[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
MORTGAGE FINANCE REFORM: AN
EXAMINATION OF THE OBAMA
ADMINISTRATION'S REPORT TO CONGRESS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
MARCH 1, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-9
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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 ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
Larry C. Lavender, Chief of Staff
C O N T E N T S
----------
Page
Hearing held on:
March 1, 2011................................................ 1
Appendix:
March 1, 2011................................................ 51
WITNESSES
Tuesday, March 1, 2011
Geithner, Hon. Timothy F., Secretary, U.S. Department of the
Treasury....................................................... 7
APPENDIX
Prepared statements:
Ackerman. Hon. Gary.......................................... 52
Canseco, Hon. Francisco...................................... 54
Capito, Hon. Shelley Moore................................... 56
Carson, Hon. Andre........................................... 58
Paul, Hon. Ron............................................... 59
Geithner, Hon. Timothy F..................................... 60
Additional Material Submitted for the Record
Bachus, Hon. Spencer:
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 67
Written statement of the National Multi Housing Council
(NMHC) and the National Apartment Association (NAA)........ 72
Waters, Hon. Maxine:
Letter to Secretary Shaun Donovan and Secretary Timothy
Geithner, dated December 20, 2010 from various
organizations.............................................. 78
Geithner, Hon. Timothy F.:
Written responses to questions submitted by Representative
Perlmutter................................................. 87
Written responses to questions submitted by Representative
McHenry.................................................... 88
Written responses to questions submitted by Representative
McCarthy................................................... 89
Written responses to questions submitted by Representative
Neugebauer................................................. 91
Written responses to questions submitted by Representative
Schweikert................................................. 93
Written responses to questions submitted by Representative
Westmoreland............................................... 98
MORTGAGE FINANCE REFORM:
AN EXAMINATION OF THE
OBAMA ADMINISTRATION'S
REPORT TO CONGRESS
----------
Tuesday, March 1, 2011
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the committee] presiding.
Members present: Representatives Bachus, Hensarling, Royce,
Lucas, Manzullo, Biggert, Miller of California, Capito,
Garrett, Neugebauer, McHenry, Campbell, Bachmann, McCotter,
Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer,
Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert,
Grimm, Canseco, Stivers; Frank, Waters, Maloney, Velazquez,
Watt, Ackerman, Sherman, Capuano, Baca, Lynch, Miller of North
Carolina, Scott, Green, Cleaver, Ellison, Perlmutter, Donnelly,
Carson, Peters, and Carney.
Chairman Bachus. This hearing will come to order.
In the interest of time, I will recognize three of our
members for opening statements in the Majority. And, without
objection, all members' written statements will be made a part
of the record.
First, the gentleman from New Jersey, Mr. Garrett, is
recognized for 4 minutes.
Mr. Garrett. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
And I also want to thank you for your report, entitled,
``Reforming America's Housing Finance Market.'' I read it over
thoroughly. And while it might be a little light on some
specifics in some areas, and without a single concrete position
on a way forward, I believe that it does come to a number of
conclusions that will be very helpful for members to grasp as
we move forward with this debate.
So the first conclusion in it is that the Federal
Government's housing policy did play a significant and leading
role in the financial crisis of 2008, and the ongoing bailout
of Fannie Mae and Freddie Mac is over $150 billion and
counting, and that dwarfs any and all other bailouts that
occurred during the crisis.
The second conclusion is that specific entities, Fannie Mae
and Freddie Mac, must be terminated and should never come back
to life. And this is important for everyone, from members to
industry, community groups and taxpayers, to understand that
point. So I agree with the Administration that these entities
must be put on a responsible path to dissolution. And I will
work closely with the Administration to see ensure that is
accomplished.
The third point, and perhaps the most important conclusion
in the report, is that a purely private mortgage finance market
is very serious and an achievable goal. Many supporters of the
status quo preach doom and gloom for the U.S. housing market
without a government guarantee. They would have us believe that
any discussion of a purely private mortgage finance market is
completely without merit and would return the housing market to
its Depression-era status. But I believe the Administration
plan ends this argument once and for all, that no one serious
in this debate believes our housing market will ever return to
the 1930s. So I applaud the Administration for taking this
ridiculous rhetoric really off the table.
So now that there is consensus on these issues, we need to
decide what steps to take next. Here, I also see a number of
areas of continued agreement between the Administration and
myself.
The first is a gradual increase of the guarantee fees. This
is an important component of bringing more accurate pricing
into the market. But any increase in these fees must correspond
with an increase in FHA premiums in order to not push greater
risk over there. So, again, I look forward to working closely
with the Treasury on specific legislation we may need to
accomplish that goal.
The next area of agreement is on the need to reduce the
portfolios of the GSEs. Currently at $1.5 trillion, these
portfolios pose a significant risk to the American taxpayers
and don't serve any real purpose anymore. So I believe these
portfolios can be wound down at a fast pace without
jeopardizing the fragile housing market. I look forward also to
discussing this with the Secretary in greater detail on how we
must best shape that legislation to achieve that goal.
A third area of agreement is on the Treasury's support for
higher downpayment premiums. I don't believe that downpayments
are the only factor that should be used to determine credit
quality, but I am pleased to see that we both recognize the
fact that they play an important role in the underwriting
process.
Fourth, is an agreement on reducing the conforming loan
limits. To be able to afford a house at $729,000, a couple must
make, they say, on average, around $250,000. This is the same
level that some in the Administration and some of my colleagues
on the other side of the aisle describe as being someone who is
rich, making that much money. So I am glad that the
Administration has finally decided that the government should
basically be out of the business of subsidizing those people
who are rich in order to buy a house.
And, finally, an area that we have strong agreement on is a
need to create a covered bonds market in the United States. I
agree that is not a cure-all for the system, but a covered bond
market could provide significant liquidity benefits and help
bring private capital back into the mortgage market.
So, as Ranking Member Frank so eloquently stated repeatedly
during the former Administration's tenure, when that was the
case, I do find it a little bit odd that I am here now this
morning defending the current Administration and their
proposals on so many fronts from their own party. But I do
believe that it is an opportunity for us now to try to reach a
broad-based consensus on all these issues in front.
And, finally, one final point of agreement that I failed to
mention above but that is probably the most important is that
we must never put the American taxpayer on the hook again for
the failures in the private mortgage market.
And, with that, I thank you, Mr. Secretary.
Chairman Bachus. At this time, I recognize Ranking Member
Frank for 4 minutes.
Mr. Frank. Thank you, Mr. Chairman.
I am struck at what a difference an election makes. I agree
that we should be moving forward, and I am interested that we
do have these areas of consensus.
But I do have to note a great disappearance. Perhaps the
Inspector General can track it down. A year ago, my colleagues
on the other side knew exactly what they wanted to do with
regard to Fannie Mae and Freddie Mac. A bill was introduced
about a year ago, in March of 2010. We heard, during the year,
constant criticism from people on the other side that the
legislation we adopted on financial reform didn't cover Fannie
Mae and Freddie Mac.
My own view was that since we had, by legislation that was
adopted in 2007 and 2008, put them into conservatorship, that
the losses had been largely stemmed, that we were dealing with
a situation in which they were very different than they were
before, and that had bought us some time to think about what to
do.
But that was a position which, last year, when they were in
the Minority, was rejected by the other side. Indeed, there was
a bill filed in March, I believe, by the gentleman from Texas,
Mr. Hensarling. And, again, we were told that should have been
included in financial reform. At the conference committee
meeting, that bill was offered. And that bill was ready last
year.
What I guess is--we used to have this question, what did
the President know, and when did he know it? My question is,
why did the Minority know something last year that they don't
know this year? They knew last year what to do. They were very
critical of us for not doing it. They talked about the urgency.
Lo and behold, being in the Majority has apparently induced a
form of legislative forgetfulness. They say that power
corrupts. Apparently, in this case, it hasn't corrupted; it has
taken away memory or knowledge.
Because, again, I don't understand why the committee is not
now dealing with--this is our second hearing, I believe, on the
GSEs. And that bill that they were so insistent on passing last
year and were so critical of us for not passing seems to have
faded away, and it is no longer there.
I understand that position. My own view is that it was a
more complicated subject than their bill assumed, that because
we had put these two entities into conservatorship by
legislation which we adopted in 2007 and 2008 that the urgency
was gone, in the sense that the losses had been stemmed, that
Fannie Mae and Freddie Mac are operating and have been
operating since they were put into conservatorship on a
bipartisan effort in 2008 in a very different manner, and that
this year was the year in which we should begin looking
seriously at it.
I did say, at the time, that it was my intention to file a
bill last December to get us started. When control of the House
changed, it seemed to me that the reasonable thing to do was to
acknowledge the fact that the Majority was in control.
But, again, I have this question: Where is the bill? It was
all ready to go last year. Last year, there was this insistence
on passing something and a criticism that it wasn't passed.
Today, we have a very reasonable attitude of working with the
Administration.
I think the explanation is that this is a harder issue to
deal with than the Majority thought when they were in the
Minority. I think it is also the case that they don't have the
votes for the bill that they were pushing last year. And it is
one thing when you are in the Majority and have to get
something done; it is another when you are in the Minority.
But I would say this: The urgency does appear to have ebbed
a little bit, because the people who are now in control and who
knew since early November that they were in control have
decided not to go forward with the bill they had last year,
which they were so insistent should be passed, and apparently,
they are now awaiting the Administration.
I have thought very hard to think of another issue on which
this particular group of Republicans has awaited the leadership
of the Obama Administration, and I haven't thought of one yet,
but maybe this is the beginning of a trend.
Thank you, Mr. Chairman.
Chairman Bachus. Thank you.
Mrs. Biggert is recognized for 2 minutes.
Mrs. Biggert. Thank you, Mr. Chairman.
Welcome, Secretary Geithner, and thank you for joining us
this morning.
Page 2 of your written testimony says that, ``The
Administration and Congress have a responsibility to look
forward, reconsider the role government has played in the past,
and work together to build a stronger and more balanced system
of housing finance.'' And I couldn't agree with you more.
As for where we should start, it is very clear that, in its
report to Congress, the Administration only laid out options
for a reform but has chosen to avoid a very tough decision for
setting a single course of action.
Having reviewed the Administration's report to Congress, it
is clear to me that Option 1 most closely resembles the kind of
plan that the taxpayers expect from us. And I ask that today
you work with our committee to not only establish a clearer
framework but put in motion reforms that facilitate private-
sector re-entry, eliminate the taxpayers' risk, and generate a
vibrant housing finance system that serves creditworthy
Americans.
For many years, it seems like Republicans on this committee
have pressed to reform Fannie Mae, Freddie Mac, and the FHA. So
it is my hope that today you can confirm your commitment to
work with us. Housing is one of the most important cornerstones
of our economy, and we have to get it right.
So, with that, I yield back the balance of my time.
Chairman Bachus. Thank you. You still have 33 seconds left,
and I will claim that time.
I do want to say that former Chairman Frank, who was the
leading advocate for Fannie and Freddie, just gave us a history
lesson. But, in 2003, he said that neither of these GSEs were
in crisis and they did not need more regulations. Two years
later, he said they ought to be pushed to make more affordable
loans--i.e., subprime loans--not less. So that part of the
history lesson was missing.
And our time has expired.
Mr. Frank. Two minutes, Mr. Chairman? I will take 2 of my
remaining minutes.
Chairman Bachus. Two additional minutes.
Mr. Frank. We have just heard a serious distortion of the
facts.
Yes, in 2003, I didn't think Fannie and Freddie needed
reform. You want to get into the history? In 2005, the chairman
joined then-chairman Oxley in passing a bill to reform Fannie
Mae and Freddie Mac which Mr. Wallison derided as ``wholly
insufficient.'' And it then failed because the Senate
Republicans rejected the House Republican bill.
In 2007, when the Democrats were in the Majority, we did
pass a bill which Mr. Wallison, the Republicans' lead witness
on this, said was a very good bill. And it was that bill which
led them to being put into conservatorship.
I would then go back to the gentlewoman from Illinois. She
said the Republicans have been pressing for reform. Yes, the
Republicans press for reform when they are unable to achieve
it. But when they are able to achieve it, they don't press for
it. We have to get these in-phase.
They were in power from 1995 through 2006 and passed a bill
in the House which Mr. Wallison and the President of the United
States, Mr. Bush, derided as insufficient. Last year, when they
were in the Minority, they pushed hard for a bill which they
told us was the answer, and this year it has disappeared, and
they are now waiting for the Administration.
And the gentlewoman from Illinois said the Administration
has avoided making the tough choices. In that, the
Administration, if that is the case, resembles the Republicans,
who aren't making the tough choices either. She said they are
ready to reform, so what is stopping them?
The fact is that, in November, it became clear that the
Republicans would take control of the House, and I am still
waiting to see the bill. We had a bill last year. I guess I
want to understand, what happened to that bill? What flaws were
discovered in it? Why is that not being put forward?
And, yes, the fact is that in 2003, I underestimated the
need for reform. I was wrong. By 2007, we adopted the bill that
resulted, at the Bush Administration's request, in their being
put into conservatorship, and it is why we now have the time,
which the Republicans are taking full advantage of now that
they are in the Majority, to deal with.
I yield back.
Chairman Bachus. We have 2 minutes left on our side. I will
claim the time in opposition.
Mr. Frank. If the gentleman would yield, you are no longer
in opposition. You have to get used to that. You have to
produce.
Chairman Bachus. That is correct; in opposition to what you
just said.
When Chairman Oxley and I and others pushed for a stronger
regulator for Fannie and Freddie because we felt that it was a
captive regulator, then-Chairman Frank opposed that bill, voted
against it, and actually said that Freddie had an accounting
problem but that the people responsible had been dismissed. As
we found out, it was slightly more than that, and they continue
to have a problem.
I yield my remaining time to Mr. Neugebauer.
Mr. Neugebauer. Thank you, Mr. Chairman.
I think, over 2 years ago, Members of Congress were asked
to prop up Freddie and Fannie. We were told we really would
never have to advance any money, that we were going to just
overwhelm the markets with the size of Congress' commitment. Oh
well, there goes that plan.
One of the things that was articulated at that time and the
question I asked was, what would be the exit strategy? And the
answer again was, we don't need an exit strategy because we
will never advance any of these moneys. But here we are, over 2
years later, and billions more mortgages have been originated
by these entities, which means billions more in contingent
liability for the American taxpayers.
I appreciate the Secretary's report. I wish they would have
taken a little bit stronger leadership, with a recommendation
rather than alternatives, but hopefully we can get into more
details about that today.
But I think it is important to understand that it is time
to get the American taxpayers off the hook. They are tired of
making their own mortgage payments and being responsible for
other people's mortgages, as well. The time to start is now,
not later. The time to start is now, because, as I said, today,
while we have this hearing, millions more mortgages will be
originated at these entities, and millions more commitments
will be outstanding, which will put the taxpayers on the hook.
An important part of this solution is getting the private
mortgage market back to operating again. We need to take steps
to make sure that happens, so that, ultimately, the goal here
is to, as my colleague, the chairman of the subcommittee, said,
never, never, ever have the taxpayers on the hook for mortgages
again in this country.
Thank you.
Chairman Bachus. At this time, I yield 15 seconds.
Mr. Frank. Yes, the bill the chairman boasted about voting
for with Mr. Oxley is the one the Senate rejected, the
President said was way too weak, and Mr. Wallison derided as
way too weak.
As to Mr. Neugebauer, the argument he gave, ``we are going
to overwhelm it with money,'' yes, that was an accurate quote
from Secretary of the Treasury Paulson under the Bush
Administration. And he was doing that pursuant to a bill for
which Mr. Neugebauer voted after cosponsoring an amendment that
somewhat weakened it, in Mr. Paulson's view, but went through
anyway.
I would ask that my remaining time go to Mr. Scott.
Chairman Bachus. Mr. Scott?
Mr. Scott. Thank you very much, Mr. Chairman.
Welcome, Mr. Secretary.
And I wanted to just make a couple of points on the options
that were presented in the Obama Administration's report.
For one, it says that Option 1, particularly, on
privatization, I think--and I would like to know if you are
concerned about whether or not private capital can meet the
needs of the housing market with any kind of sufficient
liquidity. It seems to me to be unclear whether or not there is
enough private capital willing to fund such a system.
Under this option, the report is running on the assumption
that if government support for the housing market is eventually
removed, then private money will replace it. That is what we
hear from our friends on the other side. However, if there is
no guarantee this will happen, how can this option be viable?
Isn't there a risk that the amount of private funding for the
mortgage market will be substantially lower than the demand for
mortgage loans?
And the other option in the report, proposed in the report,
calls for a government option priced far away from market rates
that can begin to lend mortgages in a time of crisis where
private capital disappears. If this backstop is implemented,
doesn't it resemble a sort of bailout, in the sense that it
would protect private market agents without asking for any
financial support from them in return?
And, finally, the report states that the Federal support
for the housing market must acknowledge that not all Americans
should be homeowners and that any future system must also
include support for the rental-housing sector. However, the
plan does not identify a specific proposal for dealing with the
GSEs' multifamily programs. So what does the Treasury plan do
in terms of reforming existing GSE multifamily programs?
Thank you very much, Mr. Chairman.
Chairman Bachus. Thank you, Mr. Scott.
At this time, let me say, without objection, all members'
written statements will be included in the record.
Chairman Bachus. Secretary Geithner has to leave the
committee at 12:30, and that is a hard stop. So we are going to
enforce the 5-minute rule on all members; just be aware of
that.
At this time, Secretary Geithner, you are recognized for
your opening statement. Without objection, your entire written
statement will be made a part of the record. And you are
recognized for a 5-minute summary of your written remarks.
STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman, Ranking Member
Frank, and members of the committee.
Two weeks ago, we laid out our proposals for reforming the
housing finance system. The written testimony I submitted
summarizes that report.
I am going to talk about our proposals for reform, but
before I do that, I want to just emphasize what I think
everybody in this room knows, which is that the housing market
of the United States is still in a very difficult state. The
damage caused by this crisis is still deep and very broad.
Millions of Americans are still at risk of losing their homes.
Housing demand is still too weak to quickly absorb the excess
supply in the market, particularly with unemployment so high.
And even with the economy growing again, it is going to take a
long time for us to repair the damage caused by the crisis.
The Administration, working with the tools the Congress
gave us, has taken a range of steps to help stabilize the
market and reduce avoidable foreclosures--not all foreclosures,
but avoidable foreclosures. These programs have helped catalyze
millions of loan modifications and refinancings, and helped
keep mortgage interest rates low. And they were successful in
preventing much, much greater damage at a much greater cost to
a larger fraction of American families.
Over the next 10 years, our estimates on conservative
assumptions show that the total cost to the taxpayer of our
support for Fannie and Freddie will be well below $100 billion.
I think the current estimates in the budget are about $75
billion, but that does not take into account our proposals to
gradually raise the guarantee fees. So if we were to implement
this plan, we expect the ultimate cost to the taxpayer to be
lower.
This process of reform will take years, as I said. And as
we debate these options, we have to be very careful that our
actions to reform the market do not jeopardize either the
housing market itself or the broader economic recovery now
under way.
Our proposal aims to achieve three key objectives on a
responsible timeline. First, we want to wind down Fannie and
Freddie and help bring private capital back into the mortgage
market.
As you know, in the wake of the crisis, private capital
fled the market and has not yet returned, leaving the
government now to guarantee more than 9 out of 10 new
mortgages. That assistance was essential in stabilizing the
market and giving Americans continued access to mortgage
credit, but it is not a long-term solution. We believe that
under normal conditions, under a reformed market, the private
sector--subject to stronger oversight and better standards of
protection for consumers and investors--should be the primary
source of mortgage credit and bear primary responsibility for
absorbing losses.
Our report recommends a combination of policy levers to
wind down Fannie and Freddie such as increasing guarantee fees,
reducing conforming loan limits, and gradually tightening
underwriting standards. And, of course, we are committed to
supporting the continued wind-down of Fannie and Freddie's
investment portfolio. These actions will help shrink the
government's footprint in the housing finance market and help
bring private capital back.
But we are not going to get private capital to come back
into this market unless we fix the very substantial fundamental
flaws that still exist in the mortgage market as a whole. So a
second key piece of our reform proposals is to put in place
reforms that will help provide a better market for private
capital.
And that means giving consumers the ability to make better
decisions about mortgages and protecting them from unfair,
predatory, and deceptive practices. It means requiring
participants in the securitization process to retain risk, and
to improve access to information, improve accountability and
transparency throughout the securitization process.
It means requiring banks to hold more capital against the
mortgages they hold. And that is important, to make sure that
banks are in a position to better withstand the losses that can
come from future recessions. It means addressing the chronic
problems we still face in the servicing and foreclosure process
by setting national servicing standards and improving the
incentives for the participants in that market.
Our third objective is to more effectively target the
government's support for access to low- and moderate-income
Americans to sustainable mortgage finance and to rental-housing
options.
We think it is important that the government continue to
help Americans get access to housing that they can afford. This
does not mean, however, that our goal can be for all Americans
to become homeowners. We want all Americans that have the
financial capacity, the desire to own a home, to be able to
take that step. But at the same time, we need to provide a
broader range of affordable options near good schools and near
good jobs for the 100 million Americans who rent today, whether
they do so by choice or by financial necessity.
With those three broad objectives in mind, we need to begin
the process, working with you, to decide on the long-term
solutions to replace Fannie and Freddie. This requires a
thoughtful, careful discussion with Congress and all the
stakeholders about what the appropriate role of government is
over the longer term.
We have put forward three broad choices. We do reject two.
We rejected--considered, and suggest Congress not embrace
either what you might call the ``full liquidation privatization
option,'' or what you might call the ``full nationalization
option,'' as many have proposed. So the options we proposed lie
in the middle of those more stark choices.
Each of the options we proposed would produce a market
where the private sector plays the dominant role in providing
mortgage credit and bears the dominant burden for losses. But
each has different advantages and disadvantages, and those need
to be carefully considered.
In the first option, the overwhelming majority of mortgages
would be financed by lenders and investors and would not
benefit from a government guarantee. We would limit the
government's role to the FHA's current job of providing
targeted support for affordable housing and more affordable
mortgage credit.
In the second option, the government's targeted assistance
through the FHA would be complemented by a government backstop,
available only in crisis, designed to promote stability and
access to mortgage credit only in crisis.
And as a third option, alongside the FHA, the government
would provide a form of reinsurance for certain securities that
would be backed by high-quality mortgages. These securities
could be guaranteed by closely regulated, carefully regulated
private companies under strict capital standards and strict
oversight and reinsured by the government.
In providing this narrower set of options and a set of
criteria for evaluating them, we are hoping to encourage a
careful discussion with the Congress about the ultimate reform
option. And I think you all recognize that this will require
some tradeoffs and difficult choices. As I said, each has
advantages and disadvantages, and there is no easy solution.
Our challenge is to find the right balance between making
sure that low- and moderate-income Americans can have access to
mortgage credit, that we have a more stable mortgage market,
that the taxpayers are less exposed to risk, and that we have
the capacity in the future to do a better job of limiting the
broader damage to the economy that can come from financial
crises like we saw in this crisis.
Each of these options would require legislation. And our
judgment is, we should work together to try to pass legislation
within the next 2 years. If we can move more quickly than that,
we would welcome that chance. But we can't put this off
indefinitely or leave the market with too much uncertainty.
That will make it harder to get private capital to come in and
replace the role the government is playing today.
So our hope is that the Congress will work with us to find
a consensus on a long-term solution and to make sure that we
have the authority in the transition--the FHA is the
authority--we have the authority in the transition to make sure
we implement a carefully designed transition program that
phases out the government role without damaging the process of
repair in the housing market.
We look forward to working with you on this challenge, and
I welcome the chance to answer any of your questions.
[The prepared statement of Secretary Geithner can be found
on page 60 of the appendix.]
Chairman Bachus. Thank you, Secretary Geithner.
Secretary Geithner, you have said that now is the time to
reform the mortgage housing finance market, and I take you at
your word.
The White Paper actually proposes four things that the
Republicans have also proposed, as well as many Democrats:
first, increasing the guarantee fees, so I think there is
agreement there; second, increasing downpayments; third,
reducing conforming loan limits; and fourth, winding down
investment portfolios.
All of those can be done without legislation, can they not?
Secretary Geithner. They can, yes.
Chairman Bachus. Could that begin today or tomorrow? Is
there any reason why at least some of those could not begin
even before legislation passes?
Secretary Geithner. In fact, we have already started, and
Fannie and Freddie and the FHA have already started to raise
guarantee fees or to change pricing and to change the basic
standards that apply to their programs. But, yes, we can move
reasonably quickly on those initial steps.
I think the challenge is to make sure that we are doing it
in a gradual way that doesn't hurt the housing market or hurt
the expansion under way. And what we propose is that the FHA
and the FHFA--sorry for these acronyms--the Federal Housing
Administration and the oversight body of Fannie and Freddie--
work together to put out a set of recommendations for how they
would implement a gradual plan to improve pricing and
strengthen underwriting standards to phase out the government's
role.
Chairman Bachus. I think if you are going to, as you say,
crowd out the private markets, you are going to have to begin
to do these things now.
The American Banker, this morning, says that Option 3 is
Fannie by another name. And also, part of Option 2, you say
here that the Federal Government should reserve the right to
backstop the mortgage and housing market during times of market
stress.
Secretary Geithner. ``Could'' reserve the right.
Chairman Bachus. Could. How do you define ``market
stress?''
Secretary Geithner. That is an excellent question. And that
is one of the risks in thinking about just a system where you
only have the emergency capacity to come in, in a crisis. That
is a hard thing to do because it takes time; it is hard to
scale those programs up quickly, and hard to design them
carefully in a crisis. And, of course, it is a matter of
judgment, when market circumstances might require the
government sort of stepping in.
And as you have seen and as you would want, you would want
the government to be very reluctant to do that. Because you
don't want the market operating with the expectation that the
government would come in too quickly or too easily in the
future, even in the face of a recession. So that is a
challenge. Among the many challenges in designing an emergency
capacity like that are those.
Chairman Bachus. If you are talking about falling housing
prices as a reason to intervene in the market, falling housing
prices could actually be constructive, in that they would make
homes more affordable. So, as long as you have that backstop,
it is almost an implicit government guarantee, in my mind. Am I
wrong?
Secretary Geithner. Yes, I think there is a risk in that,
but--and this is worth spending some time on--I don't think it
is quite right to think about these things as a stark choice
between a purely private market and a market where the
government, in crisis or in normal times, is guaranteeing
mortgages.
If you leave all these mortgages in the banking system,
like many countries do, the government is still there with an
implicit commitment to back the banking system. So if you look
at the model that Canada and many European countries have
adopted, where, in contrast to our model, they leave most of
these mortgages with banks, the government provides a lot of
support for banks, is very reluctant in those countries to let
banks fail in a crisis. So the support is there, but it is just
implicit; it is not explicit. Banks don't have to pay for that
support. But it is not quite the private-market ideal that many
people seem to think.
It is not fair to say that Option 3 is an option that would
recreate Fannie and Freddie. And just know that I would not
support that. Even if this group of people in this room thought
that was appealing, we would not support it. I think it is--
Chairman Bachus. We would not think that.
Let me close by saying, when you talk about the government
in times of stress intervening, I almost think that is what
we--and I have said for some time, the American people don't
like privatizing the profits. In other words, in good times,
the financial services industry, the lenders make money, and
then in the bad times, you socialize the losses. And the
American people have--November was about ending that. The
American people are tired of taking the loss. And I think you
would agree.
Secretary Geithner. You do not want to run a system in
which the taxpayer is going to be on the hook when things go
bad. That is not a system--to some extent, that will be
inevitable in severe crises, because banks get in trouble in
crises and government will be exposed to loss and that kind of
thing. But you want to avoid that, to the extent you can.
And you are right to say it is very hard to know what level
of stress would motivate what level of assistance. That is a
matter of judgment. But what you don't want to do is leave the
country in a situation where you face a severe recession, like
we did in this context, and you can't do anything to protect
the innocent from the collateral damage.
Chairman Bachus. There will be market stress, and
apparently there may be government guarantees, and we oppose
that.
Ranking Member Frank?
Mr. Frank. Of course, the Majority has the power to pass a
bill that does anything it wants, so they don't need to ask the
Administration's permission.
I want to come--lest I appear too partisan--to the defense
of the leisurely pace my colleagues have chosen now with regard
to legislation here, as opposed to the great urgency that they
felt last year when they were insisting that we pass the bill
as part of financial reform.
And the point is this: We have had allusion to the losses,
but my understanding is that those losses overwhelmingly,
almost entirely predate the conservatorship which Secretary
Paulson asked this Congress to give him and which we gave him
and which he then used in 2008.
So is it the case that, in fact, essentially since the
conservatorship, the activities of Fannie Mae and Freddie Mac
have not been incurring new losses?
Secretary Geithner. That, I think, is an accurate view. The
losses that the taxpayer will ultimately be exposed to will be
only, I think, in a general sense related to the loans made
before the crisis.
Mr. Frank. And that means before the legislation, which was
initiated in 2007, that Mr. Wallison praised very heavily and
which eventuated in the conservatorship of 2008.
We have recently been told that there may, in fact, be some
money recovered, that the pre-2008 losses that go from the
1990s into 2000s, that they may be less than anticipated. Is
that accurate?
Secretary Geithner. Yes. The losses keep coming down. Of
course, the future is uncertain, and it depends a lot on how
the economy does going forward. But the loss estimates are now
coming down, as I said in my opening remarks. In the budget
now, the current estimate is around $75 billion--between $70
billion and $75 billion. But that does not take into account
the fact that we proposed to raise the guarantee fees carefully
going forward, so that overstates the likely ultimate loss.
Mr. Frank. All right. I apologize. I had to step aside.
Let me then cover one other factor. One of the arguments we
have had is, a lot of this problem came because people were
trying too much to help low-income people. And my own view has
been that we have erred, bipartisan, over time, by stressing
too much homeownership for low-income people and not enough for
rental opportunity.
Fannie Mae and Freddie Mac have dealt both with
multifamily, as my colleague from Georgia referenced, and
single-family. As you look at the losses, were the losses
equally distributed, or proportionally distributed between
multi-family activity and single-family, or were they more on
one or the other?
Secretary Geithner. I have to respond more carefully to you
in writing on that question, but my impression is that the
losses are concentrated in single-family.
Mr. Frank. That is my impression, too, or I wouldn't have
asked you.
And I do think that is very important because, as we
tighten up in the single-family area, I hope that will not
lead--and this has been--yes, I have been quoted in the past
actually as talking about my support for affordable housing. I
may have not been explicit about what I meant. I have primarily
been looking for help for affordable multi-family rental
housing.
And I hope that out of whatever proposal the Administration
comes forward with and ultimately passes the Congress, there
will be some effort to do what we do with the Federal Home Loan
Banks. The Home Loan Banks, since the late 1980s, under the
chairmanship of Henry Gonzalez, have been empowered to make
mortgage decisions based on business decisions. And a fairly
small percentage of the revenue that is generated then goes to
help subsidize affordable rental housing, so that you don't
pollute the basic business decision.
The other point I would make is this: As we go forward, in
terms of losses, there are two factors that I think give us
some reason for hope. Namely, part of the problem was that
mortgages were, I think everybody agrees, improvidently
granted. People differ as to how much was the fault of the
borrower and how much was the fault of the lender and whether
it was this or that, but, clearly, mortgages were improperly
granted.
We now have two pieces of legislation that change that:
first of all, specific prohibitions on no-document mortgages,
on pick-as-you-pay, etc., in the financial reform bill; and,
second, a requirement of risk retention and securitization
unless you hit the qualified residential mortgage, which would
be maybe a 20 percent downpayment.
Is it the case that the substantive reforms that we have
adopted in the mortgage market give us a little bit more
flexibility as we design this system going forward?
Secretary Geithner. They do. And I think they are very
important. I think that any system that is going to work better
in the future is going to require homeowners to hold more
equity against the value of their homes, against what they
borrow. And banks are going to have to hold more capital
against loans, retain more risk. And you are going to have to
have more conservative underwriting standards.
And a lot of that is mandated by the financial reform law
that you helped to author, and a lot of that is already in
place and is coming to fruition.
Mr. Frank. I think that is very important to note, because
we are looking at a better set of mortgages, going forward, as
one of the safeguards.
Thank you, Mr. Chairman.
Secretary Geithner. Can I just say, Mr. Chairman, quickly
that we very much support the emphasis on rental multifamily. I
think the government did a lot of things in the mortgage
market, a lot of them badly, a lot of them reasonably well, but
too much of the support we provided went to homeownership as
opposed to rental. And too much of the support we provided to
homeownership went to relatively fortunate Americans.
Mr. Frank. And you are going to get us the breakdown on how
the losses were proportionally between single-family and
multifamily. Thank you.
Chairman Bachus. Thank you, Mr. Frank.
Our subcommittee chairman, Mr. Garrett, is recognized for 5
minutes.
Mr. Garrett. I thank the Chair.
And to the ranking member, it really is hard to predict the
future, which is what I guess he is trying to do right now. But
he tried to do that back in 2003, as well, when he said, akin
to what he is saying right now, ``Fannie and Freddie do very
good work, and they are not endangering the fiscal health of
this country.'' The ranking member also said, ``I think it is
clear that Fannie and Freddie are sufficiently secure, so they
are no great danger.''
So the same statements that he is making now about how
well-run Fannie and Freddie are and how well the underwriting
is of the loans that they are taking in right now going
forward, in essence, are really what he said in this committee
back in 2003 about the loans that we were taking out at that
time. And we all saw they didn't really turn out so well.
I am sure the Secretary will agree that the loans that they
are taking out right now have not had the opportunity to, what,
season, if you will, and that in reality you have to look at
loans a little bit down the road to really see what the loss
ratios are going to be.
Is that a fair assessment?
Secretary Geithner. True. But if you look at the estimates
people have made at FHA of the future losses associated with
the guarantees they have been writing since conservatorship,
the estimates they make are not just modest--
Mr. Garrett. And I appreciate that. I appreciate that. But,
of course, those were exactly--you weren't here at the time,
but those are basically the same arguments that were being made
and that the ranking member was making at the time, as well. If
you looked at the projections back in 2003, as the ranking
member was saying, things didn't look so bad.
But let me close where I began. It is always hard to
predict the future. The ranking member didn't do a very good
job of predicting the future back in 2003. We will see whether
his predictions are good this time.
Secretary Geithner. We don't--
Mr. Garrett. But to your report, one of the common
arguments we hear from the people who are supporting a Federal
guarantee is that if you don't do it, the cost for homeowners
is just going to skyrocket, with regard to homeownership in
this country, and people won't be able to achieve the American
dream.
So, to that point--and you have done your whole report and
what have you--did you run any quantitative analysis in any one
or all three of your options to determine exactly what the
overall impact would be on the monthly payments for a consumer
in order to get those?
Secretary Geithner. Let me just start with the following
observation, which is that, under any of these options, the
cost of a mortgage is going to be higher in the future. It has
to be, because the government substantially subsidizes--
Mr. Garrett. What about the monthly cost, though, actually?
Not just the mortgage, but the overall monthly cost--
Secretary Geithner. I am going to answer your question, but
let me just say, under any of those options, they are going to
be somewhat higher than they were before the crisis, and they
need to be. That is sort of a fundamental reality we face.
We have looked at a range of estimates, at what the
ultimate impact might be on these options on the cost of a
mortgage. But it is very hard to judge until they are defined
more clearly. You cannot know until you look precisely at what
version of Option 1, 2, or 3 or which mix of those options you
would do. You can't tell. You know they will be higher, I think
modestly higher, but different degrees of increase, depending
on the mix of those options you ultimately embrace.
Mr. Garrett. I appreciate that.
Let me just refer you to an economic analysis that was
done. This was done by--some would call him a liberal
economist--Dean Baker of the Center for Economic and Policy
Research. His report looks at a 30-year mortgage, which is what
we are talking about here, under a purely private system, and
he says that will be about 90 basis points, as you are saying,
more expensive than under a similar mortgage system where you
have the government guarantee. So what you are saying is true:
a little bit higher cost in his projections.
But then he goes into it a little bit deeper. He says, what
would the overall cost be if you combine it with the medium
price of, let's say, a $170,000 mortgage? And this is what he
comes out with. He calculates that the monthly payment for the
mortgage, what you are talking about, under a hybrid system
would be around $833. Okay? Then he calculates that a similar
mortgage under a purely private system would have a higher
financing cost, is what you are saying. But the overall price
of the house, then, would be less expensive, and the monthly
payment would be only about $8 more. Okay, so a little bit more
under that scenario, with a purely private sector.
Next, however, he factors in the monthly taxes that you
will be paying on that house. And because the house now, under
the hybrid system, the guaranteed system, would be more
expensive, housing prices would remain high, the property taxes
would be greater. He then finds--the final calculation is that
the monthly payments under a private system would be about $4
less than under the hybrid system.
So, overall, you add all of it together, the higher
mortgage price, the lower price of the house, and then the
lower property taxes, it comes in between--a difference of
about $4. Okay?
But even if his numbers are off a few dollars there,
doesn't the fact that the numbers are so close to each other
indicate, then, that a hybrid system really doesn't outweigh
the cost of a private system, with all the inherent risks that
go with it to the taxpayer at the end of the day?
Secretary Geithner. I don't--just like you just said, we
should be cautious about predicting the future. I don't think
you can make any of those judgments without knowing the precise
details of what the government role is in this context. And I
think it is almost certain that the costs to the homeowner, all
in--
Mr. Garrett. Right.
Secretary Geithner. --would be higher under Option 1 and
higher under Option 2 than they would be in Option 3.
But under all those options, it is going to be somewhat
more expensive to borrow to finance a home than was true before
the crisis.
Mr. Garrett. Thank you.
Chairman Bachus. Congresswoman Waters?
Ms. Waters. Thank you very much, Mr. Chairman.
Secretary Geithner, you have three options that have been
presented. And I guess what you are saying is, any of these
three would be acceptable to Treasury?
Secretary Geithner. No, I wouldn't say that.
Ms. Waters. Tell me about Option 1. Option 1, as I
understand it, is complete privatization, except the FHA is
available to medium-income families only. That is similar to
the Republican plan, except the Republicans don't want any FHA.
In this plan, if you are slightly above medium income,
likely there would be no 30-year fixed-rate mortgages. You
would have higher downpayments, higher interest rates. And, of
course, an adjustable-rate, short-term loan would be the norm.
What is your position on 30-year fixed-rate mortgages?
Secretary Geithner. I think under Option 1, if I understand
your question, a 30-year fixed-rate mortgage would be more
expensive and harder to get than would be true under some of
the other variants you could consider.
Ms. Waters. But it would be acceptable to you if we adopted
Option 1?
Secretary Geithner. No, I would not say that. I think the
disadvantage of just Option 1, just to be fair about it, is
that you would leave the Government of the United States with a
more limited set of tools to protect the economy and the
innocent victims in the face of the next severe recession.
And that is a disadvantage of Option 1--unless, under
Option 1, you allow the FHA in the crisis to dramatically
expand what it does. And if you do that, then the taxpayer will
be more exposed to loss. Because what the FHA does is they
provide very high loan-to-value mortgages, very low
downpayment--
Ms. Waters. So I am to understand that this is not your
choice? You are not saying that this could be as acceptable to
you as any other option?
Secretary Geithner. I would say it has some disadvantages
the other options do not have. And, again, you have to be
careful that you look at all of those advantages and
disadvantages.
And, again, I would caution people on this side of the
aisle to say that it would be tempting to look at the FHA-only
option and say, oh, the government control will be more limited
in that context. But that is not necessarily the case, because
what it means is that all the risk is with banks. The
government does provide support to banks. The guarantee is then
implicit. The government doesn't pay for it. The taxpayer is
not necessarily better protected. And if your only option in a
crisis is to have the FHA scale up dramatically, the taxpayer
is much more exposed to risk on an FHA product than it would be
in those other options.
So don't look at that as such an appealing option. It looks
like it is a more private solution, but it may not be in the
end.
Ms. Waters. Let me just--I want to get something into the
record here. The Financial Crisis Inquiry Commission examined
loan performance and found that mortgages bought by Fannie Mae
and Freddie Mac were more likely than privately purchased loans
to require a significant downpayment when borrowers had weak
credit and were less likely to default.
For instance, GSE mortgages with a downpayment of at least
10 percent had a serious delinquency rate of 5.7 percent in
2008, compared with a delinquency rate of 15.5 percent among
mortgages in private-label securities, the FCIC found.
Do you agree with that?
Secretary Geithner. I think it is true that the
underwriting standards in the private market were worse than
the underwriting standards--
Ms. Waters. Okay. Let me continue.
Mortgages originated for private securitization defaulted
at much higher rates than those originated for Fannie and
Freddie securitization, even when controlling for all other
factors. Overall, private securitization mortgages defaulted at
more than 6 times the rate of those originated for Fannie and
Freddie securitization.
And I guess this is a study that was done--``Securitization
and Mortgage Default: Reputation Versus Adverse Selection''--by
the Federal Reserve Bank of Philadelphia in September of 2009.
Are you familiar with that?
Secretary Geithner. I am not familiar with that study, but
the general pattern is correct, which is that the quality of
underwriting standards in the private market was, on balance,
worse, less conservative, less careful, than was true on the
Fannie and Freddie guarantee book.
Ms. Waters. You have alluded to the exposure to the
taxpayers under the systems as we know them now. And you have
basically concluded that it would be better to have the private
market rather than the government guarantee. And if this is
true, what I just read, and you agreed with it, how is that so?
Secretary Geithner. No, I would say it a little
differently. I would say, right now the government is doing 90
percent of new mortgages. That is unnecessary--it is necessary
today, but it is not necessary in the future. It would not be
desirable for us to preserve that system.
You want to have a system where the private market plays
the larger, the more dominant role, not the only role, but--
Ms. Waters. But it is a riskier role?
Secretary Geithner. No, not necessarily, because it depends
a little bit--
Chairman Bachus. The gentlewoman's time has expired.
Ms. Waters. Thank you very much.
Chairman Bachus. The vice chairman, Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
And good morning, Mr. Secretary.
First, I would just like to say for the record and the
ranking member, who unfortunately is absent at the moment but
who appears to be obsessing over the timing of the introduction
of my GSE bill, that as soon as he produces the GSE bill that
he promised in the last Congress, I would be very happy to
coordinate the timing of the introduction of my own bill.
And I would just note, as a general practice, Mr. Chairman,
I try to improve my bills before they are voted on instead of
after.
Mr. Secretary, in response to the gentlelady from
California, I want to make sure I heard what I thought I heard.
I thought she asked you, ``Do you support the three options
that were just presented?'' And I think I heard you say, ``Not
necessarily.''
And if that is correct, we waited 2 years for this? Did I
understand your answer correctly, that you are not necessarily
supportive of the three options you have presented?
Secretary Geithner. No. She asked me if I supported Option
1.
Ms. Waters. Option 1.
Secretary Geithner. I will say this in response to any
question, and this is very important for people to recognize--
Mr. Hensarling. Let me ask you this way: Will you support
Option 1? If you are not necessarily supportive of Option 1
over Option 2 or 3, will you support Option 1?
Secretary Geithner. Congressman, we played out three
options for a reason: because they each have advantages and
disadvantages. And we want this--
Mr. Hensarling. Are you willing to support each of them?
Yes or no? It is not a trick question. It is just a yes-or-no
question.
Secretary Geithner. But this is an important thing.
Remember, we are living with a crisis caused by a legacy of
bipartisan failures designing the role of government in the
financial system as a whole. So how--
Mr. Hensarling. Mr. Secretary, if you would answer the
question, I would be happy to give you time to give it some
context. But it is a simple question. You are presenting three
options. Are you willing to support the three options?
Chairman Bachus. Let me say this, without penalizing the
gentleman. We do want the Secretary to have an opportunity to
respond to the question. And in fairness, we had a question
last week which was just a yes-or-no answer. And it is
sometimes hard to simply give a yes or no.
But I will go back to the gentleman and add an additional
30 seconds to the gentleman's time.
Secretary Geithner. The reason I say this is because--and
this is why we started with options--because it depends a lot
on how Congress designs them. And you could do a mix of these
things that might be better than any of them individually. You
could design Option 1 in a way that would have a very
substantial role for a government in crisis that would be worse
than the other options. You could design Option 3 in a way
where the government has much less exposure to loss in a
crisis. It depends overwhelmingly on how you do this. And
critically--
Mr. Hensarling. So, Mr. Secretary, if you could--and
forgive me. There is a limited amount of time here. You are not
necessarily supportive of any option, depending upon how it is
written? Is that a fair assessment?
Secretary Geithner. It all depends on the design of the
specifics in each choice. That is why you can't know what the
effect would be on--
Mr. Hensarling. Okay. Let me move on to another question,
if I could, Mr. Secretary. On page 2 of your testimony, you say
it is ``very important to wind down Fannie Mae and Freddie Mac
at a careful and deliberative pace.''
You and the experts at Treasury have now had 2 full years
to study the matter. What is the careful and deliberative pace?
Media reports seem to indicate that you have said 5 to 7 years.
I do not know if the media reports are correct. So what is a
careful and deliberative pace?
Secretary Geithner. It is a careful and deliberate pace. I
have said it will probably take somewhere in the range of 5 to
7 years. And that is based on the judgment that we need to move
carefully because, by any measure, the housing market is in a
state of substantial stress still.
But, of course, that judgment about pace, if you leave it
to the government, will be designed by the FHA and the FHFA. It
is not something that I can design. It is their authority to
design.
Mr. Hensarling. Mr. Secretary, in speaking of Options 2 and
3, I am still concerned about the ability of the government to
be able to accurately price for risk.
Acting FHA Director DeMarco, before this committee in
September, said, ``The presumption behind the need for an
explicit Federal guarantee is that the market either cannot
evaluate and price the tail risk of mortgage default, at least
at any price that most would consider reasonable, or it cannot
manage that amount of mortgage credit risk on its own. But we
might ask whether there is reason to believe that the
government will do better.''
Already, we know that the National Flood Insurance Program
is $19 billion in debt. The Federal Crop Insurance Program has
cost the Federal Government about $40 billion. PBGC has a
reported deficit of $23 billion at the end of Fiscal Year 2010.
Barclays believes that the FHA has dramatically underpriced its
risk and could face losses of up to $128 billion. And we know
that recently there has been pressure on the Deposit Insurance
Fund of the FDIC.
Why should we have any confidence that government can
accurately price the risk on Option 2 or 3?
Secretary Geithner. I share your concern about this. It is
an excellent question, and it is one reason why you have to be
very careful in embracing any of the three options on the
table.
And you want to remove that decision about how you price
the guarantee, if you have a guarantee, from any interference
by the Congress. You want to keep it as independent of politics
as you can. And one of the reasons why the government's record
is so terrible in those programs is because you have subjected
those judgments, which are very difficult, to excess political
interference by some of the stakeholders in the system.
I will give you a few other counterexamples so that you
don't lose hope completely in this context. If you look at the
FDIC guarantee program in the crisis, all of the Fed's programs
to prevent the financial system from collapsing, the
government's investments in the banking system authorized by
Congress, all those investments all had a form of guarantee,
had risk in there, and were priced in a way that the government
had a very, very substantial positive return.
It is not impossible. It is difficult to do, but if you are
going to have a chance, you have to remove the judgment as much
as you can from political influence.
Chairman Bachus. Mrs. Maloney?
Mrs. Maloney. Thank you.
First of all, I would like to welcome the Secretary and
thank you for your leadership and your service. You have helped
navigate us through one of the worst recessions in my lifetime
and through one of the most significant reforms of our
financial system in generations. I know it has been difficult.
Thank you for your service and for the report that you have put
before us.
I would like to ask, in one of your policy proposals you
note the importance of retaining access to any future secondary
markets by lenders of all types and sizes, particularly the
community banks and the credit unions.
Could you elaborate on this issue and provide the committee
with your recommendations on how to ensure access in the future
system? Some people have written to me that they are concerned
that it may concentrate the market in very, very few hands and
would create more problems in the future for the financial
security of large institutions.
Secretary Geithner. That is a very important question. I
think you are right to say that there is a credible argument
that if Congress were to embrace something more like Option 2
or 3, that would leave the mortgage market banking system too
concentrated and create an unlevel playing field for community
banks. That is one factor you have to look at very carefully.
What we want is a system where you have a better designed
securitization market existing alongside banks, and we want to
have a banking system that is not materially more concentrated
than the one we have today. I think the fact that we have a
system with 8,000 community banks and thrifts is a great
strength of our system. We want to make sure they can play a
very active role in the mortgage market going forward.
Mrs. Maloney. But specifically, what would the
Administration's proposals do to the ability of smaller lenders
such as community banks to compete in the mortgage market and
regional banks? Currently, small lenders are able to
participate in the mortgage market by selling loans to Fannie
and Freddie without having to go through one of the larger
banks to accumulate enough loans to create a securitization
pool. So how do you answer that challenge?
Secretary Geithner. That is one of the reasons why Option 3
is laid out the way it is. That would preserve the capacity for
community banks to originate mortgages and then sell them into
a market. It is harder for us to do that in either of the other
two options. It is not impossible, but it is a little harder.
Mrs. Maloney. Okay. Your policy proposals mentioned the
development of a revenue neutral funding source to provide
resources for assisting extremely low-income residents. Can you
elaborate on what these recommendations involve and how would
you envision them functioning?
Secretary Geithner. That is something we have to work with
Congress on, but let me say the basic objectives. Where the
government provides support to help low- and moderate-income
Americans afford housing, we want the support to be transparent
and on budget, carefully designed. We think it is appropriate
for the government to find a financial means to provide support
for homeowners through downpayment assistance who need it and
for better options in the multi-family rental area.
There are a variety of different ways you can do that to
raise revenues. That is something we have to work with Congress
on. There are some examples out there that work reasonably
well, some examples other countries have tried. That is
something we have to work with you on.
Mrs. Maloney. Also, as you testified in answer to Ms.
Waters' question, the performance of Fannie and Freddie during
this crisis has been good. They have had very few losses. But
during this crisis, many private investors have fled the
housing market because of weaknesses in the private CMBS
market, and Fannie and Freddie's share, actually they have been
expanding and helping us get through this crisis.
What guarantee do we have that the private sector will step
in and provide the same support to expand housing opportunities
here in our country, and could you elaborate on that challenge?
Secretary Geithner. There is no guarantee, and for it to
happen again, you have to do two things. One is you have to
gradually phase out the government's role, phase down the
government's role, but you also have to make sure you have a
clearer set of rules of the game in place for the private
market, because investors won't come back in unless they know
there is clarity on what the capital requirements are, the
risk-retention requirements, what type of underwriting
standards will prevail, what type of standardization procedures
will apply, and what level of transparency there is going to be
so investors can see into the risk in those mortgage pools. All
of those things have to happen.
The financial reform bill lays out a framework for that to
happen, and the regulatory community is gradually laying out
those rules. But until we have a chance for those rules to be
defined and to be in place, the private market is not going to
come back in.
Mrs. Maloney. Thank you very much. My time has expired.
Chairman Bachus. Mr. Royce?
Mr. Royce. Thank you. Secretary Geithner, how are you? It
is nice to see you.
There was in 2008 the agreement for the senior preferred
stock purchase agreement that was worked out between your
predecessor and the conservator at the time who worked on
behalf of Fannie and Freddie. My concern is that if you took a
step that would violate that agreement, the original terms of
it, it would deprive the Treasury of obligated funds, it would
unnecessarily absolve the two institutions that I think were
really at the heart of a lot of the problems in the collapse of
the housing bubble, and I think that there is an opportunity
here to stay the course.
But I read yesterday in the Wall Street Journal that
executives from Fannie and Freddie were trying to reduce the
size of the dividend that is paid back down to 5 percent, and I
was going to ask you if you were aware of any conversations
between Fannie and Freddie or their conservator and any
Treasury officials on that subject, and I was also going to ask
you if the Administration would support a reduction or
elimination of the dividend payment because I frankly think
that would be the wrong message to send.
I say that because Fannie and Freddie had such a powerful
lobby up here, and you and I have talked about that before. I
know that the Fed felt the same way, that they were leaning in
and basically pushing policies that in many cases created
systemic risk. There was that perception. And that it was
impossible really to counter the weight of Fannie and Freddie
here in the Congress.
So, if they are now communicating again to change an
agreement, and that at least was the report in the press, I
would want to know and I would also want your reaction to it,
Secretary Geithner.
Secretary Geithner. I will tell you what we are going to
do, but, of course, we have to work with the conservator over
at the FHFA in this context, which is the body Congress gave
the authority to oversee these institutions. We are going to
make sure that we wind these institutions down and that we do
everything we can to minimize the ultimate losses to the
taxpayer. Those things are going to guide our decision. We will
look at any suggestion from the FHFA through the prism of does
it support those two objectives. So any proposal that is
designed to keep them in existence for the long term, we will
resist; any proposal that carries the risk of increasing the
ultimate loss to the taxpayer, we will resist.
I think you are right to highlight the risks that we saw in
the system where you had this combination of private equity
holders able to benefit from a guarantee, able to prevent
effective regulation, and that is something that we are not
prepared to preserve for the future.
Mr. Royce. I appreciate that. I will go to a second
question I have, and that is, as you look at the financial
crisis we found ourselves in, you have recognized that there
was excessive investment in the mortgage market which helped
facilitate, as I think you said, speculation: 30 percent of the
homes at one point were people basically speculating on homes,
flipping homes.
Do you believe there was a perception by investors in
addition to that, that the housing market was too-big-to-fail
basically at the time?
Secretary Geithner. I don't know. I think government
policies encouraged distorted investment decisions, encouraged
too much investment in housing, and I think that the market
operated absolutely with the perception that Fannie and Freddie
were too-big-to-fail.
The market as a whole--banks, credit rating agencies,
investors--did not make decisions on the expectation that
housing prices would fall materially over time, and that
mistake pervaded private decisions across the country as a
whole. Nobody expected or planned for the possibility that
there would be a crisis where housing prices would fall this
much, and that mistake itself was what caused the crisis.
Mr. Royce. We concur. But it sounds like from your
testimony your preference would be basically to not have
government intervention, or if you had a limited level of
government support in good times, you could be in a situation
where you would have in place a mechanism to expand and support
the market in times of stress.
My concern about that is, if you believe there was a
perception that the government would prevent the housing market
from a downturn pre-bubble, why would we take steps to compound
that perception going forward? You see, it does send that
message again.
Secretary Geithner. I think there is a risk of that, of
course, and I think that is one reason why you have to be very
careful in defining any role for the government, even in
crisis. Because, again, the risk is you create exactly the same
types of problem that led to excess risk-taking in the boom.
But again, just living with the scars of this crisis, look
what we faced in this crisis. You have to have the capacity in
extremis to protect the economy from broader damage caused by a
catastrophic financial failure. You have to do that. It is the
obligation of government to do that. And one reason why this
crisis was so deep and so traumatic was we came into this
crisis without the tools necessary to protect the innocent in
this context.
So whatever we do, we have to make sure we are preserving
ultimately a better set of tools to again protect the economy,
all businesses, the innocent victims, from the collateral
damage that a severe crisis can come. Of course, if you do that
badly, you will make future crises more likely, and that is why
this is so complicated.
Chairman Bachus. Thank you.
Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman. Welcome, Secretary
Geithner.
You discussed with Mr. Frank the fact that while Fannie and
Freddie lost billions on securities backed by single-family
mortgages, they actually turned a profit in their affordable
multi-family portfolios. What lessons did we learn in terms of
the multi-family portfolios, and what will that tell us
regarding a proposal to reform the housing system and should
this approach, this type of financing differently?
Secretary Geithner. I think the most important thing is in
any reform proposal, we have to make sure we have a well-
designed capacity for the government to help support multi-
family housing and rental options. We have to do a better job
than we did in the past. But, as you said, Fannie and Freddie
give us a model for how to do that well and carefully and
prudently, and that role would have to be assumed by the FHA at
least.
But I think you are right to say there are a lot of
examples of how to do that well, and how to do it not so well.
We will take the best model available.
Ms. Velazquez. Mr. Secretary, for New York City, multi-
family preservation transactions and special needs housing are
particularly important. Can you give us more detail on the type
of role that the new housing finance system should play in this
market?
Secretary Geithner. Again, we have to respond in more
detail in the coming weeks and months. But I want to say that
we are committed to and I think it is very important to the
Congress to provide a capacity for carefully designed but
significant support for multifamily. Again, if you look back,
too much of the support we provided went to single-family
ownership options and much of that support went to people who
were relatively fortunate in this country. So when the
government provides support, we want to make sure that support
is more targeted to low- and moderate-income families and more
of that support goes for rental, not just for ownership.
Ms. Velazquez. Would you say that the FHA has the capacity
to absorb the multifamily?
Secretary Geithner. I think the FHA does an excellent job
in a lot of things, but they would have to do more in this area
if they were going to provide the role, the substantial role we
think is important. So they would have to take on some of the
work Fannie and Freddie have been doing in multifamily.
Ms. Velazquez. If all the Administration's proposals for
reforming the housing system are intended to greatly reduce the
government's role in housing finance, how can we begin to
withdraw government support from homeownership without placing
undue stress on our financial system?
Secretary Geithner. You have to move very, very carefully.
And we have started to move, but we are doing so carefully,
because, again, we cannot afford to take too much risk that we
jeopardize what is still a very fragile system, because as we
all know, unemployment rates are very high and you have
millions of homeowners who are still at risk of foreclosure,
you have millions of communities where house prices are still
under stress, and again, the huge amount of damage to the
innocent victim in this context, and we have to be careful as
we go forward.
Ms. Velazquez. Mr. Secretary, the Administration has
proposed to let the larger conforming GSE loan limits expire in
the next 6 months. In regions like New York City where the
average home cost routinely exceeds the lower-limit threshold,
can private sector lenders continue lending without vital
liquidity from Fannie and Freddie?
Secretary Geithner. That is an important question, and you
can't be sure. But in my judgment, at this stage, based on what
we know, it is reasonable to expect the market to be able to
absorb the impact of that reduction in conforming limits.
I will give you an example of why we think that is the
case. I think it is true that in 2010, only 5 percent of the
mortgages issued in that context were within that temporarily
raised conforming limit threshold, so it is a relatively small
share of the market. The market is coming back in that area.
You can't be certain, but I think based on what we now know, we
think the market is likely to be able to absorb that.
Ms. Velazquez. And if that doesn't happen?
Secretary Geithner. That is something Congress would have
to reflect on. Congress would have to legislate actions to
prevent those limits from falling. But we have to watch
carefully. And, again, one reason why we have been so careful
not to lock in a path for phasing out the government's role is,
there is no certainty in this context and we have to be careful
again not to do damage to the recovery.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Bachus. Ms. Biggert?
Mrs. Biggert. Thank you, Mr. Chairman.
Secretary Geithner, in my opening statement, I said that we
have been looking at Option 1 on this side of the aisle. It
seems that is what taxpayers want. Would you work with our
committee on Option 1 to establish a clear framework, put in
motion reforms that facilitate the private sector?
Secretary Geithner. Of course, we will work with you. But,
again, I would be careful not to be too enthusiastic about that
option because you want to recognize that the consequences of
that could be more concentration in the mortgage market, less
level playing field for community banks, and in a crisis, you
might face the risk that in the end, your only option is a
model in the FHA where the taxpayer may be more exposed to
losses. And although it seems like a more private option, that
risk will be in the banking system, and what that means is
there will be a general implicit guarantee there the taxpayer
doesn't get paid for, so there is risk in that option too.
That is why you have to look at them a little bit more
carefully, and I would caution you from being too enthusiastic
about the stylized versions of even that more limited option,
even if you want a market that is more private than public.
Mrs. Biggert. I think it is a starting point, but I think
when you are talking about the FHA, there has to be work at the
same time with the FHA to make sure that the market goes right
to FHA. So this probably would be an increase in the costs for
FHA as the premiums increase for Fannie and Freddie so that we
get the private sector in there. But there seems to be then a
contradiction between the regulators and HUD as far as how this
is going to work, because--or the Administration seems to be
saying we have to reduce the role of FHA. But the regulators
have what seems to be this restrictive QRM that will limit the
opportunity for borrowers, especially I think the first-time
borrowers, and things like having a 20 percent downpayment is
really going to cause some problems.
Secretary Geithner. You made two points which are very
important points. One is that you want Fannie and Freddie and
the FHA to move together as they try to phase out the
government's role. That is important and we are committed to
doing that. They are going to commit to work together in that
context, because, again, you don't want one moving and the
other not moving and the business just shifting to the other.
But you are right, as you design these new rules of the
game for risk retention for the private market, you also don't
want to create a situation where you increase the incentives
for the government to take on more of that role. You are right
to emphasize that, and I think we can achieve that balance.
But I think if you look forward in the private market, I
think we should return, as an objective return to a system
where homeowners borrow less against the value of their house
and have to put a higher downpayment. That is a very important
protection. It is not the only thing you need to look carefully
at, it is not the only determinant of loss rates, but it
probably leaves the country in a better position if there is a
bigger cushion of equity in people's homes.
It is their most valuable financial asset. People need to
be able to move when they change jobs. If they can't move
because they don't have the equity cushion, it is very damaging
to the overall economy, and it could be very damaging to other
people in their community. And so I think for the broader
market, we want to move to a situation where people put more
equity down in their homes.
Mrs. Biggert. I ran into former Treasury Secretary Paulson
a couple of weeks ago, and he mentioned GSEs and said you
better fix this, and what about being a public utility? I don't
think that was too popular. But that is another thing. Did you
ever consider that as one of the options?
Secretary Geithner. There are variants of Option 3 which
people describe as having a public utility feature. Again, I
would say the following things are true: If the government is
going to provide a guarantee through FHFA or alongside FHA, you
want it to be explicit, you want the government to charge for
the risk of loss, you want there to be private capital ahead of
the public capital so that private investors absorb the loss
ahead of the taxpayer, and you ultimately want the taxpayer to
be exposed to less risk of loss.
But what you don't want to do is have a system where there
is this implicit guarantee or a guarantee that is not
appropriately priced. Those are the things we have to avoid.
But when people say the word ``utility,'' again, you could have
options--versions of Option 3 which would have that
characteristic. You could avoid that characteristic in Option
3. It depends on how you do it.
Mrs. Biggert. Thank you. I yield back.
Chairman Bachus. Thank you. Mr. Watt?
Mr. Watt. Thank you, Mr. Chairman.
Mr. Secretary, I guess I have accepted the notion without
arguing that the private sector is going to be a lot more
involved in providing mortgage financing and homeownership for
upper-income people, and it seems to me that all three options,
1, 2, or 3, are really directed at how you structure that. What
troubles me in this, what, 28, 29, 31 pages, is that there
doesn't seem to be much attention to how low-income people can
achieve homeownership. A lot more attention, with all due
respect to Ms. Velazquez and her line of questioning, to how
they would become renters.
But as I found it, I found one sentence in the whole report
that holds out a hope for low- to moderate-income people to be
homeowners. That sentence is on page 21. It says that the
Administration would support downpayment assistance and
counseling to help qualified low- and moderate-income home
buyers in a form that does not expose them or financial
institutions to excessive risk or cost. Nothing else in this
report that I can find addresses low-income people having
homeownership.
So the question is, how are you going to give--just give me
some ideas about how you give content to that one sentence
which is hedged at the end with the three options, or let's
just be transparent that low-income people are going to become
renters in this country, there is not going to be any
homeownership at the low-income level. If that is where we are,
I would rather know it and have the Administration say it up
front.
Secretary Geithner. That is not our proposal. I am grateful
for you to give me a chance to clarify this. Under any of these
options, we want to make sure that the FHA is able to play the
very important role of making sure that Americans with low to
moderate income can have the opportunity to get a government-
guaranteed mortgage with a very modest downpayment. So we think
that is very important under any of those options.
Mr. Watt. I didn't see that in any of the descriptions.
Secretary Geithner. Central to each of these options, in
any option, in our view, the FHA has to have the ability,
should have the ability, Congress has to decide whether it
will, to provide with a very modest downpayment the ability to
low- and moderate-income families to borrow to finance a house.
That is very important. There is a very good public policy case
for that. So when we say that we have to do a better job of
rental and multifamily, we don't mean at the expense of that
critical role.
In addition to that, as you said, there is an important
public policy question about how much equity, how much should
you be required to put down, how much money should you be
required to put down for an FHA-guaranteed mortgage. Right now,
FHA will guarantee, I think, above 97 percent of the value of
the house.
There are people who argue that even for the low- and
moderate-income family, they are better off if they have to put
a somewhat larger fraction of their income down at the time
they purchase their house, so, again, if they have to change
jobs or if there is a crisis, they have some cushion there for
savings. That is why we propose that there be a targeted
program funded by the government to provide downpayment
assistance to people who really need that assistance, and it is
that combination of proposals that are at the center of this
reform proposal.
So thank you for giving me the chance to clarify that.
Mr. Watt. I am glad you clarified it, because I, for the
life of me, didn't find any of that in these 31 pages. While I
know you are walking a very, very delicate line here of not
trying to agitate my colleagues on this committee, if we are
going to have an honest discussion about this, I think we have
to put those things on the table and be explicit about them and
we can't finesse them or hide them or pretend that--that has to
be done as a part of this process, not as a separate step,
because if it is done as a separate step, it won't ever get
done. Rich people will have homeownership and poor people will
have--and rich people will make money on apartment rentals, but
we will be a renter nation for low-income people.
I yield back.
Secretary Geithner. I agree with that, and you are right to
emphasize it. And, let's just, again, to be fair, we did not do
a good job in helping low-income Americans get access to
sustainable housing finance options. We left them with a system
where it was easy for them to be taken advantage of and they
had none of the basic protections we think people need to be
able to operate safely in a very complex business. So we did
not serve them well in our current system. And a lot of the
support the government provided went to much more fortunate
Americans.
So we have to get that balanced better. But you are right
to emphasize again, as we try to do, that you want to have a
balance of support for homeownership and a balance of support
for affordable rental options. Right now in the country, about
two-thirds of Americans own their homes, and about one-third
rent. But we put much more financial assistance into those who
want to own their home than we do for those who choose to rent.
We have to get that balanced a little bit better.
Chairman Bachus. Thank you, Mr. Watt.
I would also ask all the members to look at pages 20
through 22, because I think including rental, affordable
rental, because I think at least a quarter of our low-income
families spend over half their income on rental income, and I
do think there has been a failure in that regard, and the FHA,
whether they have the capacity, I think that would be a goal of
any reform to focus on low-income people in both rental and
ownership.
Mr. Watt. I am glad to hear the chairman say that. I
haven't heard much of that from your side of the aisle, Mr.
Chairman. I appreciate that.
Chairman Bachus. I think it needs to be part of the
discussion. I think, as the Administration says, only about 32
out of 100 low-income families can afford homeownership, so you
have to consider, as Chairman Frank said, affordable rental
income, too. I can tell you, I think it will be part of the
discussion.
Mr. Neugebauer?
Mr. Neugebauer. Thank you, Mr. Chairman.
Mr. Secretary, thank you again for coming. This is a very
important discussion. I am a little confused. I was kind of
excited when I saw your report come out where you embraced--
maybe it wasn't your number one, but it was the first
recommendation was more of a private market solution. I heard
you say we need to phase out Freddie and Fannie and we can do
that with raising the risk premium so that the marketplace can
create space in there. You lower the conforming loan limits,
you create more space in there.
So along those lines, with Option 2 or 3 you have to go
create something before you start that process, whereas--it
says under Option 2, the government would also have to develop
a backstop mechanism. Number three, it envisions a system where
there is an explicit guarantee of catastrophic risk, and so you
have to go establish some other mechanism in the system.
Whereas in Option number 1, basically you are just creating
space for a market that has been there before, and many of us
think we can bring back. So to me that kind of delays moving
down that road.
Secretary Geithner. Let me clarify that. We believe we have
the authority, and the chairman said this at the beginning of
the hearing, ``we'' being the FHFA and the FHA, the authority
to gradually phase down the role of the government over the
next several years while we work with the Congress to figure
out which mix of options we want for the future. You don't need
to delay that process until you lock in the ultimate design of
what is going to replace Fannie and Freddie. You don't need to
delay that. You can move ahead.
What determines the pace at which you can phase them out
are really these basic questions about the gradual process of
the repair of the housing market and our success in clarifying
the rules of the game so that private capital will come in.
That is what will determine the pace.
Mr. Neugebauer. But, Mr. Secretary, you are going to send a
very mixed signal to the private sector then if you say hey, we
are ratcheting down, we are going to create space for the
private sector, and, by the way, while we are doing that, we
are going to set up these new mechanisms. I think the private
market says, I think we will wait until you get the new system
set up. So I think that is a road that you go down.
I think one of the things that the mortgage market needs
now, because I have talked to a number of people all the way
through that chain, is they need some certainty. So, I think as
you start down that road, you have to make that commitment.
I think one of the things that I would ask you in order to
create that certainty is, do we need a definitive date where
the switch is turned over? Because at some point in time you
have to say it, at this point in time, the taxpayers are not
guaranteeing these mortgages.
Secretary Geithner. I understand the risks you are saying
and I think you said it very thoughtfully. That is one reason
why you can't delay indefinitely legislation that would define
the ultimate solution. It is important to recognize that if we
do nothing, if we don't legislate, Congress doesn't legislate,
then we are left with authority under what is called HERA that
in many ways would recreate Fannie and Freddie at the end of
the process, in a slightly different form, with many of the
risks in that context, and we don't think that would be
prudent.
So you are right to say that you want to provide as much
clarity about the endgame as possible, as quickly as possible,
but to do that in a sensible way does require legislation. So
it is a good reason to try to move. That is why I have
suggested that this is something Congress wants to do within
the next 2 years. You don't want to wait 3 to 5 years to do
that.
Mr. Neugebauer. One of the primary functions that Freddie
and Fannie play is the aggregation, being able to bring the
mortgages in and provide securitization. What about the idea of
at some point in time just letting them, as of this wind-down,
continue the aggregation function, but at some point in time,
eliminate the guarantee and let them continue to act as
aggregators and sell those securities to the private market?
Secretary Geithner. I think there is something to that and
you can envision that being part of any long-term solution.
There is a lot of talent in those institutions and there are a
lot of very valuable systems that make that process work
better. There is a lot of economic value in those systems. So
you are right to say that depending on where Congress goes with
this, you might want to find a way to preserve what is still
very valuable in both the people and those systems.
Mr. Neugebauer. Is one of the ways, in other words, the
portfolio that Freddie and Fannie have, they are supposed to be
reducing those. What we understand is that is kind of a tricky
situation. They are selling off, they are rolling off some of
that, but actually they are bringing loans out of some of the
securities and bringing those in and reworking those by
repurchasing them.
Is there merit in letting Freddie and Fannie sell off some
of their portfolio in a non-guaranteed portion? What I worry
about is they have the interest rate risk, so obviously when
they sell those securities, that interest rate risk goes on.
But if they sell them with a guarantee, then basically the risk
is still there, and I am looking for ways to minimize the
taxpayers' exposure here.
Secretary Geithner. I agree with you. You are right, as you
said in the beginning, that by gradually winding their role
down, and there really is no alternative to doing it, they are
still issuing guarantees, so there is some risk of exposure to
the taxpayer in that process. But we just see no alternative to
that. You can't flip a switch today and have the private market
come in and take over 90 percent of the market again. It is
just not realistic, as you know. So there is no real option
except for them to be issuing guarantees, but more
conservatively underwritten, more expensive over time, through
this transition process.
You are right that their retained portfolio includes a lot
of their own guaranteed mortgages, so if they sell those into
the market, they are still guaranteed in that context. I just
don't see a better way to--I don't see a way to solve that
basic problem. We are living with that. That is the price of
the mistakes of the past. Our job is to make sure that, again,
we wind them down in a way where we reduce the risk of loss to
the taxpayer ultimately over time, and I think we are doing a
very good job of bringing down those losses, those estimates,
carefully over time. But we are going to stay at it, and it
depends a lot on the quality of the judgments that the FHA
makes, and the FHFA makes.
Chairman Bachus. Thank you. Mr. Ackerman?
Mr. Ackerman. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
You have stated that the GSE loan limit is going to be
lowered from its current elevated level of $729,000 to $625,500
starting in October of the current year. In my district, which
is in New York City and Long Island, the median home price is
about $500,000. That doesn't mean that a person having a home
that costs them $600,000 is living in some extravagant home.
Home prices are based on a number of things, including the cost
of the actual construction and the location and cost of living.
That same $600,000 house in my district, which would be a
fairly modest house, would cost under $300,000 in a lot of
other places in the country, so these aren't necessarily people
who are living extravagantly.
This is going to affect my constituents tremendously and
they are going to be among the first to feel the effects of the
larger role of the private mortgage market.
What can people like that or my constituents and other
people in other parts of the country expect in terms of credit
availability and interest rates, given the fact that private
capital has been largely absent over the past few years and
that the GSEs have been a participant in over 90 percent of the
loan originations? In your view, is the private market ready to
come back and do they actually want to play a role or will the
trauma of the past few years make them hesitant to lend or
hesitant to lend at least at what most people today consider
reasonable rates?
Secretary Geithner. That is a very important question. The
way the law of the land is written now, without action by the
Congress, those limits do come down, but they still preserve
the capacity for differentiation. So they will still be higher
in parts of the country where home values are much higher than
they will be in other parts of the country.
Mr. Ackerman. You are talking about the rates?
Secretary Geithner. When the conforming limits, if they are
allowed to revert or come down in October, without action by
the Congress, that is what happens, they still are
differentiated to reflect the very different factors driving
home values. And I think the private market now is not--
Mr. Ackerman. You are saying that there would be a regional
cost-of-living adjustment?
Secretary Geithner. There is a differentiation in the way
the law is written now, and I think that is very important to
preserve. I think, again, for this transition process we are
going through, you need to have more differentiated limits to
reflect the very different factors that affect home values
throughout the country. That is very important.
You asked whether the private market is coming back yet for
those higher-value mortgages, and I would say not that much
yet. It is a very slow, gradual process. And one of the reasons
why we want to proceed so carefully is because we want to be
careful not to again jeopardize the recovery, jeopardize the
prospect for growth and repair of the housing market.
Mr. Ackerman. Is there a rate card or a scale that is
available?
Secretary Geithner. There is, but I don't have it with me.
I would be happy to share it with you.
Mr. Ackerman. Thank you very much.
Chairman Bachus. Thank you, Mr. Ackerman.
Mr. Miller?
Mr. Miller of California. Thank you, Mr. Secretary. It is
good to have you here today.
We tend to be focusing very specifically on Freddie and
Fannie, and yet when you look at the housing downturn, it has
been global. But the problem I have is I don't think we are
looking at the problem in the marketplace. And we keep talking
about Freddie and Fannie's default and the failures they have
had and the money they have lost.
As I see it, the GSEs, Fannie's seriously delinquent loans
are about 4.2 percent. That is not a good number. Freddie's is
about 3.1 percent. That is not a good number. Subprime ARMs
delinquent that are not agency loans, 38.7 percent. Subprime
loans delinquent, non-agency, 26.5 percent. Even in your prime
loans, private sector loans, just delinquent is 5.4 percent.
There is a problem here. We are shining a light on Fannie and
Freddie, but we are not saying there is something seriously
structurally wrong with the entire market.
Looking at all the numbers I have seen, you keep talking
about your affordable housing goals. Freddie and Fannie, in
1998 and 2000, basically started trying to compete with the
private sector, became very lenient in their underwriting
standards, to raise their percentage of the marketplace. It was
like a race to the bottom. Yet if you look today, they are
outperforming the marketplace, and they are basically
performing their goal, they are providing liquidity in a
stressed marketplace: FHA, VA, Freddie and Fannie, 92 percent
of the market.
We are not addressing the problem. The loans you are making
today through Freddie and Fannie are performing very well. Yet
the loans that are performing the best in high-cost areas you
are wanting to completely eliminate. So let's eliminate the
high-cost areas where people likely are able to perform in and
just take that sector out.
My concern is we are saying we are going to bring the
private sector dollars into the marketplace. Where were they at
in 2005-2006 when the market was heated? You had Countrywide
selling junk to the marketplace. The only bundled securities
you had that were any good were the GSEs. All of those
mortgage-backed securities by the private sector are worthless,
in many cases.
So we are not addressing the serious problems in the
housing industry. We are saying we are going to get the
government out.
But another problem I have is when the TARP funds were
issued to the private sector, you were charging 5 percent. You
are charging Freddie and Fannie 10 percent. Are they paying it?
Secretary Geithner. As you know, in a sense--
Mr. Miller of California. My question is, why would we
charge them double if we are trying to not create more of a
problem than we are charging anybody else? We are not paying 10
percent for money, the Treasury. When you sell notes, you are
paying very little. Yet you are saying Freddie and Fannie are
seriously distressed today, so let's charge them 10 percent
interest on the money we forward them. How much sense does that
make?
Secretary Geithner. If it makes you feel better, in effect
the taxpayer is paying that. It is one hand paying the other.
Mr. Miller of California. But you are going to get the
money back from them.
Secretary Geithner. No. As I said, we are not going to
recover fully the amount of investments the taxpayer put in. It
is not possible. But it is going to be substantially lower than
anybody thought it would be.
Mr. Miller of California. What do you think it would be?
Secretary Geithner. In the budget, we estimated somewhere
around $75 billion, but that doesn't take account of the fact
that we are going to raise the guarantee fees gradually over
time. So it will be less than that. That is an extraordinary
amount of money.
Mr. Miller of California. $75 billion is a lot of money. If
Freddie and Fannie had not been there in 2007, 2008, 2009,
2010, what kind of a hit do you think housing values would have
in this country when there was nobody to make the loans?
Because you can't tell me the private sector was there, because
they are not.
Secretary Geithner. I don't think we are disagreeing as
much as you think. You are absolutely right--
Mr. Miller of California. You are talking trillions of
dollars.
Secretary Geithner. It would have been much, much more
devastating than anything we faced, much more devastating.
Mr. Miller of California. If 61.5 percent of all the
taxpayers in this country own a home, and we allowed the values
of their homes to go down by trillions of dollars--
Secretary Geithner. I agree with you completely.
Mr. Miller of California. Who is getting hurt worse?
Secretary Geithner. I agree with you completely. That is
why I say that as you examine the future options, be careful to
make sure you preserve some capacity for the government.
Mr. Miller of California. Why don't you give--
Secretary Geithner. To protect the economy and the innocent
victims from the kind of crisis we went through.
Mr. Miller of California. You have to have the numbers. Why
don't you go back and tell us what year they started to make
the loans that had a higher propensity of default rates and why
that occurred. I looked at Freddie and Fannie. They ratcheted
up in 1998 and 1999 and specifically 2000, completely ratcheted
down their underwriting standards. Those two went in different
directions. This did not have to occur.
Secretary Geithner. It was preventable. They pulled the
market down, I agree with you.
Mr. Miller of California. Before we make a huge mistake,
would you get us the data that says why they went wrong and
when and where so we can analyze the problem rather than
throwing the baby out with the bathwater? Because Fannie lost
money in 1985. Freddie never lost a dime in their history until
recently. Let's go and find out why they lost money, rather
than just saying they are the bad guy while they are
outperforming the rest the marketplace. I would love to have an
hour to talk to you.
Secretary Geithner. Don't let them off the hook, because
they made a lot of mistakes and did not hold capital against
those losses, and Congress made it possible for that to happen.
Chairman Bachus. Your time has expired.
Mr. Sherman?
Mr. Sherman. Yes. I would like to build on Mr. Miller's
questioning.
There is this view that lenders lost money because they
made bad loans. That was true at the beginning. But then with
housing prices declining, lenders lost money when they made
good loans, because if you make 100 good loans, with at least
some of them, you are going to have a divorce, you are going to
have some guy who loses his job, somebody is going to die, you
are going to have a health crisis. And in the old days, pre-
2007, that would happen a typical amount of times, and they
would sell the house at a profit.
Anybody who invested in good loans, prime, people who
really documented their income, still lost money. I don't know.
To what extent are Fannie and Freddie's losses due to their
subprime and Alt-A lending, which was a small part of their
overall portfolio, and how much of their losses are due to
losses on prime loans where you just had an unexpected level of
default and yesterday's profitable sale is today's short sale.
Secretary Geithner. I would be happy to give you the
numbers in more detail, but since most of their book is prime,
most of the losses are on the prime. But still, they lost a
substantial amount of money in what they did in Alt-A.
Mr. Sherman. And yet if the most pristine and conservative
banker started his bank in late 2008 for the purpose of making
the most prime of loans, I am sure they lost money on the loans
they made in 2008 and 2009.
Secretary Geithner. For the reasons you said, but also
because when unemployment goes from 5 percent to 10 percent,
people lose their jobs and that huge shock to income, you are
going to see a big increase in default rates.
Mr. Sherman. The issue before us short term is the
conforming loan limit. In Los Angeles, it is easy to get a $20
million loan to buy a home in Malibu, because if you are buying
a home in Malibu, you either know your banker or you are the
banker. But it is almost impossible to get a loan in the
$800,000 range.
What could happen to this economy if we precipitously allow
that $729,750 that applies to roughly 10 major metropolitan
areas, including Gary's and mine, what happens if that were to
precipitously drop? What is the effect on housing prices in Los
Angeles and New York?
Secretary Geithner. As I said several times, I think you
need to be very, very careful as you look at what to do with
conforming limits with guarantee fees, with underwriting
standards, that we not magnify the pressures on a still very
delicate market. Again, the failures we produced, that this
government produced, were, just to be fair, they were
bipartisan failures, and we have to be very careful as we try
to fix what is broken, we don't make this crisis worse for
people. I think that is a responsibility everybody shares here.
So we have to be careful as we do it.
But I do believe that it would be prudent based on what we
now know today for Congress to let those conforming limits fall
modestly, as they are scheduled to do at the end of this year.
Mr. Sherman. Speaking for those who are trying to buy and
sell homes in Los Angeles, I don't know if you create a double-
dip recession nationwide, but you certainly do in many areas,
including the second largest metropolitan area. I would point
out that the failures of Fannie and Freddie are bipartisan, but
they are unicameral. The House of Representatives passed a bill
that was carried through this committee under Republican
leadership that former Chairman Oxley explains would have
prevented this crisis, and it was over on the other side of the
Capitol where others blocked it.
Finally, if we go bad bank-good bank, then the new GSEs'
profits belong to someone else rather than those profits being
used to pay what we hope is less than $75 billion in losses.
Doesn't it make sense to make sure not only that future
operations are profitable, but that those profits are used to
repay the taxpayer?
Secretary Geithner. I agree. And I don't think--I haven't
seen a good bank-bad bank version that would achieve the
objective of minimizing risk of losses to the taxpayer.
Chairman Bachus. Thank you.
Mr. Campbell?
Mr. Campbell. Thank you, Mr. Chairman.
Mr. Secretary, in your comments you talked about the
continuing wind-down of Fannie and Freddie's investment
portfolios at a rate of no less than 10 percent annually. Some
of that is wind-down. Some of that, however, will be selling
into the marketplace, which we have discussed before.
What has been done in that regard thus far, and does this
mean that we are going to be selling off 10 percent of Fannie
and Freddie's portfolios into the marketplace in the balance of
this year?
Secretary Geithner. I can't tell you precisely the mix
between natural runoff and what would be an actual sale, but I
can say that based on the experience so far, the market has
been able to absorb the wind-down on that pace. I am happy to
provide more details to you on that.
You can't be certain how the market is going to evolve in
the future, but we think that it is reasonable and prudent to
adhere to that path.
Mr. Campbell. And you do expect to be selling--obviously
with interest rates where they are, some of this can be sold
off at a profit?
Secretary Geithner. I want to be careful how I say it. I
can say for the Treasury portfolio that would be the case.
Mr. Campbell. Okay. I suspect you know this, but in terms
of the three options of where we go in the future, there is not
unanimity here.
Secretary Geithner. That is my impression.
Mr. Campbell. On either side of the aisle. So I will
confess that I am a public utility model type guy. It sounds
like you don't particularly like that term, so let's--I guess
it falls within Option 3 in your set of options. Let's call it
instead something where there is a guaranteed or Federal
reinsurance that is available to multiple entities that is, as
you suggested, explicit and limited, as opposed to the Freddie
and Fannie model where the guarantee was implicit and
unlimited.
What is your reaction to that sort of model going forward?
Secretary Geithner. I think it has a lot of merit. But,
again, you want to be careful to design it in a way that makes
sure you meet those tests. Again, I want to emphasize something
that Mr. Hensarling suggested earlier, which is if you are
going to have the government provide a guarantee, through the
FHA or through some hybrid mechanism like you described, what
you need to make sure is that it is priced to cover risk of
loss, the taxpayer is substantially--the taxpayer is behind a
bunch of private capital in that context, not ahead of it, and
you want to make sure that you leave politics out of the
setting of the basic fee. That is very important. And you can't
create a system that is going to be vulnerable to your
successors and lobbyists and other stakeholders trying to put
pressure to underprice those guarantees in the future.
Mr. Campbell. I couldn't agree with you more on those
points. If we don't do something like that, if we do something
that has less involvement, my concern, the housing market is
such a huge portion of the economy, as we witnessed in 2008, if
left without some stability provided by the government, you
will have vicissitudes as banks, which they often do, they get
all excited and all of a sudden they want to loan everybody in
the world money for a house, and then after they have some
losses, all of a sudden they don't want to loan to anybody for
a house. This happens in other segments of the economy and it
affects those segments, makes them very volatile, but it
doesn't have that huge an effect on the overall economy because
they are not that big. But the housing market is so big if we
subject it to those vicissitudes, I am afraid that we will have
some significant additional volatility in the overall economy.
Do you agree?
Secretary Geithner. I think there is that risk, and you
state it very well, and that is why I want to emphasize over
and over again that when you look at alternative models that
look like they have more of what people say is a private
character to it, a more purely private character to it, most of
those systems out there involve banks holding all of that risk.
And, as you know, the history of financial crisis is largely a
history of banks and real estate together, and the government
ultimately is there, it is just behind the banks with this
implicit support that they don't charge for. So it still leaves
the taxpayer exposed to loss.
So, again, the really difficult challenge is to try to make
sure you have a system where you have more conservative
standards for underwriting, homeowners hold more equity in
their homes, banks hold more capital against risk. The
government is very limited.
Mr. Campbell. Let me sneak in one final question here. You
talked about how we may have higher downs, that will require
higher downs, and that there may be higher costs for mortgages
for moderate-income people, etc. How can we reconcile that,
taking rental aside, but for low-income people then saying no,
we are going to have modest downs and perhaps no more increase?
In other words, how can we tell moderate-income people that it
is going to be harder to buy a house, and for lower-income
people, it is going to be easier?
Chairman Bachus. Let him answer the question.
Secretary Geithner. That is an excellent question. Again,
that is the kind of judgment Congress has to make. But my own
view is that there is a good public policy case for the
government providing some assistance for low- and moderate-
income Americans so they can afford that first house. I would
want to try to preserve that, carefully design it in any system
going forward. But that objective is consistent with returning
our system to a system where the private market plays the major
role in housing finance, and if we get better oversight, better
capital requirements, better underwriting standards, we will
have a more stable system.
Chairman Bachus. Mr. Capuano?
Mr. Capuano. Thank you, Mr. Chairman.
Mr. Secretary, this is all very interesting, but I think we
are mixing a lot of apples and oranges when we are talking low-
and moderate-income housing and Fannie. The truth is we are not
even talking today for some reason about HUD or about tax
credits or all of the other things that go into low- and
moderate-income housing. And I have to tell you, Option 1,
Option 2, Option 3, I feel like asking, can I get a salad
instead of soup? It is hard for anybody to follow.
Secretary Geithner. Would you like the salad and the soup?
Mr. Capuano. I would love to, if I could, but I don't think
we can afford that. For me, I look at housing as we all do. We
all come to the table with our own experience.
I live in my first and only owner-occupied two-family home.
I don't know if there is anybody else on this panel or in this
room who lives in their own two-family home. I bought it
because I couldn't afford a single family home. My children
went to college on the basis of remortgaging that home. If I
didn't have that home, my kids could not have gone to college.
Even with that, they came out with significant loans.
So, for me, I really want to get to the bottom line. When
we are done, I would like to know the Administration's goal on
numbers. When anybody I know walks in to get a mortgage, they
don't care who it comes from. They probably don't even know,
Fannie Mae, FHA, private. They just want to know how much, what
is it going to cost me, and will you give it to me.
And for me, I come from one of the markets like most of the
people in this top row, I come from a very expensive market.
Most of the people in my district probably would never or
seldom qualify for a Fannie loan. They just don't, because the
houses are too expensive even with the new numbers. Some do,
but not many.
But we have a lot of young people in this room today, many
of whom I am willing to bet do not own a home, and if I were
them, I would be asking, when is it my turn? If a young couple,
two good jobs, good education, making $100,000 together, paying
rent, probably paying student loans off, paying one or two auto
loans off, trying to put something aside for everything else,
what do you think is a fair amount to ask them for a moderately
priced home? Again, that number changes. Mr. Ackerman is 100
percent right, Mr. Miller is right. A moderately priced home in
my district is a castle in some of the other places for the
numbers.
But a moderately priced home, what do you expect them to
pay? Do you expect them to pay 20 percent down? Do you expect
them to pay 7 or 8 or 10 percent? How are they ever going to be
able to get this together and how will they ever hope to afford
to send their children to college?
Secretary Geithner. That is an excellent question, and let
me just say it again, we think it is very important to make
sure that the FHA, which is HUD through the FHA, still has the
capacity to provide mortgages at reasonable cost to people who
cannot afford to put a lot of money down on their house.
Mr. Capuano. I want to be clear. I am not talking at the
moment about people who have a lower education or have limited
income. I am talking about the people in this room. All of the
ones that I know are very well educated, very intelligent,
making decent incomes, and have probably a reasonably decent
future. But as they are living their daily lives, it will be
almost impossible for them to put aside, on top of rent and
student loans, $60,000, $70,000, $80,000 for a downpayment and
then qualify for that, especially for young women who may want
to have a family someday.
How are they going to be able to do that if we don't
address the long-term goal? How much are they going to pay?
What is that goal?
Secretary Geithner. Again, in this system today, and I
think we would want to preserve part of this, you would be able
to go to the FHA, you would have to go to a bank and get an
FHA-guaranteed mortgage and only have to put down a very small
fraction of the value of your house, and I think that is
appropriate to try to maintain for people of low and moderate
income.
Where Congress defines those lines is a choice for Congress
to make. For the rest of the American people, we want to have a
system where the private market provides that finance, and we
think that is possible.
Mr. Capuano. I think I am talking about the vast majority
of the American market. I am not talking about the lower end.
Maybe I am wrong, but all the young people I know in this room
are very intelligent people. They are going to have a great
future. They are not the low end of the socioeconomic scale.
They are going to have a great future. How are they going to
get in?
Secretary Geithner. I said low and moderate, but, again,
this is the fundamental choice and you are right to raise it,
which is the way to ask the question is, is it fair to ask all
Americans to put their money at risk to help subsidize access
to housing for more fortunate Americans? Where you draw that
line is a judgment Congress has to make. You are right to say
that if you put it too low, it will still be unfair.
Mr. Capuano. For me--and I guess that we all have to ask
ourselves that question--I am not interested in pulling up the
ladder because I got lucky enough to get my house. I have
children; I want them to be able to afford a home someday, a
reasonable home in a reasonable neighborhood, as I do everybody
else in this room.
And I have to think--I agree with you, those are the
questions we have to ask ourselves. It is also the question the
Administration has to ask. And as we go forward, though I
appreciate all the esoteric academic exercises we have to go
through, in the final analysis, it is about how much. How much
are we going to ask for them?
And I think this Administration has to do a little bit
more--
Chairman Bachus. Thank you, Mr. Capuano.
Mr. Capuano. --than this White Paper to help us answer this
question.
Thank you, Mr. Chairman.
Chairman Bachus. Mr. Pearce?
Mr. Pearce. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for being here.
I am still trying to get my hands wrapped around the
comment that you made that we just need the tools to protect
the innocent. With all due respect, when you have a policy of
``too-big-to-fail,'' then you have a policy of ``too-small-to-
succeed.'' That is the State I represent, New Mexico. So when
you all--you, the regulators--suspend prompt corrective action
for all the big banks, all the small banks still have to comply
with prompt corrective action. And it is very punitive on the
small banks.
You indicate on page 3 that you are worried about
sufficient capital. When Basel II was agreed to back in 2003 or
2004, we allowed the big banks to determine by models their own
capital requirements. So are the big banks still allowed to
determine the capital requirements under Basel II, or is that
something that you have changed? Is that one of the tools that
you have--
Secretary Geithner. I want to make it clear, I would never
support a system where you allowed banks to choose how much
capital they hold against risk.
Mr. Pearce. Am I incorrect that Basel II basically allows
them to set their models and declare their own capital
requirements? Is that a mistake on my part?
Secretary Geithner. Because Basel II took so long to put in
place, it actually never applied in this context. Under Basel
III, banks have to hold more capital against risk, and they
don't get to decide.
Mr. Pearce. But Basel III is not in effect yet.
Secretary Geithner. No, but it will be.
Mr. Pearce. Oh, okay. That is--as long as it is not in
effect and II is.
What about the mark-to-market? When I was--back in my
district, in about 2008, I had Indian hotel owners who dominate
in New Mexico--it is a small market, kind of low margins--and
they were being told they had to come up with $750,000 in new
capital for a $2 million or $3 million facility because of the
re-evaluation of the mark-to-market rules.
So is that, sort of, protecting the innocent there when
the--
Secretary Geithner. You are not going to find me
disagreeing with you that you want to have a system where you
don't create these perceptions of too-big-to-fail. And I
believe very strongly that large institutions need to be forced
to hold more capital against risk than relative to small
institutions. So if that is your view--
Mr. Pearce. If I could catch you right there, you believe
that those institutions should hold more capital, and yet--
Secretary Geithner. Relative to risk.
Mr. Pearce. --institutions were complained about to--the
SunTrust institution was complained--when it was trying to put
more reserves as capital requirements. Then they were penalized
for adjusting their earnings.
And so, in good times, banks are prohibited from putting
more capital aside; and in bad times, they are punished for not
putting capital aside. And so where does all this stuff--
Secretary Geithner. I am tempted to say--
Mr. Pearce. So the innocents out there are wondering, when
are you going to worry about us?
Secretary Geithner. I agree with you about that. And I am
tempted to say to you, it is so much worse than you think.
You are right to say that the accounting system we had in
place made it harder for banks to put more reserves aside
during the boom against loss than would have been appropriate.
I agree with you about that.
Mr. Pearce. So if we scooted over, then, to the size of the
problem, the estimates at the end of 2006, where we had $1.24
trillion in subprime loans, only $300 billion of those, 0.3,
were held in FDIC-controlled banks. If you give them 75
percent--75 percent of those were performing at that point,
which means $75 billion nonperforming. And if you took a 50
percent write-down on those, you get somewhere in the
neighborhood of $38 billion real risk associated with the
subprime.
And then if you take another 25 percent of all the
performing loans, write them down, you get another $56 billion
or $58 billion. So you get about $100 billion of exposure. And
we had a $12.3 trillion total in assets in the banks at that
point, $1.4 trillion in equity, $150 billion in earnings.
So the total exposure in the subprime market appears to be
in the $100 billion range, and yet we took very dramatic,
dramatic actions. That, to me--I question whether or not we
took the right actions after the fact.
Secretary Geithner. You mean in terms of the reform
legislation Congress passed or in terms of the actions--
Mr. Pearce. No, in terms of the responses. The responses--I
was sitting here in Congress at that period--appeared to be ad
hoc. They appeared--
Secretary Geithner. You think we overreacted?
Mr. Pearce. I--
Secretary Geithner. The government overreacted?
Mr. Pearce. They appeared to be ad hoc.
Secretary Geithner. Oh.
Mr. Pearce. And we let Lehman Brothers fail. Then we, the
day after, 2 days after, supported AIG; 2 days before, Freddie
and Fannie. And so--
Secretary Geithner. I would be happy to respond to--
Mr. Pearce. --we were sending mixed messages.
Secretary Geithner. I would say that this country came into
this crisis without the tools not just to prevent crises safely
but to respond when crises happened. And that is one reason why
the crisis was so deep and severe, and it is one reason why
Congress had to legislate in a panic at particular stages of
the crisis. That should never happen again.
And one of the most important things that the financial
reform legislation does is give the government better tools in
an emergency to wind down these institutions without the
taxpayer being exposed to the loss. It is just for that reason.
But you are right to say that the tragic mistake this
country made was to build a system where the government could
not come in and protect taxpayers, protect the economy from the
mistakes that large institutions made.
Chairman Bachus. Thank you.
Mr. Pearce. Thank you, Mr. Chairman.
Chairman Bachus. Mr. Lynch?
Mr. Lynch. Thank you, Mr. Chairman.
And thank you, Mr. Secretary, for helping the committee
with its work.
I want to look forward here. I know we could argue about
who did what when, but I think it is important here that we try
to figure out a way to wind down Fannie and Freddie, as you
have suggested.
And I think on your point, as I look at Option 3, there are
more tools, if you would, within that framework to influence
the markets and to provide some relief when necessary.
I think that the idea that this government reinsurance
would only apply to certain securities, mortgage-backed
securities, that comply with very strict underwriting
standards, I think that could offer a great incentive to
getting the type of product we would approve of and that would
be sound, especially when looking at what happened in the
previous crisis, when you had Standard & Poor's and Moody's
stamping ``AAA'' on everything. If you had those tight
requirements on underwriting, I think that could stabilize the
market.
As well, I think that having the loss allocation placed on
these private guarantors also provides that first-dollar risk
that would be absorbed by the private sector instead of the
government. And I like those ideas.
However, having been here for a few years, I know there are
some constituencies out there, such as the banking industry,
such as the housing industry, that would want to have as many
products comply and get reinsurance as possible. And these
private guarantors would also want to have the backstop as
close as they could so that their losses were minimized and the
public losses were probably maximized.
How do you deal with that issue, where you have these
constituencies and they are pushing against what you are trying
to do? And my fear is that, as we get out of this crisis and we
get more toward a period of normalcy, that we don't have the
robust oversight of these private guarantors, and we may end up
back in the same place because of a lack of oversight, and the
taxpayer ends up at risk again.
Secretary Geithner. I think you have figured this out. You
have it exactly right. I think that is exactly the mix of
advantages and risks in designing some variant of Option 3. So,
for Option 3 to work, it is very important to make sure that
you have to have these basic conditions.
Absolutely, you have to have the capacity to make sure you
set capital requirements and oversee those types of mortgage
guarantors. That would be an absolutely necessary condition.
Absolutely, it would be necessary to make sure you had the
freedom, independent of politics, removed from politics, to set
very conservative, very strict eligibility requirements for
what would be eligible for a guarantee. It is absolutely
important to make sure that that guarantee is priced on what is
an economically sensible estimate of potential future losses,
independent of political influence.
And one reason why we have been a little careful not to
commit is to say that, fundamentally, whether you like Option 3
or Option 2 or Option 1 or some mix of those things, it depends
a lot on whether Congress is willing or able to design a system
that is less vulnerable to political influence from people who
would like to benefit from the subsidy from the government.
Mr. Lynch. Mr. Secretary, the other thing I wanted to ask
you about is, the definition of ``catastrophic'' would seem to
be agreeing that the government should step in to prevent--at
that point of catastrophic loss, I guess.
And my guess is, I know what we just went through was
catastrophic, so I know that much complies or comes within your
definition. But, also, in reading through this and the
President's proposal and the report of the Administration, it
would appear that the other definition would be, ``after the
private guarantor is wiped out.''
Does that trigger ``catastrophic,'' or is there a reinsurer
beyond that?
Secretary Geithner. You are talking about in the context of
Option 3, variants of Option 3?
Mr. Lynch. Yes, please.
Secretary Geithner. One way to do it is to say you have no
exposure to the taxpayer until the guarantor has failed. That
would be one way to design it to make sure there is enough risk
ahead of the taxpayer.
And you are right to say that where you set those lines is
what is important to the economics of the whole arrangement. It
is very hard to do, but it is not beyond our capacity to design
a system that works dramatically better than the system we had.
Chairman Bachus. Thank you.
Secretary Geithner. So I am actually more optimistic you
can design something in that area that is not nearly as
vulnerable as the system we had with the GSEs to the types of
failures we saw.
Mr. Lynch. Thank you, Mr. Secretary.
Thank you, Mr. Chairman.
Chairman Bachus. Mr. Posey?
Mr. Posey. Thank you, Mr. Chairman.
Thank you for being here today, Mr. Secretary.
In your testimony, you indicate that your objective is a
healthier and more stable housing finance system with a broader
goal of helping our economy recover. A part of stabilizing our
economy is to ensure there is adequate capital in our financial
institutions so that money is available for lending for
housing, construction, and commercial purposes. You have
indicated it is one of your goals, and I assume it is part of
the Fed's goal for QE2.
Given that goal, I wanted to call your attention to a
recent proposed regulation from the Internal Revenue Service
that could have a devastating effect on the capital in U.S.
financial institutions. This rule proposed by the IRS could
lead to several hundred billion dollars leaving the United
States and fleeing to low-tax jurisdictions.
It is my understanding that for the past 90 years, our
national policy has been to encourage foreigners to put their
money in our banks. That money goes to work in the United
States economy in exchange for those individuals earning some
interest. And they have the assurance that their money is safe
and sound. They also have the assurance that corrupt
governments don't have access to that information. I think that
is a win-win situation, and you are shaking your head ``yes.''
I think you do, too.
The proposed IRS rule would force banks to hand over
interest payment information to the IRS. There would still be
no tax on the interest earned, but the IRS would, in turn, have
this information to turn over to a foreigner's own country.
This was a bad idea when it was first proposed in 2001,
and, wisely, the Administration and Congress rejected it. It
was a bad idea then, and I think it is a bad idea now. And I
look forward to working with you so that we can maybe do that
again this time around.
The flight of between $200 billion and $400 billion from
U.S. banks, as apparently would happen if this regulation were
put into place, would be devastating to our economy, I think.
Furthermore, it would raise safety and soundness issues for our
bankers and have significant deposits from nonresidents--affect
those.
Do you agree that this is a bad idea and that it has come
at a bad time?
Secretary Geithner. Congressman, I am not completely sure I
know which draft regulation you are referring to. I think I do.
And if I am right, I don't think it has the risks that you are
suggesting. But I would be happy to spend some time and talk to
you about it and see if we can figure out a way to address your
concerns.
Mr. Posey. I would greatly appreciate that, because I think
we are going to need your support here.
Again, do you think the housing market has bottomed out
yet?
Secretary Geithner. It is very hard to know. We have
unemployment between 9 and 10 percent. And although the economy
is growing and though you have had a big, big adjustment in
house prices--housing is much more affordable now--I think, by
any judgment, you still have a lot of damage for the market to
absorb over time. And that is going to take a fair amount more
time.
Mr. Posey. Yes. And I think we all know that. I just
wondered about your personal opinion, yes or no, if you thought
it has bottomed out. And I won't go in there--
Secretary Geithner. I am a very careful person--
Mr. Posey. I won't be insensitive. I apologize for seeming
insensitive sometimes and being impatient when the people I
represent have been ripped off for billions of dollars. People
have died over this issue, or this economy. It is really
serious outside the Beltway to real, live people.
I am not sure, just as a comment I wanted to make, that a
larger downpayment for FHA is going to help anything. I know
for over 30 years, most people bought their first homes with 3
percent FHA downpayments, and they paid them back. There are a
lot of zero-downpayment VA loans paid back without problems.
We never had a problem until Congress got involved and
invoked its will on Fannie Mae and Freddie Mac under the
impossible dream that everybody should have a home if they
wanted it, whether or not they had a job, whether or not they
had income, whether or not it was worth the loan amount.
I think if we just get people back to doing their jobs, the
3 percent downpayment is going to work out just fine for this
country.
And you and I talked before about regulators who were
taking performing loans and classifying them as nonperforming
loans because, in their esteemed opinions, they shouldn't have
been performing loans. The standard to determine a performing
loan, historically, has been whether or not the loan is
performing.
Can you give us any kind of help on the ground, back in our
districts, to take this arbitrary and capricious treatment of
our--or to make the arbitrary and capricious treatment stop by
some of these out-of-control bank regulators, who are
apparently overreacting for their failures to do their job in
the first place?
Secretary Geithner. If you gave me authority to do that, I
might be able to do it. But that is their authority.
What I can do is--I share your concern. And I know that if
you have talked to Chairman Bernanke and Chairman Bair and the
head of the OCC, that they are worried about this problem, too.
And they are working to try to make sure their examiners bring
a careful and balanced approach to those judgments and they
don't overdo it after, perhaps, being a little bit
accommodating in the boom.
I agree with that concern. And I have passed on those
concerns to them every time I hear them, as I am sure you have.
And they are working on it.
Chairman Bachus. Thank you, Mr. Posey.
Mr. Posey. Thank you.
Chairman Bachus. Mr. Miller?
Mr. Miller of North Carolina. Thank you, Mr. Chairman.
Mr. Secretary, in your prepared testimony, you said that
the Administration is committed to a housing finance system in
which the private market, private capital is the primary source
of mortgage credit. And you said that that would be subject to
strong oversight, strong consumer and investor protections.
It is pretty clear that private capital has not come back
in this market. There has been one issue of $236 million in the
private-label mortgage-backed securities market, which is an
asterisk compared to what it had been before.
In response to questions by Ms. Waters, you elaborated some
and said that we needed more standardization in the market and
better disclosure so investors know what they are buying, which
is consistent with what I have heard from investors.
But they say that the first effort by the SEC does not
quite get there. SEC 193 allows greater disclosure of due
diligence, but it is due diligence still by the issuer or a
third party hired by the issue. They want to have the ability
to do their own due diligence, to sample the pools, to see what
they are buying.
And more important, they say it has to be enforceable. They
actually have made--more than one has made the comparison of
this mortgage market to doing business in Russia now and trying
to sue an oligarch. There is a problem with rule of law, and
contractual rights are simply very difficult to enforce.
Will the Administration proposal--would you support, in the
structural changes to the private market, more disclosure,
including direct due diligence by investors, allowing them the
opportunity to see themselves, not take anybody's word for it,
what they are buying; servicing requirements, so they know what
happens if a mortgage goes into a default; and, third, that
there be clear remedies?
There have been stories in the last week or so about some
of the bigger banks advising their shareholders that they may
face liability. There has been kind of a peevish tone to it,
that their ankles are getting bitten by lawyers and by
regulators. But that strikes me as a fairly basic rule of law.
Will the Administration's proposal support those three
things?
Secretary Geithner. Absolutely share those objectives, and
happy to talk to you in more detail about how best to achieve
those objectives. And, again, any concern people have about the
market, as about these draft rules, we will look carefully at.
And I think you are right to emphasize that for this to
work better, you do not just need clarity on capital rules and
things like that, risk retention, but you need better
disclosure standards, you need servicer standards that can be
enforced. And those are part of the solution. And I think until
that happens, it is going to be harder to get private capital
to come in.
But I would be happy to talk to you about how best to do
that.
Mr. Miller of North Carolina. On the servicer requirement
point, there have also been stories about private negotiations
going on now between regulators and States' attorneys general
and the various servicers, as well as risk-retention rules,
whether servicing requirements will be part of that.
Why is that not within your authority now? Why do you need
them to agree?
Secretary Geithner. Treasury's authority?
Mr. Miller of North Carolina. These are all subsidies of
banks that are regulated by the OCC. The OCC does not have an
appointed director now. It has a temporary director that you
could replace at any time. Why is the OCC not requiring better
behavior by servicers?
Secretary Geithner. Again, we are trying to take the
authority that is in the financial reform legislation and apply
that carefully in a way that will apply to all participants in
the market, whether they are banks or non-banks, and make sure
that there is a consistent, clear set of rules of the game that
investors can benefit from more generally. And we are trying to
do that on a careful, integrated basis.
It is taking a little more time than we thought. But we
have to be careful to get it right. And I am not sure how much
longer it is going to take, but it is going to take a little
bit longer than we initially expected.
And we can't achieve those objectives just using the
existing authority we have or the OCC has itself. You have to
have a broader--so there is a level playing field across the
market as a whole.
But we are moving in the same direction. And I very much
share the directives you laid out. It is just a question of
getting the details right.
Mr. Miller of North Carolina. I am sorry. Do you not have
existing authority with Dodd-Frank?
Secretary Geithner. No, with Dodd-Frank we do.
Mr. Miller of North Carolina. Okay.
Secretary Geithner. But that is what we are putting in
place. We are laying out the basic architecture through draft
rules that the market can comment on that would give the
comprehensive reforms that you laid out more substance and
traction.
And, again, the way our system works is, we do have a lot
of entities involved that have a piece of this. But we want
them to move together and we want them to put out draft rules
so people can comment, we get feedback on them, get them right.
Chairman Bachus. Thank you, Mr. Miller.
Mr. Miller of North Carolina. Thank you.
Chairman Bachus. Mr. Luetkemeyer?
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Secretary Geithner, this morning I haven't heard a whole
lot with regards to Federal Home Loan Banks. And it is in your
testimony, and it is in the report.
Can you elaborate just a little bit on where you feel their
role would be--I know there have been a few problems, but
generally not a lot of problems with them--and where you think
that we could go with that?
Secretary Geithner. There are a few examples we pointed to
in the current system which we think deserve attention and
reform. I will mention those again, although they are in the
paper.
These entities were allowed, like Fannie and Freddie were,
to accumulate an investment portfolio, which we don't think is
necessary. And they took on a lot of risk in that context and
didn't have--some of them took on some risk and didn't have
capital to back that. That is something we should avoid in the
future.
We have also created a system where we allow large banks to
be members of multiple Home Loan Banks. And that is something
we have to take a look at again, again, to make sure the system
doesn't have too much risk.
There are other things people have suggested, and we will
look at every credible idea. And I think, although you are
right to say that the problems there were not nearly as bad as
we saw both in the private market and in Fannie and Freddie,
there are some things we have to take a careful look at.
Mr. Luetkemeyer. During the course of your putting together
the report, did you look at other countries and other programs
around the world and what the good points of those may have
been, what worked in other places, and see if they were
appropriate for us? Could you elaborate just a little bit on
that?
Secretary Geithner. We did. We did a very careful look,
actually. And it is a very good question, because if you look
at the experience of other countries, a lot of countries did a
lot better than we did in this crisis.
But I think the biggest difference you can point to is, in
most of those systems, banks are the overwhelmingly dominant
source of credit. And there is not nearly as large a role for
the securities markets. It is true for corporate debt. It is
also true for mortgage finance and consumer finance.
In our system, we have a better balance between credit
provided by banks and credit that is provided by the broader
markets, broader investor community, both in terms of asset-
backed securities, like real estate, like mortgages, but also
just direct corporate credit. And we want to try to preserve
that kind of balance. We think the system would be more stable
in the future if you have that kind of balance.
In those systems in housing finance, as I said earlier
several times, in countries where the government does not
provide the kind of guarantee that we did through Fannie and
Freddie, banks hold really the overwhelming bulk of risk, but
those governments generally guarantee their banks. They don't
let their banks fail in a crisis. In that context, as you saw
in the crisis, the taxpayer is still exposed to loss, and it is
just that the guarantee isn't explicit. The taxpayer isn't
protected in that way.
So I wouldn't look to that model as a particularly
appealing example of a more private system. As you know, in
many of those countries, the banks are much more close to the
government. The governments don't let them fail; they don't
allow failure. And so, in a sense, you are still socializing
losses and risk in that context, too.
Mr. Luetkemeyer. Okay. One of the comments you made a while
ago was that it is an obligation of the government to protect
the economy. Can you tell me at what level you believe that is
where we need to go with that?
Secretary Geithner. That is an excellent question. And, of
course, that is something people will disagree on in the
moment. And, again, the basic paradox of this challenge is, if
you build in protection against the extreme crisis, you might
make the crisis more likely in the future. That is why
governments get these things wrong over time. It is very hard
to get that right.
But, again, if you look at what happened in this crisis and
what helped get us out of it, you have to have the ability in
extremis to reduce the risk of collateral damage that can push
the economy off into the kind of deep recession we saw. That is
very important, to have that capacity. And I think we can do it
in a way that doesn't, again, magnify moral hazard or magnify
the risk in the future to taxpayers. But it is hard to do.
Mr. Luetkemeyer. What you are saying, though, is at some
point, the government is going to be the backstop?
Secretary Geithner. But it should be in a much more limited
way, and I think we can do it in a way where it is much, much
more limited, much less risk of loss to the taxpayer.
And, again, here is the--and not to make it overly simple,
but if you require banks to hold more capital against risk, if
you require homeowners to, in general, hold more equity in
their homes, if you make sure that underwriting standards are
more conservative in that broad context, then you will do a lot
of good in making sure the system is more stable, even in a
deep recession.
That probably won't be enough, but that will take you a
long way to it. You still may need the flexibility in an
emergency to come in and provide a little more protection.
Mr. Luetkemeyer. Okay.
And, with that, I will yield back my time. Thank you, Mr.
Chairman.
Chairman Bachus. Thank you.
Let me say this. The Secretary has to leave in 5 minutes.
So we will have one more--Mr. Scott will be the last--unless
you can stay an additional few minutes. And I think the
agreement--you extended from 12:00 to 12:30 as part of
negotiations.
Secretary Geithner. Can I offer the following commitment,
which is, again, I would be happy to respond in writing to any
questions.
Chairman Bachus. That is fine.
Secretary Geithner. I know you will have a subsequent
chance to have me up here.
Chairman Bachus. What we will do--
Secretary Geithner. You could invert the order of your
questions.
Chairman Bachus. I would ask unanimous consent that the
hearing that starts at 2:00, the Secretary Donovan hearing,
that those members in the room on both sides who did not get a
chance to ask a question will go first at that hearing.
And, hearing no objections, Mr. Scott is recognized. He
will be the last. I apologize to the other members.
Mr. Scott. Thank you very much, Mr. Chairman.
And I am glad I got squeezed in, because, Mr. Secretary, I
am very worried. I am very worried about unintended
consequences here. And granted, there is a lot wrong with
Fannie and Freddie; we certainly need to reform this situation.
But there is a role for government here, and I think we need to
be very clear on this.
We are examining this issue at a time of great volatility,
of record, record numbers of people who are losing their homes,
largely through no fault of their own but because of our
problem up here in Washington. And I am concerned about this
rush to judgment here and the tendency to be throwing the baby
out with the bathwater.
We had Fannie and Freddie for a very serious purpose. And
granted, there are some problems with them, but they provided a
very useful tool to put us in the position where we are in.
There are still problems facing minorities in the housing
market, that--just the rush to bring in--say, ``Get this out of
the way. Bring the private capital in, and that solves the
problem.'' That does not solve the problem of the pangs of
color shock many of these folks suffer simply because they are
African American, because of the color of their skin.
We have other burgeoning problems on the income levels of
individuals. Now, we have another problem with many of our
returning soldiers, which is heartbreaking, who are coming home
after leaving here, going, fighting on the battlefields of Iraq
and Afghanistan, and they come back and they are on the street,
they are under the viaduct.
No matter what we do, bringing private capital in and
saying, ``That is the answer,'' is not the answer.
So I want to stress that Treasury and this Administration
move with a very jaundiced eye on this and understand that, in
my review of your report, probably the best option, given the
volatility of the situation we are in, given the sensitivity,
would be to look at Option 3 as a base from which we can work.
I think it has the attributes in here. It has a degree of
certainty. And even members of the financial services
community--the banks, the mortgage companies--realize that
private capital isn't coming in at any price. There is a need
in our housing market for there to be some sort of Federal
Government guarantee, some way to be able to come down in these
catastrophic situations, some way for us to be able to be there
in the event of another financial crisis.
And so I would like for you simply to respond and give us--
I am not going to ask you which one you like. But do you not
agree that, given the difficulty of the situation we are in,
the vagaries of the different needs that I mentioned in my
remarks, that there is a need to move more from a position of
Option 3 than the other two?
Secretary Geithner. I agree with much of what you said. And
you are very right to emphasize, as I tried to do, that we have
to be very, very careful we don't do more damage as we try to
get the system to a better place.
And you could envision, in fact, a mix of those three
options as being the best place to land this, ultimately. But
you have to be very, very careful. And, again, I would caution
you--and I think you know this better than anybody--that if
banks and real estate companies together are in favor of
something that involves a guarantee, you have to be kind of
careful. And they will always be in favor of something that
involves a guarantee by the government, in this case. You have
to be very, very careful about that.
But, as I have said many times, I think there are ways to
design Option 3, alongside a substantial role by the FHA, that
would be a very dramatic improvement in our current system. The
test is whether we can design it in a way that doesn't have the
same kind of risks that we ultimately saw in Fannie and
Freddie.
Mr. Scott. Yes, I meant the safeguards of that.
But I want to yield 10 seconds to my friend here, if I may,
quickly.
Mr. Green. Mr. Secretary, quickly, the impact, please, if
you will, of terminating the HAMP program, the FHA refinance
program, the NSP program, and the Emergency Mortgage Relief
Program? Do you have any opinions, please?
Secretary Geithner. Oh, it would be, I would say it would
cause a huge amount of damage to a very fragile housing market
and leave hundreds and hundreds of thousands, if not millions,
of Americans without the chance to take advantage of a mortgage
modification that would allow them to stay in a home they can
afford.
So I think it would cause a lot of damage, and I would
recommend against it.
Mr. Scott. Thank you very much, Mr. Chairman.
Chairman Bachus. Thank you.
That concludes our hearing.
Let me say, Secretary Geithner, Congressman Posey posed a
question to you, I think, which is immensely important. And he
was referring to a draft proposal by the IRS, the IRS
nonresident alien deposit rule, which just doesn't seem to go
away. But I think, as he stated, it could cause hundreds of
billions of dollars to exit our banks, particularly our banks
in distressed areas in Florida, in Texas, in California, in
Arizona. So it is a real problem. It is REG-146097-09.
So, with that, the Chair notes that some members may have
additional questions for this witness which they may wish
submit in writing. Without objection, the hearing record will
remain open for 30 days for members to submit written questions
to Secretary Geithner and to place his responses in the record.
This hearing is adjourned.
Thank you, Secretary Geithner.
[Whereupon, at 12:36 p.m., the hearing was adjourned.]
A P P E N D I X
March 1, 2011