a legitimate problem there, and 
it is not just in New York State. Why the attorney general of 
New York got involved is all these securities, the ones you 
don't like--
    Mr. Miller of California. I understand that.
    Mr. Lockhart. --were sold in New York. Fannie and Freddie 
have put out the rule, and they are continuing to look at the 
impact. As they get impact back and they understand better what 
is happening out there, they certainly have the ability and 
will continue to--
    Mr. Miller of California. And you will look at this?
    Mr. Lockhart. We will look at the--I mean, we don't see it 
directly. We see it through--
    Mr. Miller of California. That is what I am asking. But you 
responded to my letter, so I am going to you. You are the one 
who signed it, and I want to thank you for taking the time to 
    Mr. Lockhart. There you go. We continue to dialogue. I have 
meetings now with both CEOs once a week.
    Mr. Miller of California. Good.
    Mr. Lockhart. Certainly, this issue has come up in the last 
month with both CEOs. And so we are continuing to dialogue as 
to what is happening out there in the marketplace, and we will 
continue to do so.
    Mr. Miller of California. And I was elected to dialogue and 
have my picture taken. So let's continue this dialogue. Is that 
    Mr. Lockhart. Yes, but the other point you have to realize, 
too, is that the bank regulators are also looking at this issue 
at this point, and are looking at potentially making changes as 
    Mr. Miller of California. Yes. But see, I have a problem 
with--when you say bank regulators are looking into it, we are 
focusing on one sector. And I think I would like to look at all 
the people who are being impacted by this.
    Mr. Lockhart. Right.
    Mr. Miller of California. And I agree that bank regulators 
need to look at it. But if we just revisit it. And I thank you, 
sir, and I thank you, Mr. Chairman.
    Mr. Lockhart. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Miller.
    Mr. Lockhart, I am sure we would have more questions from 
more members. We still have one left, the gentleman from 
Florida, Mr. Grayson, for 5 minutes.
    Mr. Grayson. Thank you, Mr. Chairman.
    I have here the Form 10-Q filed by Fannie Mae the month 
before it went broke. I actually went through it and read it 
myself personally, and I had some questions I want to ask you 
about that to try to get a sense of how this happened and what 
we can learn from it.
    Specifically, on page 112, it says, ``Risk Management 
Derivatives,'' and there is a table there, and it indicates 
that between December 1, 2007, and June 30, 2008, Fannie Mae 
increased its notional balances for derivatives by $255 
    Can you give me some idea of the justification for a 
company like Fannie Mae increasing its exposure to derivatives 
at seemingly the worst possible time by a quarter of a trillion 
    Mr. Lockhart. Fannie and Freddie had many problems that 
surfaced over the last year. Certainly, in their June 10-K of 
last year, they mentioned many issues.
    The derivatives have not been an issue that actually caused 
any significant problems at the two firms. The derivatives were 
used to hedge their mortgage portfolios.
    What they do oftentimes as the market changes, is they add 
a derivative. Then rather than closing it out, they just buy 
one to counter the one that they had before. And so you get 
this piling up of derivatives. It is an issue that we have 
talked to them over the years about. Could they close these 
derivatives out rather than just buying a counter one?
    Oftentimes, they buy it with the same counterparty, and so 
the actual exposure is not that large. It is an issue that we 
have been talking to them about before the conservatorship and 
after the conservatorship. As I think Congressman Garrett asked 
earlier, there are ways to lessen the exposure through 
exchanges and clearinghouses. And that is something we are 
looking at, at the moment.
    Mr. Grayson. I wonder if it is really true that this had no 
effect on them. I mean, logically, having an exposure that as 
of June 30, 2008, totaled $1,141,000,000,000 is something that 
could conceivably have some effect on your operations, 
particularly since we are talking about a time just 2 months 
before it went broke.
    Mr. Lockhart. Right.
    Mr. Grayson. Why would they have such an exposure like that 
unless it were for a purpose? And for that purpose, couldn't it 
easily have been something that went wrong?
    The reason I am asking this question is because if you look 
at page 78 of this same 10-Q, what you see is that for 
nonperforming single family and multi-family loans together in 
their portfolio, which was almost a trillion dollars by itself, 
the amount of interest income that they lost because of 
nonperforming loans was only $192 million and going down--$192 
million versus $255 billion--isn't it more likely that they got 
into trouble over the $255 billion than they did over the $197 
    Mr. Lockhart. I can tell you, in retrospect, they haven't 
lost significant money in the derivatives area. They are using 
derivatives to hedge their mortgage-backed exposure.
    The vast majority of those losses, the over $100 billion in 
combined losses in the two companies, has been not on their 
interest rate risk and their interest rate risk management, 
although there has been some there. Most of it has been in 
credit losses. And it is credit losses related to the private 
label securities, and credit losses related to their books.
    When we did a very extensive look at the two companies in 
August, we worked with the OCC and the Fed. Also, Treasury had 
hired an investment bank as an advisor.
    As we looked through all the issues in these two companies, 
the derivatives was an issue but nowhere near the top. The key 
issues really were they had a deferred tax asset and they had 
credit exposures in their private label securities. The three 
quarterly reports since then have shown that is where the big 
losses were.
    Mr. Grayson. Well, again, let's look at the information I 
just provided to you. If in fact the interest income that was 
lost--and interest income is defined in the 10-Q as, ``the 
amount of interest income that would have been recorded during 
the period for on-balance sheet nonperforming loans had the 
loans performed according to their contractual terms.''
    If those losses are only $192 million, how could a $192 
million loss result in a $100-billion-plus loss to the 
taxpayers? How is that possible?
    Mr. Lockhart. What has happened since then is they have had 
to put up reserves for loans that are in default. And they have 
also had to take other-than-temporary impairments on their 
private label securities. And they booked a lot of losses 
related to the credit.
    The interest give-up is a very small issue. Under proper 
GAAP accounting, if you think you cannot recover, you have to 
take an other-than-temporary impairment. Or if it is a loan, 
you have to write it down to the value that you expect to 
recover. And that is what has happened.
    Mr. Grayson. Well, I see my time is up. But let me just ask 
you this last follow-up question, and thank you, Mr. Chairman, 
for your indulgence.
    I still don't have a clear understanding from you about how 
a relatively tiny amount, like $192 million in unpaid mortgage 
interest on what is a trillion-dollar portfolio, how that 
possibly lead to the taxpayers having to shell out $100 billion 
    Mr. Lockhart. They have had a lot more missed payments 
since then. It has spread throughout not only their lower 
quality book, but even to some of their prime loans. They have 
had to put up reserves. They have built the reserves very 
dramatically since June because of the deterioration in the 
mortgage market and the deterioration in the economy.
    We would be happy to go through those numbers with you, and 
meet with you and show you what really happened, and go through 
not only the June numbers but the September, December, and 
March numbers, and how these losses have unfortunately marched 
through their financial statements.
    Mr. Grayson. Well, that would be great. Thank you very much 
for doing that because, as we know, those who don't understand 
history are doomed to repeat it.
    Mr. Lockhart. Yes, sir.
    Mr. Grayson. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Grayson.
    Mr. Lockhart, I want to thank you very much for appearing. 
And gentlemen, I am sorry that we had two interruptions and 
have taken such a long time. But I am actually sorrier to the 
next panel because you are going to--but thank you very much.
    And we may ask your indulgence again to appear, because I 
think this is an important area where we want to spend a little 
more time on it.
    Mr. Lockhart. Thank you for having the hearing, and we 
would be happy to come back.
    Chairman Kanjorski. Okay. Thank you, Mr. Lockhart.
    I am pleased to welcome our second panel. Each of you will 
have 5 minutes to verbally summarize your written statement. 
First, we have the Honorable Bruce Morrison, chairman of the 
Morrison Public Affairs Group, a former member of our 
committee, and the former head of the Federal Housing Finance 
    Mr. Morrison, welcome.


    Mr. Morrison. Thank you, Mr. Chairman, and members of the 
committee. I appreciate the opportunity to be here, and I 
commend you on starting this process. You have correctly said 
that it is not something that can be done in a sprint.
    These institutions were built over a long period of time. 
Our mortgage industry and our secondary market have been built 
over a substantial period of time. Repairing what has gone 
wrong needs to be done carefully.
    When you are talking about an industry of $11- to $12 
trillion of assets, you are talking about real money. And it is 
important that the future of housing opportunity in the country 
not suffer as it has suffered in the last several years because 
of mistakes, misjudgments, that have been made historically.
    I think it is important to acknowledge that the Federal 
role is not going away and cannot go away. We can pretend that 
this entire industry could be operated without Federal risk, 
without government risk, and then wait until the calamity 
    But you can ask, where was the Federal role in AIG? And yet 
there are all those credit default swaps which related to the 
housing market, among others, resulted in huge Federal 
intervention, nothing that anybody really anticipated before it 
    With respect to the mortgage industry, we have used the 
Federal Government to facilitate liquidity on a broad 
international basis for a very long time, and on an increasing 
    I think our challenge is not to try to privatize our way 
away from that, but to narrow and focus what the Federal role 
is, and to make sure that the guarantees that are being given 
are paid for and are priced up front so that the system really 
insures itself, rather than wait for the calamity and go out 
looking for the taxpayer money for the bailout.
    We have gained a lot in this country by a broad liquidity 
function that the secondary market provides. We need to 
preserve that. We don't have to preserve the precise 
institutional structures that provided it in the past, but we 
have to protect the function.
    It is important when we talk about this subject to separate 
who bears the credit risk and other risks involved in the 
mortgage industry, and who owns which entities that 
participate. A lot of the discussion that goes on on this 
subject tends to fuzz up which is it that the Federal 
Government is going to do and the private sector is going to 
do. Who is going to own the GSEs?
    The most important question is who is going to take which 
risks? And I think that the Federal Government should take a 
very narrow and catastrophic risk, that is, the risk of 
catastrophic failures, and that the private sector should take 
as broad and extensive a risk position as possible, as we are 
able to define.
    And I think in the past that the GSEs have taken more risk 
than they needed to take; that their role in the market, their 
limitations and their size, both of which led to the growth of 
the private label securities market in a way that undermined 
the entire structure.
    And it wasn't Fannie and Freddie who led the way, but it 
was Fannie and Freddie who followed along and become part of 
the problem. I don't think we should be drawing those lines. I 
think we need a broader structure that brings the entire 
mortgage industry under one structural scheme.
    And we can do that without implicating the Federal 
Government more. We can actually implicate the Federal 
Government less. But we are going to have the Federal 
Government as the ultimate guarantor, not as the guarantor of 
all risks but of the catastrophic risk.
    So that goes in the credit risk and the scope of the 
guarantee. And I think if you think about all of the credit 
risk that can be and will be covered by a securitization 
model--a first loss protection that mortgage insurers and 
others carry; a general expected loss coverage; the kind of 
structured debt that parcels out different levels of credit, 
but which requires a rating agency system that is not corrupted 
in the way that the system we currently have was during the 
    You can design a model that has a narrow Federal guarantee 
that will give the kinds of liquidity, the international access 
to funding that we have had, but have the Federal Government 
very rarely if ever have to step up to the plate. And you can 
pay for it through guarantee fees from the beginning if you 
design it that way. And I think that is what we ought do.
    I think other attempts to carve up the market, that leaves 
the Federal Government's role not that broad, will lead to 
regulatory arbitrage, as we have already had, will lead to the 
situation in which the private market brings down the whole 
system because it is not part of the scheme.
    With respect to ownership of the entities, as I say in my 
testimony, I really think that a serious look ought to be given 
to cooperative ownership of Fannie and Freddie or whatever 
comes after Fannie and Freddie.
    I think that the Federal Home Loan Bank system is a success 
in terms of its ownership structure; that it is better than the 
GSEs have been at aligning the interests of the public sector 
and the interests of the capital providers; that it doesn't 
require government capital; that it is able to scale its 
capital to the needs of the people who are the customers of the 
entity; and that you don't hear people saying, the Federal Home 
Loan Banks are displacing us out of the marketplace, as you 
always heard about Fannie and Freddie from other players in the 
mortgage business.
    Because the people in the mortgage business own the Federal 
Home Loan Banks, and in the same way the people in the mortgage 
business can own the secondary market outlet and get an 
advantage in terms of an overall Federal catastrophic 
guarantee, but can provide both the capital and the risk-taking 
to make the system run. And in routine times, there will be no 
calling forth of any Federal participation beyond that.
    Finally, I would say that in thinking about your regulatory 
restructuring that you are going to be thinking about across a 
broad range of financial institutions, think about the mortgage 
industry as a subject for functional regulation.
    Right now you just heard from FHFA, and you have heard when 
certain issues were being raised about appraisals, about how 
they don't regulate this or that, they would have to go to the 
bank regulators. The mortgage industry should not have its 
regulatory structure divided into so many pieces because 
looking just at the GSEs as a regulator doesn't give you the 
authority nor the perspective to see that the mortgage industry 
is properly regulated.
    So think of mortgage industry regulation as a functional 
regulation subject. And maybe when you overall change the 
financial institution regulatory structure, that will mean a 
specialization within one agency, a coordination among several 
agencies. But there ought to be a mortgage regulator. There 
ought not to be just a GSE regulator. Thank you very much.
    [The prepared statement of Mr. Morrison can be found on 
page 158 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Morrison.
    And now we will hear from the Honorable Susan Wachter, the 
Richard B. Worley Professor of Financial Management of the 
Wharton School at the University of Pennsylvania. Professor 


    Ms. Wachter. Chairman Kanjorski, members of the committee, 
thank you for the invitation to testify at today's hearing on 
the present condition and future status of Fannie Mae and 
Freddie Mac. It is my honor to be here today to discuss the 
role of secondary mortgage market institutions in contributing 
to the crisis, and what form these institutions should take 
going forward.
    The Government-Sponsored Enterprises, Fannie Mae and 
Freddie Mac, have historically provided a secondary market for 
mortgages. But in considering their future role, today it is 
most important to consider how we may develop and maintain a 
housing finance framework that supports homeownership that is 
sustainable and contributes to overall financial stability.
    Broadly speaking, there are three options for the future of 
GSEs: first, privatization; second, nationalization; and third, 
a return to their original Federal charter as hybrid public/
private entities. I will outline here the pros and cons of 
these three approaches and the facts that can be and should be 
considered as the subcommittee, and indeed, the Nation, weigh 
the options.
    Privatization of the GSEs in theory could have the benefit 
of desocializing the risk involved with secondary market 
housing finance. Critics argue that the GSEs' special access to 
cheap credit and high leverage expose the taxpayer to large 
liabilities. However, as we have seen with the socialization of 
private entities' losses, privatization does not exempt the 
taxpayer from such liabilities.
    A second option is to nationalize the GSEs and have a 
solely public secondary market--essentially, FHA/Ginnie Mae for 
everyone. Taxpayer exposure to large liabilities is still a 
risk in a solely public sector approach. There is automatic 
socialization of risk and no market check on underwriting 
because of the U.S. Government guarantee.
    The third possibility is a hybrid public/private secondary 
market. Hybrid public/private base financing worked fairly well 
until private label securitization arose. The GSEs found 
themselves losing market share, and shareholders pressured the 
GSEs to lower underwriting standards to compete while Federal 
regulators did not stop it.
    In fact, it is useful to think of privatization and 
nationalization as one choice and not two choices because 
nationalization effectively means that the existing FHA 
function is augmented with a larger sphere for lending, and the 
private sector of course would originate and securitize 
mortgages much as it did in the run-up to the crisis. Thus, a 
private label mortgage securitization would take off again.
    Within the hybrid public/private approach, there are 
various options such as cooperative versus shareholder 
ownership, and choices on regulation such as public utility 
approach versus a larger role for the Federal Government in 
    These choices are not inconsequential in system design. But 
today I will focus on the larger pros and cons of this middle 
ground versus the alternative of a Federal Government entity 
and GSE privatization, that is, a private label mortgage-backed 
securities market, which it would lead to.
    While this issue is complex and multi-faceted, the 
overriding question is: Which of these two alternatives best 
serves the interests of the public? The public has an interest 
in systemic stability in the financial system. Individual 
households are the least well-equipped to weather instability 
in the financial system.
    In addition to financial stability, a key public interest 
in mortgage finance is consumer protection. Moreover, from a 
household portfolio perspective, the long-term fixed-rate 
mortgage supports the goal of most families to at least have 
the option of continuing to live in their homes and 
neighborhoods. And the availability of this mortgage and this 
option depends on securitization.
    To understand why and to understand the importance of the 
secondary mortgage market, it is only necessary to note that 
historically in the United States, housing finance was provided 
through banking systems funded by demand deposits.
    In most countries today, deposit-funded banks remain the 
predominant, if not the sole source of funding, for mortgage 
borrowing. In countries with bank-provided mortgages, 
adjustable rate mortgages predominate, and the long-term fixed-
rate mortgage is largely absent.
    As colleagues and I have shown, real estate, including 
residential real estate, has been linked to banking and 
financial crisis, not just once but many times. Real estate 
crashes and banking crises tend to occur together. In our own 
recent history, the savings and loan crisis of the 1980's both 
contributed to the recession of 1990/1991 and destabilized the 
financial system, requiring a Federal bailout.
    Securitization was the answer to this crisis. With the 
recognition that the stability of the banking system depended 
upon banks not lending long, financed by short-term demand 
deposit liabilities. Securitization enabled the housing finance 
system to continue to offer the long-term fixed-rate mortgage 
to America's homeowners without endangering banks' stability.
    Elsewhere, in the absence of secondary market institutions, 
banks provide borrowers with adjustable rate mortgages. As I 
noted, the long-term fixed-rate mortgage is essentially absent. 
The exceptions to this, besides the United States, are Denmark, 
and to a lesser extent, Germany. Both of these countries, also 
historically, had in place extensive secondary market 
institutions which, while they differ from those of the United 
States, do in fact link long-term funders to long-term 
    Fannie Mae and Freddie Mac grew with banks' continued 
securitization of long-term mortgages originating and 
securitizing. The growth occurred both in the GSEs' guarantee 
business, in which they guaranteed mortgages, bundled into 
pass-through securities, and sold to investors, and in their 
portfolio purchases.
    The growth of the secondary market coincided with a period 
of financial and economic calm in the United States known as 
the Great Moderation. Nonetheless, controversy arose over the 
GSEs' continued growth, to a great extent focused on the growth 
of their portfolios.
    Ultimately, it was viewed that these institutions were 
implicitly guaranteed by the Federal Government. Thus, with the 
growth of their portfolios, taxpayers were liable for interest 
rate risk taken on by these institutions. Interest rate risk 
was and is an unnecessary risk for the GSEs to take on.
    Importantly, however, the GSEs' Federal charters did and 
does require them to set standards for default risk, to 
minimize default risk, and to monitor and standardize contracts 
to do so.
    The current crisis originated not with the growth of GSEs, 
but rather with the growth of private label mortgage 
securitization. In an era of deregulation, private label 
securitization drove the supply of risky mortgages. The demand 
for scrutinized mortgages fed the demand for recklessly 
underwritten loans.
    As private label MBS grew in market share, so did 
nonstandard mortgages, from only 15 percent of market 
origination in 2002 to almost half of market origination in 
    Lending standards were not monitored by private label 
securitization, and declined over time. Surprisingly, so did 
risk premiums, and Wall Street encouraged such lending despite 
growing risk. Home prices were artificially inflated due to the 
willingness of institutional investors across the world to buy 
these subprime mortgages in the form of complex securities 
created by investment banks.
    As lending standards deteriorated, the demand for homes and 
the price buyers were willing and could pay was artificially 
driven up. There was no and is no regulation in place to stop 
the deterioration of lending standards over time, driven by the 
competition for market share for private label securitized 
    This lending was not sustainable, and resulted in a credit 
bubble that burst, bringing down not only poorly underwritten 
nontraditional loans, but carefully underwritten traditional 
loans as well.
    The private label securities backing these loans were not 
liquid, nor did they bear risk premium based on their issuers 
and the underlying loans' originators' balance sheets. Because 
these securities were not backed by standardized assets, they 
generally did not trade.
    Even if short sellers knew of the heightened risk and 
mispricing of securities, they could not easily trade on this 
knowledge. Private label securities were marked to model with 
the imprimatur of rating agencies and not to market. Thus, 
market discipline was absent and could not work.
    While it is clear that systemic risk derives from the 
procyclical erosion of lending standards, there is not yet a 
consensus on how to avoid this going forward. While no system 
is perfect, securitized, fixed-rate, long-term mortgages are 
critical for a stable mortgage system. And that robust 
standardized securitization is unlikely to be accomplished by 
an FHA-like entity alone.
    Chairman Kanjorski. Professor, could we wrap it up?
    Ms. Wachter. I will finish up now.
    In any event, standardization need not only apply to 
securitized mortgages. Financial institutions could still 
originate nonstandard mortgage products and hold onto them on 
their books or resell them to each other. This means that 
financial institutions could continue to serve as a laboratory 
for product innovation. But they would be required to retain 
the risk on those products. This is the proper niche for niche 
    And in closing, the GSEs should not be removed from 
conservatorship until the economy is on a stable recovery path. 
They are currently helping to stabilize the economy through 
their support of the housing market. This effort is especially 
critical in light of recent discussion over government purchase 
of toxic assets that may be difficult to price and liquidate.
    In the future, the benefits for long-run stability and 
consumer protection point to the need for strongly regulated 
and private market disciplined entities to support the U.S. 
housing finance system. Thank you.
    [The prepared statement of Professor Wachter can be found 
on page 179 of the appendix.]
    Chairman Kanjorski. Thank you very much, Professor.
    And next we will hear from Ms. Frances Martinez Myers, 
senior vice president, Fox & Roch/Trident, LP, on behalf of the 
National Association of Realtors. Ms. Myers?

                         REALTORS (NAR)

    Ms. Martinez Myers. Chairman Kanjorski, Ranking Member 
Garrett, and members of the committee, thank you for inviting 
me to testify today on the current condition and future status 
of Fannie Mae and Freddie Mac.
    I am a senior vice president for Fox & Roach/Trident LP, 
the holding company of six home services financial and 
relocation-related companies located in southeastern 
Pennsylvania. I am here to testify on behalf of more than 1.1 
million Realtors, who are involved in all aspects of the real 
estate industry.
    Realtors believe that the GSEs' housing mission and the 
benefits that are derived from it continue to play a vital role 
in our Nation's real estate market. Had no government entity 
existed when private mortgage capital dried up in 2008, 
America's housing market would have come to a complete halt, 
throwing our Nation into a deeper recession.
    We need only look at the current status of the affairs in 
the commercial and jumbo residential mortgage market to see how 
different things might be today in the traditional residential 
mortgage market without Fannie Mae and Freddie Mac.
    For those reasons, Realtors believe that pure privatization 
of the GSEs is unacceptable. Rather, NAR supports a secondary 
mortgage market model that includes some level of government 
participation, protects the taxpayers, and ensures that all 
creditworthy consumers have reasonable access to affordable 
mortgage capital.
    NAR is currently conducting research to determine what 
model for the secondary mortgage market would best achieve 
these goals. We will share that information with you as soon as 
it is compete For now, I would like to briefly outline a set of 
nine principles that NAR's board of directors has adopted, and 
that we are using to guide in our research:
    1. Capital must flow into the mortgage market in all market 
    2. Qualified borrowers should have access to affordable 
mortgage rates.
    3. Affordable housing goals should ensure that all 
qualified borrowers, including low- and moderate-income 
households, have an opportunity to realize the dream of 
homeownership. However, such goals must also promote 
sustainable homeownership.
    4. Financial institutions should be required to pass on the 
advantage of lower borrowing costs and other costs of raising 
capital by making mortgages with lower rates and fees available 
to qualified borrowers.
    5. Conforming loan limits should be based on increases in 
median sale prices, including higher index limits for areas 
with high housing cost.
    6. Sound underwriting standards must be implemented and 
adhered to.
    7. Institutions must uphold the highest standards of 
transparency and soundness with respect to the disclosure and 
structuring of mortgage-related securities.
    8. There must be sufficient capital to support mortgage 
lending in all types of markets.
    9. The government must provide rigorous oversight. Simply 
stated, the housing market must work in all economic conditions 
at all times, and mortgage capital needs to be available to all 
potential qualified housing consumers.
    In conclusion, NAR respectfully asks that Congress and our 
partners in the industry carefully consider these nine 
principles when discussing a new secondary mortgage model. 
Working together, I believe we can create a solution that will 
serve our best interests now and become a model for the global 
real estate and financial markets well into the future.
    I thank you for this opportunity to present our thoughts on 
the current and future status of Fannie Mae and Freddie Mac. 
And as always, the National Association of Realtors is at the 
call of Congress and our industry partners to help facilitate a 
housing and national economic recovery.
    Thank you.
    [The prepared statement of Ms. Martinez Myers can be found 
on page 163 of the appendix.]
    Chairman Kanjorski. Thank you very much, Ms. Martinez 
    Next we have Dr. Lawrence J. White, the Arthur Imperatore 
Professor of Economics at the Leonard Stern School of Business 
at New York University. Dr. White?


    Mr. White. Thank you, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. My name is Lawrence 
J. White. I am a professor of economics at the NYU Stern School 
of Business. During 1986 to 1989, I served as a board member on 
the Federal Home Loan Bank Board, and in that capacity, I also 
served as a board member of Freddie Mac. Thank you for the 
opportunity to present my views on the present condition and 
future status of Fannie Mae and Freddie Mac.
    The hybrid private/public model that is and was and 
continues to be at the heart of the operation of the two 
companies is broken and should not be reconstructed. Before 
addressing what should be done, however, it is important to 
step back and remember that Fannie and Freddie have been just 
one part of a much larger mosaic of government policies to 
encourage the construction and consumption of housing.
    Much of this encouragement is broad-brush, unfocused. It 
mostly just encourages people who would otherwise buy a home 
anyway, so it is really not encouraging homeownership but just 
encouraging them to buy a bigger, better-appointed house on a 
large lot. I don't see a big social purpose in that kind of 
encouragement, instead of doing what social policy should be 
doing, which is focusing on encouraging homeownership itself.
    Now, Fannie and Freddie's structure was just part of and 
still is just part of this broad brush approach through the 
implicit and now somewhat more explicit support for their debt 
by the United States Government. It looked like a free lunch, 
something for nothing, but we have now found out just how 
costly this meal has been.
    So what is to be done? For the short term, it is clear. 
Fannie Mae and Freddie Mac need to continue to be wards of the 
United States Government, wards of the FHFA. The financial 
markets are simply too fragile to support anything else.
    However, for the longer term, because the model is broken, 
Fannie and Freddie should be really, truly privatized. To 
replace their implicit broad brush, off-budget effects in 
housing finance, there should instead be an explicit, on-
budget, adequately funded, targeted program to encourage--and 
of course, including appropriate counseling--low- and moderate-
income households who might not otherwise be homeowners to 
become homeowners, focusing on the first-time home buyer in the 
low- and moderate-income household category through targeted 
help on downpayments and targeting help on monthly payments.
    This is an appropriate function for government to really 
deal with that important spillover effect that yields benefits 
when a neighborhood is more stable, with more homeowners.
    Finally, there are some other things that the Congress 
could do that could lower the real costs of housing, make 
housing more affordable, that would improve the efficiency of 
markets and benefit consumers. I would hope all of the people 
at this table as well as the people on your side of the table 
could support these measures.
    They would include: making sure that there aren't 
impediments to shipments of timber from Canada so that we can 
keep the costs of construction of housing lower; making sure 
that there aren't impediments to shipments of cement from 
Mexico so that we can keep the costs of constructing housing 
lower; leaning on the States and localities to relax unduly 
restrictive zoning that would otherwise keep the costs of 
property higher and make it hard to build lower cost housing; 
and leaning on the States and localities to undo restrictive 
building codes that inefficiently cause the costs of 
constructing housing to be higher. These are all things that 
could really make housing more affordable.
    Thank you again for the opportunity to appear here before 
the subcommittee. And I will be happy, of course, to answer 
    [The prepared statement of Dr. White can be found on page 
186 of the appendix.]
    Chairman Kanjorski. Thank you, Dr. White.
    Next we have Mr. Michael Berman, vice chairman of the 
Mortgage Bankers Association. Mr. Berman.

                   BANKERS ASSOCIATION (MBA)

    Mr. Berman. Thank you, Mr. Chairman.
    Every part of the real estate finance industry was deeply 
impacted by the financial crisis which led to the 
conservatorship of Fannie Mae and Freddie Mac--large and small 
lenders, servicers, investors, multi-family lenders, and most 
importantly, consumers. A smoothly functioning secondary 
mortgage market is not only important for our industry but for 
the entire economy.
    Despite their financial situation, the GSEs currently 
participate in over two-thirds of single family mortgage 
transactions and about 75 percent of all multi-family mortgage 
transactions. While the FHA also facilitates a significant 
share of residential mortgages, the GSEs currently are the 
prevailing force in the mortgage market.
    In addition to falling housing prices and an unprecedented 
foreclosure crisis, the GSEs face severe management challenges. 
At the same time, they are being used as instruments of public 
    While MBA supports the temporary use of the GSEs in this 
manner, this is an unsustainable and artificial business model. 
We are committed to working with you to create a new structure 
for the future.
    Before we discuss the future, we must ensure that the 
current market works as efficiently as possible. For example, 
the credit facilities established by Treasury for the GSEs 
expire at the end of this year, as does Treasury's authority to 
purchase GSE mortgage-backed securities in the open market. We 
must ensure that these important programs are extended at least 
until the East Coast recovers.
    Congress should also help make mortgage credit more 
available and affordable by permanently raising the GSE loan 
limits. The higher loan limits have benefitted consumers, but 
because they are temporary, investors have been hesitant to 
purchase high-balance loans.
    This dilutes the full benefit of higher loan limits because 
liquidity has artificially restricted them. Ultimately, 
consumers are forced to pay higher interest rates on their 
    After the conservatorship was announced, MBA convened a 
council of mortgage finance experts from every part of the real 
estate finance industry to examine these issues. The Council on 
Ensuring Mortgage Liquidity, which I am privileged to share, 
has identified the key ingredients of a functioning security 
market and established a set of principles for you and the 
policy community to consider when debating how to rebuilt the 
secondary mortgage market in the future.
    Our approach has been to examine the issues so that 
stakeholders could assess options in a measured and thoughtful 
way. We agreed early to avoid an overly prescriptive approach, 
and instead to assess the market and present alternatives, 
which we plan to refine in the coming weeks and months.
    I have attached to my testimony a white paper on this issue 
that has been cited as one of the more helpful compilations of 
options available today. This paper presents a set of building 
blocks to aid in understanding and discussing the merits of 
various market structures. It also lists and begins to describe 
nine alternative models for channeling government support to 
the housing finance system.
    I have also attached to my testimony a set of guiding 
principles based on the key considerations mentioned in the 
white paper. The scope of these principles is the entire 
secondary market, including responsibilities of the private 
market participants as well as the role of the Federal 
    I hope to address our principles at greater length during 
the question-and-answer period. But let me close with a few 
thoughts to help guide the policy discussion moving forward.
    First, secondary market transactions should be funded by 
private investors seeking market returns who understand, 
accept, and are held accountable for the risks that they take.
    Next, in order to attract consistent levels of private 
capital from a wide range of investors, the MBA believes that 
there is a role for an explicit Federal Government credit 
guarantee on mortgage-related investments in the core single 
family and multi-family products. There is also a clear 
government role as a liquidity backstop in times of market 
    Finally, a careful, measured approach should be adopted so 
that current markets are not further destabilized. Safeguards 
should be established to ensure a smooth transition from the 
present to whatever future model is developed.
    Thank you for the opportunity to appear before you today, 
and I am happy to answer questions that any of you may have.
    [The prepared statement of Mr. Berman can be found on page 
85 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Berman.
    And next, and last, we will hear from Mr. Robson of the 
Robson Companies and chairman of the board of the National 
Association of Home Builders. Mr. Robson?


    Mr. Robson. Chairman Kanjorski, Ranking Member Garrett, and 
members of the subcommittee, I too am thankful for the 
opportunity to be here and testify today.
    The housing GSEs, Fannie Mae, Freddie Mac, and the Federal 
Home Loan Banks are viable components of the housing finance 
system, providing liquidity to the mortgage markets and 
supporting the flow of credit to meet affordable housing needs.
    Fannie Mae and Freddie Mac recently have encountered severe 
problems, and are currently operating under conservatorship 
under their new regulator, the Federal Housing Finance Agency.
    The Federal Home Loan Bank system has also experienced 
stresses which, while considerably less intense, have affected 
its capacity for mission pursuit.
    NAHB believes that the housing benefits that the GSEs have 
provided in the past, and their significant roles in dealing 
with the current financial system's problem, clearly 
demonstrate the need for Federal Government support for the 
secondary mortgage markets. There is broad agreement, however, 
that Fannie Mae and Freddie Mac will not be able to emerge from 
conservatorship without alteration in their current structure.
    While NAHB believes the liquidity and affordable housing 
mission must continue with Federal Government backing, the 
primary objective is a system that assures that the continued 
availability of affordable housing credit, that facilitates 
healthy housing markets and consistency in satisfying community 
housing needs. Therefore, NAHB looks forward to discussing 
different models for achieving that objective.
    As the credit crisis has worsened, Fannie Mae and Freddie 
Mac have tightened underwriting standards and increased loan 
delivery fees at the same time their combined market share has 
increased, and now represents nearly 75 percent of the single 
family market.
    The continual ratcheting up of delivery fees and tightening 
of underwriting standards has swung the pendulum too far, 
denying credit to viable buyers. NAHB urges the repeal of these 
obstacles to help to increase mortgage affordability, enhance 
policymakers' attempts to reduce foreclosures, and help the 
country get back on the road to economic recovery.
    Last year, NAHB housing finance task force recommended a 
permanent Federal backstop to the housing finance system in 
order to ensure a consistent specially of mortgage liquidity as 
well as to allow rapid and effective responses to market 
dislocations and crises.
    The current crisis has clearly demonstrated that the 
private sector, unaided, is not capable of consistently 
fulfilling this role. The task force concluded that the 
Enterprises should not be transformed into fully private 
companies because such companies could not be counted on to 
provide liquidity in times of crisis or to consistently address 
affordable housing needs.
    And they should not be converted to Federal Government 
agencies because such entities would be burdened by government 
red tape and would lack the resources and ability to respond 
effectively to market developments and housing finance needs.
    NAHB's task force recommended that Fannie Mae and Freddie 
Mac be recast, retaining Federal backing but limited primarily 
to providing credit enhancement of mortgage-backed securities. 
Some portfolio capacity should be permitted to accommodate 
mortgages and housing-related investments that do not have a 
secondary outlet, although Fannie Mae and Freddie Mac should 
have the flexibility to support the mortgage market under the 
types of conditions we are currently experiencing.
    Specific principles for restructuring the housing finance 
system are outlined in my written testimony.
    In closing, NAHB urges that any changes to the role and 
structure of the GSEs not proceed until the current financial 
turmoil passes, and that the markets return to more normal 
conditions. It would be extremely difficult, if not impossible, 
to restructure Fannie Mae and Freddie Mac when they are so 
intertwined in ongoing efforts to address the deepening 
financial morass.
    NAHB looks forward to working with you to develop an 
effective, safe and sound, and reliable flow of housing credit 
under all economic and financial market conditions.
    Again, I thank you for the opportunity to testify today, 
and I would be happy to answer any questions.
    [The prepared statement of Mr. Robson can be found on page 
169 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Robson.
    Listening to all this testimony here today, I have sort of 
come to the conclusion that maybe we should go back to basics. 
I want to pose just some basic questions, if I may.
    Who says that the government should have a role in 
ownership of real estate? I mean, I hear some arguments posed 
and form sometimes questions or opinions, that the private 
sector and the private marketplace can take care of it. Is 
there anybody on this panel who agrees that we do not need 
government involvement in real estate?
    [no response]
    Chairman Kanjorski. Unanimous consent. I do not know if I 
am going to ask for party registration.
    It seems to me that there is a little bit of an analogy--
not clear, but a little bit--of what happened in the late 
1920's and what happened most recently in the real estate 
bubble and burst, and that is that greed, to an extent, caused 
people to overinflate and create a false value that kept on 
feeding on itself, to the extent that just as the boiler shops 
did in the 1920's with securities that did not have the 
financial worth behind them in the ultimate end, the real 
estate did not have the ultimate end.
    Fortunately or unfortunately, I sat here and watched this 
fever. And I remember quite well having Alan Greenspan before 
us not too many years ago, about 5 years ago, and I posed a 
direct question to him. I think we have a tape of that; I think 
I will play that at my retirement party.
    Chairman Kanjorski. And I asked him whether or not he had 
any fear whatsoever of the real estate bubble, and he said, 
``Absolutely not.'' This was in 2005. And it could not cause a 
problem. They had it all handled and managed and analyzed.
    Now, I have a lot of respect for Mr. Greenspan's economic 
capacity and ability to calculate economics. But he certainly 
missed that one. And it seems to be the story today that we 
always miss the one at hand.
    And then somebody in their testimony used those horrible 
words, ``So this will never happen again.'' Could we knock 
those words out of our vocabulary? It is going to happen again 
regardless of what we do. It is just in another form or another 
    Now, the question is: Do we owe some loyalty to the private 
market, that government should stand behind these things? And 
if, in fact, it is necessary--you know, one of the methods I 
was thinking about here, if we pay the average people just a 
few percentage, maybe 10 or 20 percent more, in wages and 
income in this country, we would not have a problem. You would 
think that because it is a difficulty in some of these people 
in honoring their commitments.
    Now, on the other hand, we do know that some people, 
regardless of the amount of money they have, they always 
overbuy, overshoot. But what is the role of government? Are we 
to put a label of teaching responsibility through government 
action? Yes, Dr. White?
    Mr. White. Yes, Mr. Chairman. I have been thinking about 
your earlier question as well as this one. And I didn't raise 
my hand before because there is a role for government in 
housing. But I think it is a much more limited role than in 
fact we see government playing. It ought to be dealing with the 
true social spillover effects, the positive externalities, to 
use an economist's term, that comes with homeownership.
    There is a role for encouraging innovation. After all, it 
was Ginnie Mae, an arm of the Department of Housing and Urban 
Development, that was the first securitizer of home mortgages. 
Freddie Mac was a fast second a year later, but it was Ginnie 
Mae that was first. So there is a role for government to play.
    But markets can be terrifically efficient in allocating 
resources. I think we are all appreciative of that. And I 
believe that there is--yes, there is room for government, but 
it is a much more limited role. We ought to--
    Chairman Kanjorski. I did not ask whether there is room for 
it. That seems to say that we want to compete. As a member of 
the government, I do not want to compete. The only reason I 
vote for housing is I want people to have good housing to live 
in. And if they cannot otherwise do it, I would not give them a 
penny. I mean, I would not support any--
    Mr. White. There are better ways: by funding direct 
transfers rather than trying to lean on housing markets. By 
broadly subsidizing housing, all we do is encourage 
inefficiency in housing markets. We end up investing too much 
of our income, too much of our total capital stock in housing, 
not enough in productive physical capital, not enough in social 
capital, not enough in human capital, that could help people 
earn higher income.
    Chairman Kanjorski. We have two more activists here, so we 
want to get to them.
    Mr. Morrison. Mr. Chairman, you will always get the answer 
from the economists that, you know, if you appropriate the 
money directly and you target it most narrowly, that will be 
the best outcome. And yet our political system doesn't really 
work that way. And we have been much more successful in 
providing fundamental benefits that work for the society as a 
whole when they work for the whole society.
    And it is really that you can just compare how successful 
our Social Security program is compared to targeted income 
support that only goes to the worthy, or those things that are 
most needy. And the fact is that we gain public support for a 
broadly successful intervention and a necessity like housing 
when it is broadly shared.
    And that doesn't mean that the targeted interventions that 
Dr. White is suggesting aren't good ideas. But our basic access 
to housing for individuals, both multi-family and single 
family, need an ultimate liquidity backstop to make it most 
affordable and most broadly available.
    And that can be done with a minimal government risk and a 
maximum private sector operation and risk-taking. It is not the 
system we have because certainly Fannie and Freddie took on 
much more risk and much more power than they needed to take on. 
But it can be redesigned so that you get minimal government, 
but something that is broadly available and has broad political 
support, as the system has had.
    So I think we should be careful of not facing up to the 
political realities of how we get the best overall result. You 
and I both have worked for years on what goes on in the 
committee on specific targeted matters. We have limited 
success. The broadly available benefits have broad political 
    Chairman Kanjorski. Thank you, Mr. Morrison.
    Doctor, and then I have to get to my friend. But we are 
going to get a lot of time because I do not see a heavy 
population here. Doctor?
    Ms. Wachter. We need mortgages for homeownership. I think 
that is obvious. People can't put down $200,000 or $300,000. We 
need mortgages. We need government to set the rules for a 
mortgage market. If we don't have a secondary market, we will 
have short-term variable rate mortgages. Many crises in other 
countries have come from that system. And of course, our 
savings and loan crisis came from that system.
    Thus, we need a secondary market. If we have a secondary 
market without standards, we have a private label securitized 
system. I am not calling it a market because it is not a 
market. Rather we actually did not have a mortgage market. In 
order to have a market that works, you need to have the 
structure, the rules of the game, set out for the market 
    In the private label securitized market, heterogeneous 
mortgage securities were not traded. Thus we did not have the 
discipline of a market. The heterogeneity itself was a way of 
hiding the true costs and prices, both to investors and to 
    Chairman Kanjorski. Thank you, Doctor. I have another 
couple of questions myself, but I am going to allow my friends 
here on the other side to be heard. Mr. Garrett?
    Mr. Garrett. Mr. Chairman, thank you. Thank you to the 
panel. And I appreciate your opening comments as far as some 
basic questions. When you said, is there a role for the 
government here, I thought your next was going to go--and 
everybody concurred.
    Is there a constitutional basis for the Federal Government 
here? I know we have a professor. Anybody want to cite the 
constitutional basis for the Federal Government intervening 
directly or indirectly in assisting someone to buy a House?
    Mr. White. I am not a lawyer, and I never try to practice 
law without a license.
    Mr. Morrison. It is the commerce clause.
    Mr. Garrett. That commerce clause, we can do just about 
everything. I am not exactly sure why we have 50 States any 
more, actually, since we had that.
    But also on a broader note, is there--we sort of had this 
discussion back when things were going well in the housing 
market, and the past Administration would oftentimes be 
championing the fact that things are going well in the housing 
market, and the percentage of homeownership was always going 
    And some of us who would hear from those in the rental 
community and construction trades and what have you would say, 
well, you know, there is another trade out there as well. And 
how about us?
    And so the question would be: Is there a target number that 
we should be looking at and saying, this is what we are trying 
to get to in homeownership, that when we reach 65 or 68 or 69 
or 70 percent--we are never going to get a 100 percent 
homeownership rate--that we have reached the approximate number 
that we should be striving for in homeownership, realizing that 
there will always be some people who have to rent and there 
will always be some construction guys out there and investors 
who say, we should be building multi-family housing?
    Ms. Martinez Myers. Our view on that, I think, would be 
that if you limit--if you decide that once we get to a 75 
percent homeownership rate, we should stop pushing that button, 
also says that you would stop pushing the button that allows 
people to create wealth through homeownership.
    And homeownership creates so many other opportunities for 
people and families and the government because there is a 
higher paying of taxes, there is greater investment in the 
community, and all those things that you would sort of limit 
its capability.
    So in my view, if you are going to limit the homeownership 
rate by saying, oh, once we get there, that is good enough, you 
are also saying you would limit the possibilities of what it 
could mean to the--
    Mr. Garrett. Now, I am not going to put words in his mouth. 
But Dr. White might say that there are other ways to create 
wealth in this country other than homeownership--is that 
something we are--we might go down that road?
    Mr. White. I was going to say that in the last 3 years, it 
hasn't been a creator of wealth, among other things.
    Mr. Garrett. Yes. There you go.
    Mr. White. Yes, it was, for previous decades. Look, I don't 
know what that number is. It can't be 100 percent because it is 
clear: Homeownership is not for everyone. It requires a 
relatively steady income. It requires budgetary discipline. It 
requires an understanding of the obligations you are taking on.
    There are, as Ms. Martinez Myers just indicated, positive 
consequences for communities. That is why we want to be 
encouraging it. But, you know, within limitations, and for sure 
the very broad brush approach mostly doesn't encourage 
homeownership. It mostly just encourages people who would 
otherwise buy anyway to just buy a bigger house with five 
bedrooms rather than four, four bathrooms rather than three, on 
a bigger lot. Where is the social value in that?
    Mr. Garrett. Right.
    Ms. Wachter. This deregulated environment did not encourage 
homeownership. Contrary to what Dr. White said, homeownership 
rates have declined in the last 3 years. Homeownership rates 
were at the maximum in 2004. And since 2004, homeownership 
rates have declined in this country.
    What is important is a mortgage market that works, not only 
for homeownership but also for multi-family housing. A mortgage 
market that works supports multi-family options as well.
    Mr. Garrett. Did you comment on recourse loans in your 
testimony with regard to--I guess you talked about the Danish 
    Ms. Wachter. I would be pleased to talk about that.
    Mr. Garrett. Just a sentence because I don't have much 
time. Their system has recourse loans. Right?
    Ms. Wachter. That is correct.
    Mr. Garrett. We generally don't.
    Ms. Wachter. That is correct.
    Mr. Garrett. Which is better? Which works better?
    Ms. Wachter. Well, certainly recourse is decided by the 
States. And I do think we can have a viable system that is 
consistent with financial stability with non-recourse. We had 
it for decades. It is only with the growth of the private label 
mortgage-backed securities that we have had the financial 
instability that we have seen the last few years.
    Mr. Garrett. Okay. I will go to Mr. Morrison. Really quick, 
though, with regard to the private label, what I hear is it 
didn't work because, in part, we didn't have all the rules and 
regulations in place so you would have all those problems.
    But if we come up here with all the right rules and 
regulations in place for the private label marketplace, could 
we see that with one of my pet projects, which you heard 
before, the covered Bond situation? Could we see those combined 
to basically expand the level that we need for a secondary 
market and the--
    Ms. Wachter. I am sorry, Congressman. I may not be 
understanding your question completely.
    Mr. Garrett. Sure.
    Ms. Wachter. But my understanding of the Danish mortgage 
system is actually it is not that different than our GSEs.
    Mr. Garrett. Mr. Morrison?
    Mr. Morrison. Yes. Mr. Garrett, I am a proponent of 
recourse. I think recourse is an important part of a good 
system. And there is no reason you can't have recourse of 
various structures.
    Recourse is actually wrung out of our system by Basel I 
capital rules, which made a transferred asset with recourse 
look exactly the same as a retained asset in terms of 
capitalization. And that is really why we have a non-recourse 
    And we could have a recourse market if we designed the 
capital rules sensibly to measure the risk. So you can have a 
recourse market, and it is one option for ways for the private 
sector to bear the risk. And it is not the only model; it can 
be a part of a model. It can be a mixed model.
    So I would support your notion. Covered bonds are no 
    Mr. Garrett. Right.
    Mr. Morrison. --vehicle. It is another way of putting 
certain amounts of collateral behind your credit guarantee. So 
it is a way for the originating institution to stand behind it.
    The question at the end of the day still is: Where does the 
liquidity come from? The system as a whole. And what kind of 
liquidity do you get for those bonds versus bonds which have 
some kind of guarantee on them?
    And you can do both. I don't think we are really at war 
with each other on the options. I think it is a question of 
maximizing the benefit in the end.
    Mr. Garrett. Right. And I will close on this, then, is that 
we are hopefully coming up with a solution. And in light of 
your comments on the political realities, some great sage one 
said, ``Don't let any great crisis go to no good use.''
    Mr. Morrison. Right.
    Mr. Garrett. We are going to try to use this crisis to come 
up with something that actually works.
    And one last comment is is that I know you made a comment 
to Mr. White's comment as far as--and I appreciate your thought 
as far as targeting the money. And you are suggesting you can't 
always target, and you gave the example of Social Security 
being the broader system that really works, as an example, of 
    But we know that within a decade or so, Social Security is 
broke. And so that may not be the best example of saying--
giving us a system that is really working well across-the-
board. And targeting health care systems or targeting things 
might actually be--
    Mr. Morrison. Whatever system you have, you have to pay for 
    Mr. Garrett. Yes.
    Mr. Berman. If I may respond to an earlier part of your 
question, with respect to multi-family--
    Mr. Garrett. Yes?
    Mr. Berman. --in that instance, and I happen to be a multi-
family lender, Fannie, Freddie, FHA--that system today as well 
has become totally reliant on the GSEs. Over 75 percent of 
lending today in the multi-family sector in through the GSEs.
    And so it in part points to another role of the government, 
which is to smooth out times--certainly times like this, when 
we are in crisis. But also it is not just when there is a 100-
year flood. But between those times, to create a stable system 
where there is always liquidity in those markets for both 
multi-family and for single family.
    Ms. Martinez Myers. I wanted to add to that as well. And I 
guess to go back to some of the original questions around the 
role and why the government should continue to play a role, I 
guess when you look at real estate in general, the industry, 
and we looked at it honestly and said all the various sectors 
of the industry combined represent, what would you say, 20 to 
25 percent of our GDP?
    I would think the government would have an interest in 
preserving and keeping a healthy industry because it is so much 
of our GDP.
    Chairman Kanjorski. Mr. Manzullo. And after you get your 
reservation, if you guys do not mind, we will open it up to the 
three of us to throw questions back and forth and sort of make 
it a roundtable panel because I think we could get some 
interesting responses that way.
    Mr. Manzullo?
    Mr. Manzullo. Well, I want to thank you guys for sticking 
around. I had some other things to do, but I called my wife and 
I said, these people have been here all day, and it is a very 
interesting and tremendously important topic.
    I have been listening to the testimony going on here, and 
this is very interesting. Ms. Martinez Myers, on behalf of the 
National Association of Realtors, you want to have this hybrid. 
And Dr. White, you say no hybrid. Let's let the market forces 
determine everything.
    But the real mess has to do with the fact that people 
bought homes who couldn't afford them in the first place. Isn't 
that correct?
    Mr. White. Certainly. In many instances, that has to have 
been true.
    Mr. Manzullo. I mean, that is what made the loans go bad, 
is they closed on these loans, the so-called cheater loans, and 
    Mr. White. But it is because everybody was drinking the 
Kool-Aid that housing prices can only go up. And if housing 
prices can only go up, it is never going to be a problem.
    Mr. Manzullo. Right. But even under the Fed, the Fed had 
the authority, has the authority, to do, among other things, 
two things. Number one, the Fed can govern the instruments. And 
number two, it can set forth underwriting requirements. Okay?
    So the regulator that could have stopped all of this was 
already in place. And it wasn't until December of 2007 that the 
Fed did this top to bottom review and came to the incredible 
decision that you can't buy a house unless you can afford to 
buy it.
    I was stunned when the testimony came forth. And then 
again, that testimony came forth in October of last year. But 
the requirement is not effective until October of this year.
    And I am listening to your testimony and see the tremendous 
angst that goes on from the builders, with Mr. Robson, to the 
Realtors and the mortgage folks in between. But, I mean, if 
somebody had just--if the Fed had said, look, you can't sell a 
house to somebody who can't afford it--I mean, the regulatory 
agency was in place. Don't you think that would have stopped 
this? Yes?
    Ms. Martinez Myers. If I may comment, because your comment 
that says that all of this is only because people got loans 
they couldn't afford to pay. And I know that in the light of 
our conversation around the GSEs, I think that we need to kind 
of step back a moment and say, okay. For many, many years, 
decades, the GSEs did a really great job at providing 
affordable product that was sustainable.
    And in fact, their foreclosure rate was something less than 
1 percent. So for years they did a very good job at helping to 
grow homeownership, particularly among low- to moderate-income 
    Now, their biggest crime is probably diverting from that 
and buying those bulk loans with some assets and loans that 
were not the kind of loans--
    Mr. Manzullo. Under pressure from both parties.
    Ms. Martinez Myers. That's right. They diverted from what 
they normally would do. So I think when we are sort of using 
the hammer to sort of hit them over the head for that action, I 
think everybody has to take a little responsibility for that.
    And I think the industry has to take some responsibility 
because there is no doubt--and I think Chairman Kanjorski 
said--there is a lot of greed out there. The fuel got hotter. 
People kept selling. People kept pushing. People thought it 
would continue. People took loans thinking that they could flip 
the house or sell it and make a profit. And when it stopped, it 
was not a good story.
    So I think there are lots of different factors that 
contributed to that. Some people themselves--I mean, a lot of 
people who have been homeowners for years refinanced their 
house, took out that equity, used it for things unrelated to 
their home, and the market changed, and guess what? Now their 
house is worth less.
    Mr. Manzullo. But, you know, there are--there have been, in 
the past 20 years, periods of time when people paid ``X'' 
amount for their house, and then the houses have fallen in 
value. You have seen it happen here in northern Virginia.
    But they just hang on, and then 5, 6, 7 years later they 
recover. And, you know, that is a lot different than whether or 
not they could afford the house when they bought it in the 
first place.
    But what I don't understand, and maybe somebody here can 
clue me in, why did the Fed sit back and do nothing? Does 
anybody want to take a stab at that?
    Mr. Morrison. I think it is a very good question. I think 
the Federal Reserve fed this crisis in two ways. They fed this 
crisis by keeping interest rates low for an excessive period of 
time, and they didn't discharge their regulatory responsibility 
with respect to the subprime market.
    Those things I think you are absolutely right about, 
although it doesn't do us much good to be right about that.
    Chairman Kanjorski. Whoa, whoa, whoa. Let me break in here 
a second. What obligation does the Federal Government have to 
do anything? You are the guys on that side saying, stay out of 
our bedroom. Now why do you want us to get into all your 
    Mr. Manzullo. No, no, Mr. Chairman. What I was saying is 
that we are looking for a new regulatory system that will--
    Chairman Kanjorski. Not really. Not really. We are looking 
really for the answer of why do we get ourselves so involved, 
create systems that fail--
    Mr. Manzullo. Right.
    Chairman Kanjorski. --and then we end up blaming the person 
who was not originally part of the transaction?
    Mr. Manzullo. Well, no. But--
    Chairman Kanjorski. Your indication here is the Federal 
Government had a responsibility to see that prices were not too 
high or--
    Mr. Manzullo. No, no, no.
    Chairman Kanjorski. What was the Fed supposed to do?
    Mr. Manzullo. No, no. The Federal Reserve has the authority 
to--they could have stopped the 2/28 mortgages and the 3/27 
mortgages. And the Federal Reserve could have said, look, we 
have some very basic underwriting requirements that when you 
buy a house, you have to have, you know, a minimum of 5 percent 
down or some other type of mortgage insurance, etc.
    I am just saying that those--that the means by which these 
subprime mortgages could have been stopped--because they were 
too easy; the credit was too easy--that regulatory process was 
already there. It just wasn't used. That is what Mr. Morrison 
just said.
    Chairman Kanjorski. You know, I think you all convinced me 
at this point we have to prevail upon the Speaker and the 
Leader of the Senate to convene a committee to determine what 
caused this thing. If we think 2/28 mortgages caused this 
thing, no wonder we cannot solve this thing.
    It has nothing to do with it. It is minuscule. Who 
testified earlier, Mr. Lockhart, about the $200 million in lost 
interest on a $100 billion loss. It is minuscule. Our problem 
is why are we accepting the presumptions that we have a role to 
play, a committed role, a have to play? And why are we blind to 
what really happened?
    And I have a suggestion. I did the--got here a little 
earlier. You know, our severeness in the real estate breakup 
occurred in the last 4 years.
    Mr. Manzullo. Right.
    Chairman Kanjorski. And it is when securitized mortgaging 
left government-regulated entities, went to Wall Street, and 
Wall Street discovered a way to sell crap for a AAA rating, and 
did. And they sold it all around the world.
    And the only reason we felt obliged to go in and buy that 
crap from around the world is it looked like it had a Good 
Housekeeping seal of approval of the United States of America. 
And we were too embarrassed to recognize we stole this money 
all around the world with crap.
    Mr. Manzullo. No. I agree. I mean, crap is crap. But the--
    Chairman Kanjorski. Well, then, why do we not identify who 
put that crap together? It was the private--
    Mr. Manzullo. Mr. Robson wants to clear up this crap.
    Mr. Robson. Well, I wish I could.
    Chairman Kanjorski. It helps things grow.
    Mr. Manzullo. Mr. Chairman, are we in the informal portion 
of the hearing now? All right. Okay.
    Mr. Robson. There are a number of issues, and I don't want 
to claim that I am the expert on how what is whole crisis came. 
But I think it goes to the point of--I think if you have too 
much government or too much private side, there can be a 
    There needs to be checks and balances. And I am not going 
to get into whether the Fed could have stopped it, or whether 
they could or would have or anything else. But I think there 
are a number of issues.
    If you look back where the private sector, the private 
mortgage security started, it was really because there was a 
failure of FHA to a certain extent, that they had not 
monetized. They had not kept up with a number of--really, kind 
of providing mortgages on the low end of the market.
    The private sector stepped in and started offering a lot of 
things that FHA was not able to do because of government red 
tape and a lot of bureaucracy that was there. That kind of 
started the whole ball rolling. Certainly--
    Chairman Kanjorski. We can cut that red tape real fast by 
taking away any tax consequences of letting interest be 
deducted from income. Would you recommend we do that?
    Mr. Robson. No, I wouldn't.
    Chairman Kanjorski. Why not?
    Mr. Robson. As far as what?
    Chairman Kanjorski. I will bet I can identify three people 
at that table who would disagree with doing that because you 
get an advantage in your business with it. You have bought 
interest an advantage.
    I am not castigating it. I vote for it. I think it is a 
good principle to get private housing out there. But everybody 
sitting at that table and everybody in this country is pushing 
their own self-interest, and have extended to the point it took 
the system down.
    Now the question is: How do we get out of it? I am trying 
to suggest that let us not get out of it by redoing what we did 
    Mr. Robson. And that is to my point. I mean, GSEs were--
their primary responsibility was liquidity. I mean, it wasn't 
necessarily guaranteeing. It was providing liquidity because 
those of us who remember the days when you had a savings and 
loan, you couldn't get a new loan until they either sold them 
or you got new deposits in.
    The whole liquidity question changed the mortgage finance 
system of this country. And the new system, whatever way--
forget about how we are going forward. A joint private 
government system--and I would say start with the Federal Home 
Loan Bank, is a good place to start.
    Mr. Manzullo. Well, that is because the banks are 
shareholders in it. They eventually would be the losers if 
their loans went bad.
    Mr. Robson. And they have skin in the game as owners of 
that bank system.
    Mr. Manzullo. No, but Dr. White, you were on the board for 
that, weren't you?
    Mr. White. It was a different time, but that's right. Part 
of the responsibility of being a board member of the Federal 
Home Loan Bank board was overseeing the Federal Home Loan Bank 
system, as well as Freddie Mac, as well as regulating the 
savings and loan industry.
    Mr. Garrett. But would that give us the problem that you 
were talking about before, of a subsidization that just is even 
more obscure than what we have today?
    Mr. White. Well, I mean, it is the same implicit guarantee 
that supports the Federal Home Loan Bank debt as is supporting 
the Fannie and Freddie debt. It is the same--the Federal Home 
Loan Bank system is a GSE as well.
    The mutual ownership hasn't prevented a number of the banks 
from having their financial difficulties--not as serious as 
Fannie and Freddie, but still, they are suffering their 
difficulties as well.
    Chairman Kanjorski. That gets you in trouble. Good 
regulation and open regulation will tend to subside excess. Is 
that correct? I mean, I am a great supporter of the Home Loan 
Bank system. Mr. Morrison knows. But we know a few Federal Home 
Loan Banks that started to really get into serious trouble. If 
they had not been reined in by the regulator at the time, we 
would have been bailing them out, if we are not already.
    And we have seen that in all of our financial institutions. 
But the problem really goes to excess, is the argument I am 
trying to make, that--you know, if you went back to the values 
that you are not trying to get a free lunch--not you but we, 
the American people.
    If we are not trying to get a free lunch, if we are not 
trying to find pie in the sky over something that does not cost 
us anything, we will start evaluating things at their real 
value, and that is all we are going to pay. And if you are 
going to be a cosigner or a supporter of that, that is all you 
are going to support or cosign for. But we are always pushing 
the envelope.
    There was a great gentlemen, this morning on the Secretary 
of the Treasury. It went through his purchase of his home in 
Westchester County, New York. Did anyone hear that, by any 
chance? You know, he bought a $1.7 million McMansion and in a 
very short period of time had to sell it. And it showed what 
the drop of value was and how it went underwater very quickly 
for him.
    But drive out in Virginia and look at the McMansions that 
are out there. And I think we need to start asking the 
question: Where are these people making all this money to buy 
all these McMansions? And they are not. They are getting it 
from institutions that government-supported or underwritten, 
are they not?
    Unless there are an incredible amount of millionaires that 
I am not aware of in this country, it seems to me they are 
expending a great deal more for a piece of real estate than 
they should in rational terms.
    Do you find that to be the case, Mr. Robson?
    Mr. Robson. Those sorts of homes, I mean, if they are the 
McMansions, wouldn't be part of Fannie and Freddie anyway.
    Chairman Kanjorski. I agree. I agree. I am not--
    Mr. Robson. Those are going to be the private label 
    Chairman Kanjorski. And are some of those underwater or 
    Mr. Robson. Sure.
    Chairman Kanjorski. And why should they be under? You know, 
here is a question I really--going to the private sector, I am 
very impressed with all of the home builders, the Realtors, all 
of--but I have to ask the question: Did you, any of you, see 
this happening 3, 4, 5 years ago as some of us did?
    And some of us fought the question that--you know, I 
remember with embarrassment this committee passing an amendment 
to reduce the requirement--I think it was the FHA requirement, 
reducing it from 3 percent to 1 percent or zero on the 
downpayment. Does anybody remember that just recently? Actually 
doing it at the time, the market was starting to collapse 
because of these ``crap mortgages'' that were out there?
    Now, some saw it here and some made a question about it. 
Did any of you in the industry see that, and did it not bother 
you? Okay. What did you--did it bother you?
    Ms. Martinez Myers. Actually, the Realtors testified before 
this committee about predatory lending in 2004.
    Chairman Kanjorski. Yes. But I am not talking about 
predatory lending. That is not necessarily predatory lending. 
Predatory lending is a much higher price on a piece of real 
estate than it is worth according to a legitimate appraisal; 
and then a high price of interest to be paid that should not 
finance a piece of property that expensive.
    I am talking about just a simple question: Did you not see 
the real estate excesses that occurred in this country in 
probably the last 4 or 5 years?
    Ms. Martinez Myers. We put out brochures in 2005 and 2004 
to help the industry and the consumers understand how to buy 
mortgages, and to prevent them from buying unsuitable loans. We 
talked about--
    Chairman Kanjorski. So all the smart people did not buy the 
loans, and all the stupid ones did?
    Ms. Martinez Myers. No, no. I mean, at the end of the day, 
we have to face it. Whether people buy homes--well, people only 
buy homes once every 7 years, on average, I think, in this 
country. And they never become experts in the process.
    And we know that as people in the industry. And we 
constantly have to educate them around what is available, what 
they should be watching for, and to watch out for predators who 
are out there giving them more mortgage and more promises than 
they probably should have been involved in.
    We also tried to push for FHA reform, as Mr. Robson said 
earlier, in 2004.
    Mr. Garrett. But you also pushed for higher conforming loan 
limits. And so for those people who were buying those 
McMansions, and even though a $700,000 house is still a 
McMansion in most parts of the country.
    Ms. Martinez Myers. Well, except only in high-market areas 
because affordability was outpacing the ability for a buyer to 
get into a starter home at that point. Incomes weren't 
increasing at the rate that housing was increasing. But--
    Mr. Garrett. A $700,000 house, even in New Jersey, I mean, 
they are still pretty darned nice houses.
    Chairman Kanjorski. That is not a starter home.
    Mr. Garrett. It is not a starter home.
    Ms. Martinez Myers. Well, it is not. But in the State of 
California, it would be a starter home--$500,000. People could 
not get into the State of--not today, but--
    Chairman Kanjorski. That is economic discrimination. Maybe 
they should not be living in California if they cannot afford 
    Ms. Martinez Myers. But I think that the industry knew. The 
industry started--I can tell you at the National Association of 
Hispanic Real Estate Professionals, we started to talk to them 
about the changes that were coming on as well. So the Realtors 
have been very involved in trying to alert the brokers to 
protect their customers and to push for reforms.
    Chairman Kanjorski. How about the home builders? What do 
they do? They stopped building.
    Mr. Manzullo. I have a question.
    Mr. Robson. You know, the private--it was really the 
private label mortgages that funded the McMansions and a lot of 
this, and the exotic stuff. I mean, Fannie and Freddie didn't 
fund exotic mortgages.
    Chairman Kanjorski. No. Quite frankly, they did not. They 
ended up buying the private stuff, and they ended up, you know, 
    Mr. Robson. Unfortunately, yes.
    Chairman Kanjorski. Right.
    Mr. Robson. I mean, they bought the stuff they wouldn't 
    Mr. Garrett. So should the FHA be raising its downpayments, 
    Mr. Robson. Down payment? From 3\1/2\ percent?
    Mr. Garrett. Yes.
    Mr. Robson. I think in order to promote people to get into 
a home, I think they ought to pay something.
    Mr. Garrett. Should they be tightening up--you made the 
comment before that part of the reason why we--part of the 
reason people weren't going FHA before was because of the 
darned red tape, which some people could construe that as being 
    Mr. Robson. Well, it was red tape and not keeping up with 
technology. I had a meeting with former Commissioner Montgomery 
last year. They were still hiring people who knew Fortran. And 
this was last year.
    Chairman Kanjorski. Were doing what?
    Mr. Robson. Fortran. This is a 40-year-old computer 
programs. And as of last summer, they were still using Fortran 
    Mr. Garrett. So just as to the underwriting, I mean, 
Director Lockhart was here before, and I think he mentioned it 
yesterday, that--and I guess you probably know the numbers--is 
that the default rate on FHA loans is beginning to spike up as 
    So some might say, hey, that is like our first warning sign 
that we might have some problems over there that we all should 
be looking at. And so call it red tape or--I understand the 
computer stuff and what have you. But we should be tightening 
these things up over there before we create a whole new 
problem. Anybody agree?
    Mr. Manzullo. I have a legitimate question down here.
    Mr. Garrett. That's a legitimate question. Should we be 
tightening things up with the FHA despite the fact that it may 
have a dampening effect--right? I mean, if you tighten things 
up, it may have a dampening effect on what you guys do. But 
would that be a prudent thing to do?
    Ms. Martinez Myers. Well, I am not sure it would be a 
prudent thing to do at this time since we are trying to absorb 
as much of those foreclosed properties and the inventory that 
is in the market to get things going again.
    But I believe Secretary Donovan has just said that FHA is 
doing great, and that they expect to see a profit of $1.6 
million this year. So--
    Chairman Kanjorski. That is only because we made the mark-
to-market rule.
    Mr. Morrison. Mr. Garrett, I think you are right to ask 
questions about where FHA is going. So you had better look at 
FHA for sure.
    Chairman Kanjorski. Let me ask you this: Are we just going 
to be putting a patch on a tire as we come out of this? Or are 
we going to get the opportunity to focus and really make 
fundamental corrections to the system? And is that possible?
    Now, Professor, you had mentioned non-recourse loans? I am 
not quite up on my real estate law. Are you talking about the 
principle that you cannot go back for excess assets against the 
owner? The Pennsylvania rule.
    Ms. Wachter. Yes. That is what I understood the Congressman 
to be asking. I don't know if that is what he is asking.
    Chairman Kanjorski. Right. Well, let me ask you about that 
principle. Where did that come from, that you can throw the 
keys in and walk away? In my State, you cannot do that. You 
throw the keys in and they say, okay, where is your car, your 
firstborn, and everything else you own?
    Ms. Wachter. It does vary by State.
    Chairman Kanjorski. Yes. It varies by State. And did 
anybody do a comparison as to the foreclosure rate in 
Pennsylvania, relative to California or almost any other State 
that has a recourse rule? It is very low. When I sat on a bank 
board, a foreclosure of \1/2\ of 1 percent was huge because 
people did not want to give up their trucks or their guns. They 
like guns in Pennsylvania.
    Mr. Garrett. But that is when you were patching tires, too.
    Mr. Manzullo. I have a question that I would like to ask 
Ms. Martinez Myers.
    I looked at your testimony, along with the testimony of 
everybody else, including the Libertarian to your left. And you 
talk about wanting this hybrid. Okay? Well, apparently in 
today's economy in the United States, any business is subject 
to being taken over by the Federal Government.
    We have had several hearings here on systemic risk, and 
when Mr. Geithner testified before this committee--I believe it 
was in--gosh, I am not sure when it was. It was in January--and 
he talked about this great super-regulator that would be over 
all the companies that could pose a systemic risk or perhaps a 
moral hazard. And a moral hazard really is a teetotaler who 
drinks a beer, because nobody could define these terms.
    But I guess what bothers me is, you know, in the old days, 
you got a mortgage, you went to the bank, and the bank held it. 
And the mortgage was securitized by an appropriate ratio of 
demand deposits. And the money was simply set aside to cover 
the mortgage in case there was a problem on it.
    And then we lost that great personal contact. But my 
question to Ms. Martinez Myers is: You talk about having a 
system that is fluid and liquid and that works. But you also 
make the statement that you want to make sure that money is 
available during tough times, and only the government can make 
that possible, as Dr. White gives us his big smile on that.
    Would you explain that? And Dr. White, could you respond to 
    Ms. Martinez Myers. I guess you are asking me to explain 
why we feel that way. Well, the government has proven, through 
the experience with the GSEs, that through their existence, we 
were able to have liquidity in the market in good times and bad 
times. When things are tough in bad situations, they pull their 
money back, they don't make it available, and the market gets 
    We are looking to make sure that we can continue to help 
people sell their homes, help people buy homes in any kind of 
market because people are going to have housing needs 
regardless of what the market is doing at any given time.
    I mean, we have situations. If you look at the example in 
the commercial mortgage scenario and the jumbo residential 
mortgage scenario, those are not guaranteed by the U.S. 
    Mr. Manzullo. That is true.
    Ms. Martinez Myers. Those folks, right now there are people 
who are in trouble, say, in the jumbo market who are looking to 
refinance their house. So let me give you an example.
    You are somebody who has made a good living. You have a 
partner who loses a job. Suddenly you can't make this big 
payment anymore. You have one of those exotic loans. You want 
to go and try and refinance it. Now your house is worth less. 
And it is not guaranteed, and you don't fit into the program 
that the President has put out there. And there is no 
guarantee, and you can't refinance it because there is no money 
    So now you are going to be delinquent, when you have been 
trying to avoid that, and you are going to lose your house. And 
the likelihood is you are going to go into foreclosure. And 
there are lots and lots of stories like that, commercial folks 
who are looking to--their debt is coming due.
    They are trying to get them refinanced. They can't get any 
liquidity in the market. There is no funding for them. And they 
are in the same boat. We are seeing delinquencies rise, and we 
are seeing them go into foreclosure.
    Mr. Manzullo. So that--
    Ms. Martinez Myers. That would happen to the whole market.
    Mr. Manzullo. Okay. That is a good answer.
    Dr. White, what is wrong with her answer?
    Mr. White. Look, we do have a Federal Reserve. They are a 
lender of last resort. They are a provider of liquidity. We 
have seen just how creative Mr. Bernanke has been able to be 
over these past few years, and I applaud his creativity. I 
really do. I think he has done a spectacular job.
    At the same time, we saw that the GSEs weren't able to step 
up when hard times hit, and in fact, they went into the ditch. 
And it is only because the FHFA now is steering them and trying 
to get them out of a ditch that now they are part of the 
solution. But they weren't part of the solution, and were going 
into the ditch themselves.
    And so we do have--back to my point. We have a Federal 
Reserve. They are the lender of last resort.
    Mr. Manzullo. Yes. But so you are substituting the private/
public partnership that is advocated by Ms. Martinez Myers by 
saying privatize the GSEs but have Federal Reserve on a 
    Mr. White. I do believe in there being a lender of last 
resort in the financial system. I think that is terrifically 
    Mr. Manzullo. Then you believe the same way she does.
    Mr. White. Well--
    Mr. Manzullo. That is okay.
    Mr. White. --I think by lending--
    Ms. Martinez Myers. That is not a bad thing.
    Mr. White. Well, thank you.
    Chairman Kanjorski. Dr. White--
    Mr. White. You focus it in a single entity. You don't 
spread it out.
    Mr. Manzullo. I have always wanted to ask a professor 
questions like that. And thank you, Mr. Chairman, for the 
    Mr. White. I am happy to help.
    Chairman Kanjorski. Doctor, you are just switching 
insurance companies, are you not? You are changing--making the 
Federal Reserve the insurance company to the system.
    Mr. White. Well, I would--
    Chairman Kanjorski. I mean, to be sort of consistent with 
the free market system, you all should be pressing not to have 
the Federal Reserve as the lender of last resort.
    Mr. White. Oh, no. I'm sorry. But when we do have financial 
crises, that is exactly when we do need a lender of last 
    Chairman Kanjorski. So you do need the government?
    Mr. White. Oh, for sure. For sure. And I said that before. 
We need a Federal Deposit Insurance Corporation.
    Chairman Kanjorski. Why did you not say that when some of 
our members were here?
    Mr. White. Well, and we need a Federal--
    Chairman Kanjorski. These guys are telling me every day 
they do not need the government. We are interfering with them.
    Mr. White. All right. I am with you on this. And let me say 
for the record, we need a Federal Deposit Insurance 
    Chairman Kanjorski. Mr. Manzullo, did you hear that, that 
you guys are wrong on that side?
    Mr. Manzullo. This hearing started out pretty boring, but 
it has really picked up in the last hour or so.
    Mr. Berman. Mr. Chairman? Mr. Chairman, if I may, you know, 
we have a situation today where we have a 100-year flood about 
every 10 years.
    Chairman Kanjorski. And the government causes it.
    Mr. Berman. Well, no. What I would suggest is that the 
government can play a role in helping to smooth out those kinds 
of crises. And there is not only a role for the government as a 
lender of last resort, but there is also a role in providing 
ongoing liquidity for a core set of products for both single 
family and for multi-family that can really be the central 
nervous system, if you will, for the secondary mortgage market 
and providing that liquidity; stable pricing, which is also 
important for homeownership; and a stable set of mortgage 
products that the economy can be built on.
    Chairman Kanjorski. No. I agree with you. And of course I 
sound terribly radical up here. I mean to because I want to 
excite you people. But the reality is I am getting very tired 
of having witnesses come in and testify, and some of my friends 
on both sides of the aisle say, ``We are going to pass this 
special law so this will never happen again.''
    Now, none of these people are that stupid. Okay? So they 
know it is going to happen again. It has happened all the way 
through our history. The fact of the matter is, if you really 
look at our present situation, we went 50 years minimally 
without having a financial crisis.
    That was the first time in our history as a nation that we 
went that long; or we perhaps went 75 years. And I think 
everybody would have to admit the reason was we had good 
regulation until it went awry.
    Now, our problem is we have to get back to ``good 
regulation.'' Maybe we even have to go a little beyond that and 
say, we need to get back to good values. And that is what I am 
sort of digging you all on.
    You and I have a responsibility, it seems to me, that when 
we see somebody who is hedging the system, feeding the system, 
hurting the whole system, we have to realize it hurts us, too, 
because if they destabilize this system, all of us are going to 
get hurt.
    And the question is: What are we doing about it? And I 
don't think for the last 5 years, we did a lot; certainly not 
enough. And if we go right back into repairing this, correcting 
some of our regulation, but we allow all these people to 
function out there in the system until they can find another 
way to escape responsible regulation in capitalism and it goes 
critical, and it has in the last 5 years, what have we gained?
    We have gained very little. All we are doing is chasing our 
tail around the block. Maybe that is not wrong. Maybe that is 
how the system is intended to be. But I would hope after--there 
is a lot of pain, an awful lot of pain. And we don't see it 
down here.
    You know, quite frankly, all of you are probably wearing 
suits that exceed the cost of most Americans' suits. You are 
driving cars that exceed the cost of most Americans' cars. Your 
kids are going to universities, and it is not--no, seriously. 
In Washington, you do not see the pain that you see when you go 
back to my district or you go back to Mr. Manzullo's district.
    There are people living in this country for whom a sickness 
is a disaster. Just meals, just food, a disaster. It is a 
worrisome thing. It is not a question of educating your 
children; the need to actually not have them in school because 
you cannot even afford to have them there.
    Now, we are not making accommodation for that. Oh, we are 
passing goody acts and we are, you know, doing nice things that 
are covering it up with whitewash, if you will. But this time, 
my friend Rahm is right. A disaster should not go unused. We 
can fundamentally change some of this system to make it fairer, 
better, and more equitable. And in some respects, all of us are 
going to have to give a little.
    I am going to ask a question, and we have to wrap this up. 
Do not worry, though, we checked. The airplanes are not flying 
because of the thunderstorm, so you are all safe.
    But take a shot at us now. Republican, Democrat, Banking 
Committee. Give me the worst criticism you can of our failures 
as a government and as people. And do not pull any punches.
    Ms. Martinez Myers. May I?
    Chairman Kanjorski. You may start. You seem to like to do 
that, Ms. Myers. Go.
    Ms. Martinez Myers. I am going to give you two.
    Chairman Kanjorski. Yes.
    Ms. Martinez Myers. Okay. I think that--and I am actually 
going to do one better. I am going to say, we are going to take 
some responsibility for this, too. The FHA piece, and we have 
talked about this and have alluded to this before.
    Industry probably wasn't pushing the FHA reform soon 
enough. We should have been talking about this in 2001, maybe 
when we started to see changes, and we didn't. We got around to 
it in 2003/2004. We presented it to Congress. And it sat around 
and sat around.
    And we have to ask ourselves: If we had the FHA program 
that we have today that was relevant in the marketplace, would 
we ever have had the need for subprime mortgages, and would we 
be here today? I think we all have to take responsibility for 
    The second area that I would point out to you is we have 
seen a lot of moratoriums on these foreclosed properties. We 
need to rip the band-aid off so we can start the how long 
because right now, if we keep those moratoriums--and now they 
are released, and we are going to see a big flood of real 
estate in the marketplace over the summer. There are something 
like 800,000 foreclosed properties that are going to hit the 
    That is going to have an impact on our market. We have to 
get those absorbed. If we are ever going to right this market, 
we have to get those absorbed. And the only shining light on 
that foreclosed property--and it saddens me and breaks my 
heart; like, you know, I am involved in some of that business 
myself--that people are losing their homes.
    But the bright spot is there are a lot of first-time home 
buyers buying those homes. People who didn't jump into that 
subprime market, people who sat on the sidelines because they 
couldn't afford it, and are in there. And maybe our 
homeownership rate will get back to normal in the process.
    But we have to get that--blow that inventory through here 
and out of here for those that we cannot save instead of 
dragging our feet. No good is going to come of that.
    Mr. Robson. Mr. Chairman, could I--
    Chairman Kanjorski. Mr. Robson, do you have something to 
add? I just happen to know you have a pressing engagement.
    Mr. Robson. I appreciate that.
    Well, two things. I think I would just follow up to--
    Chairman Kanjorski. This is hate mail, now. You are 
supposed to give us the worst you have.
    Mr. Robson. One, the whole credit problem, I mean, there is 
a whole credit problem in this country. It is not just 
mortgages. It is AD&C loans on the construction side. It is 
commercial. It is--credit has completely frozen up.
    And what sprouts we are seeing in the economy, especially 
in housing, hopefully that it looks like we are maybe reaching 
a bottom on--at least as far as home sales are concerned, both 
new and existing.
    But if we don't get credit flowing throughout this 
country--whether it is small business, whether it is 
construction of development loans or anything else--we will not 
have a recovery.
    And then I just echo--and some of the other things that 
have been said today earlier that--some of the questions with 
Mr. Lockhart, the appraisal problems are a very, very big 
issue. If we don't correct some of the abuses on the appraisal 
problems, we will never recover, either.
    Chairman Kanjorski. Very good.
    Mr. Berman. Mr. Chairman?
    Mr. Robson. If I could, Mr. Chairman?
    Chairman Kanjorski. Yes. You are excused.
    Mr. Robson. Thank you very much.
    Mr. Berman. Two issues that I put out there that I think 
maybe we could have done better on. One is taking a more 
holistic approach. And there have been a number of comments 
about not only the GSEs today but FHA, the banks, the private 
label market, and the rating agencies. I think if we are too 
focused on just one piece of the regulatory puzzle, it is 
unlikely that we will be successful in solving and preventing 
this from happening again.
    Secondly, it has troubled me a little bit that some of the 
members are eager to latch onto a label of a solution. I think 
that at this stage of the debate, it is absolutely critical 
that we focused on principles and that we drill down on: What 
kind of ownership do we want for the entity?
    What kind of regulation do we want? What kind of products 
do we want? Where do we want the interest rate risk to be? 
Where do we want the credit risk to be? What do we need to do 
for liquidity? And jumping ahead and trying to put a label on 
that, whether it is a public utility model or a coop model or a 
bond model I think is a serious mistake.
    And rather, I think, if we have a principled approach and 
we start building up with building blocks from the ground up, 
we will end up with a model that--we will figure out what the 
name of it is after we create it, as opposed to trying to latch 
onto a model and say, that is a good one or that is a bad one.
    So I would encourage us to use that ground-up principled 
    Chairman Kanjorski. Very good. Shall we save Mr. Morrison 
or the professor for last?
    Ms. Wachter. Well, thank you. If I were to criticize, going 
backwards, one, the consideration of lowering the FHA mortgage 
downpayment to zero at that moment to me was just a 13th gong 
of the clock.
    And related to that, although I have no evidence but this 
is hearsay, it is out there that the GSEs were being 
encouraged, by Congress as well, to move into Alt-A and to 
subprime to help support that market.
    Going forward, I think that Congress has to be farsighted 
in understanding the problems with asset bubbles. Asset bubbles 
are just as lethal as inflation and recessions. Japan was 
brought to its knees for 10 years. The Asian financial crisis 
affected many of the tiger countries for more than 10 years.
    We have seen one. We can see more. We have had a housing 
market for decades in the United States, more than that, 
hundreds of years, even, in part because we have a very elastic 
supply of housing historically. We do not have an elastic 
supply of housing any more.
    And my colleague Dr. White argues for reducing restrictions 
locally so we would have a more elastic housing supply. But I 
just don't think that is in the cards for a variety of reasons, 
including concerns over the environment. And local control is 
simply in our blood
    So I don't think that is going to happen. Therefore, like 
Europe, like Asia, we are in a different world now. We are in a 
world where housing supply is inelastic. That means we are in 
bubble-potential world. But I don't think we can do anything 
about that from the basic regulation side. I think that means 
that we have to be attentive when housing bubbles are being 
    There were those of us in academe--I was one of them--who 
said, in the real estate academe, in the real estate department 
at the Wharton School, we were in a bubble in 2006. And I 
wasn't alone.
    And paying attention to this, and therefore to the 
potential for a major crisis when even reasonable loans are 
being priced at a point where prices aren't going to decline 20 
percent; a 20 percent downpayment gives you no protection under 
those circumstances--we will need to pay attention.
    Chairman Kanjorski. Let me stop you there for a moment 
because I am from Pennsylvania and I have a great deal of 
respect for the Wharton School. My father, my brother, my 
nephew, they are all Wharton people.
    They do have telephones, do they not?
    Ms. Wachter. Excuse me?
    Chairman Kanjorski. You do have telephones at the Wharton 
    Ms. Wachter. I was not at Wharton. I did put my papers out 
there. But why wasn't it picked up? And my understanding--and 
this is a question to which I do not know the answer; this is 
an historian kind of a question. It is not empirical. I can't 
do econometrics, to answer your question.
    But my understanding is there were good models out there. 
There were people saying this. But the models were not being 
purchased because there was no money in purchasing those 
models. Where the money was was continuing to get the deals 
    Chairman Kanjorski. Did you have absolutely no faith in 
government, either the congressional--
    Ms. Wachter. No. I absolutely have faith in government.
    Chairman Kanjorski. Why did you not take the time and the 
effort as an academic? You know, when a professor of your 
standing calls my office, you would probably get a priority 
because I assume that you would not waste your time or my time 
by calling. So I am going go talk to you about it, whatever the 
issue is.
    Why did you not do that? We have a lot of lonely people on 
the committee. They would have been--
    Ms. Wachter. Well, that is wonderful. I am thrilled to hear 
that is an option. We did publish our papers. We gave our 
papers at all of these meetings. They were in newspapers.
    There were models out that were--Case-Schiller had his 
models out there. You know, Case-Schiller is obviously out 
there. Mark Zandi was out there. Mark Zandi's company was 
purchased by Moody's. But prior to that, Moody's did not use 
Mark Zandi's models, which were excellent models.
    Chairman Kanjorski. Well, going forward, use the telephone.
    Ms. Wachter. I will. Thank you very much for the offer.
    Chairman Kanjorski. Thank you.
    Mr. Morrison? You know, I just want to blame you. You were 
here. Why did you not cure this problem? It is your fault.
    Mr. Morrison. Well, I thought I fixed the savings and loan 
problem, so then I left.
    Well, I think that just to go back to the GSE question, 
Fannie Mae and Freddie Mac were a wonderful symbolic 
battleground in the Congress. They either were the devil 
incarnate, and needed to be dismantled and got rid of so that 
the private market could function; or they were the best thing 
that was ever done for affordable housing. Without them, we 
would have no housing at all.
    And they were allowed to run a model which was totally 
unsustainable, a portfolio model of chasing growth stock status 
in the markets, and whatever they had to do to get there. After 
the years and years of the regulatory debate, what was most 
surprising to all the participants was that they were both 
    Those people who wanted to take Freddie and Fannie down 
apparently thought that Freddie and Fannie were so powerful 
that they would never be taken down. And on the other hand, 
there were those who thought they were so powerful that they 
would be the cash cow forever for affordable housing.
    And what really turned out is they were a house of cards 
that collapsed because of the very model that made them appear 
strong, the growth stock model: ``We can get this capital from 
the marketplace. We can give them portfolios, whatever it 
    I think everybody was blind to the reality behind that. It 
was parties warring over symbols. And I think by missing that, 
yes, they were not the ones who created the private market 
securities. But they in fact created that marketplace in many 
ways by funding the AAA tranche of subprime securities early on 
and made that market go, and then everybody else followed on.
    So I think that if the debate had been more honest--in 
1995, I had a conversation with Alan Greenspan about huge 
portfolios and the impact that they would have. And he was very 
concerned about the Federal Home Loan Banks, but not at all 
concerned about Fannie and Freddie because he said, ``Jim 
Johnson is the smartest man in town.''
    Well, he might have been. But his legacy we see. So we 
should be watching out for smart people and maybe do our own 
    Ms. Wachter. But Bruce, if I may, it wasn't that they 
bought these early on. They bought them--
    Mr. Morrison. They did.
    Ms. Wachter. What year did they start buying them?
    Mr. Morrison. No. They started buying them--they funded 
Ameriquest and others in 2002/2003 by buying their AAAs.
    Chairman Kanjorski. Well, now, Mr. Johnson was gone by that 
    Mr. Morrison. Oh, yes. No, I am not blaming Mr. Johnson. I 
am just saying that we had a lot of people who were blind to a 
model that was not sustainable, including Mr. Greenspan in 
    Chairman Kanjorski. No question about it.
    Mr. Manzullo, are you going to wind us up? I think Dr. 
White should get a crack at us, too.
    Mr. Manzullo. No. You know, the district I represent, in 
1980 and 1981, we had 25 percent unemployment. And there were 
more people unemployed in Rockford, Illinois, during the early 
1980's than there were proportionally during the so-called 
Great Depression.
    And Americans worked their way through that. A lot of it 
had to do with the inversion of the dollar and the collapse of 
the ability to sell manufactured items overseas, including 
machine tools, etc., because your district is very much like 
    But, you know, maybe I am thinking too simplistically here, 
is that we would not be in this problem, in this trouble, had 
not people bought homes that they couldn't afford in the first 
    And Mr. Chairman, do you know who some of the people were 
that were waving a red flag 5 years ago? It was the National 
Association of Realtors. They would come in the office, and of 
course they were thrilled to sell real estate and make 
    But I was questioning all the easy money going on, and you 
know that, and so were a lot of your Realtor colleagues, 
saying, this is great, but you just can't keep on going on like 
this because somewhere along the line something is going to 
    Chairman Kanjorski. I held hearings on it.
    Mr. Manzullo. Pardon?
    Chairman Kanjorski. I held hearings in my district.
    Mr. Manzullo. That's correct.
    Chairman Kanjorski. In 2004.
    Mr. Manzullo. That's correct. And these are the types of 
signals that were being sent out that people like myself and 
you were saying, there is something wrong here. It started with 
the laundering of the books by Fannie Mae in 1990--no, in 2003 
and 2004, with Franklin Raines and those characters taking 
those incredibly high salaries.
    And their bonuses were predicated upon the fact that they 
had to get to a certain point of profit, and they got down to 
the mill. Do you remember that, Mr. Chairman? It was mills, 
just so they could get that extra amount of money squeezed out. 
And we were screaming here.
    In fact, Fannie Mae had hired 17 lobbyist firms that were 
out there getting bogus postcards from 2,500 of my constituents 
saying, don't change anything at Fannie Mae. We don't want any 
reforms. And then the reforms that we wanted really were to 
tighten up the lending standards.
    But I guess we were just like John the Baptist, just crying 
out in the wilderness and no one was listening.
    Mr. White. All right. I will try to be brief. It is getting 
    If I were to offer the criticism that you invited, I would 
say you let us get way too deep into the whole housing issue. 
Again, there is a role for government. Bruce, you and I differ 
on this, but I have to speak truth to power. It ought to be a 
focused, targeted role.
    The broad brush role just gets us with a far too large 
stock of housing, and a far too small stock of human capital, 
of physical capital, as a consequence. That is a big cost that 
we have paid. We are paying it now in the current crisis as 
    Let's see. Some other things. Some small things--
    Chairman Kanjorski. How could that have been--
    Mr. White. There is RESPA.
    Chairman Kanjorski. Yes. But how could that have been 
    Mr. White. Sorry?
    Chairman Kanjorski. How could that have been prevented?
    Mr. White. Well, okay. You asked. The rating agencies.
    Chairman Kanjorski. They are the buggers.
    Mr. White. They are--you know, there is lots of blame to go 
around. But clearly they were one of the central parties here. 
And it was no accident that they became a central party. They 
were a central party because of financial regulation.
    Had that whole structure, and again, you could see each 
step made sense. But by the time you went down the road, you 
had a handful, a literal handful of rating agencies--
    Chairman Kanjorski. I have to ask you: Should they have 
been federally regulated?
    Mr. White. Say again?
    Chairman Kanjorski. Should the rating agencies have been 
federally regulated?
    Mr. White. I would argue no. But they also should not have 
been thrust into the center of the bond markets the way the 
bank regulators, the insurance regulators, the pension fund 
regulators, the Securities and Exchange Commission, all forced 
them into the center of the bond markets. And when the 
securitization process started--
    Chairman Kanjorski. No. I am trying to figure out, then. 
You would have had us not have a rating agency in any way 
giving indications of--
    Mr. White. Oh, no. No. I would have the rating agencies 
still there, but not as a mandated source of information. I 
want banks to have safe bonds. I want the regulator to work 
with the banks to have safe bonds. But it should be the 
responsibility of the bank to either demonstrate the bonds' 
safety to the regulator or have an advisor that it can 
demonstrate to the regulator.
    Chairman Kanjorski. Something like AIG Financial Products 
in London? A small operation of 400 people who have a bank, and 
have a regulator come over for a couple of weeks every year to 
look them over. And they get involved in transact counterparty 
positions of $2.7 trillion. That is what you would like that 
    Mr. White. Oh, no. Heavens, no. Heavens, no.
    Chairman Kanjorski. Well, is that not what--
    Mr. White. They were running a big insurance operation 
    Chairman Kanjorski. Is that not what an unregulated system 
brings us?
    Mr. White. If we are going to let entities get so big with 
so many counterparties, then we have to have a regulator.
    Chairman Kanjorski. So, now, that is a good point. Then you 
would have liked us not to have repealed Glass-Steagall?
    Mr. White. Say again?
    Chairman Kanjorski. Glass-Steagall should not have been 
    Mr. White. No. No. The repeal of Glass-Steagall had 
absolutely nothing to do with the debacle--everything that has 
happened could have happened.
    Chairman Kanjorski. Well, that is what allows entities to 
become huge.
    Mr. White. Well, Merrill and Bear Stearns and Lehman and 
Morgan Stanley were all going to--and Goldman--were going to 
get huge regardless, and Citi. Citi got a little bit bigger 
because the repeal of Glass-Steagall allowed it to buy an 
insurance operation.
    Chairman Kanjorski. Well, I am not sure I catch your drift, 
though. Do you think the government should have had more or 
less regulation?
    Mr. White. It needed to be smarter regulation. In some 
places it needed to be less, and in other places it needed to 
be more. For sure it needed to be smarter.
    Chairman Kanjorski. That sounds like Monday morning 
quarterbacking. I am on the field on Saturday. We are calling 
the plays on Saturday.
    Mr. White. Well, okay. In the case of the credit rating 
agencies, I have been there for about 8 years now. So I could 
have told you basically this story 8 years ago, and did--well, 
sorry. I was publishing it.
    Chairman Kanjorski. Well, should they be allowed to be paid 
by their users?
    Mr. White. That is something that the institutional bond 
market could figure out on their own. I don't trust this guy 
because I am worried about his conflicts of interest. I am 
going to trust somebody else who's business model I think is a 
more solid model.
    The bond market is fundamentally an institutional market, 
and those institutions can figure that out.
    Chairman Kanjorski. For some reason I think--I am sensing 
you are putting a foot on two icebergs here. You are not being 
straight with us. Give me an image of what you want the 
government to do.
    We are the big government that you have a right to hack at 
us. So tell us what the right direction is, in your opinion, 
and then you are going to be held responsible for it.
    Mr. White. Okay. As I said, we cannot do anything radical 
at the moment. The financial markets are far too fragile.
    Chairman Kanjorski. So you would clearly give advice to us 
to go easy. Do not speed through this and have unintended 
consequences. Let us get back on the recovery stage, and then 
be very serious about reforming some of these institutions.
    Mr. White. For sure. And then I would privatize Fannie and 
Freddie. I would have a targeted program to be encouraging 
first-time homeownership.
    Chairman Kanjorski. So if we privatize Fannie and Freddie, 
they can do exactly what Wall Street did with their special 
securities that they privatized. Is that--
    Mr. Manzullo. Well, given the size and the systemic risk, 
like it or not, we need a systemic regulator.
    Chairman Kanjorski. Well, then you do not. You mean you 
want Fannie and Freddie privatized, but with a very stiff 
systemic risk regulator?
    Mr. White. For sure. For sure. Yes. Yes.
    Chairman Kanjorski. Well, then, all you are doing is where 
the money flows. You want--
    Mr. Manzullo. Well, no. I think it makes a difference.
    Chairman Kanjorski. You want the wealthy institutions to be 
making more money off mortgage securitization than they are 
now. Is that not the only difference?
    Mr. White. I don't--Congressman, I don't see it that way. 
But, you know, I think it makes--I think it makes a difference. 
Also, I would not have the kind of implicit guarantees that 
were--where everybody knew that Fannie and Freddie were--
    Chairman Kanjorski. You think if we have a private 
institution the size of $5.6 trillion, that there is not an 
implicit statement that the United States Government has to 
come in and rescue it when it fails or else it brings the 
entire system down?
    You don't think we made that hard vote, going back to 
September of last year, because we wanted to ``bail out'' Wall 
Street? You do know the circumstances of that vote, don't you? 
You remember what--you know what the Secretary of the Treasury 
and Chairman Bernanke told us that famous meeting or several 
meetings that we had?
    That we were 24 hours away from a total meltdown of the 
American economy, and 72 hours away from a total meltdown of 
the world economy, that it would take us back several hundred 
years, that we did not have even the security to feed America 
at the time if it happened. I could go on to other scary 
things. I am not about to do it now.
    But you do not think we did that because we just did not 
want some rich people on Wall Street to lose their banks?
    Mr. White. For sure. For sure.
    Mr. Manzullo. I didn't do that.
    Chairman Kanjorski. What?
    Mr. Manzullo. I didn't believe it.
    Chairman Kanjorski. You did not believe him?
    Mr. Manzullo. It was $700 billion was supposed to buy up 
the bad assets. They still haven't been bought up.
    Mr. White. Anyway, I would be happy to expand on these. And 
I hope I can take up the invitation you offered to Professor 
    Chairman Kanjorski. Absolutely. All of you. The other two 
left already, and we will send them a letter. No, do not--
really. If you have ideas on the subject, regardless of how 
wacky they may sound or out of the normal configuration of 
things, do not hesitate to tell us.
    We are going to try and do the best we can to do some 
management of what has been a relatively disturbing, 
unstabilized system that we now have. And we are going to do 
our best.
    We are looking for the best thought process in the world, 
and that is why we asked you all to testify today, so that, 
one, we could harass you, two, we could keep you here until 
7:30 at night and get you--you know, I am actually leading a 
seminar for divorce lawyers. Anybody has spouses you are going 
to get into potential catastrophes with at home? No. We are 
going to close it up now.
    I do want to thank you all very much. I hope you did not 
mind going informal like this.
    Mr. White. Thank you, Mr. Chairman.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you for appearing. And I am 
supposed to read something into the record now.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Before we adjourn, the following items and statements will 
be made part of the record for this hearing: a statement from 
the Manufactured Housing Association for Regulatory Reform; a 
statement of the Independent Community Bankers of America; a 
letter from the National Association of Federal Credit Unions; 
the letter requested by Congressman Campbell from Mr. Cox to 
Mr. Lockhart; and an article by David Goldstein entitled, 
``Private sector loans, not Fannie or Freddie, triggered 
    Without objection, it is so ordered.
    The panel is dismissed, and the hearing is adjourned.
    [Whereupon, at 7:28 p.m., the hearing was adjourned.]

                            A P P E N D I X

                              June 3, 2009