[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                 GSE REFORM: IMMEDIATE STEPS TO PROTECT
                     TAXPAYERS AND END THE BAILOUT

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            FEBRUARY 9, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-2





                  U.S. GOVERNMENT PRINTING OFFICE
64-551                    WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO R. CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 9, 2011.............................................     1
Appendix:
    February 9, 2011.............................................    55

                               WITNESSES
                      Wednesday, February 9, 2011

Calabria, Mark A., Director of Financial Regulation Studies, Cato 
  Institute......................................................    13
Pollock, Alex J., Resident Fellow, American Enterprise Institute.    17
Randazzo, Anthony, Director of Economic Research, Reason 
  Foundation.....................................................    15
Wartell, Sarah Rosen, Executive Vice President, Center for 
  American Progress Action Fund..................................    19

                                APPENDIX

Prepared statements:
    Calabria, Mark A.............................................    56
    Pollock, Alex J..............................................    63
    Randazzo, Anthony............................................    70
    Wartell, Sarah Rosen.........................................    86

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Letter to Hon. Timothy Geithner, Secretary of the Treasury, 
      and Hon. Shaun Donovan, Secretary of HUD, from the American 
      Bankers Association (ABA), dated February 9, 2011..........   105
    Letter from the National Association of Federal Credit Unions 
      (NAFCU), dated February 8, 2011............................   109
    Written statement of the National Association of Realtors 
      (NAR)......................................................   112
    Written statement of the National Multi Housing Council 
      (NMHC) and the National Apartment Association (NAA)........   117
Schweikert, Hon. David:
    ``Taking the Government Out of Housing Finance: Principles 
      for Reforming the Housing Finance Market,'' An American 
      Enterprise Institute Policy White Paper, by Peter J. 
      Wallison, Alex J. Pollock, and Edward J. Pinto, Preliminary 
      draft dated January 20, 2011...............................   122


                     GSE REFORM: IMMEDIATE STEPS TO
                         PROTECT TAXPAYERS AND
                            END THE BAILOUT

                              ----------                              


                      Wednesday, February 9, 2011

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:12 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Lucas, Manzullo, Biggert, Hensarling, Neugebauer, 
Campbell, Marchant, McCotter, Pearce, Posey, Fitzpatrick, 
Hayworth, Hurt, Grimm, Stivers; Waters, Ackerman, Sherman, 
Miller of North Carolina, Maloney, Moore, Perlmutter, Donnelly, 
Carson, Himes, Peters, Green, and Ellison.
    Ex officio present: Representative Frank.
    Also present: Representatives Gary Miller of California and 
Carney.
    Chairman Garrett. Greetings. This hearing of the 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises will now come to order.
    And we have just conferred with the other side. Maxine is 
on her way, but we thought that since we have the panel here, 
and a number of esteemed Members from both sides of the aisle, 
we would begin the proceedings. So we will begin, without 
objection.
    Also, without objection, all Members' opening statements 
will be made a part of the record.
    And so we begin with opening statements.
    It was on September 7, 2008, that Fannie Mae and Freddie 
Mac were put into conservatorship by the Federal Government. 
Over $150 billion and 885 days later, the government-backed 
mortgage twins remain in conservatorship. The Federal 
Government now underwrites 95 percent of the housing market. 
And still the American taxpayer continues to hemorrhage 
billions of dollars every quarter to keep them afloat.
    So I am pleased to hear that the Department of the Treasury 
is getting closer with their much anticipated reform proposal, 
which I understand can be out here now. If I had known that 
simply scheduling a GSE reform hearing would facilitate such a 
swift response, we would have held one even sooner.
    While I know a lot of attention has been given to the 
Treasury's proposal and what the future of U.S. housing finance 
will look like, I believe that there are other areas of this 
debate that we can focus on right now.
    In particular, I believe the question we need to be asking 
ourselves is this: What are the immediate steps that Congress 
can take right now, this very instant, to protect taxpayers, to 
end the bailout, to get private capital off the sidelines, and 
to reduce the government exposures to the housing market? I 
believe it is these four objectives that should be the driving 
force behind our immediate reform efforts.
    And so I look forward to discussing a number of reform 
proposals in greater detail with our esteemed panel. As I can 
see from their written testimony, there are many ways to 
protect taxpayers and begin the end of the bailouts.
    Now, I say that on one hand. It is also unfortunate that 
some of my colleagues on the other side of the aisle have 
resisted any attempts, at least in the last Congress, to 
address the most expensive and explosive component of the 
Federal Government's intervention during the financial crisis. 
But I assure you, it will be a top priority of mine, as 
chairman of this subcommittee.
    The Federal Government's housing policy has been a 
monumental disaster, and we must find new ways forward. 
Secretary Geithner said just the other day that the new policy 
should leave us with a system that will not be vulnerable to 
the really tragic colossal failures of the past. I couldn't 
agree with him more.
    Even in The Washington Post, they are on board, too, with 
wholesale changes to Fannie Mae and Freddie Mac. In an 
editorial this Monday, the Post wrote, ``Homeownership does 
help instill thrifty habits and solidify communities, but it 
can be taken too far.'' They said the national homeownership 
rate slipped back to 1998 levels, according to the Census 
Bureau.
    So, in terms of building a community, etc., it is as if the 
last 13 years have never happened, except, of course, for the 
catastrophic losses to the taxpayers and also to the home 
buyers. They conclude by saying, ``It might be more accurate to 
say that the Federal housing policy has helped to destroy 
communities.''
    It will be the goal of this subcommittee to ensure that we 
put an end to this destructive and costly housing finance 
policy and then replace it with a system, going forward, that 
protects taxpayers and actually strengthens communities instead 
of, as the Post says, destroying them.
    I thank the witnesses for being here today, and I look 
forward to their testimony.
    And, with that, I recognize Mr. Miller.
    Mr. Miller of North Carolina. I think Ms. Waters had 
allocated 2 minutes to me. So I will now take 2 minutes.
    Thank you, Mr. Chairman.
    The wrong lesson to draw from the financial crisis is that 
homeownership should not be a goal, a public policy goal. It 
undoubtedly can be taken too far, but the financial crisis was 
by no means caused by the goal of homeownership. Seventy 
percent of the people who got subprime mortgages were not 
getting those mortgages to buy a home. They already owned their 
home, but they needed to borrow money.
    More than half, well more than half--the Wall Street 
Journal estimated 55 percent; other estimates have been much 
higher than that--of the people who got subprime mortgages 
qualified for prime mortgages. So it was not about making 
mortgages available to people who would not have qualified in 
ordinary circumstances. It was entirely about making as much 
money as possible as quickly as possible without regard to the 
consequences.
    Fannie and Freddie were certainly guilty of that, to some 
extent, but the private-label securitizers, their competitors, 
were also guilty of that and probably even more guilty of that.
    We do need to recreate, to reinvent our housing finance 
system. But a principal goal should still be to make 
homeownership available, on reasonable terms, for middle-class 
families. We got away from that in the last decade. And as we 
reinvent our housing finance system, that is what we need to 
get back to.
    I yield back my time.
    Chairman Garrett. The gentleman yields back.
    The gentleman from California, Mr. Royce, for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman.
    It appears, after months of preparing, we finally got to 
the point here where Treasury is set to release their proposal 
for GSE reform. But I think, for us, the vexing part is, 
instead of coming out with one definitive plan, they are going 
to provide three options: no government role in the secondary 
mortgage market will be their first option; government support 
only sometimes looks like their second; and permanent 
government support as their third.
    Unfortunately, three options doesn't equal one plan. And I 
think the time for debating the merits of options is long past. 
Now is the time to act.
    A permanent government guarantee will inevitably lead to 
politicians and bureaucrats putting their proverbial thumb on 
the scale. Human nature is not going to change here. 
Politicians will insist that underwriting standards be relaxed, 
guaranteeing fees being lowered, and downpayments being waived, 
so just one more group can get into homes they otherwise could 
not afford if you were depending on the market.
    So this scenario has happened before, and it will happen 
again. And when it does, we will again face a boom-bust cycle 
in our financial markets, followed by a massive taxpayer 
bailout.
    I think we can do better. I think we should confront the 
reality of not putting in place that type of permanent 
government guarantee in the future.
    I yield back.
    Chairman Garrett. The gentleman yields back.
    And before I yield the microphone to the gentlelady from 
California, I am pleased to be joined by her today and pleased 
to see her beside me as a ranking member, and I look forward to 
working with her on so many very important issues, issues that 
we worked on collaboratively in the past, in the area of 
housing finance and the area of FHA reform. So, obviously, 
there are commonalities in our interest in making sure that we 
can get the economy back on track again. I look forward to your 
comments, but also our collegiality moving forward, as well.
    Ms. Waters. Thank you very much, Mr. Chairman--
    Chairman Garrett. I yield you 4 minutes.
    Ms. Waters. --first, for organizing this first hearing of 
the Subcommittee on Capital Markets and Government Sponsored 
Enterprises for the 112th Congress. I, too, look forward to 
working with you. You are absolutely correct; we have worked 
together on issues in the past, and I think we can do that for 
the future.
    Today's hearing is an opportunity to address one of the 
most critical questions facing our economy: How do we continue 
to move forward from the crisis and organize a secondary 
mortgage market that ensures access to sustainable 
homeownership at affordable rates for the American middle 
class? And how do we do this while protecting all taxpayers?
    For many years, we did a fairly good job of providing the 
opportunity for homeownership to the average American who 
worked hard and acted responsibly. But over the course of the 
last decade, we saw the creation and evolution of toxic 
financial products that pulled Americans further and further 
away from the mortgages that we grew up with--30-year, fixed-
rate loans with sensible downpayments for homes we could 
reasonably afford.
    Now, what caused these products to develop was the subject 
of many fights in this committee during the last Congress. I 
continue to believe that an unregulated shadow banking system 
created the crisis and that casino-style betting magnified and 
lengthened it. Unfortunately, Fannie Mae and Freddie Mac, 
hungry for profits and market share, hopped on the bandwagon, 
albeit late. The result has been enormously consequential for 
American taxpayers.
    Our objective, moving forward, should not be to continue 
arguing over the facts that led us to this point. I sincerely 
want to begin the next phase, negotiating a plan for the 
future.
    I have not committed yet to any one proposal, and I am open 
to any plan coming from any Member or group or institution that 
can advance the following goals: Can the plan preserve the 30-
year, fixed-rate mortgage, whose availability I believe is 
vital for American borrowers? Does the plan provide for 
stability and liquidity, particularly in times of severe credit 
constriction, as we experienced over the last few years? Are 
there features in the plan that allow for access for all 
qualified borrowers, as well as the small and community banks 
that seek liquidity? Does the plan ensure that there is a 
secondary market for multifamily loans and a market for 
individuals who seek affordable rental housing? Is there 
transparency for investors and regulators? Does the plan 
protect taxpayers and ensure that a small number of 
institutions don't again become ``too-big-to-fail?''
    So these are the criteria by which I will evaluate 
proposals, moving forward.
    I understand that some details of the Administration's 
options paper were released to reporters last night. I am 
looking forward to reading the full report and studying the 
options they propose. But what I am more interested in hearing 
about are the principles the Administration thinks are 
important for GSE reform, such as whether they think the 
preservation of the 30-year, fixed-rate mortgage is essential.
    While it is important that we get the technical details 
right as we develop a new housing finance system, I think it is 
more important that we make clear what values underpin our 
vision for the future.
    I look forward to working with the Administration and all 
of my colleagues in Congress on developing a plan that best 
meets the needs of all market participants. I believe that all 
of us need to seriously consider every option on the table.
    And, Mr. Chairman, I do thank you. And I yield back the 
balance of my time.
    Chairman Garrett. I thank the gentlelady.
    And now, I yield 1 minute to the gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman and fellow Members 
and, obviously, our witnesses.
    I know there is a certain frustration here because the 
Administration had an obligation to provide us their proposal, 
what was it, last week, and something for to us discuss and 
build around, and here we are blind once again.
    Having read much of the literature that is out there in 
regards to Fannie and Freddie and some of the distortions they 
may have created in the price of money and also the amount of 
debt and nonperforming assets they are currently holding, Mr. 
Chairman, witnesses, I desperately hope, as you testify, you 
give us some sense of how bad it is out there and how much we 
have in nonperforming assets that have to be unwound if we are 
ever going to see a recovery in our housing market.
    Thank you, Mr. Chairman.
    Chairman Garrett. And the gentleman yields back.
    I yield now to the gentleman from Connecticut, Mr. Himes.
    Mr. Himes. Thank you, Mr. Chairman. I join in welcoming our 
witnesses today.
    I am grateful for the opportunity to finally begin 
examining reasonably and seriously the future role of the GSEs 
in our housing market. This has been the subject of much 
demagoguery for a long time. And while there is no question 
that the GSEs meaningfully contributed to our financial crisis 
through irresponsibility and the way they went in the years 
beginning in the 1990s, there are some things that we can't 
ignore.
    First, they operated for decades safely and soundly and 
helped to really bulwark and assist the creation of an American 
middle class. Secondly, a 30-year, fixed-rate mortgage may not 
exist without them, or if it did exist, it could perhaps be 
priced out of the range of American middle-class families. And 
third, multifamily lending, which is so important to smart 
growth and creating vibrant cities, might be severely damaged 
were Fannie and Freddie to not exist in any form at all.
    These are tough issues involving political decisions, and I 
hope that the panel today will address them and give us some 
guidance on how we can best secure our public policy goals 
without taking on the risks that were incurred in the 1990s.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. And I thank the gentleman.
    The gentlelady from Illinois, Ms. Biggert, please, for 1 
minute,
    Mrs. Biggert. Thank you, Mr. Chairman.
    Fannie Mae and Freddie Mac have received the largest 
taxpayer-backed bailout to date, over $150 billion. They are 
responsible for over $5.4 trillion in outstanding mortgage 
applications and were at the root of the greatest financial 
crisis since the Great Depression. And yet the Administration 
has failed to meet its deadline to produce a required report on 
reform. Moreover, GSE reform was intentionally omitted in the 
Dodd-Frank Act.
    Fortunately, this is a new Congress, and housing finance 
reform is at the top of our agenda. Certainly, we must take 
care not to disrupt an already-fragile market. However, it is 
time to move toward a market with less reliance on government 
guarantees and more private-sector participation.
    I thank Chairman Garrett for convening today's hearing, and 
next week, the Subcommittee on Insurance and Housing will hold 
a hearing to examine government barriers to the housing market 
recovery.
    The bottom line is that never again should taxpayers be on 
the hook for risky housing finance policies. I look forward to 
working with my colleagues to examine the future of housing 
finance.
    I yield back.
    Chairman Garrett. I thank the gentlelady for yielding back.
    Two minutes to the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman. And I thank the 
witnesses, as well.
    This is about homeownership, it is about the American 
dream, but it is also about the economy. It is about what 
happens once we start to build housing and we have buyers. 
Because, once you lay that foundation, you know that at some 
point you will sell carpet or you will sell a washer, a dryer.
    This economy has been driven in great part due to the 
success of our housing market. So, as we move forward, we want 
to make sure that market is still in place such that we can 
utilize it to again help us with our economic recovery.
    I think that if we don't consider the impact on the 
economy, we are making a mistake. So let's be sure that, as we 
move forward, we don't develop unintended consequences 
associated with our desire to make things right.
    I thank you for the time, Mr. Chairman. And I yield back.
    Chairman Garrett. And I thank you.
    And the other gentleman from Texas, Mr. Hensarling, for 1 
minute, please.
    Mr. Hensarling. Thank you, Mr. Chairman.
    We all know that the classic definition of ``insanity'' is 
doing the same thing over and over and expecting a different 
result. Those who want to foster a system of continuing 
government guarantees in the secondary mortgage market 
certainly bear the burden of persuasion that somehow we can 
expect a different result--a different result than $150 billion 
of taxpayer bailout money, $8 trillion of debt that ultimately 
the taxpayer is responsible for. That is a strong burden of 
persuasion.
    For 2 years now, we have had the Administration, which has 
discussed, studied, ruminated, cogitated, and done everything 
but acted upon the GSEs. I hope that very soon, they will 
release a plan.
    But I think the real question is, how do we transition to a 
competitive market without taxpayer guarantees and how soon can 
we get there? It is time for us, at three trillion-plus 
deficits in our Nation's history in a row, to end the taxpayer 
bailouts.
    I yield back.
    Chairman Garrett. Mr. Frank?
    Mr. Frank. Thank you, Mr. Chairman.
    I have, actually, a question which will be addressed.
    Chairman Garrett. For 2 minutes.
    Mr. Frank. I have heard criticism of the Administration for 
missing its deadline. And I must say, this is a newly 
discovered attitude of deference towards the Obama 
Administration on these matters. I had not previously thought 
that the Majority was waiting around for the President to 
suggest to them what to do. I had thought that, frankly, the 
Majority knew what it wanted to do.
    Last year, in July, in the conference, an amendment was 
offered to the conference report that we were told, as I 
recall, resolved this problem, got rid of them. And I didn't 
think it was germane; we ruled it was not germane. But when the 
election happened, I had assumed--in fact, I am surprised that 
we are now having a hearing on what the Administration hasn't 
done. I assumed this would be a hearing on the amendment Mr. 
Hensarling offered last year.
    It did seem to me that the Majority knew what it wanted to 
do in July when it was in the Minority. And, apparently, there 
was something about transitioning from the Minority to the 
Majority that induces a kind of legislative amnesia.
    People on the Majority side were very sure what we should 
do. So I had expected to be coming to a hearing in which we 
would be considering the amendment. There was a great deal of 
unhappiness on the Minority side that we couldn't vote on the 
amendment. The Majority is in charge of that, so I assumed we 
would go forward. And, again, I had not expected them to wait 
for the Administration.
    So my question is, why are we not--and I know it has been 
introduced as part of the RSC package, the amendment of the 
gentleman of Texas. So can we anticipate a legislative hearing 
on this and a markup of that legislation? And if not, what 
impediment intervened? Why was this a very good idea in July 
and not in February?
    Chairman Garrett. Would the gentleman yield?
    Mr. Frank. Yes.
    Chairman Garrett. I appreciate that, and I appreciate the 
gentleman's recollection of the history of what we had proposed 
in the past. And I assume the gentleman also remembers, as 
well, that we had also called on the Majority at that time to 
do what we are doing right now, and that is to call in the 
interested parties, call in the academics, call in the 
stakeholders to elaborate, to elucidate, and to explain what 
some of the ramifications of these proposals are.
    That was never done. And now we have a whole slew of new 
freshmen from--actually, we only have one freshmen new--
    Mr. Frank. I take back my time to say, no, these aren't new 
questions. There is nothing new here that wasn't known then. In 
July, people said, ``Adopt this amendment. We know what to 
do.'' And I am surprised that there was a certainty then and 
such uncertainty now. There aren't any new questions about 
this. At least, there aren't questions that weren't there 
before.
    So, again, I am struck by the contrast between the 
certainty that was expressed when the Majority was the Minority 
and the uncertainty that has overtaken them in the Majority.
    And I yield back.
    Chairman Garrett. And the gentleman yields back. I assume 
the gentleman will be interested in the contrast as we go ahead 
in the next 2 years, as well.
    And, with that, I yield to the gentleman from Texas, Mr. 
Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. And thank you for 
holding this very important meeting. As has been said, we have 
been waiting for 2 years for some action to happen on this 
issue, and finally we are about to start down that road.
    One of the things that concerns me is, while we are in this 
very hearing today, Freddie and Fannie will take on additional 
taxpayer liability. And so, the time to act is not later but is 
now. We need to start to make sure that we are doing everything 
we can and the conservator is doing everything they can to 
minimize additional exposure while, at the same time, making 
space for private securitization to begin to take place 
immediately so that we can begin to reduce that exposure.
    There are a lot of things that should be discussed today, 
and I look forward to this important dialogue.
    Chairman Garrett. And now for 2 minutes, the gentleman from 
Minnesota, Mr. Ellison.
    Mr. Ellison. Thank you, Mr. Chairman and also Ranking 
Member Waters, for this important hearing. I am looking forward 
to this dialogue, and I would like to express a few ideas as we 
go forward.
    First of all, I think it is important to learn the right 
lessons from the recent housing market crisis. And these 
lessons point to the private sector's role in creating private-
label mortgage-backed securities as we start this new Congress. 
Let's not forget that the subprime mortgage securities were 
created by Wall Street firms, not Fannie and Freddie.
    Now, I am not advocating that Fannie and Freddie were 
perfect actors during the housing bubble, but let's be clear; 
Fannie and Freddie did not start this crisis, and Fannie and 
Freddie's affordable housing mission did not cause the 
collapse.
    Let's also be clear that the Community Reinvestment Act did 
not cause the housing collapse either.
    Reforming mortgage finance systems is a big responsibility 
because homeownership has sustained the middle class of this 
country. Calls to eliminate all government involvement in the 
secondary mortgage market are not responsible. We can't go back 
to the pre-depression housing market when government played no 
role in housing finance and homeownership was restricted to the 
very wealthy.
    As this subcommittee addresses the important work of GSE 
reform, I also hope that equal attention is given to the 
important role that Fannie and Freddie have played in the 
affordable rental housing market.
    So I look forward to the testimony of the witnesses here, 
and I thank all of you.
    I yield back.
    Chairman Garrett. I thank the gentleman for yielding back.
    And now the gentleman from Illinois, Mr. Manzullo, for 1 
minute.
    Mr. Manzullo. Thank you.
    It is very simple. Whoever came up with the great idea to 
allow people who couldn't make the first mortgage payment to 
buy a house made the mistake. It took the Fed until, I believe, 
October of last year to come up with a simple rule that said, 
whenever you apply for a home mortgage, you must have written 
proof of what your earnings are.
    That is how we got in this mess. People bought homes, 
couldn't make the first mortgage payment, everything got 
behind, and derivatives were soured because of the underlying 
securities on it.
    So now, we need to find our way out of this mess. Fannie 
Mae and Freddie Mac could have done it a long time ago. They 
simply could have passed a rule that said, we will not accept 
any loan unless there is written proof of what a person earns.
    I look forward to hearing from the witnesses.
    Chairman Garrett. The gentleman from New Mexico, Mr. 
Pearce, for 1 minute.
    Mr. Pearce. Thank you, Mr. Chairman.
    I appreciate the opportunity to take a little closer look 
at Fannie Mae and Freddie Mac. I hope that we are taking the 
first step today towards significant reform of these failed 
institutions.
    We are titling the hearing, ``Immediate Steps to Protect 
Taxpayers and End the Bailout.'' And it is time for someone to 
speak up for the taxpayers, who have now dished out $150 
billion to save these institutions which were declared ``too-
big-to-fail.'' It is reason enough to put the country on notice 
that servicing foreign obligations over obligations to American 
citizens will not be the norm any longer.
    While the priority of this committee is to protect 
taxpayers, the conservatorship that took over Fannie and 
Freddie created several other victims whose investments and, in 
some cases, financial health were destroyed by the manner in 
which the mortgage giants were seized. Prior to the 
conservatorship, about 1,000 community banks held an estimated 
$15 billion to $25 billion in Fannie and Freddie preferred 
stock. That stock was wiped out by the government when the GSEs 
were taken over and placed in conservatorship.
    Former Secretary of the Treasury Hank Paulson acknowledged 
in his book on the crisis, ``On the Brink,'' that the action 
constituted an ambush. More concerning, Secretary Paulson also 
mentioned in his book that the decision to wipe out preferred 
stockholders in this country was done in part to satisfy 
America's debt obligations to the Chinese.
    As we move forward with proposals to reform the GSEs, it is 
time for Congress to do the right thing and prioritize the 
Federal Government's obligations to the citizens in this 
country.
    I look forward to the panel. Thank you, Mr. Chairman.
    Chairman Garrett. And I thank the gentleman.
    The gentlelady from New York, Ms. Hayworth, for 1 minute.
    Dr. Hayworth. Thank you, Mr. Chairman.
    The figures we are dealing with are stunning because, to 
date, the GSEs have consumed approximately $150 billion from 
our taxpayers, and most experts believe these losses will be 
much higher. The CBO says that if we do nothing to stem the 
lawsuits, the taxpayers will end up paying nearly $400 billion 
to bail out Fannie Mae and Freddie Mac.
    And as we wait for the Administration to come up with a 
plan to wind down the GSEs, and protect our taxpayers, we know 
that it becomes ever more urgent. So I want to commend our 
chairman for holding this hearing, and I look forward to 
hearing what you have to say.
    I can tell you that my constituents in the Hudson Valley of 
New York have become convinced that the more government 
intervenes, the less common sense prevails. So I submit that 
the task before us is to return common sense, in the form of 
free enterprise principles, to the mortgage and housing 
marketplaces.
    I yield back the remainder of my time.
    Chairman Garrett. I thank the gentlelady.
    The gentleman from Virginia, Mr. Hurt, please.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. Chairman, thank you for holding this subcommittee 
hearing on this important issue. With $150 billion in taxpayer 
funds already spent propping up Fannie Mae and Freddie Mac, and 
hundreds of billions more a possibility, it is clear that this 
will be the most expensive Federal bailout in response to the 
financial crisis.
    As it has been said, we must end the limitless bailouts of 
Fannie and Freddie and effectively reform them in order to 
protect the American taxpayer and give true stability to the 
marketplace.
    The previous Congress failed to address GSE reform while 
passing one of the most sweeping regulatory overhauls of the 
financial services industry. Today's hearing makes it clear 
that this committee and this new Congress are prepared to act.
    I look forward to hearing from the witnesses, and I thank 
them for their appearance.
    Thank you, Mr. Chairman. I yield back my time.
    Chairman Garrett. I thank the gentleman.
    The gentleman from New York, Mr. Grimm, for 1 minute.
    Mr. Grimm. Thank you, Chairman Garrett. Thank you for 
calling this hearing.
    And thank you to those testifying.
    This is obviously one of the most important issues facing 
this committee and our entire Nation. Ending the enormous and 
ongoing taxpayer bailout of Fannie Mae and Freddie Mac is, in 
my opinion, an absolute must.
    And this conservatorship started in September 2008. These 
two failed firms have cost the American people over $150 
billion. And this sum is almost guaranteed to go higher in the 
coming months and years. And, shockingly, the recently-passed 
2,300-page Dodd-Frank financial reform bill did not address 
these two firms, and they are continuing to hemorrhage money.
    So, as we move forward on deciding what the future of 
housing finance will look like in the United States, there are 
certain points that we should keep in the forefront of our 
discussion.
    For many years, homeownership has been considered the 
cornerstone of the American dream and has led Congress to 
support homeownership through various initiatives. I know that 
back in my district in Staten Island in Brooklyn, the ability 
to own your own home is unbelievably important to my 
constituents for them to build a strong financial foundation to 
improve the lives of their families.
    And with that being said, we must give serious 
consideration as to how to continue to make homeownership 
affordable to middle-class Americans while, at the same time, 
ensuring that the American taxpayer is never again left to 
shoulder a burden the size of Fannie Mae and Freddie Mac.
    Thank you, Mr. Chairman, for holding this hearing.
    I yield back the remainder of my time.
    Chairman Garrett. I thank the gentleman.
    The gentleman from Ohio, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman. I would like to thank 
the chairman for calling this hearing today.
    The gentleman from New Mexico focused his comments on the 
American taxpayer, and I think that is appropriate because 
these GSEs should be an issue for all American taxpayers across 
the country. The gentlelady from New York mentioned that the 
taxpayers are already on the hook for $150 billion and 
counting.
    So finding a solution where the American taxpayer is not 
left holding the bag for these gigantic losses while, at the 
same time, continuing to ensure that home loans are still 
available and accessible is a priority for me. I hope we act 
quickly and prudently as we propose and implement reforms.
    I look forward to hearing the panel discuss ideas on the 
way forward for GSE reform. I would like to thank the chairman, 
and I yield back the balance of my time.
    Ms. Waters. Mr. Chairman, I have an unanimous consent 
request.
    Chairman Garrett. What is your request?
    Ms. Waters. I request that Mr. Carney be allowed to 
participate, to sit in on the subcommittee hearing today.
    Chairman Garrett. Without objection, it is so ordered.
    Ms. Waters. Thank you.
    Chairman Garrett. Mr. Miller from California?
    Mr. Gary Miller of California. Thank you, Mr. Chairman.
    Over 10 years ago, we tried to reform Freddie and Fannie. 
We worked on it for years. We tried to put a strong regulator 
in place. We tried to create strong underwriting standards. 
And, as you know, it all got killed in the Senate.
    I have read some of the testimony, and I agree we all need 
to protect taxpayers, and a $150 billion loss is outrageous. 
There is just no excuse for that. But 66.5 percent of the 
families in this country own their homes, and many of those are 
two-taxpayer homes also.
    So we need to look and say, what do we have to do? And when 
we look at the overall marketplace, I think we need to look at 
the marketplace and say, what is wrong with the marketplace and 
how do we reform everything?
    If you look at the default rates on subprime loans, it is 
38.7 percent--38.7 percent. The default rate on Fannie and 
Freddie is 3.1 percent. If you look at the default rate on 
subprimes, it is 26.5 percent. The all-loan seriously 
delinquent rate is at 8 percent and Fannie Mae is at 4.2 
percent. So are the default rates on Fannie and Freddie high at 
3.1 and 4.2 percent? They are high, but they are better than 
the private sector.
    So how do we address that? And we need to get to the bottom 
of it. We can't put taxpayers at risk. I am not arguing with 
that. But what is wrong with the overall marketplace?
    I know some data says we need to eliminate high-cost areas. 
But they are the best-performing loans with Fannie and Freddie. 
If there is data other than that, I would like to see it, 
because I have just not seen that.
    So I look forward to the testimony. And, Mr. Chairman, I 
thank you for the time.
    Chairman Garrett. And I thank the gentleman.
    And, finally, Mr. Fitzpatrick from Pennsylvania for 1 
minute.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I believe the government has a role to play in encouraging 
homeownership, but this laudable goal has led to interference 
in the market, and now the taxpayers are writing checks to the 
tune of hundreds of billions of dollars.
    I believe that the government has overstepped its bounds, 
Mr. Chairman. The United States Government went from being a 
facilitator to now backing over 90 percent of all the loans in 
the United States. There is no question that Fannie Mae and 
Freddie Mac must be weaned off the government in a responsible 
way that protects our economy but gets the American taxpayer 
out of the bailout business.
    We can argue about how we got here, but the fact remains 
that Fannie and Freddie are now bloated with bad loans and 
toxic assets. And while too fast of a wind-down could damage 
our housing economy, we cannot allow prudence to be the enemy 
of progress. The system must be reformed, the system must be 
stabilized, American families protected, and the government be 
relegated back to its proper role.
    The path forward will not be easy, but we were sent to 
Congress to fix the system and to fight for the taxpayers. I 
look forward to the testimony and the solutions.
    And, Mr. Chairman, I yield back the balance of my time.
    Chairman Garrett. I thank the gentleman.
    And I thank all of the witnesses. As you heard, we are all 
very much looking forward to your testimony.
    And we do have a great panel of esteemed witnesses, so let 
me just run through them. And then I will refer to each of you 
for 5 minutes.
    On our left, Mr. Mark Calabria, director, financial 
regulation studies at the Cato Institute. Next to him, Anthony 
Randazzo, director of economic research at the Reason 
Foundation. Next, Alex Pollock, resident fellow of AEI, 
American Enterprise Institute. Following, last but certainly 
not least, Ms. Sarah Wartell, executive vice president of the 
Center for American Progress.
    I welcome you all here today for our very first hearing. 
And I do, indeed, look forward to your testimony and your ideas 
and your expertise to help us solve this problem.
    Sir, 5 minutes.

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

    Mr. Calabria. Chairman Garrett, Ranking Member Waters, full 
committee Ranking Member Frank, and distinguished members of 
the subcommittee, I thank you for the invitation to be here at 
today's hearing.
    Given the central role of Fannie Mae and Freddie Mac in the 
financial crisis, the need for reform is beyond dispute. While 
I believe a major overhaul of our Federal mortgage policy 
should happen sooner rather than later, reform should be done 
in a deliberate and thoughtful matter. The need for deliberate 
and thoughtful process, however, does not preclude the 
necessity of taking immediate steps to protect the taxpayer.
    The most immediate and important step that can be taken to 
protect the taxpayer is to change the role of the Federal 
Housing Finance Agency from that of conservator to receiver. 
The Housing and Economic Recovery Act of 2008 establishes a 
resolution or reorganization process for the GSEs.
    It should be noted that there is little, if anything, that 
a conservator can do that a receiver cannot. There is, however, 
a considerable amount that a receiver can do which a 
conservator cannot, the most important difference being that a 
receiver can impose losses on creditors.
    Some might object to receivership on the basis that it 
would end the GSEs. Such a position would be mistaken. HERA 
specifically prohibits the receiver from revoking, annulling, 
or terminating the charters of an Enterprise. Quite simply, the 
charters of Fannie Mae and Freddie Mac would remain in place 
under receivership.
    Another potential objection to receivership would be that 
it forces a solution upon Congress before it has had sufficient 
time to deliberate. Such an objection would also be false. 
Again, under HERA, a limited-life regulated entity, essentially 
a bridge bank for the GSEs, has an initial life of 2 years, 
which can be extended by FHFA for 3 additional 1-year periods. 
This would give Congress and the Administration 5 years to 
arrive at a suitable solution to Fannie Mae and Freddie Mac.
    Another important feature of receivership is that it would 
help lessen the perception that certain entities, including our 
largest banks, are ``too-big-to-fail.'' The Dodd-Frank Act 
establishes a resolution process for both non-banks and bank 
holding companies. This resolution process mirrors, in many 
ways, the receivership provisions of HERA.
    Market participants have questioned whether the resolution 
powers of Dodd-Frank would ever be used to impose losses on 
creditors. Quite simply, if we are unwilling to take Fannie Mae 
into receivership, then most market participants will conclude 
that we are also unwilling to take Citibank or Goldman into a 
receivership. Moving Fannie and Freddie into receivership adds 
credibility to the resolution process established in Dodd-
Frank.
    In transitioning from a government-dominated to a market-
driven mortgage system, we face the choice of either a gradual 
transition or a big bang. While I am comfortable with believing 
that the remainder of the financial services industry could 
assume the functions of Fannie and Freddie, I recognize this is 
a Minority viewpoint. Practical concerns as to the state of the 
housing market point toward a gradual transition. The question 
is then, what form should this transition take?
    One element of this transition should be a gradual step-
rise reduction in the maximum loan limits for the GSEs. I would 
recommend an immediate reduction of the loan limit to $500,000, 
followed by annual decreases of $50,000. Of course, the details 
can differ.
    The hallmark of a private corporation is that its owners 
bear the benefits and costs of its activities. This situation 
no longer holds for Fannie Mae and Freddie Mac. Any revenue 
going forward will help reduce the size of the hole, while 
expenses will dig it deeper.
    Given that the taxpayer is now the residual claimant to 
these entities, it should be clear that the employees of Fannie 
Mae and Freddie Mac are working not on behalf of the 
shareholders but on behalf of the taxpayers. Accordingly, they 
should be paid like other government employees. I recommend 
that all GSE employees be transitioned to the GS pay scale as 
soon as possible. This should also include the executive 
officers. Quite simply, if FHA can adequately manage its 
mortgage risk by paying its employees on the GS scale, then I 
see no reason that Fannie Mae and Freddie Mac cannot do the 
same.
    Credit losses suffered by Fannie Mae and Freddie Mac have, 
in some instances, been caused by the violation of 
representations and warranties by the originating lender. While 
the GSEs have made some efforts to recover losses from the 
originating lenders, there is simply not enough public 
information to gauge the aggressiveness of these efforts. 
Congress should examine in detail the agreements reached 
between the GSEs and the banks in regard to loan repurchase and 
recovery for losses, both on private-label securities and on 
mortgages bought from these lenders by the GSEs.
    I believe a GAO audit of these agreements, along with 
detailed information by lenders, would help stem some of the 
losses.
    The TARP directed the President to submit a plan to 
Congress for recoupment of any shortfalls experienced under the 
TARP. Unfortunately, assistance to the GSEs lacked a similar 
requirement. Now is the time to rectify that oversight. 
Congress should establish a recoupment fee on all mortgages 
purchased by Fannie Mae and Freddie Mac. Such a fee could be 
used to directly reduce the deficit and structured to recoup as 
much of the losses as possible. I believe a reasonable starting 
point would be 1 percentage point per unpaid principal balance 
of loans purchased.
    It is important to note that the structural flaws in our 
mortgage finance system were not limited to Fannie Mae and 
Freddie Mac, but also included the treatment of GSE debt within 
the bank capital standards. One of the rationales for the 
rescue of Fannie Mae and Freddie Mac was the concern over the 
impact their failure would have on the rest of the financial 
system. I believe we need to change the bank capital standards 
away from encouraging the holding of GSE securities over 
mortgages. So I believe Congress should direct the regulators 
to end this preferential treatment.
    Lastly, the bulk of losses suffered by Fannie Mae and 
Freddie Mac were the direct result of declines in credit 
quality. In order to limit future losses, Fannie Mae and 
Freddie Mac should be restricted to the quality of loans they 
can purchase. Under current law, Fannie Mae and Freddie Mac 
essentially set their own credit standards. Going forward, the 
GSEs should be limited to purchasing only those mortgages that 
meet the definition of a qualified residential mortgage as will 
be determined by regulations promulgated under Dodd-Frank.
    Each of these recommendations, as well as others, is 
detailed in my written testimony. I again thank the committee 
for holding this important hearing and look forward to your 
questions.
    [The prepared statement of Dr. Calabria can be found on 
page 56 of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    And, Mr. Randazzo, you are recognized for 5 minutes.
    I should also add that, without objection, the written 
testimony of all of the witnesses will be added to the record 
as well.

 STATEMENT OF ANTHONY RANDAZZO, DIRECTOR OF ECONOMIC RESEARCH, 
                       REASON FOUNDATION

    Mr. Randazzo. Thank you. Chairman Garrett, Ranking Member 
Waters, and distinguished members of the subcommittee, thank 
you for the opportunity to join you in discussing the important 
matter of reforming the Nation's mortgage finance system.
    My name is Anthony Randazzo, and I am director of economic 
research at Reason Foundation.
    It is important at the outset of this debate to frame the 
issue properly. Mortgage finance policy and affordable housing 
policy are two different things. Whether we should or how we 
should subsidize low-income Americans' putting a roof over 
their heads must not cloud the analysis and the debate about 
the consequences of government policy distorting mortgage 
prices for nearly the entire housing market.
    That being said, now is the time for major reform of the 
government's role in the mortgage finance market. Ideally, a 
fully reformed system would have no explicit or implicit 
government guarantee for mortgage finance. Such financial 
support only subjects taxpayers to high risks and eventual 
losses.
    Ultimately, the goal of housing finance reform should be to 
allow private investors to replace the government, i.e., 
taxpayers, as financers in the housing market while ensuring 
that any subsidies remaining in the system are explicit, 
direct, narrow, on-budget, and properly accounted for.
    Now, realistically, a robust overhaul of the housing 
finance sector will take time to accomplish. And in the near 
term, there is still a need to protect taxpayers from 
additional future losses while ending the ongoing bailout of 
the GSEs. The government's role in housing must be reduced, and 
private capital must be allowed to return.
    The following are 10 ideas that will help achieve these 
goals. And while they are focused on addressing short-term 
needs, they can also be extended beyond the near term as the 
basis for a robust overhaul.
    One, lower all conforming loan limits for Fannie Mae and 
Freddie Mac by 20 percent by the end of September 2011. A 20 
percent reduction would still leave conforming loan limits 
above national average and median housing prices. And this 
would be a very modest reform to create room for private 
lenders and investors to begin re-entering the mortgage market 
as Congress debates how to reform the system as a whole.
    Two, increasing downpayment requirements for mortgages 
backed by government agencies to 20 percent over the next 3 
years. This would decrease government, i.e., taxpayer, exposure 
to risky mortgages and prevent the government from supporting 
mortgages for those without the resources to become a homeowner 
right now. Both those who want to prevent future bailouts and 
those who are looking to protect consumers from loans that 
would hurt them in the future should support this idea. And 
Fannie and Freddie should also be prevented from buying or 
guaranteeing any loan originated outside the yet-to-be-
established qualified residential mortgage guidelines.
    Three, instruct FHFA to begin slowly increasing the 
guarantee fee charged by Fannie Mae and Freddie Mac. Over time, 
this would increase the cost of doing business with the GSEs 
and create room for private capital to be more competitive with 
government agencies. And, in the meantime, the GSEs would be 
collecting more revenue to put back towards the cost of bailing 
them out.
    Four, end all affordable housing goals. Again, mortgage 
finance policy should not be considered the same as affordable 
housing policy. And as I outlined in my written testimony, 
while I would argue that we should have no subsidies for 
mortgages at all, it is possible that aid for low-income 
families can be pursued in more effective ways than affordable 
housing goals which distort the entire mortgage market.
    Five, raise capital requirements for Fannie and Freddie.
    Six, create a legal framework for covered bonds.
    Seven, cap expansion of Fannie and Freddie's portfolios at 
a certain date and have the Treasury Department buy the 
combined portfolio to be run off over time. And having the GSE 
portfolios run down on the government's balance sheet would 
allow Treasury to take advantage of Uncle Sam's debt funding 
advantage and save the taxpayers money.
    Eight, p`ut the staffs of Fannie Mae and Freddie Mac on the 
Federal pay scale.
    Nine, require the Treasury Department to formally approve 
new debt issuance by Fannie Mae and Freddie Mac. And this would 
help protect taxpayers by providing more accountability and 
transparency to the GSEs while their fate is being further 
considered.
    And, 10, wipe out the remaining stock of Fannie Mae and 
Freddie Mac. And it is also critical that mortgage finance 
reform be paralleled by FHA reform.
    To close, these 10 ideas should not be considered an 
adequate fix of Fannie Mae and Freddie Mac or as sufficient to 
reform the housing market. They are merely a starting point, a 
first step towards a robust overhaul, and should open the door 
to further mortgage finance reform discussion.
    Thank you for the opportunity to discuss this important 
issue with you, and I look forward to answering any questions 
you may have.
    [The prepared statement of Mr. Randazzo can be found on 
page 70 of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    Mr. Pollock for 5 minutes. Thank you.

    STATEMENT OF ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Pollock. Thank you, Mr. Chairman, Ranking Member 
Waters, and members of the subcommittee.
    In the same lead editorial cited by the chairman, The 
Washington Post recently wrote about Fannie and Freddie, 
``Advertised as a new way to stabilize the housing market, the 
government-backed mortgage securitization ended up distorting 
and destabilizing the market.'' The Washington Post is 
absolutely right about this.
    To avoid this distortion and destabilization, we should aim 
in the long run for a housing finance sector in which you can 
be either a private company or you can be a government agency, 
but you can't be both. In other words, in the long run, there 
should be no GSEs.
    This is consistent with the GSE reform bill introduced by 
Congressman Hensarling in the last Congress, and also with the 
AEI White Paper recently published by Peter Wallison, Ed Pinto, 
and me.
    May I just remind us that the old GSE charters meant not 
only that Fannie and Freddie had a taxpayer guarantee, but also 
that they were granted many privileges and large economic 
subsidies. They were highly politicized, exercised duopoly 
market power, discriminated against small lenders, and 
transferred a portion of their taxpayer subsidies without 
appropriation to politically directed housing programs.
    They were accurately described as ``masters of Beltway 
capitalism.'' Fannie, in particular, was genuinely feared as a 
hardball political operator. Fannie and Freddie had especially 
low capital ratios because their real capital was known by the 
bond market to be the credit card of the U.S. Treasury. We 
certainly don't want those GSEs back.
    My view is that, in the long run, Fannie and Freddie need 
to be restructured into a private company, a government agency 
and a liquidating trust, but this can't be done just yet. There 
are, nonetheless, a number of focused, specific actions we 
could take now consistent with our long-term aim. My written 
testimony suggests a dozen of them, and I will touch on a 
number of these briefly.
    We should enable covered bonds as an alternate long-term 
mortgage funding option. A lesson everybody has learned from 
the bubble is the importance of whether mortgage lenders retain 
``skin in the game'' for mortgage credit. With covered bonds, 
the issuing bank has 100 percent skin in the game for their 
credit responsibility, and this is a major advantage over the 
GSE originate-and-sell model.
    Granting perpetual charters to GSEs was a major historical 
mistake. We should set a 5-year sunset on Fannie and Freddie's 
charters, thus having them expire in 2016. Before then, we will 
be ready for their long-term restructuring.
    Congress should instruct the GSE regulator to set Fannie 
and Freddie's capital requirements at no less than those 
applied to national banks for the same assets and the same 
risks.
    We should mandate the runoff of the GSE's investment 
portfolios, both loans and securities. As these assets run off, 
GSE unsecured debt will be correspondingly reduced, as will the 
complex derivatives activity and portfolios associated with 
these assets.
    As my colleagues on the panel have recommended, we should 
set a regular, predictable reduction in GSE conforming loan 
limits.
    We should mandate clear Federal budget accounting for 
Fannie and Freddie, as proposed in the Accurate Accounting of 
Fannie Mae and Freddie Mac bill introduced in 2010.
    We should eliminate all GSE affordable housing goals and 
transfer such goals to HUD. Public subsidies for affordable 
housing and non-market, higher-risk lending should be 
explicitly governmental activities. So all affordable housing 
goals, assets, and related funding should be ended for the GSEs 
and, as appropriate, become the responsibility of the housing 
finance operations of the Department of Housing and Urban 
Development.
    One of the big mistakes made by bank regulation was to 
encourage the banking system to increase the systemic risk of 
the GSEs. Congressman Pearce previously raised the issue of the 
preferred stock of Fannie and Freddie held by banks. It is 
essential for us to understand and to correct the risk 
interaction between the GSEs and the banking system. This 
interaction caused a hyper-leveraging of mortgage risk for the 
financial system as a whole, as discussed in my written 
testimony.
    Something everyone agrees on is the need to provide clear, 
simply stated, straightforward key information to prospective 
mortgage borrowers. We should mandate that no loan can be 
guaranteed by Fannie or Freddie which has not provided the 
borrower with the appropriate one-page information form.
    And, finally, an outrageous part of the GSE bailout was the 
full protection, so far, at the expense of the taxpayers, of 
the holders of Fannie and Freddie's subordinated debt. The 
investors in this subordinated debt should be put on a path 
toward market discipline.
    In sum, Mr. Chairman, there is a lot we could do now to 
move in the right direction. Thank you again for the 
opportunity to share these views.
    [The prepared statement of Mr. Pollock can be found on page 
63 of the appendix.]
    Chairman Garrett. Thank you.
    And finally, Ms. Wartell for 5 minutes.

  STATEMENT OF SARAH ROSEN WARTELL, EXECUTIVE VICE PRESIDENT, 
            CENTER FOR AMERICAN PROGRESS ACTION FUND

    Ms. Wartell. Thank you very much, Mr. Chairman, and thank 
you, Ranking Member Waters, and all of you, for the opportunity 
to share my thoughts on reform of housing finance.
    We all agree today that we find ourselves in an 
unsustainable situation. Government now bears the credit risk 
on the bulk of residential mortgage loans, and private capital 
must be attracted back into the market to bear as much of the 
load as possible in our housing finance system going forward.
    That said, our housing policy should have other goals, as 
well: decent and affordable housing rental options and 
homeownership so that American families have appropriate 
choices; access to homeownership for creditworthy borrowers who 
are ready to sustain the responsibilities of a mortgage; 
equitable and nondiscriminatory access to credit; the 
opportunity to rebuild, based on sound and sustainable lending 
principles, communities hard hit by the foreclosure crisis; and 
a diverse system not dependent on a handful of large financial 
institutions, but which includes local institutions that can 
meet the needs of the communities they know best.
    Those are all part of our goals. Thoughtful evolution, not 
overnight revolution, is the best way to reform the housing 
finance system, provide stability, and protect the taxpayers. 
So let me touch on just three topics that I mention in my 
written testimony.
    First, there are important conditions that must be in place 
if we are going to pull back government support from parts of 
the housing market in an attempt to try to crowd in private 
capital.
    Investors won't return unless the rules of the game are 
clear. And given the mess that the private-label securities 
market made in the past, we shouldn't want them to. Most will 
wait to see what regulators do in implementing the provisions 
of the Dodd-Frank Act regarding mortgages. And those who would 
delay these regulatory efforts undermine the certainty that 
they claim private markets need for investment.
    The return of private securitization also requires 
restoring confidence in servicing. Investors, as well as 
consumers, are deeply frustrated by the servicing standards of 
the lenders. A new servicing standard process is just 
beginning, and it should be a priority also for those who want 
to see private at-risk capital return.
    Withdrawing the GSEs from market segments before these 
steps, such as through loan-limit increases, risks a shock to 
the housing market already struggling from an inventory 
overhang and weak employment. We must ensure the private market 
is ready to pick up the slack or risk restarting the vicious 
cycle of falling home values, a shrinking economy, which would 
also leave taxpayer losses for its GSE obligations larger than 
is required.
    Second, I have concerns that accelerating the liquidation 
of the GSE portfolio may be directly counter to the taxpayers' 
interest. Asset sales can sometimes yield higher returns, but 
it also can allow buyers to benefit from market recoveries, 
rather than the taxpayer, who is currently backing the GSEs. 
The sales should be dictated by maximizing expected recoveries 
and not a mandated schedule of sales.
    Finally, a few quick reactions to some of the more radical 
privatization proposals that have been advanced about the end-
state. These would take us to unchartered territories--truly 
unchartered--because, despite assertions to the contrary, no 
developed country has a purely private housing finance market 
without some government support in one form or the other. 
Moody's Mark Zandi made this point in a paper that he released 
this week, as well.
    The oft-cited Canadian market has significant government 
insurance and support. In any event that purely private 
intermediaries were able to finance all of the U.S. mortgage 
market debt, their obligations would surely be considered 
systemically important, given the high degree of concentration 
in U.S. mortgage activity in a few financial institutions.
    So instead of a private system, we might create a new set 
of implicit but unmonitored and unpriced government 
guarantees--exactly the opposite of the solution that any of us 
seek.
    These problems would be exacerbated if we relied entirely 
on the covered bond model. While a useful product as a 
replacement for a mortgage finance system, covered bonds 
encourage the dominance of a few institutions, which receive 
the benefit of implicit government guarantees in Europe. I talk 
a little bit more about this in my written statement.
    While these privatization schemes are unlikely to protect 
the taxpayers and avoid moral hazard, they would result in some 
stark consequences for American households. The availability of 
mortgage finance would be sharply reduced, and middle-income 
households would be shut out of homeownership. To the extent 
that mortgage finance remained available for working 
households, it would be directed into loans of shorter 
durations, higher costs, and very high downpayments. Products 
that help families fix their housing costs over time like the 
long-term, fixed-rate mortgage would not be available at prices 
affordable to most families.
    Lack of long-term private finance would reduce the 
availability and raise the costs of rental housing, even as 
constrained homeownership access would create greater demand 
for rental units and upward pressure on rents.
    Finally, fewer families would have access to the forced 
savings that homeownership represents and the opportunity for 
economic mobility that is the American dream. After the sorry 
consequences of private-market innovation over the previous 
decade, we should think carefully before going down that path 
again, leaving American families who have already suffered the 
worst economy in our lifetime to once again pay the price. 
Thank you.
    [The prepared statement of Ms. Wartell can be found on page 
86 of the appendix.]
    Chairman Garrett. Thank you.
    This is very interesting, so I will begin with the 
questioning for 5 minutes. Mr. Pollock, you use the expression 
in your written testimony about double leveraging of the GSEs 
by the banking system.
    Could you give me just briefly, in about a minute or less, 
a little more detail on this and discuss what steps? You sort 
of touched on how we could curtail that double leveraging.
    Mr. Pollock. Yes. Thank you, Mr. Chairman.
    As I mentioned, the interaction between the way that 
lending money and investing in the GSEs was encouraged by 
regulation in the banking system and the GSEs themselves 
resulted in double leverage or hyper-leverage. One example is 
with preferred stock. A large amount of the capital of the GSEs 
was in the form of preferred stock. Preferred stock could get 
leveraged 60 to 1, 60 in debt to 1 in stock by the GSEs.
    Among the biggest buyers of the preferred stock, and 
encouraged by regulation, were commercial banks. And the banks 
themselves owned that stock on a leveraged basis, or a margin 
basis, with a risk-based capital requirement of only 20 percent 
risk weighting, which is equivalent to 1.6 percent capital. In 
other words, they owned the equity of the GSEs on a 98 percent 
margined basis, like buying stock on 98 percent margin.
    So if you combine the banking system with the GSEs and 
think about that as a total system, there was virtually no real 
equity. You had a leverage of 60 squared, or over 3,000 to 1. 
That thinking about the interaction between the banks and the 
GSEs is, I think, critical. I will just mention quickly, if I 
may, that banks were also encouraged to hold GSE debt and 
mortgage-backed securities without limit, so that you got over-
concentration in GSE risk by the banks.
    Chairman Garrett. Thank you.
    And Ms. Wartell, right now we are trying to take actions. 
What can we do today? Looking at the GSEs today, they are in 
conservatorship, lots of money going out the door. A couple of 
things are going to be coming up. The FHFA is soon to announce 
that executive compensation is going to be due with the 
executives of Fannie and Freddie.
    What is your position on exec compensation packages that we 
have seen over there? Should the taxpayer basically be funding 
these quite high compensation packages in your view?
    Ms. Wartell. I think what is important for the GSEs is that 
because they do represent a significant contingent liability, 
potential liability for the taxpayers, it is very important 
that they be able to continue to attract the talent to manage 
their obligations. And I do in their current situation believe 
that it is difficult for them--they are seeing a great deal of 
runoff already of their senior leadership into private 
institutions--and the ability to attract people, for example, 
to manage servicing and retain assets. So I don't have a 
position particularly on the current compensation packages. I 
understand the difficulty that they present. I also think it is 
really important that we don't let them lose talent to manage 
and protect the taxpayers' ultimate outcomes.
    Chairman Garrett. We have to be careful of that because 
over at Ginnie Mae and FHA, they are having to deal with the 
same problems over there, and they are not getting the same 
compensation package. So we may be getting a call for giving 
them bonuses if we are not willing do it here.
    Let me just ask you one other question. With them in 
conservatorship right now, is now a good time to address the 
issue or have them issuing affordable housing goals? Do you 
think that should be something they should be doing right now?
    Ms. Wartell. I think what is important, and what we would 
suggest for both the near term and the long term, is that the 
secondary market serve what the primary market is doing.
    Chairman Garrett. How much is the near term? Because I am 
looking at what we could do for them.
    Ms. Wartell. In the near term, the affordable housing 
goals, as written in the statute that the conservator is now 
still implementing, require the GSEs to lead the market. The 
rulemaking by the Bush Administration that really forced them 
to stretch out ahead of the market is where I think the goals 
really got out of bounds. Requiring the secondary market to 
continue to serve the primary market, the loans that lenders 
are making, and not cherry-pick those loans so that we end up 
with communities without access to capital, communities that 
are effectively credit deserts, seems to me an important 
ongoing obligation. We just don't want to make them stretch in 
ways that have them make unsafe loans.
    Chairman Garrett. Okay. And in my 30 seconds' time, because 
someone is trying to keep the time here, Mr. Randazzo, Mr. 
Calabria, you both discussed variations of how to treat their 
outstanding debt.
    Mr. Randazzo, could you expound on your idea to bring that 
debt online with the Treasury and Treasury's balance sheet, and 
the potential taxpayers' savings there? Have you had any 
discussions, I should say, also with Treasury on this as well?
    Mr. Randazzo. You are speaking specifically to how to bring 
the debt of the GSEs in line?
    Chairman Garrett. Right. And onto the Treasury's balance 
sheet, and then the tax savings that results there--in 15 
seconds.
    Mr. Randazzo. Sure. In short, the GSEs, because they are 
not technically government agencies right now, pay more to 
issue debt than the Treasury Department does. By bringing those 
portfolios onto the Treasury's debt, you would have roughly 25 
basis points cheaper borrowing when you reissue short-term 
debt. And given that over the next year, about 40 percent of 
their debt is going to come up for renewal, that has potential 
savings of anywhere between $4 billion and $12 billion for 
taxpayers just by having those portfolios run off on the 
Treasury's balance sheet as opposed to in a separate holding 
company.
    Chairman Garrett. My time has expired. Ms. Waters for 5 
minutes.
    Ms. Waters. Thank you very much. Let me direct my first 
question to, I believe, Mr. Pollock, of American Enterprise 
Institute. Could there be a 30-year fixed-rate mortgage product 
available on the market for the median-income family without 
any government involvement in the housing finance system? If 
so, how many basis points more expensive would it be compared 
to what borrowers pay now?
    Mr. Pollock. Congresswoman, there could certainly be one 
and would certainly be one. I guess it would be somewhat more 
expensive. I doubt that it would be very much more expensive. 
It is hard to say until we run the market experiment, of 
course. But that it would be available, I think is beyond 
doubt.
    Ms. Waters. I would like to ask Ms. Wartell that same 
question.
    Ms. Wartell. I agree that it would probably be available. 
But I disagree that it would be available at a rate that would 
be competitive in the marketplace and that would be able to 
attract middle-income families. I think the reality is with the 
economic uncertainty people have, they are not going to pay one 
dime more than they can for their housing costs. And the 
reality is that we are adding economic volatility into the 
system by moving people to adjustable rate mortgages, as we saw 
during the crisis. And you are also I think putting limitations 
on central bank regulators' capacity to manage interest rates 
if we know that so many families' housing costs will vary up 
and down with adjustable rate mortgages.
    Ms. Waters. Mr. Calabria, what do you make of the fact that 
William Gross, the co-founder and managing director of the 
investment firm Pimco, has said his funds wouldn't buy pools of 
private label mortgages unless homeowners made a downpayment of 
at least 30 percent? I know that as an investor, he is not 
exactly an impartial party. He has an interest in there being a 
government guarantee. Do you think he is bluffing, or do you 
think his statement is an accurate picture of what investment 
firms would actually do?
    Mr. Calabria. I think he is doing what they call on Wall 
Street ``talking your book.'' As you mention, Pimco is a very 
large holder of GSE securities. Were a government guarantee to 
end, his book of business would take a very large loss. I can't 
blame him for trying to protect that. I think his statement as 
to the effect of 3 percentage points strikes me as absolutely 
ridiculous. I think that is outside of the realm of reason.
    We don't see that kind of difference between--I think a 
more reasonable--I will be willing to guess, where Alex would 
not, and put an estimate, which is, I think, if we were to move 
our conforming mortgage market to resemble our jumbo mortgage 
market, we would see interest rates increase somewhere on the 
range of 30 to 40 basis points at most, which I will note is 
not large enough to impact the homeownership rate. And while 
that might make mortgages more affordable, I think a constant 
theme that we need to keep in mind is that homeowners are also 
taxpayers. So taking a dollar out of one pocket just to put 90 
cents back in the other does not make someone better off, and 
we need to look at the whole picture.
    Ms. Waters. Thank you very much.
    Mr. Randazzo, I don't know if your expertise extends to 
servicing. But given all of the expertise we have had over the 
past year or so in housing finance, can you explain why we are 
seeing a breakdown in the mortgage servicing industry? Today, 
the Veterans Affairs Committee is holding a hearing on improper 
military foreclosures by JPMorgan Chase. Do we need national 
standards for mortgage servicing? If so, what should be 
included in these standards?
    Mr. Randazzo. Thank you for the question. I will say my 
expertise is not mainly focused in the servicing market. I 
would say that there are a number of outside factors that have 
impacted the way that banks have put together their own 
specific servicing standards. Without the right incentives for 
private companies to track their risk, things can get out of 
whack. And I think that has happened with a lot of these 
companies.
    I don't know that national servicing standards are 
necessarily needed. But as long as there are misaligned 
incentives in the marketplace, it would be natural that that 
would be the route to go. I would say that--
    Ms. Waters. Ms. Wartell, on the same issue of servicers, 
there is a big problem--robo signing, all of this we are coming 
up with. What happened? Do we need national standards?
    Ms. Wartell. I think we absolutely need it, not only 
because consumers don't have the ability to be dealt with 
fairly, but also because investors need to know how servicers 
are going to act and whether they are going to have an 
incentive to act in the investors' best interests in trying to 
maximize returns in the mortgage. And they are, I think, 
without that confidence today. There are multiple ways of 
getting to an effective set of best practices that are applied 
across the entire market, either voluntarily or through 
legislation. But if we don't see it happen voluntarily, then it 
needs to happen in another way.
    Ms. Waters. Anyone else on servicing? Yes, Mr. Calabria?
    Mr. Calabria. I will make a comment and show that there are 
certainly some issues on which Sarah and I agree. And I think, 
given that the taxpayer is on the hook for much of the 
servicing industry, there certainly is a national interest. I 
would say the place to start is certainly with Freddie and 
Fannie's book. They have a large amount that they are 
servicing. So there is definitely a Federal interest. There is 
definitely a reason do this. The details will differ, but I do 
think it is something worth looking at.
    Ms. Waters. Thank you. I yield back.
    Chairman Garrett. Thank you. The gentleman from New Mexico, 
Mr. Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    I think I would go to Mr. Randazzo first. When we consider 
the preferred stocks that were basically allowed to not be 
exercised, do you know what the process was in which these were 
suspended? The banks were being encouraged to buy the stock; 
isn't that correct? Do you know anything about that? Do you 
know anything about the process?
    Mr. Randazzo. In 2008, when the--
    Mr. Pearce. Yes. In other words, prior to the government 
taking conservatorship, banks were encouraged to buy these--if 
it is not something you are familiar with, you can yield to Mr. 
Pollock. I think he might have--
    Mr. Randazzo. I think Mr. Pollock and Mr. Calabria could 
speak more to this.
    Mr. Pearce. Okay.
    Mr. Pollock. Thanks, Congressman. I would be glad to 
address that.
    By the regulatory capital treatment, banks were certainly 
given an incentive to own this equity on a highly leveraged 
basis. And when the GSEs were put into conservatorship, the 
dividends on the preferred stock were suspended. That strikes 
me as an appropriate thing to do under the circumstances. But 
the valuation then of the stocks, looking forward to how much 
could be recovered ever, of course, was extremely low. And the 
write-offs were very high. It troubled many banks and it put 
several banks into failure.
    The fault, as I see it, is the design of the system in the 
beginning, which encouraged the banking system running on what 
you might think of as double-dipping of the government 
guarantee. That is to say, you took government-guaranteed 
deposits and used them to leverage investments in equity of the 
GSE. That, in my view, was a big mistake.
    Mr. Pearce. The term ``preferred stock'' means basically 
just that. Were there lower-level creditors who were given 
their value while preferred stockholders lost theirs?
    Mr. Pollock. No. There were common shareholders, of course. 
There still are legally common shareholders who saw the price 
of their stock go down more than 99 percent to pennies on a 
share. Then you have the preferred. Above the preferred you 
have the subordinated debt, which I mentioned in my testimony, 
which has been protected. And that is something I believe we 
need to fix going forward; that the subordinated debt holders 
should share in the realization of the risks which they 
knowingly undertook by buying subordinated debt.
    Mr. Pearce. Ms. Wartell, you mentioned on page 17 that we 
need to bring people and families and home back into the 
conversation about housing finance reform. Would you kind of 
elaborate on that? In other words, when I hear that--I am not 
saying that everybody who took out a subprime mortgage knew 
that they could never pay a payment on it and they were being 
encouraged into it, but also they were willing participants. So 
when I hear that, I kind of hear that we need some personal 
accountability and responsibility.
    Is that what you intended in your comment, or did you have 
a different direction? I would like for you to expand on that 
just a bit.
    Ms. Wartell. Sure. That was not what I intended by my 
comment, but I certainly agree with that.
    Mr. Pearce. You would agree with it?
    Ms. Wartell. I certainly agree that individuals who take 
out loans should have the ability to repay them. And I think we 
have a responsibility as individuals and as a society to ensure 
that lenders are making loans available to people who have the 
ability to repay them. Some of them were lured or tricked 
through predatory practices into taking on obligations they 
didn't have the capacity to pay, and others were simply part of 
a crowd that--kind of a crazy frenzy.
    But what I had in mind by my comment was that I think there 
are serious economic consequences for American families if we 
don't care about the stability of the housing market and the 
role that the housing market plays in creating economic 
opportunity and mobility for families.
    Mr. Pearce. Okay. That is fair enough, as long as we take 
both sides of the equation. I mean that seems reasonable 
enough.
    Mr. Calabria, you mentioned on page, I think it is 3, that 
you do not think there is much--that we have experienced most 
of the risk in the financial sector; that if we start bringing 
accountability in the system, there is not much downside risk. 
Am I reading that correctly?
    Mr. Calabria. For starters, yes, I believe we are past the 
point where you could say we are in a financial panic. And my 
point about I think it is time to consider start imposing 
losses on creditors. Now, the concern about, I think during the 
crisis the Treasury had, was there would be a run in these 
markets. And of course the bazooka that Secretary Paulson was 
given to back up Freddie and Fannie was to calm those markets 
and provide liquidity. We are past that point.
    We are at a point where I think we can start thinking about 
where should we allocate the losses. And in my opinion, they 
should be allocated on creditors. I do believe that creditors 
can bear those losses. As I indicated in my testimony, I think 
creditors would get at least 94, 95 cents on the dollar, which 
if the Chinese central bank is not happy with that, they can go 
invest somewhere else in my opinion.
    Mr. Pearce. So all the instruments of risk, the MBS, CDOs, 
whatever you are talking about, you are saying that a large 
percent now resides in the U.S. Government to where there is 
not much left out there. We have bought most of the bad assets. 
Is that right?
    Mr. Calabria. There are still a number of bad assets. The 
concern is really if you start with the observation that 80 
percent of the funding for Freddie and Fannie comes from the 
rest of the U.S. financial services system, so about a trillion 
of that, a little more than a trillion, trillion and a half of 
that is in the commercial banking system, so we do need to be 
concerned that if you impose losses such as were imposed on the 
preferred shares, what would happen to the banking system.
    Now, the FDIC has looked at this. And the number of banks 
that would actually fail is quite small. You have other things. 
The money market mutual fund system holds about a trillion in 
unsecured debt. We have to remember the priorities would be 
preferred shareholders get hit, subordinated debt would 
essentially get wiped out, and the unsecured debt would take a 
significant haircut. The MBS would largely, in my opinion, be 
whole. That would pose significant risk I think to the money 
market mutual fund. You would see dozens probably break the 
buck.
    We still at post-crisis do not have a solution, in my 
opinion, into the issue of money market mutual funds, even 
post-reserves primary. So I think that issue needs to be 
directly addressed, but I think we can allocate those losses.
    Mr. Pearce. Thank you, Mr. Chairman.
    Chairman Garrett. Thank you. The gentleman from 
Massachusetts for 5 minutes.
    Mr. Frank. Thank you, Mr. Chairman.
    I would like to ask all the witnesses if they have views on 
H.R. 4889. That is the comprehensive bill for phasing out and 
reforming and then phasing out Fannie Mae and Freddie Mac. It 
was introduced by the gentleman from Texas, Mr. Hensarling, 
about a year ago. It has been offered on the Floor in the 
committee. And again, I had assumed that from what I had heard 
my Republican colleagues say, that they were ready to deal with 
legislation. They had a fairly well-developed bill. It is been 
reintroduced this year, I understand, as part of the Republican 
Study Committee package.
    So I am wondering, the Majority having invited these 
witnesses, if they called your attention to H.R. 4889, to 
establish a term certain for the conservatorships of Fannie Mae 
and Freddie Mac, to provide conditions for continued operation 
and the wind-down, etc.; do any of the witnesses have views on 
this?
    Mr. Calabria. I will preface by saying I haven't read the 
bill, but I understand--
    Mr. Frank. You haven't read it?
    Mr. Calabria. I haven't read the bill.
    Mr. Frank. Were you asked when the Majority invited you on 
this topic? Did they call your attention to the bill?
    Mr. Calabria. I was not asked.
    Mr. Frank. Next. Did they ask you to read the bill and give 
your opinions on it?
    Mr. Randazzo. I have read the bill. And I read the bill 
when it was introduced last year. I think that it is a good 
basis for where we need to go in terms of comprehensive reform. 
I think that it is going to be difficult to get that specific 
piece of legislation passed through both Houses of Congress 
immediately, and so this hearing does have some value.
    Mr. Frank. Okay. But let me ask you--I appreciate your view 
on the strategy. It sounds like you not only read the bill, but 
might even have been involved in it. You say it would be 
difficult. But do you think, would you urge us to pass this 
bill right now? The Majority controls the House. So would you 
urge that this 4889 be passed right now?
    Mr. Randazzo. I would not urge that the bill as it is 
currently written be passed.
    Mr. Frank. Why not?
    Mr. Randazzo. I think that there are certain things that 
can be adjusted. I think that there needs to be a more 
comprehensive approach. I think that--
    Mr. Frank. Can you tell me specifically? You obviously are 
familiar with this. Again, we were asked to pass it. If the 
Majority had its way, it would have been part of the financial 
reform law as is. But since they didn't have their way, we have 
a chance.
    What changes would you make in this bill? You say it is a 
good general framework but not ready to be passed. What changes 
would you recommend in it? Because I like to think in 
legislative terms.
    Mr. Randazzo. I think the biggest thing that can be added 
to the bill, or can be an additional piece of legislation, is 
reform for rules with FHA. If we were to lower conforming loan 
limits by 20 percent over, say, 5 years--
    Mr. Frank. I appreciate that. But that is the FHA. With 
regard to Fannie and Freddie, do you think it is ready to be 
passed now with regard to Fannie Mae and Freddie Mac?
    Mr. Randazzo. I think that the principal underlying issue 
of beginning a process of winding down Fannie Mae and Freddie 
Mac through all of the different pieces that are in there 
should be pursued.
    Mr. Frank. Okay. But that is not what I asked you. I 
appreciate that. Again, we were told, we were criticized for 
not passing this into law. And I just wonder why, if that was 
something that we should have done last year, the Majority 
wouldn't do it now. So we can't vote on--we don't vote on 
general principles here, we vote on legislation.
    Would you recommend that with regard--you said separate 
stuff on FHA. I understand that. I hope we will get to that. We 
have some pending--in fact, Ms. Capito and Ms. Waters, they 
came to some good agreements on FHA. I hope we will pass the 
rest of that. So I agree with that.
    But with regard to Fannie Mae and Freddie Mac, do you think 
the bill as it now stands is ready to be passed? And if not, 
what changes would you recommend?
    Mr. Randazzo. Once again, I think that there are pieces and 
minutia that maybe we don't want to spend 5 minutes to an hour 
going through and nitpicking.
    Mr. Frank. Be my guest. I have nothing else to do this 
afternoon. There are no more votes. I appreciate your concern 
for my time.
    Mr. Randazzo. I was not a part of putting the bill 
together, so that I have a particular way that I think would be 
best to--
    Mr. Frank. So you would not recommend that we pass this 
bill, as is, with regard to Fannie and Freddie?
    Mr. Randazzo. I would say not immediately. I think that 
there are some things that can be changed. It is a good base.
    Mr. Frank. Thank you. Mr. Pollock?
    Mr. Pollock. Congressman, I did read the bill when it was 
introduced. I supported it then. As I said in my testimony, all 
of the points in my testimony are consistent with Congressman 
Hensarling's bill. And when reintroduced, I will support it.
    Mr. Frank. It has been reintroduced. Would you urge the 
committee then to just have a markup and vote on it fairly 
soon?
    Mr. Pollock. I think that would be a good idea.
    Mr. Frank. Okay. Thank you. Mr. Hensarling is back in 
minority status on the panel of his invitees. It is one to two. 
But one out of three I suppose ain't bad.
    Let me just--one other thing to say, and I do appreciate 
the point that was made about separating mortgages and 
affordable housing. And in my case, in my view what we ought to 
be doing is affordable rental housing primarily. The great 
mistake, I have consistently felt, was pushing people into 
homeownership when they weren't ready. So I appreciate that 
separation. And I hope as we go forward, what I would hope 
would be we would find a way to get a revenue stream for 
affordable rental housing and separate that out from the 
decisions made on mortgages.
    So I appreciate that separation. Thank you, Mr. Chairman.
    Chairman Garrett. And I appreciate those comments. Now for 
the rest of the story, the gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman. And I certainly am 
fascinated by the ranking member's fascination with my 
particular bill. I would wonder where the fascination was when 
he was committee chairman. He certainly had the ability to give 
a vote on the bill. I think I heard the gentleman say the bill 
has been reintroduced. As the author of the bill, I can say it 
has not been reintroduced. As with many pieces of legislation, 
it is being refined through the process. I do intend to 
reintroduce the bill. It will be quite similar to the one that 
was introduced in the last Congress. But at least, there will 
be a bill.
    I recall on September 29th, during a full committee 
hearing, where the now-ranking member, then-chairman, told us 
that he was disappointed that we were not dealing with, quote, 
a piece of legislation, but there is no point in rushing that 
pace. It is not going to be possible now, I know, until 
November when we come back, because we lost 7 days. Apparently, 
we are now in the process of losing 133 days. I don't think I 
have seen the gentleman from Massachusetts introduce the bill 
that was committed in September.
    Mr. Frank. Would the gentleman yield?
    Mr. Hensarling. I would yield to the gentleman from 
Massachusetts.
    Mr. Frank. The gentleman is not accurately representing me. 
I was not for passing it. I agreed with that. The gentleman 
said it needs to be refined. You know how important refinement 
is to me. I wouldn't have wanted to pass something that was 
unrefined.
    Mr. Hensarling. Reclaiming my time for one point, did the 
gentleman make a commitment that he was going to introduce 
legislation in the last Congress or have I been given an 
incorrect record?
    Mr. Frank. I thank the gentleman for yielding.
    Chairman Garrett. It is the gentleman from Texas's time.
    Mr. Frank. I thank the gentleman. I would ask unanimous 
consent that the gentleman have an additional minute since I 
have taken his time, Mr. Chairman.
    I would just say after the election, when control changed 
hands, it didn't seem to me that there would be any chance of 
getting that done in the lame duck session. So I just want to 
say, no, I was not for passing this bill last year. I was being 
criticized for not being for passing it last year. And I am 
very sensitive, so I was just glad to have some support for my 
position for last year from your witnesses from this year.
    Mr. Hensarling. Reclaiming my time, I am not sure I heard 
the answer on where the gentleman from Massachusetts' bill is.
    Mr. Frank. Would the gentleman yield 30 seconds? The answer 
is, I have not filed one because it is not my expectation that 
the Majority would pay any attention to it. And if I wanted to 
do academic exercises, I would go back to school.
    Mr. Hensarling. Reclaiming my time, I appreciate that 
sentiment. I would note again, the gentleman certainly had time 
on his shift to introduce a bill before the House switched.
    Let me take time now to speak to the members of the panel. 
I think I heard Mr. Randazzo--maybe it was in your testimony, I 
am not sure. Let me ask the question this way. Do any of you 
believe, as we know what has happened to home price values, we 
know about the cratering, you can look at the Case-Schiller 
index, did Fannie and Freddie play a role in the housing 
bubble, in the housing price inflation? Mr. Pollock, do you 
agree with that?
    Mr. Pollock. Without question, they played a significant 
role in inflating housing prices, inflating the bubble, and 
therefore in making the collapse worse.
    Mr. Hensarling. Do others agree? Perhaps just a show of 
hands. At least, I see two nodding heads with Mr. Calabria and 
Mr. Randazzo. I don't know about Ms. Wartell.
    Ms. Wartell. Only a very small and--
    Mr. Hensarling. Okay. All the panelists agree that Fannie 
and Freddie played some role in price inflation. So when I 
write out my mortgage check each month, I have principal, I 
have interest. In the studies that I have seen, the GSEs may 
have helped on the interest side anywhere from 7 basis points 
to 30 basis points. Now, granted, I think the 7 basis points is 
a several-year-old study from the Federal Reserve. I have seen 
a number of academic studies. I don't know, maybe the median is 
15 basis points, 20, I don't know. So they helped me on the one 
hand by, say, a median of 15 basis points; but on the other 
hand, is my principal perhaps not higher because of the 
artificial demand? Meaning at the end of the day, as a 
consumer, was I really better off? Can we make the case? Can we 
make the case that I was better off? We know the taxpayer 
wasn't better off. So Mr. Calabria, do you have a comment?
    Mr. Calabria. To start with, the outcome of any price is 
clearly the interaction of supply and demand. And what you are 
referring to are the demand factors. So my answer would be it 
really depends on the housing market. I think in housing 
markets with relatively tight supply, places like California, 
you ended up running up the house price. The seller was better 
off in those instances.
    Mr. Hensarling. So the consumer, maybe he benefited, maybe 
he didn't benefit. We know the taxpayer did not benefit. We 
have heard some discussion of the fact, or some have made the 
assertion that there would no longer be a 30-year fixed-rate 
mortgage in America without Fannie and Freddie. Yet were there 
not 30-year fixed-rate mortgages in subprime? Were there not 
30-year fixed-rate mortgages in jumbo? You gentlemen and lady 
have researched the market. Am I correct in that assertion?
    Mr. Pollock. You are correct, there were 30-year, fixed-
rate mortgages without Fannie and Freddie in the parts of the 
market where they don't exist.
    Mr. Hensarling. So they have existed in America in parts of 
the market where Fannie and Freddie didn't exist. Isn't it also 
true, perhaps not common, but in OECD nations in Europe you can 
also find 30-year fixed? At least I think in Sweden and 
Denmark? I have tripped across a few other countries. Is it 
also true you can find examples of 30-year fixed overseas?
    Mr. Pollock. You certainly find it in Denmark.
    Ms. Wartell. I think Denmark.
    Mr. Hensarling. I see my time has expired. I thank the 
chairman.
    Chairman Garrett. I thank the gentleman from Texas. The 
gentleman from California for 5 minutes.
    Mr. Sherman. Just responding to the gentleman from Texas, I 
think 3 to 30 basis points is absurd. The fact is that if you 
try to get a loan today that barely qualifies, and then you 
say, what is a loan going to cost that Fannie and Freddie won't 
touch because it is a little over that amount, the difference 
is hundreds of basis points, if it is available at all.
    The fact is that we would see a collapse in home prices if 
it wasn't for Fannie and Freddie. And that means a collapse of 
our economy. We already had one mortgage/home value collapse of 
our economy. I am not looking for a second. And to say that in 
2012, non-GSE financing is going to be just as available as it 
was in 2002 assumes that all the lenders have been asleep with 
Rip Van Winkle over the last decade. The fact is almost nobody 
is willing to lend money to middle-class home buyers except if 
it qualifies for Fannie, Freddie, or FHA.
    The banks are not lending now because the future of 
mortgage financing is uncertain. Home buyers need a reliable 
flow of mortgage financing. GSE reform is needed. But 
eliminating all Federal involvement would harm this economic 
recovery, put the housing market at risk, and put the economy 
at risk.
    Today, private capital is nonexistent outside the GSE 
mortgage financing limits. And to assume that it will suddenly 
become available if we eliminate the GSEs because everybody 
will go back and do what they did in 2005 assumes a level of 
amnesia among investors that I don't see.
    What we don't need is a precipitous decline in housing 
prices. That is how we got the first dip. That would give us a 
second, or double-dip recession, if not a depression. And it is 
particularly important in regions like mine, where middle-class 
homes go for $600,000 to $800,000. Certainly, all the upper 
middle-class homes do. And without GSE financing, you would see 
not only a collapse of home values, but a collapse of the local 
economy.
    Ms. Wartell, under Dodd-Frank, when defining a qualified 
residential mortgage which is exempt from the Act's risk 
retention requirements, regulators must take into account 
consideration, underwriting criteria that historically 
indicates a lower profile of risk and default such as mortgage 
insurance. To the extent that such insurance reduces the risk 
of default, the data seems clear that loans with PMI have lower 
default rates.
    Do you agree that mortgages should not have to meet the 
risk retention requirements in Dodd-Frank as long as they meet 
other underwriting criteria and PMI is also part of the loan?
    Ms. Wartell. Congressman, I want to be careful not to speak 
to the precise regulatory question today. And if I could send 
you written comments on this, because I don't have all the 
details in front of me. But I would agree with your general 
proposition that there are many ways to ensure that the 
borrower has adequate equity to protect the investors. And PMI 
is certainly one of the ways to do that.
    Mr. Sherman. Okay. We have Bill Gross, the co-founder of 
Pimco, saying that without a government guarantee, if he was 
going to invest in mortgages, he would demand a 30 percent 
downpayment. There are proposals to go for a 20 percent 
downpayment. Wouldn't such a requirement push more business to 
FHA, further constraining that agency's resources? And wouldn't 
it have a dramatic impact on the ability of the average family 
to buy a home in many regions of the country?
    Ms. Wartell. Yes. I completely agree with you. And to your 
FHA point, I think it is important to understand that in the 
case of the GSEs when they were functioning, or some future 
system, it is possible to put private capital at risk ahead of 
the taxpayer. In FHA, we do not have that. So when you shift 
market to FHA by imposing high downpayment requirements like 
that, you actually are having the taxpayer stand at a much more 
extensive risk position than they would otherwise.
    Mr. Sherman. So it is worse for home buyers, worse for home 
sellers, worse for communities, and worse for the taxpayer.
    Ms. Wartell. And unnecessary for us to take risks that the 
private sector could take on their own.
    Mr. Sherman. I yield back.
    Chairman Garrett. All right. Thank you. The gentleman from 
California, Mr. Royce.
    Mr. Royce. Thank you. I think one of the vexing things for 
us is that the Federal Reserve has come to us in the past with 
concerns about the model that we have set up, especially since 
1992, the GSE Act that passed the Congress here. Under that 
model, they were able to dive into the junk mortgage market, 
and they purchased over $1 trillion worth. They wracked up 
leverage of 100 to 1. Part of the concern here is that once you 
establish a GSE, you have established a huge quasi-governmental 
monopoly that comes in and lobbies the Members.
    So the Fed came to us, they asked us to take some action in 
the Congress. I offered an amendment, endorsed by the Fed, that 
would authorize the regulator to rein in Fannie and Freddie on 
these mortgage portfolios based on the systemic risk that they 
posed. That was opposed by Fannie and Freddie, and of course it 
was defeated, as was Jim Leach's amendment.
    Jim Leach, the former chairman of this committee, offered 
an amendment to strengthen the minimum capital requirements for 
Fannie and Freddie. And Ron Paul offered an amendment to 
eliminate the ability of Fannie and Freddie to borrow from the 
Treasury. Any one of these the Fed recognized would have helped 
the situation.
    But once we create these entities, they come in, they lobby 
against those kinds of reforms. And indeed, the only reform we 
ever passed out of the House is one that was opposed by the 
Treasury and the Fed. Why? Because it made the situation worse. 
It tied the hands of the regulators even more.
    So here is the problem. We now have the president of the 
Richmond Federal Reserve--and Mr. Calabria, I will ask you 
about this--he comes to us and he says, ``We should phase out 
government guarantees for home mortgage debt.'' Clearly, he 
doesn't mean tomorrow. He means phasing it out over a long 
period of time in order to make sure that we bring private 
capital back into the market. And he says otherwise, financial 
stability will be elusive, and fiscal balance will be 
threatened by repeated boom-bust cycles in housing.
    I was going to ask you, do you think government guarantees 
on mortgages exacerbate or mitigate the boom-bust cycle that we 
have experienced in the market?
    Mr. Calabria. I would 100 percent agree with the remarks of 
President Lacker. I think that our current system of mortgage 
finance is procyclical rather than countercyclical. And I think 
the point that you make, and I say this from having spent 7 
years working on staff in the other body, I think any system we 
set up will erode over time. The reality is there will be 
another housing boom at some point in the future. We will all 
again think that housing is the best thing since sliced bread, 
and we will want to get everybody in, and we will push 
underwriting standards again down. It has happened time and 
time again. So I would 100 percent agree with that.
    While you could design a system today that, if it just 
stayed that way, might reduce the risk, I have very little 
confidence that it would stay that way over time.
    Mr. Royce. Let me ask you another question. In your 
testimony, you call for shifting the FHFA from conservator to 
receiver for the GSEs. Right?
    Mr. Calabria. Yes.
    Mr. Royce. And I think among the points that you make, your 
argument is that it could be an instrumental step in combating 
the perception that other entities out there are ``too-big-to-
fail.'' I know some think we have solved the ``too-big-to-
fail'' problem with the legislation passed last year, but a lot 
of economists think otherwise. And I would ask you to expand on 
that point and maybe explain to us how that transition process 
might occur, how you would envision us getting from point A to 
point B.
    Mr. Calabria. Sure. Let me start with a broader point about 
``too-big-to-fail.'' We have to recall that essentially every 
financial institution, whether it is Fannie Mae or Citibank, is 
primarily funded with debt. Ninety percent-plus of their 
funding is debt. And so it is all good and well to fire 
management and wipe out shareholders, but you will not have 
sufficient market discipline in that absence.
    So to me, to end ``too-big-to-fail,'' again whether it is 
Citi or whether it is Fannie, you have to set up a process 
where creditors take haircuts. And I think because we have not 
done that, and because in the last crisis under this 
Administration and the last Administration, the proposal was 
always to protect creditors, I think that has been a mistake.
    While you can argue maybe in a panic, I think going forward 
post-panic creditors need to take losses. And why? That is 
because as companies begin to take risk, whether it is 
incompetent management, whether it is a business strategy, 
those who provide funding will raise the cost of that funding 
and constrain them. I was always puzzled, working on GSE 
issues, that the more debt Fannie and Freddie issued, the lower 
their funding costs were. It is certainly contrary to--
    Mr. Royce. The bigger the share of the market they would 
take--
    Mr. Calabria. Exactly.
    Mr. Royce. And I would argue--during the conference, I 
actually had an amendment to sort of guarantee a larger 
haircut. That was defeated in the markup in the conference 
committee. I think we need to revisit that issue on the ``too-
big-to-fail'' front.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. I thank the gentleman from California. 
The gentleman from North Carolina, Mr. Miller, please, for 5 
minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. 
There is no doubt that we would not have much of a mortgage 
market now without Fannie and Freddie. They are buying, the 
vast, vast majority, well more than 90 percent of mortgages. 
Five years ago, they certainly were not in a duopoly position. 
In fact, they were rapidly losing market share.
    What the three of you seem to imply is that the reason 
their market share is now so enormous is that they are crowding 
out the private securitization market somehow. I have talked to 
mortgage investors, and they don't say that at all. The pension 
funds, the insurance companies that bought the private-label 
mortgage-backed securities 5 years ago, say there is no way 
they are going to buy that stuff again unless there is a 
serious reform of the private securitization market. They are 
not going to buy mortgages based on a AAA rating from a rating 
agency. Unless there is the kind of disclosure that an investor 
in a new stock issue gets, so they can actually do due 
diligence themselves and figure out what they are buying, they 
are not touching that stuff again.
    Do any of you have any basis, any evidence for the idea 
that the private-label securitization market is going to come 
back without reforms if we simply hobble Freddie and Fannie, 
limit what they can do, but don't reform the private-label 
securitization market?
    Mr. Calabria. If I could touch on this, and this might be 
where I differ from some of my colleagues, while I would like 
to see the private securitization market come back, I don't 
think that should be the ultimate objective. The vast majority 
of mortgage lending in this country can be funded by a 
portfolio of various financial services institutions, whether 
it is banks or insurance companies. And it is important to keep 
in mind, as I mentioned earlier, 80 percent of the funding for 
Freddie and Fannie--so when people ask me, if Freddie and 
Fannie aren't going to fund it, who is? The parties that fund 
Freddie and Fannie. If the banking system can hold a trillion 
and a half in Freddie and Fannie securities, then the banking 
system can certainly hold a trillion and a half in mortgages.
    So it is just moving it around from different institutions. 
Are there problems with those other institutions? Absolutely. 
And we should address those problems. But I don't think our 
objective should simply be let's bring back the private 
securitization. I think it should be how do we set up a system 
that has substantially more capital? And it is important to 
remember the very existence of Freddie and Fannie is to a large 
degree a capital arbitrage, it is a massive subsidy for 
lenders.
    Mr. Miller of North Carolina. My understanding is about 
half of all lending 5 years ago was the securitization market. 
And you are saying if we simply let that go away, it would be 
replaced by portfolio mortgages.
    Mr. Calabria. First, we need to remember that in 2005, 
2006, 40 percent of private-label mortgage-backed securities 
were bought by Freddie and Fannie. So if you add what they 
bought, what they originated, they maintained a majority of the 
market share, which was still very close to--they dominate what 
they can do. And if you look at it today in terms of how much 
the housing stock is next to the jumbo market, they dominate 
what they can do.
    Mr. Miller of North Carolina. That strikes me as a 
remarkable leap of faith upon which the entire economy depends.
    Mr. Calabria. I would be happy to sit down with you at any 
time.
    Mr. Miller of North Carolina. Ms. Wartell?
    Ms. Wartell. I would agree with you. I think that the 
capacity of our financial institutions, which right now with 
the new capital standards are already severely 
undercapitalized, to provide the kind of ongoing support for 
the housing market in the near term is an enormous leap of 
faith.
    I would also note that the durations that those--the big 
thing that the secondary market provided, by creating a market 
that was liquid, was it allowed longer term obligations to be 
made available into the capital markets. If you don't have that 
mechanism, banks will not make long-term mortgages available, 
and we will have driven the entire housing market to an 
adjustable rate regime in which you will see people's economic 
costs of living varying with interest rates. And that, in and 
of itself, will limit the ability of central bankers to be able 
to adjust interest rates as they need to for monetary policy 
purposes.
    Mr. Miller of North Carolina. Let me move on to another 
topic. I am sorry. You certainly can supplement your answers. 
You are more than welcome to do that.
    I have raised many questions before about the conflicts of 
interest of having the servicers be affiliated with the 
securitizers. And I have talked to investors who say that the 
barriers they now face in pursuing their legal claims against 
the securitizers is like doing business in Russia and trying to 
bring a lawsuit against an oligarch. And they will not play 
unless that is reformed as well.
    I have talked to the small banks and the credit unions, and 
they say one of the reasons they did business with Freddie and 
Fannie, and not Wall Street, is they knew that their mortgages 
would end up being serviced by a big bank, and the big bank 
would try to use that relationship to steal their customers.
    When the servicers sat there a month or two ago, I asked 
them why on Earth, what is the reason for having a servicer be 
affiliated with a securitizer? And they said, ``cross-
marketing.'' Which seems to support the concerns about the 
small banks. What possible reason should servicers--should they 
not be separate entities not affiliated with a bank? Is there a 
reason that has not occurred to me? Because I have been 
thinking a lot about it and been drawing a blank.
    Chairman Garrett. I think what we will on that is do just 
what you said, to ask them to provide that answer in more 
detail not only to Mr. Miller, but to all of us as well. It 
would be interesting to see the answer to that.
    With that, I yield to the gentleman from Texas.
    Mr. Neugebauer. Thank you, Mr. Chairman. Again, thank you 
for having this hearing. One of the things I think we need to 
point out is that, prior to securitization, as Mr. Calabria 
said, is there were people who bought mortgages that didn't go 
through Freddie and Fannie. In fact, I originated and actually 
was in the banking business for a while, and we sold those 
loans to other financial institutions, the insurance companies.
    But securitization does provide a certain amount of 
liquidity opportunity for investors to hold those mortgages and 
some other ability to manage interest rate risk. And so, 
certainly, we don't want to do away with securitization.
    Back to what I think Mr. Pollock has said and maybe Mr. 
Randazzo has said and the other panelists, probably where the 
big mistake is here is we have had the government setting the 
risk premium. And the government doesn't have a very good 
record on setting the risk premium. All you have to do is look 
at our National Flood Insurance Program and realize we haven't 
been charging the appropriate amount of money for the risk that 
the government is taking.
    And so there is really not much space for private market 
right now because the risk premium is so low that getting these 
loans sanitized by Freddie and Fannie makes more sense than 
doing it outside.
    So, isn't it a way to make some space for private 
securitization or for private investment--I don't want to get--
is to lower these conforming loan limits and, at the same time, 
increase the risk premium that Freddie and Fannie are charging 
for buying those loans and securitizing them?
    At some point in time, the private market is going to say, 
I am not willing to give up 50, 75, 100 basis points, whatever 
that is; I would rather have that yield than go through that. 
If I knew that those loans were being underwritten in a fashion 
that gave me some sense that these are good-quality residential 
loans, good old underwritten residential loans is a good 
investment.
    Is there consensus that that has to be some of the initial 
steps if you are going to bring the private market in, is you 
have to take away the competitive advantage of Freddie and 
Fannie?
    Mr. Calabria?
    Mr. Calabria. I would say, absolutely. And, as I mentioned 
in my testimony, I do think you need to institute a fee to try 
to recoup some of the money we have put in. Obviously, one 
benefit of that is you recoup some taxpayer money. The other 
benefit is you reduce the competitive advantage that Freddie 
and Fannie have.
    I would also emphasize--and I know Alex has made this 
point--we really do need to change the incentives facing the 
banking industry. If you hold a Fannie Mae security, it is only 
a 20 percent risk rating, where if you are holding a whole 
loan, it is 50 percent. So, to some extent, the existence of 
Freddie and Fannie has reduced the capital behind mortgages by 
about 60 percent of the system.
    I don't think a public policy objective should be how do we 
get less capital into the system behind mortgages. So making 
that a little more equal and treating Freddie and Fannie 
securities as if they were any other corporate securities, I 
think, would shift the incentives of banks.
    Mr. Neugebauer. Mr. Pollock?
    Mr. Pollock. I think you make a very good point, 
Congressman. We might ask, looking back historically, why did a 
private securitization market for middle-class prime loans not 
develop? It is a natural market. It doesn't need a government 
guarantee. The reason it didn't was because nobody could 
compete with subsidized providers, namely Fannie and Freddie, 
who effectively enjoyed tens of billions of dollars of taxpayer 
subsidy.
    And so, one way I have thought about the question of how 
could you make that move with guarantee fees is to consider 
that Fannie and Freddie, historically, had much lower capital 
than other people. Now they have no capital at all, literally 
zero, counting the government's capital, and their own capital 
is very negative.
    So one might do a calculation and say, if Fannie and 
Freddie had to have the same capital as everybody else for a 
risk and they had to have a reasonable return on that capital, 
what would their price have to be?
    You remember, with the Federal Reserve some years ago, the 
Congress put in what they called the ``private-sector 
adjustment factor'' for the Fed (the Fed is kind of a GSE) in 
order to take away the Fed's pricing advantage. You might think 
about that same kind of calculation for Fannie and Freddie.
    Mr. Neugebauer. Kind of risk-based pricing basically is 
what you are saying?
    Mr. Pollock. Yes.
    Mr. Neugebauer. And I think I agree totally, is that 
whatever we do over at Freddie and Fannie, we can't make FHA 
the new subprime lender. And so we are going to have to go over 
there and determine what the lending limits and the credit 
underwriting standards are going to be over there, as well. 
Otherwise, we just move that market.
    Mr. Randazzo?
    Mr. Randazzo. The one thing I would add to what my 
colleagues have said is I think the approach that you 
mentioned, with a few other steps, addresses the concerns on 
the other side of the aisle that this is not jumping into 
privatization. You are not ending Fannie Mae and Freddie Mac 
tomorrow. You are incrementally dropping the conforming loan 
levels, and you are raising your G fees to let private capital 
begin to step in slowly over time.
    It is not this leap of faith and just trusting that capital 
is going to be there from the private sector. It is, we are 
going to take these short-term steps, and, along the way, the 
private sector can adjust, can look at the new rules of the 
game, and we can begin to back the government out slowly.
    Mr. Neugebauer. Thank you.
    Thank you, Mr. Chairman.
    Chairman Garrett. I thank you.
    And now, my good friend from New York, Mrs. Maloney.
    Mrs. Maloney. Thank you. And I yield 30 seconds to the 
ranking member.
    Mr. Frank. I thank the gentlewoman.
    I want to make it very clear, I did not think that we were 
ready to pass the bill last year, including the one, 4889, the 
Republicans offered. I thought it needed more time. My 
Republican colleagues said, ``No, it is taking too long to get 
to it. We are ready. Here is the bill.''
    I mentioned earlier that it had been introduced this year 
and I was surprised that the witnesses weren't asked to talk 
about it. The gentleman from Texas said it hadn't been 
introduced, but I was not hallucinating. It was introduced. It 
was introduced as part of a package, the Spending Reduction Act 
of 2011, introduced by the prime sponsor, Mr. Jordan. The 
chairman of the subcommittee was a cosponsor.
    So 4889, the late, lamented 4899, which was so popular last 
year but has withered on the vine of popularity, was, in fact, 
introduced.
    And I only stress that to say, yes, I did think it was more 
complicated and needed more time. It was my Republican 
colleagues who were very critical of that, said, ``No, let's 
move now; we can't wait.'' And I am, therefore, surprised at 
this change of heart and their lack of enthusiasm for the bill 
they were ready to have enacted last year.
    I thank the gentlewoman.
    Chairman Garrett. Mrs. Maloney?
    Mrs. Maloney. Reclaiming my time, we have been discussing 
how to restructure, what to do in the future. But irrespective 
of any future policy, how should we address the literally 
trillions of dollars of existing debt from the GSEs that are in 
the mortgage-backed securities and in corporate bonds that were 
purchased with the expectation that there was an implicit 
government guarantee?
    Much of this debt is now in pension funds, it is in 
401(k)s, it is in assets that benefit the overall American 
public. And I have read in some press reports that many central 
banks across the world are also holding large packages of these 
mortgage-backed securities.
    So my question, really, to Ms. Wartell and then to Mr. 
Pollock and just down the line is, how do we address what is 
there now? And are these bonds government-guaranteed, at this 
point? It is always an implicit guarantee? Are they guaranteed 
or not?
    Many of my constituents are holding them in their 401(k)s, 
and they are very anxious to find out what the future holds for 
them.
    Ms. Wartell?
    Ms. Wartell. I understand that the Treasury Department has 
been very careful not to say that they are a full-faith-and-
credit obligation of the United States Treasury. That said, I 
believe it has been the policy of this Administration and the 
former to treat them as if they were--that the outstanding 
debt--many of us talk about that, in a system in the future 
when we have a new design, most of us would agree that the debt 
of any future institutions should not be guaranteed, that any 
liquidity backstop ought to be on the MBS.
    But for the outstanding obligations, much like our 
discussion about the debt ceiling in this country, it seems to 
us very important that we give investors here at home and 
around the world confidence that the United States stands 
behind those obligations.
    Mrs. Maloney. Mr. Pollock?
    Mr. Pollock. Congresswoman, the question you raised focuses 
on an essential point. Bond salesmen all over the world, when 
they sold Fannie and Freddie unsecured debt and Fannie and 
Freddie mortgage-backed securities, said to the investors 
something along these lines: ``You have nothing to worry about. 
This is a government debt. But it has a higher yield, it has 
more spread, as we say. But it is a government credit. Don't 
worry.''
    Legally, as a technicality, that wasn't true, but, in fact, 
the bond salesmen were absolutely right. It always was really 
guaranteed, and it is guaranteed. Many of us could agree in a 
theoretical world it shouldn't be. But I think we are stuck 
with that on the existing debt.
    In my view, that existing debt should, on the restructuring 
of Fannie and Freddie, go into a liquidating trust, in a very 
similar way as to what was done with the privatization of 
Sallie Mae, and that debt be honored by the U.S. Government as 
it runs off.
    Mrs. Maloney. Mr. Randazzo?
    Mr. Randazzo. This is where I disagree with one of my 
colleagues, is technically, legally, this debt was not 
guaranteed by the U.S. Government. And just as there has been a 
lot of discussion in this Chamber and previous Congresses about 
the importance for institutions that take on too much risk to 
be able to fail, I believe that investors should also be able 
to fail.
    They knew, or they should have known, that, by law, they 
were not explicitly guaranteed by the U.S. Government. And we 
should not extend this explicit guarantee to honor what was an 
implicit guarantee. It would be bad for the taxpayers.
    Mrs. Maloney. Mr. Calabria?
    Mr. Calabria. I would also add, I think an important part 
is, not only by statute--and this was not changed in HERA--that 
not only is it not guaranteed, it is explicitly rejected. The 
Federal law says, you will not be paid.
    And so, any commitments that Treasury Secretaries, previous 
or current, or that bond managers or that GSE CEOs made, they 
had no authority to. And they were making those commitments in 
contradiction of statute.
    And so, to me, a very important principle we should always 
carry with us is the rule of law. It is not what a Treasury 
Secretary says; it is what the statute says that should be 
important and that should govern here.
    Mrs. Maloney. Thank you.
    My time has expired.
    Chairman Garrett. Thank you.
    I yield now to the vice chair of the subcommittee, the 
gentleman from Arizona.
    Mr. Schweikert. Mr. Chairman, fellow Members, and 
witnesses, first off, in my opening remarks, I hope I didn't 
cause a little bit of fussing when I complained that the 
Administration hadn't met its obligation. Being a freshman 
Member, I have actually really, really been killing myself to 
read everything I get my hands on, Mr. Chairman. And, with 
that, I was trying to be fair-minded and read stuff that was 
coming from all directions. And, apparently, I annoyed the 
ranking member with my fairness.
    Mr. Pollock, I absolutely love this. Having now read binder 
after binder after binder, yours is one of the best white 
papers I have read so far. But one of your premises in there is 
that Fannie Mae and Freddie Mac distort the true price of risk. 
Am I fair in that assumption or in that interpretation or of 
what am I reading out of that?
    Mr. Pollock. That is exactly right. It is what we say, and 
I think it is quite indubitably the case.
    Mr. Chairman, may I request that the white paper that the 
Congressman refers to be entered in the record, if that is all 
right?
    Chairman Garrett. Does the vice chair wish to--
    Mr. Schweikert. Mr. Chairman, I would actually be elated. 
There are some terrific items in there.
    Chairman Garrett. Without objection, it will be entered 
into the record.
    Mr. Pollock. Thank you.
    So when you push credit at an asset, at a market, the 
credit flow gets capitalized into the prices in that market. 
And when you separate the risk of the providers of the funds by 
telling them they are guaranteed by the government so they 
don't suffer the results of their putting a large flow of money 
into a real estate market and driving up the prices, I think 
the only fair way to describe that is as a distortion of 
prices. The result will always be unhappy.
    Mr. Schweikert. Mr. Chairman, I know I have very limited 
time, and I have a handful of questions, so can I bounce on to 
the next one? This one is for all the witnesses.
    In also reading your white paper, the belief that if we 
were to move to a much more true either private market or some 
sort of bifurcated, that we would also have to reach out and 
touch FHA and Ginnie Mae and those, so we didn't create a push 
from one side of the bubble to the other.
    Mr. Chairman, witnesses, is there an agreement that if we 
are going to approach a GSE government-insured market that we 
have to do something holistic?
    Mr. Pollock. I think we all agree on that.
    Mr. Randazzo. I do.
    Mr. Calabria. I agree, absolutely, with that. And I think 
we should keep in mind that a lot of that already is happening. 
FHA is about half of new homebuyers now. So it is already a 
considerable push of risk on to FHA as it is. But we need to 
avoid that further erosion of credit quality on FHA.
    Mr. Randazzo. It would be very irresponsible to just look 
at Fannie and Freddie and not address all the components that 
impact housing in the United States.
    Ms. Wartell. I would agree that we need to--one of the 
reasons I would argue against a fully private market is 
because, in fact, it will push and create enormous pressure for 
us to keep FHA taking on risks that I think otherwise the 
private sector could be bearing if the government were standing 
behind with a limited liquidity backstop. So we are taking on 
more risk than we need to.
    Mr. Schweikert. Mr. Chairman, you actually hit an issue. I 
am concerned that if we are going to do something, we need to 
be looking at everything together.
    Mr. Chairman, witnesses, do I have a prediction on the 
total loss in Fannie and Freddie? When we look back a decade 
from now, how much taxpayer money will have bled?
    Mr. Pollock. It is very hard to know, even if you are 
inside and poring over the numbers. But informed estimates 
range from $180 billion to $300 billion or $400 billion. It is 
highly uncertain, of course.
    Ms. Wartell. I agree with that; like he said, it is highly 
uncertain. But the one thing I would say is that our actions 
now can very much affect the size of that obligation, both in 
how quickly we liquidate their portfolios--if we sell at fire 
sale prices, that actually potentially increases the amount of 
the losses.
    And, similarly, the GSEs have an obligation to repay the 
taxpayers, in effect, in the form of these dividend payments. 
And if we, sort of, withdraw them from the market too quickly, 
their ability to continue to make those payments might be 
mitigated.
    Mr. Schweikert. Okay. Mr. Chairman--and it is, Ms. Wartell?
    Ms. Wartell. Yes.
    Mr. Schweikert. Forgive me. To that point, if I am holding 
huge amounts of nonperforming paper and I am waiting for the 
market to come up to sell it, don't I perpetuate a 5-year real 
estate depression to last a decade? Because when do you hit 
bottom? If prices move, and the expectation--and there is 
always an expectation of this huge overhang. And, Mr. Chairman 
and Ms. Wartell, maybe it is because I come from the Phoenix 
area, where there are 50,000 foreclosures in process, and a 
year ago, there were 50,000 foreclosures in process, and the 
year before, 50,000, there is no change in expectation.
    I almost wish we would take our lumps, process through 
those. We may come down substantially more, but at least we 
start to build a base back up.
    Give me your comment.
    Ms. Wartell. My comment is, I guess, the question of, who 
gets the benefit of the upside and having taken the losses on 
the taxpayers? If we sell them at fire sale prices, then 
private investors will get the market when it comes up, and we 
will end up having larger obligations. It seems to me that the 
taxpayers ought to be able to make a sensible, staggered sale.
    And the other thing I would say is, not all those assets 
they hold are nonperforming. In fact, the majority of them are 
performing assets.
    Mr. Schweikert. Mr. Chairman, Ms. Wartell, I was only 
speaking to the nonperforming portion of the portfolio. And 
being at foreclosure central, I don't know how you get the 
chicken and the egg. We are going to wait until it gets better 
to sell, but it never gets better to sell because I always have 
an anticipation of all these foreclosures that are in process 
that never go to the actual sale.
    Chairman Garrett. And, with that--
    Mr. Schweikert. Sorry, Mr. Chairman. Does that mean I am 
beyond my time?
    Chairman Garrett. Just a smidge.
    Mr. Schweikert. Thank you.
    Chairman Garrett. And I thank the gentleman.
    The gentleman from Colorado.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    Mr. Pollock, you and I have had a chance to talk about this 
subject on a couple of occasions. And so my first question to 
you is, when was Fannie Mae created?
    Mr. Pollock. Fannie Mae was created in 1938.
    Mr. Perlmutter. Okay. When was Freddie Mac created?
    Mr. Pollock. By the Emergency Housing Finance Act of 1970.
    Mr. Perlmutter. Okay. And just so we understand that we are 
all talking the same language, we are not talking about Federal 
Home Loan Banks? Are any of you? When we talk GSEs, you are not 
talking about the Federal Home Loan Banks, are you?
    Are you, Mr. Pollock?
    Mr. Pollock. Congressman, I understood the hearing to be 
about Fannie Mae and Freddie Mac.
    Mr. Perlmutter. Okay. But it also says ``GSEs,'' and the 
Federal Home Loan Banks are GSEs, are they not?
    Mr. Pollock. That is true, Congressman.
    Mr. Perlmutter. Okay. What about--we are not talking Ginnie 
Mae here?
    Mr. Pollock. Ginnie Mae is not a GSE. It is a wholly owned 
government corporation whose credit is the full faith and 
credit of the United States.
    Mr. Perlmutter. Okay. But your premise is that Fannie Mae 
more or less has been treated as something that is backed by 
the full faith and credit--rightly or wrongly, it has been 
promoted as being backed by the full faith and credit of the 
United States, right?
    Mr. Pollock. That is correct. I don't think there is any 
doubt that is the way the markets looked at them.
    Mr. Perlmutter. Okay. So here is my question. Initially, 
was Fannie Mae simply government owned and then it became 
partially privatized?
    Mr. Pollock. That is correct, Congressman. Fannie Mae 
originally was a 100-percent government-owned corporation. It 
was actually owned by the Reconstruction Finance Corporation 
when it was first set up. It had an extremely limited function; 
it was to buy FHA loans. That is all it was allowed to do for a 
portfolio.
    Mr. Perlmutter. Right.
    Mr. Pollock. Probably the original sin was the 1968 
restructuring, which most people think was done in order to get 
Fannie Mae off the Federal budget because President Johnson was 
running outsize deficits at that point and he wanted Fannie's 
debt off the budget. That unleashed the much wider activity of 
GSEs, and we are now living with the results.
    Mr. Perlmutter. Okay. And so, I guess the thing that 
concerns me is that from--and I am to not going to be their 
defender, but I want to understand really what is going on 
here. You all have given us several proposals. We can do an 
FDIC kind of a proposal and have a guarantee fund if everything 
fails. We can have a Ginnie Mae, Fannie Mae kind of proposal, 
which is you just go out and buy these mortgages, and you 
provide liquidity in that fashion. Or you can do nothing at 
all. I think there are sort of three--there is a guarantee, 
there is the buy, there is just let the market handle it.
    Given the history, what I see--and, I have my apple, and I 
have--it really was a crash of the housing market starting in 
really, oh, the end of 2007, beginning of 2008. It is about as 
big a picture of a crash as you could have.
    Prior to that, was the full faith and credit of the country 
being called upon in Fannie Mae or Freddie Mac? Had it ever 
occurred before?
    Mr. Pollock. Congressman, the answer to that is ``yes.'' In 
fact, Fannie Mae was in serious trouble in the early 1980s, 
1981-1982, just as the savings and loans of the day were. They 
were losing tens of millions of dollars. But they were always 
able to keep borrowing because their debt was viewed by the 
market as government debt.
    Mr. Gary Miller of California. Would the gentleman yield on 
that question?
    Mr. Pollock. Sure.
    Mr. Gary Miller of California. The first time they lost 
money was 1985.
    Mr. Perlmutter. Okay. In 1985 though 1990, the model that 
was used as a guarantee model, the Federal Savings and Loan 
Insurance Corporation--which is one of the proposals here, 
something like that--failed, and the government had to pick it 
up through the RTC.
    So, I harken back to Mr. Oxley and the effort of the 
Republican Congress in 2005 to put some limits on Fannie Mae 
and Freddie Mac. And, I have said to you his quote. He was 
upset because the House passed it, and the Senate wouldn't. He 
said, ``All the hand-wringing and bed-wetting is going on 
without remembering how the House stepped up on this. What did 
we get from the White House? We got a one-finger salute.''
    Okay? The White House, under the Bush Administration, 
opposed any limitations on Fannie Mae and Freddie Mac because 
it is my opinion, whether it was because of the government-
backed guarantee being promoted or that real estate only goes 
up in the United States, we were repatriating a lot of money 
that had gone overseas.
    And so, Mr. Calabria, or Doctor, you said that China was 
one of the owners of this debt. So in a perfect world those 
creditors should just get hammered. Why did Mr. Paulson not 
want to take that step?
    Mr. Calabria. I think, to some extent, Secretaries Paulson 
and Geithner were both concerned about, if you impose haircuts 
on foreign holdings of GSE debt, then there would be questions 
about how that would bleed over to the response by Treasuries, 
so that you might see an increase in Treasury costs.
    Now, I don't think that was ever explicitly made, but that 
is an important part of it. So I do think it is looked it as 
the credibility of the American public.
    Mr. Perlmutter. Thank you.
    Chairman Garrett. I thank the gentleman.
    I now turn to the gentleman from Virginia, Mr. Hurt, for 5 
minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    This is for Mr. Pollock. I was wondering, going back to, 
kind of, the history of Fannie Mae and Freddie Mac, if you look 
back at the time that it was established and formed, how come, 
since that time, we haven't seen a private market for these 
mortgages develop over that time?
    And it sounds like from the question that was just asked 
that, from its founding in 1938 to 1968, that, really, it had a 
very narrow mission. Why didn't the private sector step in 
during that period? And how does that inform us as we go 
forward?
    Mr. Pollock. Congressman, that is a very good question. And 
the answer is, of course, the private sector was acting in the 
market all during that period.
    If I could put in a historical footnote, as I think one of 
the other Congressmen said, there always was a secondary 
mortgage loan market. Going back to the 1920s, there was a 
channel of mortgage bankers who placed loans with insurance 
companies, for example. So that is a classic idea.
    But as the GSEs developed in their post-1968 form, which 
was really the invention of the GSE form, wherever they could 
operate they dominated the market, because no one could compete 
with their government advantages and subsidies.
    So, as I said a little bit ago, the market where it would 
be most likely to have a private securitization market in 
addition to a private portfolio lending market didn't develop. 
It didn't develop because it was dominated by the subsidies 
given to Fannie and Freddie. Of course, the subsidies include 
the government guarantee--real, though not formal.
    Mr. Hurt. Thank you.
    I yield back my time.
    Chairman Garrett. Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    Just as a follow-up to the questions that were asked about 
the private loan market in the 1920s, is it true that market 
had balloons? And is it true that market had interest-only 
loans? Is it true that market was very much akin to what we 
just went through, with what we are calling ``exotic products'' 
now?
    Is that true, Ms. Wartell?
    Ms. Wartell. Yes, Congressman, that is absolutely true.
    Mr. Green. So you had a private loan market in the 1920s, 
but did it make homes available? Let's not talk about 
affordable, since that has become a negative term now. I marvel 
at how ``affordable'' can be negative for middle-class people.
    But did it make those homes available to middle-class 
people? Were middle-class people able to buy homes and fulfill 
the American dream to the extent that they were before the 
bubble and before the crash?
    Ms. Wartell. In that period, most people who were able to 
buy homes had been able to accumulate very significant amounts 
of savings, sometimes up to 50 percent. And so the availability 
of homeownership was very limited compared to modern--
    Mr. Green. Seems like somebody ought to say that, that we 
had that problem--that it was a circumstance. Let's not call it 
a problem, but it was a circumstance. And we have 
metamorphosed. It is no longer a circumstance.
    But let's move forward to something else. Ms. Wartell, you 
indicated that all governments, I believe, have some kind of 
government involvement in the loans. Is that correct?
    Ms. Wartell. Either explicitly or implicitly. In many of 
the European countries, which are often cited as a comparison, 
there are a relatively small number of financial institutions 
that serve those markets that benefit very significantly from 
an implied ``too-big-to-fail.'' And, in fact, many of them have 
been supported by their countries as they have gotten in 
trouble.
    Mr. Green. Let me intercede because I have limited time.
    My assumption is that the three other persons at the 
table--all of whom I have great respect for, by the way; I 
appreciate your commentary--but that all of you are in favor of 
no government involvement at all. Is that a fair statement, or 
did I miss something?
    Mr. Pollock. I will speak for myself, Congressman.
    My long-term objective for American housing finance is a 
market that is principally a private market. I estimate about 
85 percent. And about 15 percent--
    Mr. Green. Mr. Pollock, you know I love you. We have been 
together before here. And, I have a deep, abiding affinity for 
you.
    But the three of you, in essence, would have no government 
involvement.
    Now, let me ask you, Mr. Pollock, do you speak for the 
banks when you say this?
    Mr. Pollock. No, sir. I speak only for myself.
    Mr. Green. All right. Let's go to your next colleague.
    Do you speak for the banks, sir?
    Mr. Randazzo. No, I do not speak--
    Mr. Green. Do you speak for the banks, sir?
    Mr. Calabria. I only speak for myself.
    Mr. Green. Okay. Is it not true that, generally speaking, 
we consider what those in the industry have to say about this? 
Does someone have some plethora of evidence, empirical 
evidence, if you will, connoting that the banks entirely 
support this type of circumstance that you have called to my 
attention?
    Mr. Calabria. I will react--
    Mr. Green. Is it yes or no?
    Mr. Calabria. It is no. I put--
    Mr. Green. No. Okay, here is why I bring this up. We put a 
lot of thought on this committee into what those who actually 
have to do what we say will be done, what they think about it.
    It seems to me that, given that you are talking about what 
is revolutionary--and I think Ms. Wartell said that we should 
be thoughtful and have a resolution, not an overnight 
revolution.
    Is that your phrase?
    Ms. Wartell. Evolution, not revolution.
    Mr. Green. Evolution, not revolution.
    It seems to me that the banks ought to have some say in 
this process, as well, since they had a pretty good say in all 
of the other aspects of things and since they are going to do 
the lending, they will do the lending.
    How is it that we conclude that banks will do all of these 
things that you say and not what they are saying they will do?
    Because the bankers who talk to me, they tell me they would 
like to see a Federal backstop. That is what the bankers 
talking to me say. And if you tell me that you speak for them 
and that is not what they are saying, I will put that into my 
computer and let that be a part of my processing of this 
intelligence.
    One more thing before we go, and I have to do this. I 
apologize to you. But you indicated that it would be bad for 
taxpayers--I believe this was indicated by Mr. Randazzo--bad 
for taxpayers, but you didn't say what it would be like for the 
economy to allow the default.
    ``Bad for taxpayers.'' Taxpayers have to be a part of the 
economy. What is it going to be like for the economy if we just 
allow the collapse? What would it be like if we allow all of 
this bad paper to just go under?
    Ms. Wartell, would you respond, please?
    And I thank you, Mr. Chairman. I know that will be my last 
question.
    Chairman Garrett. Was that Mr. Randazzo's question?
    Mr. Green. No. It is to Ms. Wartell, please.
    Chairman Garrett. Okay. If you will keep that to 10 
seconds, because we are over time.
    Ms. Wartell. Too rapid a withdrawal of support from the 
housing market could cause us to take the fragile economic 
growth we are currently seeing back in the wrong direction.
    Chairman Garrett. And I thank you.
    The gentleman from Ohio, Mr. Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    I would like to thank the panelists for coming today.
    The thing that I was struck by is that there does seem to 
be some similarities, commonality, that all of you agree on at 
least some of the steps that we might want to consider moving 
forward, or at least there is a consensus among you. And I know 
that there are clearly some differences.
    My first question is for Ms. Wartell. You talked about a 
yield spread analysis, and you used that to conclude that 
investors in Europe view covered bonds as having essentially a 
government guarantee. But I guess the part I am trying to 
understand is that yield spread was actually smaller than the 
yield spread between U.S. Treasuries and the Fannie and Freddie 
debt, which does have a government guarantee.
    Isn't it really a statement by those investors that they 
are admitting that there is less risk in those covered bonds 
because the banks that originated them have continued to have 
skin in the game, and they believe when somebody who originates 
a mortgage has skin in the game, they are not going to let 
themselves lose money, versus the system we have, where you can 
originate and sell off 100 percent? Isn't that another way to 
look at the view?
    And, obviously, there is no--it is all speculation, too, 
because we are just looking at a yield analysis instead of 
really interviewing investors who have invested in these.
    Ms. Wartell. It is my--let's put aside the analysis of the 
spreads, because I think obviously different people can 
interpret it different ways. But I do think that it is safe to 
say both, as you said, that there is particular collateral 
behind the covered bonds, and the investors understand they 
have that, and that they believe that those institutions in 
most of those countries benefit from an implied government 
guarantee
    Mr. Stivers. Thank you. Do you think, Ms. Wartell, that the 
retention of risk leads to less risky behavior by those 
institutions that have skin in the game?
    Ms. Wartell. I generally have supported that lending 
institutions should retain risk, have skin in the game, in 
their loans, as the Dodd-Frank legislation also would require.
    Mr. Stivers. Sure. Thank you.
    And the second question I have, also for Ms. Wartell, how 
do you explain the 30-year, fixed-rate mortgage in Denmark if 
you think that a covered bond won't lead to a fixed-rate 
mortgage here in the United States?
    Clearly, it seems that it is a market requirement that 
consumers in Denmark, consumers in the United States, have 
demanded those products, and, therefore, the market has 
provided them.
    Ms. Wartell. Actually, I think there are two different 
arguments that I have made that are being conflated in this 
case. Denmark has provided, through the covered bond mechanism, 
long-term, fixed-rate mortgages.
    My point is that I think that if you have a purely private 
market, the appeal of covered bonds for most of our financial 
institutions under the U.S. regulatory scheme is very 
different. It won't likely be the primary mechanism of funding. 
And I also think that here we will end up with short-term debt.
    But it is not the covered bond that I argue won't produce 
30-year, fixed-rate mortgages. It is the fact that if we have--
    Mr. Stivers. The problem with the FDIC.
    Ms. Wartell. If we don't have the backstop for the 
investments.
    Mr. Stivers. Okay. Thank you.
    Could the other panelists comment on their thoughts, 
quickly, on retention of risk and what that would mean for the 
marketplace?
    Mr. Pollock. Congressman, I have worked on introducing 
credit risk retention into the mortgage markets for 15 years. I 
think it is an extremely useful and important idea. It is one 
of many ideas, but it is a very useful one.
    I think the advantage of the covered bond, which you cite, 
is that there is 100-percent credit risk ``skin in the game'' 
for the covered bond issuer. This is also extremely important 
in understanding how these bonds work.
    Mr. Randazzo. I would just echo the comments of my 
colleague.
    Mr. Stivers. Thank you.
    Mr. Calabria. And I would say, I think retention of risk is 
an important thing in the marketplace, but I also believe there 
was considerable retention of risk prior to the crisis. In 
fact, most of the 400-some subprime lenders that went out of 
business were because they were forced to buy back the piece 
that they had. So skin in the game is important, but it isn't a 
cure-all.
    Mr. Stivers. Sure.
    Mr. Calabria. I would also argue that one of the things 
that should be considered going forward, if we are going to 
keep a Fannie and Freddie model, is to get them out of the 
guarantee basis, where they simply sell off the MBS, they don't 
guarantee the credit risk, because three-fourths of their 
losses have come about because they retained that risk and the 
investor did not take it.
    So we have lots of retention of risk. It hasn't always 
worked that well. Sometimes it has; sometimes it hasn't. But it 
is not a cure-all.
    Mr. Stivers. Thank you.
    Now for the whole panel, just going across, the focus of a 
lot of your testimony was on covered bonds. Are there 
approaches somewhere between what we are doing today and 
covered bonds? Are there other approaches that people are 
talking about, reinsurance or any other approach outside of 
just the two approaches that we have heard today?
    And I know that we don't have much time, so--
    Chairman Garrett. Ten seconds.
    Mr. Calabria. I will say very quickly that I think that you 
can have a large amount of money that is portfolio-based not in 
a covered bond way, even though that is portfolio-based.
    Mr. Pollock. My answer is yes.
    Mr. Stivers. Thank you.
    Thank you, Mr. Chairman.
    Chairman Garrett. Thank you.
    The gentlewoman from New York.
    Dr. Hayworth. Thank you, Mr. Chairman. I will make this 
brief.
    I was thinking about the comments that Ms. Waters made 
regarding the PIMCO chair reflecting his comments about how 
increasing the downpayment on houses might be burdensome for 
homebuyers. But isn't it true that it would also help to, if 
you will, rationalize home prices? I would appreciate the 
panel's assessment of that.
    Mr. Calabria. Yes, it largely would. I do think that we 
need to get back to a point where housing prices reflect 
fundamentals rather than availability of credit driving prices, 
necessarily. There should be credit there.
    I do want to note, as well, there was an earlier discussion 
about very large downpayments in the 1920s. And I will note 
that the homeownership rate for working males aged 55 to 64 in 
1920 was 66 percent. So in no way was the 1920's homeownership 
limited only to the wealthy. That is false.
    Mr. Pollock. Congresswoman, I would say I have spent a lot 
of time around bond markets in my career. The head of PIMCO's 
comments have been widely cited. I never take too seriously 
what bond traders say.
    When it comes to downpayments, there is no doubt--and this 
is just an unquestionable regularity of housing finance--that 
size of downpayments or, inversely, the extent of the loan-to-
value ratio, is one of the most reliable indicators of credit 
performance, either good or bad.
    Ms. Wartell. I think that it is true that downpayment is a 
relevant factor, but I think we overemphasize it in the 
conversation. In the late 1990s, there was a great deal of very 
positive experimentation that was going on, demonstrating 
positive ways to mitigate the risk of low-downpayment lending. 
And all of those good practices were wiped out by the abusive 
practices in the subprime market.
    And there are enormous disparities of wealth in our 
society, and communities with low homeownership rates have 
other social costs. So if we go to a system where we mandate 
very high downpayments, there will be consequences that I think 
we will all be very sorry to see.
    So we need to make sure that there are ways to mitigate 
risk, but downpayment should not be our only measure.
    Dr. Hayworth. Is it fair to ask, on a very fundamental 
level, whether or not all that these GSEs have done and all 
that the Federal intervention in the housing and mortgage 
markets has done, is it fair to conclude that those most 
vulnerable have actually benefited from these interventions? 
Because, certainly, the state of our economy would suggest 
otherwise.
    Mr. Randazzo. I would say, in large part, no. And if you 
just look at the waves of foreclosures that have basically been 
besieging the United States over the past several years, any 
gains that were established turned out to be faulty and have 
been wiped away. And, in large part, there are a number of 
individuals who seemingly thought that we were helping that are 
now worse off than when we started.
    Mr. Calabria. If I could make a comment, I have worked on 
housing policy and mortgage finance policy for a very long 
time. And one of the things that has constantly puzzled me is 
that proposals that have the aim of running up housing prices 
are presented as enhancing affordability. That kind of confuses 
me. Usually, that is a transfer to the seller.
    I look at it as, housing is a basic necessity of life. 
Everybody needs shelter. And when housing becomes more 
affordable--that is, when prices come down--I think that is a 
great thing.
    Now, currently, the impact of that certainly helps the 
poor, hurts maybe the middle class and the rich, but that is a 
policy outcome I can live with.
    Ms. Wartell. I think it is important, as we look backwards, 
though, not to conflate the role that the GSEs played in the 
housing market with the consequence of the subprime crisis that 
we had.
    The reality is, if you look at the Financial Crisis Inquiry 
Commission report and others, the preponderance of the evidence 
here is that there was an intervening factor. There was this 
unregulated market, the shadow banking that was accelerated 
with the Wall Street inventions. The result of that was chasing 
horrible loans. And it is those lending practices, and not the 
lending practices of the GSEs. They reacted to those; they 
joined in the party. They have cost a significant amount of 
money to the taxpayers.
    I have no book to protect their record. But I think we 
should be very careful here not to conflate the role the GSEs 
played in the housing market prior to the year 2000 with the 
consequences of the subprime crisis.
    Dr. Hayworth. May I have 30 more seconds, Mr. Chairman?
    Chairman Garrett. No, I am sorry, no. Your time has 
expired.
    Dr. Hayworth. Thank you.
    Chairman Garrett. Your colleague from New York is up next. 
If he wants to yield you--
    Mr. Grimm. I will yield my time.
    Dr. Hayworth. Oh, thank you, Mr. Grimm.
    I would simply submit to you that there were, as we all 
know, dissenting opinions regarding that Financial Crisis 
Inquiry Commission report. And the clear message that someone 
like me would take from it is that it is, in fact, the implicit 
Federal guarantee, indemnification of bad risk, that created 
the impetus for all of these risky investments.
    Thank you.
    Mr. Grimm. On that note, I think, Mr. Pollock, if you would 
like to comment on the last comments, please, I will give you a 
minute to do so.
    Mr. Pollock. Thank you very much, Congressman.
    I want only to make two points. One, when it comes to 
subprime mortgage-backed securities, of course Fannie Mae and 
Freddie Mac were among the biggest buyers and the richest bids 
for subprime securities.
    But on a more general point, having to do with credit 
policy and housing finance policy everywhere, the worst thing 
you can do for somebody is to make them a loan they can't 
afford.
    Ms. Wartell. No disagreement.
    Mr. Grimm. I think we are getting ready to wrap up, and I 
will be very brief.
    Overall, I think to bring this all together at where we are 
at, the Federal debt stands at $14 trillion. GSE debt stands at 
$8 trillion.
    I will ask Mr. Pollock, what are the implications of this 
unsustainable debt load, in a nutshell?
    Mr. Pollock. Unsustainable debt can't be sustained, and it 
has to be addressed and adjusted to. It usually involves 
finding ways to reschedule, restructure, or inflate your way 
out of it. We are faced with a really tough problem, as you 
suggest, Congressman.
    Mr. Grimm. My last question: Mr. Calabria, you have 
proposed that Congress establish a recoupment fee on all 
mortgages purchased by Fannie Mae and Freddie Mac to reduce the 
deficit and to recoup as much of the losses as possible. Just 
very briefly, how would that work?
    Mr. Calabria. Essentially, it could be a fee that the GSEs 
charge to any lender that sells them the mortgage, and then 
that fee is recovered just like the way the guaranteed fee 
structures work now. Essentially, you would layer it on top of 
the guarantee fee that the GSEs already require from lenders, 
and then you put it off to pay down the amount of money we put 
in.
    So I certainly would not suggest that we charge them any 
more than we have already put in, but just as an attempt to 
recoup what we have put in.
    Mr. Grimm. Okay.
    And, in closing, I would just like to say that we have 
heard both sides and that, on one hand, we need the government 
to make sure that we still have mortgages. And, without it, 
there will be the collapse of our economy and the collapse of 
home housing. My inclination innately is always that, where 
there is a need, the market will fill that need and that this 
country was founded on private-sector principles that have 
really risen to the occasion time and time again.
    And if the government were to, say, step aside and move out 
of the way of our free market, it would thrive. And a lot of 
the answers to this insurmountable debt is that free market, 
the enterprise, the entrepreneurial spirit that has made us 
great and will continue to make us the greatest nation in the 
world.
    And, with that, I yield back the rest of my time.
    Chairman Garrett. The gentleman yields back, but the 
gentlelady from New York could have 1 minute left of his time 
to use for any other questions that she has.
    Dr. Hayworth. Would the panel agree that, in fact--and I 
thank you, Mr. Chairman. I am sorry.
    Would the panel agree that the mobility issue created by 
the challenges that mortgage holders face because of the bad 
risks they undertook with Federal help, if you will, actually 
affects our unemployment rate materially today?
    Mr. Pollock. Many economists, Congresswoman, have pointed 
out the labor mobility problem entailed by having houses that 
are underwater on their mortgage.
    There is something else we should point out. For all the 
advantages of a 30-year, fixed-rate mortgage, there are also 
disadvantages to it. For example, if you are underwater and you 
have what is now a high-rate mortgage, you can't refinance it. 
I call that the ``dark side of the 30-year, fixed-rate 
mortgage,'' and we have to take that into account. It relates 
to this mobility problem.
    Mr. Calabria. Responding to the Congresswoman's question, 
there are a number of empirical studies that have looked both 
across countries and across States and have reached the 
conclusion that the higher your homeownership rate, the higher 
structural unemployment you have. And this is something that is 
very well-founded, in peer-reviewed journals.
    My back-of-the-envelope is that at least a percentage point 
of the unemployment rate we are seeing today is due to the high 
homeownership rate we had going into the crisis.
    Chairman Garrett. Thank you. And the gentlelady yields 
back.
    The gentleman from California.
    Mr. Gary Miller of California. Thank you, Mr. Chairman.
    This has been a very interesting hearing. I have heard so 
many different sides.
    I heard one of my good friends from the other side of the 
aisle say that the Bush Administration did not support 
reforming GSEs. That is fallacious. I met with the President 
many times on this issue. We probably sent the bill to the 
Senate 3, 4, maybe 5 times. And there was a filibuster that 
occurred, and it wasn't by the Republicans, that stopped the 
bill from being heard. So that is the fact on there. I 
corrected one thing on you earlier, but that was just wrong on 
that.
    And I am having trouble with a lot of facts out here. I am 
not taking sides on the issue. No doubt we have serious, 
serious problems. But I am hearing a lot of the debate that 
doesn't make sense when it is applied to reality, in some way.
    Mr. Calabria, you made a great statement on mortgage-backed 
securities because the only mortgage-backed securities worth a 
darn are GSEs out there. The alternative, when the market got 
really good in 2004, 2005, and 2006 was the private sector. 
Countrywide did come in and be major players in the 
marketplace. Now, if we had defined predatory versus subprime, 
they would have never been in the marketplace. But they played 
a huge part in the marketplace, made a tremendous number of 
loans to people who could never pay them back, sold them off to 
the private sector. And the way those loans are bundled, they 
can't be debundled.
    Now, GSEs--I will say that if you buy a mortgage-backed 
security from the GSEs, you will get what you are promised. 
Because they bundle them in a way where a nonperforming loan is 
removed and replaced with a loan that is performing. And many 
of the loans that the GSEs are eating today is because they are 
taking those loans out and replacing them.
    The problem we have is--let's go back to 2008. When you 
look at the total losses in the marketplace in 2008, the 
lending sector lost about $2.7 trillion in losses. Now, 
understanding at that point in time that Fannie and Freddie 
represented 70 percent of the marketplace, or 31 million loans, 
Fannie lost $117 billion, Freddie lost $67 billion--a lot of 
money, but let's put it in perspective. They had 70 percent of 
the marketplace. Out of $2.7 trillion lost, they lost less than 
$200 billion of it. Unacceptable numbers, no argument.
    There have been statements made that the problem is that we 
made loans to people with low downpayments. But VA and FHA do 
that today. Let's look at the reality. In my district alone, LA 
County, VA and FHA loan defaults are 2.6 percent; Freddie and 
Fannie are 3.9; the jumbos, 10.1. Obviously, VA and FHA are 
doing very well making low-downpayment loans.
    In Orange County, the FHA/VA default rate is 1.4 percent; 
Freddie and Fannie, 2.1 percent; the jumbo private sector is 
2.89 percent. San Bernardino County--a high default rate in San 
Bernardino County overall. VA and FHA is 3.5 percent; Freddie 
and Fannie, 7.8 percent; jumbo is 18.4 percent.
    So if the logic is that a low downpayment means necessarily 
a high default rate, the numbers don't verify that argument.
    To make a loan to somebody that they cannot repay, it 
doesn't matter what they put in, they are going to default. If 
they can't make the payments and they put 20 percent down, they 
are still going to lose the house. If they put zero down and 
they can't make the payments, they are still going to lose the 
house.
    So if we would have taken at some point in time and said, 
let's define predatory versus subprime--which I know I put in 
at least five bills going to the Senate, and my good Democrat 
friends filibustered it--a matter of record, not fallacious--we 
would probably not have some of the problems we have today.
    And if you look at the chart, a great example of that is 
delinquencies today. Had we taken and fixed the problem in 2000 
when we tried to fix predatory versus subprime, the subprime 
ARMs had a default rate of about 5 percent. Now, you go from 
2000, when we did not fix it, to 2008; they had a default rate 
of 38.7 percent. Why? Because nobody bothered to define 
predatory versus subprime.
    The default rate also, if you look at the middle-range 
market, an average in 2000 was about 2 percent. An average in 
2009 was 8 percent. The default rate for Freddie and Fannie in 
basically 2000 were nonexistent. They had no default rate. It 
rose in 2009 on the Freddie side to 3.1 percent and the Fannie 
side to 4.2 percent. It is too high. But the average market is 
8 percent. Subprime is 26.5. The better subprime, the ARM 
subprime, is 38.7.
    So when you look at the numbers, you say, is there a 
problem? A serious problem with the entire industry. I remember 
when I was a young man in my 20s, if I went to borrow money 
from a lender for a construction loan, if I didn't meet 
conforming standards, they would not make me the construction 
loan. Why? Because at the end of the day, there was probably 
not going to be a lender to make them the loan to do the 
takeout on the house I had just built.
    So, Freddie and Fannie were basically created to provide 
liquidity to the marketplace. Had Freddie and Fannie not been 
there in 2007, you could not have given a house away, period. 
Wall Street was shut down. Private sector was shut down. Wells 
Fargo, Bank of America didn't know if they could survive the 
next day.
    So what did we do to the taxpayers in this country who own 
a home? Sixty-five percent of the families own a home. Many of 
those homes have double--I ran out of time, didn't I?
    I hate this when I am preaching. I love to preach. I should 
have been a preacher. If I was a Baptist, I would be a preacher 
today, but I am not.
    But, in closing--
    Chairman Garrett. Was there a question in there?
    Mr. Gary Miller of California. Yes, there was. I never got 
to the question.
    My question was, I heard a lot of great information today, 
but I heard it from a lot of different perspectives. And when 
you put it together in reality, you see there are some basic 
problems that should have been corrected. Was low downpayment 
the problem? According to FHA and VA, no. Were underwriting 
standards a problem? Absolutely. And guidelines were a problem. 
Predatory versus subprimes were a problem.
    And, Mr. Chairman, I hope we have a lot of these because 
there is so much we need to get on the table, because I know 
you have a passion on this issue, and so do I and many other 
Members. But we have to figure out what we are going to do to 
fix the housing market in this country without destroying it. 
And if Fannie and Freddie don't make sense, let's get rid of 
them. If they can make sense with modifications, let's look at 
that. But let's just don't make assumptions based on an entity 
that has 70 percent of the marketplace and is performing better 
than any lender sector out there today other than FHA and VA. 
So when we move into getting an answer for this, let's move 
with that understanding and move cautiously.
    I yield back the balance of my time.
    Chairman Garrett. I appreciate that.
    Mr. Gary Miller of California. Thank you for your 
generosity.
    Chairman Garrett. And I will seek unanimous consent to 
allow the witnesses, even though it is over time, just to give 
a short--
    Mr. Gary Miller of California. --answer to my question.
    Chairman Garrett. Yes, answer his global, and then they 
will be our last--
    Mr. Calabria. There was an awful lot there, but let me 
first react to--in 2007, Fannie and Freddie were actually 
pulling back. And one of the reasons that Secretary Paulson 
gave for taking the conservatorship was to get them to make 
more lending. Now, the fact is today that the reason they are 
making lending is because their losses and their debt are 
essentially backed by the government. And I would put it this 
way: You cover all my losses, guarantee all my debt, and I will 
go out and buy a whole lot of mortgages, too. So we have to 
remember what is the important part here that is keeping them 
together.
    I 100 percent agree that downpayment alone is certainly not 
the determinative factor. I think FICO score is far more 
predictive of default than downpayment. So, certainly, that 
could be a tradeoff.
    I do think we need to keep in mind the vintages of loans 
that we are looking at. As you are very well aware, in about 
2005--
    Mr. Gary Miller of California. Can I ask one question?
    Mr. Calabria. Sure.
    Mr. Gary Miller of California. Yes, on Freddie and Fannie's 
making loans today, but the underwriting standards are 
tremendously different than they were 3 or 4 years ago.
    Mr. Calabria. Yes.
    Mr. Gary Miller of California. Especially in the high-cost 
areas, they are very stringent.
    Chairman Garrett. Yes. Let's let the panel complete, 
because otherwise we will--
    Mr. Calabria. So, but what I was going to say, in comparing 
FHA to jumbo or any other part of the market, you do have to 
look at vintages. As you are well aware, FHA's market share in 
California in 2005 was about 2 or 3 percent. So there was very 
little lending, where they have picked up since when the loan 
limits were raised. So my point would be, you have to make sure 
you are comparing 2005 to 2005 loans. And that is an important 
part of it.
    I do think you can offset the downpayment if you put other 
factors in the require good credit quality.
    Mr. Randazzo. I would be happy to submit comments in 
writing.
    Chairman Garrett. All right.
    Mr. Pollock?
    Mr. Pollock. Mr. Chairman, I look forward to the discussion 
of this at another hearing, should you ever want to invite me 
back.
    Chairman Garrett. Oh, okay.
    Ms. Wartell. Thank you very much, Mr. Chairman, for having 
us.
    Chairman Garrett. Thank you.
    And I thank all the witnesses and the members here today.
    I seek unanimous consent to enter into the record the 
statements of the National Association of Realtors, the 
American Bankers Association, the National Multi Housing 
Council, and the National Association of Federal Credit Unions.
    And, with that, the Chair also notes that some members may 
have additional questions for this panel, which apparently they 
do, which they may wish to submit in writing. Without 
objection, the hearing record will remain open for 30 days for 
members to submit questions to these witnesses and to place 
their responses in the record.
    This hearing is thereby adjourned.
    [Whereupon, at 4:50 p.m., the hearing was adjourned.]



                            A P P E N D I X



                            February 9, 2011


[GRAPHIC] [TIFF OMITTED] T4551.001

[GRAPHIC] [TIFF OMITTED] T4551.002

[GRAPHIC] [TIFF OMITTED] T4551.003

[GRAPHIC] [TIFF OMITTED] T4551.004

[GRAPHIC] [TIFF OMITTED] T4551.005

[GRAPHIC] [TIFF OMITTED] T4551.006

[GRAPHIC] [TIFF OMITTED] T4551.007

[GRAPHIC] [TIFF OMITTED] T4551.008

[GRAPHIC] [TIFF OMITTED] T4551.009

[GRAPHIC] [TIFF OMITTED] T4551.010

[GRAPHIC] [TIFF OMITTED] T4551.011

[GRAPHIC] [TIFF OMITTED] T4551.012

[GRAPHIC] [TIFF OMITTED] T4551.013

[GRAPHIC] [TIFF OMITTED] T4551.014

[GRAPHIC] [TIFF OMITTED] T4551.015

[GRAPHIC] [TIFF OMITTED] T4551.016

[GRAPHIC] [TIFF OMITTED] T4551.017

[GRAPHIC] [TIFF OMITTED] T4551.018

[GRAPHIC] [TIFF OMITTED] T4551.019

[GRAPHIC] [TIFF OMITTED] T4551.020

[GRAPHIC] [TIFF OMITTED] T4551.021

[GRAPHIC] [TIFF OMITTED] T4551.022

[GRAPHIC] [TIFF OMITTED] T4551.023

[GRAPHIC] [TIFF OMITTED] T4551.024

[GRAPHIC] [TIFF OMITTED] T4551.025

[GRAPHIC] [TIFF OMITTED] T4551.026

[GRAPHIC] [TIFF OMITTED] T4551.027

[GRAPHIC] [TIFF OMITTED] T4551.028

[GRAPHIC] [TIFF OMITTED] T4551.029

[GRAPHIC] [TIFF OMITTED] T4551.030

[GRAPHIC] [TIFF OMITTED] T4551.031

[GRAPHIC] [TIFF OMITTED] T4551.032

[GRAPHIC] [TIFF OMITTED] T4551.033

[GRAPHIC] [TIFF OMITTED] T4551.034

[GRAPHIC] [TIFF OMITTED] T4551.035

[GRAPHIC] [TIFF OMITTED] T4551.036

[GRAPHIC] [TIFF OMITTED] T4551.037

[GRAPHIC] [TIFF OMITTED] T4551.038

[GRAPHIC] [TIFF OMITTED] T4551.039

[GRAPHIC] [TIFF OMITTED] T4551.040

[GRAPHIC] [TIFF OMITTED] T4551.041

[GRAPHIC] [TIFF OMITTED] T4551.042

[GRAPHIC] [TIFF OMITTED] T4551.043

[GRAPHIC] [TIFF OMITTED] T4551.044

[GRAPHIC] [TIFF OMITTED] T4551.045

[GRAPHIC] [TIFF OMITTED] T4551.046

[GRAPHIC] [TIFF OMITTED] T4551.047

[GRAPHIC] [TIFF OMITTED] T4551.048

[GRAPHIC] [TIFF OMITTED] T4551.049

[GRAPHIC] [TIFF OMITTED] T4551.050

[GRAPHIC] [TIFF OMITTED] T4551.051

[GRAPHIC] [TIFF OMITTED] T4551.052

[GRAPHIC] [TIFF OMITTED] T4551.053

[GRAPHIC] [TIFF OMITTED] T4551.054

[GRAPHIC] [TIFF OMITTED] T4551.055

[GRAPHIC] [TIFF OMITTED] T4551.056

[GRAPHIC] [TIFF OMITTED] T4551.057

[GRAPHIC] [TIFF OMITTED] T4551.058

[GRAPHIC] [TIFF OMITTED] T4551.059

[GRAPHIC] [TIFF OMITTED] T4551.060

[GRAPHIC] [TIFF OMITTED] T4551.061

[GRAPHIC] [TIFF OMITTED] T4551.062

[GRAPHIC] [TIFF OMITTED] T4551.063

[GRAPHIC] [TIFF OMITTED] T4551.064

[GRAPHIC] [TIFF OMITTED] T4551.065

[GRAPHIC] [TIFF OMITTED] T4551.066

[GRAPHIC] [TIFF OMITTED] T4551.067

[GRAPHIC] [TIFF OMITTED] T4551.068

[GRAPHIC] [TIFF OMITTED] T4551.069

[GRAPHIC] [TIFF OMITTED] T4551.070

[GRAPHIC] [TIFF OMITTED] T4551.071

[GRAPHIC] [TIFF OMITTED] T4551.072

[GRAPHIC] [TIFF OMITTED] T4551.073

[GRAPHIC] [TIFF OMITTED] T4551.074

[GRAPHIC] [TIFF OMITTED] T4551.075

[GRAPHIC] [TIFF OMITTED] T4551.076

[GRAPHIC] [TIFF OMITTED] T4551.077

[GRAPHIC] [TIFF OMITTED] T4551.078

[GRAPHIC] [TIFF OMITTED] T4551.079

[GRAPHIC] [TIFF OMITTED] T4551.080

[GRAPHIC] [TIFF OMITTED] T4551.081

[GRAPHIC] [TIFF OMITTED] T4551.082

[GRAPHIC] [TIFF OMITTED] T4551.083

[GRAPHIC] [TIFF OMITTED] T4551.084

[GRAPHIC] [TIFF OMITTED] T4551.085

[GRAPHIC] [TIFF OMITTED] T4551.086

[GRAPHIC] [TIFF OMITTED] T4551.087

[GRAPHIC] [TIFF OMITTED] T4551.088

[GRAPHIC] [TIFF OMITTED] T4551.089

[GRAPHIC] [TIFF OMITTED] T4551.090

[GRAPHIC] [TIFF OMITTED] T4551.091

[GRAPHIC] [TIFF OMITTED] T4551.092

[GRAPHIC] [TIFF OMITTED] T4551.093

[GRAPHIC] [TIFF OMITTED] T4551.094

[GRAPHIC] [TIFF OMITTED] T4551.095

[GRAPHIC] [TIFF OMITTED] T4551.096

[GRAPHIC] [TIFF OMITTED] T4551.097

[GRAPHIC] [TIFF OMITTED] T4551.098

[GRAPHIC] [TIFF OMITTED] T4551.099

[GRAPHIC] [TIFF OMITTED] T4551.100

[GRAPHIC] [TIFF OMITTED] T4551.101

[GRAPHIC] [TIFF OMITTED] T4551.102

[GRAPHIC] [TIFF OMITTED] T4551.103

[GRAPHIC] [TIFF OMITTED] T4551.104

[GRAPHIC] [TIFF OMITTED] T4551.105

[GRAPHIC] [TIFF OMITTED] T4551.106

