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



 
                  HOUSING FINANCE--WHAT SHOULD THE NEW
                    SYSTEM BE ABLE TO DO?: PART I--
                GOVERNMENT AND STAKEHOLDER PERSPECTIVES

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 23, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-115


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 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
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
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
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 23, 2010...............................................     1
Appendix:
    March 23, 2010...............................................    73

                               WITNESSES
                        Tuesday, March 23, 2010

Berman, Michael D., Chairman-Elect, the Mortgage Bankers 
  Association (MBA)..............................................    48
Bowdler, Janis, Deputy Director, Wealth-Building Policy Project, 
  the National Council of La Raza (NCLR).........................    56
Calabria, Mark A., Ph.D., Director, Financial Regulation Studies, 
  the Cato Institute.............................................    50
DeWitt, Robert E., Vice Chairman, Chief Executive Officer, and 
  President, GID Investment Advisers LLC, on behalf of the 
  National Multi Housing Council and the National Apartment 
  Association....................................................    54
Geithner, Hon. Timothy F., Secretary, U.S. Department of the 
  Treasury.......................................................     7
Malta, Vince, 2010 Vice President and Liaison to Government 
  Affairs, the National Association of Realtors..................    59
O'Donnell, Vincent F., Vice President, Affordable Housing 
  Preservation, Local Initiatives Support Corporation (LISC).....    52
Sanders, Anthony B., Distinguished Professor of Real Estate 
  Finance, School of Management, George Mason University.........    58
Wartell, Sarah Rosen, Executive Vice President, the Center for 
  American Progress (CAP)........................................    47

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    74
    Berman, Michael D............................................    75
    Bowdler, Janis...............................................    94
    Calabria, Mark A.............................................   103
    DeWitt, Robert E.............................................   110
    Geithner, Hon. Timothy F.....................................   126
    Malta, Vince.................................................   143
    O'Donnell, Vincent F.........................................   159
    Sanders, Anthony B...........................................   167
    Wartell, Sarah Rosen.........................................   178

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Written statement of the National Association of Federal 
      Credit Unions..............................................   203
Maloney, Hon. Carolyn:
    Written responses to questions submitted to Vincent O'Donnell   204
Royce, Hon. Ed:
    Written responses to questions submitted to Hon. Timothy F. 
      Geithner...................................................   207


                      HOUSING FINANCE--WHAT SHOULD
                     THE NEW SYSTEM BE ABLE TO DO?:
                         PART I--GOVERNMENT AND
                        STAKEHOLDER PERSPECTIVES

                              ----------                              


                        Tuesday, March 23, 2010

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Maloney, Watt, Sherman, Capuano, Hinojosa, McCarthy of New 
York, Baca, Lynch, Miller of North Carolina, Green, Donnelly, 
Minnick, Peters, Maffei; Bachus, Castle, Royce, Paul, Manzullo, 
Biggert, Miller of California, Capito, Hensarling, Garrett, 
Neugebauer, Marchant, Posey, Jenkins, Paulsen, and Lance.
    The Chairman. The hearing will come to order. Let me make 
an announcement--I don't know why I say, let me make an 
announcement--who's stopping me? I am now making an 
announcement. The President is signing the health care bill 
today. That is why there are so few Democrats here and why 
there may soon be fewer Democrats here because the signing is 
now. Ordinarily, I would have considered postponing the 
hearing, but this hearing has already been postponed once. 
We're about to go into recess. We have a crowded hearing 
schedule. We have hearings coming up on Lehman Brothers, on 
Greece, and on some other issues, therefore, I did not want to 
postpone this hearing, and so we're going to go ahead. And what 
I will do is proceed. Members will get a chance to ask 
questions if and when they come, but that's why we are somewhat 
thin, particularly on the Democratic side.
    I also want to announce that we are, I think, close to some 
agreement--the gentlewoman from West Virginia and the gentleman 
from California have been working on the FHA reforms. I know 
there has been a lot of Minority/Majority cooperation there. 
And we were on track to have a markup on Thursday. We will now 
almost certainly--well, we won't be having a markup on 
Thursday, we have to give notice. We probably won't be here. 
But we will schedule that markup as soon as we come back, and I 
think we will have an agreement on an FHA bill to come to the 
Floor.
    Finally, we are going to go ahead on Thursday with the 
hearing on the Federal Reserve's need to deal with the 
liquidity that they have provided and what they will ultimately 
do. Mr. Watt wants to go ahead with that, and I agree with him. 
Once again, we have had postponements because of the snow and 
other reasons. So that hearing, the hearing on the Federal 
Reserve, will go forward on Thursday. The markup obviously will 
not happen since we almost certainly won't be here.
    And with that, I recognize for the first opening 
statement--we have 8 minutes of opening statements under our 
agreement on each side--the chairman of the Subcommittee on 
Capital Markets, which has jurisdiction under our rules over 
the GSEs, the gentleman from Pennsylvania, Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Chairman. Last 
June, the Capital Markets Subcommittee held the first hearing 
on housing finance in the 111th Congress to examine the present 
status and future structure of Fannie Mae and Freddie Mac.
    Today, we continue with what will undoubtedly be a long-
term negotiation about the prospective configuration of our 
Nation's housing finance system. As a result of considerable 
stress in our economy, and because of a need to maintain access 
to affordable mortgages, then-Secretary Paulson placed Fannie 
Mae and Freddie Mac under conservatorship in late 2008. Since 
then, the Treasury Department has committed to purchase more 
than $125 billion in preferred stock of the enterprises. 
Government agencies have also purchased in excess of $1.3 
trillion in mortgage-backed securities. Together, these actions 
and others have helped to keep housing credit available for 
America's middle class and prevented a complete collapse of our 
housing markets.
    Lawmakers also must now begin to grapple with what type of 
housing finance system we should construct for the future. In 
this regard, we have no shortage of ideas. While we must give a 
thoughtful consideration to each of these proposals, we must 
keep in mind the importance of why we created housing 
Government-Sponsored Enterprises in the first place, to 
increase liquidity and to improve the distribution of capital 
available for home mortgages.
    My goals in this debate are: to establish a more stable, 
long-term funding source to help average Americans buy a home; 
to limit taxpayer risk through strong regulation; and to ensure 
that the housing finance system continues to support community 
bank and credit union lending. The task before us is not all 
that different from the one that engineers and policymakers 
faced in preparing for the ``Big Dig,'' the enormous 
construction project that significantly structured how traffic 
flows through downtown Boston.
    We must figure out what pieces of the old housing finance 
system worked and keep them. We also need to determine what 
parts of the infrastructure we need to eliminate. In order to 
ensure access to affordable mortgages in the interim, we must 
additionally work to keep capital moving through the financial 
pipelines during our legislative debates.
    Finally, we must figure out how to pay for this enormous 
undertaking. As we kick off this year's deliberations, the 
Treasury Secretary has joined us. In the near future, we will 
also hear from the Secretary of Housing and Urban Development. 
After the completion of these initial proceedings by the full 
committee, the Capital Markets Subcommittee will renew its 
examinations of these matters by exploring more detailed and 
technical questions related to Government-Sponsored Enterprises 
and our Nation's housing finance system.
    In sum, Mr. Chairman, I appreciate your efforts in 
convening this hearing as we receive testimony regarding what 
functions a new housing finance system should be able to 
perform. We also have to work to do no harm to those parts of 
the housing finance system that have worked well, and to 
protect taxpayers from future losses. I look forward to a 
fruitful set of discussions.
    The Chairman. The gentleman from Alabama--I am now reading 
from the Republican list--is recognized for 1 minute.
    Mr. Bachus. Thank you, Chairman Frank, for holding this 
very important, and I think long overdue hearing. It's 
unacceptable that more than 18 months after the GSEs were 
placed in conservatorship the Treasury Department still does 
not have a plan for Fannie and Freddie. Without reform, the 
bailouts will not stop, the housing market will not find its 
footing, and the American economy will not recover. But so far 
the response has been to pledge unlimited bailout aid and 
guarantee all the GSE debt, which has already cost the American 
taxpayers more than $127 billion.
    The question posed is, what should the new system be able 
to do? The answer is simple: Protect taxpayers from further 
losses and bailouts in order to build a stable housing finance 
system based on private capital. While the Administration and 
Congressional Democrats have remained silent, Republicans have 
introduced legislative measures to immediately address the 
failures--I yield myself an additional 20 seconds--
    The Chairman. The gentleman is recognized for 20 seconds, 
but it will all come out of the 8 minutes.
    Mr. Bachus. --and to put forth real solutions. Mr. 
Chairman, I hope today is the beginning of open dialogue 
between Congress and the Administration and that you follow the 
leadership of House Republicans and phase out Federal credit 
privileges and taxpayer support and guarantee of Fannie and 
Freddie. Thank you.
    The Chairman. The gentleman has consumed 1 minute and 26 
seconds. We are going to hold ourselves to this. So, the 
gentleman from California is recognized for 1\1/2\ minutes.
    Mr. Royce. Thank you, Mr. Chairman. We are all well aware 
of the damage caused by the mortgage giants Fannie Mae and 
Freddie Mac. Because they were perceived to be government-
backed, they were isolated from market forces that would have 
otherwise prevented the excessive risk-taking. As a result, 
they wiped out any form of competition and formed a duopoly 
over the prime secondary mortgage market and dominated much of 
the junk loan market.
    As a matter of fact, between homeowners and flippers, 30 
percent of the loans they held were flippers, you had over 10 
million individual loans outstanding in 2008, held or 
guaranteed by Fannie and Freddie. Those junk loans accounted 
for 85 percent of their losses. They were at the heart of the 
housing bubble. The 1992 GSE Act, which included the affordable 
housing mandates, played a significant role in the accumulation 
of those junk loans. Going forward, these requirements should 
be repealed, as should any other mandate on financial firms 
that puts at risk the safety and soundness of the institution 
for a broader goal. They were overleveraged 100 to 1. I carried 
legislation on the House Floor that would have allowed the 
deleveraging of the institutions, would allow the regulators to 
do that. Never in the future should we allow that kind of 
arbitrage and overleveraging of institutions like this, and 
that's why I say the 1992 GSE Act with the affordable housing 
mandates frankly should be dropped. Thank you, Mr. Chairman.
    The Chairman. The gentlewoman from Illinois, for 1 minute.
    Mrs. Biggert. Thank you, Mr. Chairman. Since entering into 
conservatorship in the fall of 2008, Fannie Mae and Freddie Mac 
have lost $174 billion, and billions more in losses are 
anticipated. Taxpayers have loaned the Enterprises over $127 
billion and are liable for over $5 trillion in outstanding 
mortgage obligations.
    Edging out private sector mortgage market participants, 
Fannie Mae and Freddie Mac guaranteed or financed over three-
fourths of new single family home mortgages in 2009. Taxpayers 
deserve to know where their dollars are going, what risks they 
are being exposed to, and how these institutions are being 
managed or mismanaged. Republicans have proposed reforms that 
will impose some commonsense accountability on these 
institutions and take immediate steps to wind down the immense 
risk they pose to the long-term stability of our housing 
market.
    GSE reform is critical. I yield back.
    The Chairman. The gentleman from California, Mr. Miller, 
for 1 minute.
    Mr. Miller of California. Thank you, Mr. Chairman. As we 
know, the government currently owns 80 percent of Freddie and 
Fannie. We can all agree that the current scenario is not one 
that should last indefinitely, but I must disagree with anyone 
who suggests that Freddie and Fannie were the cause of the 
current housing crisis and must be abolished immediately.
    In California, Freddie and Fannie's serious delinquency 
rates are dramatically lower than the jumbo market, evidence 
that while many of their loans were bad, they are outperforming 
the rest of the market. Currently, Freddie and Fannie and FHA 
make up roughly 90 percent of the loans made today. I have yet 
to see a viable alternative from this Administration or this 
Congress. We must find a path to effectively return Freddie and 
Fannie to profitability, allowing the government to recoup its 
investment in the secondary firms and ensure that there is a 
viable secondary mortgage market while removing the government 
from the home loan business.
    I look forward to hearing testimony from the witnesses 
today on how we should reform GSEs. Thank you. I yield back.
    The Chairman. I now recognize myself for the remaining 4 
minutes and 40 seconds on our side. I very much agree that this 
is a subject that has to be addressed. That's why I initiated 
the scheduling of this hearing. I regret the fact that 
constituency commitments of mine made us hold off a couple of 
weeks. We will have the Secretary of HUD coming forward. And I 
want to stress that I believe this should be seen as a hearing 
and as a legislative task, more importantly, not simply about 
Fannie Mae and Freddie Mac, but about housing finance.
    We have a very complex housing finance system that was 
allowed to grow in bits and pieces without any overall vision. 
There is the FHA and Ginnie Mae, two Federal agencies. There is 
Fannie Mae and Freddie Mac, hybrids as they were, public 
shareholder corporations given by a variety of congressional 
and presidential mandates from both parties directions to do 
good, which came into conflict in some ways with their private 
mandate.
    There are the Federal Home Loan Banks, which should not be 
left out, which play a very important role in the housing 
finance. We will have two hearings here. We have a very large 
number of private sector witnesses, and I will say that many of 
them will be in agreement with what we just heard from the 
gentleman from California. We have two jobs here today. One is 
to figure out the best way to wind down Fannie Mae and Freddie 
Mac. But an equally important job is to decide what goes in 
their place.
    Now when I say decide, much of that will be purely private. 
It will not be government-mandated. But there will be some role 
for government agencies in figuring out the interaction of all 
of these, who provides liquidity to the secondary mortgage 
market? Is there a role for subsidy? My own view has always 
been that it's a mistake for the government to heavily 
subsidize homeownership, and that we are much better off trying 
to subsidize rental housing because when you put people into 
decent rental housing, you do not confront the problems that we 
have seen from putting people inappropriately into 
homeownership. But there are some claims to be made for helping 
some working people get into homes after careful scrutiny. That 
may be partly the FHA, but it may be some other modes as well.
    So, yes, it is important to put into place a way to wind 
down Fannie Mae and Freddie Mac. I believe the overwhelming 
consensus from people concerned about the economy in general 
and the role of housing in the economy--Realtors, home 
builders, mortgage bankers, bankers, advocates for various 
groups, advocates for minority groups, and advocates for lower-
income people--all agree that simply abolishing Fannie and 
Freddie, as well as we do that, would not be enough for this 
committee's role. We also have to make decisions about what 
replaces it.
    Now again, many of those replacement entities will be 
purely private and may need no role for us. I notice there was 
a piece in the Republican bill that said, well, any State or 
Federal Government can charter a corporation to do this. Sure 
they can. They already can. And we would expect that. But I 
think those who are going to be doing the purely private aspect 
have a right to know, what is the role of Fannie Mae going to 
be? Where will the Federal Home Loan Banks be?
    So again I stress, and this is the beginning of this 
process, we will simultaneously, I hope, be figuring out how 
best to wind down Fannie Mae and Freddie Mac and make sure that 
before that is completed, we are ready to replace the functions 
they are now performing in the economy without leaving this 
great vacancy. It's the old story that says you can't really 
tear down the old jail until you build the new one. And that's 
partly where we are with regard to this effort.
    We have a very important set of functions that are being 
performed, and it's important for us to deal with the 
replacement of Fannie Mae and Freddie Mac knowing that there 
will be a new set of institutions that will deal with housing 
and that will also deal with the economy. And as I said, that's 
one of the things that we get from all of the participants in 
the economy who are coming forward.
    The goal of this committee will be to, I hope, come out 
with legislation that does both of those jobs: winds down 
Fannie Mae and Freddie Mac; and appropriately puts the 
government into places where it should be and leaves room for 
the private sector where the government shouldn't be.
    The gentlewoman from West Virginia is recognized for 1 
minute.
    Mrs. Capito. Thank you, Mr. Chairman, and I would like to 
thank you for this hearing today, something that needs 
immediate attention. Our Nation's housing finance system is 
slowly recovering, but the system is being dominated by the 
GSEs, and we need to work together to restore a strong private 
market presence.
    As many of my colleagues know, the FHA is facing serious 
challenges with their capital reserve levels. I'm pleased that 
Secretary Donovan and Commissioner Stevens are taking a 
proactive approach in seeking a bipartisan consensus to resolve 
FHA's challenges, and we're still working through that process.
    Unfortunately, the same commitment to reaching a consensus 
could not be said for the Administration's approach to the 
GSEs. Despite the complete collapse of Fannie and Freddie in 
2008, and the massive taxpayer exposure, the Administration 
chose to barely mention the reform of these entities in their 
budget this year.
    The time for action is now. Republicans on this committee 
have put a statement of principles forward. The Federal 
Government should not be playing this large a role in the 
Nation's housing finance system. We need to begin determining 
the roles of the GSEs and what the appropriate role for the 
government is in housing finance.
    I look forward to hearing the testimony of the witnesses. 
Thank you.
    The Chairman. Next, we have for 1 minute and 10 seconds, 
Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Of all the dumb 
regulation and legislation that caused our economic crisis, 
none was dumber than that which created the GSE monopolies and 
gave them ever-increasing affordable housing missions. In other 
words, the Federal Government told them, we will let you 
monopolize a market as long as you securitize and insure 
mortgages for people who cannot afford to pay them.
    Regardless of many good motives and good people, ultimately 
the story of the GSEs is one of enriched executives, cooked 
books, political bullying, a massively inflated housing bubble, 
millions of home foreclosures, a shattered economy, and the 
mother of all taxpayer bailouts. The answer from the 
Administration to all of this, page 352 of the budget, quote, 
``The Administration continues to monitor the situation.'' It 
is unacceptable to protect the structural status quo to 
announce Christmas Eve multi-million-dollar bonuses for their 
executives and announce unlimited taxpayer exposure.
    Republicans are attempting to lead. I'm attempting to be 
one of them. That's why I have introduced H.R. 4889, the GSE 
Bailout Elimination and Taxpayer Protection Act, that over a 5-
year period would transition the GSEs to an innovative and 
competitive marketplace without taxpayer bailouts. I encourage 
members to consider it, and I yield back.
    The Chairman. The gentleman from New Jersey, for 1 minute.
    Mr. Garrett. Thank you, Mr. Secretary. It has been 3 months 
since the Obama Administration lifted the $400 billion cap on 
Fannie and Freddie and also allowed to be paid out literally 
millions of dollars to executives whom a lot of people are 
saying simply losing the taxpayers' money. And today is simply 
our very first hearing on the topic, which I think is 
unbelievable. The ranking member and I sent a letter to the 
chairman immediately after that, saying we should have a 
hearing on this. It has been 3 months. We have had 20 hearings 
on other sundry issues, and it's only now that we're having 
this hearing today on one of the most important topics, over 
$400 billion in CBO estimates as far as the cost of it.
    For a lot of these people, it's uncomfortable to discuss 
this issue because some of them played a supporting role in 
helping the demise of the GSEs, Fannie and Freddie. But, from 
your perspective, I know you said in the paper, AP has a story 
that says, if we rush, there's risk if we do not achieve enough 
and not get consensus or something on this, through sweeping 
enough. Rush? It has been almost 18 months--
    The Chairman. The gentleman's time has expired.
    Mr. Hensarling. --since we have had this collapse. I don't 
think 18 months--
    The Chairman. The gentleman's time has expired. The 
Minority is entitled to divide its time as it wishes. I'm not 
the one who says people should get 1 minute, but if you have 1 
minute, you get to talk for 1 minute. The Secretary of the 
Treasury is now recognized for his statement.

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Chairman Frank, Ranking Member Bachus, 
and members of the committee, thanks for giving me the chance 
to come before you again. I want to compliment many of you for 
pointing out that the challenge of reform of the GSEs requires 
a broad look at the full range of government institutions that 
operate in the housing market. This is a complicated, difficult 
question, but I think we're now at the point where we can begin 
a serious effort to build consensus on reform.
    Fannie Mae and Freddie Mac played a significant role in 
this financial crisis. Over the past decade, they were allowed 
to take on excessive risk and leverage with inadequate capital 
and inadequate oversight. And by the fall of 2008, their 
potential collapse posed a threat to the entire American 
financial system. Fannie and Freddie operated with a perception 
of government backing, which allowed them to take on 
significant leverage and build up a retained portfolio to a 
size the market never would have allowed for a fully private 
enterprise.
    Meanwhile, the government did not move quickly enough to 
put in place a set of restraints on their activities, 
restraints that would have protected the system from failure. 
This committee understands as well as anyone that these 
failures were not unique to Fannie and Freddie, which is why 
you moved late last year to pass a comprehensive set of 
financial reforms for the rest of the American financial 
system.
    The failures of Fannie and Freddie were symptomatic of 
failures in the financial system as a whole, failures made by 
people over a long period of time. As the GSEs were growing, 
they retained portfolios and taking on tremendous amounts of 
risk, there was a damaging erosion in underwriting standards 
and a buildup in leverage across the rest of the financial 
system.
    Private companies, mortgage brokers, and large financial 
institutions with no government backstop and support were also 
becoming overleveraged. These institutions were offering credit 
that too many Americans could not afford and in many cases did 
not understand. And underlying all of this, of course, was the 
unrealistic assumption that housing prices would always go up. 
Together, these failures brought America to the edge of 
financial collapse.
    Over the past year, the Administration, Congress, and this 
committee have made important progress towards comprehensive 
financial reform, and today this hearing marks the beginning of 
the next stage in the process of reform, evaluating how to 
bring reform to the GSEs and the entire housing finance system. 
Over the coming months, we're going to consult broadly across 
the public and private sector, across both sides of the aisle, 
working closely with this committee and your counterparts in 
the Senate to take a fresh, cold, hard look at the core 
problems in our system. We're going to consider a full range of 
options, a full range of alternative models to determine what 
role the government, and what role the private sector should 
play in promoting a stable and efficient housing finance 
system.
    We believe any reform should meet the following broad 
objectives: to ensure broad and reliable access to mortgage 
credit; to provide financing for affordable rental housing and 
ownership for Americans; and to protect consumers and to 
safeguard the stability of our financial system.
    Effective reform has to end the system in which the 
benefits of government support were captured by shareholders 
rather than homeowners and where the taxpayers were left with 
very substantial losses.
    As we move forward, it's critical we facilitate a smooth 
transition to any new system, and I want to be clear. Treasury 
remains committed to supporting the continued activities of the 
GSEs in conservatorship. We will continue to make sure they 
have sufficient capital, the capital necessary to perform under 
any guarantees issued now or in the future, and to meet their 
debt obligations. And we will be very careful not to pursue 
policies or reforms that would in any way threaten to disrupt 
the function or liquidity of the securities they have issued or 
the ability of Fannie and Freddie to honor their obligations.
    Thank you, Mr. Chairman, and I look forward to your 
questions.
    [The prepared statement of Secretary Geithner can be found 
on page 126 of the appendix.]
    The Chairman. I thank you, Mr. Secretary. And before I get 
to the questions, I do want to address some of the history. The 
gentleman from New Jersey raised some questions. First of all, 
he said that we have been waiting 3 months for the hearings. 
Well, as he knows, 3 weeks of that came because I had it 
rescheduled on March 2nd, and had to postpone it, and this was 
the first day we could get. So I think the desire to make 
points here sometimes breaks out of the bounds of normal 
conversation. Yes, the hearing would have been 3 weeks ago, but 
I had a problem, and we do have other hearings that are 
scheduled. Many of those hearings, by the way, have been at the 
request of the Minority.
    But he also then said that it was uncomfortable for some of 
us to talk about this because of our role in helping Fannie and 
Freddie. The gentleman from California, Mr. Royce, also 
mentioned his efforts to try and rein things in. Well, it's 
true. And again, the history gets forgotten here. The 
Republican Party controlled the House from 1995 through 2006. 
No legislation became law at that point. The House did pass a 
bill in 2005 under the chairmanship of Mr. Oxley to reform 
Fannie and Freddie. Most of the Republicans supported it. Some 
opposed it as too weak. It's true, the gentleman from New 
Jersey thought that was not a good bill, but it was a 
Republican bill in a Republican House.
    So the notion that some of us on this side, I don't know 
whether the assumption is that we inhabited Mr. Oxley's body, 
that we somehow captured his mind, that we were working through 
Mr. DeLay, who was running the House at that point. I'm not 
sure what the--but it is true, the gentleman from New Jersey, 
Mr. Garrett, offered an amendment to strike the higher cost 
loan limits, and he did get some support. The gentleman from 
New Jersey mentions in 2005 under Republican control, he 
actually got 53 Republican votes. Of course, 168 Republicans 
voted against him. Those voting against him included my friend 
here, Mr. Bachus, Mrs. Biggert, the minority leader now, Mr. 
Boehner, Mr. Cantor. These are all apparently our tools. I have 
to tell you, you don't know how good we are that I got all 
these people to vote to undermine poor Mr. Garrett's valiant 
effort here.
    So then Mr. Royce had his bill. He did a little better than 
Mr. Garrett. He got 70 Republicans and only lost 153 of them. 
And again, the same people voted against him: Mr. Oxley; Mr. 
Boehner; Mrs. Biggert; and Mr. Bachus. So this notion that it 
was the Democrats who stopped him. By the way, Mr. Garrett had 
previously said, well--
    Mr. Garrett. Would the gentleman yield on that?
    The Chairman. I'll yield if I get unanimous consent for an 
additional 40 seconds, sure.
    Mr. Garrett. I think my words actually were to the 
Secretary that some members of this committee were 
uncomfortable with discussing this issue, and looking at my 
notes, I never mentioned Democrats once at all, so I think the 
chairman doth protest too much.
    The Chairman. I don't know what ``doth protest too much'' 
means when someone is correcting something. I thought he had 
said people on the other side. But if in fact he was referring 
to Mr. Bachus and Mrs. Biggert and Mr. Castle and Mr. Boehner 
and Mr. Cantor, I accept my correction, and I appreciate his 
making sure that people know that he was criticizing them, not 
just some of us.
    Mr. Royce got 70 Republican votes. The same group of people 
voted against it. By the way, the bill that the Republican 
House passed was then denounced by the Republican President. 
Some will remember famously Mr. Oxley saying that he could have 
passed this legislation in 2005 if he hadn't gotten the one 
finger salute from the White House. The Secretary of the 
Treasury at the time, Mr. Snow, was in favor of going forward. 
What happened then was the Republican Senate and the Republican 
House had a fight and no bill passed.
    Then comes 2006, and Mr. Paulson becomes Secretary of the 
Treasury, and as he reports in his book, he asked for 
permission to negotiate with the Congress. He got the 
President, whom he admires for doing this to let him do it, 
over the objection of many others in the White House. He then 
mentions in the book that he began negotiating with me and with 
the Democrats. In that next election, the Democrats got the 
Majority. He then points out in his book that we honored the 
agreements we had made and that in 2007. When we took office, 
we passed a bill that he said was far from perfect, but was 
still better than the Republican bill in 2005.
    So I apologize to the gentleman from New Jersey. I thought 
he was saying that it was the Democrats who had done this. 
Instead, he was talking about Democrats and also the Republican 
leadership. I will say that previously the gentleman from New 
Jersey had said that, well, Republicans had tried--I do 
remember this; we can check the transcript--to fix the bill, 
but they were outvoted by the Democrats and some Republicans. 
In fact, in 2005, the records are all here, no amendment either 
in committee or on the Floor aimed at making the bill tougher 
on Fannie and Freddie that received a majority of Republican 
votes passed. In other words, the bill that passed committee 
and on the Floor was supported by a majority of Republicans in 
every single case. In no case did a majority of Republicans get 
overridden because a minority of Republicans voted with the 
Democrats.
    Now that is the history, and we do have to go forward. I 
believe with regard to the current situation there is agreement 
that we need to replace Fannie and Freddie. There may be 
disagreement about whether doing that is enough or whether or 
not we need to also figure out if we need to restructure the 
Federal Home Loan Banks and Ginnie Mae and the FHA, and if we 
need to provide any more authority in terms of the liquidity of 
the secondary mortgage market. All of those subjects are before 
us. In some ways they are harder intellectually, and that's why 
we're here to deal with them.
    The gentleman from Alabama.
    Mr. Bachus. Thank you. I guess there's a question in there 
someplace for Mr. Geithner.
    The Chairman. No, no there wasn't.
    [laughter]
    The Chairman. The rules say--I'm sorry, this won't come out 
of the gentleman's time.
    Mr. Bachus. Oh, sure.
    The Chairman. The rules say each member has 5 minutes.
    Mr. Bachus. Oh, you're right. You're absolutely right.
    The Chairman. Sing a song if you want to.
    [laughter]
    Mr. Bachus. Secretary Geithner, how can you say that the 
regulatory reform bill in the Senate is comprehensive when it 
doesn't include the GSE's reform? And as Chairman Frank has 
just said, we all realize now that that's a critical part of 
financial reform.
    Secretary Geithner. The reform of the housing finance 
system is going to be a critical part of overall financial 
reform. But for reasons I think you understand, we decided to 
do this in two stages, and we're now at the beginning of the 
next stage. This is going to be a very complicated 
consequential process, and we're going to have to take a 
careful look across again the full range of institutions that 
operate in these markets. There are parts of the system that 
worked very well over a long period of time, but there are 
parts--
    Mr. Bachus. Of course, Fannie and Freddie were not a part 
of the system that worked very well.
    Secretary Geithner. No, I think that--I agree with you 
about that. I think that you can't--if you look over the past 
decade, a lot of things went wrong. The system did work 
relatively well for a long period of time, but things started 
to change at the beginning of this decade. At that point, you 
saw Fannie and Freddie start to build up these very large 
retained portfolios. There's a huge amount of risk in those 
portfolios. They also started to provide guarantees that 
ultimately resulted in them taking on more credit risks than 
they were charging for. Both of those mistakes were central to 
the problem.
    Mr. Bachus. All right. Mr. Secretary, I would have to 
disagree with you. In 1997, they started making loans without 
downpayments, and to people with questionable credit, so I 
think that it was a disaster waiting to happen. And I will say 
that several of us did speak on the House Floor at that time 
and resisted the Clinton Administration's efforts to relax 
those standards.
    Secretary Geithner. Well, there was a--I was not a 
combatant in these debates in that period of time, but there 
was a long period of advocacy by people up here in the Congress 
on both sides of the aisle and in the Administration starting 
in the late 1990's designed to try to bring stronger oversight, 
greater constraints in them. But of course, ultimately, as many 
of you have said, those efforts were not successful and that 
was a very consequential failure of policy.
    Mr. Bachus. Right. And I think the time is now, not some 
second stage. Let me ask you this. Several alternatives have 
been suggested to reform them. One is to simply nationalize 
them and make the government guarantees explicit and permanent, 
and allow them to continue to have a line of credit with the 
Treasury and borrow from the Fed, and be exempted from State 
and local taxes.
    Another is to create more GSEs to compete against each 
other, and this is the government competing against itself, but 
still with the government subsidy and guarantees and 
privileges. Isn't a better alternative to do what we 
Republicans are saying, at least long term, and let's phase out 
the government's subsidy and guarantee the duopoly over time, 
transition housing finance to a competitive market based 
environment and implement a withdrawal of all Federal 
Government support?
    Secretary Geithner. I agree with you Congressman, that I do 
not think either of the two options you began with look 
particularly appealing at this stage. I think the two options 
you laid out at the beginning, full nationalization or creating 
a whole new class of GSEs to compete with each other with the 
same basic model, those do not look like appealing options to 
me. I have not had a chance to look in detail at your proposed 
alternative, but I will, and I am happy to spend time working 
closely with you on that. I think you ended by saying 
transition to a world in which you phase out all government 
support in any form. Is that what you said?
    Mr. Bachus. Well, particularly the GSE that has a line of 
credit with the Treasury or ability to borrow from the Fed or 
exempt from State and local--
    Secretary Geithner. I personally think, as I said in my 
testimony, that we need to end a system in which you have this 
awkward combination of private shareholders with a broad sense 
of explicit implicit support. I think that system was a 
terrible mistake. Those mistakes were very consequential. And 
when--as we work together to create a new system to replace our 
current one, we can at least agree we should not recreate that 
fatal mix of public and private shareholders in the same 
institution.
    Mr. Bachus. But I think as long as you have a government 
entity competing with the private market, if you subsidize them 
in any way, it's unfair competition, and I think it crowds out 
the private market, and I think we have seen the result of 
that.
    Secretary Geithner. Well, I think, again, this--the heart 
of this debate will be to think about what is the appropriate 
role for the government in providing some form of guarantees to 
assure a more stable flow of housing finance, and what role 
should the private markets face. That's the fundamental 
question we face, and we should take a fresh, cold look at 
that. And that's going to be critical to reach consensus on 
before we figure out what the transition period should be--that 
transition pass should be to that new regime.
    The Chairman. The gentleman from Pennsylvania.
    Mr. Kanjorski. Thank you very much. Welcome back, Mr. 
Secretary. It seems you have been remiss. You have not been 
here for at least a week.
    Secretary Geithner. I have had the privilege of being 
before this committee many times over the last year, and I look 
forward to many more times.
    Mr. Kanjorski. Very good. And Mr. Secretary, it seemed we 
had some testimony the other day from Chairman Bernanke and 
former Chairman Volcker. And I thought part of Mr. Volcker's 
testimony was particularly enlightening insofar as he was 
calling the committee's attention to the difficulty of getting 
the regulators to regulate in accordance with their authority. 
To a large extent, I listened to the banter back and forth 
early. We are still, I guess, attacking each other as to who is 
at fault and why are they at fault. And I think you are taking 
the correct perspective there. That is history.
    Now we have to go forward and do something, and we have to 
address and answer some very serious questions. I happen to 
agree with you that with all the errors that may have occurred 
at some time with Fannie and Freddie, the reality is for a 
period of 20 or 30 years, we had a relatively stable real 
estate market that functioned very well at poor times, so that 
we did not have stops and starts as we have had in prior 
decades.
    The question I guess that comes to my mind is, what are we 
going to be able to do about when this Congress passes 
authorization for someone like the Federal Reserve to create 
and control mortgages and how they are made, and who is allowed 
to get them, and they do not exercise that influence? And 
regardless of whether the Republicans were in power for the 10 
years in which that failure occurred, or whether the Democrats 
were in power, we can see that sometime in the future, one 
party or the other will be in power, and we are not quite 
getting the anticipated results from regulators that at least 
in policy we pass here as a matter of law.
    Should we start with that proposition and see--because it 
really does not matter what we do here if it is not 
implemented. What plans can you make, or are you intending to 
make, for better implementation of public policy as set by the 
Congress?
    Secretary Geithner. I think you have to start by making 
sure that the entity that is responsible for constraining risk-
taking over these institutions, for example, has the authority 
and the ability to put in place those constraints. And among 
the many failures of policy in this area was we did not give 
the responsible body, which used to be called OFHEO, the 
authority to constrain risk-taking, set capital requirements 
high enough, and protect the taxpayer from loss in those 
entities. I think that's the most important thing. If you don't 
have that, nothing's possible.
    Of course, that may not be sufficient. You still need to 
make sure that Congress is holding those supervisors, those 
oversight bodies, accountable for performance over time. But I 
think you have to start again by making sure there is clear 
authority and accountability for constraining risks that can 
pose systemic damage to the financial system as a whole.
    Mr. Kanjorski. Are the independent regulators too 
independent in terms of when they seem to be going astray in 
what they are doing?
    Secretary Geithner. Well, I--
    Mr. Kanjorski. Neither the Executive Branch nor the 
Congress can do much about it. They are independent, and--
    Secretary Geithner. I think that we created a system that 
put a lot of challenge on the regulators for the following 
simple reason: Parts of the system were held to quite high 
standards for capital consumer protection underwriting 
standards. But there were vast parts of the system that were 
not held to similar standards and had no oversight or effective 
enforcement in place. And when you do that, what happens is 
risk tends to migrate from where it's constrained to where it 
is unconstrained. Risk tends to move to where regulations are 
weaker and the supervisor is more compliant or less 
experienced.
    So a central feature to the bill this body passed and a 
central part of reforms moving through the Senate are to make 
sure you have a level playing field across the system with 
clear standards enforced evenly across institutions doing 
similar activities. If you do that, you make the job of the 
supervisor much easier. If you make it easy for firms to evade 
those protections, you make their job much more difficult. And 
if you look back over the history of Fannie and Freddie's role 
in the mortgage market where you saw--like you saw across the 
system as a whole, you saw mortgage underwriting business 
migrate from those institutions to parts of the system that 
were engaged in a competitive race to the bottom in 
underwriting standards in consumer protection. And the most 
important thing we have to do in financial reform, and this 
will be true as we move to housing finance too, is to make sure 
there are clear standards set across the marketplace with clear 
accountability for enforcing those standards.
    Mr. Kanjorski. Thank you, Mr. Secretary. My time has 
expired, Mr. Chairman.
    The Chairman. The gentleman from Delaware.
    Mr. Castle. Thank you, Mr. Chairman. Mr. Secretary, I have 
about three questions here. I'm going to try to put them all 
together, so this might get a little complicated, but last 
month I asked Federal Reserve Chairman Bernanke whether Fannie 
Mae and Freddie Mac served their purpose and whether we should 
be looking at some different way to finance mortgages since the 
problems we had, the expense of them at this point. And he 
responded that the Fed has been very vocal on this issue for 
years. He said we need to very cautious about returning to the 
existing structure with potential conflicts between private 
shareholders and public objectives, and suggested either 
privatization with government guarantees or a public utility 
approach. My first question is, would you agree, or could you 
comment on that assessment?
    My second question is, using the Federal Home Loan Bank 
model, is that something you could actually substitute for all 
this in terms of what we're doing or not doing as far as the 
future is concerned? They don't seem to have had the problems 
that the other GSEs have had.
    And then my last question is, what about just eliminating 
all these support systems, just a system whereby institutions 
which are making loans have to stand on their own in terms of 
what they are doing? I'm not necessarily saying I advocate that 
or you do, I just would be curious about your comments on it.
    Secretary Geithner. I agree with the quote you attributed 
to Paul Volcker about his diagnosis of what happened, what 
caused the problem in this context. He's absolutely right. And 
I think the two options you summarized there should be among 
the options we take a careful look at. I think the Federal Home 
Loan Bank System is not without challenge today. And I think as 
the chairman said at the beginning, when you look at the 
housing finance markets and reform of the GSEs, you have to 
look at the FHLB structure as well to make sure that it can 
play the role it's designed to play, again without leaving us 
with too much risk in the future that the government is going 
to have to come in, to step in to underwrite those losses.
    You ended by asking, is it possible to advocate a system in 
which the government plays no role in providing support for 
mortgage finance market through explicit guarantees, subsidies, 
support for liquidity? And I think there is certainly a pure 
theoretical option in which that may make sense. But my own 
view is there's probably going to be a good economic case, good 
public policy case, for some continued provision of a carefully 
designed guarantee by the public sector going forward, because 
housing markets are so critical to overall economic activity. 
They play such a large role in people's wealth, the perception 
of wealth. They are very vulnerable to volatility when you 
see--when you experience broader financial markets' shocks to 
the financial system.
    And because of that unique role housing markets play, I 
think there's likely to be a good public policy case, good 
economic case, likely that both conservatives and liberals 
could agree on, for the design of a carefully calibrated 
guarantee, appropriately priced, that would continue in some 
form.
    Mr. Castle. What do you think the timetable on all this is? 
We have had a lot of discussion, some hearings now and that 
kind of thing. Is this something that you feel needs to be 
addressed in the next 2 or 3 months, or within a year, or do 
you have any thoughts about the timetable of how quickly 
Congress and the Administration should move on these issues?
    Secretary Geithner. I think realistically it's going to 
take several months to do a careful exploration of the 
problems, solutions, alternative models, and to try to shape 
legislation that could command consensus. And again, I think 
we're at the point now where we can start that process in 
earnest, and I think we should try and get it right. But I 
don't see why this should take years. I think really at the 
moment now where there is a huge, compelling need to make sure 
we design the successor system, and it's very hard, I think, 
for anybody to argue that we can live with the system as it now 
is indefinitely in the future.
    I know people are worried that we're not going to take 
advantage of this moment together and put in place reforms, 
because many people tried in the past and failed to get 
consensus. But I don't think we face that risk now, frankly, 
because I think no one can look at the model we have today and 
say we can afford to live with that model going forward. So I 
suspect you're going to find very broad support for reform. The 
challenge is going to be just to design something that we think 
is going to work better in the future.
    Mr. Castle. I would agree with you that it's going to take 
time to put it together, but I would hope that we could work on 
it together as rapidly as possible. There are a lot of dollars 
out there and a lot of correction which is needed. Thank you, 
Mr. Secretary.
    I yield back, Mr. Chairman.
    The Chairman. The gentlewoman from California.
    Ms. Waters. Thank you very much. Thank you, Mr. Secretary, 
for being here to discuss Fannie and Freddie, the GSEs that we 
depended on for many years to provide mortgage support, and 
mortgage financing for lower- and moderate-income homes. With 
the missteps of Fannie Mae and Freddie Mac into the subprime 
mortgage market during the past several years and the resulting 
conservatorships, they were given little credit for their 
decades of support for mortgage finance. They developed the 
fixed-rate, 30-year mortgage and consistent underwriting 
standards that made mortgage credit and homeownership available 
to millions of American families. These were the good aspects, 
and I won't run away from that. I know that since they have 
been in trouble and some of us have been accused of having 
given them so much support that people are sometimes hesitant 
to say that. I believe that they dove into the uncharted waters 
when they followed private firms into the subprime market in an 
effort to increase market share and earnings of as publicly 
held companies. This effort to meet earnings targets may have 
been the fatal flaw in their structure. If they had not been so 
focused on quarterly earning reports, they may have weathered 
that storm.
    Now having said that, we continue to have a great need for 
our low- and moderate-income housing in this country. This 
committee, led by our chairman and strongly supported by 
members of this committee, particularly on this side of the 
aisle, are supporting a $1 billion housing trust fund, national 
housing trust fund. That's important to us right now. And we 
thought we were going to get the resources from Fannie, 
Freddie, their profits, what have you. That's not possible at 
this time. Do you have any ideas about how we can support this 
housing trust fund? I would like to hear from you on that.
    Secretary Geithner. Congresswoman, let me just start by 
saying I think what you said at the beginning is very important 
for people to understand. Our system, our housing finance 
system, did work remarkably well over a period of many, many 
decades. It was in many ways the envy of the world. Things 
started to change, though, in the late 1990's, and in the last 
decade you saw a dramatic increase in risk on their balance 
sheets, and a substantial erosion in underwriting standards 
more broadly. And as we know now, those mistakes caused a huge 
amount of damage. But I agree with you that it's important as 
we think about the future, to make sure we retain what was good 
in this system. I don't think, though, it's going to be tenable 
to try to recreate the system as it exists today in the future. 
I think we're going to have to do things. We're going to have 
to do a fundamental change if we're going to achieve the 
objective you laid out at the beginning.
    We are, of course, prepared to work with you and your 
colleagues on the committee to find ways to provide continued 
support for the housing trust fund. I'm not in a position today 
to describe in precise detail how we can do that, but we're 
prepared to work with you on that, and we do have some 
suggestions.
    Ms. Waters. I appreciate that very much, and we look 
forward to working with you on that. As I wrap this up, I would 
just like to be clear about whether or not we're talking about 
Fannie and Freddie formulated perhaps in different ways to 
continue the mission without the risk, or are we talking about 
getting rid of them altogether? What are we talking about here?
    Secretary Geithner. As many of your colleagues have already 
said, I don't think there is a credible argument that we can 
abolish, put out of existence these institutions today. That 
would not be responsible. One could not defend that. But I 
think we need to be very careful as we work together to design 
the future of the American housing finance system, that we 
preserve what was good, but we end what was too risky.
    Ms. Waters. That makes good sense. And in the interim, I 
appreciate your representation that you will help us to do what 
we can to fund this housing trust fund. We need something while 
we're trying to reorganize those GSEs. Thank you.
    The Chairman. Will the gentlewoman yield?
    Ms. Waters. Yes.
    The Chairman. You have 30 seconds left. I just want to 
stress again the Administration has committed to work with us 
on this. We are talking primarily here about rental housing. I 
want to make that point clear. We're not ruling out 
homeownership, but many of us believe that we did too little in 
terms of rental housing, and the right rental housing financing 
avoids a lot of the problems we have gotten into in the past.
    The gentleman from California, Mr. Royce.
    Mr. Royce. Yes. Mr. Geithner, I want to thank you, and I 
also want to thank you for the period of time when you were at 
the Fed. I went back through my notes. I counted 15 times when 
the Fed came before Congress and warned us about the moral 
hazard with respect to the GSEs. And I admit we were in the 
minority, those of us--I think there were about 70 of us who 
listened to the Fed about this argument, about the 
overleveraging. But my amendment on the House Floor was not 
actually written by me. It was actually written by the Fed, 
just as over on the Senate side, Chuck Hagel's amendment which 
was brought forward, was at the behest of the Fed to allow them 
to deleverage the arbitrage that was going on at Fannie and 
Freddie. And it was Chairman Dodd who blocked that amendment of 
Hagel's or that bill that came out on the Floor.
    The Chairman. Would the gentleman yield?
    Mr. Royce. I will yield if you will yield me additional--
    The Chairman. Yes. I would point out that at that time, 
Chris Dodd was not even the ranking Democrat. The Republicans 
were in control in the Senate at that time in 2005.
    Mr. Royce. Right.
    The Chairman. Paul Sarbanes was the ranking Democrat, so 
Chris Dodd was the second ranking Democrat in the Minority.
    Mr. Royce. Yes. Right. And he objected on the House Floor 
to the bill going forward. But the point I'm making is that the 
Fed recognized the problem created in the housing market, but 
there's another aspect of this that economists have talked to 
me about. And we have also seen over the last 10 or 15 years 
the huge increase in the derivatives market, and this is where 
I'm going with this, with respect to the GSEs. How much of that 
was tied to the GSEs, especially since they trade in the 
derivatives market the same way they did in the housing market?
    And I was going to ask you, Mr. Secretary, have you looked 
at this issue where GSEs were a large driver in the growth of 
the derivatives market and in the non-risk adjusted trading 
that went on in that market? In other words, the point I'm 
trying to make is that these entities, because of the 
presumption, because of the moral hazard, the same argument you 
were making to us, just like investors in their debt believed 
they were triple A, the counterparties here believed they were 
triple A. But here, it had additional significance. And so they 
played a big role, I think, in the growth of the derivatives 
market on Wall Street. How do we mitigate that going forward in 
the context of GSE reform? Thank you, Mr. Secretary.
    Secretary Geithner. GSEs take on two types of risk: credit 
risk, the risk the homeowner defaults; and interest rate risk, 
because a lot of the mortgages are guaranteeing their 30-year, 
fixed-rate mortgages. They need the capacity to hedge those 
risks. They need to use derivatives markets to hedge the 
interest rate risk on their books. So I think what they did 
there was necessary. Again, the central failure of oversight of 
the GSEs was not to force them to hold enough capital to back 
their commitments. They took on more risk than they had capital 
to support.
    This committee has passed a sweeping set of reforms to 
establish oversight over the derivatives markets, and those 
reforms would make sure that you can force institutions that 
operate in those markets to hold capital against the 
commitments they write, would force standardized derivatives on 
to central clearinghouses where you can regulate and supervise 
margin, would give the SEC and CFTC the authority to police 
fraud and manipulation in those markets, and would bring broad 
transparency and disclosure to trading in those important 
markets. We think those reforms are central to reduce the 
substantial systemic risk that comes from the growth in those 
basic markets. And I think if we put those reforms in place, we 
will be doing a very important set of changes in building a 
more stable system.
    Mr. Royce. I understand that argument, but there are two 
points: one, you still have the moral hazard problem because of 
the presumption of the government-backed guarantee; and two, 
they were the 800-pound gorilla. So when you, in the Fed then 
and Treasury now, come forward and say, ``Well, we have to make 
sure they don't overleverage,'' they were overleveraged at a 
hundred to one. They were involved in arbitrage big time. And 
all the Fed was asking was for the ability to deleverage this 
portfolio, arguing that if we slowly did that, we would avoid 
the bust in the market, we would avoid the systemic risk that 
would otherwise hit us. And that systemic risk did hit us and 
the Fed turned out to be absolutely right about this.
    But how do we overcome the fact that when you create a 
Government-Sponsored Enterprise, it becomes so powerful that it 
leans on the very institution that's supposed to regulate it?
    Secretary Geithner. I would just say again, even without 
the many failures around the GSEs, what happened in derivatives 
markets posed systemic risk to the American financial system. 
And so even again without the challenges we face in the GSEs, 
we would have to bring about broad reforms, establish oversight 
over the derivatives market themselves. And you're of course 
right to emphasize again the heart of all financial crisis is 
when you have too much leverage, not enough capital to back 
commitments. That simple failure was pervasive across the 
financial system, not just in the GSEs.
    Mr. Royce. Mr. Geithner, I have a few other questions for 
the record, and if you wouldn't mind getting back to me in 
writing, I would appreciate it. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, gentlemen. I thank them for having 
yielded, and I recognize the gentlewoman from New York, but I 
ask for 20 seconds, if you would yield to me?
    Mrs. Maloney. Absolutely.
    The Chairman. Just to say that, yes, the Fed was 
complaining about Fannie and Freddie buying up mortgages. But 
the Fed was also at the time refusing to use authority that 
Congress had given it in 1994 to stop the bad mortgages from 
being made in the first place. So they were worried about the 
secondary market when they were neglecting their opportunity to 
correct the primary market. If the Fed had used the authority 
that Congress granted them that Mr. Greenspan now acknowledges 
he could have used, you wouldn't have had those bad loans made 
in the first place for Fannie and Freddie to buy up.
    The gentlewoman from New York.
    Mrs. Maloney. Thank you. Welcome, Mr. Secretary. In 2007, 
both Fannie and Freddie invested in a very successful 
affordable housing project in the district I'm honored to 
represent called Stuyvesant Town and Peter Cooper. Over 25,000 
constituents live in this affordable, rent-stabilized rental 
housing. Fannie and Freddie were the senior debt holders in a 
$22 billion commercial mortgage-backed securities deal that 
included the Stuyvesant Town/Peter Cooper debt. It was well 
known in the press and by economists and people looking at the 
deal. They knew at the time that the rental income on the Stuy 
Town property would not be sufficient to meet the owner's debt 
service obligations. The owners knew that they would have to 
turn over or convert affordable housing to market rate units in 
order to increase the rental income and accelerate the rate of 
turnover. Hundreds and hundreds of my constituents, the 
tenants, were dragged into court to defend their homes on very 
frivolous lawsuits. Knowing this, Fannie and Freddie still 
invested in the debt.
    And I would like to ask you, Secretary Geithner, what can 
be done to prevent GSEs from investing in properties that can 
only be profitable if you convert affordable housing to market 
rate by forcing out certain tenants? That certainly works 
against the mission of Fannie and Freddie to build or provide a 
base for affordable housing. I am working on legislation with 
the chairman and others to ensure that Enterprises cannot 
receive affordable housing goals credits for investments like 
the one they made in the Stuy Town debt. Do you believe they 
should receive housing goals credit for this type of investment 
where they know cannot continue to provide affordable housing?
    Secretary Geithner. Congresswoman, I don't know, but I 
would be happy to spend some time talking to you and your staff 
about that particular problem and how we can prevent this kind 
of thing from happening again. I can't tell you now what is 
possible in that area. But I understand your concerns and I'm 
happy to work with you on it.
    Mrs. Maloney. Thank you. In this vein, New York City has a 
growing problem of overleveraged multifamily properties, 
including the Stuy Town project. What incentives can we put in 
place to encourage GSEs and community banks to work with local 
housing authorities to ensure troubled affordable multifamily 
buildings are sold to buyers who are in the business of 
preserving affordable housing? We're working so hard to build 
affordable housing and yet when it's sold, it is sold under an 
umbrella that absolutely makes it impossible to continue as 
affordable housing.
    Secretary Geithner. Congresswoman, Secretary Donovan and my 
colleagues at Treasury have spent a lot of time looking just at 
exactly those issues, and again, I would be happy to have them 
come to you and talk through the range of options we think 
would be most productive in meeting that objective.
    Mrs. Maloney. And how do these securitized loans get 
detangled in a timely manner in order to protect tenants from a 
tumultuous foreclosure process, which is what we are now 
confronting with Stuyvesant Town and Peter Cooper? We can't 
even figure out who owns it now. So what are your ideas in that 
area?
    Secretary Geithner. Again, I am happy to come spend some 
time talking to you about that. In the market we created for 
housing and finance, we have made it much more complicated in 
many ways, to work out economically sensible restructuring of 
loans backed by real estate than may have been possible in a 
more simple system in the past. You're citing just one example 
of that. There are thousands of examples across the country of 
that. And I think the reforms that this committee has put 
forward to try and improve the way the securitization markets 
work would be helpful in that area. But they will take some 
time coming, and they're not going to provide immediate relief 
to the problems you're facing, but we would be happy to spend 
some time talking with you about how to address the specific 
problems you refer to in New York.
    Mrs. Maloney. Thank you, and my time has expired.
    The Chairman. The gentlewoman from Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. Secretary, it seems like the GSEs have exposed the 
fallacy of bifurcating the mission or consumer protection 
regulation from the safety and soundness oversight. When HUD 
oversaw Fannie and Freddie's affordable housing mission and 
OFHEO served as its safety and soundness regulator, I think the 
result was a $227 billion bill for the American people.
    Do you think the Administration is posed right now to make 
the same mistake by creating a consumer financial protection 
agency even if it's in the Federal Reserve or whether it's been 
some places have talked about it being a separate agency? Can 
you explain how the financial institution supervision would be? 
Or do you think it would be more effective if there's the one 
regulator to focus on both consumer protection and the safety 
and soundness?
    Secretary Geithner. Congresswoman, that is a very important 
question, and I'm glad you raised it. We are now living with 
the consequences of a system which for many, many decades gave 
bank supervisors the responsibility to write and enforce rules 
for consumer protection, and that system did a terrible job for 
the country. It did a terrible job of protecting consumers, and 
it did not do an adequate job of protecting the safety and 
soundness of the banks in our country.
    There were failures in both those two areas, and our 
judgment is you're going to get better outcomes in consumer 
protection and better outcomes in safety and soundness if you 
separate those functions. We propose that. I don't know if this 
helps the argument, but Secretary Paulson in 2006 in his 
Financial Blueprint--2008, maybe--proposed exactly the same, 
basic model, which is to separate consumer protection from 
safety and soundness supervision with the basic judgment that 
that would produce better safety and soundness regulation and 
better consumer protection.
    Mrs. Biggert. So you would really advocate for separating 
them?
    Secretary Geithner. Oh, absolutely, and, again, I do not 
believe. I have heard this argument a lot from bankers and 
supervisors, and I do not believe it is a strong argument. 
Again, look at what that system produced--a colossal 
devastating failure. Let me try one simple example. Why should 
there be any conflict between rules designed to give consumers 
adequate disclosures so they can make choices of what type of 
mortgage product to take and rules designed to enforce sound 
underwriting standards for consumers?
    I do not see the basis for conflict. Now, in the bill this 
committee passed in recognition of that concern, there are a 
careful set of checks and balances against the risks that the 
consumer agency would somehow write rules that could imperil 
the stability of the financial system. But I think those jobs 
are better separated. President Bush and Secretary Paulson had 
the same view in their proposal, and I think the record of the 
current system supports that judgment.
    Mrs. Biggert. Well, wasn't it that the Federal Reserve was 
really responsible for writing the rules and regulation, the 
financial regulators?
    Secretary Geithner. I think that's the point. Again, I 
think that you want bank supervisors worrying about risk 
management, about capital, about liquidity. You want them 
focused on those core things. You don't want them having to 
spend a bunch of time also having to worry about consumer 
protection if that job can be better done by an independent 
agency.
    Mrs. Biggert. I guess I see it differently as with the GSEs 
and the banking industry, the consumer regulations, and the 
other regulators was separated and it didn't work.
    Secretary Geithner. Again, I respect that view, but in 
fact, the GSEs played a generally quite responsible role in 
what they did in establishing standardized mortgage products; 
and, generally, they held to better underwriting standards than 
was true of the private market. So I don't see the failures and 
successes of the GSEs as undermining the argument for 
separating consumer protection from safety and soundness 
supervision and banks.
    Mrs. Biggert. Does it create a duplication? What if the 
consumer protections with GSEs or with the banking industry 
that it's something that one way they propose that this will 
protect the consumers, and then the regulator with the safety 
and soundness, and they're in conflict?
    Secretary Geithner. Well, again, if there's any risk of 
conflict, you can deal with that risk by making sure that you 
have a body that looks at conflict and can pass judgment on 
conflict. But I think it's very unlikely there would be any 
conflict.
    The Chairman. The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Secretary.
    Our housing market is to some extent broken. Thank God, the 
GSEs and FHA are really providing all the financing outside of 
Beverly Hills. The definition of median home price is 
distorted, because you may have a few arms-length sales, 
willing buyer, willing seller, home in good condition, and then 
you have tens and hundreds of thousands of foreclosure sales of 
homes in terrible repair, deeds in lieu.
    Now, focusing on high-cost areas, including Los Angeles and 
the 10 largest or most expensive metropolitan areas, what would 
happen if at the end of the year, the maximum home limits for 
Fannie Mae and Freddie Mac not only decline from $729,750, but 
not just to $625,000, but the government resets the loan to the 
current median price? I'm told in Los Angeles this means that 
the FHA limit drops from $729,000 to $376,000. The GSE limit, 
Fannie and Freddie, dropped from that $729,000 to $417,000. I 
don't expect that by the end of this year, we're going to have 
a robust, middle-class home finance market independent of the 
GSEs. What happens if you have that sudden inability to buy and 
sell a home anywhere in some of our country's remote, largest 
areas? What happens to the national economy? Could it cause a 
second dip in this recession?
    Secretary Geithner. Congressman, that's a very important 
question. I don't have a judgment now about what Congress 
should do with those temporary increases and the conforming 
limits. I think it was very appropriate that Congress extended 
them. I fully supported that. I don't have a judgment yet. I 
would say the following, though. I think it was very important 
for people to understand that the basic mistakes most 
governments make in dealing with financial crises, real estate 
crises, is they tend to prematurely declare victory, say that 
the great risks are behind us, and they tend to walk-back 
support too quickly--not too slowly. And I think it's important 
to recognize that this housing crisis, the financial crisis has 
caused a huge amount of damage and it is going to take quite a 
long time for us to heal and repair that damage. I don't know 
how long it's going to take, but it's going to take some time 
still.
    Mr. Sherman. Do you think we're ready by the end of this 
year to see the GSE limit drop in half in America's most 
important and largest cities without damaging the economy of 
the country?
    Secretary Geithner. As I said, Congressman, I'm not in the 
position yet to make that judgment. We don't need to make that 
judgment yet. We'll have to make that judgment at some point 
this year, but not quite yet. But, again, I want to underscore 
I think your basic point is we have to be very careful that we 
are doing carefully designed, sensible things to help 
facilitate this process of repair and recovery.
    Mr. Sherman. Let me move on to the next question. This one 
is just for the record, because I don't want to get you in 
trouble with the Senate. But a year ago today, the President 
nominated an Under Secretary for International Affairs, which 
is still on hold in the Senate after a year, as well as other 
major positions--the Under Secretary for Domestic Finance and 
the Assistant Secretary for Tax Policy. And so the question for 
the record is, do holds, filibusters, and the Senate practice 
of not allowing a nominee to work as an acting on a temporary 
basis until the confirmation, do those Senate practices lead to 
higher unemployment to companies not being able to find out 
what the tax regulations are because you don't have an 
Assistant Secretary for Tax Policy? And are there hundreds of 
thousands or tens of thousands of Americans unemployed today 
because of the perks and prerogatives of the other body? Don't 
answer that one for the record. Let me guess.
    Secretary Geithner. Say. Can I just thank you for raising 
that concern and for pointing out that these three senior 
positions in the Treasury remain unoccupied today. It has now 
been 15 months since the President took office. And we have an 
amazingly talented, dedicated, hard-working group of people at 
the Treasury doing a lot of important things for the country, 
but we need to get those people in place.
    Mr. Sherman. Finally, we have disagreed on whether the 
Executive Branch should have permanent, unlimited bailout 
authority to make sure that the creditors and counterparties of 
major institutions on Wall Street can get bailed out only by 
the Executive Branch. Congratulations on convincing the Senate, 
at least this far, to give you that permanent, unlimited buy 
authority.
    Secretary Geithner. Can I respond to that, Mr. Chairman? 
Actually, we agree on more than you think. As I said in the 
past in this hearing room, I would not support that, and 
neither your bill nor the Senate bill gives the Executive 
Branch the authority you describe. What it does do is make it 
clear that a large institution in the United States, if that 
institution in the future manages itself to the point where it 
gets to the edge of the abyss can no longer survive, then the 
government should have no option at that point except to put 
that institution into a form of receivership so it can be 
dismembered over time.
    The Chairman. Mr. Secretary, at this moment of agreement 
among you, Mr. Sherman, and the Senate, we are going to move 
on. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Mr. Secretary, it 
is good to see you again. Given the unprecedented support that 
the Federal Government, both at the Federal Reserve and the 
Treasury has propped up, the securitization market for housing 
in this country, one of the things that concerns me is that the 
longer we keep this government presence, I think the longer 
that the private sector and private securitization sits on the 
sidelines. Because quite honestly, now, we do know that there 
is some activity pending out there, and there could be, but not 
to the level that we have had in the past, so what do we do?
    And, you say--here you are saying--Congressman, I'm not 
really ready to do anything right now, but I am very concerned. 
It's kind of like a muscle. Like the doctors tell you the 
longer that you don't use a muscle and you keep your arm in the 
sling, which is where we have the housing finance market 
today--we have it in a sling--the harder it is to rehabilitate 
that arm once you take it out of the sling. How are we going to 
do that and what is your Blueprint to do that?
    Secretary Geithner. Congressman, I worry a lot about that 
risk, and you are right to highlight it. But I think the main 
risk we face today is we still have an economy that has only 
now been growing now for three quarters. We have unemployment 
at around 10 percent, much higher in many parts of the country, 
a housing market still overwhelmingly dependent on the 
government, because there is no private will to provide 
financing for residential real estate, and it is going to take 
us a while to get through this and be confident that we have a 
recovery in place led by the private sector that could be self-
sustaining over time.
    The main risk we face today, still, is that there is still 
enormous damage caused by this crisis. You see it conspicuously 
in housing across the country. If you look at what we have done 
in the rest of the financial system, you can see we have been 
very, very careful to unwind, to walk back to terminate and end 
the emergency programs that we no longer need to put in to keep 
in place, so we have ended the money market guarantee fund. The 
FDIC is no longer providing guarantees for the debt of bank 
holding companies.
    We have replaced the overwhelming majority of public 
investments in our banking system with private capital. We are 
unwinding and trimming as the Fed is doing all those emergency 
programs, exactly for the risk you pointed out. We do not want 
these markets excessively dependent on government support in 
the future, and we want to see those private markets come back 
as quickly as we can.
    Housing still has been so damaged. That process and repair 
is going to take a long time. But if you look at what we have 
done in those other areas, you can see we have been willing and 
careful and effective and walking back and unwinding the things 
that no longer play a useful, essential role in supporting 
recovery.
    Mr. Neugebauer. I hear what you are saying, and I agree 
with some of that as well. But one of the big problems here is 
that we really don't incentivize people to get into the 
securitization on the private side because of the interest rate 
levels that make borrowing very, very inexpensive. And so they 
can borrow very inexpensively. They can go out and buy the 
Freddie and Fannie products and the Ginnie Mae products, and so 
there's not a lot of incentive to go out and look for private 
demand in those markets.
    Secretary Geithner. Again, I agree with that risk. I think 
if you look, you'll have a chance to talk to Secretary Donovan 
about this, but if you talk to him, or you talk to Ed DeMarco 
who runs the FHFA, you'll see that they have put in place a 
variety of changes already in underwriting standards and how 
they price their guarantees. It is designed to help promote the 
private sector coming back and replacing them as things start 
to heal, but that process is going to take some time. I think 
you're right to underscore its importance, and I will be fully 
supportive of that effort as we move to a transition where the 
private sector can play a larger role.
    Mr. Neugebauer. And one of the things I have heard also is, 
for example, PMI was an important part of the private 
securitization market. But what the PMI companies tell me is 
that they can't compete with the Federal rates, and so 
sometimes we have to bring a level playing field here so that 
there is a yield difference there that people are willing to 
say, I would rather have the higher yield here, and so I will 
move outside of the current parameters and move into the 
private securitization.
    Secretary Geithner. Again, I agree with you about the 
objective. It's the question about how we do it; and, again, I 
just want to underscore that even though the economy is growing 
now and we have brought a measure of substantial stability back 
to the overall financial system and interest rates are much 
lower today than they were, there's a lot of challenge ahead 
still in the housing market and housing finance market. And we 
need to be very careful that we're still helping to facilitate 
this process of recovery as we transition to a new, better 
system.
    Mr. Neugebauer. One final, quick question: As Chairman 
Bernanke is wrapping up his purchase program of mortgages, what 
do you think that does to the market?
    Secretary Geithner. I would leave that to the Chairman to 
describe, but again as the Fed does the careful responsible 
thing of winding down its emergency actions, we want to make 
sure again that the full complement of government policies in 
this area is helping facilitate this process of repair and 
recovery. And, it is getting better. We are making some 
progress in that area, but there is a lot of damage still out 
there.
    The Chairman. Before getting to Mr. Capuano, I ask 
unanimous consent that a letter from the National Association 
of Federal Credit Unions be put into the record. Just, ``GSEs 
allow credit unions to obtain the necessary liquidity to create 
new mortgages, despite their conservatorship, Fannie Mae and 
Freddie Mac have made it an important tool for credit unions to 
help free them up to make more loans; and they're a valuable 
resource for low-and moderate-income members. As Congress 
considers ways of reforming the current system, we believe it 
is important that safeguards are in place to make a very smooth 
transition, and the important roles that Fannie Mae and Freddie 
Mac play for credit unions not be capitalized.''
    That's from the National Association of Federal Credit 
Unions. The gentleman from Massachusetts is recognized for 5 
minutes.
    Mr. Capuano. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary.
    Mr. Secretary, there have beeen a lot of big things talked 
about today, but I look at Fannie and Freddie maybe too 
simplistically, and I'm just curious. I'm not sure I know the 
exact number. Do you know the number of the general percentage 
of homeownership in this country prior to the existence of 
Fannie and Freddie? Am I right to think it was in the 30 to 40 
percent range?
    Secretary Geithner. You mean going back to the 1930's?
    Mr. Capuano. Yes.
    Secretary Geithner. I don't know, but a small fraction of 
where it is today. I agree with that.
    Mr. Capuano. And today, it's around 70 percent, give or 
take?
    Secretary Geithner. Today, it's about two-thirds.
    Mr. Capuano. And I look at homeownership. Maybe I'm wrong, 
but I think it's probably the main financial aspect of this 
country that helped create and maintain the middle class. I 
come from a neighborhood where everybody I know, their way into 
the middle class was the purchase of a simple home, oftentimes 
a multifamily home. And I look at Fannie and Freddie as 
symbolic if not in fact responsible for that. Prior to Fannie 
and Freddie, how did people get mortgages? The private market 
alone? There was no government involvement.
    Secretary Geithner. That's right.
    Mr. Capuano. And for me, that's what this is all about. I 
guess I understand that Fannie and Freddie like everything else 
needs to be retooled. I have no problem with that, but as far 
as the current economic crisis, did Fannie and Freddie create 
the derivatives market?
    Secretary Geithner. No.
    Mr. Capuano. Did they participate in it any worse or any 
differently than a million other private entities?
    Secretary Geithner. Differently, but I wouldn't say worse.
    Mr. Capuano. And so they did some bad things, but no worse 
than many private entities of this country around the world.
    Secretary Geithner. Well, I would say they were better than 
most private entities in these markets.
    Mr. Capuano. And that is my problem. I'm not going to 
suggest that they don't need to be retooled. I'm not going to 
suggest that we don't need to revisit them. I'm certainly not 
going to suggest in any way that they don't need to be overseen 
or even destroyed and recreated in a different fashion. None of 
that bothers me, and that's why I haven't yet made up my mind 
exactly how I would like to approach this or like to seen it 
approach.
    That's why I came today to listen to different ideas, but I 
will tell you that for me, subjecting homeowners or potential 
homeowners to nothing but the private market has been tried in 
this country for 150 years and failed to create a middle class. 
Since government got involved indirectly through Fannie and 
Freddie, we created the middle class, and we sustained the 
middle class. And when we are done with this, for me, that is 
the goal, the only goal.
    As a matter of fact, anything short of that, my emotions 
might overcome me, and I might be tempted to scream out that 
someone or something or some group of people might be a 
homeownership killer, if they got rid of Fannie and Freddie, 
and I hope that doesn't happen. Thank you, Mr. Secretary.
    The Chairman. The gentleman from Texas.
    Let me just, before Mr. Hensarling, the Secretary has 
asked, and I think reasonably, to leave at 12:30. I would note 
all the members now here will be able to question him. Other 
members, if you plan to come over here about 12:15 to question 
the Secretary, have lunch instead and then come over and talk 
to the second panel. The gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. Welcome again, Mr. 
Secretary.
    I note that it was about 18 months ago that the President 
was elected. I think it was 13 months ago that the 
Administration decided to double taxpayer liability for the 
GSEs; 9 months ago that the Administration asked--
    Secretary Geithner. Not to double the liability under the 
original preferred stock agreements.
    Mr. Hensarling. $100 billion per to $200 billion per?
    Secretary Geithner. Under the law the Congress passed, you 
gave my predecessor unlimited authority to make sure Fannie and 
Freddie could meet their obligations. At that point, in effect, 
the government committed to make sure they had whatever capital 
was necessary to meet those obligations. All I have done is 
carried out that basic commitment using the authority that 
Congress gave my predecessor.
    Mr. Hensarling. Okay. Well, exercising that authority.
    Secretary Geithner. It didn't change our liability.
    Mr. Hensarling. Mr. Secretary, please, I control the time 
here. It was 9 months ago that in the Administration's White 
Paper, we were told to expect some type of plan or option in 
the budget. We know what that plan was and that is you continue 
to monitor the situation. Three months ago, the Administration 
announced unlimited taxpayer exposure for Fannie and Freddie.
    I just note, Mr. Secretary, in 18 months, the 
Administration has clearly found the time to put forth a plan 
that would provide substantial regulation for one-sixth of our 
economy of healthcare, extend more control over broker-dealers, 
investment banks, credit card companies, community banks, hedge 
funds, finance companies, payday lenders, pawn shops, and auto 
companies, but still no plan for the GSEs except seemingly 
unlimited taxpayer exposure.
    So one Member's opinion, Mr. Secretary, with respect to the 
timing, I just thing the timing is unacceptable. But let's talk 
about the taxpayer exposure. Clearly, you're familiar with the 
numbers. CBO estimates over the next 10 years, $376 billion. We 
know that there's trillions more of exposure there; and, so, on 
the one hand, I see that Treasury continues to monitor the 
situation. I guess my greater concern is, is there in fact a de 
facto plan, perhaps not by design but perhaps by accident.
    I note that the chairman of our committee in January stated 
that Fannie Mae and Freddie Mac are now ``basically public 
policy instruments of the government.'' Charles Haldeman, 
Freddie Mac's chief executive has stated, ``We're making 
decisions on loan modifications and other issues without being 
guided solely by profitability.'' Daniel Mudd, who is Fannie 
Mae's former CEO said, ``The government is running Fannie and 
Freddie as an instrument of national economic policy, not as a 
business.''
    It appears to many of us, and I'll give you an opportunity 
to disabuse me of the notion or to accept the premise that what 
we now have is the GSE's or essentially an instrumentality of 
the Administration to fund taxpayer funds and to frankly fail 
foreclosures mitigation plan with nothing else in sight. So 
I'll yield to you, Mr. Secretary.
    Secretary Geithner. Thank you, Congressman. Let me tell you 
what our strategy and our plan is. Our strategy is to fix this 
damaged housing finance market to make sure this economy 
recovers from the trauma caused by the recession. We're going 
to do that as carefully and quickly as we can.
    As part of that process, we will be working with this 
committee to lay out a comprehensive set of reforms to the 
housing finance system, including the GSEs. But our obligation 
now and our priority now is to try to make sure that we heal 
what is broken in this housing finance system, and we help this 
economy dig out of this terrible mess.
    Mr. Hensarling. I understand that, Mr. Secretary, but 
there's still no timetable for that. Is that correct? As of 
today, there is still no timetable for a plan dealing with the 
GSEs?
    Secretary Geithner. Again, we're looking forward to having 
this debate about reform. You are not going to care more about 
this than I am. I'm the one who has to preside over a set of 
broad commitments that I inherited from my predecessor, and we 
are going to do a careful, competent job.
    Mr. Hensarling. Mr. Secretary, it's just a simple question. 
Is there a timetable or is there not a timetable?
    Secretary Geithner. We are going to do a careful competent 
job--
    The Chairman. It is The gentleman from Texas' time.
    Secretary Geithner. --of digging out of that mess and 
making sure that we work with you to put in place a set of 
reforms that will leave our country in a better position.
    Mr. Hensarling. Well in the little bit of time I have left, 
Mr. Secretary, in your mind, in the Administration's mind, is 
there any reason that inherently we must have a Government-
Sponsored Entity to securitize mortgages in order to have 
stable homeownership in America, because I note many other 
nations do not have GSEs.
    Secretary Geithner. This is the central existential 
question as you contemplate reform; and, as I said earlier in 
response to one of your colleagues, I think there is a quite 
strong economic case, quite strong public policy case for 
preserving designing some form of guarantee by the government 
to help facilitate a stable housing financing market. But it 
can't be the one we have today.
    It can't be the one we have lived with over the last 
decade. It's going to be significantly different, but we will 
likely conclude as our predecessors have that there will be 
some rule for a guarantee of some sort.
    The Chairman. Thank you, Mr. Secretary.
    The gentleman from Texas, Mr. Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman. I want to also say 
welcome to our Secretary.
    As you know, most of us and most of my colleagues are aware 
that April is National Financial Literacy Month. Throughout 
that month, special attention will be focused on efforts to 
increase the awareness of financial education and the 
importance of managing personal finances, increasing personal 
savings, and hopefully reducing personal debt in the United 
States.
    I look forward to working on financial literacy education 
and capabilities issues with you, Mr. Secretary, as well as 
with Michelle Greene, your Deputy Assistant Secretary for 
Financial Education and Financial Access. I have listened very 
carefully to many of your responses, and I agree with you that 
the system for protecting consumers in the mortgage market was 
and remains fundamentally flawed, and consumers should have the 
information they need about the cost, terms, and conditions of 
their mortgages, which would be incorporated into legislation 
reforming the House Finance System.
    I am sick and tired of listening to some of the folks who 
signed contracts and showing me the 20 or 25 items that were 
listed on fees, something very different than what it was years 
ago. I am pleased that the truth in lending and real estate 
settlement procedures will be placed under one roof in the Wall 
Street Reform and Consumer Protection Act. We should address my 
many concerns regarding the implementation of both of these 
acts.
    Mr. Secretary, do you intend to provide housing counseling 
in languages other than English?
    Secretary Geithner. Did you say ``counseling?''
    Mr. Hinojosa. Yes.
    Secretary Geithner. I believe that it is true today that 
the substantial support Congress has authorized to give in 
support of counseling agencies across the country now includes 
many nonprofits which provide those services in languages other 
than English, but I'll check that for the record.
    Mr. Hinojosa. I was pleased when I visited the Federal 
Reserve Branch in Dallas that they are very strongly supporting 
these financial literacy programs and have it in eight 
languages. In Texas, it's not uncommon to have school districts 
that have 40 or 50 languages spoken by some of the limited 
English-proficient students. So this is something that is very 
important, and I know some of my colleagues here in Congress 
don't want anything but English in materials that are used by 
some of our Federal agencies, and so I disagree with that.
    I think that this is such a big investment that it's 
important to me that this concern be addressed. Fannie Mae and 
Freddie Mac as Government-Sponsored Enterprises are responsible 
for helping many middle-class families in my district in buying 
a home. So it's important to me that they survive through these 
difficult times. What actions will Treasury take to ensure that 
they survive?
    Secretary Geithner. Oh, Congressman, as I said, we are 
going to do everything necessary to make sure they can not just 
meet their obligations, but they can continue to play an 
important role in supporting housing finance markets as we work 
on the design of a better, stronger, more effective housing 
finance system in the future.
    We are completely committed to that and we will do 
everything necessary to make sure we allow them to continue to 
play the very important role they now play in providing a 
stable source of housing finance for this country as we try to 
dig out or repair what's broken in our financial system.
    Mr. Hinojosa. As you may well know, I have been a very 
strong proponent of community banks, because my district is one 
that has a very, very large number of community banks and that 
is one of the sources of borrowing. Some of them bought stock 
from Fannie Mae and Freddie Mac and took a huge loss. Is 
anything being considered to help them so that their balance 
sheets can look a little bit better because of the losses they 
took?
    Secretary Geithner. Congressman, we have proposed 
legislation to the Congress that would establish what we call a 
Small Business Lending Facility. And this facility would make 
capital available to small community banks so that they have 
more financial resources to support lending to their customers 
as we come out of this recession. And this legislation would 
establish a $30 billion lending facility. It involves very, 
very modest costs and we think this is one of the most 
important things we can do to help small community banks 
continue to get through the very challenging period we still 
have--
    Mr. Hinojosa. What is the timetable to make that happen?
    Secretary Geithner. The leadership of both bodies are 
considering taking up a small business bill which includes a 
set of tax provisions and financial credit support mechanisms 
like the one I described.
    Mr. Hinojosa. Thank you.
    The Chairman. The gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary. In your testimony, you briefly talked about an 
alternative to securitization and that is covered bonds. Paul 
Kanjorski is not here right now, but he and I dropped in a bill 
this past week, H.R. 4884. I wonder whether you have looked at 
that?
    Secretary Geithner. I haven't yet looked at it, but I will. 
And I would say that I understand. I know that you have been a 
long proponent of this issue of covered bonds. We do have a 
covered bond system in the FHLB today.
    Mr. Garrett. Right, but this is structured statutorily, 
so--
    Secretary Geithner. Yes, it is. I would be happy to work 
with you on that, and I think looking at the covered bond model 
will be an important part of looking at the reform agenda.
    Mr. Garrett. And would that be something we would help if 
we can get that done sooner this year rather than later?
    Secretary Geithner. It's possible. I don't know. Again, my 
basic feeling, like many argued when we were looking at 
financial reform of the private financial system in the United 
States, you want to look at comprehensively at the full 
complement of institutions, policy issues involved in this 
area. But again, I am happy to work with you on that part of 
reform.
    Mr. Garrett. Great. A couple of weeks ago, we--I'm back now 
to the GSEs, like everyone's talking about. We had the hearing 
here at the Budget Views and Estimates. I introduced an 
amendment that went down along party lines, which would 
basically put the GSEs on budget and applied $1.6 trillion of 
GSE debt, should be subject to the debt limit.
    Secretary Geithner. Okay.
    Mr. Garrett. Back then, when Chairman Bernanke was here, I 
asked him his opinion of this, and I also asked him another 
question, and I'll ask you the same question, is the debt of 
the GSEs sovereign debt?
    Secretary Geithner. Congressman, this is a very technical 
question, the appropriate accounting treatment of Fannie and 
Freddie and their obligations, so let me just give you two 
responses on this.
    Mr. Garrett. Yes and no?
    Secretary Geithner. Determining the appropriate accounting 
treatment of these obligations, we have followed the advice of 
accountants. GAO agrees with the judgment we have made, and 
does not think it's appropriate for us to consolidate. We 
followed that basic model.
    On your second question, let me repeat again what I said in 
both my written statement and my oral statement. We will do 
everything necessary to make sure these institutions have the 
capital they need to meet their commitments.
    Mr. Garrett. And I understand that from reading your 
statement. But it's really a basic question, and I'm not a 
Treasury Secretary or the Chairman of the Fed. And even 
Chairman Frank, not even, but the chairman also recognizes and 
he understands the difference because in his statement he says, 
``I--meaning the chairman--have noted that Fannie and Freddie 
debt did not have the legal standing as Treasury debt.'' So, he 
recognizes that there is a distinction between sovereign debt 
and GSE's debt.
    Secretary Geithner. Absolutely, they are different, but 
again, I want to emphasize again in saying they are different 
that I want to make sure that you understand, again I say this 
as clearly as possible, we will make sure that they have the 
financial resources necessary to meet their obligations.
    Mr. Garrett. Okay. I understand that. And the chairman says 
the same thing that he and many others want to make sure that 
is being done. Although, the chairman did say, I believe, 
throughout the debate, we will make sure that there are no 
implicit guarantees, hints, suggestions, or winks or nods, we 
will be explicit as to what is and what is not an obligation of 
the Federal Government. So, with the debt that we're incurring 
since this has all happened going forward, is that on the same 
standing as the existing debt that is out there? In other 
words,--
    Secretary Geithner. That issue by the GSEs?
    Mr. Garrett. Yes.
    Secretary Geithner. Yes.
    Mr. Garrett. It is? So, when he says that we should have no 
implicit guarantees, hints, suggestions, winks or nods, we are 
nodding and winking and guaranteeing about that, as well?
    Secretary Geithner. No, no. We're not doing nodding and 
winking, we're saying very clearly, and I'll say it over and 
over again, we will make sure, using the authority Congress 
gave us that these institutions have the ability to meet their 
obligations present and future.
    Mr. Garrett. So, the chairman is incorrect when he states 
that there is a distinction between the debt that these have 
and sovereign debt?
    Secretary Geithner. No, I don't think so. No, as I said, 
and of course, you know the answer to this question, they are 
different types of obligations. But again, I want to make it 
clear you understand that we will use the authority Congress 
gave us to make sure they can meet their commitments.
    Mr. Garrett. I do, and okay, so what I'm hearing is, it is 
not sovereign debt, but it is debt that we will stand behind.
    Secretary Geithner. Well, I'll repeat it. I'll try and say 
it the same way every time I said it.
    Mr. Garrett. Is it sovereign debt?
    Secretary Geithner. No, as I said, it's not sovereign debt 
in that--
    Mr. Garrett. Okay, that's good, that's really all I needed 
to know. It's not sovereign debt, but it's debt we're going to 
stand behind.
    Secretary Geithner. I want to make sure--this is a very 
extensive issue. We're going to make sure that these 
institutions have the resources they need to meet their 
commitments, past and future.
    Mr. Garrett. Right. So, as I have heard it, and I 
understand it, it is not sovereign debt, but it is debt that we 
are going to stand behind, and because Congress has given you 
that authority to stand behind that--
    Secretary Geithner. For very good reasons, yes.
    Mr. Garrett. Okay. And I still have 30 seconds left.
    The Chairman. You had 3 seconds.
    Mr. Garrett. Excuse me?
    The Chairman. You had 3 seconds left when you said that. We 
will make it 10 seconds more now.
    Mr. Garrett. Do you have any comment on the fact that 
Bloomberg is reporting that the bond market is saying that it's 
safer to lend to Warren Buffet than to this Administration 
right now because of the spreads?
    Secretary Geithner. I don't agree with that comment. And I 
would say the following, which is that it is very important 
that the Congress work together to make sure we put in place 
over time a set of policies that will bring down our fiscal 
deficits to a more sustainable level. That's very important to 
the strength of this recovery. It's going to be very important 
to future growth of the American economy and we look forward to 
working with Members on both sides of the aisle to develop a 
political consensus to bring those deficits down to a 
sustainable level.
    Mr. Garrett. Thank you.
    The Chairman. The gentleman's time has expired. The 
gentlewoman from New York.
    Mrs. McCarthy of New York. Thank you, and welcome again, 
Mr. Secretary. Watching, listening to the debate, I can't help 
wondering--many, many years ago, a lot of years ago, I bought 
my first home and I, a single woman starting out in nursing, 
which by the way, back then nurses didn't make much money, so 
every door was closed to me as far as buying a home. And it was 
my parents' home. I was a good risk. But, it was through the 
GSEs that actually I was able to get a loan. I never missed a 
payment, and I paid it off. So, there are a lot of us out there 
who certainly took advantage of it.
    And from my understanding from a lot of these statistics, 
the majority of middle-income families will do everything they 
possibly can to make sure that they always pay their mortgage 
so they have a roof over their head. That's their dream. That 
was my dream. So, I was just curious, when we started going 
into this spiral downfall with the GSEs and also with the 
subprime lending crisis that we saw, who actually had the worst 
record? I know in New York City, we had a--I was reading 
somebody's testimony that 13,000 out of 20,000 loans defaulted. 
And that came through a housing agency. So, we need to look at 
things, how to change things, but I agree with my colleague 
that financial literacy is going to be an important part.
    But, I just want to know now, what are we doing as far as 
the government to encourage more lenders to work towards loan 
modifications before people go into foreclosures?
    Secretary Geithner. That is a very good question. The 
program that we put in place to make it possible for homeowners 
to restructure, modify their loans is now reaching more than 
one million Americans. And what this means is for those 
families, those one million Americans, they now have 
substantially lower monthly payments, which on average is 
putting $500 to $600 more in the pockets of those families than 
they had before the modifications. We're trying to make sure 
that as many of those as possible are translated into permanent 
modifications. And we're going to keep working to make sure 
this program reaches as many people as we can to make sure 
people who do not need to lose their homes can stay in their 
homes.
    Mrs. McCarthy of New York. Just one other question, too. 
With--obviously with the GSEs, and they have the backing of the 
Federal Government, on that, there are going to be a lot of 
homes that probably will not be, they're foreclosed now, 
they're sitting there. What are the chances of turning some of 
those homes over into rental properties where people are 
getting back on their feet again?
    Secretary Geithner. Well, again, I think there are 
substantial opportunities for doing that. A lot of that is 
happening. And again, I would be happy to ask my colleagues, or 
my colleagues at HUD, or FHFA, to come brief you in more detail 
on what they can do in those areas.
    Mrs. McCarthy of New York. Thank you.
    The Chairman. The gentlelady from West Virginia.
    Mrs. Capito. Thank you. Thank you, Mr. Secretary. I would 
like to talk about this maybe a little more simplistically and 
a little more globally. I just got the report this morning that 
existing home sales are down again for the third straight 
month. Unemployment, as you mentioned in your opening 
statement, remains too high. We have witness after witness, 
particularly from the financial institutions, asking why 
they're not lending or why people aren't borrowing, lack of 
confidence, uncertainty.
    My question is, is the lack of a certain plan forward with 
Fannie and Freddie leading to the uncertainty, as well? I'll 
just give you an example. Speaking with a community banker 
several weeks ago, asking him, why are you not getting into the 
mortgage market because the FHA has taken up so much more of 
the mortgage area? And he said, well, maybe if you would give 
me a loan guarantee, maybe I would get into that a little bit 
more.
    Are we--because of this, all of the government involvement 
with Fannie and Freddie and dollars and just what you said, 
that we will back the debt of Fannie and Freddie, could that be 
part of--I know we need to do it slowly--but could it be part 
of the, maybe putting it in some mud and making it going 
slower, so that the confidence is not rebounding the way that 
we need it to in order to get out of this slump that we're in?
    Secretary Geithner. I don't think so, but I'll give you my 
sense of this. I think if you talk to, as you do, and as we all 
do, community bankers across the country and you ask them 
what's happening on the lending side, generally what they say 
is the following: They say, loan demand is still very low; they 
say, the supervisors are being very tough on us; and to some 
extent, they say, they would like to know what the rules of the 
game are going to be in terms of broader financial reform.
    So, for example, the bill that passed the House last 
December and the bill now moving its way through the Senate, 
they would like to know a little more certainty about what the 
rules of the game are going to be on capital, things like that, 
going forward.
    I think those are the principal factors still affecting the 
lending conditions for small community banks and I think we can 
do something about those things. Again, we can, as the Chairman 
of the Fed, and the Chairman of the FDIC are doing, try to make 
sure that their examiners across the country are not overdoing 
it. We can make sure, as I said, to your colleague, that we 
provide capital to small community banks so they can have a 
little bit of assistance to get through this that will help 
support lending. And if we pass financial reform, that will 
bring some clarity to the rules of the game, that would be 
helpful.
    But I do not believe that what Fannie and Freddie and the 
FHA are doing now is overwhelmingly constructive to the process 
of repair of housing finance.
    Mrs. Capito. But, at the base of a recovery, a good, solid 
recovery, is going to be this bouncing back of the housing 
market at the most fundamental part. Would you agree with that?
    Secretary Geithner. It will, again, it's hard to tell the 
timing now, but part of recovery will be more durable stability 
in housing prices.
    Mrs. Capito. Right.
    Secretary Geithner. And as that happens, you're going to 
see the private market come back and take back some of the 
business of housing finance that is now dominated by Fannie and 
Freddie and the FHA.
    Mrs. Capito. Okay, on a totally different topic, and we 
have talked about this a little bit, the Administration's 
Making Home Affordable modifications and refinancings, is that 
where we have done the $1 million dollar modification, is this 
affecting the bottom line of Fannie and Freddie at all? And are 
you concerned about the re-default rates on some of these re-
modifications in terms of the ones that are held by Fannie and 
Freddie?
    Secretary Geithner. No, it's not hurting the bottom line of 
Fannie and Freddie at all. The way this program works for both 
a private lender and for Fannie and Freddie is that they do the 
modifications if the economic value of the mortgage is better 
after being modified than it would be in foreclosure. So, 
because of that, that's what these modifications do. They put 
Fannie and Freddie in a better position, not a worse position 
than if no modifications were happening.
    Mrs. Capito. But, we're still having re-default rates in 
those?
    Secretary Geithner. Yes, absolutely. Again, given, as you 
said, how high unemployment is across the country still, you're 
going to still see re-default rates happen; it's just 
inevitable. We want to make sure we're doing as much as we can 
to help people who lose their jobs and face the risk of losing 
their homes, but you're going to see some risk of re-default 
rates across Fannie and Freddie and the banks who hold 
mortgages.
    Mrs. Capito. All right. Thank you, Mr. Secretary.
    The Chairman. Thank you very much. Now, we will hear from 
Mr. Lynch of Massachusetts.
    Mr. Lynch. Thank you, Mr. Chairman. Welcome, Mr. Secretary. 
I think one of the major weaknesses in our housing finance 
system is the securitization process, and I was happy to see 
that you called that out on page 5 of your testimony and 
devoted a really substantial section to that.
    There was an article, I'm not sure if you saw it, in this 
past Sunday's New York Times by Gretchen Morgenson where she 
astutely points out that much of the difficulty with the 
mortgage-backed securities part of our crisis was rooted in the 
opacity of these products. And part of the problem, obviously, 
was that the ratings and valuations that were assigned to these 
mortgage-backed securities were completely wrong. But, because 
of the complexity and the opacity, folks were induced to rely 
on just the rating. And that was a real problem.
    As Ms. Morgenson points out, the Bank of England has just 
issued sort of an advisory, I think they call it a consultive 
report, and their Bank of England risk management division has 
recommended that--and they face the same problem, because in 
England, the collateral is being posted using these mortgage-
backed securities and so, and at their discount window 
facilities, similar to what we're doing here. What they're 
recommending is that there be more useful information, 
additional information, supplied by those who, the issuers, the 
people who are creating these mortgage-backed securities, so 
that individual parties, the market, the banks, will be able to 
look through and actually vet them themselves rather than 
relying on Triple A and I think in our own situation with the 
Fed doing what they're doing, I think especially, they're 
posting collateral in much the same way. Is this something 
that, this is so important, this is such a critical part of 
credit formation here in this country, it's a great thing, the 
securitization, if it's properly used with proper standards.
    Is this something that we need to look at, as well, in 
terms of getting more information to the markets so they can 
discern the proper valuation on a rolling basis, not just a 
static number or rating when the issue comes out, but ongoing.
    Secretary Geithner. I completely agree with you. I think 
you said it very well, bringing more transparency to those 
structures so the investors can look through them, and 
understand the true risks in them is very important. It's also 
very important, as many of your colleagues know, to bring more 
transparency to the rating processes themselves, and we would 
like to see the rating agencies be compelled to disclose much 
more about the models used to underpin those ratings. We want 
to make sure that in the regulatory system that supervisors 
preside over, they're not creating incentives that encourage 
overreliance on ratings.
    That set of changes, including most importantly, the one 
you began with, we think would make a big difference.
    Mr. Lynch. Let me ask you about that. In your report, it's 
a little bit vague about the reform of the rating agencies. You 
do mention it, but can you drill down on that a little bit?
    Secretary Geithner. The reforms that this committee has 
embraced and which were the center of our proposals really had 
two pieces. One is to give the SEC the authority to police 
conflicts of interest because you don't want the judgment 
skewed by the model these firms have been operating with and in 
the future. You don't want their economic interests--
    Mr. Lynch. Right.
    Secretary Geithner. --in the issuer altering their 
judgment, assigning excessively favorable ratings. That's very 
important.
    Two, again, is to bring much more transparency to the 
rating process, make sure they have to disclose much more 
information about the inputs into their models into the rating 
and that way investors can bring an independent assessment 
about whether the ratings make any sense.
    Again, the big mistake that underpinned almost everything 
that happened in our housing markets was that everyone made a 
judgment, almost everyone made a judgment that house prices 
would not fall in the future.
    Mr. Lynch. Yes.
    Secretary Geithner. And the ratings were too favorable. 
Because of that, there was too much leverage, because of that, 
there was too little capital, because of that, it was a 
systematic failure across the GSEs and across private lenders. 
Transparency will help in that area but we also have to make 
sure we put in place stronger capital requirements, other 
things, so that we're aren't vulnerable to those kind of 
mistakes in the future.
    Mr. Lynch. Right. Thank you, Mr. Secretary. I yield back, 
Mr. Chairman.
    The Chairman. Thank you, Mr. Lynch. Now, we'll hear from 
Mr. Marchant of Texas.
    Mr. Marchant. Thank you, Mr. Chairman. My questions have to 
do with the projected losses, or the existing losses that are 
in Fannie Mae and Freddie Mac. Are you fairly confident, do you 
have any confidence that the loans that are being originated 
today and have been originated in the last year are high-
quality loans and are not of the same quality as the loans that 
were originated in the previous 3 years?
    Secretary Geithner. Congressman, my sense is that the 
underwriting standards today are much stronger than they were. 
And I think the people who have looked at this question 
carefully say if you look at what these institutions are doing 
today enters a new guarantees and how they're pricing them for 
those guarantees, means that the business is on a more stable 
footing, stand up footing today than it was.
    Mr. Marchant. With respect to the ability in the long term 
of having Fannie or Freddie or a successor agency repaying or 
earning back the losses over a long-term horizon, do you see 
that as a possibility?
    Secretary Geithner. I do not believe, Congressman, well, 
let me say it the other way around. I think the Government of 
the United States is likely to face substantial losses on the 
inherited commitments of these two institutions. It is very 
hard to judge what those scale of losses are, both the OMB and 
the CBO, as well as the FHA do a rolling assessment of those 
estimates. They're going to move around a bit, but they're 
going to be very substantial.
    Mr. Marchant. I would like to explore the bridge, I call it 
a bridge loan, it's the loan that you're making from the 
Treasury to Fannie and Freddie every month to meet their 
obligations. And I would like to explore if in fact, the 
government or the Treasury, at some point, is going to have to 
take some kind of a loss on, eventually, some kind of a loss on 
these funds? Why would we, what went into the judgment call of 
charging Fannie and Freddie such a high rate on the loan that 
it's making to Fannie and Freddie, if in fact, that only adds 
to that long-term debt and in fact, may exacerbate that long-
term debt? Why are we not dealing with a lower-cost facility? 
Because the cost of funds is--or is this money coming out of 
TARP? How is this income being booked? Those are--
    Secretary Geithner. Those are very good questions. And this 
is under the authority we call the MAHRA authority, not under 
the TARP. And this was authority that again, President Bush 
asked for and received from the Congress. I have been carrying 
out the responsibilities that I inherited in that context.
    What we're doing, Congressman, again, we're trying to make 
a careful judgment of how best to minimize the extent of losses 
the taxpayer ultimate bears, maximize the chance we carefully 
manage these institutions as we promote a recovery in the 
housing markets. We're trying to balance those objectives and 
we're going to do the best job we can. Again, I'm trying to 
make sure that we reduce the risk of future loss from these 
institutions and we'll look at the broader terms of our 
engagement through that basic objective.
    Mr. Marchant. But, you see where a person--
    Secretary Geithner. I do understand your point. It wouldn't 
make sense to charge a punitive rate if we're only charging 
ourselves for that, so you're making the right point.
    Mr. Marchant. You go into a small bank and make a $10,000 
car loan, and then each month, they loan you the money to make 
the car loan, then at the end of 3 years, you could have a 
$14,000 car loan, and I don't know what would have been 
accomplished in that, exactly.
    Secretary Geithner. I understand the point you're making. 
We did take some actions at the end of last year to restructure 
those commitments in some ways, partly in response to that 
concern. But again, we're going to do what makes overall sense 
for the taxpayer, economically, in terms of reducing the risk 
of ultimate loss.
    Mr. Marchant. Thank you.
    The Chairman. The gentleman from Indiana, Mr. Donnelly.
    Mr. Donnelly. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary for being here. I think one of the things that has 
caused continued housing problems is obviously the unemployment 
rate, that people can't afford to move into homes, to purchase 
homes. And a huge portion of the unemployment difficulties, at 
least in my area of the country, has been credit availability, 
and continues to be so.
    I have business after business after business who, in 
trying to--they have had their lines of credit cut, lines of 
credit cut not because they have missed a payment, but because 
a covenant was missed because maybe their sales were down for a 
quarter during that time. And they have spent the last year in 
order to get down to that lower number of the line of credit, 
selling equipment, laying off employees, and telling me they 
could be adding employees if they weren't in this situation. We 
have jobs bill after jobs bill across the street. The real jobs 
bill, the folks in the shops tell me, is having a normal credit 
situation.
    So, what can you tell me where we're going to be as we move 
forward on this?
    Secretary Geithner. You're absolutely right. Many 
businesses across the country still are suffering from a very, 
very tight credit environment, even ones that have quite good 
businesses and have very good payment history. You're 
absolutely right. The bill I referred to a few minutes ago, 
which is a small business package of incentives and assistance, 
has three important components.
    One is, as a series of tax measures for small businesses, 
zero capital gains rate on investment of small businesses, more 
favorable expensing depreciation, range of tax provisions which 
we think would be very helpful.
    The second is, it includes expanded authority for the SBA 
to provide guarantees, both the size of guarantees and the 
economics of the guarantee. We think it would be very helpful.
    And this is the critical thing, we propose a $30 billion 
small business lending facility that would make capital 
available to small banks so they can do a better job of meeting 
the loan demand of their customers.
    We think giving capital to small banks is one of the most 
effective things we can do. It can happen very, very quickly if 
Congress gives us the authority. And that will help make sure a 
dollar of capital to a small bank means $8 to $10 in lending 
capacity. Without that capital, it's hard for many of them to 
raise capital in the private market, so they're going to have 
to reduce lending to their customers.
    We think that mix of tax incentives, SBA support, and a 
small business lending facility would make a big difference.
    Mr. Donnelly. Here is the other conundrum, so to speak. I 
get emails from the businesses, from my friends who run 
businesses, and they say, the banks won't lend us anything. And 
the banks come in to the office and they say, we have money to 
lend and we're looking to make good loans.
    So, how can we put these two sides together?
    Secretary Geithner. I think what typically happens is, you 
have a bank that may have been a well-run bank, may have made a 
lot of good decisions over time but also may have gotten itself 
very exposed to commercial real estate. It has customers they 
have been working with for 30 years. They find themselves, 
because of a bunch of judgments in commercial real estate, 
having to reduce exposure to their customers and they, in 
explaining that to their customer, they frankly often say, it 
wasn't us, it's the supervisors who won't let us lend, forcing 
us to raise capital requirements.
    As I said earlier, part of what's happening is supervisors 
are being tougher than they were. And that is making these 
problems worse. I think part of the solution is to try to make 
sure that Chairman Bair and Chairman Bernanke and Comptroller 
Dugan and their colleagues as supervisors are sending a more 
balanced message to their examiners across the country.
    Mr. Donnelly. And that is the message I would like to leave 
with you and those folks is, we want to make good loans. We 
don't want to make bad loans.
    Secretary Geithner. Exactly.
    Mr. Donnelly. But at the same time, we want to have 
supervisors who are understanding the entire economic picture 
here that there are good loans that don't have to be 
extraordinary loans. And it is really choking the lifeblood out 
of a number of jobs that are available.
    And when we get these jobs back, people will be buying 
homes again.
    Secretary Geithner. I agree. I think there are businesses 
who see growing demand for their products now across the 
country. As you start to see growth spread across the country, 
and they say they can't meet that demand because they can't get 
credit to add more equipment, add back payroll. So, you're 
absolutely right. It is a critical problem, but Congress has a 
chance to do something about it now and that would help 
alongside what the supervisors are trying to do, to send a more 
balanced message to their examiners.
    Mr. Donnelly. And I would suggest that the message is 
really, that's the best jobs program of all, because those are 
the jobs that were there before, that can come back, but they 
can't do it without the capital to run the business.
    Secretary Geithner. And it's not expensive.
    Mr. Donnelly. No.
    Secretary Geithner. It's the highest return on a dollar of 
taxpayer's money of, I think, any of the programs we have put 
in place over the last 15 months.
    Mr. Donnelly. And that's our small business guys making it 
happen instead of it having to happen out here.
    Secretary Geithner. I agree.
    Mr. Donnelly. Thank you, Mr. Chairman.
    Mr. Kanjorski. [presiding] Thank you very much, Mr. 
Donnelly. We will now hear from the gentleman from California, 
Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman. 
Secretary Geithner, it's good to have you here again today. A 
lot of people in this country don't realize that Fannie and 
Freddie even hold their loan, which is interesting. And I come 
from a history in the real estate industry, being a builder and 
a Realtor myself, and 92 percent of the loans in this country 
are made by Freddie, Fannie, and FHA today. I'm looking at what 
would occur in this country in the housing market if they were 
not there.
    I'm not here to defend them, but I'm looking at reality. 
Fannie and Freddie have made some tremendous mistakes, there's 
no doubt about it. But I'm looking at the serious delinquency 
rates in this country: Fannie has about 5.38 percent; Freddie 
has about 3.87 percent, but the private sector jumbo has about 
9.6 percent. Fannie and Freddie are performing much better than 
the private sector in my district, the 42nd Congressional 
District. In LA County, Fannie and Freddie's delinquency rate 
is 3.9 percent; the jumbo market is 10.1 percent; and FHA and 
VA are 2.6 percent. In Orange County, Fannie and Freddie are 
2.1 percent delinquent; jumbo is 8.9 percent; and FHA and VA 
are 1.4 percent. In San Bernardino County, Fannie and Freddie 
are up to 7.8 and that's alarming, but the jumbo market is 18.4 
percent.
    And I guess my question is, I have had arguments presented 
to me that we need to allow the private sector to completely 
control the secondary marketplace and get Fannie and Freddie 
out of it. But I'm concerned if there was a viable alternative 
to a GSE, where was it at in 2005, 2006, 2007? It wasn't there. 
At the same time the mortgage-backed security markets were 
blooming at that point in time, but the blooming part of the 
mortgage-backed security market was a group that sold terrible, 
terrible bundles to the private sector.
    Many of Fannie and Freddie's losses today, in fact a 
majority of them, are because when they sell mortgage-backed 
securities, if you have a nonperforming one, they take that 
nonperforming loan out and eat it themselves and replace it 
with a performing loan. Nothing Countrywide or anybody else 
ever did matches that because the way they bundle their 
securities, when investors bought them in good faith--these are 
not just rich people, these are people who have a moderate 
income, but they invested in the market--they bought absolutely 
worthless mortgage-backed securities.
    So my concern is, if we're looking for a private sector 
alternative, might we be where we were with the mortgage-backed 
securities? I would appreciate an answer to that.
    Secretary Geithner. I think you're exactly right. If you 
look at the record of what happened, the most appalling 
damaging erosion underwriting standards happened outside Fannie 
and Freddie, happened outside banks, happened in thrifts, 
mortgage finance companies, specialized finance companies. 
Fannie and Freddie's prime portfolio has better quality today 
than the average across the market, as you said, your 
statistics are absolutely right.
    So I think you're right in the basic emphasis, and right 
now you're right to emphasize that the only games in town are 
Fannie and Freddie and the FHA. And it is very important again 
that they in this transition period, and it's not going to go 
on indefinitely, but for a period of time, they need to be able 
to continue to provide mortgage finance if we're going to heal 
what's still very damaged across the country, including in 
California.
    Now I have not seen a ideal model yet for what to replace 
this current system, but as I said earlier, I think there's 
going to be--we're going to have to take a careful look at how 
to design a better form of guarantee and support than take the 
same risk--
    Mr. Miller of California. And I'm open to that. I'm not--
say we have to have Fannie and Freddie. I want to know what we 
do if we don't have them. In fact, 9 years ago, the argument 
about conforming loan limits in high-cost areas has risen, and 
we talked about some oppose that. I started fighting for that 9 
years ago, and I'm the one who always had the amendments out 
there that said we need to raise conforming in high-cost areas, 
and a few of my colleagues, including Mr. Hensarling, disagreed 
with me. But as I understand it, FHA and Fannie and Freddie, 
the best performing loans they're making today are in high-cost 
areas. Is that not true?
    Secretary Geithner. I don't know if that's true, but I 
would be happy to check on that.
    Mr. Miller of California. The FHA told me it was true that 
they are best for loans. I guess I'm too--the question of what 
are the key structural improvements Treasury thinks are 
necessary to prevent government from distorting, and I'm saying 
distorting the marketplace because some have said that they're 
distorting the secondary marketplace as Fannie and Freddie have 
done. What can--do you think there's a distortion because of 
them? And if there is, what can we do to resolve that?
    Secretary Geithner. Well, again, this is an unfair--this is 
a much more complicated problem than my answer will suggest, 
but there are two things that happen that we can prevent in the 
future, and we should prevent. One is, we should not allow 
institutions that operate with the expectation of government 
support to build up a huge retained portfolio.
    Mr. Miller of California. And I agree.
    Secretary Geithner. With a lot of risk in it with no 
capital to support it.
    Mr. Miller of California. I agree.
    Secretary Geithner. It's also true that I think, although 
economists disagree on the extent of this mistake, that Fannie 
and Freddie over time did provide guarantees for lower-quality 
mortgages without charging appropriately for that guarantee 
fee. Both those mistakes were consequential. The first, I 
think, was a much greater mistake. But whatever we do in 
redesigning the system, we need to avoid those two errors.
    Mr. Miller of California. And in closing, Mr. Chairman, I 
want to point out the fact that the only time Fannie and 
Freddie ever lost money other than this round was the year of 
1985. Other than that, they were profitable, and maybe Congress 
did things to distort their mission and get them headed in 
different directions and we may need to go back to a time when 
that mission wasn't distorted, where they were making true 
conforming loans that met the criteria that they specified. I 
thank you for your patience, Mr. Chairman, and I yield back the 
balance of my time.
    Mr. Kanjorski. Thank you very much, Mr. Miller. And we will 
now hear from Mr. Posey of Florida.
    Mr. Posey. Thank you very much, Mr. Chairman. Mr. 
Secretary, during, I believe it was this committee's last 
meeting, we heard breaking news that said Fannie and Freddie 
executives received millions of dollars in bonuses all the 
while this meltdown was continuing. And I just wondered if you 
had any part in signing off on those bonuses when the FHFA met 
on December 24, 2009?
    Secretary Geithner. The FHFA, as you said appropriately, is 
responsible as conservatorship for approving the compensation 
packages of these executives. They reached that decision in 
consultation with Ken Feinberg, whom I appointed to help 
establish stronger compensation standards across other 
institutions that were beneficiaries of the TARP.
    Mr. Posey. Is that a yes or a no?
    Secretary Geithner. That gesture was made by the--
    Mr. Posey. Is that a yes or a no? Did you have any hand in 
that?
    Secretary Geithner. I was not involved. It was--
    Mr. Posey. That's all I need. I don't have much time, so 
I'm going to ask my questions, and if you don't have time to 
answer them, I'm going to ask with the chairman's permission 
that you respond in writing. It seems like every time I ask 
somebody a question here, if I ask them what time it is, they 
start describing a clock, and we never get an answer.
    I'm wondering why we're never able to get an answer from 
you on a comprehensive recovery plan. We have testimony. We 
hear the same old rehashing of what went wrong.
    Secretary Geithner. For the GSEs?
    Mr. Posey. But we never have any real plan, comprehensive 
plan for recovery. I wonder how much longer we're going to have 
to wait for a plan, what information anybody could possibly 
still be waiting for to come forth with a plan. Clearly, the 
Administration has some serious credibility problems. They 
broke promises on space, they broke promises not to raise 
taxes, not to take over personal sovereignty. The stimulus has 
failed to do what you said it would do. You said--
    Secretary Geithner. I don't agree with that.
    Mr. Posey. --if the stimulus is passed, your words, it 
would not exceed 8 percent unemployment--
    Secretary Geithner. That's not true.
    Mr. Posey. It's now over 10 percent.
    Secretary Geithner. That's not true, Congressman.
    Mr. Posey. It's your chart, not mine. There are so many 
fair and legitimate questions that we just can't get answered, 
for example, when will Freddie and Fannie Mae's conservatorship 
end? I think there ought to be a legitimate estimate on that. I 
think a professional ought to say, with your experience and 
guidance, I think-- this is today. This ought to be the target, 
and this is how we're going to go there. I don't think those 
are out of bounds at all. And I'm curious about to what extent 
our creditors--China--are worried about the failures of Fannie 
and Freddie. And of course I think it has been asked before, 
how do we prevent ``too-big-to-fail'' Freddie and Fannie, going 
forward? These are questions Congress has to know, and we can't 
wait forever to find out.
    Secretary Geithner. You won't have to wait forever. And 
again, we're starting today the necessary process of figuring 
out what Congress and the Executive Branch would like to do to 
reform the housing finance system. But as you know, this is an 
enormously complicated question. We need to do it carefully, 
but we're beginning that process now and we look forward to 
working with you on how to fix what's broken in the system.
    Mr. Posey. What about the last year; what did they do?
    Secretary Geithner. What did who do?
    Mr. Posey. Well, we have had a year to come up with a plan.
    Secretary Geithner. Well, we--if you worry we have been 
idle, I would just point out that we inherited the worst 
financial crisis in 75 years since the Great Depression. We 
have been working--
    Mr. Posey. Who inherited it?
    Secretary Geithner. This Administration did and this 
Congress did.
    Mr. Posey. This Congress has been run by the same Majority 
for 3 years. I'm sick and tired of hearing that we inherited 
it.
    Secretary Geithner. Let's look forward. We are looking to 
move forward.
    Mr. Posey. We're looking to you for answers.
    Secretary Geithner. I'm happy to move forward. We will work 
with you on how to reform the GSEs and our very damaged housing 
market, and I look forward to doing it.
    Mr. Posey. But no answers.
    Secretary Geithner. Congressman, again, we have laid out a 
comprehensive, detailed set of objectives and principles. We 
laid out a comprehensive diagnosis of what was broken and what 
caused this housing crisis, and that is a good foundation on 
which to build and thinking about reforms. If we don't agree on 
what was broken, we can't begin the process, and we're going to 
go through a process with this committee to consult with people 
in the private sector, in the academic community, among 
Republicans and Democrats. We'll look at alternative models, 
and we'll figure out the best way forward.
    Mr. Posey. So the reality is, we still don't have a plan.
    Secretary Geithner. Congressman, again, you're asking us to 
design in the midst of again the worst financial crisis in 
generations.
    Mr. Posey. Listen, every business--
    Secretary Geithner. Comprehensive reform.
    Mr. Posey. Every business in this country is suffering 
right now, and they're working on some kind of a plan for 
recovery. They're not doing it on a crisis--
    Secretary Geithner. And we're working hard too, 
Congressman. We have been working hard too and we have done 
extraordinary things, and this economy is growing, and if you 
just want to go back, you say you don't want to go back to 
history, but when we came into office, when this Congress came 
into office, the economy was shrinking at a rate of 6 percent a 
year and three-quarters of--were losing their jobs every month. 
And today, because we actually acted as a country, the economy 
is now growing.
    Things are dramatically better today than when we took 
office 15 months ago because of the actions we took and this 
House of Representatives has passed the most sweeping set of 
financial reforms contemplated since the Great Depression. 
We're on the verge of enacting those kind of reforms, and 
today, fortunately, we have a chance to begin the conversation 
about how we're going to reform the GSEs. And again, we look 
forward to working with you, and look forward to seeing your 
ideas. I expect you guys will have some ideas on your side of 
the aisle, and we'll take the best ideas on both sides and 
we'll propose something that we think will meet the test of 
reform.
    Mr. Kanjorski. The gentleman from Texas, Dr. Paul.
    Dr. Paul. I thank the chairman. Today, we're talking about 
reforms in the housing financial markets, which I think is 
crucial and very, very important. My concern is that there 
hasn't been a full explanation or an understanding of how we 
got into this mess. And from what I hear, the little bit we do 
hear, is that we will deal with the problems with more 
technical solutions and more regulatory solutions rather than 
looking at the fundamental causes.
    To me, the fundamental causes are well understood by the 
Austrian free market economists because they predicted early on 
exactly what was going to happen, and it did. And they put the 
blame on three things. Fixing interests rates, price fixing, 
interest rates too low for too long, and also the line of 
credit that was--with the Federal Reserve, which was something 
the Congress did, even though it was $2 billion, it created a 
lot of moral hazard because even Mr. Greenspan admitted that 
there was probably about a $14 billion indirect subsidy to 
Fannie and Freddie which also encouraged the distortion. And on 
the books, it was legal for the Federal Reserve to buy mortgage 
debt. And, of course, there were no restrictions at all because 
it was done in secret about exactly how much credit will be 
created.
    Because of my concerns and understanding of what was 
happening, in July of 2002, I was convinced that we were 
working on a financial bubble, and I introduced legislation 
that would have removed the line of credit from the Treasury as 
well as prohibited the Fed from buying mortgage debt, which 
most people would object to: ``No, we need them for the 
emergency.'' But that's what caused all the moral hazard. And I 
think it also existed for the benefit of us selling debt 
overseas. This encouraged foreigners to buy it, knowing the 
Treasury stands behind this, and the Federal Reserve stands 
behind this, and the whole cycle continues.
    But when I introduced that legislation back in 2002, I said 
by transferring the risk of widespread mortgage default, the 
government increases the likelihood of a painful crash in the 
housing market. And the system could stave off the day of 
reckoning by purchasing GSE debt and pumping liquidity into the 
housing market, but this cannot hold off the inevitable drop in 
the housing market forever. In fact, postponing the necessary 
but painful market corrections will only deepen the inevitable.
    Now that's not so much my statement coming about that on my 
own but because I endorse free markets, I endorse Austrian 
economics, and I don't see any understanding of that coming 
from our leadership in the Congress or the Fed or the Treasury, 
and I think it is so crucial that there is this understanding. 
So my question is, are you familiar with the explanation of the 
Austrian economist of the business cycle, how bubbles are 
formed and what we should do? And you shake your head, yes. If 
so, if you do understand that, which part of it don't you like, 
and why don't we look more carefully at those economists? They 
were right 10 years ago. I believe they're right now. Why 
aren't they consulted?
    Secretary Geithner. Congressman, I agree with much of what 
you said. And as you and I have talked about in this hearing 
room before, I think you're right to point out that a long 
period of low real interest rates around the world played a 
major role in contributing to this financial crisis, this real 
estate boom, this credit boom. You're also right that moral 
hazard played a very important role, most dangerously in Fannie 
and Freddie. And those institutions were allowed to grow to 
enormous size, take on enormous risk, without capital to 
support those commitments, because of the expectation that the 
government would come in and protect them from the failures. I 
completely agree with you.
    Dr. Paul. Since my time is running out, I want to see if I 
can get one answer. My bill that was suggested years ago, would 
that be a proper thing to do now, to make sure that line of 
credit and this inevitable purchase of this kind of debt from 
the Fed, we should restrict that or remove it? Would you agree 
that was a good suggestion back then?
    Secretary Geithner. I would have to go back and look at 
your bill, but as I said in my statement, I think when you 
think about what system should replace our current system, a 
critical part of that is to make sure you don't have 
institutions with private shareholders taking advantage of a 
subsidy from the government that leaves the taxpayer exposed to 
the risk of substantial losses.
    So I agree that a centerpiece of future reform will be 
dealing with the moral hazard in the current framework.
    Dr. Paul. But doesn't the monetary system breed into the 
system the moral hazard? The Fed is designed to be the lender 
of last resort.
    Secretary Geithner. No. I don't think that was--
    Dr. Paul. That's what it says. They are to be there to pick 
up the pieces.
    Secretary Geithner. Not--GSEs were different, as you said, 
because there was a credit line and because this expectation 
built over time that the government would be there. That had 
nothing to do with the Fed. In fact, the Fed is--
    Dr. Paul. Our concerns bore out because that's what exactly 
happened. The government did pick up the pieces, and now we're 
in a bigger mess.
    Mr. Kanjorski. The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman. Mr. Secretary, Hank 
Paulson, the former Treasury Secretary wrote in his book, ``On 
the Brink,'' that in September of 2008, the Treasury issued, as 
you referred to on page 10 of your testimony, the preferred 
stock purchase agreements, encouraging banks to purchase these. 
And that this was done at the same time to help satisfy the 
Chinese government, which owned billions of dollars in Fannie 
and Freddie bonds, which were paid off in their entirety. And 
so now we have these banks that were intentionally misled, 
intentionally deceived to buy Fannie and Freddie preferred 
holdings, and then after the government said buy these, it's 
going to help out, the government just defaulted and stuck all 
those banks, big time.
    At the same time, you mentioned there's a new $30 billion 
capital program being considered for community banks, and my 
question to you is, when I look at the objectives of reform, 
and this is a guideline, I don't see anything in there that 
addresses whether or not these community banks should be 
treated the same as the Chinese and be made whole when they 
were intentionally misled by the U.S. Government to buy these 
bonds that turned out to be worthless.
    Secretary Geithner. Congressman, I cannot speak adequately 
to the judgments my predecessor made at that time--I cannot.
    Mr. Manzullo. I understand. I'm asking you, do you have a 
solution for these banks that got stuck?
    Secretary Geithner. Well, again, I think that one of the 
most powerful things we could do to help community banks get 
through the challenges still ahead is to put in place a capital 
facility that gives them the ability to come to the Treasury 
and apply for capital support, small business lending. I 
believe that would help make a big difference.
    Mr. Manzullo. I understand that. But if they're made whole 
on their bonds, they're just getting back--if they're made 
whole in their preferred stock purchases, then they're simply 
getting back the money they paid in the first place and don't 
have to worry about another exotic program coming from the 
Federal Government.
    Secretary Geithner. Again, I understand those concerns, but 
small banks across the country face a lot of challenges, not 
just those who held Fannie and Freddie preferred stock. And 
that's one of the reasons why small businesses across the 
country are still having a hard time getting credit, and I 
think it is a--
    Mr. Manzullo. Well, that, and the fact that the regulators 
have really tightened up the screws, even though the regulators 
say they have not, and I believe them, but the people in the 
field have done that, to make what credit is available even 
tighter.
    Secretary Geithner. You're right. I think--
    Mr. Manzullo. Here we have a situation where my question 
is, is the Treasury as part of its reform program interested or 
willing to treat the community banks in the same manner in 
which it treated the Chinese by making sure that they were 
indemnified on their bonds?
    Secretary Geithner. Well, again, I would be happy to spend 
time with you, Congressman, in looking in more detail at that 
particular--
    Mr. Manzullo. Can you give me at least the basis of an 
answer on that?
    Secretary Geithner. Congressman, we have put forward a very 
detailed--
    Mr. Manzullo. If you don't know, I would accept that.
    Secretary Geithner. No. As I said, we think the most 
effective thing Congress could do to help small community banks 
now--
    Mr. Manzullo. I understand that. I'm asking, what can you 
do?
    Secretary Geithner. What I can do is administer a program 
like that with authorization from the Congress, but I need 
authorization from the Congress for it to work.
    Mr. Manzullo. You need authorization--would you need 
authorization in order to honor those preferred stock 
purchases?
    Secretary Geithner. I--
    Mr. Manzullo. That were issued in September of 2008?
    Secretary Geithner. I would have to think about that and 
get back to you.
    Mr. Manzullo. Okay. That's fair enough. Thank you.
    The Chairman. The Secretary is now dismissed. Well, 
``excused,'' I guess, is better than ``dismissed.''
    [laughter]
    The Chairman. With our thanks. The hearing has been useful. 
I thank the members. I think we had a very serious set of 
questions asked in a perfectly reasonable way, and we will now 
call the second panel.
    People leaving, please leave. The panel will sit down. What 
are you running around the table for? There's no music. The 
hearing will begin. This is obviously a continuation of the 
hearing on the future of housing finance, and I'm going to be 
very clear. We are not talking only about the GSEs.
    This is now the first of two hearings we'll be having 
because Secretary Donovan will be testifying, and I should note 
that there are some organizations and others, and groups and 
individuals who have a lot of relevant things to say. They will 
be in the next panel. I will just say that I think this is one 
of the most interesting intellectual issues that we have before 
us, and it obviously has a lot of policy implications. Some of 
those are more easily done than others. But getting right what 
the successor set of institutions should be in housing finance 
is very important.
    We will begin with Sarah Rosen Wartell, who is the 
executive vice president of the Center for American Progress. I 
would just make one point. Please do not lean into the 
microphones. Move the microphone closer to you.

STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE PRESIDENT, THE 
               CENTER FOR AMERICAN PROGRESS (CAP)

    Ms. Wartell. Thank you, Mr. Chairman, and Representative 
Capito. I applaud you, and I appreciate the way you framed the 
purpose of this hearing for beginning this conversation. I 
should say my testimony benefits from 18 months of conversation 
with the Mortgage Finance Working Group, which is a group of 
affordable housing finance experts sponsored by CAP, although 
my remarks are mine alone.
    I ask the Chair if my full statement and a statement of 
principles and a draft whitepaper that the working group has 
prepared could be included in the full record.
    Let me leave you with just six points. First, the new 
system's goals should include liquidity, stability, and 
affordability. These objectives have served us well since the 
1930's. The mistakes that led to the current crisis represent 
not the failure of this vision, but the failure to keep those 
objectives paramount.
    The system also must better balance rental and 
homeownership, offering appropriate options for all kinds of 
families. Unfortunately, history suggests that the private 
market alone will not meet these objectives.
    Second, the crisis stemmed from the unchecked growth of a 
shadow banking system of unregulated and irrationally priced 
private label MBS or private label securities. As investor 
demand for PLS grew, issuers demanded more subprime loans, and 
good lending practices would yield, driving down standards and 
distorting markets. The only cops on the street were the rating 
agencies, and they had an incentive to keep the party going.
    An analogy may be helpful here. Imagine that there was 
suddenly great demand for hamburgers in the United States. 
Facing a shortage of Grade A meat, USDA inspectors would face 
pressure to let older, less healthy cows receive that Grade A 
designation. If we had a system in which they were paid by 
those whose meat they graded and there was no transparency on 
the standards, we might find ourselves waking up one day 
realizing that what we were eating in our hamburgers had 
changed. That's basically what had happened with the PLS 
market. Our investors were eating the equivalent of horse meat.
    Figure 1 in the package of charts--there's a package of 
charts that I believe is on your table with the CAP logo--shows 
how dramatically credit quality declined with early 
delinquencies, growing from 5 to 25 percent in only 4 years. 
Going forward, we must not reproduce a bifurcated system, as 
the Secretary mentioned earlier, in which unregulated capital 
in one part of the market drives a race to the bottom. Our 
working graph proposal argues that the same system of rules 
must apply to both whatever receives government backing and the 
private market.
    Third, we look at the GSE's role in the crisis. They were 
followers, not leaders. They made poor decisions with costly 
consequences for taxpayers. They came to the party late, were 
drawn in to the subprime market to regain lost market share, 
and chased what seemed like higher returns. And Figure 2 in 
that set of charts shows how their market share dropped as the 
private label securities share grew.
    As others left that market, the GSEs stayed, and 
inexplicably doubled down while credit quality collapsed. The 
regulators also made significant errors in risk oversight and 
in awarding goals credit for unsustainable subprime purchases. 
While both the GSEs and the regulators made the problems worse, 
neither was the primary cause of the junk mortgages or the 
larger global financial meltdown.
    Fourth, lending to low- and moderate-income and minority 
borrowers didn't cause this crisis, nor was it the result of 
longstanding policies like CRA and the housing goals that 
encouraged serving creditworthy borrowers. Figure 3 in your 
package shows how the MBS market followed the same bubble burst 
pattern as other asset-backed securities markets that had no 
affordable housing goals. If the GSE goals drove the subprime 
business, these patterns would diverge.
    Fifth, while recent subprime lending was more detriment 
than benefit, we do know how to do affordable homeownership 
right. With sound lending practices, research shows, comparable 
borrowers are 3 to 4 times more likely to sustain homeownership 
as the fourth figure in the package shows. Communities have 
been stripped of equity by this foreclosure epidemic. It would 
be obscene if we first failed to prevent harmful subprime 
lending and then we let the hardest-hit communities be denied 
the fair and sustainable lending needing to recover. That must 
be a priority in reform.
    Sixth, while we should not preserve the government's 
greatly expanded role any longer than necessary, policymakers 
must move cautiously. Even simple statements about the future 
might move markets, affect home values, and make domestic and 
overseas investors wary of agency securities, representing 
trillions of investment in the U.S. economy. And housing market 
deterioration could increase the taxpayer exposure from its 
existing obligations.
    Over time, we must reduce the Federal role to one focused 
on serving the historical goals of liquidity, stability, and 
affordability, and creating the conditions in which private 
capital can better serve the market. The Federal backstop 
should be more target than it is today. Private and public 
capital under explicit rules and rigorous oversight can be 
paired to ensure that all appropriate Americans have access to 
long-term, fixed-rate homeownership opportunities and 
affordable rental housing.
    Thank you.
    [The prepared statement of Ms. Wartell can be found on page 
178 of the appendix.]
    The Chairman. Thank you, Ms. Wartell.
    Next, Mr. Michael Berman, who is the chairman-elect of the 
Mortgage Bankers Association.

 STATEMENT OF MICHAEL D. BERMAN, CHAIRMAN-ELECT, THE MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Berman. Thank you, Mr. Chairman, and Representative 
Capito, for the opportunity to testify.
    I live in Newton, Massachusetts, and I have been in the 
real estate finance industry for over 25 years. I currently 
oversee all of my company's national loan programs, including 
multifamily programs with Fannie Mae, Freddie Mac, and the FHA. 
My company has also been active in the commercial mortgage-
backed securities arena as an investor, lender, issuer of 
securities, servicer, and special servicer.
    Since the creation of Fannie Mae in the 1930's, the Federal 
Government has played a key role in providing stability to the 
secondary mortgage market. The current housing crisis has 
tested that role and led to calls for fundamental rethinking of 
the part played by the government in the housing finance 
system. To spearhead this thinking, in October 2008, the 
Mortgage Bankers Association formed the Council on Insuring 
Mortgage Liquidity, which I chair. This 23-member council is 
made up of industry practitioners from single family, 
multifamily, and commercial sectors of the real estate finance 
industry. Its mission has been to look beyond the current 
crisis to what a functioning, secondary mortgage market should 
look like.
    Let me identify three principles that lie at the heart of 
our discussions. First, the secondary mortgage market 
transactions should be funded with private capital. Second, to 
promote uninterrupted market liquidity for the core mortgage 
market, the government should provide an explicit credit 
guarantee on a class of mortgage-backed securities backed by 
core, single family and multifamily mortgage products. This 
guarantee should not be free but should be financed with risk-
based fees. And, third, taxpayers and the system should be 
protected through limits on the mortgage products covered, 
limits on activities, limits on portfolio size and purpose, 
strong risk-based capital requirements, and risk-based payments 
into a Federal insurance fund.
    The centerpiece of MBA's plan is a new line of mortgage-
backed securities. Each security would have two components: a 
security-level, Federal Government guaranteed wrap which would 
be backed by loan level guarantees from privately-owned, 
government-chartered, and regulated mortgage credit guarantor 
entities. The government guarantee would be similar to the one 
provided by Ginnie Mae, guaranteeing timely payments of 
interest and principal to bondholders and explicitly carrying 
the full faith and credit of the U.S. Government.
    This government wrap will help provide affordable financing 
rates. These guarantees will be supported by a Federal 
insurance fund, capitalized by risk-based fees charged on the 
supported securities, which could also be a vehicle for an 
affordable housing fund. In supporting these loan level 
guarantees, the private entities would rely on their own 
capital as well as risk retention from originators, issuers and 
other secondary mortgage market entities such as mortgage 
insurers. MBS investors would not face credit risk, but would 
take on the interest rate risk from the underlying mortgages.
    It's important to note that while MBS in this model would 
be guaranteed by the government, the companies backing these 
securities would not. The debt in equity issued by these 
entities would be purely private. As with other firms, 
investors would accept the potential risk of failure and loss. 
For this reason, we recommend that regulators charter enough 
entities to establish a truly competitive secondary market and 
to overcome issues associated with ``too-big-to-fail.'' At 
least initially, the number of entities should be two or three, 
and that number could increase as the market develops.
    The framework we proposed is not intended to be the entire 
market. It's meant to focus on a narrowly defined set of core 
mortgage products that are essential to have available through 
all market conditions. Our proposal recognizes the need for a 
wider array of products through a re-emergence of the private 
market, including private label securities and covered bonds. 
We must also ensure that the transition from the current system 
to a new model is as seamless as possible.
    Measures such as focusing the GSEs on a narrow range of 
mortgages and winding down their portfolios can be undertaken 
now. Additionally, the use of a good bank/bad bank strategy 
would help retain the best people, processes, and 
infrastructure from the GSEs. Identifying a clear path that 
will move forward to remove uncertainty and ensure that GSE's 
resources are of service now and in the future is essential.
    Mr. Chairman, MBA's recommendations combine an 
acknowledgment that only a government guarantee can attract the 
depth and breadth of capital necessary for the market with a 
reliance on private capital and insistence on multiple layers 
of protections for taxpayers and a focus on ensuring a 
competitive, efficient secondary mortgage market. Our 
recommendations represent a clear and workable approach to 
ensuring liquidity in the mortgage market. These proposals were 
developed by industry practitioners who have been working on 
these issues for their entire careers.
    We understand that capital markets have perspective on what 
will work. We welcome your thoughts and comments on our ideas. 
Thank you.
    [The prepared statement of Mr. Berman can be found on page 
75 of the appendix.]
    The Chairman. Next, Mark Calabria, who is the director of 
financial regulation studies at the Cato Institute.

   STATEMENT OF MARK A. CALABRIA, Ph.D., DIRECTOR, FINANCIAL 
             REGULATION STUDIES, THE CATO INSTITUTE

    Mr. Calabria. Chairman Frank, distinguished members of the 
committee, I thank you for the invitation to appear at today's 
hearing.
    Before offering specific reform proposals, I think it's 
useful to start with a set of principles that I think should 
guide any restructuring of our mortgage finance system. The 
first and foremost of those principles is that I believe 
private, at-risk capital should serve as the foundation of our 
mortgage finance system. We simply must put an end to 
privatized profits and socialized losses.
    Second, government policy should be structured to act in a 
countercyclical manner. Too much of our current structure 
magnifies the booms and busts in our housing markets, and we 
certainly should make every effort to dampen our housing 
cycles, we are unlikely to avoid them. So we should structure 
our housing finance system, keeping in mind that we will have 
booms and busts and our system should be robust to those booms 
and busts.
    Just as we have booms and busts, we will have companies 
that fail, and we should structure our mortgage finance system 
with that in mind so that our mortgage finance system is robust 
to the failure of a small number of companies. I think it's 
also important that the costs and benefits of that system 
should be transparent, understandable, and credible. All 
subsidies and contingent liabilities should be on budget. I 
believe the American public has a right to know what they're on 
the hook for. I also think policy should be tenure-neutral. 
Renting should be a respectable alternative, and to the extent 
that we encourage homeownership, it should be sustainable. And, 
additionally, I believe all homeownership policies should focus 
on housing as shelter and not housing as a speculative 
investment.
    We should also reduce the current levels of leverage, the 
use of debt in our mortgage finance system, both on the part of 
financial institutions and on the part of households. 
Additionally, the level of maturity mismatch in our financial 
system should be reduced. But, with those principles in mind, 
I'm going to give a set of recommendations for reforming 
Freddie and Fannie. These recommendations should also apply to 
any entities that succeed Freddie and Fannie.
    First and foremost, I think whatever entities we have 
funding our secondary mortgage market, we should have a lot of 
them. Concentrating the risk of our mortgage market into a few 
entities is simply a recipe for disaster. If we were to keep 
some version of Freddie and Fannie, I believe we need to break 
them up into at least a dozen pieces. Anything else would be 
viewed as implicitly backed by the government.
    In keeping with the principle of transparency, if private 
sector debt is used to fund the secondary mortgage market, such 
debt should be explicitly not treated as government debt, 
should be subject to 33 and 34 Act disclosures, and we should 
remove references and statute treating it as government debt. I 
would emphasize the part of Freddie and Fannie that provided 
the substantial amount of liquidity for the mortgage market is 
essentially securitization of mortgages. Future activity should 
be limited to issuing mortgage-backed securities and 
prohibiting the holding of an investment portfolio.
    Additionally, any securitization should be a true 
securitization where Freddie and Fannie or their successor 
entities transfer all the risk, including credit, to the holder 
of the MBS's. This would imply that their guarantee business be 
ended. We should also reduce the extent to which Freddie and 
Fannie debt and mortgage debt generally permeate our financial 
system. For instance, prior to the financial crisis, FDIC-
insured depositories held GSE securities equal to over 150 
percent of their tier 1 capital.
    Investment banks and mutual funds were similarly full of 
Freddie and Fannie debt. There should be explicit concentration 
limits on financial holdings of GSE securities and such debt 
should be treated no better than commercial paper for the 
purposes of capital adequacy. But we must also recognize that 
the rescue of Freddie and Fannie was as much a foreign policy 
decision as it was an economic one.
    If we were not going to let foreign governments or central 
banks such as the Chinese take losses on their GSE holdings, 
then we need to either have that reflected on budget or we need 
to prohibit the sale of GSE securities to foreign entities. We 
should also consider a new ownership structure for Fannie and 
Freddie. I believe reconstituting Freddie and Fannie as a 
lender-owned cooperative could reduce the risk-taking and lower 
potential cost to the taxpayer. I say that, well aware of the 
many problems facing the Federal Home Loan Bank System.
    But, despite those problems, I believe the Federal Home 
Loan Bank System has come through this crisis in better shape 
than Freddie and Fannie. I also believe it's appropriate to set 
minimal underwriting standards and loan requirements for 
whatever GSEs look like, such as requiring reasonable 
downpayments on the part of borrowers in addition to requiring 
all GSC loans to be full recourse.
    At the core of any discussion of the U.S. mortgage market, 
stands the 30-year, fixed-rate mortgage. We must start with the 
very simple observation that someone must bear that interest 
rate risk. It will never simply go away. In normal times, the 
borrower or the lender bears some or all that risk, and in 
extreme market events, the taxpayer gets hit. I believe we 
should ultimately let the market decide where that falls.
    In wrapping up, as the committee moves forward, I would 
strongly encourage the committee to hear from experts from 
other countries on the functioning of their mortgage markets. 
Despite the rhetoric during the bubble, our mortgage market is 
clearly not the envy of the world nor do we have the highest 
homeownership rates in the world. Several countries had even 
bigger housing bubbles with less ramifications, while other 
countries largely avoided a bubble, yet still maintain 
ownership rates similar to our own.
    For instance, the Canadian system requires significant 
downpayments, full recourse, sizable prepayment penalties, and 
leaves significant share of the interest rate risk with the 
borrower. Yet, Canada has ownership rates similar to our own 
without the recent bubble.
    I thank you, and wrap up there.
    [The prepared statement of Dr. Calabria can be found on 
page 103 of the appendix.]
    The Chairman. Next, Vincent O'Donnell, who is vice 
president of the affordable housing preservation initiative of 
LISC.

 STATEMENT OF VINCENT F. O'DONNELL, VICE PRESIDENT, AFFORDABLE 
  HOUSING PRESERVATION, LOCAL INITIATIVES SUPPORT CORPORATION 
                             (LISC)

    Mr. O'Donnell. Thank you, Mr. Chairman, and distinguished 
members of the committee for the opportunity to testify about 
where we go with our housing finance system.
    I lead LISC's national efforts in supporting the 
preservation of affordable rental housing, but I speak today 
from the perspective of LISC as a whole. We work through 
partnerships with the private sector, including banks and GSEs 
and insurance companies, mostly through generating loans and 
investments. And we have seen at close hand in this work the 
best and the worst elements of the housing finance system and 
how it affects low-income, metropolitan, and rural communities 
and their residents.
    We have seen effective public-private partnerships that 
foster the production and preservation of affordable rental 
homes and sustainable homeownership, fed by a fixed-rate, 30-
year mortgage and prudent underwriting and innovation. Even in 
distressed urban and rural communities that were previously 
written off, private interest served the public interest 
safely, profitably, and successfully, not out of luck, but as a 
result of careful public policies that blended responsibility, 
opportunity, prudence, capacity, and accountability.
    But we have also seen predatory lending ravage families and 
neighborhoods and we have seen public policies that oversell 
the genuine virtues of homeownership and ignore and neglect or 
even denigrate rental housing where a third of American 
households live. We have learned from this work that the long-
term interests of consumers, lenders, investors, and 
communities in the financial system must fundamentally align 
rather than conflict. And we also must bring all communities--
distressed, rural, and minority--into the mainstream of the 
financial system.
    I want to set some context, but first state some basic 
guiding principles: first, the elements of the housing finance 
system should be better integrated in a number of ways; and 
second, private institutions that receive public benefits 
should also help address public objectives.
    Just for perspective, our role is that of a community 
development financial institution. In that capacity, we make 
loans and equity investments to benefit people in a variety of 
circumstances. And, therefore, the functioning of the long-term 
housing finance market is critical to our success, because 
otherwise the investments we make will not pay off either in 
terms of financial return to us and recovery of our funds, or 
in the success of our mission. Our written testimony goes into 
some detail about how this interplay works. In particular, we 
use the example of affordable rental housing preservation to 
discuss the interplay between housing subsidies and the housing 
finance system, and the community development financial 
institutions like us that get these useful developments jump-
started.
    I do want to say that other parts of the system are 
addressing this interplay. Secretary Donovan is looking at the 
relationship between rental assistance and stable financing, 
and this committee is also doing that. I want to commend H.R. 
4868, the Housing Preservation and Tenant Protection Act of 
2010, which was filed last week by Chairman Frank and a number 
of cosponsors on the committee.
    Now going back to the system, any reconsideration of the 
GSE role should note their current centrality to the housing 
finance system in the broad context. System fragmentation has 
increased risk, created unlevel playing fields, and reduced 
access to responsible credit. Any new system must assume the 
functions and capacities that the GSEs have developed and deal 
with transitional issues. We need coordination between primary 
and secondary markets. We need system-wide regulation, 
including regulation of the secondary markets, which are 
powerful drivers of the primary market. The painful subprime 
home mortgage crisis is evidence of how this can happen.
    Both homeownership and rental housing are important. We 
need a balanced policy between both. We need policies to 
address both market rate and affordable housing, and we think 
it's a false dichotomy to suggest that the capital markets 
should address market rate housing and only the government 
should address affordable housing. We also need the system to 
understand and support both debt and equity. The secondary 
markets have been crucial to the equity market with low income 
housing tax credits, for example, and there needs to be a place 
for that.
    The public policy objectives that we want to support, and 
we go into more detail in our written testimony, are that: we 
need liquidity in all economic conditions--upmarkets and 
downmarkets; we need long-term, fixed-rate mortgages for both 
homeowners and for rental housing; we need capital access for 
all communities, including economically distressed, low-income, 
rural, and minority communities on a fair and sustainable 
basis--not a return to redlining; and we need some approach to 
support the housing trust fund and the capital magnet fund. We 
recommend a small millage fee; by broadening the base, the 
impact on the taxpayers is reduced. I just want to say in 
conclusion that there will be an enormous, far-reaching 
consequence coming from this. Our perspective is that the 
system needs to serve all communities in this country, 
including low- and moderate-income families. And we thank you 
for your support.
    [The prepared statement of Mr. O'Donnell can be found on 
page 159 of the appendix.]
    The Chairman. Thank you.
    Mr. DeWitt?

 STATEMENT OF ROBERT E. DeWITT, VICE CHAIRMAN, CHIEF EXECUTIVE 
OFFICER, AND PRESIDENT, GID INVESTMENT ADVISERS LLC, ON BEHALF 
    OF THE NATIONAL MULTI HOUSING COUNCIL AND THE NATIONAL 
                     APARTMENT ASSOCIATION

    Mr. DeWitt. Chairman Frank, Ranking Member Capito, and 
distinguished members of the committee, I am Bob DeWitt, chief 
executive officer of GID Investment Advisers, testifying on 
behalf of the National Multi Housing Council and the National 
Apartment Association.
    It's important to draw a clear distinction between the 
performance of the single family and multifamily sectors. The 
multifamily finance system has been an unqualified success for 
over 2 decades. As Congress crafts solutions to fix the single 
family problems, you should be mindful not to do so at the 
expense of the much smaller, less understood, but vital 
multifamily sector.
    Since the early 1990's, apartment developers and owners 
have had access to reasonably priced capital throughout all 
economic cycles as a result of the secondary market. This has 
allowed them to produce millions of apartment units affordable 
to working families, those households at or below area median 
income in communities all across the country. We didn't 
overbuild, and those apartments produced within the system came 
at virtually no risk to the taxpayer. The two GSEs have had to 
foreclose on fewer than 100 apartment properties over the past 
20 years.
    Today, their delinquency and defaults remain under one-half 
of one percent, a tenth of the size of the delinquency and 
default rates plaguing single family. In normal times, GSEs 
finance approximately a third of the capital going to 
apartments. Banks, insurance companies, conduits, and other 
private players have made up the other two-thirds. However, the 
past 18 months have not been normal times. Those purely private 
players abandoned the market and have not and cannot yet 
return. As a result, Fannie and Freddie currently finance some 
90 percent of the debt capital for apartments.
    Clearly, this is not sustainable, nor desired; but, neither 
is the uncertainty regarding what role the private market can 
play in financing apartments. The apartment industry urges you 
to consider the following key points for inclusion in any 
reform measures.
    Number one, mission: the public mission of the federally 
supported secondary market needs to be clearly defined and 
should be focused primarily on using the government guarantee 
to provide liquidity to the multifamily mortgage market. This 
liquidity will help meet the current and growing need for 
workforce housing.
    Access to a steady stream of capital promotes 
affordability. Affordable housing is one of the Nation's most 
pressing needs and multifamily housing is inherently 
affordable. Fully 90 percent of the apartment units financed by 
the present system over the past 2 decades, literally millions 
of apartments, were affordable to families at or below area 
median income. This includes an overwhelming majority of market 
rate apartments with no direct Federal subsidy.
    The Harvard University Joint Center for Housing Studies 
estimates that we already have a shortage of some 5 million 
units of affordable rental housing. Our industry cannot meet 
the Nation's current or future housing needs, or refinance the 
approximately $200 billion in mortgage debt coming due over the 
next 2 years without a fully functioning, secondary mortgage 
market.
    Number two, the private market simply cannot meet 100 
percent of the multifamily demand for capital. Any new or 
revised secondary market system must recognize the unique needs 
of the multifamily sector and create a capacity to fill the gap 
left by the private sector. There are structural impediments 
facing banks, insurance companies and conduits that preclude 
them from financing more than they traditionally have. As the 
GSEs shrink their overall presence in the markets during this 
transition, we expect them to continue to be the primary source 
of the apartment sector's mortgage capital.
    Number three, private capital is preferable to 
federalization of the secondary market or the creation of a new 
Federal entity. Federalization will limit the broad range of 
finance products required to maintain a healthy and changing 
multifamily market. Attracting private capital based on the 
Federal Government guarantee allows for needed innovation and 
flexibility.
    Number four, explicit guarantee: we believe that the 
transition to any new system should provide access to explicit 
Federal guarantees for multifamily mortgage securities and 
loan. We support a fee structure to support this backstop. Such 
a risk-based guarantee on the underlying mortgage would provide 
reserves against mortgage losses, thus protecting and 
insulating the taxpayer from loss.
    Number five, portfolio lending: securitizing multifamily 
loans is not always the best way to manage credit risk. Unlike 
single family loans, they are not easily commoditized, and 
therefore any new system should permit the ability to hold 
loans in portfolio.
    And number six, secondary market infrastructure: during 
these transition years, we believe it is critical to retain 
many of the resources and capacities of the existing GSEs. The 
two firms have extensive personnel and technology expertise, 
and established third party relationships that are critical to 
a well-functioning, secondary market.
    If I can leave you with one message today, it is that a 
government-supported secondary market is absolutely critical, 
at least during an appropriate transition period to the 
multifamily industry's ability to continue to meet the demand 
for safe, decent, and affordable rental housing. I thank you 
for the opportunity to be with you today to present the views 
of the apartment industry, and I look forward to your 
questions.
    [The prepared statement of Mr. DeWitt can be found on page 
110 of the appendix.]
    The Chairman. Next, Janis Bowdler, who is the deputy 
director of the wealth-building policy project at the National 
Council of La Raza.

 STATEMENT OF JANIS BOWDLER, DEPUTY DIRECTOR, WEALTH-BUILDING 
     POLICY PROJECT, THE NATIONAL COUNCIL OF LA RAZA (NCLR)

    Ms. Bowdler. Good morning. Thank you. I am the deputy 
director of the National Council of La Raza's wealth-building 
policy project, and I would like to thank Chairman Frank, Mrs. 
Capito, and others for inviting NCLR to share a perspective on 
this issue.
    Record foreclosures in communities of color have taught us 
painful lessons on the consequences of predatory lending. For 
decades, qualified borrowers of color have struggled to gain 
access to the same loans as their White peers. During the 
bubble years, many believed their homeownership dream came 
true, only to learn that they were sold second class products. 
As we consider how to revive our housing finance market, it 
must be shaped by the lessons of the past and built on 
principles of fairness and inclusion.
    In my remarks, I will review important lessons from the old 
system. Then, I'll lay out a series of principles to create a 
system that promotes true ownership opportunities for 
communities of color. Let me start with the lessons. The bubble 
years have become infamous for a glut of inventive but 
devastating financial products; however, we can't lose sight of 
those innovations that really move the ball forward. As the 
housing counseling intermediary, NCLR has helped more than 
135,000 families purchase their first home.
    Based on our experience, there are three areas from the old 
system that we must incorporate moving forward. The first is 
housing counseling. Research has shown that families who attend 
counseling are less likely to default. With significant support 
from both sides of the aisle, and this committee in particular, 
the field of housing counseling has become increasingly 
sophisticated. The second is flexible underwriting. The 
mortgage industry has learned how to underwrite various 
borrower characteristics without jeopardizing the bottom lines 
of banks or families. And the third is non-traditional credit. 
We also learned how to profile credit using data from rent, 
utility, and other monthly bills. Doing so opened the door for 
a whole new segment of borrowers. All too often, however, this 
work was overshadowed by risky yet profitable loans.
    Under the old regime, industry players had little incentive 
to think past the commission they would earn at origination or 
securitization. Building on these lessons, NCLR has two primary 
goals. The first is to ensure that qualified Latinos can access 
a home loan at fair, equal, and affordable rates. And the 
second is to ensure that home will develop into an asset they 
can share with their children.
    With that in mind, we would like to share with you six 
principles to guide the shaping of our housing finance market. 
The first is that there is a role for the Federal Government in 
providing liquidity and innovation. Whether directly or through 
quasi-public agencies, the government can help facilitate the 
flow of adequate capital. As a rule, they should bolster and 
not replace the private market and they should set a high 
standard for lending, secondary market credit, and rental 
financing. The second is that mortgage credit must be equally 
accessible and available to all qualified borrowers. Moving 
forward, policymakers must be careful not to exacerbate the 
tendency of the market to favor the easiest-to-serve borrowers. 
One way to do this would be to invest in lending tools that are 
unattractive to the private market, but for which there is 
strong public purpose.
    The third is that sound and affordable mortgages should be 
the norm. The rise of subprime mortgages was driven by Wall 
Street's appetite for risky loans, not by borrower's demand on 
the ground. We need to restore balance so that the system 
reflects true demand from the bottom, not from the top.
    The fourth is that diverse delivery and outreach channels 
must be incorporated. A key lesson from the financial fallout 
in 2008 is that prime banks did not compete well against more 
agile and less scrupulous competitors. Congress should look at 
how to maximize and reward those that are offering sound and 
sustainable loans.
    The fifth is that predatory lending should be eliminated. 
Much of the best developments in the last 10 years were blocked 
from the borrowers who needed them most, and abusive lending 
routinely beat out the slow and steady practices on the ground 
that would have created sustainable ownership opportunities. 
And finally, our sixth principle is that affordable rental 
housing and ownership opportunities are linked. Unfortunately, 
these goals of creating affordable rental and helping low-
income families achieve homeownership have been pitted against 
one another. Yet, families can build savings or prepare for a 
homeownership when their rent is too expensive.
    Rental and ownership policy must be connected to create a 
clear national housing strategy. On a final note, NCLR strongly 
urges Congress to be data-driven. With unparalleled access to 
GSE portfolio data, we have the information we need to identify 
the strong tenants of affordable lending. There is a strong 
public demand for a robust housing finance market that delivers 
a steady flow of affordable credit on fair terms to all corners 
of the country. History has shown that this is not likely to 
happen without targeted investment from the Federal Government.
    We look forward to working with you to determine that role.
    [The prepared statement of Ms. Bowdler can be found on page 
94 of the appendix.]
    The Chairman. Next, Professor Anthony Sanders from George 
Mason University.

  STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED PROFESSOR OF 
    REAL ESTATE FINANCE, SCHOOL OF MANAGEMENT, GEORGE MASON 
                           UNIVERSITY

    Mr. Sanders. Thank you, Mr. Chairman, Ranking Member 
Capito, and members of the committee.
    The Federal debt at the end of 2009 stood at $8 trillion, 
but the Fannie Mae, Freddie Mac, and Federal Home Loan Bank 
debt and MBS stands at $8 trillion as well. This combined debt 
load for the United States is $16 trillion and represents 110 
percent of our gross domestic product. This Grecian formula of 
debt issuance to fund housing goals is not sustainable. We 
simply have too much leverage in the housing finance system. To 
make matters worse, the Federal Government controls 95 percent 
of residential mortgages made with FHA insurance or Fannie Mae 
or Freddie Mac loan purchases. Stated differently, our 
financial institutions will not originate residential loans 
unless the Federal Government ensures or purchases them.
    We need to take immediate action to get the financial 
institutions and the investment community back in the game and 
wind down the Federal Government's involvement. We have 
affordable housing missions at HUD and at Freddie and Fannie 
through affordable housing goals, and at financial institutions 
through the Community Reinvestment Act and numerous other State 
and local programs. Given the massive supply of vacant housing 
on the market, the shadow inventory of foreclosed homes at 
financial institutions, and the multifamily vacancy rates, 
perhaps it is high time that we consolidate the affordable 
housing missions under one tent. Historically, the Nation's 
affordable housing mission has been under HUD. Hence, I would 
recommend that any Federal affordable housing mission be housed 
there.
    But the FHA, our low- to moderate-income mortgage insurance 
entity, is woefully antiquated in terms of technology, and is 
in desperate need of modernization. Thus, my first 
recommendation is a dramatic overhaul and modernization of the 
FHA. My second recommendation is to slim down Fannie and 
Freddie's role in the housing market. We can begin by: one, 
removing the affordable housing mission; two, unwinding the 
retained portfolios at an accelerated pace; and three, 
toughening the regulatory oversight of Fannie and Freddie by 
moving it to a stronger FHFA.
    My third recommendation is to pass legislation governing a 
covered bond market similar to the market that exists in 
Denmark, and begin with the jumbo mortgage market as an 
experiment. Covered bonds potentially provide an excellent 
vehicle to fund the residential and commercial mortgage markets 
going forward.
    My fourth recommendation is to repair the securitization 
model that is already in existence. Having lenders retain skin 
in the game of at least 5 percent of the loans originated is a 
good start. Our recent downturn in housing teaches us that 5 
percent would have been grossly insufficient to cover the 
future downturns in housing prices. On the other hand, a 
private securitization market should be a buyer-beware market, 
so skin in the game would be pointless.
    Lastly, we have to return to a 10 to 20 percent down or 
more downpayment standard for mortgage lending, and 10 percent 
in FHA programs. The housing bubble of the last decade was 
fueled mostly by low interest rates combined with low 
downpayment mortgages and exotic mortgages such as pay option 
ARMs. The much maligned subprime market was a convenient 
scapegoat for this crisis. Had lenders and GSEs adhered to 10 
to 20 percent down standards, there would not have been a 
bubble in the first place and the subprime borrowers would not 
have defaulted in such numbers had the bubble not burst.
    Mr. Chairman, I thank you for letting me share my comments 
and suggestions with you and the committee. Thank you.
    [The prepared statement of Professor Sanders can be found 
on page 167 of the appendix.]
    The Chairman. And our final witness, Mr. Vince Malta from 
the National Association of Realtors.

 STATEMENT OF VINCE MALTA, 2010 VICE PRESIDENT AND LIAISON TO 
    GOVERNMENT AFFAIRS, THE NATIONAL ASSOCIATION OF REALTORS

    Mr. Malta. Chairman Frank, and members of the committee, 
thank you for holding this hearing today. I am Vince Malta, the 
2010 vice president of the National Association of Realtors. I 
am a third generation Realtor, and I am here to testify on 
behalf of more than 1.2 million Realtors who are involved in 
all aspects of the real estate industry.
    As our members began exploring the question of how to 
improve the U.S. housing finance sector, and developing 
recommendations on what to do about Fannie Mae and Freddie Mac, 
there were a couple of significant issues for which they sought 
a solution. First, Realtors want to ensure that in all types of 
markets, there is always mortgage capital available for the 
creditworthy housing consumer. Second, and equally important, 
Realtors want to ensure that taxpayer dollars are optimally 
protected.
    Among the models that our members considered were to make 
the secondary mortgage market entities either fully private or 
fully Federal. However, we believe neither option effectively 
addresses these two critical issues. Full privatization is not 
an effective option because a private firm's business strategy 
will focus on optimizing its revenues/profit generation. As a 
result, such an entity would foster mortgage products that are 
more aligned with business goals rather than the Nation's 
housing policy or consumers. Such a model could lead to the 
elimination of long-term, fixed-rate mortgage products and 
increase costs. We have also learned in the last few years that 
in extremely difficult markets, private lenders have not been 
willing to make loans without government backing.
    On the other hand, full nationalization has its own share 
of problems. Either converting Fannie and Freddie to fully 
Federal agencies or merging them with Ginnie Mae would place 
taxpayers at significant risk. Realtors want to eliminate as 
much as possible any scenario that would place the taxpayer 
fully on the hook to protect these entities. Additionally, 
having only one secondary mortgage market entity would remove 
competition in the secondary market space and remove any 
incentive for innovation. Further, we fear that a combined 
secondary mortgage market entity could lose focus on its 
mission to serve low- and moderate-income families and to 
maintain liquidity in the mortgage markets.
    Realtors believe that to ensure the flow of capital into 
the mortgage market regardless of the state of the housing 
market or the overall economy, Fannie Mae and Freddie Mac 
should become government-chartered, non-shareholder-owned 
authorities. These new entities should be subject to tighter 
regulations on product, profitability, and minimal retained 
portfolio practices in a way that ensures the protection of 
taxpayer monies. The new authority should focus on standard 
mortgage products that are the foundation of our housing 
finance market.
    While such a focus may curtail some private participation 
in alternative products in this portion of the market, over 
time we believe private market participants will offer 
innovations that meet consumer needs. With the new entities 
focusing on standard, safe mortgage products, including 15- and 
30-year, fixed-rate mortgages and traditional adjustable rate 
mortgages, we believe private capital will be free to compete 
for opportunities outside of that product window.
    Finally, Realtors believe that regardless of the secondary 
mortgage market model selected, there is a place for the 
utilization of covered bonds. Our members do not believe that 
they can replace the liquidity tools of our existing system, 
but should be encouraged as an additional product to provide 
liquidity to the secondary mortgage market. Realtors recognize 
that this is but the first of many conversations regarding how 
we mend and improve a housing finance system that had served us 
well for many years. We believe that our recommendations, along 
with some key elements that we mentioned today, will help 
Congress and our industry design a secondary mortgage model 
that will serve America's best interests today and in the 
future.
    I thank you for this opportunity to present our views. As 
always, the National Association of Realtors is ready to help 
you as you work to sustain the housing and national economic 
recovery.
    [The prepared statement of Mr. Malta can be found on page 
143 of the appendix.]
    The Chairman. Thank you. I want to begin with an 
observation from before. There was a comment about the 
pressures of the Federal Reserve in warning about Fannie and 
Freddie, and that is true, but it should be coupled with a 
recognition that the Federal Reserve was given by the Congress 
in 1994 the responsibility for preventing irresponsible 
lending, whether it was inside or outside the banking system. 
And Mr. Greenspan, as he later acknowledged, refused to do it 
on ideological grounds.
    So yes, the Fed was worried about Fannie and Freddie buying 
up mortgages, but the Fed was worried about Fannie and Freddie 
buying up mortgages that the Fed should have prevented from 
being made in the first place. It is important to remember that 
Fannie and Freddie were in the secondary market and they would 
not have, as a matter of fact, been impacted if there had not 
been problems in the primary market, although they may have 
encouraged it. So the Fed's record here is indeed a very mixed 
one.
    Mr. DeWitt, I want to acknowledge--you made explicit the 
importance of separating out multifamily and single family, and 
that is relevant. Several people here talked about the 
importance of rental housing which was, I think, ignored, and 
part of the problem was a failure to understand that, and I 
agree with that. We will be very careful, and we ask you all to 
work with us, to make sure that it is not a failure to 
recognize that.
    Let me just ask Mr. Calabria--I was struck, and I 
appreciate that you stated, I think, a very important point, 
that our policy shouldn't be based on the form of tenure, 
whether it is a rental or ownership. I'm just wondering if you 
would care to speculate about--and I would ask Mr. Malta to 
stay calm--the question of the home interest deduction on home 
mortgages. Would you change that at all?
    Mr. Calabria. I would. I would ultimately, in a budget 
neutral way, get rid of it. I think our tax code in general 
encourages excess leverage on the part of households and 
corporations, so without a doubt, we should be phasing out the 
mortgage interest deduction.
    The Chairman. Thank you. And Mr. Sanders, I appreciated 
your comments on a number of areas. On downpayments--and I was 
just checking--when you say having borrowers have skin in the 
game in subprime, would you mandate that in some way? I 
certainly agree with that. Should we mandate that?
    I will tell you one of the things we did do with regard to 
securitization--and I will get to that in a minute on your 
comments there--we called for 5 percent as the norm, with the 
regulators going to 10 percent if it is a particularly risky 
thing. But it had gone down to zero, and we had in mind if they 
had a 30-year, fixed-rate mortgage with a 20 percent 
downpayment--not to mandate, but to incentivize. But would you 
go further? I very much agree on the desirability of the 
downpayment. Is there some way in public policy we should 
follow through on that?
    Mr. Sanders. There is no doubt about it. I think having the 
3.5 percent down FHA, which was brought down to zero, is a--
again, public policy viewpoint, I understand that side of it. 
On the other hand--again, in my report, you will see that the 
FHA insurance fund is suffering greatly--
    The Chairman. I agree, and we are in fact in conversations 
now, and we will have a bill when we come back that I think is 
going to raise that. But the question is, what about non-FHA, 
would you do anything about that?
    Mr. Sanders. Well the non-FHA, and from a financial 
stability viewpoint, I think--as I put, 10 to 20 percent makes 
a lot of sense. Going back--
    The Chairman. I understand that. Should public policy try 
to force that, to incentivize it? What should we do about it 
other than say it is a good thing?
    Mr. Sanders. I would actually include it as a requirement 
for financial institutions, yes.
    The Chairman. Thank you. That is important, and that is in 
the private market.
    A query here on the other thing, securitization. I wasn't 
sure if--you said the 5 percent is a good start, but then you 
said a private security market should be buyer-beware, so skin 
in the game would be pointless. I'm not sure I fully understand 
what your recommendation is with regard to securitization.
    Mr. Sanders. Yes, there are two sides to it. First of all, 
``skin in the game,'' which I have discussed with some people 
sitting at this table, is good in theory. On the other hand, on 
the securitization market, particularly the private label, I 
disagree with some of the characterizations that everyone was 
misled by it. I think in many cases, we have so many 
information systems and databases out there that investors in 
the market knew full well what was going on. So again, I'm not 
sure that would make that much difference.
    The Chairman. Would you be for it or against it? If it 
doesn't make a difference, does it do any harm?
    Mr. Sanders. To have 5 percent down?
    The Chairman. Correct--no, not down. Securitization on the 
lender now. Downpayment is on the borrower. I was assuming we 
were talking about a 5 percent requirement on the seller of the 
loan, who was the originator.
    Mr. Sanders. And again, Chairman Frank, that is a two-sided 
issue. We could ask for 20 percent. Then we would end up drying 
up--
    The Chairman. I'm just asking for your recommendation. I 
don't mean to be intrusive, but you did come here as a witness.
    Mr. Sanders. You are--
    The Chairman. What would your recommendation be?
    Mr. Sanders. 5 percent.
    The Chairman. On the lender?
    Mr. Sanders. On the lender.
    The Chairman. And 10 to 20 percent on the borrower. That is 
perfectly reasonable.
    The gentlewoman from West Virginia.
    Mrs. Capito. Thank you, Mr. Chairman.
    Mr. Berman, from the Mortgage Bankers Association, correct?
    Mr. Berman. Yes.
    Mrs. Capito. You talk a lot about how MBA has suggested a 
framework for single and multifamily mortgage markets. The 
centerpiece would be for the Federal Government to support the 
secondary mortgage market through a new line of mortgage-backed 
securities. Do you think it is possible to have a fully 
functioning private secondary market without government 
support? This sort of is a theme I have heard from others as 
well, but what is your opinion on that?
    Mr. Berman. The issue really is, how do we survive in terms 
of creating a liquid market through downturns? And it is the 
position of the MBA and the practitioners that were part of 
this council that the depth of the market is not sufficient 
without this government wrap, Ginnie Mae-type wrap, in times of 
illiquidity such as we have today. And we have these 100-year 
floods about every 10 years, so this is not an uncommon event.
    Mrs. Capito. Does anybody else have an opinion on that? 
Yes, Mr. Calabria?
    Mr. Calabria. I would make two quick points. We largely 
actually had a private label securitization market in the 
1920's, and granted we had a big housing bubble then too, so 
that is not a way to get out of it. But I would note that if we 
are going to accept the role of the Federal Reserve as a backer 
of asset markets in terms of the mess like we had with the 
asset-backed facilities in the--you could certainly have the 
Fed be the lender of last resort and buy mortgage-backed 
securities when you are hit with your 20-year flood. So if you 
are going to keep that, that is there, and we should recognize 
that is part of it.
    Mrs. Capito. Mr. Malta?
    Mr. Malta. Yes, thank you. We couldn't get around the 
issue. When we first looked at this, we were hoping that the 
private sector could pick up what was needed in the 
marketplace. And as evidenced by the last 18 months, we have 
seen that the private side does not perform or does not provide 
the needed capital when the markets are as stressed as we have 
been experiencing. If it had not been for Fannie and Freddie 
and the FHA, where would this market have been if we had just 
relied on the private sector?
    Ms. Wartell. Yes, I think there are two different roles 
that we ought to be distinguishing here. The first is, what do 
you do when there is stress in the market, and when private 
capital loses confidence in housing? I hope we will not see 
ourselves back in the circumstance we are in now, but you do 
need a backstop.
    The second is a different role, which is really to deal 
with the mismatch in durations, and Mark mentioned this in his 
policy, although I think we probably come to a different place 
on this--30-year, fixed-rate financing allows people to have a 
predictable level of their own expenses devoted to housing. It 
allows middle-class families to plan for their own financial 
futures. Investors are rarely willing to commit dollars for 
that period of time, and that mismatch is what the Federal 
intervention or some other mechanism is designed to provide. 
And it is that--if we want to have long-term, fixed-rate 
financing available, that seems to be where we ought to focus a 
Federal backstop.
    Ms. Bowdler. I just wanted to add that having a government 
provide some liquidity through whatever form is also very 
important for areas where the private market doesn't find the 
borrower attractive, and they don't find all borrowers equally 
and universally attractive. So rural areas, urban cores, 
moderate-income families don't always have access and may not 
get it if it isn't for some form of government intervention.
    Mr. Berman. I would also just like to add that the MBA 
proposal is designed to continue to have the mortgage credit 
guarantor entities to have 100 percent skin in the game, if you 
will, throughout all the market variations. So in what we have 
proposed, we have this consistent alignment of interest. And 
again, the government wrap is really to encourage bond holders 
to come into the market at those times.
    Again, the emphasis we have is on private sector. We want 
to get private--we really don't want the Fed to come in if we 
can avoid that. We want to encourage private investors to come 
in, and we think that government guarantee of credit will 
enhance that probability through the downturns.
    Mrs. Capito. Thank you.
    The Chairman. The gentleman from North Carolina.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    We have looked a lot in this committee at how to revive 
bank lending, but securitization was roughly half of all 
lending before the financial crisis or before the foreclosure 
crisis really set in. And I understand that with respect to 
issues of stock, there are fairly elaborate rules for 
standardized disclosures, periods of time, waiting periods so 
that potential investors can do due diligence, they can take 
their own look at what they are getting, and that the standards 
or the rules for issuing mortgage-backed securities or any 
securitization--any securitized debts, but mortgage-backed 
securities in particular, were just starkly different.
    Instead of having a period that investors could--instead of 
having standardized disclosures and allowing investors to 
sample the mortgages in the pool, it usually was the case that 
investors got a call saying, ``We are going to market in 3 
hours, are you in?'' And not surprisingly, one of the reasons 
the securitization market has not bounced back, I understand, 
is that investors are leery of going back to that. They would 
like to know a little bit more about what they are buying. But 
the securitization industry has resisted greater disclosure.
    Mr. Calabria, I am always surprised when a witness from the 
Cato Institute says something I agree with, but when you called 
for the requirements of the 1933 and 1934 Securities Acts to 
apply to GSEs, is that what you were calling for, and would you 
extend that call to private label securitizers as well?
    Mr. Calabria. I would, and I would extend that as well to 
the Federal Home Loan Banks. I think it is very important that 
if we have the security disclosures, you have to get that with 
the MBS, and I think that is an important part of it.
    I want to touch on something very related that Sarah 
mentioned, which is the credit rating agencies, and I think we 
need to go very far in forcing regulators and the market to do 
due diligence. We do need to end that quasi-monopoly status 
that the rating agencies have, but I would focus on that as a 
part of it. So yes, the 1933 and 1934 Acts, or whatever is 
coming forward in the future.
    Mr. Miller of North Carolina. I have never seen so many 
heads nodding from what is largely an industry panel to 
questions that I have had in this committee before.
    Any other thoughts on this issue? And do you think that the 
SEC has the statutory authority now to issue rules to require 
this?
    Mr. Calabria. Currently, under Freddie's and Fannie's 
charters and the Federal Home Loan Banks, they are exempt. I 
know that the recent reform act put them under the 1934 Act. 
They are still exempt from the 1933 Act. So that would take a 
change. And as I mentioned in my testimony, there are a variety 
of pieces throughout Federal law where they are treated as 
``government securities.'' That would need to be changed.
    Mr. Miller of North Carolina. How about all the private 
label--well, there are perhaps not so many anymore, but we 
obviously want to return to the day when there are, but with 
better standards.
    Mr. Calabria. Most of the private label was subject to the 
1933 Act. They had gone through shelf registrations, and 
certainly I think it merits re-evaluating the shelf 
registration process to see whether that provided sufficient 
information to investors.
    Mr. Miller of North Carolina. Mr. Berman?
    Mr. Berman. I think there are a number of issues here. One 
is transparency, which clearly is something that the Mortgage 
Bankers Association is in favor of. But it is not just 
transparency with respect to the entities or the securities, it 
is also transparency with respect to the rating agencies, and 
clearly the only reason that investors at the time were willing 
to make such quick decisions was their reliance on the ratings. 
I think it is important for the SEC to take a close look at how 
the rating agencies function, the transparency of their models, 
the transparency of their ratings. Restoring confidence is what 
it is all about, and without confidence in the rating agencies, 
we have a long way to go.
    Mr. Miller of North Carolina. Ms. Wartell--
    Ms. Wartell. Sure, go ahead.
    Mr. Miller of North Carolina. I'm kind of accustomed to 
having the Center for American Progress agree with me, but go 
ahead.
    Ms. Wartell. The only thing, I just wanted to emphasize 
your point, which is that our ability to attract private 
capital back into these markets will depend upon us giving 
markets confidence in the quality of private label securities. 
So the idea of looking at these proposals for comparability, 
whatever the government-backed market and the private market, 
really need to have rules that are consistent.
    Mr. Miller of North Carolina. I yield back, Mr. Chairman.
    The Chairman. Let me use your remaining time briefly just 
to say, with regard to the rating agencies, I would like to 
make them better. Some of us are skeptical. And one thing I 
think was very important that Mr. Garrett and I collaborated on 
was to repeal all the statutory requirements that people rely 
on the rating agencies, because if we can't make them better, 
we can at least tell people, you are on your own, and don't 
hide behind them, and I think that was a very important, simple 
thing.
    Further, I guess I would say to Mr. Calabria--and it is 
nice that we have had this agreement--do I take it from what 
you said that if Cato had been in existence 70 years ago, it 
would have supported the 1933 and 1934 Acts?
    Mr. Calabria. I'm not certain that we would have. I would 
say that I think those standards need to be applied uniformly 
if you are going to have them.
    The Chairman. If you are going to have them. Thank you.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    I appreciate the testimony of all the panelists. Frankly, 
it was helpful. It was illuminating. Particularly, Mr. Berman, 
and Mr. Malta, on behalf of your respective organizations, I 
applaud you for, frankly, bringing a plan to the table, 
something the Administration hasn't done. Mr. Berman, I found 
your plan particularly interesting and comprehensive. I want to 
study it a little more. I still don't agree with it all. Mr. 
Malta, you have a thoughtful plan. I agree with it less, but it 
is a thoughtful plan nonetheless, and you should be applauded 
for bringing one to the table.
    I believe we have to have a plan. The status quo is simply 
unsustainable, and I'm disappointed in the Administration for 
really maintaining the status quo. And I believe, Mr. Sanders, 
you pointed out that the exposure of the taxpayer to Fannie and 
Freddie after the Secretary of Treasury earlier today told us 
that it is not sovereign debt, but we are going to stand behind 
every penny of it--that is a paraphrase, not a quote--not sure 
how--I guess that was particularly illuminating. But when you 
think about the debt being at roughly $8 trillion and Fannie 
and Freddie exposure of roughly $8 trillion, it is really a 
staggering amount.
    I also picked up this Bloomberg report that the gentleman 
from New Jersey alluded to earlier which stated, ``The bond 
market is saying that it is safer to lend to Warren Buffett 
than Barack Obama. Two year notes sold by the billionaire's 
Berkshire Hathaway in February yield 3.5 basis points less than 
Treasuries of similar maturity according to data compiled by 
Bloomberg.'' And we know already that Moody's is threatening to 
lower our AAA rating. I find all of this quite staggering 
myself, and so again, to have the Administration proffer no 
plan I believe is simply inexcusable.
    The first question I would like to ask the panel--I have 
been trying to study other housing markets, because I 
personally would like to see a GSE future for America. I 
haven't convinced myself--although I have come to this debate 
with an open mind, it is not an empty mind. But as I look 
around, I see countries like Ireland, the U.K., and Portugal 
that seem to have no GSEs, a high rate of homeownership to our 
own. Denmark, no GSEs, and although they have had a housing 
bubble themselves, there has been no surge in delinquencies and 
foreclosures. Certainly, there have been some.
    I forget who it was--maybe it was you, Mr. Sanders, or 
maybe it was you, Mr. Calabria, who commented upon the Canadian 
system, which also has no GSEs, and frankly has a higher rate 
of homeownership there. Some of them use covered bonds. I do 
believe Canada has an FHA-like structure. I believe in Canada, 
you said that mortgages are fully recourse. I think there is a 
larger downpayment. I don't know if that is simply due to 
market forces or the government. I don't know the answer to 
that.
    So the question for those of you who believe that 
ultimately we must have some form of GSE, which I believe 
includes you, Mr. Malta--am I missing something in these 
international examples? I'm sorry, I was calling to you, Mr. 
Malta. I thought you advocated we needed some, essentially, 
government-backing to our securitization market. I don't see 
that overseas, and so am I missing something?
    Mr. Malta. The United States and Denmark are the only two 
countries that have the 30-year, fixed-rate mortgage. And you 
look at Canada, for instance, their mortgages reset every 5 
years.
    Mr. Hensarling. So you would advocate, then, that these are 
needed--you do not believe ultimately that the market would 
produce a 30-year, fixed-rate mortgage, and you believe in 
order to achieve your goal in homeownership that we would have 
to see the 30-year, fixed-rate mortgage, is that what you are 
advocating?
    Mr. Malta. That is correct. I think market incentives would 
say that we would have something less than the 30-year, fixed-
rate or 15-year, fixed-rate mortgages. It would reset.
    Mr. Hensarling. I don't know--listen, I respect the 
opinion. You may or may not be right. I don't know the answer 
to that. I know that I have certainly seen a study from the 
Federal Reserve that says that ultimately at the end of the 
day, Fannie and Freddie provided 7 basis points advantage for 
homeowners given that the taxpayer is already out $125 billion, 
given that they are on the tab for much more, particularly 
trillions. It just reminds me--and I just think the American 
dream is not to buy a home, the American dream is to keep a 
home. And I'm not sure for 7 basis points increase in the 
interest rate that it was worth all the human misery, all the 
foreclosures. So I'm not completely sure that achieved our 
goal.
    Mr. Calabria?
    The Chairman. Quickly.
    Mr. Calabria. The median life of a mortgage tends to be 
about 7 years. Few people live in their house for 30 years or 
keep that, so even a mortgage that has a 5-year, fixed-rate 
mortgage and resets like in Canada covers most of that risk. I 
do think the reason we would still see--and I touch on this in 
my testimony--30-year mortgages out there--if they weren't 
subsidized, we would just see the spread between adjustable and 
then higher, and maybe that is appropriate, that it reflects 
the full price of it.
    The Chairman. Thank you. Having lived in this House for 30 
years, I don't find that I'm getting to be able to pay anything 
off.
    [laughter]
    The Chairman. The gentleman from New Jersey.
    Mr. Lance. Thank you, Mr. Chairman.
    Mr. Calabria, your testimony suggests breaking up the GSEs, 
as I understand it, into about a dozen equal-sized entities. 
Could you explain in a little more detail how that would work?
    Mr. Calabria. Sure. You could go--and I will preface--my 
back of the envelope is certainly that comes with a cost, and I 
think mortgage rates would probably go up about 6 or 7 basis 
points if we reduce--
    Mr. Lance. How much would they go up, in your opinion? Six 
or seven--
    Mr. Calabria. Basis points.
    Mr. Lance. Six or seven basis points.
    Mr. Calabria. If we reduce the scale of the GSEs. There is 
certainly a cost to that. So what I would do is I would 
randomly take one every other 12th loan and the--and I think 
you need to set up a good bank, bad bank model. Take the bad 
loans, take the good loans, just randomly set them up in 12 
different spots. The things I would avoid to do is I would 
not--
    Mr. Lance. Not geographic, I trust?
    Mr. Calabria. Not geographic. I would not reproduce that 
part of the Federal Home Loan Bank System, nor would I make 
them cooperatively owned or jointly--I would make them just 12 
independent entities.
    As I touch on in my testimony, I think you need to allow 
the charters to be issued by the regulator, and if this is a 
model that works, and other entities want to come in and 
charter in that model, they should be allowed to. I would just 
as well say if this is a model that doesn't work, those 
entities should be able to apply their charters, go the OCC, 
and try to get a bank charter.
    So I think it is important to let the number of these 
entities grow and let the market determine that. But I would 
emphasize if you only have two or three, the market is going to 
look at these as ``too-big-to-fail'' regardless of what we say.
    Mr. Lance. And then how would you wind down the current 
GSEs?
    Mr. Calabria. Well, as I mentioned, I would set up a good 
bank/bad bank situation, which I will note the current 
receivership structure in the bill that was passed in 2008 
allows the separation into a good bank/bad bank. So I would say 
you just have to set that up like a modern day RTC that 
resolves those bad assets.
    Certainly, you want to ask a broader question, which is do 
we want to set up something like the REFCORP bonds where the 
Federal Home Loan Bank pays us back for some of the costs of 
the savings and loan crisis, whether in the future or these new 
entities pay us back for some of the losses from Freddie and 
Fannie. But all of that can be structured very similarly to 
what was set up with the Federal Home Loan Banks.
    Mr. Lance. Thank you. Is there anyone else on the panel who 
would like to comment on that proposal? Yes?
    Mr. Berman. Yes, Congressman. The MBA proposal would agree 
with what Mr. Calabria said with respect to good bank/bad bank 
resolution of Fannie and Freddie in order to help leverage the 
important good assets that we have there, not just the physical 
assets, but the intangibles.
    I think that the transition--and we have all agreed, I 
think, that transition is critical--might take a long time to 
get to 12. And again, I'm not suggesting that 12 is a good 
number or a bad number. But our thought is that creating two at 
the beginning is probably an easier way to a smooth transition. 
We have databases, origination systems, underwriting systems, 
and so on--
    Mr. Lance. Wouldn't that be ``too-big-to-fail'' if there 
were only two?
    Mr. Berman. Well, again, two wouldn't be the end game, but 
I'm speaking about the transition. I think it would be very 
hard to wave a wand and create--
    Mr. Lance. And how long would you presume the transition 
should be?
    Mr. Berman. I think that would be market determinative, 
which I agree with Mr. Calabria. It would--and up to the 
regulator to charter those. So we agree on those pieces.
    Mr. Lance. Thank you. Mr. Sanders, in your proposal 
regarding a covered bond approach, some have said that covered 
bonds are simply another complex financial instrument. Do you 
think we should be cautious in facilitating the creation of 
such a market in the United States?
    Mr. Sanders. The answer to that is, of course, we would 
probably do it on a trial basis to begin with. But no, actually 
I think they are much more straightforward and clear cut. The 
banks make loans, they keep them on their balance sheet. If you 
have transparency, you have bondholders that will be receiving 
the cash flows from it. I think it is so straightforward it is 
shocking, and there is actually--as long as there is 
transparency, let me make that clear.
    Mr. Lance. And how would you assure transparency?
    Mr. Sanders. Again, you can write in what the average LTV 
interest rate, maturity of the mortgages are. Whatever product 
you are doing, making sure they are verifiable, that it is what 
the actual collateral looks like.
    Mr. Lance. Thank you. And to continue, Professor Sanders, 
how would you manage the GSEs retained portfolios?
    Mr. Sanders. What I recommend in my report was, at this 
point, wind them down as soon as possible, which in this market 
is a little more cumbersome than normal. But I would start with 
having three tiers of loans.
    I would start off with the bad performing loans--not like a 
bad bank, but split them off into a securitization structure 
where we throw them out there and say, here is some risky 
paper, what are the bids on it? I would have a second tier, and 
the second tier would be all the loans that Fannie and Freddie 
probably shouldn't have purchased, such as the Alt-A mortgages, 
some subprime paper, bundle those as a second tier. And then 
the ones we can keep a little longer are the conforming loan 
pools, the way we used to do it a long time ago. That would be 
less--
    The Chairman. The gentleman's time has expired.
    Mr. Lance. Thank you, Mr. Chairman.
    The Chairman. The gentleman from California.
    Mr. Royce. Yes, I was going to ask Mr. Calabria a question. 
You were on the Senate Banking Committee at the time. Some of 
these issues that came up over the GSEs, Fannie and Freddie, 
and those were really the boom years when you were over there, 
in housing. And I would just ask you a question on the logic of 
what would have happened had the Fed come in and cracked down 
on Alt-A loans and subprime loans. How would that have been 
received on the Senate side? You had a chance to interact there 
with Members, and some of them, like Chris Dodd, weren't 
exactly in favor of clamping down on Fannie and Freddie, 
especially with respect to affordable housing. What do you 
think the reaction would have been in the Senate?
    Mr. Calabria. I think there sure would have been some 
skepticism. I would certainly say one of the things that I 
think was constantly heard in efforts to reform Freddie and 
Fannie was that the housing market was carrying the economy, 
which it was. Certainly, the housing market was a very large 
part of the economy in 2004, and we certainly heard common 
refrain that we should not do anything to take the air out of 
the housing market.
    I think, in my mind, it opens up a broader question, which 
is--and Sarah has said this, other people have said this--we 
need to kind of make our mortgage finance system 
countercyclical, and part of that is a very real problem, which 
is we all love bubbles when they are going on. So how do you 
set up an incentive system that leans against that when the 
pressure is to keep a bubble going rather than to avoid the 
bubble in the first place?
    Mr. Royce. Yes, I think a lot of this was viewed--I have my 
own view of this, but I think for a lot of members, they viewed 
this as a way to get people with less than perfect credit into 
a home. That is the way they were viewing the activity over 
there.
    But since the failure of Fannie and Freddie, several former 
executives have explained that the GSEs entered into the 
subprime and Alt-A market to send a signal to the broader 
market, which was these were in fact safe loans. You and I 
might have considered them junk loans, but the perception or 
the intent was to send that signal, according to Fannie 
executives. I was going to ask you do you care to comment on 
this.
    Mr. Calabria. It is important to start with two different 
distinctions, which is even on the loans that Freddie and 
Fannie bought directly as whole loans that I think most of us 
would say were subprime, they did have a variety of standards 
set to those. They did not apply those standards until very 
late in the game, after the bubble had already burst, to the 
mortgage-backed securities, the private label that they 
pushed--that they bought. So they had two different standards.
    I think it is also important to look at--that if you look 
at the vintages of subprime loans that have performed the 
worst, which are 2005, 2006, 2007, that is the time when 
Freddie and Fannie entered the market in force and there were 
larger sources of liquidity for that market. So I think they 
were the marginal buyer during that time, and really ended up 
lowering the standards that we saw in the marketplace.
    I would note that one of the things that I think would have 
been helpful if the second--I'm a little biased by saying it--
but if the second Shelby bill with the portfolio restrictions 
had taken place, they would not have been able to buy those 
mortgage-backed securities that were subprime, and I think that 
is half the problem in terms of Freddie and Fannie's losses.
    Mr. Royce. Thank you, and here is my last point. Both 
regulatory reform bills endorse the creation of a resolution 
process for failed or failing systemically important firms, and 
both bills label a group of institutions as ``too-big-to-
fail.'' They create a resolution fund and they draw a line from 
that fund to the U.S. Treasury. Is there an assumption here 
that creditors and counterparties will be on the receiving end 
of something more than what they would receive in the case of a 
liquidation process through bankruptcy?
    In other words, are we recreating the moral hazard problem 
with Fannie and Freddie by allowing for the possibility that 
creditors and counterparties will be bailed out by the Federal 
Government? Because I think regardless of whether it comes from 
the industry or the taxpayer, there will be a breakdown in 
market discipline, and that is the fatal flaw in this approach. 
That is what has to change, or else we will repeat another 
mistake made in the Fannie and Freddie debacle.
    Mr. Calabria. And I think it is very important to emphasize 
the market discipline role on the part of creditors. Any 
financial institution, it is 90 plus percent of their funding--
is from the debt markets. For Fannie and Freddie, it was 
essentially 99 percent of their funding on a mark-to-market 
basis. So the market discipline has to come from creditors, and 
I do believe as long as there is a fund there, there will be a 
perception by creditors that they will be bailed out, and I 
think that is problematic.
    I think you also have to look at what sort of discretion 
that the regulator has. For instance, in the most recent Senate 
bill--and I remember we spent lots of time on the Hill arguing 
about ``may'' versus ``shall.'' It says the FDIC ``may,'' so I 
do think you need to set some certainly so that the marketplace 
knows they will be--
    Mr. Royce. Thank you, Mr. Calabria.
    The Chairman. The witnesses are thanked, and the hearing is 
adjourned.
    [Whereupon, at 1:40 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 23, 2010


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