[Senate Hearing 111-925]
[From the U.S. Government Publishing Office]
S. Hrg. 111-925
NOMINATION OF JOSEPH A. SMITH, JR.
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
ON
THE NOMINATION OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, TO BE
DIRECTOR, FEDERAL HOUSING FINANCE AGENCY
__________
DECEMBER 9, 2010
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii BOB CORKER, Tennessee
SHERROD BROWN, Ohio JIM DeMINT, South Carolina
JON TESTER, Montana DAVID VITTER, Louisiana
HERB KOHL, Wisconsin MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Erin Barry, Legislative Assistant
Laura Swanson, Professional Staff Member
Beth Cooper, Professional Staff Member
Jonathan Miller, Professional Staff Member
Mark Oesterle, Republican Chief Counsel
Chad Davis, Professional Staff Member
Dawn Ratliff, Chief Clerk
Levon Bagramian, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
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THURSDAY, DECEMBER 9, 2010
Page
Opening statement of Senator Johnson............................. 3
Prepared statement........................................... 11
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 4
WITNESSES
Richard Burr, Senator from the State of North Carolina........... 1
Kay Hagan, Senator from the State of North Carolina.............. 2
NOMINEE
Joseph A. Smith, Jr., of North Carolina, to be Director, Federal
Housing Finance Agency......................................... 6
Prepared statement........................................... 11
Biographical sketch of nominee............................... 13
Responses to written questions of:
Senator Shelby........................................... 20
Senator Reed............................................. 31
Senator Kohl............................................. 31
Senator Bennet........................................... 35
Senator Crapo............................................ 36
Senator Corker........................................... 38
Senator DeMint........................................... 39
Senator Vitter........................................... 40
Additional Material Supplied for the Record
Letter submitted by the Conference of State Bank Supervisors..... 49
Letter submitted by the Mortgage Bankers Association............. 50
Letter submitted by the National Association of Realtors......... 51
Letter submitted by the Independent Community Bankers of America. 52
Letter submitted by the National Association of Home Builders.... 53
(iii)
NOMINATION OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, TO BE DIRECTOR,
FEDERAL HOUSING FINANCE AGENCY
----------
THURSDAY, DECEMBER 9, 2010
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:55 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Tim Johnson, presiding.
Senator Johnson. We have votes at 11 o'clock and,
therefore, would you commence your introduction?
STATEMENT OF RICHARD BURR, SENATOR FROM THE STATE OF NORTH
CAROLINA
Senator Burr. Mr. Chairman, thank you. To Senator Shelby
and to my esteemed colleagues on the Committee, thank you for
this opportunity. I am sure my cohort from North Carolina will
be here shortly.
Mr. Chairman, I want to thank you for holding this hearing
and for giving me the opportunity and the pleasure of
introducing Joseph Smith to my colleagues today. I know getting
a nominee for Director of the Federal Housing Finance Agency
has been a long time coming. However, I am pleased the
Administration has sent forward the best nominee rather than
the most quickly named nominee.
I could not agree with the President more when he stated,
and I quote, ``Mr. Smith brings to this position both
tremendous expertise and a deep commitment to the strengthening
of our housing finance system for the American people.''
Although born in West Virginia, North Carolinians have proudly
claimed Joe as one of our own ever since he moved to Davidson,
North Carolina, to attend Davidson College and become a
Davidson Wildcat. And, Senator Shelby, that was under the days
of Lefty Driesell, as you can remember.
Many of you in the room today have gotten to know Joe over
the years as his expertise and knowledge as a State banking
commissioner has been sought by both this Committee and others
on earlier occasions. Since 2002, Joe has served the citizens
of North Carolina as our State's Commissioner of Banks. Joe is
also the immediate past president chair of the Conference of
State Bank Supervisors. In addition to his expertise as a
regulator, Joe also has extensive real-world, everyday
experience, having served as the general counsel and secretary
for Centura Bank, based in Rocky Mount, North Carolina, during
the 1990s. From the North Carolina Bankers Association stating,
and I quote, ``He has been an outstanding commissioner for
banks. We hate to lose him,'' to the Centers for Responsible
Lending stating, and I quote, ``It is hard to think of a better
choice''; to his fellow State banking commissioners stating,
and I quote, ``I think it is a perfect choice,'' Joe's
nomination to serve as Director of the Federal Housing Finance
Agency has been met with much and well-deserved praise.
For those of us who know Joe and have gotten to see his
work up close, we are not surprised by the words of praise for
his nomination coming from both the financial institutions he
regulated and the consumer advocates alike. The praise is a
testament to Joe's knowledge, his hard work, common sense, and
his commitment to getting the job done right.
Without a doubt, the job Joe has been nominated for will
not be easy, and many might even ask why anyone would want to
take on the role of overseer of Fannie and Freddie. However, I
guarantee each and every one of you, having gotten to know Joe
over the years, that Joe comes to this not seeking personal
glory but out of a sense of duty to do a job that must be done
and that must be done well.
I want to thank Joe, Mr. Chairman, for accepting this
difficult task and assure you, if confirmed, we will all miss
his leadership and his guidance as North Carolina's
Commissioner of Banks.
I thank the Committee for the opportunity to speak before
you and urge my colleagues to, as expeditiously as you can,
confirm this nominee. I thank the Chairman and I thank the
Ranking Member. I thank my colleagues.
Senator Johnson. Thank you, Senator Burr.
Senator Hagan.
STATEMENT OF KAY HAGAN, SENATOR FROM THE STATE OF NORTH
CAROLINA
Senator Hagan. Thank you, Chairman Johnson, Ranking Member
Shelby, Members of the Committee, and my colleague Senator
Burr, I am grateful for the opportunity to introduce to you
North Carolina's Commissioner of Banks, Joseph A. Smith, Jr.
While he may be quick to point out that he was born and raised
in West Virginia, Commissioner Smith and his wife, Elizabeth,
have lived in North Carolina for more than 20 years where they
raised their two sons, Joseph and Matthew.
As a student, business leader, and public servant in North
Carolina, Commissioner Smith garnered the respect and support
of consumers, regulators, and businessmen and--women throughout
our State. I am sure they also got a taste of Joe's self-
deprecating sense of humor. Indeed, just this morning, he joked
that his Type A personality brought him to my office 2 hours
before this hearing. My office, by the way, is no more than ten
steps from this Committee room. But, obviously, Commissioner
Smith comes prepared for any task that he takes on, and I am
excited that, should he be confirmed, he will have the
opportunity to serve as Director of the Federal Housing Finance
Agency, where he will bring his considerable talents and
experience to some of our Nation's most pressing issues.
Commissioner Smith graduated from Davidson College in
Davidson, North Carolina, in 1971 and from the University of
Virginia Law School in 1974. During the 1990s, he gained
considerable private sector experience while working as general
counsel and secretary of a community bank in Raleigh. And for
the past 8 years, Joe Smith has served as North Carolina's
Commissioner of Banks. In his latest role, Commissioner Smith
leads the agency responsible for regulating banks, savings and
loans, mortgage bankers, mortgage brokers, check cashers, and
money transmitters.
Despite the challenges posed by these broad supervisory
responsibilities, Commissioner Smith has garnered the respect
of bankers, regulators, consumer groups, and legislator, both
in North Carolina and across the Nation.
In 2009, Commissioner Smith's peers honored him when they
selected him Chairman of the Conference of State Board
Supervisors. The North Carolina Bankers Association and its 135
member banks, savings institutions, and trust companies proudly
support his nomination. And after working with Commissioner
Smith on consumer finance laws in the North Carolina
Legislature, I join these organizations by offering my
unqualified support for Commissioner Smith.
As the Members of this Committee are keenly aware, the
housing finance system in this country is in need of reform.
The Director of the FHFA will play a critical role in the
future of Fannie Mae, Freddie Mac, and the 12 Federal home loan
banks that form the backbone of our current housing finance
system. President Obama has nominated a capable leader in Joe
Smith who has the experience and convictions to make the tough
choices that will be required in the coming years. I cannot
think of a better partner for Congress to work with as we take
up those challenges.
After 2 years in the Senate, I understand how difficult the
nomination process can be, but I am quite confident that, after
having the opportunity to learn more about Mr. Smith and having
the opportunity to discuss some of these issues with him,
Members of the Committee will be as enthusiastic as I am about
confirming this thoughtful, capable, and effective nominee.
Thank you.
Senator Johnson. Thank you, Senator Hagan.
OPENING STATEMENT OF SENATOR TIM JOHNSON
Senator Johnson. Mr. Smith, would you take your seat at the
table so we can begin the second hearing?
I call to order this hearing on the nomination of Mr.
Joseph A. Smith, Jr., of North Carolina, to be Director of the
Federal Housing Finance Agency.
Mr. Smith is no stranger to this Committee or to the
challenges of implementing financial reforms. As Commissioner
of Banks, he was responsible for implementing and enforcing
North Carolina's antipredatory lending laws, overseeing the
State's foreclosure prevention program, and serving on the
Governor's task force to increase small business lending--to
name a few of his accomplishments--all while regulating small
and large financial institution in the State. To highlight some
of those accomplishments, I would like to enter into the record
letters from the Independent Community Bankers Association, the
Conference of State Bank Supervisors, the Mortgage Bankers
Association, and National Association of Realtors.
Thank you for your willingness to serve at the Federal
level, especially at a time when our country is trying to
overcome significant economic challenges. Balancing consumer
protection and credit availability, regulation and economic
growth will be extremely important for creating a sustainable
housing and economic recovery. I look forward to learning more
about your work and how you view the role of Director of FHFA.
Senator Shelby, would you like to give a statement?
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman. I would like my
opening statement to be made part of the record because we are
getting ready to have some very important votes, and I do not
know if I will get back.
I would like to propound to you in my time, Mr. Smith--and
I will furnish these in writing to you, too--some questions
that I think are very important as you move forward.
Protecting the taxpayer. Mr. Smith, according to an article
in the Wall Street Journal yesterday, the Obama administration
is pressuring Fannie Mae and Freddie Mac, through their primary
regulator, the Federal Housing Finance Agency, to get the
mortgage giants to agree to write down mortgages. For a variety
of reasons, Fannie and Freddie have been reluctant to reduce
principal balances. An important reason why the Federal Housing
Finance Agency has been reluctant is that they Federal Housing
Finance Agency is charged, as you well know, with limiting
taxpayer losses. While underwater homeowners could benefit from
principal writedowns, financing the writedowns through
additional losses imposed on taxpayers amounts to a
redistribution from taxpayers in general to certain classes of
homeowners.
Mr. Smith, given the responsibilities of the Federal
Housing Finance Agency as a conservator of Fannie and Freddie,
would you resist Administration pressure on Fannie and Freddie
for principal writedowns? Do you want to answer that now or do
you want to answer it for the record later? This is important.
Mr. Smith. I had hoped to make an opening statement, but I
know there is----
Senator Shelby. No, I asked you a question.
Mr. Smith. I understand that.
Senator Shelby. Yes or no.
Mr. Smith. Senator, the Federal Housing Finance Agency is
an independent agency of Government. I am the head of an
independent agency of Government now.
Senator Shelby. Will you be independent if you are
confirmed?
Mr. Smith. I will.
Senator Shelby. And will you not be subject to pressure
from anybody?
Mr. Smith. Well, I will be pressured by a lot of people,
Senator, but the answer to your question----
Senator Shelby. Well, will you be subject to that pressure?
Mr. Smith. In exercising discretion--in exercising the
power that this office has and that the agency has in this and
a number of other very important issues, first and foremost I
have got to look at it through the screen, if you will, of role
as conservator. The first and foremost thing is to protect
taxpayers.
Senator Shelby. I hope you will elaborate on that for the
record.
Mr. Smith. I will, Senator.
Senator Shelby. Influence from outside agencies. Given the
involvement of both Treasury and HUD in loan modification
programs in which Fannie and Freddie participate, there will be
instances in which these agencies have strong opinions as to
what actions Fannie and Freddie should take regarding certain
policies. What is your view of the appropriate role for either
the Secretary of the Treasury or the HUD Secretary? Does either
have any authority relating to the Federal Housing Finance
Agency and its responsibilities as conservator? Or is that your
responsibility? And would it be appropriate for either to ask
you to take some action that is inconsistent with conserving
Fannie and Freddie assets such as principal reductions or not
pursuing putbacks to protect bank solvency? You might want to
answer that for the record a little later. I want to go through
my questions.
Mr. Smith. Very well.
Senator Shelby. PACE loans, an question for you. On July
16, 2010, FHFA, the Federal Housing Finance Agency, found that,
and I will quote, ``certain energy retrofit lending programs
present significant safety and soundness concerns that must be
addressed by Fannie Mae, Freddie Mac, and the Federal home loan
banks.'' Accordingly, they released guidance to protect these
institutions from what are commonly referred to as PACE loans.
It is my understanding that during conversations with the
Banking Committee staff, you indicated that you would not alter
this guidance as long as it was under active litigation. And
would you confirm that this is your position? And if confirmed,
would you protect the lien priorities of existing mortgages
owned or guaranteed by the enterprises through any guidance
that the Federal Housing Finance Agency may issue in the
future.
I want to keep going on my questions.
Plain vanilla mortgages. During the debate on Dodd-Frank,
some advocated that customers be offered a default of ``plain
vanilla mortgages,'' arguing that behavioral economics
supported this position. In previous testimony before this
Committee, you seemed to have a position consistent with this,
stating, ``Recent work in behavioral economics suggests that
when confronted with information overall, bad choices often
result.'' You then stated, ``The default mortgage for certain
borrowers should be the 30-year fixed-rate mortgage.''
Do you continue to believe in the concept of a default
mortgage for certain consumers? And how do you define so-called
behavioral economics? And would you use behavioral economics in
your capacity running the FHFA? Then we can go to the next
question.
Financial statements. Mr. Smith, as a prospective
conservator for Government-owned enterprises with large
portfolios and scales of business, you need to be intimately
familiar, like anyone, with the financial condition of Freddie
and Fannie. My question to you would be: What financial
statements of Fannie Mae, Freddie Mac, or the Federal home loan
banks have you read yourself since you learned of your
nomination? And what have you taken away from these statements?
I would like that answer for the record.
Appropriate level of housing goals. During a conversation
with Banking Committee staff, you indicated that you did not
have a position on the appropriateness of the current levels of
the GSEs' housing goals. The need for the Director of the
Federal Housing Finance Agency to balance these goals with the
safety and soundness requirements of the institution, however,
makes this, I think, a critical matter. My question: Having now
had more time to reflect on the subject, what are your views on
Fannie and Freddie's housing goals? Are they appropriately set?
And do you have any reasons for changing them?
I appreciate the Chairman's time in letting me have the
latitude to ask these questions, but we will give these
questions to you here today, and we would like for them to be
answered for the record.
Thank you, Mr. Chairman.
Senator Johnson. Before we turn to you, Mr. Smith, would
you please stand and raise your right hand for the swearing in.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you, God?
Mr. Smith. I do.
Senator Johnson. Do you agree to appear and testify before
any duly constituted committee of the Senate?
Mr. Smith. I do.
Senator Johnson. You may be seated.
We have a short amount of time available, but can you give
us your testimony, please.
TESTIMONY OF JOSEPH A. SMITH, JR., OF NORTH CAROLINA, NOMINATED
TO BE DIRECTOR, FEDERAL HOUSING FINANCE AGENCY
Mr. Smith. Yes, Senator, I will. I would first like to
thank Senator Burr and Senator Hagan for their kind
introductions. That was overwhelming. I would like to thank
Senator Shelby for bringing them back to earth.
[Laughter.]
Mr. Smith. Mr. Chairman, Ranking Member Shelby, and Members
of the Committee, I am Joseph A. Smith, Jr., currently the
North Carolina Commissioner of Banks, and the President's
nominee for the office of Director of the Federal Housing
Finance Agency. It is an honor and privilege to sit before you
today. I would like to express my appreciation to the President
for nominating me to this position and his confidence in me in
fulfilling this significant role.
I would like to express my particular thanks to Chairman
Dodd and to Ranking Member Shelby for agreeing to consider this
nomination so promptly. Such consideration is a great courtesy
to me and a recognition of FHFA's critical importance. Thank
you very much.
I regret that Elizabeth Smith, my wife of 31 years, cannot
be with me today. Without her love and support, including sound
advice, I would not be here today.
I come before you with a commitment to public service and
to strengthening the Nation's housing finance system. Direct
experience in both banking and housing and the hard-won
knowledge I have managed to accumulate over a 35-year career in
law, banking, and State government service.
During my career, I have been involved--directly involved
in a variety of activities that serve as a daily reminder of
the challenges ahead. I have worked out commercial loans,
represented a bank through a real estate crisis, implemented
both State and Federal mortgage licensing regimes, and
supervised banks in varying stages of distress up to and
including resolution.
In my 8 years as North Carolina Commissioner of Banks, my
colleagues and I have worked diligently and consistently to
mitigate losses to our lending institutions and the financial
system at large, as well as to prevent failures on a larger
scale. My office supervises depository institutions with over
$245 billion in total assets and a range of nonbank financial
services firms, including mortgage bankers and brokers,
consumer finance companies, check cashers, and money
transmitters. I have been the Commissioner during the recent
financial crisis and have direct experience as a safety and
soundness regulator.
While I believe that this experience will be important
should I be confirmed as Director of FHFA, I also know that
experience alone will not be enough to be successful in that
position. In that regard, I am looking forward to working with
the staff of the FHFA, the Administration, and with you and the
other Members of Congress for your input and guidance.
As you have said, sir, we are facing a significant
challenge in the housing finance markets today. Fannie Mae and
Freddie Mac are under conservatorship and have received $151
billion from the Treasury Department in order to maintain their
support of the housing market, which is critical at this time.
But conservatorship cannot be a long-term solution.
Congress and the Administration have important decisions to
make regarding the future structure of the housing finance
system. If confirmed, I look forward to working with you and
having FHFA become an active participant in this process.
I understand that if confirmed, you expect leadership and
not just management. The activities of Fannie Mae and Freddie
Mac are national in scope but local in impact, directly
affecting communities across the country. Leadership in this
context means determining how to address critical local needs
in conjunction with the agency's duties of conservatorship.
I also pledge to you the same kind of leadership with
regard to FHFA's supervision of the Federal Home Loan Banks. I
expect that many of you have heard from your bankers what I
have heard from mine. The Federal Home Loan Banks are a crucial
and needed source of funding and support to community banking,
which in turn plays a vital role in addressing the credit needs
of consumers, small businesses, and communities around the
country.
As FHFA has effectively reported, the Federal Home Loan
Banks have their own challenges and are now subject to enhanced
supervision. Community banks are dear to my heart, and you may
be assured that the Home Loan Banks will receive my full
attention with an eye to strengthening them and the banks they
serve.
Mr. Chairman, Ranking Member Shelby, and Members of the
Committee, thank you again for your consideration of my
nomination. Should you see fit to confirm me, I look forward to
serving as the Director of the Federal Housing Finance Agency.
I would be happy to answer any questions that you may have.
Senator Johnson. Thank you, Mr. Chairman.
I ask that 5 minutes be put on the clock before we continue
with questions.
Mr. Smith, we spoke a little about this in my office, but I
think it is an important question to get on the record. The
Director is in a unique position because FHFA is both a
conservator and regulator of Fannie Mae and Freddie Mac. As
conservator, the agency is responsible for the operations of
the entities as well as regulating these operations. How do you
plan to balance those roles?
Mr. Smith. Senator, I believe that those two roles are
actually profoundly complementary because, as a regulator, the
agency seeks to ensure that the enterprises have proper
governance, proper risk management, proper operating
procedures, that they obey law, and all of these things are
consistent with the preservation of their assets and their
rehabilitation. And so I think one is an extension of the other
and I think that we can--the agency is and I think we will
continue to deal with that--any tension there may be
successfully. But I think the two support each other.
Senator Johnson. Would you cooperate with the
investigations of the Inspector General's Office?
Mr. Smith. You mean the FHFA Inspector General?
Senator Johnson. Yes.
Mr. Smith. FHFA has just gotten, after long efforts to do
so, an independent Inspector General, and the Inspector
General, of course, operates independently and we will--as a
matter of course, I think our activities should be consistent,
in any event.
Senator Johnson. In addition to Fannie and Freddie, FHFA
regulates the Federal Home Loan Banks which are not in
conservatorship. These institutions fulfill different but
important roles in our financial system. How will you approach
the differences and unique characteristics of the Home Loan
Banks as you develop policies and regulations?
Mr. Smith. Senator, as I said in my testimony, I think the
Home Loan Banks are crucial, particularly to community banks,
and so I will work with staff to come to a full, frankly,
understanding of the situation in which each of these banks
finds themselves and the system as a whole, its health and
operation, and we will work with the managements of those banks
to improve them.
And also, I would say, I look forward to working with
bankers around the country on this issue, as well, because as
you know, sir, the Home Loan Banks are cooperative
organizations and so it is important to be engaged with bankers
themselves about what they are going to do to support their--
the Home Loan Bank system. It is all of the above. I will take
in a lot of information and we will work together.
Senator Johnson. Can you talk about how the Federal Home
Loan Bank Advance System has functioned in North Carolina
during the economic downturn and the impact on financial
institutions in the State.
Mr. Smith. The Home Loan Banks have, over time, during the
downturn and before, been an important source of funding to our
banks and an important source of advice, if you will, or
technical support, and have also been a great assistance to our
banks in meeting certain of their affordable housing needs. It
has been crucial over the long term, frankly, Senator, for the
Home Loan Banks provide a needed source of funding and support
for our banks through all parts of the cycle.
Senator Johnson. Can you talk about how you use your
regulatory position in the State to help address some of the
challenges that families are facing during this crisis?
Mr. Smith. I am sorry, I did not quite understand----
Senator Johnson. Can you talk about you use your regulatory
position in the State----
Mr. Smith. The State----
Senator Johnson. ----to help address some of the challenges
that families are facing----
Mr. Smith. I will.
Senator Johnson. ----in this crisis.
Mr. Smith. We have done several things. First and foremost,
we began a licensing system that, over time--it took a long
time--removed a number of undesirable characters from the
mortgage origination business. The more recent and more
apposite answer to your question is that my agency has
conducted, first with our own funds and now with funds gotten
from a fee on foreclosures, a foreclosure prevention--we have
organized a Foreclosure Prevention Network, and over the course
of the last couple of years have kept 5,000 North Carolina
families in their home. It took a lot of effort, and I will not
say it is perfect, but we did what we could do to keep families
in their homes.
Going forward, by the way, I will say that the challenge we
face now in the North Carolina is that while in the past, two-
thirds, let us say, of the loans were what you might call
subprime or high-cost loans to start, two-thirds of the loans
now are conventional loans. They are loans that were properly
underwritten to families who were fine when the loans were made
and the economic situation in which our Nation and the State
finds itself has put them up against it. So it is an entirely
new and different challenge now.
Senator Johnson. Votes have just begun I will recess until
after the votes are concluded.
[Recess.]
Senator Johnson. Mr. Smith, you are getting off easy. We
are going to submit questions for the record to you by four
o'clock p.m. tomorrow. Please get your responses back quickly.
I am hopeful that we can then begin to move your nomination in
a timely manner.
I want to thank both of our witnesses at both hearings
today. Oversight of the financial system and the reform of the
housing finance system will be top priorities for this
Committee as we begin the next Congress, and both of today's
hearings contributed to those discussions.
I thank everyone again for their time today, and the
hearing is adjourned.
[Whereupon, at 12:29 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of nominee,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
I call to order this hearing on the nomination of Mr. Joseph A.
Smith, Jr., of North Carolina, to be Director of the Federal Housing
Finance Agency.
As our economy recovers, the regulators begin to implement the
Dodd-Frank Walls Street Reform Act and we consider the future of the
housing market, it is essential that the Federal Housing Finance Agency
have leadership that is answerable to Congress. I would like to commend
Chairman Dodd and Ranking Member Shelby for their joint letter urging
President Obama to name a nominee for this post and ask that the letter
be included in the record. The Director of FHFA has a unique role as
regulator for the Federal Home Loan Bank system and both regulator and
conservator of Fannie Mae and Freddie Mac. This dual role requires a
balance between protecting taxpayers and using the tools available to
stabilize the housing market.
Mr. Smith is no stranger to this Committee or to the challenges of
implementing financial reforms. As Commissioner of Banks, he was
responsible for implementing and enforcing North Carolina's
antipredatory lending laws, overseeing the State's foreclosure
prevention program and serving on the Governor's task for to increase
small business lending--to name a few of his accomplishments--all while
regulating small and large financial institution in the State. To
highlight some of those accomplishments, I would like to enter into the
record letters from the Independent Community Bankers Association, the
Conference of State Bank Supervisors, the Mortgage Bankers Association
and National Association of Realtors.
Thank you for your willingness to serve at the Federal level--
especially at a time when our country is trying to overcome significant
economic challenges. Balancing consumer protection and credit
availability, regulation and economic growth will be extremely
important for creating a sustainable housing and economic recovery. I
look forward to learning more about your work and how you view the role
of Director of FHFA.
______
PREPARED STATEMENT OF JOSEPH A. SMITH, JR.
To Be Director of the Federal Housing Agency
December 9, 2010
Mr. Chairman, Ranking Member Shelby, and Members of the Committee.
I am Joseph A. Smith, Jr., currently the North Carolina Commissioner of
Banks, and the President's nominee for the office of Director of the
Federal Housing Finance Agency. It is an honor and a privilege to sit
before you today.
I would like to express my appreciation to the President for
nominating me to this position, and his confidence in me in fulfilling
this significant role. I would also like to express particular thanks
to Chairman Dodd and Ranking Member Shelby for agreeing to consider my
nomination so promptly. Such consideration is a great courtesy to me,
and a recognition of FHFA's critical importance. Thank you very much.
I regret that Elizabeth Smith, my wife of 31 years, cannot be with
me today. Without her love and support, including sound advice, I would
not be here today.
I come before you with a commitment to public service and to
strengthening the Nation's housing finance system, direct experience in
both banking and housing, and the hard-won knowledge I have managed to
accumulate over a 35-year career in law, banking and State government
service. During my career, I have been directly involved in a variety
of activities that serve as a daily reminder of the challenges ahead. I
have worked out commercial loans, represented a bank through a real
estate crisis, implemented both State and Federal mortgage licensing
regimes, and supervised banks in varying stages of distress, up to and
including resolution.
In my 8 years as the North Carolina Commissioner of Banks, my
colleagues and I have worked diligently and consistently to mitigate
losses to our lending institutions and the financial system at large,
as well as to prevent failures on a broader scale. My office supervises
depository institutions with over $245 billion in total assets and a
range of nonbank financial services firms, including mortgage bankers
and brokers, consumer finance companies, check cashers and money
transmitters. I have been the Commissioner during the recent financial
crisis and have direct experience as a safety and soundness regulator.
While I believe that this experience will be important should I be
confirmed as Director of FHFA, I also know that experience alone will
not be enough to be successful in this position. In that regard, I look
forward to working with the staff of FHFA, the Administration, and with
you and other Members of Congress for input and guidance.
We are facing a significant challenge in the housing finance
markets today. Fannie Mae and Freddie Mac are under conservatorship and
have received $151 billion from the Treasury Department in order to
maintain their support of the housing market, which is critical at this
time. But conservatorship cannot be a long-term solution. Congress and
the Administration have important decisions to make regarding the
future structure of the housing finance system. If confirmed, I look
forward to working with you and having FHFA become an active
participant in that process.
I understand that, if confirmed, you expect leadership and not just
management. The activities of Fannie Mae and Freddie Mac are national
in scope but local in impact, directly affecting communities across the
country. Leadership in this context means determining how to address
critical local needs in conjunction with the Agency's duties of
conservatorship.
I also pledge to you the same kind of leadership with regard to
FHFA's supervision of the Federal Home Loan Banks. I expect many of you
have heard from your bankers what I have heard from mine: the Federal
Home Loan Banks are a crucial and needed source of funding and support
to community banking which, in turn, plays a vital role in addressing
the credit needs of consumers, small businesses and communities around
the country. As FHFA has effectively reported, the Federal Home Loan
Banks have their own challenges and are now subject to enhanced
supervision. Community banks are dear to my heart, and you may be
assured that the Home Loan Banks will receive my full attention, with
an eye to strengthening them and the banks they serve.
Mr. Chairman, Ranking Member Shelby, and Members of the Committee,
thank you again for your consideration of my nomination. Should you see
fit to confirm me, I look forward to serving as the Director of the
Federal Housing Finance Agency. I would be happy to answer any
questions you may have.
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM JOSEPH A. SMITH, JR.
Q.1. Position on Important Issues. Please state your positions
on the following important issues that will face the next
Director of FHFA. What is your view on the current levels of
affordable housing goals, as set by the Federal Housing Finance
Agency (FHFA) for Fannie Mae (Fannie) and Freddie Mac
(Freddie)? Do you view the current levels as appropriate? If
so, on what basis do you judge appropriateness? If not, why
not?
A.1. While tension exists between implementing the affordable
housing mandates and the goals of conservatorship to minimize
taxpayer losses, if confirmed, I would do my best to strike a
balance between these two statutory mandates. I believe that my
first goal will be to conserve and preserve assets, but
recognize that, as Director I would be legally obligated to set
and measure compliance with the affordable housing goals. If
confirmed, I look forward to working with Congress to address
appropriate alternatives for supporting affordable housing.
Q.2. What is your view on whether Fannie and Freddie should
have sizeable portfolio holdings?
A.2. I understand that both GSEs are required under the terms
of their preferred stock purchase agreements with the Treasury
Department to reduce their portfolios by 10 percent per year. I
want to acknowledge that, while there is no reason for the GSEs
to have large investment portfolios, the portfolios are being
used today for loss mitigation purposes. I understand that some
level of portfolio is needed to be able to hold nonperforming
loans that will be modified. If confirmed, I look forward to
working with my colleagues at FHFA to gain a better
understanding of the details of the GSEs' portfolios.
Q.3. Is the current conforming loan limit for Fannie and
Freddie appropriate?
A.3. Congress authorizes and sets the conforming loan limit. If
confirmed as Director, it would be my responsibility to ensure
that Congress' direction is correctly implemented.
Q.4. What is your view on whether agency mortgaged-backed
securities should be explicitly guaranteed by the Federal
Government as part of any reform of the housing finance system?
A.4. If Congress decides to provide for an explicit Government
guarantee, I believe that they should consider the costs of
such a guarantee and who will bear those costs; any guarantee
must be appropriately priced to compensate for risk, to cover
potential losses.
Q.5. It is my understanding that during conversations with
staff of the Senate Committee on Banking, Housing, and Urban
Affairs (Banking Committee), you stated that you did not have
positions on the above issues. If you now have positions on
these issues, what has occurred to change your positions?
A.5. During the last few weeks, I have had an opportunity to
review public reports and materials related to all of FHFA's
regulated entities, including their financial statements and
FHFA's conservator report and loss projections for Fannie Mae
and Freddie Mac. That being said, these are complex and huge
financial institutions and there is much more to understand
before I can responsibly come to fully informed positions.
Q.6. Analytical Support for Positions. What macroeconmic
analysis or analysis of mortgage and housing markets have you
performed or evaluated to arrive at your positions regarding
what you feel should be the future course for Fannie Mae and
Freddie Mac?
A.6. I am familiar with various pieces of analysis on the U.S.
housing market and some of the proposals for reforming the
system. However, I defer to the judgment of Congress regarding
the future of Fannie Mae and Freddie Mac. If confirmed, I hope
that I can be helpful to those who will be making critical
decisions about the most appropriate structure, by providing
information and data that can help to inform the deliberations.
Q.7. Options for Ending the Conservatorship. When then Treasury
Secretary Paulson and Director Lockhart acted in September 2008
to establish the conservatorship for Fannie Mae and Freddie
Mac, they indicated that this is a ``time out'' so that
Congress can consider what, if any, is the appropriate role in
our housing finance system for the GSEs.
What would you like to see happen if the GSEs become
economically viable again and Congress has not acted on GSE
reform? Would you, as FHFA Director, continue the
conservatorship, or would you be required to return the
companies to their previous form?
A.7. FHFA's current loss projections for the GSEs show an
expectation of continued losses over the next few years. If
confirmed, my role as their conservator is to work to minimize
these losses. I expect that the decisions made regarding the
future of the housing finance system will include some type of
resolution that ensures that the overall cost of the Federal
support for the GSEs is as low as possible. We all recognize
the significant problems that resulted from the public/private
structure. In whatever form the GSEs emerge from
conservatorship, we should aim to ensure that they are stronger
and well-managed to perform any role that Congress lays out for
them going forward.
Q.8. If the companies were returned to their previous form,
what would be the Treasury's role in their day-to-day
operations, considering that the Treasury holds warrants for
79.99 percent of the companies' common stock?
A.8. I believe that Congress will act with due speed to
consider and enact housing finance reform and I look forward to
working with you and other members of Congress to ensure that
this accomplished.
Q.9. Risk Management. According to Fannie Mae's most recent 10-
Q statement, Fannie's business activities expose taxpayers to
four, often overlapping, major categories of risk: credit risk,
market risk, operational risk, and model risk.
If confirmed, please explain in detail what you will do to
manage each of these risks and whether what you would do
deviates from what you understand Fannie currently does. If you
advocate deviation(s), please explain why.
A.9. The risks mentioned in the question are traditional
concerns of financial services regulators (along with liquidity
risk, reputation risk, and a number of other risks that may
vary, depending on market conditions). These risks have been
and are being addressed by FHFA supervisory staff as part of
their examination and supervision of the Enterprises. If
confirmed, I intend that this process should continue so that,
working with the managements and boards of the Enterprises,
each of these risks (and others, as appropriate) are
effectively addressed and the Enterprises are made more stable
and resilient.
Q.10. Protecting the Taxpayer. Mr. Smith, according to an
article in the Wall Street Journal dated December 8, the Obama
administration ``is pressuring Fannie Mae and Freddie Mac,
through their primary regulator, the Federal Housing Finance
Agency'' to get the mortgage giants to agree to write down
mortgages. The FHFA has been reluctant to allow principal
balance reductions because the FHFA is charged with limiting
taxpayer losses.
Mr. Smith, given the responsibilities of FHFA as
conservator, would you resist Administration pressure on Fannie
and Freddie for principal write-downs? If so, please explain
why. If not, please explain why and provide details of the
analysis you have performed or consulted that has led to your
position.
A.10. The Federal Housing Finance Agency is an independent
agency of Government. I am the head of an independent agency of
State government now, I understand how important that
independence is, and I appreciate that I will be independent if
I am confirmed. While there will be many varying interests
before the agency, I will consider any proposal first and
foremost from the prospective of the role as conservator, with
eye to protecting taxpayers. I understand that FHFA has
publicly stated that the idea of principal reduction is under
review. I have no further knowledge of the topic than what I
have read in press accounts.
Q.11. View of Responsibilities. The Director of FHFA has many
responsibilities. If confirmed, what do you believe would be
your primary responsibility?
A.11. If confirmed, my main duty is to serve as conservator of
Fannie Mae and Freddie Mac, working to minimize their losses
and bring them back to a position of health, in anticipation of
Congress' determination of the future structure of the housing
finance system. As Director, I would be expected to ensure the
safety and soundness of all 14 GSEs and would seek to ensure
that all of the GSEs have proper governance, proper risk
management practices, proper operating procedures, and that
they obey law. For Fannie Mae and Freddie Mac under
conservatorship, all of these mandates are consistent with the
preservation of their assets and their rehabilitation.
Q.12. The oversight of Fannie Mae and Freddie Mac, which are
multitrillion dollar organizations and are larger than any
private financial institutions, is a serious responsibility.
How has your experience prepared you to undertake this effort?
A.12. If confirmed, I would look forward to the opportunity to
participate in the healing and reform of our Nation's housing
finance system. I would bring to this task 35 years of
experience in law, banking, and financial services regulation.
I am humbled by this opportunity and look forward to working
with agency staff, Congress, and others to address this
critical effort.
Q.13. If confirmed, who do you believe are what you have
referred to elsewhere as ``stakeholders'' in Fannie and
Freddie, and how would you rank those stakeholders in terms of
importance and in making tradeoffs?
A.13. If confirmed, my first priority will be the success of
the conservatorship of the Enterprises, to protect the interest
of taxpayers. As noted in my oral testimony, the Enterprises'
business has a significant impact on communities around the
country. I will, if confirmed, have an obligation to implement
affordable housing mandates and, in that regard, will have to
deal with the tension between the ``mission'' goals and the
goals of the conservatorship. I expect that I will be asked to
implement or support changes to current Enterprise policy in
order to increase the availability of credit and the
involvement of private sector in the housing market. If
confirmed, I will listen to such proposals, but will make
decisions based on my position as an independent regulator and
conservator of the GSEs.
Q.14. Lack of Conservator Experience. Thus far, I am unaware of
any experience you have with running a conservatorship. If this
is correct, how would you plan to compensate for a lack of
experience in this area given the magnitude of responsibility
in operating these companies?
A.14. As my oral testimony points out, as North Carolina
Commissioner of Banks I have been and am involved with
financial institutions in distress, up to and including
resolution. I have extensive experience working with bank
management, boards, and Federal regulators to mitigate losses
and, where possible, to prevent bank failures. That said, I
understand that the Enterprises differ in degree and kind from
the institutions with which I have been dealing. I am not
conducting my current work with distressed institutions alone;
rather, as Commissioner, I supervise teams of examiners and
other supervisory personnel, who deal with these lending
institutions diligently and skillfully. If confirmed as
Director of FHFA, I would review with agency management the
current status of conservatorship and regulatory activities and
would work with them to support their efforts and to ensure
that they have the resources (human, financial, and technical)
necessary to do their work fully and effectively. Policy
decisions would be made only after careful review of legal
authority and facts and only after full discussion with staff.
The conservatorship and regulation of the Enterprises is not a
one person job; while responsibility ultimately rests with the
Director, it has to be exercised through the agency as a whole.
Q.15. FHFA as Conservator. In describing its role as
conservator, FHFA has previously stated:
The purpose of appointing the Conservator is to
preserve and conserve the Company's assets and property
and to put the Company in a sound and solvent
condition. The goals of the conservatorship are to help
restore confidence in the Company, enhance its capacity
to fulfill its mission, and mitigate the systemic risk
that has contributed directly to the instability in the
current market.
Do you agree with this assessment of FHFA's
responsibilities as conservator? Why, or why not?
A.15. I agree with the approach that prior leadership of the
FHFA have taken with regards to the responsibilities as
conservator. If confirmed as Director, I intend to pursue three
main strategies that I believe are consistent with Congress'
intent in granting FHFA the authority to act as conservator of
the GSEs: (1) minimize the losses on the poor quality existing
book of business; (2) ensure that the GSEs take on good quality
business going forward, with their prices effectively covering
the expected risk; and (3) work to stabilize the housing
market, which is in the best interest of not only the GSEs, but
also homeowners and taxpayers who have supported these two
firms.
Q.16. FHFA Role in the Financial Stability Oversight Council.
The FHFA participates in deliberations of the Financial
Stability Oversight Council (FSOC). One task of that Council
will be to identify ``systemically important financial market
utilities and payment, clearing, and settlement activities.''
What criteria would you use to identify a market utility or
payment, clearing, or settlement activity as ``systemically
important'' and can you provide examples of entities that
currently satisfy your criteria? (If you rely solely on the
considerations provided in Title VIII of the Dodd-Frank Act,
please identify quantitative cutoffs beyond which an entity
would become, in your view, systemically important.)
A.16. As I understand it, the determination of systemically
important financial market utilities is an important
responsibility of the Financial Stability Oversight Council. I
understand that an Advanced Notice of Proposed Rulemaking was
recently issued by the Council. If confirmed, I look forward to
fully considering this issue as a member of the Council.
Q.17. Plain Vanilla Mortgages. During the debate on what became
the Dodd-Frank Act, some advocated that customers be offered a
default of ``plain vanilla mortgages,'' arguing that behavioral
economics supported this position. In previous testimony before
this Committee you seemed to have a position consistent with
this, stating ``recent work in behavioral economics suggests
that when confronted with information overload, bad choices
often result.'' You then stated that the default mortgage for
certain borrowers should be the 30 year fixed rate mortgage.
Do you continue to believe in the concept of a ``default''
mortgage for certain consumers?
How do you define so-called ``behavioral'' economics, and
how would you use behavioral economics in your capacity running
the FHFA? What do you believe to be the difference between
``behavioral'' economics and nonbehavioral microeconomics or
macroeconomics?
What do you believe behavioral economics has to offer, if
anything, in the context of mortgage contract design? Please
identify any empirical studies that provide support for your
view.
A.17. I would like to clarify that the remarks that are quoted
were made in the context of a discussion of the subprime
crisis. The key elements that are important to me are
simplicity, clarity, and consumer choice in the offering of
mortgages and their documentation, as well as underwriting
practices that fairly consider the borrower's ability to repay
and other factors that lead to a successful loan. These
considerations are now under the purview of the Consumer
Financial Protection Bureau and the Federal regulators who are
working to implement the provisions of Dodd-Frank that would
define ``qualified residential mortgages.'' The FHFA has a role
in drafting these regulations and, if confirmed, I look forward
to working with the staff on this issue.
Q.18. PACE Loans. On July 6, 2010, FHFA found that: `` . . .
certain energy retrofit lending programs present significant
safety and soundness concerns that must be addressed by Fannie
Mae, Freddie Mac and the Federal Home Loan Banks.''
Accordingly, they released guidance to protect these
institutions from what are commonly referred to as PACE loans.
It is my understanding that during conversations with Banking
Committee staff, you indicated that you would not alter this
guidance so long as it was under active litigation. Would you
confirm that this is your position?
A.18. I feel strongly that the protection of the priority of
liens with respect to loans financed or guaranteed by the GSEs
is critical to conservatorship. However, I understand the FHFA
is currently a party to litigation with respect to PACE loans.
Accordingly, should I be confirmed, I may well be a named party
in such litigation. This being the case I believe that any
further comment on the subject would be inappropriate at this
time.
Q.19. Role on the FSOC. The Director of the FHFA will sit on
the Financial Stability Oversight Council, which was recently
created by the Dodd-Frank Act. In your view, what role should
the FSOC play, if any, in improving financial regulation, and
how would you plan to carry out your responsibilities as a
member, if confirmed?
A.19. I think that it is appropriate for FHFA to be a voting
member of the FSOC, given that the agency's regulated entities
have a significant role in the housing finance system today. I
understand that most of the members of the Council are also
engaged in various aspects of the interagency rule-making to
develop the regulations required to implement Dodd-Frank. If
confirmed, I will continue to support these efforts, providing
information and data, as necessary, as well as the expertise of
agency staff to discuss and debate the important issues to be
addressed in the regulations.
Q.20. Fed and Systemic Risk. The ``Housing and Economic
Recovery Act'' (HERA) required that the FHFA consult the
Federal Reserve (Fed) on all regulatory matters related to
authorities granted by HERA. This was an effort to make certain
that the FHFA remained mindful of the impact of its decisions
on financial system stability. Going forward, what do you
believe should be the role of the FSOC or the Fed in mitigating
systemic risks posed by Fannie and Freddie?
A.20. My understanding of the provision in HERA that required
FHFA to consult with the Federal Reserve on significant rules
is that it expired in December 2009. I would note that HERA
requires an oversight board for FHFA with certain regulators
providing advice to the agency. In addition, the Dodd-Frank
bill makes FHFA a member of the Financial Stability Oversight
Council. In its role on the FSOC, FHFA would work with other
regulators to consider the systemic impact of the GSEs on
markets as well as the impact of market events on the GSEs.
FHFA has primary authority to work to avoid unsafe and unsound
practices at the GSEs that could have a systemic risk.
Q.21. Influence and Oversight. Given the involvement of both
Treasury and HUD in loan modification programs in which Fannie
and Freddie participate, there may be instances in which these
agencies have strong opinions as to what actions Fannie and
Freddie should take regarding certain policies. What is your
view of the appropriate role for either the Secretary of
Treasury or the HUD Secretary with respect to the oversight and
management of Fannie Mae and Freddie Mac? Does either have any
authority related to FHFA and its responsibilities as
conservator?
A.21. As I understand it, FHFA is an independent regulator and
therefore is not accountable to the Treasury Department or
Department of Housing and Urban Development for its decisions.
I would note that the Treasury Department does have a
contractual relationship with the GSEs through the Preferred
Stock Purchase Agreements and the financial agent contracts for
the Making Home Affordable program. FHFA also works with the
Treasury Department and other Federal regulators through the
Financial Stability Oversight Council and, should I be
confirmed, I would, of course, willingly listen to their views
and coordinate with them on systemic risk issues. However, my
role as Director would be to make the appropriate decisions
related to the entities that I would regulate--the GSEs--and I
would prioritize the goals of the conservatorship in any
decision I make.
Q.22. Would it be appropriate for either to ask you to take
some action that is inconsistent with conserving Fannie Mae and
Freddie Mac assets, such as principle reductions or not
pursuing ``putbacks'' to protect bank solvency?
A.22. Should I be confirmed as Director of the FHFA, my main
duty would be to conserve and preserve the assets of the GSEs
in conservatorship. While I would consider input from a variety
of sources in reaching a decision, any decision would
ultimately be made in light of my role as an independent
regulator and conservator of the GSEs. Regarding principal
reduction specifically, I understand that FHFA has publicly
stated that the idea of principal reduction is under review. I
have no further knowledge of the topic, other than what I have
read in press accounts.
Q.23. If confirmed, what course of action would you take if
asked to make a decision that might somehow benefit the public,
but would be detrimental to Fannie Mae and Freddie Mac and thus
also detrimental to the interest of the taxpayer?
A.23. If confirmed, my main duty as Director of FHFA would be
to conserve and preserve the assets of Fannie Mae and Freddie
Mac in conservatorship. My course of action would entail
seeking input from a variety of sources, both within FHFA and
the GSEs, as well as seeking input from external sources. The
ultimate decision would conform to my role as an independent
regulator and conservator of the GSEs, to preserve and conserve
GSE assets.
Q.24. Freddie Mac Suing IRS. On October 22, Freddie Mac filed
suit against the Internal Revenue Service (IRS), disputing the
IRS's determination that Freddie Mac owes $3 billion of
additional income taxes and penalties for the 1998 to 2005 tax
years. While, as conservator, the FHFA has a duty to preserve
and conserve Freddie Mac's assets and property, and the
Secretary of the Treasury has the duty to enforce revenue laws,
this dispute seems to be an instance of the right hand suing
the left, given that the taxpayers essentially own Freddie Mac.
If confirmed, would you expect that the FHFA and Treasury
could work out a solution to this dispute that would avoid a
scenario in which the taxpayers gain nothing but a bill for
attorney fees? Would you pursue such a solution? How would you
go about making this happen?
A.24. I am unaware of the details of the dispute between
Freddie Mac and the IRS, but I understand that this matter is
now before the U.S. Tax Court. If confirmed as Director of
FHFA, I would work with my colleagues at the FHFA and the IRS
to determine if a resolution is possible, without the need for
further litigation.
Q.25. When To Expedite Foreclosures. Press reports detailing
problems with the preparation and notarization of foreclosure
documents by some servicers has led to increased discussions
regarding foreclosure procedures and their impact on the
housing market. One such issue is the length of time now
required to foreclose in certain States. While every homeowner
deserves the right to proper due process, averages approaching
a year and a half in some instances add significant costs to
our economy.
In what instances, if any, should FHFA instruct Fannie Mae
and Freddie Mac to pursue foreclosure expeditiously? If
confirmed, would you as FHFA Director advocate suspension of
the so-called ``dual track'' process of mortgage modification?
If so, what tradeoffs would you be making and what empirical
assessment guides your decision?
A.25. As the North Carolina Commissioner of Banks, I have
worked directly on foreclosure prevention programs and
therefore have been closely following the national press on
foreclosure processing problems. I have heard local and city
officials in North Carolina express serious dismay when vacant
properties languish and create blight in local communities, and
I have heard from consumer advocates who oppose the ``dual
track'' process as unfair to the troubled homeowner, so I am
very interested in finding a middle ground to address these
competing problems. While all of my decisions as Director of
FHFA will be based on the overriding principals of
conservatorship, if confirmed, I will certainly take a look at
the situation and work to find some common ground--to ensure
that homeowners are provided with every opportunity to keep
their homes, yet to move foreclosure processing along promptly
when necessary, to protect local neighborhoods from the harmful
effects of abandoned and vacant properties.
Q.26. Financial Statements. Mr. Smith, as a prospective
conservator for Government-owned enterprises with large
portfolios and scales of business, you need to be intimately
familiar with the financial conditions of the enterprises. What
financial statements of Fannie Mae, Freddie Mac or the Federal
Home Loan Banks have you read during the past year, and what
have you taken away from those statements?
A.26. I have read the SEC filings of the GSEs, with particular
attention to Fannie Mae, and the consolidated financial
statements of the Federal Home Loan Banks. I also thoroughly
read the examination reports published by FHFA on all of their
regulated entities. Frankly, I find the FHFA reports most
helpful in understanding the weaknesses and condition of the
GSEs. These reports highlight a number of supervisory concerns
that I intend to focus on in my role as regulator and
conservator, if confirmed for this position.
Several things occurred to me as I reviewed the financial
statements. Recently, Fannie Mae and Freddie Mac were required,
due to accounting rule changes, to bring on the balance sheet
all their guaranteed loans. I was struck by the impact of the
consolidated statements on the scope of their operations and
the difficulty it creates in comparing results quarter-to-
quarter or year-to-year. I was also struck by the extensive
discussions of the national economy and levels of employment,
which are material factors that have to be disclosed as part of
the financial statements. The descriptions in the reports
highlight that there are critical factors to the success of the
GSEs that are not under FHFA's control, but that must be
closely monitored.
Q.27. Do you believe that you possess sufficient knowledge of
FHFA's authorities and responsibilities and of Fannie Mae,
Freddie Mac, and the FHLB's operations to be able to properly
manage FHFA immediately, if you are confirmed? Are there any
areas where you would need time to get yourself up to speed? If
so, what areas?
A.27. As a result of my nomination, I have done my best to
familiarize myself with the authorities and responsibilities
mentioned in your question. If confirmed, I will act only after
careful study of the relevant authorities and in consultation
with staff.
Q.28. Leadership and Tradeoffs. In discussing your views about
leadership at FHFA, you testified that: ``Leadership in this
context means determining how to address critical local needs
in conjunction with the agency's duties of conservatorship.''
Could you elaborate on what you mean by ``local needs'' and
how you would use resources available to, or guided by, the
Federal Housing Finance Agency to address those needs? Could
you describe how you would balance local needs with needs of
taxpayers who are invested in Fannie Mae and Freddie Mac?
A.28. I was referring to the fact that Fannie Mae and Freddie
Mac are very large players in the housing finance system and
that their activities can have an impact on local communities.
For example, the large numbers of foreclosures are creating a
high volume of properties that must be sold, which can affect
neighborhoods if the properties are not moved to sale in an
expeditious manner. If confirmed, my priority would be to
minimize further losses to the taxpayer, but I would also be
conscious of the effect of Enterprise activities on local real
estate markets.
Q.29. FHFA Role in the Future of Housing. In your testimony,
you identify that conservatorship of Fannie Mae and Freddie Mac
cannot be a long-term solution and that Congress and the
Administration have important decisions to make with respect to
housing finance. You go on to state that: ``If confirmed, I
look forward to working with you and having FHFA become an
active participant in this process.'' Could you elaborate on
what you mean by FHFA being an ``active participant'' in the
process involving decisions by Congress and the Administration
with respect to the Nation's housing finance system?
A.29. In preparing for this nomination, I have had occasion to
review various proposals and options to restructure the GSEs
and the housing finance system. I am also aware that the
Administration is preparing a proposal for Congress's
consideration in January. If confirmed, I look forward to
working with my colleagues at FHFA to advise Congress about the
costs and benefits on any proposals that would be brought
before you. As Director of FHFA, I expect to provide you
factual information and data, and I hope that FHFA can serve as
a trusted adviser as you deliberate the future of the housing
finance system.
Q.30. Abusive Lending and the Housing Bubble. Mr. Smith,
according to a November 12 article in the New York Times, you
played a ``crucial role'' in North Carolina's response to the
collapse of the housing market.
The article goes on to say that: ``He identified abuses by
lenders as an important factor in the boom and bust . . . ''
Mr. Smith, have you identified abuses by lenders as an
important factor in the boom and bust that has been experienced
in the Nation's housing market? If not, do you believe that
such abuses have been an important factor? If so, could you
quantify the contribution of lender abuse to the boom and bust
in the housing market or identify the empirical evidence upon
which your belief is based?
A.30. During my entire term as North Carolina Commissioner of
Banks, starting in 2002, I was involved in the implementation
and enforcement of a licensing system for mortgage brokers and
bankers not affiliated with banking organizations. The statute
under which this system was implemented, the North Carolina
Mortgage Lending Act (MLA), like the high-cost loan law
(commonly called the ``predatory lending law'') that preceded
it, had been adopted by large bipartisan majorities of both
houses of the North Carolina General Assembly in response to
perceived abuses in the market place, particularly the high-
cost segment of the market, which ranged from churning of loans
(repeated refinancing with no net benefit to the borrower) to
outright fraud. Enforcement of the MLA resulted in the removal
from the market of literally hundreds of originators and their
employers who had no business being in the mortgage business
and, in the worst instances, in Federal and State criminal
prosecutions. As the most recent Conservator's Report of FHFA
(Second Quarter 2010) shows, the work my colleagues and I have
done in mortgage licensing has taken place during a period when
the GSEs (including Ginnie Mae) accounted for a relatively
small share of the MBS market: 54 percent in 2004, 45 percent
in 2005, 44 percent in 2006 and 63 percent in 2007. The
Conservator's Report graphically shows a large increase during
this period in private label securities. In my view, these
securities, which were the financing source for the abusive
practices mentioned above, contributed to the financial crisis.
Q.31. Foreclosure Prevention. Mr. Smith, during your nomination
hearing before the Senate Committee on Banking, Housing, and
Urban Affairs, it was identified that you oversaw a
``foreclosure prevention program'' in North Carolina. Please
provide a description of the successes or failures of that
program and summary statistics of the program's performance.
A.31. Pursuant to legislation adopted by the North Carolina
General Assembly, commencing November 1, 2008, the Office of
Commissioner of Banks implemented a program that requires
filing of a notice with the Office of Administrator of the
Courts prior to the filing of a foreclosure action and a
deferral period of 45 days (extendable once, for cause shown).
The law also required, and funded from the agency's reserves,
outreach to borrowers and referral to counselors with regard to
high-cost loans. At the time of the statute's adoption,
foreclosure starts were running at the rate of about 60,000 a
year, primarily on high-cost loans. In more recent times, the
rate of foreclosure starts has increased and its composition
has changed to predominately conforming loans. Pursuant to
further State legislation reflecting this change, effective
November 1, 2010, the General Assembly extended the reach of
the program to all home loans and funded it with a one-time fee
on the filing of foreclosures. Over the course of its
operation, the State Home Foreclosure Prevention Program has
referred over 13,000 borrowers to counseling and has kept 5,237
families in their homes to date. A ``save'' is determined by
follow-up with counselors to ensure that the loan has been
modified or restructured, that the family can afford the
payments, and that the family is, in fact, still in the home.
Modifications as the result of counseling are voluntary as a
rule; my office has no statutory authority to compel
modifications. I believe that the SHFPP is a success in that it
has prevented foreclosure for a significant number of families.
The principal challenges the SHFPP has faced have been
borrowers' reluctance to respond to outreach efforts in a
timely way, as well as difficulties experienced by homeowners,
counselors, and servicers in seeing the loss mitigation process
through to ultimate resolution. Loan modifications are
typically a document-intensive process that takes proactive
coordination on the part of all involved.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JOSEPH A. SMITH, JR.
Q.1. At our last full Committee hearing examining foreclosure
processing and loan modification issues, we heard from Governor
Tarullo of the Federal Reserve. He said, ``while bank
regulatory agencies can and should respond to specific failings
that are being identified in our interagency examination, there
is a strong case to be made that broader solutions are needed
both to address structural problems in the mortgage servicing
industry and to accelerate the pace of mortgage modifications
or other loss mitigation efforts.'' Do you agree with this
statement? Why or why not?
A.1. I believe that reform of the mortgage finance system
should include a coordinated and coherent system of regulation
of all aspects of the mortgage process from origination through
foreclosure. The SAFE Act, which is included in the Housing and
Economic Recovery Act, is an example of the way in which
Federal and State regulators can work together on the
origination end; comparable coordination in the remainder of
the process is very important.
Q.2. What do you see as FHFA's major challenge(s) going
forward?
A.2. FHFA's major challenges are: (i) managing the tension
between the duties of conservator, statutory affordable housing
goals and aspects of the ongoing crisis, the most recent
manifestations of which involve foreclosure; and (ii)
attracting, retaining, and motivating the human capital
necessary to carry out its mission.
Q.3. What would be your top priorities if the Senate confirmed
you?
A.3. My top priorities would be: (i) prudent and effective
management of the conservatorship of the Enterprises; (ii)
effective assistance to Congress as it considers housing
finance market reforms; and (iii) effective supervision of the
Federal Home Loan Bank System.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
FROM JOSEPH A. SMITH, JR.
Q.1. Fannie Mae and Freddie Mac have dramatically increased
their nonguarantee fees over the past 2 years. These include a
set fee applicable to all mortgages, as well as separate
delivery fees that are tied to a borrower's credit score,
initial loan-to-value ratio and other factors. Fannie Mae and
Freddie Mac claim that these fees are used for risk mitigation
purposes.
The GSEs charter requires them to use one of three forms of
credit enhancement to mitigate their risk on low down payment
loans. The one used most frequently is mortgage insurance.
These credit enhancements employ private sector capital which
minimizes risk to the GSES and, therefore to taxpayers, and are
less expensive for borrowers. As Director, what will you do to
eliminate these fees and ensure that the GSE use proper risk
mitigation tools? Furthermore do you believe that these fees
are driving homebuyers, who are putting less than 20 percent of
the home's value toward the down payment, to purchase a home
with an FHA mortgage rather than with mortgage insurance?
A.1. From what I understand, Fannie Mae and Freddie Mac use
various strategies to reduce losses to the taxpayer including
credit enhancements, such as private mortgage insurance, and
guarantee fees to cover the cost of potential losses. I have
heard the concerns about loan level pricing by the GSEs,
including its impact on private mortgage insurance. Should I be
confirmed as Director of FHFA, I will review this issue with
staff and the GSEs to better understand how those fees are set,
to what extent they are necessary to compensate for risk, and
the interplay between the fees and the credit enhancement.
Q.2. In Wisconsin, 87 percent of our commercial banks are
members of the Federal Home Loan Bank of Chicago. Bankers in
Wisconsin tell me how valuable the Federal Home Loan Bank of
Chicago is to their business as a source of low-cost funding
and mortgage-related services. During the liquidity crisis of
2007 and 2008--as other sources of funding dried up virtually
overnight and before the Federal Reserve or the Administration
had time to devise a response--the Home Loan Banks proved
especially valuable as the only reliable source of funding for
financial institutions, particularly smaller community banks.
The Chicago Home Loan Bank increased its lending to
Wisconsin financial institutions approximately 56 percent from
July of 2007 to January of 2009--resulting in an additional
$4.9 billion of funding to better help Wisconsin banks serve
the needs of their customers and their communities. While not
well understood outside of financial circles, this rapid
infusion of liquidity into the financial system in a safe and
controlled manner helped prevent the financial crisis from
becoming even more disastrous.
What are your thoughts on the Federal Home Loan Banks and
their mission of providing funding to community lenders through
all business cycles?
Are there any specific areas or operations of the Home Loan
Banks that you are concerned about or that you plan to focus on
as their regulator?
Are there any specific changes to the Home Loan Banks that
you would recommend?
A.2. As I said in my testimony, community banks are dear to my
heart and the Federal Home Loan Banks are crucial to the
success of many community banks. The Federal Home Loan Banks
provided critically needed liquidity during the financial
crisis. I am aware that the Federal Home Loan Bank System is a
matter of heightened supervisory concern for FHFA. If
confirmed, I intend to address these supervisory concerns with
the Federal Home Loan Banks and their member banks to maintain
and strengthen the Home Loan Bank System.
Q.3. Many of the Federal Home Loan Banks, including the Chicago
Bank, operate mortgage purchase programs that allow their
member banks to sell traditional fixed-rate loans they
originate directly to their Home Loan Bank, or to the loans
through their Home Loan Bank as an alternative secondary market
option. Many of these programs are different from mortgage
purchases made by Fannie Mae and Freddie Mac because
participating lenders are able to share in the credit risks of
their mortgage loans, thereby keeping ``skin in the game.''
This innovative structure has proven to be very successful. The
percentages of loans that are seriously delinquent or are in
foreclosure are only about one-third of the loans purchased by
Fannie Mae and Freddie Mac.
These programs are also very popular with FHLB member
banks, particularly community banks. In Wisconsin, more than
125 lenders have funded more than $13 billion of mortgage loans
using these programs to help a family buy a new home or lower
the costs of their existing mortgage through refinancing. The
superb credit performance of the loans demonstrates that local
community banks and thrifts originate very high quality
mortgages.
Are you familiar with the unique risk sharing structure
used by the Home Loan Bank mortgage programs?
Do you plan to encourage the further development and growth
of these programs?
Are there lessons in these programs that can be applied as
we look to reform the housing finance industry?
A.3. Based on the information I have at this time, I am not
familiar with the details of this program. If confirmed, I
undertake to consult with my colleagues at FHFA to assess this
program in light of the supervisory regime for the Federal Home
Loan Bank of Chicago and the Federal Home Loan Bank System as a
whole.
Q.4. Farmers back in Wisconsin often tell me that they have
trouble finding banks that are willing to lend to them. I also
hear from Bankers that regulators often make it difficult for
them to expand their agriculture farm loan portfolios. The
Gramm-Leach-Bliley Act expanded the available collateral from
Community Financial Institution members of the Federal Home
Loan Banks to include agricultural and small business loans. A
recent report released by the Government Accountability Office
found that:
Small business and agricultural loans account for
only 1 percent of FHLB advances;
Implementation has fallen short of the
congressional intent to improve economic development in
local communities and enhance the availability of
capital for agricultural loans.
Why do you think the Federal Home Loan Banks have fallen
short of the Congressional intent to improve the development of
local communities?
Do you think that Federal Home Loan Banks should facilitate
more agriculture lending?
Do you plan to encourage Home Loan Banks to facilitate more
agriculture lending for their member banks?
A.4. Based on my experience as North Carolina Commissioner of
Banks, I appreciate the difficulties farmers have in obtaining
credit. If confirmed as Director of FHFA, I intend to review
the current status of agricultural lending by members of the
Federal Home Loan Bank System and work with Federal Home Loan
Banks and their members to develop an appropriate participation
by such banks in that important market. To the extent that
these activities are relatively new to the Federal Home Loan
Banks or their members, any increase in agricultural lending
would have to be done in a way that does not compromise the
integrity the Federal Home Loan Banks or the Federal Home Loan
Bank System.
Q.5. Let me get your views on the structure of Government
sponsored enterprises (GSEs). Because all GSEs have at least
the implicit backing of American taxpayers, the structure of
these entities is very important. The 12 Federal Home Loan
Banks are each organized as a cooperative, as are the Farm
Credit Banks. Unlike corporations with publicly traded stock,
such as Fannie Mae and Freddie Mac, a cooperative structure
ensures the interests of a GSE's customers are closely aligned
with those of its shareholders because they are largely the
same group. This structure also greatly reduces a GSEs'
incentive to take unnecessary risks in order to meet high
profit expectations. For example, all Home Loan Bank loans to
members are underwritten to strict, traditional standards and
are fully secured by high-quality collateral.
What are your views of the cooperative structure of the
Home Loan Banks? Do you believe this structure should be
preserved and protected, including protecting the par value
stock of GSE shareholders?
Do you believe this structure has merit for future housing
finance entities that Congress might create?
A.5. The model of the Federal Home Loan Banks proved successful
during the financial crisis, providing critically needed
liquidity to community banks across the Nation. As Congress
considers the future of the housing finance system and
potential options for restructuring, they should consider the
successes of the Federal Home Loan Bank System as part of their
deliberations.
Q.6. I would like to discuss a local Government innovation
called Property Assessed Clean Energy, or PACE financing.
Wisconsin enacted a law in 2009 that allows local governments
that set up financing districts to offer loan programs to pay
back investments in renewable energy systems through property
tax payments. As a result of this law, the Milwaukee Shines
Solar PACE Loan Program was created in March 2010 making the
City of Milwaukee one of the first municipalities in the
country to implement a PACE financing mechanism. This program
was suspended in July after the Federal Housing Finance Agency
released guidance on Pace liens.
Are you aware that the Federal Housing Finance Agency
(FHFA) issued a statement on July 6 that blocked PACE pilot
programs across that Nation and in Wisconsin?
Will you agree to revisit PACE and work with stakeholders
on this issue?
A.6. The protection of the priority of liens with respect to
loans financed or guaranteed by the GSEs is critical to
conservatorship. However, I understand the FHFA is currently a
party to litigation with respect to PACE loans. Accordingly,
should I be confirmed, I may well be a named party in such
litigation. This being the case, I believe that any further
comment on the subject would be inappropriate at this time.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BENNET
FROM JOSEPH A. SMITH, JR.
Q.1. Property Assessed Clean Energy (PACE) Financing is a
creative mechanism to help finance the installation of clean
energy projects and energy efficiency upgrades on residences.
My home State of Colorado is at an impasse with the FHFA on the
continued use of this mechanism because the Agency has issued
guidance that has essentially halted PACE programs across the
country. Can you state your position on PACE?
A.1. I understand and agree with the goals of PACE programs, to
provide the opportunity for homeowners to make energy
improvements to their homes. However, the protection of the
priority of liens with respect to loans financed or guaranteed
by the GSEs is critical to FHFA's mandate of conservatorship.
Q.2. The Colorado counties of Gunnison, Pitkin, Eagle, and
Boulder all passed legislation to promote PACE financing. The
State legislature and Governor Ritter seized on this momentum
and recently passed statewide authorizing legislation as well--
all of which are dependent on the establishment of so-called
``improvement districts.'' Are improvement districts (PACE
districts) for energy efficiency and renewable energy different
than the more traditional improvement districts used for water,
sewer, sidewalks, roadways, etc.--and if so, how and why?
A.2. I am unfamiliar with the specifics regarding Colorado's
improvement districts and look forward to working with my
colleagues to better understand the details of the situation,
should I be confirmed as FHFA Director.
Q.3. Throughout Colorado, many homeowners who had hoped to make
energy efficiency improvements on their properties have been
disappointed in FHFA's lack of progress on the PACE program.
Would you consider revisiting the FHFA's current position on
the program?
A.3. I understand the FHFA is currently a party to litigation
with respect to PACE loans. Accordingly, should I be confirmed,
I may well be a named party in such litigation. This being the
case, I believe that any further comment on the subject would
be inappropriate at this time.
Q.4. FHFA has indicated general skepticism about the
reliability and relative value of energy efficiency capital
improvements. Do you support solutions to help homeowners save
money through energy efficiency improvements?
A.4. I do support solutions that help homeowners save money
through energy efficient improvements to their homes. I believe
that it is the responsibility of the Department of Energy to
determine measurable standards for reliability and relative
value of energy improvements.
Q.5. I hope you can work with me and my staff until we find an
amicable solution to this impasse on the PACE program. Can I
have a pledge from you and FHFA that you will continue to work
with my office to find a solution to this problem?
A.5. It is my understanding that the current impasse and
related litigation was preceded by a substantial amount of
discussion and attempts at accommodation between interested
parties. That being said, and if confirmed, I am more than
willing to work with you to identify an appropriate approach
going forward.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM JOSEPH A. SMITH, JR.
Q.1. We need to fix our Nation's broken housing finance system
and reduce the Government's involvement in the housing market
from current levels where the GSEs and FHA are guaranteeing
about 95 percent of all new mortgages. Some alternatives being
discussed range from a completely privatized housing finance
system to a system in which the Government takes the first-loss
position in the entire conforming mortgage market. What are the
positive and negative aspects of the range of options for
reforming Fannie Mae and Freddie Mac?
A.1. In preparing for this nomination, I have had occasion to
review various proposals and options to restructure the GSEs
and the housing finance system. I am also aware that the
Administration is preparing a proposal for Congress'
consideration in January. If confirmed, I look forward to
working with my colleagues at FHFA to advise Congress about the
costs and benefits on any proposals that would be brought
before you. As Director of FHFA, I expect to provide you
factual information and data, and I hope that FHFA can serve as
a trusted adviser as you deliberate on the future of the
housing finance system.
Q.2. In January, the Treasury Department is required to submit
its report on how to reform Fannie Mae, Freddie Mac, and the
housing finance system as a whole. What input has FHFA had in
this report and what role do you plan to take in this debate?
A.2. I have had no discussions with the Treasury Department or
Administration on their plan for reforming the housing finance
system and the GSEs. I am not aware of FHFA's level of
involvement in developing options on the future structure of
the GSEs or the housing finance system as a whole. If
confirmed, I look forward to contributing to the dialogue and,
as the Director of the FHFA, providing information to help
facilitate Congress' deliberations on the future of the GSEs.
Q.3. According to an August FHFA report, Fannie Mae and Freddie
Mac have burnt through $226 billion in capital since the middle
of the 2007. The Congressional Budget Office has estimated
that, in the wake of the housing bubble and the unprecedented
deflation in housing values that resulted, the Government's
cost to bail out Fannie Mae and Freddie Mac will eventually
reach $381 billion. If confirmed, what internal steps will you
take at FHFA to reduce taxpayer losses?
A.3. Should I be confirmed as Director of the FHFA, my main
duty is to conserve and preserve the assets of the GSEs in
conservatorship and work to right the ships so that they emerge
from conservatorship, in whatever form Congress deems
appropriate, in a stronger position to fulfill whatever
functions Congress may give them. If confirmed, I intend to
pursue three main strategies, which are consistent with the
approach that the prior leadership of the FHFA has taken: (1)
minimize the losses on the poor quality existing book of
business; (2) ensure that the GSEs take on good quality
business going forward, with the fees effectively covering the
expected risk; and (3) work to stabilize the housing market,
which is in the best interest of not only the GSEs, but also
homeowners and taxpayers who have supported these two firms.
Q.4. According to the Wall Street Journal:
Fannie Mae and Freddie Mac are in talks with Obama
administration officials to join fledgling Government
programs aimed at reducing loan balances of mortgages
where borrowers owe more than their homes are worth,
according to people familiar with the situation. An
agreement with the two Government-owned mortgage giants
to write down so-called underwater loans could reduce
the threat to the U.S. housing market from the glut of
homeowners believed at risk of default should their
personal finances or home prices worsen. A deal would
deepen losses at Fannie Mae and Freddie Mac, which
already have cost taxpayers about $134 billion.
What is your perspective on this proposal and how will this
impact projected losses on Fannie Mae and Freddie Mac?
A.4. While I have read the article you referred to, I have no
specific knowledge of this particular plan or these discussions
on principal reduction. If confirmed, I pledge to work with my
colleagues at FHFA to carefully evaluate any principal
reduction proposals from the perspective of the conservator,
working to conserve the GSEs' assets and reduce their losses. I
believe that all of my decisions related to Fannie Mae and
Freddie Mac should have the primary goal of protecting the
taxpayers.
Q.5. On Christmas Eve, the Treasury Department lifted the $400
billion loss cap on the two companies, creating a potentially
unlimited liability, and effectively providing the full faith
and credit of the Government in support of their debt. Would
you support reestablishing the $200 billion cap per entity and
accelerate the 10 percent reductions of the mortgage
portfolios, effectively requiring the companies to shrink those
portfolios by holding a combined $100 billion from their
current levels?
A.5. My understanding of the Preferred Stock Purchase
Agreements is that they are contracts between the Treasury
Department and the GSEs. From my perspective, should I be
confirmed as FHFA Director, these agreements are in place and
stand as agreed to. They are the starting point for my work as
conservator, to preserve and conserve the GSEs' assets. I
understand that, under the terms of the agreements, the GSEs
must reduce their portfolios by 10 percent each year. I have
personal experience as the North Carolina Commissioner of Banks
with quick sales of an institution's assets during resolution
and I do not believe that such actions always result in the
best price. Consequently, in my view, any decision to
accelerate the pace of the disposition of assets would need to
be made after analysis of the impact of such action on real
estate markets, capital markets, and the financial position of
the GSEs.
Q.6. During consideration of financial reform, I pushed an
amendment to include in the debt calculations of the budget
resolution the debt obligations of Fannie and Freddie as long
as they were in conservatorship or receivership. Although the
amendment received a majority of votes (47-46) it failed
because the procedural vote needed 60 votes to pass. Would you
support including the debt obligations of Fannie and Freddie in
the budget?
A.6. Decisions about what should be on or off the Federal
budget should be made by Congress and the Administration,
through the Office of Management and Budget. Experts in Federal
Government accounting are in a better position to make this
determination.
Q.7. When the Congress developed legislation to combine the
regulation of Fannie Mae, Freddie Mac and the Federal Home Loan
Banks under one new regulator, we wanted to be sure that the
differences between Fannie and Freddie and the Federal Home
Loan Banks were recognized by the FHFA in its supervision and
regulatory duties. How will you approach Congress' direction to
recognize and preserve the differences and unique
characteristics of the Federal Home Loan Banks as you develop
policies and regulations for all of your regulated entities?
A.7. As I said in my testimony, community banks are dear to my
heart and the Federal Home Loan Banks are crucial to the
success of many community banks. The Federal Home Loan Bank
model proved successful during the financial crisis, providing
critically needed liquidity to smaller institutions that cannot
access the capital markets on their own. However, I am aware
that the Federal Home Loan Bank System is a matter of
heightened supervisory concern for FHFA. If confirmed, I intend
to address these supervisory concerns with the Federal Home
Loan Banks and their member banks to maintain and strengthen
the Home Loan Bank System.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
FROM JOSEPH A. SMITH, JR.
Q.1. This week the Wall Street Journal reported that Treasury
may be pressuring Fannie and Freddie to modify loans in their
portfolio in a manner that will make them eligible for a FHA's
principle write down refinance program. But as you know, FHFA
is an independent Federal agency. Can you provide assurance
that the decisions you make as the Director of FHFA will be
done independently of political pressure? And will you assure
us that all decisions you make with regard to the management of
the GSE's existing books will be done with the principal goal
of minimizing additional costs to the taxpayer or recouping
taxpayer losses?
A.1. The Federal Housing Finance Agency is an independent
agency of Government. I am the head of an independent agency of
State government now, I understand how important that
independence is, and I appreciate that I will be similarly
independent if I am confirmed. While there will be many varying
interests before the agency, I will consider any proposal first
and foremost from the perspective of conservator, with eye to
protecting taxpayers. I understand that FHFA has publicly
stated that the idea of principal reduction is under review. I
have no further knowledge of the topic than what I have read in
press accounts.
Q.2. Please briefly describe some of the general principles
that you would like to see part of a new American housing
finance system.
A.2. If confirmed as Director of FHFA, I would, of course,
defer to Congress on the structure of the future system, but I
would hope that the new system would include:
appropriate regulation of all aspects of the
mortgage finance system (origination, funding,
servicing, foreclosure, REO)
appropriate levels of consumer protection
appropriate levels of capital for participants
proper balancing of the private capital and
Government support
If confirmed, I look forward to contributing to the
discussion and, as the Director of the FHFA, providing
information to help facilitate Congress' deliberations on the
future of the GSEs.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR DEMINT
FROM JOSEPH A. SMITH, JR.
Q.1. A December 8th, 2010, article in the Wall Street Journal
referenced talks between the Obama administration and Fannie
Mae and Freddie Mac aimed at encouraging the latter to join an
FHA program whose goal is securing reductions in loan balances
for homeowners having difficulties making their mortgage
payments. Do you support having Fannie and Freddie forgive
principal on mortgages in order for the borrowers to refinance
into FHA loans?
A.1. While I have read the article you referred to, I have no
specific knowledge of this particular plan or these discussions
on principal reduction. If confirmed, I pledge to work with my
colleagues at FHFA to carefully evaluate any principal
reduction proposals from the perspective of the conservator
working to conserve the GSEs assets and reduce their losses.
All of my decisions related to Fannie Mae and Freddie Mac would
be considered in the context of the primary goal of protecting
the taxpayers.
Q.2. If the answer to the previous question is yes, can you
please provide your reasoning, including how to square the
potential added losses to Fannie and Freddie would be
consistent with the FHFA's duties as a conservator to the
enterprises and the goal of minimizing taxpayer losses?
A.2. Not applicable.
Q.3. Do you believe that reductions in loan balances should be
a part of any programs that constitute the Government's
response to the ongoing mortgage crisis?
A.3. I understand that FHFA has publicly stated that principal
reduction is under review. If confirmed, I would take any prior
review under consideration. However, the ultimate decision
would be made to conform with FHFA's role as the regulator and
conservator of the GSEs' assets.
Q.4. Would you consider the Administration's current HAMP
program a successful one, and if so, by what standards?
A.4. It's not only appropriate, but also critical that the GSEs
be fully engaged in loss mitigation efforts, including HAMP and
non-HAMP modifications. The primary objective of these efforts
has been to keep families in their homes, to stabilize the
housing market, but also to minimize losses to Fannie and
Freddie. I have heard the concerns about the HAMP program, and,
if confirmed, commit to you that I am open to additional
assessment of the program guidelines and whether there are
changes that would make it more effective. In addition, I would
look forward to hearing your thoughts on the subject.
Q.5. On December 24th, 2009, the Treasury Department removed
any limits on assistance for Fannie and Freddie, who have
currently cost taxpayers more than $150 billion dollars--do you
believe that any limits are appropriate on the amount of
taxpayer assistance that they can receive, and if so, could you
please detail what limits you think would be appropriate and
why? If you do not, could you please explain how that would be
consistent with the goal of minimizing taxpayer losses?
A.5. My understanding of the Preferred Stock Purchase
Agreements is that they are contracts between the Treasury
Department and the GSEs. From my perspective, should I be
confirmed as FHFA Director, these agreements are in place and
stand as agreed to. As conservator, my primary responsibility
is to limit losses to taxpayers from the GSEs.
Q.6. Can you please detail ways that you see or that you intend
to use to increase the use of private capital, such as private
mortgage insurance, as ways to mitigate risk of loss in Fannie
and Freddie portfolios?
A.6. Fannie Mae and Freddie Mac are authorized to use several
forms of credit enhancement, including private mortgage
insurance, to mitigate risk. Since the onset of the mortgage
crisis, the mortgage insurance industry has been fairly credit-
constrained. Therefore, if confirmed, I would expect to
carefully monitor the regulatory capital condition of these
critical counterparties, to ensure that they do not pose any
additional risk to the Enterprises.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
FROM JOSEPH A. SMITH, JR.
Q.1. In testimony to the Senate Banking Committee on ``Mortgage
Market Turmoil: Causes and Consequences,'' on March 22, 2007,
you advocated for ``FHA First'' plan to deal with the problems
in the mortgage market. You bemoaned the inability of FHA to
offer subprime loans when you testified:
Congress should take immediate steps to modernize FHA
to enable it to be a viable option for home ownership
by borrowers with credit blemishes. Much of the growth
of the subprime industry came at the expense of FHA.
Clearly, Congressional concerns of the solvency of the
FHA insurance fund led it to overreact and hamstrung
the FHA from serving the subprime market.
Are you aware that the Federal Housing Administration
mortgage insurance fund, used to pay claims, is currently below
its 2 percent statutorily required capital ratio? If so, when
did you become aware and does that change your opinion on an
``FHA First'' solution?
A.1. The testimony in question was on behalf of the Conference
of State Bank Supervisors and was principally intended to
present the efforts States had made to address abuses in the
marketplace,. The discussion of FHA was a minor part of the
testimony and was intended as a response to what the Federal
Government might do to provide mortgage financing for low and
moderate income borrowers. I was not an advocate regarding FHA
at that time, in 2007, and am not now. If confirmed, I will
deal with issues relating to the Enterprises, both in their
current state and as the debate on restructuring goes forward.
Q.2. Are you aware that the 2010 annual study shows that the
peak losses for the FHA are still 2-5 years out? If so, when
did you become aware.
A.2. I have not done any review of FHA mortgage insurance fund.
Q.3. Are you aware that if the FHA takes no further action to
more quickly increase its capital ratio that it will take until
2015 for the fund to reach that 2 percent requirement? If so,
when did you become aware?
A.3. I have not done any review of FHA mortgage insurance fund.
Q.4. Do you still believe that Congress overreacted to concerns
of the solvency of the FHA insurance fund or that the FHA did
not adequately serve the subprime market?
A.4. I have not done any review of FHA mortgage insurance fund.
Q.5. You also testified at that same hearing in 2007 that, ``in
addition, Congress should encourage the GSE's to devote their
primary attention to affordable housing for all Americans,
particularly the subprime market.'' The action you suggest
would have a devastating impact on the U.S. taxpayers
subjecting them to even more dramatic losses. Do you still
believe that is the appropriate role of the GSE's?
A.5. During that hearing, in which I was testifying solely on
behalf of the Conference of State Bank Supervisors, the point
that I was intending to make was that Fannie and Freddie Mac
could serve some number of creditworthy borrowers who were
otherwise being offered subprime loans. Access to affordable,
prime rate financing on safer terms would certainly have been a
better option for many of these borrowers. I did not intend to
convey that Fannie Mae and Freddie Mac should follow the lead
of the subprime market; rather, my point was the opposite--that
the American public would be better-served if traditional,
conventional conforming loans represented a greater portion of
the market.
Q.6. I believe your above comment is an inappropriate sentiment
for someone who is charged with protecting the American
taxpayers by governing the conservatorship of these two
companies. Do you agree the primary goal of the conservator
should be to limit the amount of taxpayer dollars that need to
be spent to prop up these companies?
A.6. Yes.
Q.7. The data clearly shows that Federal housing policy clearly
played a large role in creating this crisis. New research by
Edward Pinto, a former chief credit officer for Fannie Mae and
a housing expert has found that, almost half of all mortgages
in the financial system--27 million loans--were subprime or
Alt-A mortgages. Two-thirds of these loans were held or
guaranteed either by the U.S. Government or by Government-
backed and controlled institutions like Fannie Mae and Freddie
Mac. Clearly, the vast numbers of weak mortgages that have
resulted in the financial crisis were made as a result of a
concerted Government policy to increase homeownership in the
United States.
This point is particularly timely because this week the
Wall Street Journal reported that Fannie Mae and Freddie Mac
are in talks with the Obama administration officials to
increase the number of loans the two companies will reduce the
loan balances for underwater borrowers. The article says, ``the
Obama administration is pressuring Fannie Mae and Freddie Mac,
through their primary regulator, The Federal Housing Finance
Agency. The Administration wants the firms to join a program
run by the Federal Housing Administration that allows banks and
other creditors, which agree to write down mortgages, to
essentially hand off reduced loans to the FHA.''
Of course, taking these write downs will mean not just new,
huge losses for both Fannie Mae and Freddie Mac but also for
the American taxpayer.
The WSJ article continues, ``one of the reasons Fannie Mae
and Freddie Mac are reluctant to reduce principal is because it
limits their options to reduce losses.'' They can do this
either by collecting claims from mortgage insurers or by
forcing banks to buy back loans.
If the GSE's are in conservatorship largely because of
subprime loans they either originated or invested in, do you
believe that you were wrong to have previously advocated for
the GSE's to give ``primary attention to affordable housing for
all Americans, particularly in the subprime market?''
A.7. As I mentioned in response to a previous question, I did
not intend for my comments to advocate for the GSEs to have a
greater role in the subprime market. I have carefully read
FHFA's latest Conservator's Report and, based on that
information, believe that the vast majority of losses they have
experienced to date are from the single family guarantee
business. In fact, according to the third quarter report, 82
percent of their charges against capital were from the single
family guarantee business and only 4 percent from investments,
including purchases of subprime securities. This data suggests
that the GSEs' subprime investments were not the primary reason
that it was necessary to place them in conservatorship and that
my focus as conservator, should I be confirmed, should be on
minimizing losses in their main line of business in
conventional mortgages.
Q.8. Can you tell the Committee what you think of the idea of
forcing these two companies to write down more loans?
A.8. While I have read the article you referred to, I have no
specific knowledge of this particular plan or these discussions
on principal reduction. If confirmed, I pledge to work with my
colleagues at FHFA to carefully evaluate any principal
reduction proposals from the perspective of the conservator,
working to conserve the GSEs' assets and reduce their losses. I
believe all of my decisions related to Fannie Mae and Freddie
Mac should have the primary goal of protecting the taxpayers.
Q.9. Do you think the two companies should put back all loans
that are appropriate on the banks that made them and collect
relevant mortgage insurance to those loans?
A.9. Both Fannie Mae and Freddie Mac have contracts with the
lenders from whom they purchased the loans which specify that
the loans meet certain standards. As conservator, I would
expect these banks and mortgage insurance companies to honor
their contracts and repurchase any loans that do not meet the
standards.
Q.10. Do you pledge to resist Administration efforts to use
your role as the conservator and regulator of Fannie Mae and
Freddie Mac to force the two companies to participate in a
dramatic write down program that would subject taxpayers to
tremendous losses?
A.10. The Federal Housing Finance Agency is an independent
agency of Government. I am the head of an independent agency of
State government now, and I understand how important that
independence is and will be, if I am confirmed. While there
will be many varying interests before the agency, I will
consider any proposal first and foremost from the perspective
of conservator, with an eye to protecting taxpayers. I
understand that FHFA has publicly stated that the idea of
principal reduction is under review. I have no further
knowledge of the topic than what I have read in press accounts.
Q.11. Currently, Fannie Mae and Freddie Mac are owned by the
taxpayers. Last month Fannie Mae and Freddie Mac posted
additional losses, increasing the amount they have taken from
the U.S. Treasury to $153 billion. Thanks to a dramatic
announcement by the Treasury Department, in what some have
called the Christmas Eve massacre, the two failed mortgage
giants can draw an unlimited amount of taxpayer dollars from
the U.S. Treasury in order to cover losses they suffer. The two
companies have been delisted from the New York Stock Exchange.
Unfortunately, the real price tag of resolving these two
companies has yet to be presented honestly to the taxpayer. Do
you support putting Fannie Mae and Freddie Mac on budget where
they belong?
A.11. Decisions about what should be on or off the Federal
budget are made by Congress and the Administration. If
confirmed, it would not be my role to make these budgetary
determinations.
Q.12. The Treasury Department has repeatedly kicked the can
down the road when it comes to reform of Fannie Mae and Freddie
Mac. On June 18, 2009, at a Senate Banking Committee hearing on
the Administration's proposal to modernize the financial
regulatory system, United States Treasury Secretary Timothy
Geithner agreed with me that ``Fannie and Freddie were a core
part of what went wrong in our system,'' and that Congress and
the Administration are facing ``a challenge for exit, what the
future should be. We have to fundamentally rethink what the
appropriate role of the Government is in the future.''
Yet, the Administration didn't include Fannie and Freddie
at all when it announced a blue print to reform the financial
regulatory system. Despite the Administration's promises to
submit a reform proposal to the Congress along with the
President's budget earlier this year, they now promise a plan
next year. According to Inside the GSEs, ``we've been holding
meetings,'' said a Treasury senior policy advisor, ``and more
are expected.''
If confirmed, as the conservator of these two companies,
what do you see as your role in determining an exit strategy
for the taxpayers? Will you commit to developing a plan for
this Committee to review that will end the conservatorship of
both Fannie and Freddie?
A.12. In preparing for this nomination, I have had occasion to
review various proposals and options to restructure the GSEs
and the housing finance system. I am also aware that the
Administration is preparing a proposal for Congress's
consideration in January. If confirmed, I look forward to
working with my colleagues at FHFA to advise Congress about the
costs and benefits on any proposals that would be brought
before you. As Director of FHFA, if confirmed, I would provide
you with factual information and data, and I would hope that
FHFA would serve as a trusted adviser as you deliberate on the
future of the housing finance system.
Q.13. The 2009 FHFA annual report, issued in May 2010, said:
The condition and performance of 6 of the 12 FHLBanks
are less than adequate. At these FHLBanks, the
principal supervisory issue is private-label mortgage-
backed securities (MBS) investments. Half the FHLBanks
incurred credit-related impairment charges of more than
$200 million on private label MBS in 2009. Four
FHLBanks have negative accumulated other comprehensive
income, mostly reflecting noncredit impairment on
private-label MBS, in excess of their retained
earnings, and this excess is large at two FHLBanks,
Seattle and Boston.
At the Seattle FHLBank, this condition has led me to
use my discretionary authority to deem that FHLBank
``undercapitalized'' despite holding capital in excess
of required regulatory minimums. During 2009, the
FHLBanks collectively made substantial progress in
improving the rigor and consistency of their analytics
in determining the valuation of their private-label
MBS.
I believe this issue is of the upmost importance because of
the Dodd-Frank bill. In Dodd-Frank legislative language
prohibited institutions from lending to any unaffiliated
company an amount that exceeds 25 percent of the capital stock
and surplus of the lending institution. Originally, the Senate
version applied this rule to the Federal Home Loan Banks. At
the time this seemed to be appropriate because the FHFA already
has the authority to institute concentration limits on the
institutions which it regulates. But, frankly, that increases
the pressure on you at the FHFA to get this issue right.
As you may be aware, at one point during the financial
crisis, the Federal Home Loan Bank of San Francisco had 62
percent of its advances (loans) to JPMorgan, Citi, and
Wachovia.
Do you think that the Federal home loan banks should have a
concentration limit on loans to one borrower?
A.13. As a banking regulator, the issue of concentrations of
all kinds is important to me. If confirmed, I intend to address
this question with FHFA staff as one of a number of supervisory
issues that should be considered as part of a dialogue
regarding how best to strengthen the system.
Q.14. What is the maximum amount you think a Federal home loan
bank should lend to one borrower?
A.14. If confirmed, I will review this issue with FHFA staff
and revise the current policy, if appropriate.
Q.15. Do you believe that the FHFA should have a policy on
this?
A.15. I do.
Q.16. What strategic role do you envision for the FHLB System
in the future?
A.16. I believe that the Federal Home Loan Bank System can be
an important source of funding and support for community banks.
To that end, I support Acting Director DeMarco's call for the
system to return to its core mission and traditional methods of
operation.
Q.17. How should the role of the FHLBs be addressed in the
upcoming reform of the U.S. housing finance system?
A.17. This issue will, of course, be for Congress to decide. If
confirmed, I look forward to working with Congress as it
considers proposals to deal with this very important matter.
Q.18. Regarding the Federal Home Loan banks, should they be
consolidated? Why, or why not?
A.18. I am aware that FHFA has recently issued a proposed rule
on this topic, to permit the merger of Federal Home Loan Banks,
but I do not have any personal, settled views on the subject.
Q.19. Given that some banks have encountered serious financial
trouble before and during the crisis, does the Nation need 12
Federal home loan banks? Why, or why not?
A.19. While I personally prefer a diverse and geographically
distributed system--a view that is shared by the community
bankers I talk to--the number of home loan banks will be
determined by the quality of their operations and, ultimately,
by Congress.
Q.20. Would the FHLB system be collectively stronger if there
were fewer FHLBs than currently exist? Why, or why not?
A.20. If confirmed, I would address the issue as part of FHFA's
supervisory activities with regard to the Federal Home Loan
Banks system and with Congress, if the system is included in
reform legislation.
Q.21. Should some or all of the Federal Home Loan banks be
considered systemically risky?
A.21. Given the interdependence of the member banks of the
Federal Home Loan Bank System and their relationship to
community banks, I believe that the Federal Home Loan Banks are
very important, but not necessarily systemically risky.
Q.22. Freddie Mac has recently announced two fees without
giving any explanation as to where the money is going. Since
the company is being kept alive through the forced generosity
of the taxpayer, taxpayers deserve to know what those fees are
and how they are being used. Are they being put in a reserve
fund to pay future losses or is it for something else?
A.22. At this time, I am not familiar with the operational
aspects of Freddie Mac's accounting and how income generated by
fees is recorded and retained.
Q.23. What is the appropriate role of FHFA in overseeing and
commenting on the fees like these and their uses?
A.23. FHFA's primary role in overseeing the Enterprises' fee-
setting and collection activities must be to ensure that the
loan-level charges are adequate to cover the future potential
losses as well as any administrative expenses incurred in
guaranteeing the loans so that the fees cover the costs of
doing business. In other words, FHFA, as regulator and
conservator, must prevent any underpricing of risk, which would
create additional taxpayer losses.
Q.24. Without further explanation, it is unclear who benefits
from these fees. By FHFA inaction in this area, the fees are
driving the market to FHA which, despite some limited
Congressional action to allow for increased premiums, is still
a ticking time bomb. It is the Banking Committee's
responsibility to make sure that there isn't a huge taxpayer
bailout of yet another housing entity. Both the FHA and GSEs
are completely backed by the U.S. taxpayer and we must
understand how the pricing used by one company drives taxpayer
exposure to another company or agency.
As part of this hearing record will you provide this
Committee with all the supporting documents necessary to
understand these new fees, and how they are being used by the
two companies?
A.24. Until confirmed, I am unable to access nonpublic
documentation at FHFA's regulated entities. If confirmed, I
would look into this situation further and would be happy to
meet with you to discuss pricing.
Q.25. As a State Banking Commissioner, you were in a unique
position to see more of what was happening ``on the ground.''
What changes, if any, would you recommend to the mortgage
modification programs that have been in place--HAMP and HARP?
Clearly, the programs, as currently structured, have struggled
and have not been as effective as the Administration promised
they would be. It seems that these programs were structured to
extend the problem and pretend that it would resolve itself
over time.
A.25. It's not only appropriate, but also critical that the
GSEs be fully engaged in loss mitigation efforts, including
HAMP and non-HAMP modifications in order to minimize their
losses under conservatorship. I would note that the Treasury
Department runs the HAMP program. I have heard concerns about
the HAMP program and about the GSE high-LTV refinance program,
HARP. If confirmed, I commit to you that I am open to
additional assessment of the program guidelines for the GSEs'
implementation of HAMP modifications, non-HAMP modifications,
and HARP refinances, and whether there are changes that would
make these programs more effective. In addition, I would look
forward to hearing your thoughts on the subject.
Q.26. What is your view of the recent Foreclosure Crisis (i.e.,
robosigning, etc.)? North Carolina was a nonjudicial State, do
you believe we should be looking towards some type of global
settlement so that this problem can be resolved?
A.26. I am concerned about the recent problems in the
foreclosure process and, from my position as North Carolina
Commissioner of Banks, have seen the impact both on homeowners
and neighborhoods and communities in my State. We must strike a
balance to ensure that homeowners are provided with every
opportunity to keep their homes, yet to move foreclosure
processing along promptly when necessary in order to protect
local neighborhoods from the harmful effects of abandoned and
vacant properties. I am unaware of any details or plans related
to a global settlement and therefore cannot comment on it at
this time.
Q.27. Some have suggested the creation of an explicit
Government guarantee for mortgage-backed securities in the
event of significant losses in the market. Fannie and Freddie,
meanwhile, would be privatized after a transition period and
any securitizers would pay premiums to the Government for the
MBS guarantee. What are the benefits or drawbacks of such an
approach? Do you favor such an approach?
A.27. If Congress decides to provide for an explicit Government
guarantee, I believe that they should consider the costs of
such a guarantee and who will bear those costs; any guarantee
must be appropriately priced to compensate for risk, to cover
potential losses.
Q.28. How would such a MBS-guarantee-like system have fared in
the financial crisis?
A.28. Given that a number of other facets of the system would
likely differ if the Enterprises were set up to provide an
explicit Federal guarantee, I cannot speculate how such a
system would have fared.
Q.29. Would the cost of a MBS-guarantee-like system to
taxpayers have been higher or lower than the estimated cost of
the conservatorship of Fannie and Freddie?
A.29. As North Carolina Commissioner of Banking, I think that
it was clear that risk was substantially underpriced during the
period leading up to the crisis, for both nonguaranteed and
guaranteed loans alike. That said, I do not think that this
type of cost analysis would be simple to perform, given the
numerous external factors that would need to be considered.
Q.30. Should the Government have any significant role in the
mortgage market? Please describe the role you believe the
Government should play in the mortgage market.
A.30. I think that we can all agree that there have been
advantages to the Government role in the housing market, based
on a system established during the Great Depression, including
the widespread availability of an affordable 30-year mortgage
product with the ability to prepay. Going forward, there are
certainly segments of the larger market where the Government
can make a difference, for example supporting multifamily
rental housing and first time homebuyers. Of course, the
ultimate decisions regarding the role of the Federal Government
in housing finance will be up to you in Congress. If confirmed,
I am committed to assisting you in that important work.
Q.31. Property Assessed Clean Energy loans have garnered a lot
of attention recently. PACE loans encourage home-energy
improvements through special property-tax assessments for
homeowners that are senior to existing mortgage debt. This
summer the FHFA's Acting Director Edward J. DeMarco had this to
say:
In keeping with our safety and soundness obligations,
the Federal Housing Finance Agency will defend
vigorously its actions that aim to protect taxpayers,
lenders, Fannie Mae and Freddie Mac. Homeowners should
not be placed at risk by programs that alter lien
priorities and fail to operate with sound underwriting
guidelines and consumer protections. Mortgage holders
should not be forced to absorb new credit risks after
they have already purchased or guaranteed a mortgage.
Do you agree with Mr. DeMarco?
Would you continue to direct Fannie and Freddie to avoid
participating in the PACE program, or would you reverse the
FHFA's position on this issue? What affect would PACE loans
have on the ability for borrowers to get second liens on
primary residences in general?
A.31. I am familiar with the general direction of FHFA's view
on PACE and its potential affect on first lien mortgages, but I
have not studied the issue closely. If confirmed as Director, I
would consult with the agency experts in this area and review
their analysis of the situation. The protection of the priority
of liens with respect to loans financed or guaranteed by the
GSEs is critical to conservatorship. However, I understand the
FHFA is currently a party to litigation with respect to PACE
loans. Accordingly, should I be confirmed, I may well be a
named party in such litigation. This being the case I believe
that any further comment on the subject would be inappropriate
at this time.
Additional Material Supplied for the Record
Letter Submitted by the Conference of State Bank Supervisors
Letter Submitted by the Mortgage Bankers Association
Letter Submitted by the National Association of Realtors
Letter Submitted by the Independent Community Bankers of America
Letter Submitted by the National Association of Home Builders