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


 
                     THE FUTURE OF HOUSING FINANCE: 
                     A PROGRESS UPDATE ON THE GSEs 

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                           SEPTEMBER 15, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-153

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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
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

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























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 15, 2010...........................................     1
Appendix:
    September 15, 2010...........................................    45

                               WITNESSES
                     Wednesday, September 15, 2010

Barr, Hon. Michael S., Assistant Secretary for Financial 
  Institutions, U.S. Department of the Treasury..................    12
DeMarco, Edward J., Acting Director, Federal Housing Finance 
  Agency (FHFA)..................................................    13

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    46
    Bachus, Hon. Spencer.........................................    48
    Barr, Hon. Michael S.........................................    49
    DeMarco, Edward J............................................    56

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Written responses to questions submitted to Edward J. DeMarco    67
Garrett, Hon. Scott:
    Letter to President George W. Bush from various undersigned 
      Members of Congress, dated June 28, 2004...................    71
Sherman, Hon. Brad:
    Article from the Financial Times entitled, ``Oxley hits back 
      at ideologues,'' dated September 9, 2008...................    76
    Article from The New York Times entitled, ``Resale Fees That 
      Only Developers Could Love,'' dated September 11, 2010.....    77


                     THE FUTURE OF HOUSING FINANCE:
                     A PROGRESS UPDATE ON THE GSEs

                              ----------                              


                     Wednesday, September 15, 2010

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:35 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Sherman, Baca, 
Lynch, Miller of North Carolina, Scott, Carson, Foster, Kosmas, 
Himes; Garrett, Manzullo, Royce, Biggert, Hensarling, Campbell, 
Neugebauer, and Jenkins.
    Ex officio present: Representatives Frank and Bachus.
    Also present: Representatives Waters and Moore of Kansas.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order. Without objection, all members' 
opening statements will be made a part of the record.
    Pursuant to committee rules and prior discussion with the 
ranking member, each side will have 15 minutes for opening 
statements. Without objection, all members' opening statements 
will be made a part of the record.
    I yield myself 5 minutes. Good morning. We meet today to 
focus on the many strategies that Fannie Mae, Freddie Mac, and 
the Federal Housing Finance Agency and the Treasury Department 
have employed to limit capital infusions into the two housing 
Enterprises. This hearing is also the 6th in a series that we 
have so far convened this Congress to examine the future of 
housing finance.
    Two years have now passed since the Federal Housing Finance 
Agency placed Fannie Mae and Freddie Mac into conservatorship 
under procedures of the Housing and Economic Recovery Act of 
2008. At the request of then-Treasury Secretary Henry Paulson, 
this law also provided the Treasury Department with emergency 
liquidity powers to support the Enterprises. To stabilize the 
United States housing markets, the Treasury Department has to 
date purchased or announced plans to buy just under $150 
billion in the senior preferred stock of the Enterprises 
combined. Moreover, according to a June report issued by the 
Federal Housing Finance Agency, the Treasury Department and the 
Federal Reserve have together purchased $1.36 trillion in 
mortgage-backed securities of the two institutions.
    At this hearing, we will explore the many approaches used 
to protect taxpayers and limit the losses of Fannie Mae and 
Freddie Mac. For example, in July, the Federal Housing Finance 
Agency issued 64 subpoenas seeking documents related to private 
label securities in which the two Enterprises invested to 
determine if issuers of these securities are liable for 
Enterprise losses. Fannie Mae and Freddie Mac have also begun 
forcing underwriters of delinquent mortgages purchased or 
guaranteed by the Enterprises to buy back the faulty loans if 
the loans violated the representations and warrants provided at 
the time of sale. As a result, the four largest commercial 
banks have already incurred losses of $9.8 billion on the loans 
they have repurchased or expect to repurchase from Fannie Mae 
and Freddie Mac.
    During the height of the housing bubble, many players in 
our financial markets trusted what they bought, but they did 
not verify that the loans lived up to the promises contained in 
representations and warrants. During the height of the Cold 
War, however, Ronald Reagan taught us better. For the housing 
finance system to regain its footing, we need the players in 
the market not only to trust but also to verify. Any new 
housing finance system must do both.
    While the Enterprises, their regulators, and the Treasury 
Department have acted to limit the losses of Fannie Mae and 
Freddie Mac in the aforementioned ways and through several 
other methods, we must also consider what more can and should 
be done to protect taxpayers both now and going forward. In 
particular, we must begin to think about approaches for 
recouping the taxpayers' money in the long run. We found a way 
to pay for the savings and loan crisis, and we can surely find 
a way to recover the costs associated with this crisis.
    Some of my colleagues may try to use today's hearing as an 
opportunity for political grandstanding. They, however, need to 
remember that people who live in glass houses should not throw 
stones. Under the leadership of former Chairman Mike Oxley, we 
tried for several years to enact bipartisan legislation to 
improve the regulation and activities of Fannie Mae and Freddie 
Mac. Unfortunately, many Republicans in Congress and officials 
in the Bush Administration blocked these efforts. Their delays 
allowed the housing crisis to fester into an ulcer.
    As we now consider the future of housing finance, we have a 
chance to proceed differently. The Dodd-Frank Wall Street 
Reform and Consumer Protection Act has already laid the 
foundation for change by adjusting securitization rules, better 
regulating rating agencies, modifying appraisal practices, and 
standardizing mortgage underwriting. The adoption of these 
process reforms should simplify the debates about altering the 
housing finance system.
    In sum, today's hearing brings us one step closer to 
figuring out what needs to be done to improve our housing 
finance system. As I have previously said, my goals in these 
debates are to limit taxpayers' risk and establish a more 
stable, long-term funding source to help hardworking, 
responsible, middle-class American families to buy a home with 
an affordable mortgage.
    I look forward to hearing the perspectives of our 
distinguished witnesses on these matters.
    I would like to recognize the ranking member, Mr. Garrett, 
for 4 minutes for his opening statement. Mr. Garrett.
    Mr. Garrett. Thank you. Thank you, Chairman Kanjorski, for 
holding this very important hearing. When you review all the 
material that is before us in preparation for the hearing, you 
could probably hold a GSE oversight hearing just about once a 
month and still have enough important issues to deal with. I am 
sure the Director would agree with that. The current state and 
future of mortgage finance has really been a hot topic and 
continues to be a hot topic with the Financial Services 
Committee, and we are holding several hearings over the next 
several weeks to look at the current state of the housing 
finance situation and discuss ideas on how to structure the 
market in the future and think about it. Unfortunately, I 
believe this focus is happening much later than it really 
should; it really should have been happening, what, about 2 
years ago, since Fannie and Freddie were put into 
conservatorship. We are finally beginning to formally and 
seriously look at the way to reshape that market.
    Throughout the financial regulatory reform debate, my 
Republican colleagues and I continuously looked for 
opportunities to end the bailouts of Fannie and Freddie, wind 
down the businesses and accurately account for their losses to 
the American taxpayer. But at each turn, if you remember when 
we did those amendments and such, the majority party and the 
White House have prevented those efforts from moving forward.
    So to my colleagues, including Chairman Frank, who has said 
specifically, ``There is no urgency. We have already abolished 
Fannie and Freddie.'' May I remind him that just because you 
say something enough times doesn't actually mean that it is 
true. Just because Fannie and Freddie have been put into 
conservatorship, that doesn't mean that they have been 
reformed. Fannie and Freddie are continuing to hemorrhage 
billions of dollars each and every quarter. With the 
possibility now of a double-dip recession and further value 
decline in homes, really, there is no end in sight. So Fannie 
and Freddie have not been reformed. Rather, they are being used 
essentially as an experimental guinea pig, if you will, for the 
Administration's home modification programs.
    Also, I have seen a quote by Chairman Frank where he said, 
``The money is not being lost by anything that we are doing 
right now.'' In 2004 and 2005 when this committee was pushing 
ahead to institute new regulatory oversight over these 
companies, supporters of these entities, including Chairman 
Frank, said, well this was unnecessary then because they were 
in such terrific shape. We see where that led us.
    So to say that Fannie and Freddie have already been 
reformed and everything is fine now is really just making the 
same excuses that have been made before and the same mistakes 
as well.
    As any expert in the mortgage business will tell you, 
mortgage loans typically hit their peak default rates when? At 
5 to 7 years. The loans underwritten by Fannie and Freddie 
during 2009 and this year are only 1 or 2 years old. We have no 
idea what the market will be like 3, 4 or 5 years from now, so 
we need to take concrete steps right now to reduce the ongoing 
financial risk that Fannie and Freddie pose to the American 
taxpayer.
    One of these steps is to more rapidly increase the wind-
down of these entities' retained portfolio. Fannie and 
Freddie's combined portfolio is $1.6 trillion. With the current 
market demand for GSEs' MBSs, there is absolutely no plausible 
reason they have to be this size. If they are so large, there 
is a significant amount of interest rate risk that continuously 
has to be hedged. As interest rates sometimes rise in the 
future, the hedging of these assets will get even more 
complicated and volatile and harder to manage. So with the 
current market situation and the appetite for GSEs' MBSs, we 
should be requiring the entities right now to reduce their 
portfolio size and do it soon to reduce the risk before 
interest rates inevitably will rise and when the conservator 
can actually make more money back for the taxpayer.
    One closing note to the Director, I thought it was a 
thoughtful decision that you made to shut down the PACE program 
during the summer. This was a scheme that was putting taxpayers 
at further risk while really only benefiting a few tax security 
firms that were offering these products. Now we must need to 
make more hard decisions, as you did then, to protect the 
taxpayers and wind down the entities' portfolios in a more 
responsible manner and finally abolish these two companies.
    Thank you.
    Chairman Kanjorski. Thank you, Mr. Garrett. Now we will 
hear from the chairman of the full committee, the gentleman 
from Massachusetts, Mr. Frank, for 5 minutes.
    The Chairman. Mr. Chairman, I regret the fact that the 
ranking member has decided to continue a political debate. But 
if he was going to do it, I wish it had been done more fully. 
Obviously, we have a problem here, because Fannie and Freddie 
bought loans that shouldn't have been made in the first place. 
The point though is that beginning in the period that the 
gentleman from New Jersey alluded to in part, members of this 
committee, led by the gentleman from North Carolina, Mr. 
Miller, and the gentleman from North Carolina, Mr. Watt, tried 
to outlaw those loans. Congress had, in fact, previously asked 
the Federal Reserve to do that. They hadn't done it.
    So in 2007, which was the first year in which we were in 
the majority, we did pass a bill in that year to prevent the 
kind of predatory loans from being made that Fannie and Freddie 
were buying. And here is what the gentleman from New Jersey, 
Mr. Garrett, had to say in the committee vote on that bill to 
ban predatory loans: ``The increasing availability and 
affordability of subprime mortgage credit is and has been an 
important factor leading to the increase in homeownership in 
recent years. This bill--the bill that restricts predatory 
lending--may well limit now the products available to subprime 
borrowers, particularly minority borrowers and will deprive 
many of those consumers from owning or maintaining a home. What 
we need to do is to ensure that it does absolutely nothing to 
homeownership, particularly among minority communities who have 
benefited from the innovations that have occurred in the 
marketplace.''
    That is a song of praise to predatory loans which we tried 
to stop, and had the loans not been made they could not have 
been bought.
    In fact, the gentleman was also incorrect when he said in 
2004 and 2005, when Republicans were trying to restrain Fannie 
Mae and Freddie Mac, some of us were on the other side. No, 
exactly the opposite is the case. In 2003, I said I didn't 
think Fannie Mae and Freddie Mac were in trouble. In 2004, when 
President Bush ordered them to go beyond 50 percent in the 
number of loans that they bought from people below median 
income, the kind of loans the gentleman from New Jersey was 
defending when we tried to outlaw them, I changed my opinion. I 
thought this was dangerous.
    In 2005, Michael Oxley, who was the Republican chairman of 
the committee, put a bill through this committee to restrain 
Fannie Mae and Freddie Mac. I actually voted for it in 
committee. A couple of my Republican colleagues voted against 
it. I later found problems with an unrelated aspect of housing. 
But the fact is that Mr. Oxley passed a bill through the House 
which he thought would restrain Fannie Mae and Freddie Mac. And 
the Republicans in the Senate and the Bush Administration and 
some in this committee didn't like the bill.
    So I have never heard a more inaccurate characterization 
than when the gentleman from New Jersey said, when Republicans 
were trying to get something through, we opposed it. No, the 
Republican majority of this committee and the Republican 
majority of this House, the gentleman from Texas, Mr. 
Neugebauer, supported it. The gentleman from Alabama, Mr. 
Bachus, supported it. They put through the bill. We didn't stop 
them. They had a lot of cooperation. The gentleman from New 
Jersey didn't like the bill. But the argument that the 
Democrats stopped it is just absolutely the opposite of the 
truth in 2004 and 2005. That broke down.
    As Secretary of the Treasury Paulson points out in his 
book, he became Secretary of the Treasury in 2006. Some in the 
Bush Administration had given up on trying to reform Fannie and 
Freddie politically. He said, no, he wanted to work with us. He 
approached me. And as he says in the book, we worked together. 
And when in the year 2006 the majority switched and 2007 came, 
this majority passed a tougher Fannie and Freddie regulatory 
bill in 2007 than the Republicans had passed in 2005. Things 
had moved beyond that. And then in 2008, when the Senate caught 
up to us, which they sometimes do, Secretary Paulson put them 
in a conservatorship.
    So yes, we have changed Fannie and Freddie. The Fannie and 
Freddie that have existed since Hank Paulson used the 
authority, a Democratic authority gave him at his request, to 
put them into conservatorship has been very different. And yes, 
the PACE loans have been a source of controversy, and many 
people--the Governor of California, the Republican Governor of 
California, the Democratic attorney general from California are 
suing Fannie and Freddie because they are being too tough. Joe 
Nocera of The New York Times had a column criticizing Fannie 
and Freddie because they are insisting on too high a level of 
credit score before they give loans. The fact is undeniable. 
Fannie and Freddie, once they were put into conservatorship, 
are very different, and that is why I say there is no urgency. 
There is no urgency because the pattern of abuse that they had 
been engaged in has changed.
    It is also the case that over the objection of the 
gentleman from New Jersey and others, we outlawed finally in 
2010, the financial reform bill, the kind of predatory loans 
that were getting people in trouble, which the gentleman from 
New Jersey was so fond of and a few others on his side. And The 
Wall Street Journal, when we did finally pass the bill in the 
House to restrict subprime predatory loans, calls it a 
Sarbanes-Oxley for housing. And Sarbanes-Oxley is of course as 
nasty a set of words as you can get from The Wall Street 
Journal.
    So let's get back to where we are. Fannie and Freddie are 
behaving differently and are causing far less problems, thanks 
to the action of the Democratic majority in Congress that gave 
the Republican Administration the power to do conservatorship. 
There was bipartisanship there and let's continue it.
    Chairman Kanjorski. Thank you, Mr. Frank. And now we will 
hear from the gentleman from Alabama, Mr. Bachus.
    Mr. Garrett. I think we want to yield first to Mr. 
Neugebauer.
    Chairman Kanjorski. Okay. We have a passover here to Mr. 
Neugebauer for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. And I will yield a 
few minutes to the distinguished ranking member.
    Mr. Garrett. If the gentleman will just yield 10 seconds 
for me to respond to the chairman. It is odd that I am now put 
in the position, as I often am, to actually be the member to 
defend minority interests. And that is exactly what that quote 
was doing, as you said, quoting from me in 2004 and 2005. I was 
defending the rights of minorities and the minority housing 
interests.
    I would like to enter into the record a letter of June 28, 
2004, signed by 70 Republicans addressing that issue, signed by 
70 Democrats, written to President George W. Bush which would 
have weakened those same sort of regulations that the chairman 
was talking about. Those regulations would have weakened the 
affordable housing standards that the chairman was talking 
about, that they were trying to do at that period of time. Any 
objection?
    Chairman Kanjorski. Without objection, it is so ordered. 
Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Two years and $148 
billion later, we still have Freddie and Fannie basically 
operating like they were before, maybe with a little bit better 
underwriting and that is a good thing. But the bottom line is 
that the taxpayers are still on the hook for these mortgages 
that are being originated today. And quite honestly, one of the 
problems with that is that as long as we continue with Freddie 
and Fannie operating where they are the primary guaranteeing 
these single family mortgages--which, by the way, accounts for 
about 75 percent of the losses that they have sustained, this 
particular book of business--we really are not going to see any 
private activity in the mortgage market at all. And so I think 
what many of us feel like is 2 years, it is time to begin to do 
a model to wind this activity down, to get the taxpayers off 
the hook, and to move in the direction that we will be able to 
encourage private activity in the mortgage market. But quite 
honestly, as long as Freddie and Fannie are the majority of the 
originations and the taxpayers pick up the tab, there is really 
no incentive for us to do that.
    And Mr. Chairman and ranking member, I think it is time for 
this committee and this Congress to get the taxpayers off the 
hook and to get a robust, sustainable mortgage market that 
doesn't depend on the taxpayers to bail them out.
    Chairman Kanjorski. Thank you very much, Mr. Neugebauer. 
Now we will hear for 3 minutes from the gentleman from Alabama, 
Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, I say to 
you and to Chairman Frank, I think it is time for President 
Obama to quit blaming President Bush for all the problems that 
are confronting us today. And I really think it is time that 
Chairman Frank, for you and the Democrats, to quit saying that 
some Republicans went along with you in watering down these 
affordable housing and underwriting standards.
    The American people aren't concerned with the history of 
how this happened. They are concerned with taking action now to 
see that it doesn't happen again. And for 2 years now, Fannie 
and Freddie have been controlled by the Federal Government. 
They own 79.9 percent of those corporations. The only reason 
they don't own 80 percent is, if they owned 80 percent, or 0.1 
of 1 percent more, they would have to be put on the books of 
the Federal Government. So they are just 0.1 of 1 percent from 
there.
    We have released detailed proposals on what we want to do 
with Fannie and Freddie, and that is put them in receivership. 
They shouldn't be in conservatorship. No other corporation 
would be. They are failed corporations. We don't need to--they 
are not ``too-big-to-fail.'' There ought to be an orderly wind-
down. They ought to be in receivership. That would solve a lot 
of the uncertainty. The mortgage bankers have urged the 
Administration to resolve that uncertainty, and the housing 
market needs it.
    We, in the Dodd-Frank bill, pushed for something very 
reasonable and that was for downpayments for loans. That is not 
a very outrageous proposal, that simply Fannie and Freddie quit 
approving or buying mortgages without a downpayment and without 
good credit history. Not only did the majority party reject our 
attempts to simply say in Dodd-Frank that you have to have a 
downpayment and you have to have good credit history, they went 
beyond that and the Administration and Fannie and Freddie have 
actually now started this Affordable Advantage program, 
mortgage program, that actually doesn't require a downpayment 
and you don't have to have a good credit history. So we are 
laying the seeds for the next bubble. We are laying the seeds 
for the next failure.
    Assistant Secretary, with all respect, you have really done 
nothing but plan to do things. There are no proposals on the 
table. You have done nothing. You seem to be content in the 
Administration with doing nothing except having progress 
hearings. There has not been any progress. There have been 
planning sessions, but there has been no action taken. And you 
have 10 percent unemployment, you have 30 percent home price 
depreciation, and you have these bailouts. What probably 
bothers me worse than anything--and I think bothers the 
American people--is that we continue to make guarantees 
presently that the taxpayers will have to meet in the future, 
and it is time that we quit the slow walking and we started 
doing things. This should be a legislative hearing, not another 
planning session.
    I would ask permission that my full statement be included 
in the record.
    Chairman Kanjorski. The gentleman's full statement will be 
included in the record. The gentleman from California, Mr. 
Sherman, is recognized for 3 minutes.
    Mr. Sherman. Thank you, Mr. Chairman. Three points. First, 
we need to stabilize home prices and make sure they are stable. 
If we see another precipitous drop in home prices, even in some 
key markets, that could create a double-dip recession. The key 
to that is extending the $729,750 limit in the roughly one 
dozen most expensive housing markets in the country. If we 
allow this to expire at the end of the year, it will be 
impossible to finance homes in most parts of Los Angeles and 
certain other major cities. And even in areas where homes sell 
for less, if in the middle-class neighborhoods, the price drops 
precipitously, then in the working-class neighborhoods prices 
will drop precipitously as well and we will see a double-dip 
recession. I hope that we get even more than the 74 cosponsors 
we have for H.R. 2483, which I introduced along with Gary 
Miller, a fine Republican Member from California.
    Second, I want to commend Mr. DeMarco for his agency's 
efforts against these Wall Street transfer fees. These 
provisions in deeds say that every time the property is 
transferred, somebody on Wall Street gets 1 percent of the 
gross purchase price. That undercuts the security of the 
lender; it disadvantages the home buyer; it complicates the 
transaction; and it lowers comps for the entire neighborhood, 
thus impairing the value of the substantial investment that the 
Federal Government has in home prices nationwide.
    Finally, to set the record straight, I think the chairman 
was eloquent in talking about H.R. 1461, which we passed in 
2005. But the former chairman of this committee might have been 
even more eloquent in his article, which I would like to put in 
the record without objection--
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Sherman. --of September 9th in the Financial Times. He 
was quoted as describing that bill, which we passed in May 
2005, which would have prevented this bubble from occurring and 
what Chairman Oxley said, All the hand wringing and bed wetting 
is going on without remembering that the House stepped up. What 
did we get from the Bush White House? We got a one-finger 
salute. Mr. Oxley did not specify which finger. But he did make 
it clear that it was the Republican opposition in the Senate 
and the White House that prevented us from nipping this crisis 
in the bud by stopping it in 2005. And had we done so, in the 
opinion of Chairman Oxley and I believe Chairman Frank as well, 
we would be in much better shape.
    The Chairman. Would the gentleman yield?
    Mr. Sherman. I will yield.
    The Chairman. The chairman did make it clear that it was 
not a thumbs up. He didn't say which finger it was, but he 
didn't say which finger it wasn't.
    Mr. Sherman. It was clearly a finger, not a thumb. I yield 
back.
    Chairman Kanjorski. The gentleman's time has expired. The 
Chair now recognizes the gentlelady from Illinois, Mrs. 
Biggert, for 2 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. Simply put, where is 
the plan? When will this Administration or Congress wind down 
and put an end to these what we would call Frankenstein-like 
mortgage giants Fannie and Freddie? Fannie and Freddie have 
edged out the private sector over a period of years. In 
September 2008, these GSEs entered into conservatorship, 
explicitly backed by the taxpayers. The GSEs have received over 
$150 billion in taxpayer-backed funds and are a significant 
taxpayer liability upwards of $6 trillion. According to the 
Wall Street Journal, the GSEs were twice as leveraged as Bear 
Stearns. In addition and aside from the regulator, the FHFA, 
which runs them, Fannie and Freddie have no independent 
watchdog, no Inspector General reviewing their activities and 
the many questionable actions of the GSEs that are directed by 
FHFA.
    The Senate leadership should without further delay schedule 
a vote on approving the nomination of Steve Lennox to be the 
FHFA Inspector General. For the GSEs, we need transparency and 
accountability to end the bailouts and have reform. We have 
needed this for a long time. The questions remain, Why were 
there no substantive provisions to address the GSEs included in 
the Dodd-Frank Act? When will the GSEs be addressed? What is 
the plan?
    I look forward to hearing from the witnesses. I yield back.
    Chairman Kanjorski. I thank the gentlelady from Illinois. 
And now, we will hear from the gentleman from North Carolina, 
Mr. Miller, for 2 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. I 
agree we need to think about a plan. We have to reinvent our 
mortgage lending system. And since there is something like $12 
trillion to $14 trillion in outstanding mortgage debt right 
now, that is not a small matter. But it would be very helpful 
in knowing how to fix what went wrong to figure out what it was 
that went wrong. It is particularly hard to take Republicans 
complaining about Democrats trying to place blame since all I 
have heard from Republicans for 2 years is how this was somehow 
the Democrats' fault. We had a financial crisis that happened 7 
years, 8 months into a Republican Administration because of 
mortgages made during 2004 to 2006 when the Republicans were 
also in the majority in Congress. And I know that the 
Republican ministry of information has hit upon Fannie and 
Freddie as the culprits of all this. But when Dick Fuld sat at 
that seat in the Lehman Brothers bankruptcy--it appears to be 
what most immediately precipitated the crisis--I asked him, 
after having heard several Republicans somehow work Freddie and 
Fannie into the conversation, I asked him, ``How in the world 
did Fannie and Freddie cause Lehman Brothers to go bankrupt?'' 
And the answer of course was he could not come up with any role 
that Fannie and Freddie played at all. In fact, Fannie and 
Freddie were losing market shares throughout that period to 
private label securitizers, and investment banks in New York, 
and all Republican criticisms of Fannie and Freddie were 
parroting all the criticisms of their competitors who were not 
looking to have a more honest mortgage lending market. They 
were looking to make more money than they were already making 
and they were making more money than God.
    Thank you.
    Chairman Kanjorski. Thank you, Mr. Miller. We have two 
reservations, but I suspect that neither Mr. Royce nor Mr. 
Hensarling will be here, is that correct? Okay.
    Mr. Bachus. How much time do we have remaining on our side?
    Chairman Kanjorski. You have 4 minutes.
    Mr. Bachus. I would like to claim that time.
    Chairman Kanjorski. The gentleman from Alabama wants to 
claim 4 minutes, and we think he should be allowed to claim the 
4 minutes, so we will recognize him.
    Mr. Bachus. Thank you. I appreciate that.
    Secretary Barr--and this is not a question, but I note that 
you say here, ``Private gains will no longer be subsidized by 
private losses.'' And that is what has happened in the past. I 
think you have acknowledged that. But if the government is 
going to make guarantees, if the government is going to buy 
mortgages and those mortgages fail, then there will be public 
losses. So I know your statement that you released last night 
says that. It also says, ``capital and underwriting standards 
will be appropriate.'' And they certainly need to be. I think 
that is a given. I think we would 100 percent agree with that. 
But I am disturbed that we have programs like Affordable 
Advantage along with the State financing authority, but there 
is no downpayment required and a good credit history is not 
required. In fact, people are getting those without any 
downpayments.
    I was on CNBC this morning and Wilbur Ross, who was a guest 
said, ``When you have no downpayment because of your closing 
costs and Realtor fees, you start 6 percent underwater.'' You 
can't sell it, can't turn around and sell that house for the 
same amount. So if housing prices go down--and who knows 
whether they will or not, you are actually--in my mind, you are 
actually creating more mortgages that taxpayers may one day 
have to pick up. And I think that is something I would like to 
hear. You say excessive risk-taking will be restrained. I don't 
see that happening right now. When Republicans--and I think the 
Administration resisted our attempts to say that if you have 
mortgages you are going to have to have a downpayment, you need 
good credit history, at least if the government is going to 
stand behind them.
    And finally, I would say, there has been a debate. I 
noticed that some of the statements out of the Administration 
are whether or not there ought to be an explicit government 
guarantee or an implied government guarantee, whether it needs 
to be implied or explicit. I will say to you there is another 
option, and that is that taxpayers shouldn't guarantee any of 
it. I think the forgotten man here--Roosevelt used the term 
forgotten man--is the taxpayer. I think we are all forgetting 
about the taxpayer. As long as Fannie Mae and Freddie Mac exist 
as government agencies, you are going to have the risk of 
taxpayer subsidies, and you are going to be subsidizing those 
who get those mortgages or those mortgage guarantees by people 
who rent, by people who don't have a mortgage, or by people who 
have a conventional mortgage that is not backed by the 
government. And I think it is time for the government to get 
out of that business. As long as the government is in the 
business, they subsidize the business, that crowds out private 
investment and private capital. We have basically eliminated 
the private mortgage market by having a government guarantee. 
The government can--because of that, knowing the taxpayers 
stand behind it, the cost of capital for the government will be 
less. And we have seen that Fannie and Freddie have been 
operated on many occasions as an extension of some social or 
public policy to allow people to own homes at less than what 
the true cost would be.
    And finally, I would say, who bails out the government? If 
the government has to bail out Fannie and Freddie, who bails 
out the government? We just can't continue to be in the rescue 
business or the lifeguard business. That is just not 
something--I think the people are speaking out. In every 
election, they are saying, get the government out of my pocket.
    Chairman Kanjorski. The gentleman's time has expired.
    Mr. Bachus. Thank you.
    Chairman Kanjorski. Now we have completed everything but 
one remaining minute on our side. I recognize the gentleman 
from Georgia for 1 minute.
    Mr. Scott. I will take that minute, sir. Joe Friday said, 
``Just the facts, ma'am. Just the facts.'' You remember him? 
The great Joe Friday, Dragnet series. The facts are not any 
questions, so we can get this behind us. It was Hank Paulson, 
Secretary of the Treasury, and he was not President Barack 
Obama's Secretary of the Treasury. He was George Bush's 
Secretary of the Treasury who came before this committee and 
laid out the dire consequences if we did not act. So when you 
measure this deal, let's be honest. There is no--you have to 
figure out how you got into a problem before you can figure out 
how you got out. It is not a matter of calling names. It is a 
fact, this did not happen under President Barack Obama. The guy 
was out as a State Senator trying to become President. This 
happened under Paulson's watch who was the Treasury Secretary 
for President Bush.
    Fact, close. Now, there is still a need out here for help 
and assistance with middle- and moderate-income people to be 
able to get their homes. Mr. Chairman, may I just add this one 
thing, I hope that when we pay attention here that we will to 
these community banks. Our community banks own 85 percent of 
the lenders who own stock in the GSEs. So when you start 
talking about dismantling and doing all of that, it isn't just 
as simple as that. This is a complicated area, and the need is 
still there.
    Chairman Kanjorski. The gentleman's time has expired. All 
time has expired.
    We will now hear from the panel of witnesses that we have, 
and we want to thank you for appearing before the subcommittee 
today. Without objection, your written statements will be made 
a part of the record, and you will each be recognized for a 5-
minute summary of your testimony. I hope you will hold to that 
5 minutes better than members of the committee did.
    First, we have the Honorable Michael S. Barr, Assistant 
Secretary for Financial Institutions, United States Department 
of the Treasury. Assistant Secretary Barr.

STATEMENT OF THE HONORABLE MICHAEL S. BARR, ASSISTANT SECRETARY 
  FOR FINANCIAL INSTITUTIONS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Barr. Thank you, Mr. Chairman. Ranking Member Garrett, 
Chairman Frank, Ranking Member Bachus, and members of the 
subcommittee, thank you for the opportunity to testify today 
about housing finance reform and the progress made since the 
placement of Fannie Mae and Freddie Mac into conservatorship in 
September of 2008. Before I talk about the conservatorship, it 
is important to remember how we got here.
    For too many years, the GSEs were allowed to operate under 
an unacceptable ``heads, I win; tails, you lose'' system. They 
enjoyed the benefits of the perception of government support. 
They had inadequate oversight and inadequate capital. The 
market did not instill appropriate discipline because the 
market assumed they had a government backstop.
    The events that led to conservatorship were symptomatic of 
the range of regulatory management and oversight failures 
throughout our financial system. As the private, unregulated 
mortgage market grew and market players began to loosen 
mortgage credit standards to pursue ever-riskier business in 
the booming market, the GSEs, which had initially stuck to 
their core business of guaranteeing well-underwritten loans, 
saw their market shares fall precipitously. Driven by profit 
motives in an effort to regain that market share, the GSEs 
purchased riskier mortgages without holding adequate capital or 
having appropriate risk management. These moves left them 
dangerously exposed.
    As a result of the substantial deterioration in the housing 
market, and Fannie and Freddie's inability to raise necessary 
new capital, FHFA placed the GSEs into conservatorship under 
the authority granted to them by Congress under the bipartisan 
Housing and Economic Recovery Act. Since September 2008, FHFA 
has acted carefully to help ensure that Fannie Mae and Freddie 
Mac's assets are conserved while continuing to play a critical 
role in making mortgage credit available. By facilitating the 
flow of credit for responsibly underwritten mortgages, the GSEs 
have served as a source of stability for the housing market and 
helped to enable millions of Americans to continue to have the 
ability to take out a new mortgage or to refinance. The new 
loans being guaranteed by the GSEs are not contributing in any 
material way to the losses the GSEs now face. Quite the 
contrary. In fact, it is the GSEs' old book of loans, those 
acquired before conservatorship, which are the overwhelming 
source of losses. The credit quality and risk profile of the 
post-conservatorship book of business has dramatically improved 
compared to pre-conservatorship levels, and less than 1 percent 
of losses have come from loans originated in 2009 and 2010.
    Now some have suggested that taking time to get reform 
right will expose taxpayers to even greater losses. That is 
simply not the case. The losses that Fannie Mae and Freddie Mac 
face are the result of mistakes made in the years leading up to 
the crisis, not those made today. The country is unfortunately 
stuck with the consequences of the poor choices the GSEs made 
prior to conservatorship.
    The GSEs today are working hard to minimize losses through 
loss mitigation, and the GSEs are continuing to promote overall 
stability in the housing finance system, which is the most 
important source of loss mitigation they can provide. While we 
continue to bring stability in the mortgage market, we are also 
hard at work on the business of reform. It is not tenable to 
leave in place the system that we have today.
    The Administration is committed to delivering a 
comprehensive proposal to Congress, as called for under the 
Dodd-Frank Act by January 2011. Our proposal will call for a 
fundamental change. Congress began the process of reform with 
the passage of HERA in 2008 and FHFA continued the path when 
they placed Fannie Mae and Freddie Mac into conservatorship. 
The next stage of reform came with the passage of the Dodd-
Frank Act, which includes fundamental reform of mortgage market 
rules, including important ability-to-pay requirements and risk 
retention standards for mortgages. This Act will help to ensure 
that homeowners are not sold products that they cannot afford 
and that originators retain ``skin in the game'' when they 
originate risky mortgages.
    As we move forward together towards responsible reform of 
our Nation's housing finance system, we are committed to 
ensuring that the transition to a new system occurs in an 
orderly fashion that is minimally disruptive to the market. In 
designing a new system for housing finance, we must ensure that 
the system is more stable, consumers are protected, sustainable 
credit is widely accessible, and low- and moderate-income 
families have access to affordable housing.
    After reform, the GSEs will not exist in the same form as 
they did in the past: private gains will no longer be 
subsidized by public losses; capital and underwriting standards 
will be appropriate; consumer protection will be strengthened; 
and excessive risk-taking will be restrained.
    Thank you.
    [The prepared statement of Assistant Secretary Barr can be 
found on page 49 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Barr. We will 
now hear from Dr. Edward J. DeMarco, Acting Director of the 
Federal Housing Finance Agency. Mr. DeMarco?

   STATEMENT OF EDWARD J. DeMARCO, ACTING DIRECTOR, FEDERAL 
                 HOUSING FINANCE AGENCY (FHFA)

    Mr. DeMarco. Thank you, Mr. Chairman. Chairman Kanjorski, 
Ranking Member Bachus, and members of the subcommittee, thank 
you for inviting me here today. My written testimony covers 
four topics: the status of the conservatorships; the current 
condition of the Enterprises; projected losses by the 
Enterprises; and considerations for the future of the housing 
finance system. I will briefly summarize several key points 
from my written statement.
    The Enterprises have been operating in conservatorships for 
2 years now, since September 2008. A principal focus of the 
conservatorships is to maintain the Enterprises' secondary 
mortgage market role until legislation produces a resolution of 
their future. FHFA's oversight is also directed toward 
minimizing losses, limiting risk exposure, and ensuring the 
Enterprises price their services to adequately address their 
costs and risk. FHFA recognizes that losses by the Enterprises 
translate into costs for the taxpayers, and we are doing 
everything in our power to minimize future losses.
    Examples of these loss mitigation activities include loan 
modifications both through the Administration's HAMP program 
and through each Enterprise's proprietary modification 
programs, repayment plans and forbearance plans, and short 
sales and deeds in lieu of foreclosure. The foreclosure 
alternatives pursued by the Enterprises not only serve the 
conservatorship goal of minimizing losses but also fulfill FHFA 
statutory mandate in EESA to maximize assistance to homeowners 
while minimizing losses to the Enterprises.
    FHFA reports every month to Congress on the full range of 
Enterprise foreclosure prevention activities through our 
Federal Property Manager's report. Since the first full quarter 
of the conservatorship, the Enterprises have completed more 
than 1 million foreclosure alternative transactions with 
borrowers.
    As conservator, FHFA has also been clear that the 
Enterprises should actively enforce lender compliance with 
their contractual obligations, which includes pursuing 
repurchases from those institutions whose loans did not meet 
the Enterprises' underwriting and eligibility guidelines.
    Separately, in July, FHFA issued 64 subpoenas as part of an 
effort to determine whether other firms have legal 
responsibility for some of the Enterprises' losses on private 
label mortgage-backed securities which to date have been borne 
by the Enterprises and taxpayers. In February, I communicated 
to Congress my position that in conservatorship, the 
Enterprises will be limited to continuing their existing core 
business activities in taking actions necessary to advance the 
goals of conservatorship. We continue on that course today.
    When I appeared before you in late May, I pledged that FHFA 
would expand its reporting on the Enterprises in 
conservatorship. In fulfillment of that pledge, last month FHFA 
published the first of what will be a quarterly conservator's 
report on the Enterprises' financial condition. Two of the 
findings presented in the report are: At the end of 2007, the 
Enterprises had $71 billion of combined capital. From the end 
of 2007 through the second quarter of 2010, charges against 
capital totaled $226 billion. The largest contributor to these 
charges against capital has been the single family credit 
guarantee segment, accounting for $166 billion, or 73 percent 
of combined capital reductions over that period. During 
conservatorship, the Enterprises have made significant progress 
in improving the quality of new mortgages purchased. New 
Enterprise mortgage guarantees have been for borrowers with 
higher credit scores and loans with lower loan-to-value ratios, 
two factors that affect expected default rates.
    Also when I appeared here in May, I was asked how much more 
money the Enterprises may draw under the preferred stock 
purchase agreements. I said that even across most severe stress 
scenarios modeled by the Enterprises, combined Treasury draws 
appear to be less than $400 billion. Based on the analysis 
available to me, that remains my view today. But to provide 
Congress and the public with a more defined sense of the 
Enterprises' potential future Treasury draws, FHFA is working 
with the Enterprises to develop forward-looking financial 
projections for public release. Similar to the Supervisory 
Capital Assessment Program (SCAP) conducted by the Federal 
banking agencies last year, the results of this exercise will 
not be forecasts or expected outcomes but rather modeled 
projections in response to what-if exercises that utilize 
various scenarios.
    As we prepare for the future, legislation is needed to 
restructure and strengthen our housing finance system and 
resolve the conservatorships. Ensuring an orderly transition 
will be essential. The role of the government in housing 
finance going forward is a key decision point.
    In my written statement, I offer some issues for 
consideration regarding government guarantees. We look forward 
to working with the Administration and Congress in this 
endeavor.
    [The prepared statement of Acting Director DeMarco can be 
found on page 56 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. DeMarco. And now we will 
move on to questioning by the committee members. Let me take 
the first crack at it. Not that I apologize, but I think that 
in some of the opening statements, we have had a little bit of 
revisionism of history, if we might. And that tends to confuse 
the problem. Let me try to move with what I see the problem as 
being.
    We are trying to get back to an active, responsible real 
estate market and mortgage market in this country. In order to 
accomplish that at the level that the country needs, it seems 
to me we need a methodology of having a secondary market that 
brings in and attracts more capital to the American market, not 
maybe to the exact level of the pre-crisis state but certainly 
a great deal higher than today.
    Have either of you given a great deal of thought to whether 
or not just having two institutions like Fannie and Freddie, 
that obviously didn't compete very well to get the best price 
and both seemed to rely on the same conditions and failed in 
the same way? What if we broke up the mortgage market into 10 
GSEs and carry it a little further and say, we offer the 
license to be purchased as we do airtime in the communications 
field and let the private sector get in? But if we had 10 GSEs, 
if any one of them failed, we would be able to allow the 
bankruptcy process to weed that out and clean it out and 
continue on. We wouldn't insulate, however, against deflation. 
If across-the-board deflation occurs, I don't know how we can 
create any situation that is going to take that into 
consideration and protect against it. But what are your 
thoughts? And instead of having just the two GSEs that have 
handled this problem, that we spread it over the 10 or even 15, 
if you will. And is there a given number that makes it so 
inefficient that it is not worth doing it in those small 
proportions?
    Mr. Barr?
    Mr. Barr. Mr. Chairman, I think that the question of how 
many entities are involved in the system of housing finance and 
the secondary market is only one set of factors in the 
development of a new housing finance system. And I think 
bringing it back to the fundamental level, what is the shape of 
that housing finance system, what do we want it to look like, 
how will it deliver widely available credit for sustainable 
mortgages, how will it deliver on financial stability goals, 
how will it deliver on affordability, I think those broader and 
deeper sets of questions come into play in a sense first. But 
the question of whether you want one entity or multiple 
entities; if you want multiple entities, how many to have 
relate to those broader sets of concerns. And as you are 
thinking about the numbers of entities in the system involve a 
number of tradeoffs and you have identified some of those, the 
question of what part of the system is inside the new housing 
finance system we have created and what part is out? How do we 
ensure a level playing field for different kinds of approaches 
to financial intermediation? How do we prevent races to the 
bottom in that sector? If we have multiple entities involved, 
does it deal with the basic question of correlation of risk in 
the system or just add to that? And I think those are the kinds 
of fundamental questions we are going to need to address in the 
reform plan.
    Chairman Kanjorski. When do you anticipate the Treasury's 
reform plan to be available so it can start to be considered? 
And I ask this honestly. Because I hear sometimes the beating 
of the chest up here on the Hill at a point that it is going to 
take time, but we ought to get some timeframe that we are 
looking at so we can inform the American people that this is 
not going to go on interminably but in fact we have some 
constraints on time. When do you anticipate that?
    Mr. Barr. As required under the Dodd-Frank Act, we will be 
submitting a plan no later than January of 2011. So that is the 
timeframe. I think it will give Congress the opportunity to 
take up legislation in earnest in the next year. And we would 
anticipate working very hard to get that done at that time.
    Chairman Kanjorski. What are your thoughts on this, Mr. 
DeMarco?
    Mr. DeMarco. Mr. Chairman, I would add two things to what 
Secretary Barr said. First, with regard to the system we had, 
we were limited to two because of the way the Enterprises were 
structured. That model envisioned that there would be only two 
companies. They were given a number of advantages not otherwise 
available in the marketplace, and so we did not have freedom of 
entry and exit. In terms of how many firms there might be in 
the future, if we are looking for a market model, I would think 
it is the market that should determine that, not a regulator or 
the government generally. So I would look for a market model in 
which there was licensing of firms to do certain things if they 
met certain requirements. But other than that, we should be 
having a model that lets the market determine that through 
entry and exit and that would help to spread and diversify 
risk.
    Chairman Kanjorski. Thank you very much. My time has 
obviously expired. We will now recognize the gentleman from 
Alabama, Mr. Bachus.
    Mr. Bachus. Thank you. And let me say this, the 
subcommittee chairman asked, ``How do we keep the housing 
market going?'' And I think that is what people are asking. I 
am not sure that ought to be the question. I think the question 
should be, should the government keep the housing market going? 
Is it up to the government through subsidies and guarantees to 
do that? Or is that the proper role of government?
    Secretary Barr, you have said the government is committed 
to ensuring that the GSEs have sufficient capital to perform 
under any guarantees issued now or in the future. So you 
obviously envisioned Fannie and Freddie continuing to make 
guarantees, I suppose. Is that correct?
    Mr. Barr. The basic goal of the provisions that the prior 
Administration put into place and that we have continued under 
the preferred stock purchase agreements is to ensure that the 
GSEs can meet their obligations now and into the future until 
such time as the Congress enacts reform. And when Congress 
enacts reform, the future state of the system will decide after 
that point, do we have guarantees, do we not have guarantees, 
do we have GSEs, do we not have GSEs. But in terms of 
obligations that are being issued today, absolutely, standing 
behind those is essential to market stability, to the continued 
ability of our housing finance system to function, and to not 
creating an environment of great instability that will harm 
taxpayers.
    Mr. Bachus. Let me ask this, and then I will ask Mr. 
DeMarco. This idea of the government guaranteeing--in the 
future, not the past but the future guarantees--you have said 
that--and this is an answer to some, particularly some on the 
other side, who have called for an explicit government 
guarantee for home mortgages is one option. You said, 
``Replacing the Enterprises' implicit guarantee with an 
explicit one does not resolve all the shortcomings and inherent 
conflicts in that model and it can produce its own problems.'' 
That was your statement. I read it on your Web site yesterday.
    Mr. DeMarco. Yes, sir.
    Mr. Bachus. What are some of the shortcomings with a 
government guarantee? And what are some of the possible 
consequences for taxpayers?
    Mr. DeMarco. I think, Congressman, that what I tried to 
articulate there was that while there are a number of industry 
representatives and others who have been advancing the cause of 
having explicit government guarantees backing a wide array of 
mortgages in the future housing finance system, my testimony 
says that I think that there are definitely some positives to 
that, but that some of the negatives have not been fully 
explored. So I have tried to identify several matters that I 
would think lawmakers would want to consider in determining 
whether and the extent to which to provide explicit government 
guarantees in the future housing finance system. And that goes 
to the ability and capacity of the government to be able to 
adequately price the risk that is there. It goes to the 
question of to the extent that there is government support for 
an activity that provides a subsidy, you get more of that 
activity. And that comes as an opportunity cost of funds not 
going elsewhere. It is a matter for lawmakers to weigh. And I 
believe that if the government is involved in providing 
guarantees on a broad portion of the mortgage market, that it 
seems likely--and past experience would suggest the government 
would want a say, to some degree, in how the mortgage market is 
working, pricing, what segments are being served, and how that 
gets done, and how that might affect the proper pricing of 
mortgage credit risk or challenges that would need to be 
considered in a model that is relying upon government 
guarantees.
    Mr. Bachus. Let me say, I read part of what you said, and I 
would agree with it. You said, ``The premise for an explicit 
guarantee is that the private markets are not able to price the 
risk of the mortgage default at reasonable levels. But we must 
ask--and I agree with you--whether the government can do a 
better job.'' I think the whole debate here is whether the 
private market or the government can do a better job. And I 
think most of my colleagues on this side say the private market 
can. You go on to say, ``If a government backstop is 
underpriced--in other words, if the government underprices the 
risk--taxpayers may eventually foot the bill again.'' And we--I 
know the minority party--at any and all costs wants to see that 
the taxpayers don't foot that bill.
    Mr. DeMarco. May I respond?
    One other thing to note here, though, is that it is for you 
all to decide what sort of multiplicity of guarantees there 
are. We still have, and I would expect would continue to have, 
the FHA program. That is a government guarantee program. It is 
one that is targeted. It is one that has certain transparencies 
about it.
    I am getting to the larger question of going to the full, 
what we know today as the conventional market, to what degree 
is the government going to get involved there? But there may 
well be a role, and it is for the public benefits of that to be 
weighed by lawmakers.
    Mr. Bachus. Okay, thank you.
    Chairman Kanjorski. Thank you very much.
    Now we will hear from the gentleman from California, Mr. 
Sherman.
    Mr. Sherman. First, as to conforming loan limits for the 
high-cost areas, the Federal Housing Finance Agency has 
determined that the loans originated since the temporary loan 
limit went into effect have consistently outperformed the 
smaller conforming loans, at least that is what I have been 
told, and have dramatically lower delinquency rates. One issue 
that comes up is will Congress, even if we do extend the 729, 
do it late in December?
    Mr. DeMarco, if Congress waits until the very end of the 
year to extend the current increased conforming loan limits, 
what do you think will be the impact of not doing it earlier? 
Will homes be able to open escrow in November and December 
without the borrower knowing whether he can get a conforming 
loan or she can get a conforming loan during that escrow 
period, and Congress perhaps not extending? How important is it 
for Congress to act expeditiously?
    Mr. DeMarco. Congressman, if you say, just to give this 
rough justice, there are 90 days from purchase to closing on a 
mortgage, then you would expect that for mortgages, for home 
purchases that begin in October, that certainty for both 
potential borrowers as well as lenders would be helpful in that 
regard.
    Mr. Sherman. So if we don't act before we adjourn for the 
election, or for October, then people won't be able to open an 
escrow in November because they don't know whether they can 
close in January?
    Mr. DeMarco. Congressman, ``won't be able to'' is a much 
higher hurdle. The jumbo market is in fact performing, and it 
is actually coming back. The spreads on mortgages above 729, 
relative to those below, has been coming down, and so there 
would be mortgage credit presumably available. So I wouldn't 
say--
    Mr. Sherman. I would hope you would go back and look at 
statistics. What I see in the Los Angeles area is, yes, the 
jumbo market is working well for the homes in Malibu. Anybody 
buying a home in Malibu has a banker on speed dial, probably 
the CEO.
    But for those homes selling for $600,000; $700,000; 
$800,000, 99 percent of them are FHA, Fannie or Freddie, and 
the idea that the private market could step in, I certainly 
don't see it.
    I look forward to working with you to see what the 
statistics are, not in the most expensive home markets, but 
places where the 417 level applies, to see whether and under 
what circumstances people can get loans in the $700,000 or 
$600,000 range.
    Let's move to these private resale fees. Last month, your 
agency proposed guidance for Fannie and Freddie and the Federal 
Home Loan Banks that they should not deal in mortgages on 
properties encumbered by these private transfer fees. I want to 
commend you for moving in that direction.
    We discussed these fees last time you appeared before this 
committee, and, as you know, they typically involve a 
circumstance where hidden in the documents is a statement that 
when the home buyer sells, 1 percent of the purchase price goes 
to a designee, usually an investor on Wall Street. In The New 
York Times expose, which I would like to add to the record 
without objection--
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Sherman. --dated September 11, 2010, it details a case 
where this fee is in a separate document that wasn't even 
included in the documents for signature at closing.
    Do you expect that this proposed guidance will become 
guidance, and do you expect it to become adhered to by the 
relevant lenders?
    Mr. DeMarco. I expect that we will finalize the guidance in 
some fashion, Congressman. It is currently in a public comment 
period, and we are looking forward to receiving public comment 
on this.
    We cast a wide net in this proposed guidance, and I think 
it is very important for us to take the time to get public 
comment on this and to consider it so that we make sure 
whatever we come out with in final form is fashioned 
appropriately.
    Mr. Sherman. I would hope you would take this as an 
additional public comment, especially as it affects the lender 
and the prudential standards applied--when I say the lender, 
the lender or guarantor of these loans.
    Mr. DeMarco. Yes, sir. Thank you.
    Chairman Kanjorski. The gentleman's time has expired.
    The gentleman from California, Mr. Royce, is recognized for 
5 minutes.
    Mr. Royce. Thank you, Mr. Chairman. I am going to ask Mr. 
DeMarco a question.
    Would you agree with this notion that the goals, at least 
in part, led the GSEs into the junk loan market?
    Mr. DeMarco. I believe that the Enterprises began acquiring 
subprime and Alt-A loans and lowered their own credit standards 
for three reasons, Congressman: they did it to make money; they 
did it so they would stem their growing loss of market share; 
and they did it because of housing goals.
    Mr. Royce. Okay, one of the three goals. And, certainly, 
for me at the time, in 2005, I remember discussions I had and 
we had with the Federal Reserve Chairman where he told us where 
these goals would lead and, in particular, with the fact that 
unless Congress allowed the regulators to deleverage the 
portfolios--over the years, we watched those portfolios grow to 
$1.5 trillion. We watched about $11 trillion, I think, in 
subprime loans go through securitization or end up in those 
portfolios, and the Federal Reserve actually became frantic.
    And their worry was we created kind of a political beast 
here that was half politics and half private. And it became the 
most influential lobby here, at least in Financial Services, on 
the Hill. It was very hard for Congressmen to stand up against 
it.
    President Clinton did. I remember one of the quotes he 
made. He said, ``I think the responsibility that the Democrats 
have may rest more in resisting any efforts by Republicans in 
the Congress, or by me when I was President, to put some 
standards and tighten up a little on Fannie Mae and Freddie 
Mac.''
    That was the fact. In the Senate, we had a good bill. In 
the House, we had the congressional bill. The congressional 
bill would have made the problem worse, and that is why it was 
opposed by economists and by the Treasury and by the Fed, 
because, frankly, it would not have allowed the regulators to 
step in and regulate and deleverage those huge portfolios.
    But here is the concern I have: Having watched in the past 
exactly what the Fed warned about, the systemic risk and how we 
were going to create this political beast that would eventually 
bring down the housing market and then, on top of it, the 
financial services sector, we are talking about reconstituting 
them. And at the same time, we have these further goals that 
your office has put out that will lead, at least economists who 
look at this tell us, it is going to lead to these new minimum 
downpayment standards--that there is going to be sort of again 
this road towards lower downpayments, at least that is one 
interpretation under this; that there is going to be a purchase 
of high LTV loans, junk loans, to meet those goals, 
potentially, again.
    My worry is, how do we--if we end up reconstituting this 
institution, how do we constrain it? Because I guarantee you, 
they are not regulated by market discipline. They become an 
instant monopoly because they knock their competition out of 
business because of the government backstop that they have 
behind them. And at the same time, with the way in which they 
influence Members of Congress, they basically dictated terms 
and said they will not be regulated by the regulators.
    So why would we go down this quasi-socialist road again of 
reconstituting these institutions? Couldn't we eventually phase 
back towards sort of a private market? I know it will take time 
to do. But wouldn't that be the wiser course, in your opinion, 
rather than the kind of involvement we have seen Congress put 
into this with the goals in 1992 with the act that Congress 
passed, with the leverage on trying to get to zero downpayment 
loans and all the rest of it; wouldn't we be smarter in the 
long term, rather than this boom-bust cycle in housing we seem 
to contribute to?
    Mr. DeMarco. Congressman, I think that there is widespread 
agreement that reconstituting the GSEs as they were would be a 
very bad idea, and I would agree that one of the quite possible 
outcomes, one of the options that is available to Congress, is 
one that is far more market-based.
    Mr. Royce. Thank you, Mr. DeMarco. I appreciate it.
    Chairman Kanjorski. The gentleman from Massachusetts, Mr. 
Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    First of all, I want to thank Mr. Barr and Mr. DeMarco for 
your willingness to come before the committee and help us with 
your work.
    Mr. Barr, you mentioned in your opening testimony that only 
1 percent of the losses that we are seeing are related to the 
post-conservatorship book of loans, and that, I assume, the 
rest is from the, as you call it, the old book of loans.
    Now, just before the break, the August break, I know, Mr. 
DeMarco, your office issued 64 subpoenas in connection with 
private label mortgage-backed securities that were sold to 
Fannie and Freddie.
    Mr. DeMarco. Yes, sir.
    Mr. Lynch. So I know that was just before the break, maybe 
mid-July, that you sent those subpoenas out. Can I ask you, 
where are we now? I know that there were some questions about 
the valuation of those securities, whether some 
misrepresentations were made. I know you asked for a lot of 
documents. I didn't go through all of the subpoenas, but I went 
through some of them.
    Where are we now with that whole process?
    Mr. DeMarco. Sir, the information we have requested is in 
the process of coming in, and we are initiating our process of 
reviewing those documents for the purposes of doing a financial 
review.
    The purpose here is to review the records, the mortgages 
underlying these securities, to make a determination as to 
whether there is a breach of warranty or some other 
misrepresentation that would suggest that the losses the 
Enterprises have incurred are the legal obligation of someone 
else. That process is going to take some time, Congressman, but 
we are hard at work at it now, and the records are beginning to 
come in.
    Mr. Lynch. Do you have a timeframe, Mr. DeMarco?
    Mr. DeMarco. I am afraid not, sir.
    Mr. Lynch. So it is open-ended?
    Mr. DeMarco. Not open-ended in terms of responding to the 
subpoenas, but the timeframe to go through all of these records 
and so forth is very hard to say.
    Mr. Lynch. Is there any opportunity that you might share 
with Congress, with this Committee on Financial Services, your 
progress or lack thereof?
    Mr. DeMarco. Congressman, I would be happy to try to find 
an appropriate method to periodically update the committee on 
the progress we are making here, recognizing sort of some of 
the privacy and legal sensibilities that need to be respected. 
I would be pleased to find a way of providing periodic updates.
    Mr. Lynch. I would really like that. I think that, just as 
some of these mortgage-backed securities were foisted on 
others, I think that Fannie and Freddie for various reasons 
bought into these as well and that misrepresentation resulted 
in major losses for the taxpayer.
    Let me ask you another angle on this. While you are going 
after some of these private label issuers and trying to hold 
them accountable for selling bad products, mortgage-backed 
securities to Fannie and Freddie, Treasury and the Fed are 
pumping in at last count $1.36 trillion into some of these same 
companies by purchasing their securities.
    Mr. DeMarco. Congressman, I would correct that just a bit. 
Two things, just to clarify.
    First, we are not yet pursuing anyone. We are just 
gathering information. We have made no determination that there 
have been misrepresentations or breaches of warranty. We are 
gathering information through the subpoenas to see if that is 
in fact the case.
    Second, with respect to what the Federal Reserve and the 
Treasury have been purchasing, their purchases of mortgage-
backed securities are those securities that have been issued by 
Fannie Mae, Freddie Mac, and Ginnie Mae. They are not--
    Mr. Lynch. I realize that. But I am just looking at the 
numbers here, what we are looking at as losses, the valuations 
on these things since they were sold to Fannie and Freddie. 
They just went in the toilet in a very brief period of time. 
So, at one point, they were AAA, and then the next thing we 
know, they are worth nothing.
    So I am just looking at the losses you have here, one 
quarter, $266 billion. It is just a whole litany of losses 
here. You are hemorrhaging value. So I am just making a 
deduction that we have made everywhere else in the industry 
with their mortgage-backed securities that there were 
misrepresentations made here to some degree. Whether it is 
malfeasance or nonfeasance, I am not going to go there.
    Mr. DeMarco. We are going to find out. I think this is 
important for the American taxpayer. The American taxpayer is 
now backing Fannie and Freddie so that the mortgage market in 
this country can continue. The losses are extraordinary, and I 
think that we owe it to the American taxpayer to find out as 
part of our responsibility to conserve assets, to see where 
these losses are coming from and whether they are the legal 
responsibility of others, and we will do that.
    Mr. Lynch. You sure do.
    In closing, Mr. Chairman, all I am saying is that it is 
counterintuitive, that we are going to hold them accountable, 
but we are also going to pump them full of money to try to prop 
up the values here. That is all I am saying.
    I yield back. Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman from New Jersey, Mr. 
Garrett.
    Mr. Garrett. Thank you.
    So, Director, my colleague Mr. Campbell and I sent a letter 
to you, actually with 40 other Members of Congress, back during 
the summer, and it came about actually because it was on media 
reports, as a lot of these things are driven as far as coming 
out with information, that mortgage bonds had reached an all-
time high price of 106.3 cents on the dollar, which, as an 
aside, is, if you think about it, really an incredible number 
for purchase of a bond and for an investment purpose. 
Nonetheless, that is where it was or is.
    The media reports indicated that Fannie and Freddie didn't 
want to sell a larger percentage of their securities, even 
though they could, and they could do so and obviously get a 
good value for them, a great value for them.
    It also said that the GSEs didn't want to sell more because 
it would more rapidly shrink their portfolios, and then, with a 
smaller portfolio, it would be more difficult to eventually 
free those entities from conservatorship and even then 
potentially put them back the way they were and loose on the 
capital markets.
    So you sent a formal response, and honestly, I just got it 
late yesterday for the first time, and you say, ``Enterprises 
hedge their portfolios so gains in asset prices may be offset 
by losses on derivatives.'' That is true.
    If that is the case, then couldn't you actually lose less 
money or no money if you sold off those assets now, because 
then they wouldn't have to be hedged in any other way; they 
would be off your books?
    In your letter, then, you go on to talk about how you are 
living up to your commitment to their current agreements with 
Treasury, and everything is on schedule.
    So we have had discussions and what have you, and every 
time you come here to testify, you state that you are trying to 
fulfill your mission, and I know you are, of maintaining values 
of the entities and reducing losses to the taxpayers.
    But if you are really trying to do that, preserve that 
value and get money back to the taxpayers, shouldn't we be 
selling them today when they are at these prices and not have 
to deal with the hedging of the risk down the road a year or 
two, or whenever that may be, when inflation kicks in and then 
that problem of hedging that would be just be astronomically 
harder than it is today?
    Mr. DeMarco. This is a challenge question, Congressman, and 
I would point out that there is more to this than just the 
hedging. So the Enterprises are funding long-term assets by 
issuing long-term liabilities. If we start rapidly shrinking 
the assets out of the balance sheet, I am left with long-term 
liabilities that need to be funding something. So it has more 
to do than just hedging.
    I would also say that they are substantial holders--
    Mr. Garrett. If I could stop you there, so I understand 
what you are saying. But can't you take care of that better 
today? If you can tell them at 106 today, who knows what they 
would be worth, say, 5 years from now if the interest rates go 
up and what have you. So you can take care of those other 
underfunded assets that are on your books if you basically sell 
them and put that money aside to take care of that?
    Mr. DeMarco. So managing $1.5 trillion worth of retained 
portfolio has lots of complexities to it.
    Let me just simply say that part of that is that is, it is 
so large that is substantial relative to what is trading in the 
marketplace, and I think that the Enterprises also have a 
responsibility to market stability, that their sales and the 
unwinding of their portfolio be done in a stable and 
predictable way in order to ensure greater market stability.
    With that said, my letter to you also pointed out that, as 
a result of these market movements this summer, we have been in 
discussions with Treasury, as required by the senior preferred 
agreement, and we are making some adjustments to how we 
approach the question of disposition of assets in normal 
business order in order to take greater advantage of market 
prices.
    But I think we have a responsibility to do so in a way that 
does not invoke market instability and also is cognizant of the 
fact that there is hedging and long-term funding here as well.
    But we do want to--the basic point, Congressman, I do 
agree; we want these portfolios to be run down, and we are 
working very much to that end.
    Mr. Garrett. My time is moving quicker than I would like.
    Secretary Barr, you made in your opening comment, I think 
it was in your opening comment, with regard to the purchase by 
Treasury of the GSEs, of the mortgage-backed securities, and I 
wanted to go into more detail, but in 30 seconds here. So I 
asked the same question to Chairman Bernanke.
    When you are purchasing these things today, up until--they 
are guaranteed by the good faith and credit effectively of the 
taxpayer until, when, 2012, right? After that, that guarantee, 
in essence, is no longer there. So what actually are you 
purchasing, and what is the value of those securities that you 
are purchasing today after 2012 if there is not the backing and 
the funding by the Treasury for the GSEs' operations going 
forward?
    Mr. Barr. There is not a sharp distinction between the 
activities before and after 2012. The preferred stock purchase 
agreements that backstop the Treasury's support for Fannie and 
Freddie continue into force after that date with respect to the 
obligations of the GSEs and with respect to the mortgage-backed 
securities.
    The mortgage-backed securities that the Federal Reserve 
purchased and that in smaller part the Treasury purchased have 
the value that they have intrinsic to the asset, and that also 
continues after 2012. So there is not a sharp break. Those 
obligations are obligations that will be supported in either 
event.
    Mr. Garrett. And that is actually where I wanted my 
question to go, is that, from reading the Treasury's agreement 
with Fannie and Freddie, it seems that there is no deadline on 
that, and it can go on ad infinitum. Is there any deadline?
    Mr. Barr. May I just briefly answer, Mr. Chairman?
    Under the preferred stock purchase agreement, those are 
designed to put in place support for Fannie Mae and Freddie Mac 
such that the obligations that they are incurring today or have 
incurred in the past are supported. And the obligations are 
designed so that, as the Congress considers reform of the 
housing finance system, it is not driven to instability in the 
housing finance system during the transition.
    So whatever Congress decides about the future in Fannie Mae 
and Freddie Mac can be done on the basis of sound policy and 
good choices, whether one wants a guarantee or doesn't want a 
guarantee, whether the size and the shape of the government's 
role in the market, can all be made independently of disturbing 
any existing arrangements. So they are designed really to free 
the Congress to develop a plan that is good for the country 
going forward in the future.
    Chairman Kanjorski. The gentleman's time has expired.
    The gentleman from Massachusetts, the chairman of the 
committee, Mr. Frank, is recognized for 5 minutes.
    The Chairman. Thank you, Mr. Chairman.
    I would hope we could focus on going forward, but my 
Republican colleagues seem to open a somewhat lamentable 
discussion of history, while others engage in distorted 
versions of that history.
    The gentleman from California, Mr. Royce, continues to 
misstate what has happened. He talks about a congressional bill 
in 2005. He meant the bill passed by the House Republicans. The 
House Republicans brought that bill up. That was the bill Mr. 
Oxley brought forward that most of the Republican members of 
the committee voted for.
    The gentleman from California, as he has pointed out, 
didn't like the bill. He offered amendments both on the Floor 
and in committee. No amendment was even close to supported by a 
majority of Republicans. They all lost.
    He mentioned that President Clinton said, well, the 
Democrats fought this. President Clinton is a great guy. He is 
not infallible. From the time President Clinton said that, the 
Republicans controlled Congress. It is extraordinary.
    The Republicans controlled Congress from 1995 to December 
of 2006 and did nothing, nothing legislatively. We took office 
in 2007 and worked with Hank Paulson and put it into 
conservatorship. Those are the clear facts.
    We also tried to block the subprime lending, and that was 
somewhat controversial.
    I will note, the gentleman from Alabama, to his credit in 
my mind, in 2007, joined the Democratic majority in supporting 
a subprime lending restriction bill and almost lost his ranking 
membership. That was widely reported in the press. Other 
members of this committee said, oh, no, you can't do that.
    So the Republicans for 12 years did nothing to regulate 
Fannie and Freddie. We did it when we took the majority, 
working with Mr. Paulson, and that is why they are now in 
conservatorship.
    Secondly, the Republicans have consistently and still 
opposed any effort to stop the predatory lending, because as 
the gentleman from North Carolina pointed out, it wasn't simply 
Fannie and Freddie buying those loans; it was others. And those 
are the facts.
    Now, Mr. DeMarco, I just want to be very clear. You were 
appointed originally when President Bush was President, 
correct, into the FHFA?
    Mr. DeMarco. I was not appointed, Mr. Chairman. I am a 
career civil servant. I was hired by OFHEO.
    The Chairman. You were there, and when Mr. Lockhart last 
year took over--I don't mean to total impute you; just to show 
you are totally nonpartisan in this.
    Mr. DeMarco. Yes, sir.
    The Chairman. An argument has been made that Fannie and 
Freddie are still terrible problems and a source of losses. The 
view I got, and I will say, by the way, from the standpoint of 
Fannie and Freddie, Mr. Paulson points out in his book that 
when he got ready to put them into conservatorship, knowing 
what a drastic change that would mean for them, he was afraid 
they would appeal to Congress to block him. And he called 
myself and Senator Dodd, and we said, please, go ahead.
    I have to ask you, did putting them into conservatorship 
make a significant difference in the way in which they operate? 
Are Fannie and Freddie as they have operated since the 
conservatorship operating essentially similarly to the way they 
were before, or have there been improvements from the 
taxpayers' standpoint?
    Mr. DeMarco. There have been many changes and improvements 
since conservatorship began.
    The Chairman. Would you elaborate on that?
    Mr. DeMarco. Certainly. They have limited their activities 
to their existing core business activities. Their underwriting 
standards have improved substantially. And without having gone 
into conservatorship and having the backstop of the U.S. 
Treasury Department, they would have been rapidly receding from 
the marketplace, which would have meant we would have lost our 
secondary market and the housing finance crisis would have been 
much more severe.
    The Chairman. Mr. DeMarco, I appreciate that.
    Let me ask you, because we are concerned about the losses, 
is it correct--if not, I have full confidence in your 
bipartisan approach to this--is it correct that the great bulk 
of the losses predate the conservatorship and that since the 
conservatorship, losses, if any, that we can expect are 
severely curtailed?
    Mr. DeMarco. Yes, sir.
    The Chairman. Thank you for that, because I think that 
ought to be clear.
    Now the question is, where do we go from there? And that is 
why I said there was an urgency. Because we acted, the 
Democratic Congress, when the Republican Congress wouldn't, and 
put them into conservatorship, or allowed Mr. Paulson to do 
that, we have made drastic changes. And as you say, we would 
lose the secondary market.
    I tend to agree more with Mr. DeMarco than some in the 
Administration. I want it to be more purely private, but you 
simply can't go from A to Z without making sure you have done 
it right.
    Mr. DeMarco, you are going to hear, I think, from some of 
my Florida colleagues. They are concerned that what has gone on 
in Florida has, Gretchen Morgenson documented this in The New 
York Times, a kind of a foreclosure mill without any true 
notice to the people being foreclosed, and there is concern 
that Fannie Mae in particular has not been as helpful as it 
could be in protecting people's rights.
    We have written you before. I hope you have read that 
article. I believe there is a role for you through Fannie Mae, 
and I think you may hear about this from Mr. Klein. I will be 
joining that.
    Finally, let me just say, I appreciated your comment about 
the Federal Home Loan Banks. One of the best things we did in 
the financial reform bill was not bother the Federal Home Loan 
Banks model and leave them essentially as they were.
    When they no longer have to pay off the pay off the 
REFCORP, which is $300 million, however much it is a year, I 
saw your comments that you think they should not have to 
continue to send that into the Treasury, but it should be used 
to enhance the mission of those agencies. I appreciate that, 
and I hope we can work together to do that.
    Mr. DeMarco. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Chairman Kanjorski. Thank you, Mr. Chairman.
    And now we will hear from the gentleman from Texas, Mr. 
Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Gentlemen, forgive me, I missed part of this hearing, so we 
may be plowing a little bit of old ground here.
    Secretary Barr, in your testimony, you speak about the 
events leading up to conservatorship. And I read your 
testimony; I didn't hear it. Assuming that it was the same 
testimony, I didn't see any mention of Fannie and Freddie's 
affordable housing goals, which, as you well know, the low- and 
moderate-income housing goals ratcheted up from 42 percent in 
2000 to 56 percent in 2008; underserved areas, from 24 percent 
in 2000 to 39 percent in 2008; special affordable, from 14 
percent in 2000 to 27 percent in 2008.
    We have had testimony before in this committee about Fannie 
and Freddie having to take on a lower quality of loans that 
were connected to these affordable housing goals. Again, I saw 
no mention in your testimony. Should I conclude that you 
believe there is no nexus?
    Mr. Barr. Mr. Hensarling, I think that, primarily, if you 
look at what happened in the leadup to the financial crisis and 
the conservatorship, primarily what happened was that Fannie 
Mae and Freddie Mac were chasing the private market. The 
private market in the boom went out and did, frankly--
    Mr. Hensarling. I understand that, Mr. Secretary. But do 
you believe there is a nexus or not a nexus?
    Mr. Barr. I think, primarily, the cause of the 
conservatorship and the cause of the failure of the two GSEs is 
fundamentally driven by profit motive and a desire to regain 
some market share.
    Mr. Hensarling. Does that mean there is a nexus or not a 
significant nexus?
    Mr. Barr. I think the argument with respect to the goals, 
if they contributed, it was rather minor in relation to those 
two other factors, which is why I would not put it at the top 
of the set of problems.
    I should say, going forward, that I think that if Congress 
is considering affordability going forward, that it ought to 
have a clear delineation between that objective and other 
objectives in the housing finance system.
    Mr. Hensarling. I see the chairman of the full committee is 
here. Throughout most of his career, he encouraged Fannie and 
Freddie to get more deeply involved in affordable housing and 
encouraged them to do more in affordable housing.
    On December 11th, Chairman Frank went to the House Floor 
and said, ``In 2004, President Bush and, yes, the affordable 
goals came in 1992, President Bush raised them from 42 to 54 
percent over my objection. I thought it was imprudent and said 
so at the time.''
    You don't want to take the opportunity and try to blame 
President Bush for one more problem here?
    Mr. Barr. Sir, I don't think it really helps to blame one 
or another party or Member with respect to any activity. I 
think what we want to do is look at the basic problems in the 
housing finance system.
    We had a race to the bottom in mortgage standards. We had a 
lack of uniform level playing field in the system. We had a 
system in which there was an implicit government backing for 
these GSEs, and we let the private sector benefit and the 
public sector take the losses.
    Mr. Hensarling. Mr. Secretary, we will move on to a new 
question then.
    In your testimony, you list four objectives and goals for 
housing finance and reform, I believe on pages 4 and 5 of your 
testimony. I did not see any mention whatsoever of taxpayer 
protection. As you well know, we already have $150 billion of 
taxpayer loss in Fannie and Freddie. We have, as you well know, 
taxpayers on the hook, the Fed, their NBS over $1 trillion.
    I assume that was not an accident that you did not 
consider, that the Administration did not consider taxpayer 
protection among the lead objectives and goals for housing 
finance reform. Is that a fair assumption?
    Mr. Barr. I think taxpayer protection is absolutely 
critical, and that is why I talked about not having private 
gains and public losses. Perhaps the colloquialism did not 
translate effectively, but it is absolutely designed to protect 
the taxpayers.
    I don't think we can have a system in the future in which 
we have these private gains that are subsidized by the 
taxpayer, which the taxpayer is on the hook for and which 
shareholders of private entities get the upside and taxpayers 
get the downside. We can't have that in the future.
    Mr. Hensarling. I think you have mentioned in your 
testimony that part of the lack of desire to achieve reform 
today, as I believe you testified, that most of the losses have 
resulted from the underwritings of 2005, 2006, and 2007. But 
isn't it true that the loans that are being underwritten today, 
albeit with a new underwriting standard, one, we have a limited 
track record as opposed to the longer track record; also, do we 
know how these loans would perform if they became underwater; 
and isn't the bottom line the taxpayer is still on the hook?
    Mr. Barr. With respect to the losses that are being 
incurred today, there is a shortened time period, you are 
absolutely correct. On an age-adjusted basis, those loans are 
performing significantly better than they would on an age-
adjusted basis to the old book of loans. So we do have an 
apples-to-apples comparison in the conservators' report from 
August.
    With respect to reform, we are strongly in favor of reform. 
I do believe the Congress took the important first step in 
passing here in 2008; the important second step of placing 
these entities into conservatorship; the important third step 
of passing the Dodd-Frank Act, which fundamentally transforms 
the regulation of the mortgage market, creates a level playing 
field, has ability-to-pay requirements, has risk retention with 
respect to risky mortgages, has a whole set of reforms that are 
designed to prevent the market from blowing up the way it did 
in the past.
    Now we need to take the last step in that process, which is 
the housing finance sets of reform that I think the Congress 
should take up in this coming year.
    Mr. Hensarling. Thank you.
    Chairman Kanjorski. The gentleman's time has expired.
    We will now hear from the gentleman from California, Mr. 
Baca, for 5 minutes.
    The Chairman. Will the gentleman yield for 15 seconds?
    Mr. Baca. Excuse me. Thank you very much for recognizing 
me. I yield the balance of my time to Chairman Frank.
    The Chairman. Thank you. I won't take all of it. But I did 
want to say, and I appreciate the accurate quotations by the 
gentleman from Texas, seriously.
    But the one thing I should clarify, yes, I have been a 
strong advocate for affordable housing. I wasn't making the 
distinction at the time--by affordable housing, I was always 
talking about rental housing. I am in fact proud--like a lot of 
people, I missed a lot of this. But I have always been critical 
of what I thought was an excessive push into homeownership.
    And when I talked about the affordable housing goals, I was 
focusing on the multi-housing housing, which in fact did not 
cause nearly as many problems. And I believe what we should be 
doing is affordable rental housing. I was and continue to be 
skeptical of the notion that we do people a favor when we push 
them into homeownership beyond what they can sustain.
    I would just take further to elaborate a little bit more, 
Mr. DeMarco, on that Florida situation. It was troubling to me. 
I had heard some complaints, and then, frankly, the article by 
Gretchen Morgenson was really quite troubling about decisions 
being made in Florida where people were getting foreclosed 
without notice, etc. And Fannie could play a role in that.
    And we have been asking Fannie, to the extent that they are 
involved in that process, even the court system hasn't been 
doing it, Fannie could take steps to make sure that notice is 
given to people, and we have learned that there are problems 
with the papers.
    So we had written you before. We are going to renew that. I 
would ask you to look at that and work with us to make sure 
that, to the extent that there is a Federal conservatorship 
there, Fannie in particular but maybe Freddie, that we do 
everything to protect the rights of the people who are there.
    I thank you, and I thank the gentleman. I yield back.
    Mr. Baca. Thank you very much. Along the same lines, I 
guess we are all very much concerned with what is going on 
right now with a lot of the foreclosures that are pending 
before us.
    It seems like the institutions, though, and either one of 
you can answer it, a lot of the institutions right now are 
foreclosing, and there seems to be a lot of problems in the 
documentation and losing of the documentation within the 
banking industry, too, as well.
    I don't know if the Treasury or others can be involved in 
part of that process, because the consumer who is being 
foreclosed right now gets a notice and in that process, they 
fill out the documents, and then they don't tell them 
specifically what those documents should be. And then what 
happens is, during that whole process, they are losing their 
homes because they are not complying.
    It seems like now it is another gimmick that is being used 
by some of the banking institutes to foreclose on individuals. 
What can be done in that area, or how are we addressing that?
    Mr. Barr. Let me try and address a bit of that. I do think 
there were serious problems in the documentation process, in 
the foreclosure process. Treasury, through the lever of our 
Home Affordable Mortgage Program, has been putting pressure on 
services to do a better job in that. I think they have made 
significant progress over the last number of months in reducing 
documentation problems.
    We have engaged both with Fannie Mae and Freddie Mac as 
compliance agents and directly with the servicers to deal with 
the lost documentation process and require additional reviews. 
I still think there are problems out there in the market and 
homeowners are having difficulty in that way, and I think that 
we need to continue to focus on making better improvement.
    Mr. Baca. Right. Because they are still being penalized, 
and they are being foreclosed, and they shouldn't be, because 
of the deadline that they said, yet they are the ones who are 
late to respond back. Yet the homeowner is the one who ends up 
being penalized.
    The Chairman. There is one other point I wanted to make in 
support of my colleague from California, Mr. Sherman, although 
he is echoed here, not echoed, but joined by the gentleman from 
California, Mr. Miller, on the other side, and that is on the 
conforming loan limit being raised.
    Two points that are relevant. First, we had a vote on that 
in the House. We had some language in there in the FHA bill, 
and I thought it was best. My argument to the Rules Committee 
was, let's have votes.
    The vote on that was more than 300 Members of the House, 
three-quarters of the House voted in favor of the higher loan 
limits, not just those of us in the affected area.
    Secondly, I did note that in a very good paper written by 
Alan Blinder and Mark Zandi, kind of bipartisan, about how we 
ended the great recession, they specifically credited the 
increase in the conforming loan limit as one of the factors 
that had helped the private market in a good way. So I would 
just add to what the gentleman from California said, and I hope 
we do do it before we adjourn.
    I thank the gentleman from California.
    Mr. Baca. I yield back the balance of my time.
    Chairman Kanjorski. The time has expired.
    We will now hear from the gentlelady from Illinois, Mrs. 
Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. DeMarco, on page 8 of your testimony, you talk about 
how work is under way to develop projections that are 
comparable between the Enterprises and therein say that there 
are some differences between the Enterprise-generated results 
and results from FHFA-directed exercises. But you say that is 
consistent with what you said in the past; even under severe 
stress scenarios, that Treasury draws remain under $400 
billion.
    Would you support legislation to set a cap for Fannie and 
Freddie at $400 billion so that they can't borrow any more from 
the taxpayers? I know that cap was taken off around Christmas 
at some point.
    Mr. DeMarco. Congresswoman Biggert, I believe we owe 
investors in these securities and we owe the financial system 
clarity and certainty with regard to what the government is 
doing here with respect to Fannie and Freddie, and we have been 
clear about the securities that they are issuing today so that 
our mortgage market continues to function and will have the 
backing of the Treasury Department under the terms of the 
senior preferred agreement. Those terms are public. People are 
trading billions of dollars of securities based on that. I 
don't think that we should come back in and alter the terms of 
that at this time.
    Mrs. Biggert. Okay. I am hearing from constituents about 
the fact, they are saying that Fannie and Freddie through the 
States are providing mortgages, just as in the past, where 
there is no downpayment.
    Mr. DeMarco. Yes, I would very much like to respond to 
that, if I may, because Congressman Bachus raised it as well. 
There have been some news reports recently about a so-called 
affordable advantage program. I would like to explain this and 
provide some clarity around this.
    This program is an agreement between Fannie Mae and several 
State housing finance agencies. It is a limited term agreement. 
Think of it as an addendum to an ongoing purchase agreement 
that Fannie has with the HFAs.
    Under the terms of this with the several HFAs, apparently 
Fannie has agreed to buy certain mortgages with little or no 
money down that it involves recourse back to the HFA and that 
has a great deal of underwriting and review by the HFA.
    I have had great communication with both Fannie Mae and 
Freddie Mac during the period of this conservatorship, and any 
significant actions that have been taken by these companies 
have been reviewed and approved by the conservator. This one 
got away from us. There was a miscommunication, and this 
agreement with these HFAs was signed without my knowledge.
    When I learned about it after the fact, I reviewed what had 
been done. I saw that there was now a legal contract with the 
HFAs, and I made clear to Fannie Mae a couple of things: one, 
we were going to honor and respect that contract for its 
duration, it ends next March; and two, we were not doing this 
in the future.
    There were several other requests that had come into Fannie 
Mae from other parties for similar no-down-payment or very 
little downpayment mortgages, and I said, absolutely not. So we 
have had nothing further on this, and when this particular 
program with these HFAs expires, it will not be renewed.
    Mrs. Biggert. But how much is the value of them?
    Mr. DeMarco. The amount of loans that have been made under 
this program I believe is less than $10 million.
    Mrs. Biggert. It seems pretty risky, going back to where we 
were before.
    Mr. DeMarco. Congresswoman, I agree.
    The basic premise here is I believe borrowers should have a 
downpayment if they are going to purchase a house, and I found 
that the terms of this program did not fit with what we are 
trying to accomplish here in conservatorship, and that is why 
you won't be hearing about additional programs such as this.
    Mrs. Biggert. I am not sure that--I don't think you 
answered my previous question. Would you support legislation 
for a cap on the amount of money at $400 billion?
    Mr. DeMarco. Congressman Biggert, as I understand the way 
you have represented it, I would not, because I believe that 
would change the terms of the agreement under which investors 
today are purchasing securities issued by Fannie Mae and 
Freddie Mac.
    Mrs. Biggert. Thank you.
    I yield the remainder of my time to Mr. Royce from 
California.
    Mr. Royce. I appreciate the gentlelady for yielding.
    In point of fact, Chairman Frank said in September of 2003, 
I do think I do not want the same kind of focus on safety and 
soundness that we have in OCC and OTS. I want to roll the dice 
a little bit more in this situation towards subsidizing 
housing.
    Now, that is, frankly, the fact. And I do think that 
President Clinton was right in terms of his observation that 
the responsibility that the Democrats may have rests more in 
resisting any efforts by Republicans in the Congress or by me 
when I was President to put some standards and tighten up a 
little bit on Fannie Mae and Freddie Mac.
    For those of us who were involved in trying to put those 
standards on and watching the Senate Republicans succeed in 
putting a bill out to deleverage those portfolios, it is a 
rewrite of history today not to acknowledge that we might be 
going down the same road again.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman's time has expired.
    We will now hear from the gentleman from North Carolina, 
Mr. Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    I joined this committee in 2003, and it was like walking 
into Harlan, Kentucky, and I didn't know the Hatfields, and I 
didn't know the McCoys, but I did know they didn't get along 
with each other.
    What Republicans on this committee now remember, apparently 
remember, was that they were voices in the wilderness years ago 
saying that subprime lending was the road to ruin, and Fannie 
and Freddie were hugely responsible, and they warned us about 
Fannie and Freddie.
    And that is not what I remember at all.
    Fortunately, these meetings are transcribed, and they live 
on in videotape. I have gone back and checked, and that is not 
what they said at all, just as I remembered. In fact, they 
praised subprime lending as being just the type of the kind of 
innovation that can come from unfettered capitalism; it was 
leading to this huge spike in homeownership by people who never 
would have qualified for mortgages under some stultifying set 
of regulations like what Democrats might propose.
    And they did criticize Fannie and Freddie, but their 
criticisms of Fannie and Freddie were almost entirely repeating 
the talking points of Fannie and Freddie's bitter rivals, the 
companies that were almost entirely without government 
regulation, the private label securitizers, such worthy 
companies as Goldman Sachs, Merrill Lynch, Bear Stearns, Lehman 
Brothers, and AIG, which was in competition with Fannie and 
Freddie, as well, because you all essentially insure your own 
securities.
    The criticism was that those private label securitizers, 
those unregulated companies, were running rings around Fannie 
and Freddie in affordable housing and that Fannie and Freddie 
were not doing nearly enough for affordable housing.
    And the Bush Administration kept raising the affordable 
housing goals, but then said that Fannie and Freddie could meet 
that goal, when Fannie and Freddie were saying, we don't buy 
mortgages like the mortgages they are buying.
    HUD, under the Bush Administration, said that Fannie and 
Freddie could meet that goal by buying the private label 
mortgage-backed securities, what we now call toxic assets, from 
those companies.
    Mr. DeMarco, to what extent did the $255 billion in private 
label subprime mortgage-backed securities, how much of the 
losses are as a result of those securities?
    Mr. DeMarco. If I may pause for just a minute, Congressman.
    It is less than 10 percent of the total, Congressman. I 
will get the exact number for you.
    Mr. Miller of North Carolina. Okay. You said most of it has 
come from nontraditional mortgages that Fannie and Freddie did 
begin to buy in the last decade. ``Nontraditional'' covers a 
lot of ground.
    Mr. DeMarco. It is nontraditional and traditional. They 
have taken a huge hit on their credit guaranteed book.
    Mr. Miller of North Carolina. But I assume that the 
nontraditional led, and then traditionals have more recently 
become--
    Mr. DeMarco. Yes.
    Mr. Miller of North Carolina. It is only when the housing 
crisis really hit that the traditional became a problem; is 
that correct?
    Mr. DeMarco. I suppose so. Certainly, as house prices and 
unemployment have risen, it has affected quite a broad range of 
home buyers.
    Mr. Miller of North Carolina. Okay. Of the nontraditional, 
how much of that was Alt-A, which did not really include 
predatory terms, but certainly with benefits of hindsight and 
certainly at the time should have appeared foolish, poorly 
underwritten loans, loans that required little documentation, 
stated income. But the terms were not--the interest rate may 
have been higher, but the terms were not terrible different 
from prime loans.
    How much were Alt-A, and how much did Fannie and Freddie 
buy any of the kind of 2/28s, 3/27s with a 30 to 50 percent 
increase in monthly mortgage payment and a 3 percent prepayment 
penalty, the kind of subprime mortgage lending in the last 
decade that I consider predatory?
    Mr. DeMarco. I am sorry, Congressman, there are a lot of 
different questions rolled up into that. If you would indulge 
me, I would prefer to be able to prepare that in an orderly 
fashion for you in writing so I can give accurate answers.
    Mr. Miller of North Carolina. If you could provide that for 
me, that would be fine.
    And Mr. DeMarco, I think you probably know that I have 
praised you for beginning to pursue claims against the 
mortgage-backed securitizers that sold Fannie and Freddie $255 
billion in subprime mortgage-backed securities, in issuing 
subpoenas in July. I don't think it should be the Federal 
Government's role to take sides in private litigation, but your 
claims are almost identical to those of many private litigants, 
pension funds, that feel cheated in the very same way, who have 
been stymied so far in their litigation. It is not uncommon for 
litigants with similar claims to sort of compare notes, share 
information.
    Are you in contact with those private litigants, the 
pension funds and insurance companies that bought the same kind 
of securities you bought?
    Mr. DeMarco. Congressman, no. We have issued the subpoenas. 
We are gathering this information. At this point, we are simply 
gathering the information and determining what it tells us. 
Whatever our path is from there is yet to be determined, and I 
will certainly rely upon the advice of counsel in that process.
    Chairman Kanjorski. The gentleman's time has expired.
    I now recognize the gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you.
    I apologize that I haven't been able to stay for the whole 
hearing. But I think one of the fundamental questions I have 
been asking and been talking to a lot of folks about, and Mr. 
DeMarco, you and I have actually had this discussion as well, 
is, Congress is considering GSE reform and the fate of Freddie 
and Fannie.
    At one time, we had a functioning private market in this 
country, and there are other countries that have mortgage 
financing that doesn't necessarily have government backing. Can 
you see in the future the ability for, if Congress decides to 
get the taxpayers out of the bailout business, of having a 
functioning private mortgage market where the government is not 
on the hook?
    Mr. DeMarco. Yes, sir, I can envision such an environment. 
I believe this country has, despite the incredible difficulties 
it has had the last few years and the losses suffered, we have 
a strong and robust financial system. It is getting stronger 
every day. Congress took a lot of action this summer to enhance 
regulatory oversight. That will contribute to it. I can 
envision a market system for a good chunk of the U.S. mortgage 
market. Yes, sir.
    Mr. Neugebauer. Mr. Barr?
    Mr. Barr. I would agree with Director DeMarco that we have 
a long history of a vibrant and innovative financial sector 
that has played a strong role in housing finance and business 
finance and commercial finance all across the market. We do 
need to attract private capital back into the market.
    I think that, as Congress considers the future shape of 
reform, as I said just a few moments ago, I do think it is 
important that we not go back to the system that we had in the 
past where there were basically private gains and public 
losses. We can't have that kind of system in the future.
    I do think there is a question as to what extent there 
should be a government guarantee in the mix of ways that we are 
approaching, revitalizing and having a strong and robust 
housing system; what the role of that guarantee should be, when 
it should come into play if it exists, and how it is priced, I 
think are important questions for the Congress.
    As Director DeMarco suggested, it is hard to imagine not 
having some kind of role similar to the role FHA plays, for 
example. So I do think that there needs to be a mix of 
strategies used to bring the private capital back into the 
system and ensure we have a strong and vibrant system into the 
future.
    Mr. Neugebauer. Are you familiar with the Canadian system?
    Mr. Barr. I am. I am not an exert on Canada, but I am 
familiar with their approach.
    Mr. Neugebauer. I don't think that they have a guarantee on 
those mortgages, do think?
    Mr. Barr. The Canadian system is quite different from ours. 
In part, they have a quite tightly regulated but also highly 
concentrated banking system. They rely not on a 30-year fixed-
rate mortgage, but on a shorter term, adjustable-rate mortgage. 
It is possible to create a system similar to that. Other 
countries have used the covered bond market as an approach.
    I think, in each instance, when you look at the 
international examples, it is important to look not just at 
what is on the books, but what may also be implicitly there. A 
number of countries with concentrated banking sectors where 
there doesn't appear to be a government guarantee involved, 
there is an implicit backing for the financial institutions, 
which I think we don't want to recreate,
    So I do think international examples can help, but we have 
to go a couple of layers deeper to know whether that is the 
kind of system we want or not.
    Mr. Neugebauer. So the question I have is, is there any 
incentive for the private market to get back into this market, 
given the fact that Freddie and Fannie are in existence and we 
are continuing this--I don't know what this is called, but this 
freeze in time where we just are continuing to let Freddie and 
Fannie do what they were doing before the crisis?
    Mr. Barr. Let me just echo a little of what Director 
DeMarco said before, which is that Fannie and Freddie are not 
doing what they did before the conservatorship. That is, they 
have fundamentally changed the nature of their underwriting. 
They are still operating under the strictures of the 
conservatorship. Their underwriting standards have changed. 
They are not involved, for example, in purchasing Alt-A loans 
as they were so significantly in 2006 and 2007.
    I do think that Congress now needs to turn to the task of 
reforming the housing finance system, including Fannie Mae and 
Freddie Mac, and deciding what kind of system we want to have 
in the future. I think very strongly, I know that Treasury 
believes, we should not return to the system we had in the 
past. We can't recreate these entities the way they were.
    Mr. Neugebauer. But hasn't the Administration, you just 
basically said whatever capital this company needs, that we are 
going to keep putting it into it. So why would the private 
sector securitize outside of Fannie and Freddie as long as 
Freddie and Fannie are still there and as long as you all are 
committed to keep just throwing money at that company?
    Mr. Barr. I think I would like to separate out the steps 
that we took and that the prior Administration took to bring 
stability to the housing finance system. I think those are 
absolutely critical as the Congress decides what the future 
system should look like. It is not a statement that the future 
system should look like the past.
    Quite the opposite. It is a statement that says, as we 
figure out what the new system should look like, we can't 
disrupt the market, we can't disrupt the ability of homeowners 
to get mortgages, and that is absolutely critical to maintain 
so that Congress can decide what the right system is for the 
future.
    Chairman Kanjorski. The gentleman's time has expired.
    Now the gentleman from Indiana, Mr. Carson, for 5 minutes.
    Mr. Carson. Thank you, Mr. Chairman.
    And thank you, Congressman Moore.
    The Basel III rule agreed to on September 12th includes a 
liquidity requirement for banks that will encourage them 
effectively to buy the debt of Fannie and Freddie as well as 
mortgage-backed securities they back. Specifically, those banks 
will be required to enough high-quality liquid assets, and 
Fannie and Freddie counts as a high-quality debt. How will you 
ensure that Fannie and Freddie will not inadvertently take on 
more risk than they can effectively handle?
    Mr. Barr. Let me just say a little bit about the capital 
rules and then maybe turn it over to Director DeMarco.
    I think the capital rules are an important step in bringing 
greater stability now and in the future to our financial 
system. It will significantly increase the financial 
requirements for our firms as well as will improve their 
ability to withstand liquidity crises.
    I do think, as Congress takes up the question in the future 
of Fannie Mae and Freddie Mac, we are going to need to address 
the way in which other participants in the financial system 
interact with those institutions if they continue into the 
future; or if they don't continue into the future, what the 
role of financial intermediation is with respect to the link 
between the housing finance entities and the rest of our 
financial sector, so that we are not increasing systemic risk, 
but rather reducing it.
    Mr. DeMarco. In terms of what was done just a few days ago 
among the international bank regulators, I am sorry, 
Congressman, I am not familiar with what exactly it might say, 
so I would be happy to take a look at that.
    But I would note that, obviously, the debt and mortgage-
backed securities being issued by Fannie and Freddie today are 
both issued with the backstop of the senior preferred agreement 
with the Treasury Department, and in fact, the Federal Reserve 
and the Treasury Department hold those securities in large 
volume.
    Mr. Carson. Thank you, Mr. Chairman. I yield back.
    Chairman Kanjorski. The gentleman from Illinois, Mr. 
Manzullo, is recognized for 5 minutes.
    Mr. Manzullo. Thank you, Mr. Chairman. The frustration 
level of the American people has exceeded to be the boiling 
point. And I am not saying that the two of you here are 
responsible for that. I just want to share that with you. And 
here is the whole point, now that I have made that caveat.
    Mr. Barr. We appreciate that, thank you.
    Mr. Manzullo. I just got another e-mail from a world-class 
manufacturer in my congressional district. He has orders. The 
Institute for Supply Management is up I think 9 or 10 months in 
a row. He has orders--O-R-D-E-R-S--to manufacture. He has 
people he wants to hire. He has gone to eight banks. Every one 
says the same thing. The banks say, it is the examiners. The 
examiners say it is the regulators. The regulators are saying, 
we have changed nothing. And so we can recover right now, but 
the Federal Government is stopping the recovery in 
manufacturing. I have 25 percent unemployment back home. One 
out of four people works in manufacturing. Effectively, it is 
at 25 percent, if not more. For every 10 applications that go 
to a bank, nine are turned down, nine. And of those nine, four 
to five normally would be given. And many of those are on the 
stuff that you have on your hands, what is in foreclosure and 
short sales.
    So here we are now. Even in Rockford, Illinois, a city with 
that amount of unemployment, people are ready to buy. They are 
ready to move this stuff. They are ready to restart the supply 
chains of manufacturing not only in traditional manufacturing 
but in the housing market, and the clog to the entire recovery 
for this recession is here with the regulators. I have talked 
to them; and they have said, ``We have changed nothing.'' I 
want to know what you, Mr. DeMarco, can do or anybody else to 
unplug that clog. The recovery is here. Washington is stopping 
it.
    Mr. DeMarco. So, Congressman, I appreciate the challenge 
and the frustration and the real impact this has on individual 
families and communities. I regulate, as you know, the entities 
involved in the secondary market for mortgages. In fact, I 
would not, as a regulator, say nothing has changed. I think a 
lot has changed with respect to mortgages. It is a change that 
needed to happen. It is a change that is still under way. We 
needed to improve the underwriting standards in the extension--
    Mr. Manzullo. But the standards are being met by the people 
who are applying.
    Mr. DeMarco. If I may, Congressman, yes, I think that those 
changes have been made. But I think that with the Enterprises 
operating in conservatorship, awaiting congressional action on 
housing finance reform, we have a function in the secondary 
mortgage market. So there is a secondary mortgage market outlet 
for creditworthy borrowers seeking a mortgage. So I can't 
explain what might be a particular problem for a particular 
constituent of yours, but we have a functioning mortgage market 
right now.
    Mr. Manzullo. This is not a particular constituent. I am 
talking about the hundreds of thousands of people across 
America.
    Mr. DeMarco. Forgive me for saying it that way, 
Congressman. But yes. But all I can tell you is that the 
secondary mortgage market is open and operating to purchase 
these mortgages.
    Mr. Manzullo. No. I understand that--and obviously that 80 
or 90 percent of the homes financed today are going through 
Fannie Mae or Freddie Mac. This has to be resolved. It is not 
an issue of dishonest people or incompetent people in the 
different areas that I mentioned. But the problem is we could 
have all the mortgage foreclosure help, all the programs we 
want, and nothing is going to happen. We can't buy our way out 
of this recession. We have to work or manufacture our way out 
of it. But now people want to buy homes. Arbitrarily, even 
coming in with the whole deal on the appraisals again, at the 
last minute, we need another appraisal. Another closing was 
stopped because somebody couldn't explain a $17 charge on their 
credit report. This is a real problem. We are there, Mr. 
DeMarco. We are there, and there was a summit in this city, 
what, 2 weeks ago dealing with the lack of credit and with 
foreclosures in the home market. But there is nothing more the 
government can do except to unfreeze this credit and make sure 
that people who deserve the credit get it.
    Mr. Barr. Can I just add to the comment before? With 
respect to business credit, I do think that there has been an 
excessive tightening. It is common in any downturn. It has been 
much more pronounced in this downturn. It has been I know 
frustrating to businesses around the country. It is frustrating 
to us. I do think there are steps that we can take to help on a 
regulatory front but also with the pending small business and 
jobs bill.
    Mr. Manzullo. But that bill is not going to do it because 
it doesn't change the underlying standards for lending the 
money. Banks have money. The community banks have money. They 
don't need more money from the Federal Government. They don't 
need another program. They are not lending the money out 
because they are being hammered by the regulators because the 
examiners will come in and just arbitrarily classify a loan. 
Don't talk to me about another Federal program.
    Mr. Barr. I do think that with respect to examinations, you 
do find, again, on any downturn a tightening and an excessive 
tightening that is in a sense the mirror image of--
    Mr. Manzullo. What are you going to do to stop extensive 
tightening?
    Mr. Barr. We obviously don't have regulatory authority 
ourselves over this sector, but we do have the ability to talk 
to other regulators, which we do on a regular basis. Treasury 
has.
    Chairman Kanjorski. The gentleman's time has expired.
    Mr. Manzullo. Thank you.
    Chairman Kanjorski. We have the gentleman from Kansas 
waiting anxiously. We recognize Mr. Moore for 5 minutes.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. Barr and 
Mr. DeMarco, thank you for your service. Mr. Barr, I understand 
that Treasury has been collecting comments from all 
stakeholders on what the government should do to replace Fannie 
Mae and Freddie Mac and create a stronger housing finance 
system. I have heard one suggestion that concerns me and that 
is simply to end Freddie and Fannie and privatize the entire 
housing finance system. Is Treasury receiving comments from 
private industry stakeholders that full privatization would be 
a good idea? And is it a good idea?
    Mr. Barr. Representative Moore, we have received a range of 
public comments on privatization, on nationalization, on a wide 
variety of different strategies looking at the housing finance 
system in the future. As with any topic this complex, there are 
conflicting views on each of the suggested approaches. The 
potential downsides of having a system in which there is no 
government involvement include the lack of standardization, a 
potential lack of consumer protection, a potential lack of key 
products that the country has become reliant on, such as the 
30-year fixed-rate mortgage with a to-be-announced market, and 
the potential for a lack of standardization and liquidity.
    The potential upsides of having a full privatization 
include removing some element of direct taxpayer risk, 
increasing the ability for private sector capital to flow into 
the market, potentially reducing the relative amount of capital 
flowing into housing vis-a-vis business to the extent that 
there is a mismatch in subsidy rates. And we are looking at 
those tradeoffs. Again, as with any area this complex, choosing 
an approach that sounds pure in advance is usually less 
satisfying once one gets into the details of it.
    Mr. Moore of Kansas. Thank you, sir. Mr. DeMarco, the other 
side has raised several concerns that the GSEs are taking a lot 
of risk with respect to low downpayment loans. Is that really 
the case? And how many home purchase loans have Fannie and 
Freddie bought in the past 12 months in which the downpayment 
was below 5 percent and below 10 percent respectively? If you 
don't have the exact numbers, could you please give us those 
numbers in writing as soon as you can? And can you at least 
give us a general sense whether the value is high or low, sir?
    Mr. DeMarco. I will certainly provide the precise numbers 
to you and to the committee, but I can assure you that the 
numbers are quite low. Particularly with respect to less than 5 
percent down, it is very little. It is almost virtually 
nonexistent.
    Mr. Moore of Kansas. Thank you.
    Mr. DeMarco. Actually, can I clarify one thing? I don't 
want there to be a misunderstanding here. The one exception to 
this is that we do have a refinance program operating, the Home 
Affordable Refinance Program, or HARP. So there are refinances 
going on in the HARP program where we have allowed for 
refinances of existing mortgages that Fannie and Freddie own up 
to a current loan to value of 125 percent. And the purpose of 
doing that is that it benefits the homeowner, enabling them to 
take advantage of lower mortgage rates. But it also benefits 
the credit risk of Freddie and Fannie by having improved 
pricing on that mortgage and a homeowner with an improved 
balance sheet, so it reduces the credit risk. Whenever we go 
over this data, I have to be careful about carving out that 
exemption for the HARP program.
    Mr. Moore of Kansas. Okay. Mr. DeMarco, at a Capital 
Markets Subcommittee hearing in July, John Taylor from the 
National Community Reinvestment Coalition indicated his strong 
concerns about fees being charged by Fannie and Freddie. His 
response to why he was concerned, ``Because we think it is 
unfair. The notion that because somebody lives in a declining 
market that somehow they have to pay a premium seems fairly 
anti-American to me. You ought to be able to judge the person 
on their capabilities, their individual financial status, their 
creditworthiness, and so on, not by the neighborhood they 
necessarily live in.''
    These fees that are charged in lieu of adequate private 
mortgage insurance seem to be driving mortgages away from the 
GSEs into FHA. This seems to be in large part because these 
fees can't be financed. Mr. DeMarco, is that true? And if so, 
what are these fees being used for?
    Mr. DeMarco. The pricing on mortgages prior to this housing 
finance debacle we have had, we clearly were underpricing 
credit risk. I believe the typical conversation about Fannie 
and Freddie pricing today is regarding what are called loan-
level price adjustments. But I think the Congress needs to 
understand that Fannie and Freddie have base guarantee fees 
that they apply; and then the loan-level price adjustment is 
essentially the risk-based pricing that gets placed on a 
mortgage that allows for pricing for the particular risk 
characteristics provided by that mortgage. I have a 
responsibility as conservator, and I have certainly heard it in 
the last few hours in front of this committee, that we are 
supposed to be operating these conservatorships so that we are 
pricing to the risk that mortgages have. So I think with 
respect to the pricing that is going on today, that is what I 
would say we are doing. The Enterprises are pricing their 
guarantee fees to cover expected losses, operating expenses, 
and to be able to have a measured rate of return that is 
certainly reflective of their responsibility to make dividend 
payments to the Treasury Department on a senior preferred.
    Mr. Moore of Kansas. I thank the gentleman. I yield back, 
Mr. Chairman.
    Mr. DeMarco. It is not a question of fairness, Congressman. 
It is a question of being economic and risk-based pricing in 
the business that we are doing today in conservatorship.
    Chairman Kanjorski. Thank you. We are going to wind this 
hearing up by hearing from our two members from Kansas. And I 
will now recognize the gentlelady from Kansas, Ms. Jenkins.
    Ms. Jenkins. Thank you, Mr. Chairman. I would like to yield 
my time to the gentleman from California, Mr. Royce.
    Mr. Royce. I thank the gentlelady. Mr. Chairman, the 
talking points did not come from Fannie and Freddie's 
competitors in 2005. It came from the Federal Reserve; the 
Chairman of the Federal Reserve came down here and spoke to us. 
And I just pulled out the quote he gave us in 2005 as a warning 
in terms of the pending problem if we did not address this 
problem with Fannie and Freddie. He said, ``If legislation does 
not limit GSE portfolios, we run the risk of solidifying 
investors' perceptions that the GSEs are instruments of the 
government, that their debt is equivalent to government debt. 
GSEs will continue to grow faster than the overall home 
mortgage market. They can grow virtually without limit and 
without restrictions on the size of the GSE balance sheets. We 
put at risk our ability to preserve safe and sound financial 
markets in the United States.''
    Now this is what caught Jim Leach's attention and, frankly, 
the attention of Richard Baker, myself, Mr. Garrett, Mr. 
Hensarling, Chris Shays, and others on this committee who took 
the Fed seriously and took the Treasury Department--both under 
the Clinton Administration and under the Bush Administration--
seriously when they looked at what we had done in the 1992 
passage of the GSE Act to set up this house of cards that would 
eventually lead to two-thirds of the mortgage market, the 
subprime mortgage market, being handled by Fannie and Freddie 
and FHA--65 percent in 2001, 68 in 2002, 67 in 2003. These were 
making the purchases of the junk put out by Countrywide, right? 
And convincing the rest of the market that they should get into 
this line of business as well.
    Now the testimony that Mr. DeMarco gave I thought was a 
very strong case, and the question I would ask him is, do you 
believe that the private market eventually can handle the vast 
majority of this market down the road if we properly handle the 
phase-in? Because right now we have a real problem in terms of 
how we sustain this. But in the long term, I would like to see 
us get away from a situation where there is so much political 
pull replacing market discipline and where the biggest lobby on 
the Hill is a GSE.
    I would make one other quick observation, and that goes to 
the issue made by Mr. Ed Pinto, the former Chief Credit Officer 
of Fannie Mae. He said, ``The new goals put out on September 
2nd are likely to prove more risky than those that led to 
Fannie and Freddie's taxpayer bailout. Meeting these goals will 
necessitate a return to dangerous minimal downpayment lending 
along with other imprudent lending standards. So to what extent 
will the GSEs be allowed to purchase again high LTV loans and 
junk loans to meet these goals?''
    That is my second concern. But let me go to my first 
question to you. Long term, do you think we can get back to a 
private market here?
    Mr. DeMarco. With respect to the first question, 
Congressman, I believe that if Congress decides that it would 
like to see the bulk of the conventional mortgage marketing be 
handled in purely private hands, I believe that is achievable. 
It is not the only option. I believe it is achievable.
    With respect to the second question regarding housing 
goals, I am not familiar with the full extent of that quote. I 
will say that FHFA did issue final housing goals for Fannie and 
Freddie for 2010 and 2011. We are required to by statute. And I 
believe that continuing the housing goal regime is important 
because one of the things we are doing in conservatorship is to 
assure that they meet their existing core mission 
responsibilities under the statute. And I believe that the 
housing goals are one reflection--one set of metrics as to 
whether they are accomplishing that congressional mandate or 
not. We have substantially changed the goals. Congress did in 
HERA, and so this rule that we just finalized is a 
substantially different set of housing goals than had existed 
prior. And we also, in setting the final goal levels for Fannie 
and Freddie, have tied them to what the primary market is 
actually producing. And to put it simply, the goals are that 
Fannie and Freddie keep up with, be proportionate to what the 
primary market produces, not to have to exceed it.
    Mr. Royce. I understand that. But I remember also in the 
1992 Act--and I think the 1992 Act was a disaster--but there 
was a provision in there on the need to maintain the sound 
financial condition of the Enterprises. And what the former 
Chief Credit Officer of Fannie Mae is now saying is that you 
are actually likely to put at risk sort of this going concern 
concept for the GSEs, given the fact that you are headed down 
that road again towards minimal downpayment lending, and so 
forth. And I think that has to be considered because we know 
that Congress is reluctant to address this issue.
    Mr. DeMarco. We will take that under consideration, 
Congressman. And I have tried to be clear to the committee in 
response to the question from Congresswoman Biggert that I am 
not looking for the Enterprises to engage in very low or no 
downpayment lending. And I also, as part of the final rule, 
made absolutely clear that we expect them to not undertake bad 
mortgages or to have loss leaders or anything of the sort with 
regard to satisfying the housing goals.
    Mr. Royce. Thank you, Mr. DeMarco. Thank you, Mr. Barr.
    Chairman Kanjorski. The gentleman's time has expired.
    Mr. DeMarco, before we close, I will just ask one thing to 
follow up on Mr. Manzullo's question. I am acutely aware--and 
you responded to my letter on Friday about the inadequate 
Federal Home Loan Bank system responding to commercial loans 
and encouraging and priming that market. Is there anything you 
can do to get out there and start encouraging the Federal Home 
Loan Banks to get involved in commercial loan activity in the 
country? And are you intending to do so?
    Mr. DeMarco. Mr. Chairman, only with respect to what is 
authorized in the statute. I believe with any government 
sponsored enterprise, their activity should be limited to the 
specific areas that Congress has targeted for them. So generous 
support of commercial lending is not part of the charter of the 
Federal Home Loan Bank system. But there are provisions--and 
you have certainly been a proponent of it, I am well aware of 
that, sir--with regard to certain of the programs they have, 
the community investment program for community financial 
institution members. There is a broadened set of eligible 
collateral because it has been clearly stated the intent of 
Congress is that for community financial institutions, they be 
able to take down advances for a broader set of community 
development purposes, and there is a broader set of eligible 
collateral for that.
    The letter that I sent you on Friday made clear, I 
reiterated my commitment that I made in the comment letter to 
the GAO in response to their study this summer that we were 
going to back and look at how they were examining each of the 
Home Loan Banks with respect to their implementation of these 
authorities under the statute. So we will do so, but we will do 
so consistent with what the statutory mandate and limits are. 
Yes, sir.
    Chairman Kanjorski. I appreciate that, Mr. DeMarco. I think 
I heard an undertone from the whole committee in terms of 
commercial lending and business activity that after every one 
of these events, as Mr. Barr well pointed out, there seems to 
be a slow response to the banking community, and the regulators 
get hesitant of what they will approve, and I can see that 
happening. I am hearing from community banks, from regional 
banks. I am hearing from a cross section of lenders and they 
would like to do more but they are being constrained by their 
regulators. Maybe you all can have a couple of summit meetings 
yourselves down here and get together and make sure it is not 
only your decision here in Washington but you send that out 
into the field. I know in one of our past recessions, the 
Washington regulators actually went out and convened meetings 
in the regions to encourage it. Maybe it is time we start doing 
that, because I agree with Mr. Manzullo. There are a lot of 
jobs out there that can be and will be created. But there is a 
need for money, operating capital.
    Mr. DeMarco. Mr. Chairman, if I may, because I think that 
is an excellent suggestion, I would like to point out something 
that FHFA is in fact doing. Congress, in establishing FHFA, 
said we should all have a division of housing mission and 
goals, and we have such a division, sir. And in fact, the team 
in that division that works on these matters is, in fact, going 
out into the field and is holding field hearings, is meeting 
with community development participants out in the field. They 
are going around the country and actually seeing what is going 
on and trying to hear in local markets what are the needs, what 
are the concerns. And with respect to the Federal Home Loan 
Bank system, we are trying to better understand how the 
programs available through the bank system are working or are 
not working, how they could be improved. And we are in the 
process of refreshing the regulatory framework we inherited 
from the Federal Housing Finance Board regarding those 
programs. We are in the process of refreshing them to make them 
more responsive to the needs of local communities. But an 
important input of that has been sending my staff out across 
the country to gather this input.
    Chairman Kanjorski. I appreciate that. We want to thank 
you, Mr. DeMarco, for your activities and certainly that new 
initiative that you are talking about. And Mr. Barr, I want to 
thank you for your participation in the hearing. I think it has 
been informative. We have rewritten history to some extent, but 
that is always the case when you are 7 weeks out from an 
election. We hope that ultimately history will be written in 
the years ahead and have a little more truth to it on both 
sides, if I may say.
    That being the case, and no further activity before the 
committee, the Chair notes that some members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for members to submit written questions 
to these witnesses and to place their responses in the record. 
And without objection, all other things having been handled, 
the panel is dismissed, and this hearing is adjourned.
    Mr. Barr. Thank you, Mr. Chairman
    Mr. DeMarco. Thank you, Mr. Chairman.
    [Whereupon, at 12:00 p.m., the hearing was adjourned.]






















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                           September 15, 2010

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