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




 
                 LEGISLATIVE HEARING ON IMMEDIATE STEPS
                 TO PROTECT TAXPAYERS FROM THE ONGOING
                 BAILOUT OF FANNIE MAE AND FREDDIE MAC

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 31, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-22



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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
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 31, 2011...............................................     1
Appendix:
    March 31, 2011...............................................    87

                               WITNESSES
                        Thursday, March 31, 2011

Dalton, Hon. John H., President, Housing Policy Council, The 
  Financial Services Roundtable..................................    47
DeMarco, Edward J., Acting Director, Federal Housing Finance 
  Agency (FHFA)..................................................     7
Nielsen, Robert, Chairman of the Board, National Association of 
  Home Builders (NAHB)...........................................    51
Papagianis, Christopher, Managing Director, Economics21..........    48
Phipps, Ronald, President, National Association of REALTORS.....    53
Pinto, Edward J., Resident Fellow, American Enterprise Institute.    49
Wachter, Susan M., Professor, The Wharton School, University of 
  Pennsylvania...................................................    54

                                APPENDIX

Prepared statements:
    Dalton, Hon. John H..........................................    88
    DeMarco, Edward J............................................    97
    Nielsen, Robert..............................................   113
    Papagianis, Christopher......................................   128
    Phipps, Ronald...............................................   138
    Pinto, Edward J..............................................   145
    Wachter, Susan M.............................................   213

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the National Association of Federal 
      Credit Unions (NAFCU)......................................   218
    Written statement of the Office of Inspector General, Federal 
      Housing Finance Agency (FHFA)..............................   221
Biggert, Hon. Judy:
    Washington Post article entitled, ``Rush to foreclose by 
      Fannie, Freddie helped feed problems with legal 
      paperwork,'' dated December 23, 2010.......................   235
Stivers, Hon. Steve:
    Additional information provided by the Honorable John H. 
      Dalton, President, Housing Policy Council of the Financial 
      Services Roundtable, in response to questions posed during 
      the hearing................................................   240


                    LEGISLATIVE HEARING ON IMMEDIATE
                       STEPS TO PROTECT TAXPAYERS
                      FROM THE ONGOING BAILOUT OF
                       FANNIE MAE AND FREDDIE MAC

                              ----------                              


                        Thursday, March 31, 2011

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Biggert, Hensarling, Neugebauer, McCotter, Pearce, 
Fitzpatrick, Hayworth, Hurt, Grimm, Stivers; Waters, Sherman, 
Lynch, Miller of North Carolina, Moore, Perlmutter, Donnelly, 
Carson, Himes, Peters, Green, and Ellison.
    Ex officio present: Representatives Bachus and Frank.
    Also present: Representatives Miller of California, 
Renacci; and Watt.
    Chairman Garrett. Good morning. This hearing of the 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises is hereby called to order.
    Without objection, all members' opening statements will be 
made a part of the record. And at this point, I yield myself 1 
minute for my opening statement.
    And now that we actually have a gavel, it is official.
    Today, we begin the process of considering specific 
legislation that will take immediate steps to protect taxpayers 
from the ongoing multi-billion dollar bailout of Fannie Mae and 
Freddie Mac.
    I know those on the other side of the aisle will be 
critical of this Congress about the pace in which this 
committee has formally considered legislation to address Fannie 
and Freddie. However, unlike the last Congress, this committee 
is actually going to hold hearings and allow members to study 
and examine legislative proposals to end the bailouts and not 
simply pass legislation that actually would do the opposite, 
encourage more of them.
    Last Congress, our friends across the aisle refused to have 
any real hearings on specific bills to address the largest 
bailouts of the financial crisis. And so with the complete 
disregard by our Democratic colleagues of this bailout, we were 
compelled then to offer a bill absent any time, really, to 
fully debate and formally examine legislative proposals 
addressing the GSEs.
    It was literally the only opportunity that we have had to 
offer an alternative to respond to the complete absence by our 
Democratic counterparts to address the issues at all in the now 
sacrosanct Dodd-Frank Act.
    Today, we begin to do this process the right way, with our 
first hearing on specific legislative proposals regarding the 
GSEs. And we are going to have these hearings and go through 
regular order to consider a wide array of proposals that this 
committee didn't have the opportunity to do last Congress.
    So I look forward to reviewing the eight proposals before 
us today, many of which I believe and hope the Obama 
Administration will support. And I thank you all and look 
forward to the witnesses' testimony.
    And with that, I yield to the gentleman from Massachusetts.
    Mr. Frank. Thank you. Let me just preliminarily, before I 
start, the ranking member of the subcommittee is on her way 
over from the Whip meeting, so she, Ms. Waters, will be here.
    I will now begin my statement. I am not surprised that the 
chairman of the subcommittee began not with any positive 
statement about what he is planning to do, but by a defense of 
what they are doing. The contrast between their rhetoric of 
last year and their reality this year is overwhelming.
    I am now hearing that the bill that they were very critical 
of us for not incorporating into legislation last year wasn't 
really ready for primetime and that was the best they could do. 
They had all year. The gentleman from Texas, Mr. Hensarling, 
introduced it in March. It was in July when they asked us to 
act on it, and were very critical when we didn't.
    I have seen the extraordinary spectacle this year of people 
on the Republican side, Senator Corker, for one, asking for 
adult supervision from Secretaries Geithner and Donovan, people 
here being critical because the Obama Administration hasn't 
given them more guidance on what to do.
    And it reminds me of the kind of classic scene of the man 
in the bar who is all ready to fight a very big guy and is 
being held back by his friends and insists that his friends 
turn him loose, and then they turn him loose, and he is 
immediately looking for somebody else to hold him back.
    The Republicans spent all last year telling us that they 
were just ready to take on this tough issue of what to do about 
housing finance, after you get rid of Fannie Mae and Freddie 
Mac, and we said it is a very tough issue and we should get to 
it this year, and that was the way to deal with it, but they 
were raring to go, and they were very critical that we hadn't 
moved. They filed a bill in March, a comprehensive bill, and 
were very critical of us in July for not acting on this bill.
    And the notion that because we didn't let them perfect it, 
they couldn't get it perfected, of course makes no sense. They 
could have talked to anyone they wanted to talk to. They could 
have had whatever conversations they wanted.
    What happened, of course, is it turns out it is a tougher 
issue than they were prepared to acknowledge. And so what 
happens is, all last year, they were, ``Let me at him, let me 
at him,'' and they were being held back. They were being held 
back by their Minority status.
    And then they got Majority status. Going from Minority to 
Majority status was equivalent to having your friend let go of 
your coat, and now you have no excuse not to go fight the guy. 
And so, they have been looking very much for someone to be the 
substitute coat-holder, and they found it, the Obama 
Administration.
    It is extraordinary to me that my Republicans colleagues, 
who have been so disrespectful of virtually anything the Obama 
Administration has said, on this very difficult issue are 
trying to hide behind it and are trying to say that they can't 
really deal with this until the Obama Administration tells them 
how to do it.
    There are some specific pieces today, many of which I can 
support, and one or two which, I think, need some further work. 
But it is a far cry from the comprehensive solution they had. I 
am, however, prepared to take ``yes'' for an answer.
    I will give myself--if I can take another minute out of our 
time, Mr. Chairman--I am prepared to take yes for an answer.
    Chairman Garrett. The gentleman is recognized for one 
additional minute.
    Mr. Frank. Thank you, Mr. Chairman. I have learned to take 
``yes'' for an answer.
    What the Majority is now saying is that it is not as urgent 
as they said. It is important, but the losses are not mounting. 
They appear, in fact, to be somewhat diminishing. Yes, we 
should deal with this. And much of what they are talking about 
now is relatively non-controversial. There are one or two 
controversial pieces, in the portfolio area mainly.
    But the key question of, what do you do to replace Fannie 
and Freddie, which will be abolished and should be abolished, 
remains untouched. And so that tough issue, which they were so 
eager to tackle last year, they are now acknowledging is harder 
than they were prepared to acknowledge last year, and they are 
counting on the Obama Administration to hold them back until 
they can get some more time to figure out what to do.
    We would reserve the balance of our time, Mr. Chairman, 
until the ranking member can get here.
    Chairman Garrett. Thank you. And we so appreciate the 
gentleman from Massachusetts exchanging his experiences in 
saloons.
    And with that, I yield now to the gentleman from Alabama 
for 1 minute.
    Chairman Bachus. Thank you, Chairman Garrett.
    As recent statistics and reports show, our housing markets 
remain very fragile, and housing is an important part of our 
overall economy and of consumer spending. We are not going to 
be able to revive our economy until we fix the housing market. 
And that is why Congress must take some action to bring some 
certainty.
    But it has to be thoughtful and deliberative action. And we 
have started that with this process of introducing a number of 
measures to address the failures of Fannie and Freddie.
    The main thrust of this is the--Freddie and Fannie had 
tremendous advantages over the private market, and over a 
several-year period, it drove everything into Fannie and 
Freddie, which were government-run funds. And, of course, what 
happened in 2008 and 2009 only precipitated that.
    Going forward, what we need to do, bottom line, is diminish 
in a thoughtful way those advantages that Freddie and Fannie 
have and ultimately get the government out of the mortgage 
financing market and particularly the guarantee market.
    So I appreciate that.
    Chairman Garrett. I thank the gentleman.
    The gentleman from Massachusetts for 2 minutes.
    Mr. Lynch. Thank you, Mr. Chairman. I want to begin by 
thanking all the witnesses for coming before us here today and 
helping the committee with this work.
    I just want to remind everyone that, together, Fannie and 
Freddie now provide about 90 percent of the financing or 
guaranteeing of all residential mortgages in the country today. 
This is an enormous market share, up from about 40 percent in 
2006. And without the financial support of the Department of 
the Treasury and American taxpayers in 2008, the residential 
mortgage market would be in even more desperate shape than it 
currently remains.
    I understand that my colleagues on the other side have 
introduced eight bills to eliminate the GSEs and wind down 
their prominence in the mortgage market. The question is, as my 
colleague from Massachusetts has asked, what will take their 
place?
    I hope together we can devise a replacement for the GSE 
system that allows the 30-year fixed-rate mortgage to remain 
available at reasonable rates for creditworthy borrowers in a 
way that does not continue to put the taxpayer at tremendous 
risk.
    I look forward to hearing from our witnesses on how we can 
move to the next generation of mortgage finance and wind down 
the taxpayers' investments in these GSEs.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. And I thank you.
    The gentleman from California, Mr. Royce, for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman. I thank you, also, for 
your continued leadership on this issue.
    The level of government intervention which contributed to 
the housing boom is well documented. As a matter of fact, what 
is often swept under the rug is the level of government 
intervention in the junk loan market during the boom years.
    Over the years, the GSEs acquired more than $1 trillion 
worth of subprime and Alt-A loans, making them the largest 
buyer of junk loans. Much of it goes back to the 1992 GSE Act 
and the affordable housing goals, which for the first time 
mandated that the GSEs dedicate a sizable portion of their 
business to affordable housing.
    This mandate on government-backed private institutions was 
a recipe for disaster. As former Chairman of the Federal 
Reserve Alan Greenspan said, their failure, Fannie and Freddie, 
is because they paid whatever price was necessary to reach the 
goal. And clearly, this was a mistake inspired by Congress.
    That is why I introduced legislation to eliminate these 
goals and correct one of the many errors in the GSE charter. It 
should be made clear that the group of bills introduced this 
week is merely a first step. Over the coming months, it is my 
hope that we will move additional legislation, and I think this 
is the only way to end what Jamie Dimon labeled the biggest 
disaster of all time.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentlelady from Illinois for 1 minute?
    Mrs. Biggert. Thank you, Mr. Chairman.
    As one of these eight bills, I have introduced H.R. 31, the 
Fannie Mae and Freddie Mac Accountability and Transparency for 
Taxpayers Act. H.R. 31 establishes in statute an inspector 
general with FHFA, something that Congress failed to do 
originally, and this is one agency that needs an independent 
watchdog.
    It also gives this new IG authority--new authority to 
enforce the law and hire expert investigators that expose fraud 
and abuse within the GSEs and their regulator.
    Three, it requires that this information be provided to the 
public in regular reports that outline taxpayer liabilities, 
investment decisions, and management details of Fannie and 
Freddie.
    For example, one problem we found with Freddie and Fannie 
is that they maintain a short list of just a few law firms that 
are allowed to monopolize the foreclosure process by offering 
the quickest, cheapest, and probably the least reliable 
service. This has contributed to a broad array of problems, 
paperwork discrepancies and fraud. These issues have to be 
investigated and resolved for the sake of homeowners, for the 
sake of taxpayers, and for the sake of housing recovery.
    This bill would ensure that effective oversight tools are 
in place. And with this bill, waste, fraud and abuse will no 
longer fly under the radar.
    I yield back.
    Chairman Garrett. And the gentlelady yields back.
    Mrs. Biggert. Mr. Chairman, if I may, could I ask unanimous 
consent to include a letter from the FHFA Inspector General on 
H.R. 31 in the record?
    Chairman Garrett. Without objection, it is so ordered.
    And to the gentlelady from California for 3 minutes. Yes, 3 
minutes.
    Ms. Waters. Thank you, Mr. Chairman, for organizing this 
hearing.
    This is now our third hearing on GSE reform during the 
112th Congress. As I have stated at those previous hearings, I 
am committed to working with my colleagues on a practical, 
comprehensive reform proposal to reshape our housing finance 
system.
    That comprehensive proposal will inevitably need to include 
shorter-term provisions to address how we transition from where 
we are to where we want to be. Those measures must both 
encourage the return of private capital to the market, while 
also ensuring that we do not disrupt our housing finance system 
and shake our nascent economic recovery.
    I think it is important to note that some shorter-term 
steps are already being addressed as the GSEs go into 
conservatorship. For example, the Federal Housing Finance 
Agency has raised guarantee fees, making GSE mortgages more 
expensive for borrowers, and more accurately pricing risk. FHFA 
has also prohibited the GSEs from launching new product lines.
    The office of the FHFA Inspector General has been 
established, and the portfolios of Fannie Mae and Freddie Mac 
are being wound down. Many of the proposals that we will 
consider today are to a certain degree restatements of what is 
already occurring, and I am willing to work with my colleagues 
on some reasonable refinements of current practices. Some other 
aspects of the proposal accelerate what is already being done 
or include more prescriptive direction to regulators for how 
they should manage the conservatorships.
    I think these are important debates for us to have, but we 
must consider that if we move too precipitously, we run the 
risk of destabilizing our economy. Three million more 
foreclosures are expected in the next year, and home prices are 
3 percent lower than they were last year. Like many observers, 
I believe that the housing crisis is far from over.
    I am also eager for the committee to consider whether 
adopting these shorter-term measures without considering 
comprehensive reform is the best strategy. I think that most 
stakeholders would like to know what is coming next before we 
start accelerating the wind-down of what we have now. We must 
also ensure that our regulators have the flexibility they need 
to respond to our still-volatile housing market conditions and 
that their hands are not tied by legislation that is too rigid.
    Again, Mr. Chairman, I thank you for holding this hearing, 
and I look forward to learning more about these proposals. And, 
of course, I yield back the balance of my time.
    Chairman Garrett. And I thank the gentlelady.
    The gentleman from Texas for 1 minute?
    Mr. Neugebauer. Thank you, Mr. Chairman.
    This is an important hearing. One of the things that was 
brought out is that 98 percent of the mortgages that are being 
originated in this country today have some form of government 
backing. And as my colleagues on the other side of the aisle 
said, we don't have anything to replace it with. That is 
because these entities enjoy a subsidized monopoly.
    So what we need to do is to begin to provide space and 
opportunity for the private capital to come into the market, as 
long as we provide lower guarantee fees to sanitize these 
mortgages, and there is no incentive for private capital to 
come into these markets.
    Our goal here is two things: first, to make sure that we 
shore up and reduce any additional losses that Fannie and 
Freddie may have; and second, to also provide opportunity for 
private capital to come back in so that we will have robust 
housing finance markets in this country.
    But if we keep what we have been doing, we are going to 
keep getting what we have been getting. And I think the 
American people have spoken pretty loudly; they are tired of 
not only making their mortgage payment, but they don't want to 
make their neighbor's mortgage payment, as well, and basically 
if we continue down the road that we are on right now, that is 
the direction we are headed.
    So I think this is a very important hearing, Mr. Chairman. 
And I will look forward to hearing from our witnesses today.
    Chairman Garrett. Thank you.
    Mr. Pearce for 1 minute?
    Mr. Pearce. Thank you, Mr. Chairman. I appreciate the 
hearing today. I am looking forward to it.
    And we have one of the pieces of legislation that simply 
says the debt has to be approved with each new issuance, and it 
is what used to be, and we are simply requesting that we go 
back to that kind of stable approach. But I am looking forward 
to the hearing today, and thank you very much.
    Chairman Garrett. The gentleman yields back.
    Mr. Fitzpatrick, for 30 seconds.
    Mr. Fitzpatrick. Thank you, Mr. Chairman, for the hearing. 
Today marks an important first step toward a major correction 
in our housing market and in our financial system. Fannie Mae 
and Freddie Mac control about 95 percent of the secondary 
mortgage market, and its access to easy capital has helped spur 
an unprecedented run on mortgages that, once it caught up to 
us, nearly brought the economy to its knees, and as the house 
of cards began to fall and implied government backing became a 
real one, to the tune of $150 billion.
    So let's discuss how to get private capital back into the 
system and immediately in the bailouts, while protecting 
current and future homeowners.
    Thank you, Mr. Chairman.
    Chairman Garrett. And I thank you.
    And for the remainder of the time, which is, I think, 30 
seconds, the gentleman from California, Mr. Miller?
    Mr. Miller of California. Thank you, Mr. Chairman.
    I hope this can be a bipartisan issue, because it is 
definitely a national issue. We need to be very cautious in 
what we do. We need comprehensive reform. But we need to look 
and ask, ``What did Freddie and Fannie do wrong? And how can we 
correct that?''
    Without a doubt, they are outperforming the non-agency 
loans. So irrespective of that, they are losing money, and we 
have to determine what they did wrong to correct the problem.
    But we need to be sensitive as this industry has been 
dramatically impacted in recent years. And what we do here is 
going to have an impact. My goal is to make sure it has a 
positive impact, rather than a negative impact.
    And so I hope we will look at this issue in a comprehensive 
way, understanding the complexity that we are facing, and the 
impact of the results of what we do.
    I yield back the balance of my time.
    Chairman Garrett. Thank you.
    Mr. DeMarco, once again, we welcome you back to our 
committee. And as you know, your full statement will be made a 
part of the record. You are recognized for 5 minutes, and we 
welcome you to the committee.

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

    Mr. DeMarco. Very good. Thank you. Thank you, Mr. Chairman.
    Chairman Garrett, Ranking Member Waters, and members of the 
subcommittee, thank you for inviting me here. My written 
statement covers the financial condition of Fannie Mae and 
Freddie Mac, how FHFA is carrying out its conservatorship 
responsibilities, and FHFA's views on certain proposals made 
this week by subcommittee members. I will touch on just the 
last two at this point.
    As conservator, FHFA has a statutory responsibility to 
preserve and conserve the Enterprises' assets, which I would 
group into four broad categories: the legacy, pre-
conservatorship book of business, including investments, 
mortgages owned and mortgages guaranteed; the post-
conservatorship book of business; the business platforms, 
operations and processes of the two companies; and the people 
who work at the Enterprises, the human capital who run the 
business, manage the risk, and support the operations.
    Preserving and conserving Enterprise assets protects 
taxpayers from further losses, ensures market stability and 
liquidity, gives lawmakers options for the future, and protects 
the future value of the Enterprises' intangible assets for 
future utilization and value recognition for the benefit of 
taxpayers and markets.
    As conservator, we oversee these assets so that value may 
be returned to taxpayers from them in a manner to be determined 
by financial market developments and the decisions of 
lawmakers. These responsibilities entail challenging risk 
management issues.
    For the legacy book of business, the key risk is further 
credit losses from delinquent mortgages. For the post-
conservatorship book of business, the key risk management 
challenge is establishing appropriate underwriting standards 
and risk-based pricing. The Enterprises' business platforms, 
operations and processes present multiple risk management 
challenges. We need to develop and maintain the infrastructure 
supporting ongoing business in order to preserve and conserve 
the value of the securities being issued today, which have 30-
year maturities backed by the taxpayer.
    Finally, preserving and conserving assets includes 
maintaining each company's human capital in the face of a very 
uncertain future. Protecting taxpayer interests in the 
Enterprises requires each company having experienced, qualified 
people managing the day-to-day business operations.
    I will now briefly summarize a few of my written comments 
on the bills introduced earlier this week. I will begin with 
risk retention.
    The proposed rule on risk retention issued by the agencies 
this week does not classify Enterprise loans as qualified 
residential mortgages. It stipulates that Enterprise single-
family mortgage securities are structured with a 100 percent 
risk retention by the securitizer, that is, the Enterprise, 
obviously, the maximum possible and far beyond the 5 percent 
retention required by Dodd-Frank.
    If the Enterprises were subject to the risk retention 
requirements for non-QRM loans, they could be forced to hold on 
their balance sheet 5 percent of the securities they issue. To 
impose such a requirement would add nothing further to the 
Enterprises' skin-in-the-game or credit risk exposure. They 
already have 100 percent of the credit exposure. However, such 
a requirement would require the Enterprises to increase their 
portfolios by financing 5 percent of their mortgage-backed 
securities themselves.
    Retained portfolios. We are on a path to reduce the 
retained portfolio of each Enterprise by at least 10 percent 
per year. The only material additions to the retained 
portfolios today come from removing delinquent mortgages from 
the Enterprises' mortgage-backed securities. While some faster 
reduction of the Enterprises' retained portfolios may be 
possible, a congressional mandate for a significantly faster 
reduction could cost taxpayers unnecessarily.
    New activities. FHFA is not permitting the Enterprises to 
offer any new products or enter new lines of business. Their 
operations are focused on their existing core businesses and on 
loss mitigation. I support in principle a bill to codify this 
position of the agency. As the subcommittee deliberates such a 
mandate, it may wish to consider whether exceptions should be 
provided for products that advance other purposes of the 
transition.
    Compensation. Retaining human capital and setting a 
compensation strategy in an environment of uncertainty requires 
a delicate balancing act. I am concerned that overhauling the 
compensation programs in place today by applying the Federal 
pay system to non-Federal employees carries risk for the 
conservatorship and, hence, the taxpayer. In my view, such an 
approach would increase costs to the taxpayers and risk further 
disruption in housing markets.
    And finally, guarantee fees. Since the beginning of 
conservatorship, FHFA has been steadily--has been overseeing 
steady increases in guarantee fees for the Enterprises. FHFA 
expects to continue to evaluate further changes along these 
lines, and we look forward to working with Congress on 
legislative approaches for determining appropriate changes for 
the Enterprises' strategy for setting guarantee fees.
    Thank you again for this invitation, and I look forward to 
our discussion.
    [The prepared statement of Acting Director DeMarco can be 
found on page 97 of the appendix.]
    Chairman Garrett. I thank the gentleman for his testimony 
and his full testimony, which we have seen previously. And I 
would at this point yield myself 5 minutes.
    Let's go to the first point and the legislation that I have 
dropped in, which deals with risk retention. This goes with 
Section 941, 15(g)(e)(3)(B) of the act of the law, which 
specifically exempts all assets which are insured or guaranteed 
by the United States toward any agency of the United States, 
but then the rest of the section specifically says what? That 
Freddie and Fannie are not agencies of the United States, and 
you, of course, agree with that.
    So what is hard for me to see is that it is--Congress was 
explicit in what that they are saying, that these are not 
agencies of the United States, and therefore they should be 
under the same requirement as in the private sector. But you 
are claiming in your testimony here that you don't have to 
worry about that. Why? Because of the, what, 100 percent 
guarantee functionality for this type of risk, right?
    Mr. DeMarco. What I am stating, Mr. Chairman, is that what 
Section 941 is designed to do is to have securitizers--that is, 
issuers of an asset-backed security, including mortgage-backed 
securities, to retain a portion--some economic interest in the 
credit risk of the loans that are underlying that security.
    The way Fannie Mae and Freddie Mac undertake their 
securitization, they are providing a 100 percent corporate 
guarantee of timely payment of principal and interest. That is 
retaining 100 percent of the credit risk. It can't retain more 
of the credit risk than that.
    Chairman Garrett. Yes, I understand that. I appreciate 
that. So what happens, then, on the private-sector side is 
what? If they are issuing an QRM, there is no problem? If they 
are issuing a non-QRM, that is when the--under the rule, it 
comes out, what, they have to retain the additional 5 percent?
    Mr. DeMarco. They have to retain 5 percent.
    Chairman Garrett. Right. And if they do that, what happens 
then? They have to have additional capital with regard to that 
5 percent. What happens there? That means that there is an 
additional cost, right, to that transaction?
    Mr. DeMarco. Right.
    Chairman Garrett. Now, if the goal I think we have agreed 
on here, if the goal is to try to get them to be able to 
facilitate that marketplace and not simply have all the markets 
just continue to go over to the GSEs, we can't have that cost 
higher, right, than what is over the GSEs. So that is why set--
at least in my legislation--we would want to try to bring them 
on par.
    So if your position is such as it is, walk through it with 
me, what are some of the alternatives that we could do in order 
to make it on par? Could we, for example--what could we do? 
Could we raise the dividends that the GSEs are responsible 
paying back to the Treasury, for example, in which case there 
would be a higher cost here that would effectively go back and 
make these on a level playing field? There is other legislation 
with regard to G-fees, correct? Could we do something with G-
fees, elevate them to an additional point, again, to make it on 
a level playing field?
    If my legislation as it is crafted right now doesn't solve 
the problem on this area in risk retention, how can we do it, 
in your mind, that is equal--takes care of the problem?
    Mr. DeMarco. Right. Three things, Mr. Chairman. I 
appreciate the question. And you have already started to 
outline the answer.
    Chairman Garrett. Okay.
    Mr. DeMarco. The first is, in fact, G-fees. I do believe 
guarantee fee pricing and continuing to make gradual 
adjustments there is an important step. The second thing has to 
do with, whatever path is taken to gradually recede back to the 
private market a portion of the universe of mortgages 
originated that is not eligible for Enterprise purchase. And 
the conforming loan limit is the obvious mechanism for doing 
that.
    So making adjustments with respect to the universe of 
mortgages originated that are eligible for Enterprise purchase 
would be the second way to gradually reintroduce a portion of 
the market that would have to be financed out of the private 
sector.
    And the third is fundamentally what you are trying to do at 
this hearing and what the subcommittee is aiming to do over the 
long term, which is comprehensive housing finance reform, so 
that for private capital to truly come back into the mortgage 
market, it is not just about removing Fannie and Freddie. 
Private capital is going to want to know what the rules of the 
game are going forward--what is going to be the role of the 
government? What is going to be the kind of oversight and 
regulation requirements that are in place for private firms 
that want to enter into the secondary mortgage market?
    Now, the Dodd-Frank Act and the some of the provisions 
being implemented--not just risk retention, but others--are 
part of that step of providing clarity to private financial 
institutions that would be considering re-entry in the market. 
So those are the three things.
    Chairman Garrett. And in just the last 10 seconds, outside 
of your field, what about the FHA, with the whole argument with 
regard to the exemption? Should we be doing actions over there 
so we don't have everything simply flow over to the FHA?
    Mr. DeMarco. I think that the role of the FHA is a very 
important aspect of what I would expect the subcommittee to be 
looking at in terms of housing finance reform. Whether risk 
retention is the way to get at articulating the role of the 
FHA, I would think maybe not. But I would really defer to the 
HUD Secretary on that.
    Chairman Garrett. Great. Thank you for your answers.
    The gentlelady from California?
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me wade into an area that has emerged as rather 
controversial. Mr. Royce has the GSE Mission Improvement Act. 
The bill would immediately repeal the GSEs' affordable housing 
goals. And you know what this is all about. In this whole 
discussion of the subprime meltdown, it has been said more than 
once, I suppose by Mr. Royce and others, that the GSEs' 
affordable housing goals are responsible for the GSEs' problems 
and its meltdown.
    I know that there are those who believe that somehow there 
were too many people who could not afford mortgages who were 
extended mortgage opportunities. I want to know, did the GSEs 
change its criteria--its underwriting criteria, I suppose you 
would call it--for buying up these mortgages from Countrywide 
and other places? Did they somehow do something that would 
cause these goals to be undermined?
    Mr. DeMarco. Congresswoman Waters, I think it is pretty 
clear that Fannie Mae and Freddie Mac both took steps to reduce 
their underwriting standards, particularly in the 2005 to 2008 
period. So, yes, they reduced their underwriting standards. 
They took on more risk. They did invest in mortgages of a 
quality that they, in earlier days, would not have.
    And I believe that their pursuit of some of these riskier 
mortgages was motivated by three things: a loss of market 
share; wanting to make money; and housing goals.
    Ms. Waters. All right. If they had stayed with their 
criteria, would that have been a different story? Would the 
results have been different if they had maintained the criteria 
that had been established for purchasing these mortgages?
    Mr. DeMarco. If they had not reduced their underwriting 
standards, I think that the housing crisis that we have had, 
the losses they have had would not have been as great. But they 
still were taking on a lot of credit risk, and a lot of the 
losses that they have absorbed have come from prime, 
traditional mortgages, because of just the tremendous decline 
in house prices, and the tremendous and persistent unemployment 
that we have had, and because of the tremendous amount of 
leverage on the balance sheet of households--
    Ms. Waters. Can you tell me what percentage of the loss can 
be directly traced to the change in the underwriting criteria 
or just the economy? Do you know the difference?
    Mr. DeMarco. Sitting right here, Congresswoman Waters, I 
cannot tell you that breakdown.
    Ms. Waters. All right. Are you familiar with any threats to 
the GSEs by Countrywide or any of the other big banks 
indicating that if they did not take everything that they were 
writing that they would pull back all of their business and 
this would make the GSEs less profitable, less competitive? 
Have you heard that?
    Mr. DeMarco. I am not aware of such threats.
    Ms. Waters. Are you aware of any conversation from 
Countrywide that was reported in the newspapers of that nature?
    Mr. DeMarco. I am not recalling it. I am not saying it 
hasn't been reported and that I haven't even read about it. I 
am sorry, Congresswoman Waters. I am not recalling it just 
sitting here.
    Ms. Waters. I know you may not be recalling it, but what I 
am trying to find out is, as this meltdown took place, there 
was a lot written about what was going on. One of the stories 
that emerged--a lot of stories emerged, for example, around 
Countrywide. And one of those stories had to do Countrywide, 
because of the volume that they had involved with the GSEs, 
that they were in a position to either work with the GSEs and 
allow them to purchase these mortgages, or to block them and to 
not work with them, and thus put the GSEs in a less competitive 
situation. Are you not aware of that--those reports in any 
shape, form or fashion?
    Mr. DeMarco. I am aware that Countrywide was a major 
provider of mortgages to both Enterprises. I am aware that book 
of business has been particularly costly to both Enterprises. 
And I am aware that the Enterprises were concerned about the 
loss of market share as a result of mortgage originations by 
Countrywide and others being financed or securitized through 
mechanisms other than the two of them.
    Ms. Waters. All right. Thank you. I yield back.
    Chairman Garrett. Okay, thanks.
    To the gentleman from Alabama, the chairman of the full 
committee.
    Chairman Bachus. Thank you. And I appreciate your 
appearance.
    Two days ago, James Pressley wrote an article in Bloomberg 
where he reviewed a book by four professors from the NYU Stern 
School of Business. The title of the article is, ``Godzilla 
Hedge Funds Fannie Mae and Freddie Mac Were Guaranteed to 
Fail.''
    It is a fascinating article about how they went from 4 
percent of the mortgage market to about 42 percent right before 
the meltdown in 2008. And now they are financing well above 
that, 80 percent or 90 percent. It is fascinating.
    And Pressley at the end asked two questions, which we have 
discussed for really 2 years. And one--and these are authors of 
the book, and I think most people on both sides of the aisle 
agree that we have to wind down Fannie and Freddie.
    So my first question would be, how do you do that? Now, 
these professors--I don't know if you have read their book--
    Mr. DeMarco. I have not, Mr. Chairman.
    Chairman Bachus. Yes, they propose a bad bank, a good bank 
and a bad bank. But the second thing they say--and it is a 
trickier question, maybe--is what to do about Fannie Mae and 
Freddie Mac's second main function, to guarantee mortgages 
against default. So let's focus on that, because I only have 
about 4 minutes.
    Mr. DeMarco. Okay. So--
    Chairman Bachus. Government continued to guarantee these 
mortgages, whether they are private or public. And let me say 
this, you disputed the view that explicit government guarantees 
of mortgages could rectify the problems created by the GSEs. In 
your testimony to the last Congress you said that the argument 
for creating an explicit guarantee was built on the presumption 
that the market either cannot evaluate and price the risk of 
mortgage default, at least not at an acceptable cost, or that 
the private market cannot manage that amount of risk on its 
own.
    And you added, ``We might ask whether there is a reason to 
believe that the government will do better. If the government 
backstop is underpriced, taxpayers eventually may foot the bill 
again.'' And, that is the main concern on this side of the 
aisle, that if it is not priced right, it won't be the sellers 
or the buyers. It will be the taxpayers.
    Mr. DeMarco. Right. So several things there. In terms of 
what we can be doing now, I think the steps that we are taking 
are, in fact, designed to assist the Congress in preparing for 
an ultimate transformation.
    And so that is why as conservator, we have taken the 
following steps, that we are restricting the Enterprises to 
their core business activities, we are gradually raising prices 
so as not to disrupt markets, but to move towards a more risk-
based mechanism and a mechanism more reflective of what purely 
private firms would do. We are gradually shrinking the 
portfolio. As I said, the only thing that really is being added 
to the portfolio are delinquent mortgages being pulled from 
pools.
    In terms of next steps, what we need is a clearer path 
forward. The path that is available to me in the legislation, 
in the law that exists today, would require us ultimately to--
we are really at a stalemate. The only alternative left is to 
put them in receivership, which creates a limited life entity--
which is, in essence, the bad bank that you were referring to--
but it requires the FHFA to then re-issue the two charters as 
they exist under current law.
    And, if I hear one consensus in the whole GSE realm, it was 
nobody wants that, and so we are awaiting Congress to give 
further direction in terms of what is the role of the 
government, including whether there is going to be a role for 
limited or maybe not even limited guarantee of mortgage credits 
in the United States, but to define that. Getting that 
definition clear is going to be one of the things that is going 
to allow private financial institutions to make a better 
business determination about where it is they can enter and 
actually apply their capital and make money in serving this 
sector.
    So I think that while incremental steps are important and 
really can help move us, fundamentally the market is going to 
want to know what is the whole picture in order to know how 
they can deploy private capital to serve the mortgage market.
    And with respect to your--the quotes from my testimony last 
year on guarantees, it can very well be a legitimate conclusion 
of lawmakers for there to be some form government guarantee of 
some portion of the mortgage market. I was trying to raise that 
it is not without costs and without risk, and that is what 
everyone is looking to lawmakers to sort of make those 
judgments.
    Chairman Bachus. And I guess what you have said is that the 
Congress needs to act or the Administration?
    Mr. DeMarco. Yes, sir.
    Chairman Bachus. Thank you.
    Chairman Garrett. And I thank you. Thank you.
    The gentleman from Massachusetts?
    Mr. Frank. Thank you.
    Mr. DeMarco, as I--and I appreciate your very specific 
testimony on the legislation. This is very helpful testimony. 
And I would say, there is a fairly--on the whole moderate 
package--and as been noted, a lot that the Administration 
agrees with--some of them are tying down what is already being 
done.
    So I am supportive of--the one question I had--first of 
all, let me say, on risk retention, the gentleman from New 
Jersey is quite correct. He read the article--he read the bill. 
We covered them under risk retention. And I am sometimes told, 
oh, well, but they really are. Don't worry about it. And I go 
back to my fundamental principle of legislation: Prefer 
redundancy to ambiguity. If they really are, what is the 
problem with saying so?
    And as I listen to your testimony--the one problem appeared 
to be--and I hope this is the only one that you see--that it 
would complicate the portfolio situation, because you would 
have to hedge--you would have to hold against them.
    If we exempted--if we explicitly said--of this bill that 
you were covered by the risk retention 5 percent, and exempted 
anything held specifically for that from the portfolio, would 
that remove any objections you would have?
    Mr. DeMarco. I would have to think about that, Congressman 
Frank. This is really not about whether they hold a piece of 
the MBS. I don't think--as I understand, what is explicitly 
written in Dodd-Frank, the point of--
    Mr. Frank. Mr. DeMarco, let me put it this way. Look, 
nobody ever likes to be told what to do. I understand that. But 
I am trying to figure out what harm can come. I have to say, I 
am--
    Mr. DeMarco. There is no harm.
    Mr. Frank. No harm? If we--
    Mr. DeMarco. If the Congress of the United States is not 
concerned about them building or retaining a larger retained 
portfolio--
    Mr. Frank. But, Mr. DeMarco, though, in other words, if we 
were to exempt or add to the retained portfolio allowance an 
amount specifically equivalent to that 5 percent, then you 
would have no--it would not cause you any problem?
    Mr. DeMarco. As I understand the question, yes, sir, that 
is right.
    Mr. Frank. Okay. I thought the question was pretty clear.
    Mr. DeMarco. Well--
    Mr. Frank. Okay. The other issue, then, is on the retained 
portfolio. And I say that because I am struck by this notion--
people are making this mistake that, oh, the downpayment 
percentage in the qualified residential mortgage is too high. 
The notion that people will not be able to make loans unless 
they can securitize without risk retention I think is a great 
mistake.
    Mr. DeMarco. I agree.
    Mr. Frank. Wells Fargo has said they will. Smaller banks--
portfolio. We didn't use to have securitization, so--but I 
appreciate that, that it is only the portfolio.
    The other impact in the portfolio--because the major 
difference between this set of bills and the Administration, as 
I read it in substance, is the rate at which the portfolios get 
reduced--now, your point is that a major--the offset to 
reducing the portfolios is the need to take some bad mortgages 
and put them in portfolio. And as I read your testimony, the 
problem is, you believe, if I am correct, that a requirement 
that you accelerate the sell-off will require you to sell 
prematurely some assets which you might be able to get more 
from if you held them. Is that accurate?
    Mr. DeMarco. Yes, sir.
    Mr. Frank. So if we were, again, in the portfolio 
limitation, in the portfolio reduction, to make some allowance, 
some distinction between sort of the good and the bad assets 
and gave you more time to sell off the bad assets so that the 
reduction would be unrestricted with regard to the good ones, 
but give you some discretion of the time you are selling the 
bad ones, again, that would meet your problem?
    Mr. DeMarco. That would be much easier for us to implement. 
I think it would be better for taxpayers.
    Mr. Frank. Okay, I appreciate that. Last point. I just want 
to talk appropriately in your testimony--this is not about the 
bill--about the legacy book of business and the post-
conservatorship book of business, because this goes to the 
urgency of moving right away. And I believe that, since 
Congress gave the Bush Administration the power to establish 
the conservatorship--and that was done by Secretary Paulson in 
2008--you are really talking about a very different set of 
GSEs.
    You say here, since conservatorship, underwriting standards 
have been strengthened and several price increases have been 
initiated to better align pricing with risk. I know we can't be 
certain, but based on what has been done, is it reasonable to 
assume that you are not going to see future losses from the 
business now, anything like what we saw before the 
conservatorship?
    Mr. DeMarco. That is certainly our anticipation.
    Mr. Frank. You are not likely to see that?
    Mr. DeMarco. Right.
    Mr. Frank. Thank you. I yield back.
    Chairman Garrett. And if the gentleman will yield just 
for--
    Mr. Frank. Yes, I would yield to the chairman.
    Chairman Garrett. On your second point, with regard to 
putting some sort of language in there, with regard to saying 
they would have additional discretion for the bad book, for the 
bad loans, okay, I understand that. But is there something in 
the proposal now that would tie their hands in that regard?
    Mr. Frank. As I understand it--and I will be--
    Chairman Garrett. Yes, sure.
    Mr. Frank. As I understand it, if you have a general 
reduction of the portfolio, it doesn't differentiate.
    Chairman Garrett. Right.
    Mr. Frank. And that what they are saying is it--at the 
level at which the portfolio would be mandated by this bill--
and I generally support portfolio reduction--that might force 
them to sell bad assets--
    Chairman Garrett. In one year, and then something might go 
wrong--
    Mr. Frank. Yes.
    Chairman Garrett. Okay.
    Mr. Frank. And so that they could have some discretion, 
maybe to make an exception with the bad assets. So, it doesn't 
specifically say it, but by covering the whole portfolio, it 
doesn't give them the ability to differentiate.
    Chairman Garrett. I understand. Thanks. I appreciate it.
    And with that, I yield to the vice chair of the 
subcommittee, the gentleman from Arizona.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Mr. DeMarco--and, first off, thank you. You have always--
you have been very kind to me and very forthcoming with many of 
the questions we keep throwing at you. In sort of rapid fire, 
just as it helps me understand some things, how many units, how 
many residential units do you believe the GSEs presently have 
the deed to? How many do you own?
    Mr. DeMarco. A couple hundred thousand.
    Mr. Schweikert. Are we over 200,000 now?
    Mr. DeMarco. Yes, indeed. You mean REO properties?
    Mr. Schweikert. Yes, REO properties.
    Mr. DeMarco. A couple hundred thousand.
    Mr. Schweikert. What is the mechanics right now? How many 
units are you getting sold every month? Any idea?
    Mr. DeMarco. The intake has slowed down a bit because of 
some of the foreclosure processing problems. And I know that 
they have been coming in at a faster rate than we have been 
able to get them back out. I could get you the exact number, 
Congressman. I don't know it off the top of my head.
    Mr. Schweikert. Because even in my short time here, that 
number looks like it is already up--I have been here, what, 
about 84 days, 85 days, and I think that is up about 20,000 
from where we were at the beginning of this year.
    Mr. DeMarco. That could well be.
    Mr. Schweikert. And do you think some of the growth in 
inventory is--you are processing foreclosures faster? Your 
short sales aren't going as quickly? Or just the process has 
cleaned up and you are actually taking down the ones that had 
to be taken down?
    Mr. DeMarco. All of the above, plus the seasonality of the 
time of year we are in with respect to sales.
    Mr. Schweikert. Mr. Chairman, Mr. DeMarco, on the non-
performing portfolio of loans, how big is that? What is your 
best guess?
    Mr. DeMarco. About 5 percent of their book, 5 percent on 30 
million mortgages.
    Mr. Schweikert. And mechanically you hold those, and if you 
can't mitigate something out, they go into the foreclosure 
queue?
    Mr. DeMarco. That is correct. But, the real emphasis and 
priority is, when loans start to go delinquent, Fannie and 
Freddie want their mortgage servicers to be reaching out to 
delinquent borrowers immediately and beginning loss mitigation 
procedures. That is very, very important to us, and I think it 
is very important to the taxpayer that it be done. And there is 
a great of effort and energy on that effort.
    Mr. Schweikert. I am hopeful I get to a second round of 
questions, because I have a whole bunch of things on the 
servicer side that--I am wondering if there are some better 
mechanics out there we could help.
    On principal write-down, your opinion? And would you also--
for many of us who have a great concern that--if that sort of 
becomes aggressive stated policy, the moral hazard of, do we 
also start to create an additional cascade of non-performing 
debt?
    Mr. DeMarco. Sir, I think the question of principal 
reduction is one for, really, the investor in the mortgage. 
There are investors in private-label securities who, as I 
understand it, at least some of them have expressed a desire 
and an interest that there is a way of doing a principal write-
down with an underwater mortgage, particularly if that mortgage 
can then be, through an FHA short refi program, that the 
borrower goes over to FHA for a new mortgage, is one example, 
that allows them to cut their losses, get their principal back, 
and take that remaining principal and invest it elsewhere.
    We have looked at that as conservator of Fannie and 
Freddie, and we have examined it relative to the loss 
mitigation tools that are available and their position in the 
marketplace as a more longer-term participant. And it has been 
our conclusion that it is not loss minimizing for Fannie and 
Freddie to be engaging in a general program of principal 
reductions.
    I would say a couple of things. Fannie and Freddie's 
mortgage book--the portion of it that is underwater today is 
much less than the case in private-label securities. And the 
majority of it--the vast majority of it is still performing, so 
these are performing mortgages today, and we expect these 
households to continue to honor their financial commitment. 
And, frankly, I think the households themselves are 
anticipating and fully expect to fulfill their commitment.
    So the moral hazard question that you raise is one that if 
you create an incentive for someone to find a way to not 
continue to make a mortgage payment that they are capable of 
making, in the Fannie and Freddie context, that would be 
shifting that loss to the taxpayer, and that is something we 
are trying to avoid.
    In fact, what we are experiencing is that the loss 
mitigation programs through loan modifications are households 
that have income and are committed to staying in their house 
can and should be a very useful way to adjust the mortgage 
payments so that they can retain homeownership and we can 
minimize losses. And, frankly, the performance rate on loan 
modifications does not seem to be variant to what the current 
loan-to-value of those mortgages are.
    The final point I would say about Fannie and Freddie, with 
respect to principal forgiveness, is that the way that book of 
business has been done by Fannie and Freddie, a lot of the 
underwater mortgages have mortgage insurance in front of them. 
So there is a loss mitigant there for taxpayers that I want to 
make sure that protection stays there, and principal 
forgiveness can complicate that, as can second liens.
    Mr. Schweikert. I thank you, Mr. Chairman. And for my next 
half-an-hour of questions--oops, out of time.
    Chairman Garrett. Yes, okay.
    Oh, the gentleman from California?
    Mr. Sherman. Thank you, Mr. Chairman.
    I can see how, once this crisis is over, we can divide up 
on philosophical lines. I have read the complete works of Ayn 
Rand, or at least I will claim I have, because I can state with 
confidence that Ayn Rand says nothing positive about either 
Fannie Mae or Freddie Mac. And if we were not in a crisis, we 
could divide up on the role of government and overall 
philosophy.
    But we are in a crisis. The economy is fragile. And we need 
to be practical.
    A double-dip recession is a very real possibility, and the 
most likely way that will occur is another precipitous drop or 
long slide in home prices. And loose talk here in Washington 
can add to that crisis.
    There are those on another committee talking about ending 
the home mortgage deduction. That is a great philosophical 
debate for good times. But right now, what it means is, why 
should anybody in my district buy a home if a couple of years 
from now they are going to lose their home mortgage deduction, 
and 5 or 10 years after that, when they go to sell their home, 
it is going to sell 10 percent, 20 percent, 30 percent less 
than what it would otherwise, some would see an even greater 
drop?
    If we were to end the system whereby a Federal agency 
guarantees qualifying conforming mortgage loans, we would see a 
dramatic increase in home mortgage costs, a dramatic decline in 
values. The dramatic decline in values would then lead to a 
dramatic increase in defaults, and we would have a double-dip 
recession.
    That is why I am a little concerned about the title of 
these hearings, which talk about protecting taxpayers from the 
ongoing bailout of Fannie Mae and Freddie Mac. That may be a 
noble goal, but we also have to protect taxpayers from the 
precipitous removal of Fannie Mae and Freddie Mac from the 
housing system in this country, and we have to protect 
taxpayers from a double-dip recession. A second dip could mean 
double-digit unemployment and could make our situation even 
worse than that which we have recently experienced.
    Now, Mr. DeMarco, one issue is the size of the portfolio 
held in the safes of Fannie Mae and Freddie Mac. How large is 
that portfolio, adding the two agencies together?
    Mr. DeMarco. $1.3 billion to $1.4 billion.
    Mr. Sherman. Now if all of that was dumped on the market--
    Mr. DeMarco. Trillion. Sorry about that.
    Mr. Sherman. What?
    Mr. DeMarco. Trillion dollars.
    Mr. Sherman. Yes, I--I knew you meant trillion even without 
the correction. If that was precipitously dropped on the 
market, would Fannie Mae and Freddie Mac secure full value for 
the assets they were selling?
    Mr. DeMarco. No, sir, if you are talking about selling $1.3 
trillion all at once, no.
    Mr. Sherman. In fact, if there was even a precipitous 
decline in the size of that portfolio within any particular 
month, wouldn't that affect the market price of the assets 
being sold and cause Fannie and Freddie to not be able to 
secure full value?
    Mr. DeMarco. It could.
    Mr. Sherman. I yield back.
    Chairman Garrett. I thank the gentleman.
    The gentleman from Texas?
    Mr. Hensarling. Thank you, Mr. Chairman.
    Welcome, Mr. DeMarco. Forgive me. I was at another meeting, 
missed part of your testimony, and came in on part of the 
questioning of the ranking member. So if we are covering a 
little bit of old ground, I apologize.
    Following up on the questioning of the gentleman from 
California dealing in the reduction of their portfolio 
holdings, the GSE report from the Obama Administration itself 
says the PFPAs required reduction in this risk-taking by 
winding down their investment portfolios and an annual pace of 
no less than 10 percent. So I suppose that would be a minimum 
of a 10-year plan.
    I think you mentioned in your written testimony--I didn't 
hear your oral testimony--I believe it was in your written 
testimony that the GSEs are ``on track to meet or exceed the 10 
percent reduction.''
    Mr. DeMarco. Yes.
    Mr. Hensarling. I assume by definition, you do not define 
10 years as acting precipitously. Is that correct?
    Mr. DeMarco. Ten years would not be precipitous, 
Congressman.
    Mr. Hensarling. Okay. Let's talk about 5 years, for 
example. One of the witnesses on the panel to follow you, Mr. 
Pinto, has said in his testimony, ``The natural liquidation 
rate being experienced by these portfolios for 2010 had an 
annualized rate of 21 percent and continued at the same 
annualized rate in January of 2011.'' I think you also noted in 
your written testimony, ``Some faster reduction of the 
Enterprises' retained portfolios may be possible.''
    So if I am--and I looked forward to questioning Mr. Pinto, 
when he--I see him sitting there now--on the second panel, but 
he seems to be under the impression that already these are 
being reduced on a 5-year timeframe, so was the 5-year 
timeframe too precipitous, yet 10 years is just right?
    Mr. DeMarco. Congressman, that question is basically 
impossible to answer, because one doesn't know what market 
conditions are going to be, and I can't tell you what is going 
to--or how much is going to be added to the portfolio--
    Mr. Hensarling. Thank you. I thought that was the answer, 
so you clarified that for me.
    In the Administration's proposal--I say proposal, their 
list of three options that I know you are very well familiar 
with--it seems that option two and option three clearly include 
some form or facet of Federal guarantee mechanism in the 
secondary market.
    About 6 months ago, I believe it was before the full 
committee in September, you seemed to question--call into 
question the government's ability to accurately price these 
guarantees. Reading from your testimony, you 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 cannot manage that amount of mortgage 
credit risk on its own.
    You went on to say, but we might ask whether there is a 
reason to believe that the government will do better. If the 
government backstop is underpriced, taxpayers eventually may 
foot the bill again.
    When I look at the record of the National Flood Insurance 
Program, which is $19 billion in debt, when I look at the 
Federal Crop Insurance Program, which has cost the Federal 
Government almost $40 billion over the past decade, when I look 
at the PBGC, which has a debt, I believe the last number I have 
is $23 billion and counting, with an exposure of over $190 
billion, I would seem to agree that the track record of 
government for accurately pricing this risk is questionable at 
best.
    So my question to you is this. Have you changed your 
opinion in the last 6 months on whether or not there is a 
credible reason to believe that government could accurately 
price risk in the context of the Administration's proposal 
number two and three?
    Mr. DeMarco. Excuse me, Congressman. I have not changed my 
opinion in the context of what I stated in that testimony, that 
there would be risks and challenges for the government being 
able to do that. I have not changed that opinion.
    Mr. Hensarling. Thank you, last question. I see my time is 
winding down. I have heard many on the other side of the aisle 
offer criticisms of those who are proposing reform plans, but 
isn't it true that if we don't have a reform plan, the 
conservatorship that Fannie and Freddie are presently in could 
not continue in perpetuity? Is there a termination date--
    Mr. DeMarco. There is not a termination date set, no, sir.
    Mr. Hensarling. Okay. So if we don't bring forth a reform 
plan, we go to the status quo, and the status quo is 
conservatorship in perpetuity. And I think the last estimate 
from CBO is that, as opposed to $150 billion of taxpayer 
exposure, we would eventually end up at $400 billion. I see my 
time has expired. Thank you.
    Chairman Garrett. And I thank the gentleman from Texas.
    The gentlelady from Wisconsin?
    Oh, I am sorry. The gentleman from Massachusetts? You were 
preempted before by the gentleman from California.
    Mr. Lynch. No problem. Thank you, Mr. Chairman.
    I want to thank Mr. DeMarco for your good work in helping 
the committee.
    One of the bills--one of the eight bills that has been 
proffered by my friends on the other side of the aisle includes 
a provision offered by Mr. Royce of California, my friend, that 
is called the GSE Mission Improvement Act. However, part of 
this bill would repeal the mission of the GSEs to serve the 
section 202 elderly market. These are folks who are 62 years of 
age and older. We have a huge demographic in this country of 
people 62 years and over. As baby boomers retire, this is going 
to be a very critical part of the population served by section 
202 housing.
    As someone who grew up in the old colony housing projects 
in south Boston, and my involvement on the housing committee 
the last few years, this section 202 housing happens to be some 
of the most successful housing that we have in the country. It 
is the best-managed. It is the cleanest. It is the safest. It 
is the most desirable. And, again, with that demographic of 
folks coming into 62 years of age and older, it is desperately 
needed.
    In my district, I have half the City of Boston, I have the 
City of Brockton, and 19 towns in between. I am at my wit's end 
trying to get more 202 housing in there.
    I am very concerned about what this bill would do by 
eliminating the mission of serving this market. And I am hoping 
that you might be able to shed some light on that, what the 
impact would be for that market and for those seniors who are 
served. What happens? What happens when we stop serving this 
market and this 202 housing goes away?
    Mr. DeMarco. Congressman, I am not--I could do some 
research and get back to you about the particulars of the 
current activity of Fannie and Freddie with respect to the 202 
program. What I would say is that, as I understand Congressman 
Royce's bill, this would be consistent with what the approach 
we are already taking in conservatorship, which is, if it is a 
line of business that Fannie and Freddie are not already in, 
that they would not start doing it.
    I presume from your question that this is something where 
they are already active. And so my view of this that Fannie and 
Freddie's charter acts fundamentally require them to serve the 
full range of markets that is available to them, that is, for 
which they are eligible to participate, and I believe it would 
be our responsibility as both regulator and conservator to 
ensure that they remained active in serving all segments of the 
market that are available to them, that are part of their core 
business activities.
    So I would not expect a reduction or elimination in housing 
goals to necessarily alter what it is that they would be doing, 
because I think that they have an overriding charter 
responsibility to be served in the housing market.
    Mr. Lynch. I appreciate that. I just hope that we don't 
forget the history here. Section 202 housing was developed for 
seniors. You have to be 62 years of age or older. You can't--
    Mr. DeMarco. Yes, sir.
    Mr. Lynch. There is no other way to get into that housing. 
And the reason that we had to come up with that model was 
because, in the general family housing and elderly handicapped 
housing model, because of the laws in this country, we had to 
include a lot of people in the old handicap/elderly model that 
their needs were much different than elderly people.
    If they were drug-addicted, handicapped, we had some 
horrific experiences when we put seniors in the same housing 
with very young people who were handicapped because of 
addiction to heroin and whatnot. So we created this model to 
protect seniors and also to better serve those people who were 
in addiction, because they have a different set of needs. We 
bifurcated this. And so that is why have 202 housing.
    Mr. DeMarco. Thank you, Congressman. That helps. And so, 
again, to reiterate, my understanding of Congressman Royce's 
bill is it--the extent to which Fannie and Freddie are serving 
that market today, I do not understand that bill would preclude 
them from continuing to serve it, nor would I view it as 
responsible as either regulator or conservator for them to be 
walking away from a segment of the market just because the 
housing goals--
    Mr. Lynch. The bill would eliminate the provisions of HERA, 
which established a duty of the GSE to serve the 202 elderly 
market.
    Mr. DeMarco. And that is why--
    Mr. Lynch. If they are not going to serve that market, I 
think it goes away.
    Mr. DeMarco. So that is what I am trying to be--
    Mr. Lynch. You are doing 90 percent of the mortgages 
through the GSEs right now, so--
    Chairman Garrett. We will let the gentleman answer, and 
this will be the--
    Mr. DeMarco. I am simply trying to express that--I am not 
personally aware of what portion of activity Fannie and Freddie 
have in a 202 market today. If they are not serving it already, 
we are not going to get them to start serving it. But if they 
are serving it, I don't see how removing the duty to serve 
requirement would cause any change in their continued service 
to that segment of the market.
    Chairman Garrett. Okay, thank you.
    Mr. DeMarco. And that is being consistent in what we have 
set forth as conservator, that we are not getting them into new 
lines of business.
    Chairman Garrett. I thank the gentleman.
    Mr. Lynch. I have exhausted my time. Thank you, Mr. 
Chairman.
    Chairman Garrett. Thanks a lot. I appreciate it.
    The gentlelady from Illinois?
    Mrs. Biggert. Thank you, Mr. Chairman.
    Mr. DeMarco, for a couple of years now, I think I have been 
asking this question. You probably know what it is. It is about 
Fannie and Freddie's exclusive list of law firms that have 
handled the foreclosures.
    Reports have indicated that there are--that these few firms 
get paid by the foreclosure, and there has been a rush to 
process those foreclosures to increase earnings. And meanwhile, 
there are reports of fraudulent paperwork among other paperwork 
problems. And these have also been reported.
    I would actually ask to submit for the record the 
Washington Post story dated December 23, 2010, ``Rush to 
foreclose by Fannie, Freddie helped feed problems with legal 
paperwork.''
    Chairman Garrett. I am sorry?
    Mrs. Biggert. I asked to submit--
    Chairman Garrett. Without objection, it is so orderd.
    Mrs. Biggert. Thank you. Back to the question.
    What have you done to review the need for this exclusive 
list or whether it should exist? Have you initiated audits of 
these law firms? And how many?
    Mr. DeMarco. We have been doing a lot, in terms of taking a 
close review of these law firms. Fannie and Freddie certainly 
have. I think it is well known that a couple of them have 
caused a great deal of difficulty and loss to the Enterprises. 
They have been taking steps to expand, and they have been 
expanding the range of firms that are participating.
    But, Congresswoman, to the core of your question, we are 
taking a fundamental look at the use of and reliance on these 
firms as part of the foreclosure process and process.
    Mrs. Biggert. Has there been any--not just a review, but 
are they being charged with anything?
    Mr. DeMarco. There are several firms that have been 
dismissed, if you will, no further business is being done, and 
ongoing business has been transferred. And, yes, there has been 
a heightened scrutiny of those that are continuing.
    Mrs. Biggert. And did you do audits of these law firms? Is 
that proper to do?
    Mr. DeMarco. We do audits of Freddie and Fannie in terms of 
how they manage counterparty risk. So as part of our 
examinations, we have been undertaking additional exam 
activities to look at how Fannie and Freddie are managing those 
counterparties. Fannie and Freddie in turn have been taking a 
closer look at the performance and controls of their law firm.
    Mrs. Biggert. Okay. And should the FHFA Inspector General 
have access to all of FHFA's records, reports, audits, reviews, 
documents, papers, recommendations, or other material that is 
available to FHFA?
    Mr. DeMarco. As any other inspector general, yes, ma'am, 
and they do.
    Mrs. Biggert. Okay. And that is provided in section 6(a)(1) 
of the Inspector General Act of 1978?
    Mr. DeMarco. I believe that is right. Our Inspector 
General, with all reference to the authorities there in the 
Inspector General Act of 1978, as amended.
    Mrs. Biggert. Okay. Would this also include the books and 
records of the GSEs, which are available to FHFA?
    Mr. DeMarco. The books and records of the GSEs are 
available to FHFA, as both the regulator and the conservator. 
The role of FHFA's Inspector General is to oversee FHFA and how 
we are conducting and carrying out our responsibilities as both 
the regulator and now as the conservator. I think that our IG 
has been under way for 6 or 7 months, and has been very active. 
And I think we have been developing a good process for ensuring 
that the IG has access to the information he needs to carry out 
his audits and evaluations of FHFA.
    Mrs. Biggert. But the answer would be ``no?''
    Mr. DeMarco. The books and records are available to FHFA, 
yes, not to the IG.
    Mrs. Biggert. Okay. Thank you.
    Mr. DeMarco. I will say that there are certain exceptions. 
Questions like that are difficult because there are 
circumstances and particular activities, such as criminal 
investigations and so forth, for which different answers apply.
    Mrs. Biggert. So there would be some limitations?
    Mr. DeMarco. Yes.
    Mrs. Biggert. Yes, okay. And then you have--in looking at 
the three options that the Treasury has proposed, has said 
there is a privatized system of housing finance, with the 
government insurance role limited to FHA, USDA, and Department 
of Veterans Affairs assistance. Could you provide us with some 
ideas as to how option one could work specifically for multi-
family housing?
    Chairman Garrett. And the gentleman's answer is your final 
answer.
    Mr. DeMarco. Honestly, Congresswoman, that is a challenging 
question. I would like a little more opportunity to think about 
that.
    Mrs. Biggert. Maybe you could put that into writing?
    Mr. DeMarco. I would be happy to get back to you on that.
    Mrs. Biggert. Thank you. I yield back.
    Chairman Garrett. I thank the gentlelady.
    The gentlelady now from Wisconsin is recognized.
    Ms. Moore. Thank you so much, Mr. Chairman.
    I actually would like to follow up on Mrs. Biggert's 
questions. I have three specific questions. First, how does the 
absence of GSEs, what impact would that have on affordable 
housing? Isn't it sort of oxymoronic to talk about producing 
affordable housing and yet having a private entity provide the 
securitization?
    Second, I wanted to ask you about the liquidity. On page 
four of your testimony, you talked about the importance of 
keeping the GSEs focused on their existing core business and 
generating earnings, therefore benefiting taxpayers. And you 
also say that, because the private mortgage securitization 
market is already banished by this time, there were no other 
effective secondary market mechanisms in place. So I would like 
your view on whether or not the private sector and 
privatization really can take the place of providing secondary 
mortgage markets.
    And on page six, you talk about how the Nation's housing 
finance structure depends on institutions capable of absorbing 
the flows that a market of that magnitude generates. You talk 
about, for example, the single-family market being a $10 
trillion market. So if we were to privatize the secondary 
securitization, would we not be, indeed, creating too-big-to-
fail institutions?
    Mr. DeMarco. Congresswoman, let me take the questions in 
order. With respect to affordable housing, as I understood it, 
you were asking whether I thought that the affordable housing 
segment of the mortgage market would be served or could be 
served if we were operating with secondary mortgage market 
entities that were fully private, that it did not operate with 
a government guarantee. I think that the answer to that is 
``yes.'' I don't see why it wouldn't, because that is a large 
market segment. It is one where profits can be made and where 
customers can be served.
    Ms. Moore. Without a lot of fees? What would the fee 
structure be?
    Mr. DeMarco. Congresswoman, I can't answer that, except to 
say that I would assume that the fees would be risk-based. And, 
there is a lot that has changed in our mortgage market in terms 
of private institutions serving low- and moderate-income 
households and serving the rental market.
    This market has long had and continues to have today a 
great deal of government involvement, not just at the Federal 
level, but also at the State level. So in considering your 
question, assuming that there is still an array of Federal 
through FHA, State through State and local housing finance 
agencies, actors still involved, but I do think that in terms 
of thinking about the role that Fannie and Freddie have played 
in the conventional conforming mortgage market over the years, 
including serving low- and moderate-income households, I do 
think a portion of that can be served by private institutions.
    With respect to your second question about, can the private 
sector take the place of Fannie and Freddie in the secondary 
mortgage market? I think fundamentally that is really, in 
essence, the question the Administration--
    Ms. Moore. Liquidity.
    Mr. DeMarco. --its White Paper.
    Ms. Moore. Would it wipe out the small banks, the community 
banks? How would they fare in this market with respect to 
liquidity?
    Mr. DeMarco. With fully private, I think that the more 
competitive that market is, the better served small- and mid-
sized lenders would be. And so I would commend to the 
subcommittee that, in thinking about each reform of the 
secondary mortgage market, that the more competitive this 
marketplace is, I think the better for borrowers and the better 
for small- and mid-sized loan originators.
    I think that this is really the core question. And I must 
say that, in terms of market participants that I talk to, I 
find an array of views about this, as to just how much of a $10 
trillion or $11 trillion single-family mortgage market can be 
effectively financed by capital markets, whether domestic 
investors or foreign investors in U.S. mortgages, how much of 
that can be done without any connection or backstop or 
guarantee from the government?
    So if you view the range as being between zero on the one 
hand and we have about an $11 trillion single-family mortgage 
market on the other, somewhere in there is an answer or a range 
of answers of how much can be done effectively by fully private 
firms. And I think that is the core question that the Congress 
is going to have to grapple with in determining the future of 
the secondary mortgage market.
    Chairman Garrett. I thank the gentlelady.
    The gentleman from California?
    Mr. Royce. Thank you, Mr. Chairman.
    I wanted to ask you, Mr. DeMarco, I want to thank you for 
your testimony, but briefly, on the affordable housing goals 
legislation, you mentioned in your testimony that, ``Similar to 
the housing goals, eliminating the duty to serve requirements 
could be consistent with the realities associated with the 
Enterprises operating in conservatorship.''
    Could you please elaborate on that point? Walk us through 
that.
    Mr. DeMarco. Certainly. Congressman, the duty to serve 
requirement was new in the HERA legislation enacted in 2008. It 
does not set quantitative--Congress did not want FHFA to set 
quantitative goals, but instead identified three areas of the 
housing market where it identified Fannie and Freddie as having 
a duty to serve them, and the legislation was encouraging them 
to take innovative steps to develop more product and activity 
in that area.
    In conservatorship, we are restricting Fannie and Freddie 
to their existing core business activities. It is inconsistent 
with conservatorship, in my view, to engage in new lines of 
business where you have to develop new infrastructure, new risk 
controls, new underwriting, and so forth, and new technology to 
service.
    And so the approach we took in our proposed rule on duty to 
serve was to implement the duty to serve requirement in areas 
that Fannie and Freddie were already providing support and to 
those particular market segments, but not to require them to 
develop new products in order to satisfy duty to serve, because 
that was what was in an inherent conflict with the approach we 
are taking in conservatorship.
    Mr. Royce. And also, with the experiences in the past, let 
me ask you--and we touched a little on this issue--but last 
month, the president of the Richmond Federal Reserve, Jeff 
Lacker, criticized proposals similar to the ones that will be 
touted on the second panel. And what Richmond President Jeff 
Lacker said was that many proposals would make government 
guarantees on home mortgages explicit and priced. Such 
proposals differ mainly in the nature of the intermediaries 
through which such guarantees would be channeled, but 
perpetuating guarantees for housing-related debt will continue 
to artificially stimulate the risky leverage that critically 
fueled the disastrous housing boom we have just experienced.
    The devastating consequences of the housing bust suggest 
that government backstops for housing finance are not worth the 
price of overbuilt, overleveraged, and at times overheated 
housing markets, on top of the fiscal burden of large 
contingent liabilities.
    You have made comments raising concerns with simply making 
a government guarantee explicit, rather than implicit. I wonder 
if you would comment on some of the other aspects of Mr. 
Lacker's statement there. I would like to get your thoughts on 
that.
    Mr. DeMarco. Certainly. As an economist, I would share the 
general principles that Mr. Lacker has set forth. I would add 
to that--certainly economists recognize that where there are 
either market failures or where there are public policy 
objectives that are to be served, there can be a role for 
guarantees, subsidies, or other incentives provided by 
government to incentivize greater activity in an area relative 
to what purely private actors would create. And that is really 
a determination for lawmakers to make, not regulators.
    Mr. Royce. My time is up, but, Mr. DeMarco, thank you very 
much.
    Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman has one more minute. Do you 
have another question? Okay.
    The gentleman from Colorado?
    Mr. Perlmutter. Thank you, Mr. Chairman.
    Mr. DeMarco, let me begin with a couple of comments you 
made. In the conservatorship, you are not taking on any new 
products, new approaches. It is just trying to keep things 
going, right?
    Mr. DeMarco. We are trying to restrict the Enterprises to 
their existing core business activities, to remediate where 
they had weaknesses in those business activities, and to keep 
them from getting into new lines of business or new products, 
yes, sir.
    Mr. Perlmutter. Anecdotally, I hear out there, 5, 6, 7 
years ago, that 2003 to 2007 timeframe, anybody could get a 
mortgage if they were breathing. Obviously in this 
conservatorship mode, Freddie Mac and Fannie Mae are much more 
restrictive in what they will buy. Is that a fair statement?
    Mr. DeMarco. Their underwriting standards have been 
appropriately strengthened, yes, sir.
    Mr. Perlmutter. What I have heard is the pendulum was very 
easy back in that 2003 to 2007 timeframe, much more difficult 
now.
    Mr. DeMarco. I would say that underwriting standards have 
strengthened and pricing has become more risk-based. And I 
would say, Congressman, that is probably where it is actually 
seen its effects, is we were under pricing credit risk, and now 
we are getting at least closer to having appropriate pricing of 
credit risk.
    Mr. Perlmutter. Okay, and I will take your answer as a 
``yes.''
    Mr. DeMarco. Yes, sir.
    Mr. Perlmutter. I ask those questions because of some 
questions Mr. Hensarling posed to you, that there were some 
$150 billion in troubled loans that are part of the 
conservator's package and responsibility, but have those 
developed during the term of the conservator? Or were those 
things that preceded the conservatorship?
    Mr. DeMarco. Most of the troubled loans and delinquent 
mortgages we are dealing with, sir, were originated pre-
conservatorship.
    Mr. Perlmutter. Okay. So at this point, based on the 
underwriting standards, you wouldn't expect to have that level 
of troubled loans on a going-forward basis, would you?
    Mr. DeMarco. That is correct.
    Mr. Perlmutter. Okay. There were a couple of areas where I 
did agree with Mr. Hensarling. Obviously, we have some 
financial issues we must confront in this country. He and I 
absolutely disagree as to how we got here. I believe when the 
Bush Administration took a voluntary pay cut, in effect, cut 
our taxes substantially in 2001, 2002, prosecuted a couple of 
wars to the tune of $1 trillion, and then we don't have enough 
police on Wall Street in 2008 and that put this country behind 
the financial eight ball.
    But we are behind the financial eight ball, which brings me 
to a second question. Obviously, in this conservatorship, you 
are not taking on anything new, but there are places, I 
believe, and your counsel and I have talked about this in the 
past, which are called real estate mortgage investment 
conduits. Are you familiar with that concept, sir?
    Mr. DeMarco. With REMICs? Yes, sir.
    Mr. Perlmutter. Okay. And the reason I am asking it is, 
there are certain portfolios--there are certain bonds that you 
have sold, either Fannie Mae or Freddie Mac has sold, that had 
very substantial interest rates back in the 1980s and the 
1990s, compared to the interest rates today. So there is an 
opportunity in those older bonds to call those bonds and make 
some money. Are you familiar with that?
    Mr. DeMarco. I am familiar with this issue, yes, sir.
    Mr. Perlmutter. Okay, I just want to bring it to your 
attention, because at least a couple of the proposals that the 
Republicans have brought forward--particularly for me, Mr. 
Schweikert's, and Mrs. Biggert's, have real merit in kind of 
advancing and continuing to build Fannie Mae and Freddie Mac. 
But I probably will want to reiterate the fact that the 
American taxpayer could make some money if some of those loans 
that are at higher interest rates were called today.
    And so I will--don't be surprised if you see an amendment 
that, instead of focusing on NPR or Planned Parenthood or 
things that, in my opinion, didn't cause the debt this country 
faces, we actually do something where there is money on the 
table that would benefit the American taxpayer.
    So I thank you for your service in this difficult time. I 
really do. And I thank you for your testimony today.
    Mr. DeMarco. Thank you.
    Chairman Garrett. The gentleman yields back. And we look 
forward to working with the gentleman on a number of those 
bills.
    And with that, I yield to the gentleman from Texas.
    Mr. Neugebauer. Yes, thank you, Mr. Chairman. Thank you, 
Mr. Demarco, for being here.
    A couple of thoughts here. One is, I appreciated your 
thoughts on raising the guarantee fee. You and I have had a 
number of conversations about that. And I guess the question 
is, is from a strategy standpoint, is the goal here to just 
keep raising the G-fee until you start to see some private 
activity foregoing sanitizing these mortgages through Freddie 
and Fannie and begin to see some private activity? Or what is 
going to be your criteria and your goal in your G-fee strategy?
    Mr. DeMarco. The approach we have been taking is to ensure, 
first of all, we have been focused on enhancing the risk-based 
characteristics of pricing, so that riskier mortgages are, in 
fact, charged a higher price. In the pre-conservatorship world, 
there is a tremendous amount of cross-subsidization going on 
from low-risk borrowers to high-risk borrowers, and we are 
trying to gradually correct that by enhancing the risk-based 
characteristics of the pricing.
    And the other is that we are continuing to move in a 
direction of looking at the risk characteristics of a 
particular group of loans based on their characteristics, 
determine what is the appropriate amount of economic capital 
that would be required to back that, if these were operated as 
private entities, and then what the rate--at least getting to a 
rate of against that sort of imputed capital that would be 
needed to back that. So that is really the benchmark that we 
are looking at as we take these gradual steps with price 
adjustments.
    Mr. Neugebauer. I think you brought up something else that 
I agree with, and that is that, in order to continue to create 
some space for the private market, lowering the conforming loan 
limits has to be a part of that strategy, because basically 
what we have done is we have pushed the jumbo market way up 
there now with the current limits, and so basically all of the 
private activity that seems to be going on in the marketplace 
right now is at the jumbo level.
    So I guess if you bring the jumbo level down some, you 
begin to create some space for the--do you have the authority 
as the conservator to say to the entities, ``I am establishing 
new conforming loan limits, and from this point forward, this 
will be your conforming loan limit?''
    Mr. DeMarco. The conforming loan limit is driven by 
statutory direction and formula, and we simply implement that.
    Mr. Neugebauer. I think the man behind you is going to 
disagree with you here.
    Mr. DeMarco. Oh, okay, thank you. I am being advised that 
my answer is partially correct. It is established by formula, 
but apparently I have authority to go lower.
    Mr. Neugebauer. Would you consider doing that?
    Mr. DeMarco. Since I have just discovered that I have this 
authority, I would have to--I suppose I would consider it. What 
I would do with it, Congressman, I am not sure.
    This has traditionally been something that has been really 
directed by Congress. The adjustments have been directed by 
Congress. And for me to make a change in that, as a regulator, 
I really want to think hard about that.
    Mr. Neugebauer. I would just say this to you, Mr. DeMarco, 
that you are a conservator for the taxpayers of the United 
States of America. And so if you feel like it is in the best 
interests of the American taxpayers to begin a process of 
lowering those conforming loan limits, we certainly would 
expect you to fill your fiduciary responsibility and consider 
that.
    I want to go to another area where we were talking about 
the portfolio. And I agree with a number of my colleagues. I 
think the sooner we reduce our portfolio, the better. And I 
think sometimes--and there is an old banking saying that your 
first loss is sometimes your cheapest loss.
    One of the things that I am concerned about is--and you and 
I have talked about this a little bit--that basically your 
portfolio reduction is actually being slowed down some by the 
fact that you are purchasing some of these troubled loans 
rather than paying the principal and the interest deficiency on 
those loans. And I guess you have been bringing them into your 
portfolio and trying to rework them. I think in some cases you 
are selling those properties and putting new borrowers in 
there.
    And so my feeling is that, as we are really bringing the 
troubled loans into the portfolio, we are probably selling the 
better quality loans, and so basically the quality of the 
portfolio is probably deteriorating. Would that be a correct 
assumption?
    Mr. DeMarco. Certainly, the liquidity of the assets are 
deteriorating, because just as you quite rightly point out, the 
shift in the share of the mortgages that are financed on 
balance sheets by Fannie and Freddie are modified loans or 
otherwise troubled loans. And so that makes them much more 
difficult to sell.
    Mr. Neugebauer. Just one quick question. Have you 
considered looking at a liquidation of some of the portfolio 
loans without a Freddie or Fannie guarantee?
    Mr. DeMarco. The idea--
    Mr. Neugebauer. Kind of--
    Mr. DeMarco. The idea, in terms of REO, most of that is 
sold--
    Mr. DeMarco. You are talking about loans. The idea has 
occurred to us. And actually, in my written statement, my 
commentary about one of the bills, about no new products, was, 
in fact, making really by inference--that was one of the things 
I had in mind, Congressman--is that while I remain steadfast in 
my view that as conservator we should not have the Enterprises 
entering new businesses and new product lines, that at some 
point, we might want to revisit that question, if it is part of 
a considered transition mechanism, really worked out with the 
Congress, about moving from Fannie and Freddie as we have them 
today to greater private participation.
    That is one mechanism that could be considered. And that 
needs to be balanced against the fact that it would be 
considered a new product.
    Chairman Garrett. I thank the gentleman. And perhaps just 
on that, if you have specific ideas in that area, the gentleman 
and the committee would probably like to hear as to what those 
specific areas would be needed in order to get into that 
transitional phase, that might want to be excluded from any 
area limited--with the limitation on new products.
    Mr. DeMarco. Certainly. I would welcome that discussion 
with any members of the committee. It is not something where I 
have a plan today. I am simply anticipating where we might find 
ourselves.
    Chairman Garrett. Okay. The gentleman from North Carolina 
is recognized.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. DeMarco, you and I agree that the principal 
consideration, perhaps the only consideration for FHFA as 
conservator of Fannie and Freddie should be reducing the losses 
of taxpayers, but it appears pretty clear that the cycle we 
have of foreclosures leading to declining home values, 
declining home values leading to more borrowers, more 
homeowners being underwater, leads to more foreclosures, and on 
and on, it clearly is in the interest of taxpayers for FHFA, as 
conservator of Fannie and Freddie, to minimize the continuing 
decline in home values. Isn't that correct?
    Mr. DeMarco. Yes, sir.
    Mr. Miller of North Carolina. Okay. The power--and you and 
I have corresponded about this, and I appreciate your response 
to my earlier letter, that more than 50 other members signed. 
The GSEs, Fannie and Freddie, obviously have enormous market 
power in the mortgage market now. Not only are they 50 percent 
of legacy loans, but they are in essence the entire market for 
new loans. There is no PLS market now.
    Mr. DeMarco. Right. It is Fannie, Freddie, and the FHA, 
basically.
    Mr. Miller of North Carolina. Okay. Why would it not be in 
the taxpayers' interest for FHFA, as conservator of Fannie and 
Freddie, to use that market power to try to reform the market 
for servicers, servicers' conduct, with respect to your own 
servicers, that they not do all of the things that we have 
heard complained about, the dual track, the lack of a single 
point of contact, the failure to terminate the contracts with 
those servicers who keep losing paper, for instance.
    Why is FHFA as conservator not using your market power to 
reform the servicing industry, which seems to be in dire need 
of reform?
    Mr. DeMarco. Indeed, I agree with you. And I would say that 
we are working very hard on the very set of things you just 
described. I made a presentation in the Mortgage Bankers 
Association's annual servicing conference last month, and I 
told them rather directly that we were working with Fannie and 
Freddie to revise and make consistent a whole set of practices, 
timelines, and penalties, with regard to mortgage servicing, so 
we wouldn't have this--Fannie wants it this way, but Freddie 
wants it that way. No, we are not doing that.
    We are getting them consistent. We are going to be 
rigorous, and there are going to be penalties associated with 
failure to service properly based on this, and we are very much 
engaged in that activity.
    Mr. Miller of North Carolina. And are you using--are you 
applying those expectations, those standards to the same 
servicers in how they handle PLS mortgages?
    Mr. DeMarco. No, sir, I don't have regulatory authority 
over what mortgage servicers are doing.
    Mr. Miller of North Carolina. You have contractual 
authority.
    Mr. DeMarco. Pardon?
    Mr. Miller of North Carolina. Contractual authority.
    Mr. DeMarco. My contractual authority is what we were 
trying to exercise, yes.
    Mr. Miller of North Carolina. Your contract can say--why 
can't it not say that, with respect to your servicing standards 
generally, with respect to all clients, you must do these 
things?
    Mr. DeMarco. I will take that under consideration, check--
and I will go back and see if that is feasible for us.
    Mr. Miller of North Carolina. Okay. And you and I have 
corresponded about principal reductions and the value of that. 
It seems that every study that has looked at the success of 
modifications has found that modifications that reduce 
principal, particularly--especially for those underwater, are 
much more successful if they reduce principal.
    And you said that actually not that many of FHFA's--of 
Fannie and Freddie, the Enterprises' mortgages are underwater, 
and it certainly makes sense that your book of business would 
be substantially better than the PLS book of business.
    But why are you not pushing them to reduce principal to the 
extent it is consistent with their contracts, PLS contracts?
    Mr. DeMarco. First of all, Congressman, some of these 
studies that purport to show principal forgiveness as superior, 
as minimizing losses, are actually combining principal 
forgiveness and principal forbearance, which are different 
concepts and matter a lot to me as conservator.
    As conservator, some of the loan modifications that Fannie 
and Freddie are doing, in fact, include principal forbearance, 
which means that you are basically being charged a zero rate of 
interest on the principal, but we are retaining--the principal 
value is still owed.
    And what that does, essentially, is that over time it 
retains for the Enterprises an upside should markets continue 
to improve, that households be able to maintain a good, steady 
payment on the modified loan. It has the potential to improve 
the net realized value on that mortgage for the Enterprise, 
whereas principal forgiveness, once it is forgiven, then that 
is it. There is no upside potential.
    The other thing, in response to an earlier question, the 
vast majority of the Enterprises' underwater mortgages are 
continuing to perform. They are paying timely, and we would 
like to continue that, and it is our expectation that those 
households will continue to honor their financial commitments. 
So we are using principal forbearance as a tool in the loan 
modification process as a way of getting an affordable payment 
for consumers.
    The other thing--the comment I had made earlier before you 
arrived, in response to another question, is that in our 
examination of data of households that have received loan 
modifications, the performance rate on those modified loans 
does not seem to vary much with what the actual current loan-
to-value is.
    So we see that there is a value in getting the borrower 
that is committed to their home into a payment that they can 
afford, and they then succeed in paying that modified loan 
regardless of what their loan-to-value ratio is.
    So we have been trying very hard to take an empirical 
approach to looking at this--at this important question, 
because I agree with you. This is a very important question. 
And as I said in my correspondence to you, there may be well be 
other segments of the market, and particularly in the private-
label realm, where principal forgiveness makes more sense.
    Mr. Miller of North Carolina. And, Mr. Chairman, my time 
has expired, but--
    Chairman Garrett. Your time is--
    Mr. Miller of North Carolina. If I could have 30 seconds?
    Chairman Garrett. You are a minute and 40 seconds over, so 
let me go to the gentleman from New Mexico, please.
    Mr. Pearce. Thank you. Thank you, Mr. Chairman.
    Thank you, Mr. DeMarco. On page one, you refer to the 
business as doing much better, but you also refer to 
substantial credit losses. How much are those credit losses?
    Mr. DeMarco. The credit losses have been--I am sorry, on 
the order of $180 billion, I think--
    Mr. Pearce. --$180 billion, in this past year?
    Mr. DeMarco. No, sir. I am talking since--the losses 
against capital from 2008.
    Mr. Pearce. I understand, but you say it is significantly 
better, but it still has credit losses during the current--
    Mr. DeMarco. Oh, credit losses in 2010 were much smaller 
than in prior years.
    Mr. Pearce. How much are those?
    Mr. DeMarco. I am sorry, Congressman. I will get you the 
number.
    Mr. Pearce. You have an approximate ballpark?
    Mr. DeMarco. It is in the order of $20 billion to $30 
billion.
    Mr. Pearce. Okay, so on page three, you refer to $28 
billion drawdown, right?
    Mr. DeMarco. Yes, sir.
    Mr. Pearce. Is that then the amount of the credit losses?
    Mr. DeMarco. That is pretty close to it, sir, because some 
of the draws are due to having to make dividend payments--
    Mr. Pearce. Okay, that is--that will--
    Mr. DeMarco. --to make dividend payments.
    Mr. Pearce. So let me try to get this business model in 
mind. You have 30 million loans, and 1.5 million are 
nonperforming, right? And those are creating losses of $28 
billion, which you drew down from the Treasury. Is that more or 
less correct? I see somebody shaking their head.
    Mr. DeMarco. We have been reserving for those losses as we 
go along, so they have built-up loan-loss reserves that have 
been reflected in part--
    Mr. Pearce. Okay. So you have basically 28.5 million loans 
that are performing, right?
    Mr. DeMarco. That would seem about right.
    Mr. Pearce. Yes. And those loans have the value of about 
$5.5 trillion. Is that right? That is on page four of your 
testimony.
    Mr. DeMarco. Yes, sir.
    Mr. Pearce. So how much do you make on the $5.5 trillion? 
What are your revenues off the $5.5 trillion? And where 90 
percent, 95 percent are performing, what are your revenues 
then?
    Mr. DeMarco. The revenues that we are making on that are 
basically the guarantee fees that are being charged.
    Mr. Pearce. No, how much? What quantity?
    Mr. DeMarco. I am sorry, Congressman. I don't keep these 
numbers straight in my head--quite available.
    Mr. Pearce. Excuse me, sir. You are a conservator of $5.5 
trillion, and you don't know how much money you are making? Can 
any of the people behind you tell us how--because what I am 
getting at is that, if you make 10 percent--and 10 percent is a 
very low value for a business model--you are sitting at $550 
billion and yet you are drawing down from the Treasury. And I 
think the American people have a right to know that.
    And for you to come to a meeting here on a business model 
where you are talking about conserving the value for the 
taxpayers, I think that is one of the most basic questions of a 
business model. You are in the business of business, and you 
don't know how much money you made in the last 12 months. Do 
any of the four people behind you know that?
    Mr. DeMarco. Total credit-related expenses for Fannie Mae 
last year was about $27 billion. Total credit-related expenses 
for Freddie Mac in 2010 was $21 billion. The net income for 
Fannie Mae last year was negative $14 billion, and it was the 
same for Freddie, a negative $14 billion.
    Mr. Pearce. Okay, let's hold up right here then. So let me 
get this clear. You have 28.5 million performing loans, and you 
have 1.5 million nonperforming loans, and your performing loans 
are outweighed so that you have $114 million net loss in 
revenue, net income.
    Mr. DeMarco. $14 billion net loss for the year.
    Mr. Pearce. $14 billion net loss. So you have 95 percent 
performing loans and 5 percent nonperforming loans. I think 
there are some serious flaws. If I have a business and I am 
performing at 95 percent capacity, I can go to 0 percent on the 
others and they should never, never, never outweigh.
    So what you are asking me to believe is that the losses 
from 5 percent of your loans, from 1.5 million loans, outweighs 
the revenues from 28.5 million loans? That seems to me to be 
preposterous. If you look at it in large terms, you have $5.5 
trillion of performing loans minus 5 percent. When I do the 
math, they are worth about $200,000 apiece, and I assume that 
$200,000 per loan goes across to the other side.
    So you have 1.5 million nonperforming loans at $200,000 
apiece, that is about $300 billion on our portfolio, thinking 
of $5.5 trillion? Something stretches--what is it that I am 
missing here?
    Mr. DeMarco. Congressman, I think--so I would welcome the 
opportunity to sit down with you and walk through this. But the 
thing about it is, I can't be making $200,000 on a loan when 
the average loan size is itself less than--
    Mr. Pearce. No, I am not saying you are making it. I am 
saying the loan size itself. The loan size itself--
    Mr. DeMarco. And so the earnings that the companies are 
making, they are securitizing these mortgages, and so they are 
making maybe--they are charging maybe 20 basis points, 15, 20, 
25 basis points on a mortgage as the guarantee fee. And from 
the guarantee fee, they have to pay their operating expenses, 
cover their credit losses, and then the rest is their income.
    Mr. Pearce. I welcome the opportunity to visit with you in 
the office to look at it, because I don't see a market where 
you have 1.5 percent nonperforming, 1.5 million, 5 percent 
nonperforming, sinking the 95 percent performing.
    Thank you, Mr. Chairman.
    Mr. DeMarco. Congressman--
    Chairman Garrett. And I thank you.
    The gentleman from Texas?
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing. And I think that we all agree that we have to do 
something with reference to Fannie and Freddie. The question 
becomes, what do we do? And also, when do we do it?
    Would it be prudent to simply eliminate Fannie and Freddie 
and not have some idea as to what the market structure will be 
upon elimination?
    Mr. DeMarco. No, Congressman, I think the better course 
would be to have some sense of what the legal framework and 
institutional arrangements would be for the country's secondary 
mortgage market.
    Mr. Green. And can you give some indication as to what we 
might have to confront if we don't give some prudent thought to 
this process, such that at the end of the day we have in place 
some structure that we can at least associate some degree of 
predictability with, in terms of how the market will react to 
it and how it will impact the market? What could be some of the 
consequences of simply repealing, capping, eliminating, without 
having some idea as to what the structure will be?
    Mr. DeMarco. One would expect that the implications would 
be higher mortgage rates and less liquidity in the mortgage 
markets.
    Mr. Green. And what would these higher rates and the lack 
of liquidity or not as much as we might have, how would that 
impact an economy that is recovering?
    Mr. DeMarco. All else being equal, obviously, those things 
would make the recovery more difficult.
    Mr. Green. I am asking you to give these kinds of answers, 
sir, because I think that while efforts to repeal, eliminate, 
and downsize are noble, I don't question the motives. I do 
think that we need to have a comprehensive approach that 
addresses not only what we would like to do in terms of 
downsizing Fannie and Freddie, but also what the structure is 
going to be at the end of the day if that happens.
    Because my fear is that we may end up with a market that 
has much higher interest rates than we want. Many persons will 
not be able to afford a home, which will then impact other 
organizations. You have REALTORS who do business and who 
depend on the opportunity to have interest rates that are 
reasonable, so that people can buy. And as a result, they have 
businesses that can continue to flourish. The domino impact of 
this can be huge.
    And I am concerned about how that domino impact can impact 
the market. Do you have any thoughts on the impact that--we 
will go beyond simply just eliminating Fannie and Freddie and 
move to the broader economy and the dominos and how they may 
start to fall and collide with each other?
    Mr. DeMarco. Congressman, I actually have a great deal of--
though I have been challenged the last few years--faith in the 
resiliency and robustness of private financial institutions and 
the financial system of this country.
    I think that a gradual program of moving away from the 
degree of government support for the mortgage market to one 
that involves greater reliance on private capital and private 
institutions is something that is achievable and it is 
something to--that I understand most to be wanting to work 
towards.
    Precipitous action in the economic state we are in could be 
problematic and could raise costs to taxpayers and could be 
further disruptive to the housing market.
    But I agree with you that working on a gradual transition 
and transformation, something that we are doing as conservator 
of Fannie and Freddie would be helpful to the housing market, 
but we can move over time--
    Mr. Green. If I may, because my time is about to expire. 
Would you simply define a phrase that you utilized, 
``precipitous action?'' Would you define that, please?
    Mr. DeMarco. If I was told to shut things down tomorrow at 
Fannie and Freddie and they were no longer purchasing or 
securitizing mortgages, I would view that as a precipitous 
action.
    Mr. Green. That would be an extreme action, obviously. Can 
you give me something that would be not quite as extreme, but 
also precipitous?
    Mr. DeMarco. Certainly, Congressman, there is a range of 
things.
    Mr. Green. If you would, just give me the range, and I will 
yield back the balance of my time after you have done so, time 
that I do not have, by the way.
    [laughter]
    Mr. DeMarco. There is a range of things that are being done 
as part of the unwind, so if we wanted to unwind the portfolio 
in 6 months, that would be precipitous.
    Chairman Garrett. I appreciate the gentleman's answer.
    The gentleman from Virginia is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. DeMarco, thank you for being here and helping us work 
through these eight bills, legislative proposals. I don't want 
to cut too much into my time, but I was very intrigued by Mr. 
Pearce's line of questioning. And it seems like you might have 
had an answer.
    I would like for the benefit of the committee to hear 
briefly your response to the numbers that he set forth, if you 
can.
    Mr. DeMarco. What I was trying to explain, I think maybe I 
was just either misunderstanding the Congressman or--but in 
thinking about the revenue stream that Fannie and Freddie get 
on $5.5 trillion of mortgages, that revenue stream is measured 
in fractions of a percentage point that is in the guarantee fee 
that is earned. And it is from that guarantee fee that they 
pay, they cover their credit losses, and they cover their 
operational and administrative expenses. That is all I was 
trying to get to. And we can do a breakdown of how the 
economics of that business works.
    But the other point I was trying to make, so thank you for 
the opportunity, is that, prior to conservatorship, I think one 
of the things that has contributed to these dramatic losses is 
that the Enterprises substantially underprice credit risk that 
they were taking on.
    And so the revenue stream that should have been coming off 
of these mortgages that were originated in the period prior to 
conservatorship has been inadequate to the losses that have 
been realized, because they were underpricing risk and, 
furthermore, they were operating with substantially less 
capital than would have been appropriate, something that the 
predecessor agency to FHFA had testified to numerous times, but 
was unable to materially change because the capital 
requirements were set in statute.
    Mr. Hurt. Do you think that what you have just set forth 
underscores the importance of trying to wind down Freddie Mac 
and Fannie Mae?
    Mr. DeMarco. I think it underscores the importance of what 
we are doing to try to adjust the pricing and the underwriting 
standards at the companies operating in conservatorship--that 
is being written now provides support to the country's mortgage 
market, but does so without creating risk to the taxpayer.
    Mr. Hurt. Obviously, we are here looking at eight 
legislative proposals that are being considered by this 
subcommittee. In the White Paper that the Administration and 
Treasury made public recently, there were identified four 
different things that could be done, it was stated, without 
legislative action, increasing the guarantee fees, which you 
have discussed, winding down the portfolios, which you have 
discussed.
    The two other things were reducing conforming loan limits, 
which you indicated that you all had not considered. I would 
like to know why you haven't considered that. And then, 
finally, is increasing the downpayments. I would like to hear 
about that.
    And I would also like to just--if you could speak generally 
about the objectives of the conservator in attempting to take 
some of these actions proactively, knowing that is where this 
legislation seems to be headed, it seems to be what the 
Administration may or may not be aggressively pursuing, but it 
seems to me that getting the GSEs out of the marketplace--or 
reducing--certainly diminishing their role is important.
    So I would like to know what your objectives are as 
conservator in taking actions in advance of any legislation, 
because I think it would serve the marketplace generally, at 
least provide some of that--or reduce the precipitous action 
that you are talking about, helps us ease into it.
    Mr. DeMarco. Right. So I believe, in fact, as conservator, 
FHFA has been marching down this path for quite some time prior 
to either these particular bills or the Administration's White 
Paper. And some of the ways in which we have done that have 
been, in fact, through increasing G-fees, improving 
underwriting standards, and the reduction in the portfolio, and 
restricting the company's core business.
    And you asked me about two other things, downpayments and--
    Mr. Hurt. Conforming loan limits.
    Mr. DeMarco. --conforming loan limits. So the question on 
conforming loan limit, this is--so whether FHFA has authority 
or not--and my staff is telling me we do--this has 
traditionally been something that the Congress and the United 
States has taken a very deep and specific interest in. And the 
practice for decades has been that the conforming loan limit 
has been something that has been stipulated by Congress and has 
simply been implemented by the regulator.
    And, in fact, in each of the last several years, Congress 
has enacted temporary provisions to state what it wants the 
conforming loan limit to be, based upon its judgment of the 
condition of the economy and housing markets, and it has 
allowed for a series of temporary increases in the conforming 
loan limit as part of Congress' approach to providing support 
to the country's economy and to its housing market.
    And that is why I think it is quite prudent for me to have 
a good bit of deference to Congress to determine what the 
conforming loan limit ought to be. Where we are in current laws 
is the conforming loan limit will come down October 1st of this 
year, if there is no further action by Congress.
    I would be happy to provide you and all the members of the 
subcommittee--we put out a research note just this week 
describing the parts of the country that would be affected, if 
the--if Congress takes no further action with the conforming 
loan limits. So I have that research out already.
    I am happy to share with you so you can see where these 
changes would take place. There are about 250 counties in the 
United States that would experience a reduction in the loan 
limits.
    With respect to downpayments, we have, in fact, been 
taking--just like with pricing--gradual steps to increase 
downpayment requirements. I testified before the House 
Financial Services Committee last year about a particular 
program that I had made clear we were not going to continue 
with, and that was very low downpayment mortgages. Now that we 
have the Administration's White Paper, we are examining what 
would be appropriate gradual steps with respect to further 
tightening with respect to minimum downpayment requirements.
    Chairman Garrett. The gentleman's time has expired. And I 
thank you for your answer.
    The gentleman is recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman.
    Mr. DeMarco, we have had a lot of dialogue about whether 
Fannie and Freddie take up too much of the secondary mortgage 
market, and I think maybe there is a consensus that they do.
    But my question is, after reform, what would be the proper 
balance? What should a GSE share of the secondary market be in, 
say, 10 years, assuming we were to have responsive reform?
    Mr. DeMarco. Congressman, I would like to, if I may, answer 
the question differently. The way I would approach the thought 
process is, what part of an $11 trillion single-family mortgage 
market should have the benefit of a government credit support?
    Mr. Ellison. Yes, that seems a good way to put it.
    Mr. DeMarco. And then that credit support can be provided 
through the existing government programs, the FHA, G.A., 
rural--VA, excuse me, rural housing, and Congress is free to 
look at making alterations to the scope or targeting of those 
particular programs, because here is where we want to have 
government credit support.
    With respect to what the GSEs do today, then the question 
on the table is, does the government want to--or feel it is 
appropriate and is in the best public interest to provide some 
portion of the rest of that universe with a government 
guarantee that would somehow wrap a private guarantee of the 
mortgages that are being written in that space?
    So whatever replaced Fannie and Freddie, whatever these 
private-sector securitizers are, presumably they would be in 
the first loss position with respect to mortgage credit. And 
the question is, can the capital market sufficiently and 
appropriately finance all of that without there being--
    Mr. Ellison. Mr. DeMarco, the analysis you are going 
through does make sense to me, but they only give us 5 minutes. 
So I guess--
    Mr. DeMarco. Sorry, sir.
    Mr. Ellison. I guess my question is, so it is clear to me, 
based on your answer to me, that you do see a role for a 
public-sector or quasi-public-sector institution in the 
mortgage market?
    Mr. DeMarco. Yes, sir. I continue to see a role for the 
FHA, the VA, the rural housing, that can be defined up or down 
from where it exists today, but I envision that would continue.
    Mr. Ellison. Let me ask you this. We have a lot of dialogue 
about the role Fannie and Freddie may or may not have played in 
the recent crisis, and the Financial Crisis Inquiry Commission 
said that GSEs played a contributing role, but certainly were 
not the primary cause.
    Let me ask you the question this way. Do you believe that 
there is a public interest in the United States Government, 
through its programs for housing, having homeownership as a 
laudable and meritorious goal?
    Mr. DeMarco. Certainly, the evidence would suggest that the 
answer to that is yes, because there are numerous ways in which 
the Federal Government--and, frankly, State governments--
provide subsidies, incentives, or otherwise support home 
ownership activity.
    Mr. Ellison. Yes. And it sounds--and I was reading in the 
document where it states that--where basically, I am wondering 
whether--I wanted to get your answer on that, because I was not 
sure where the Administration was coming from on homeownership 
as a laudable goal of a government program. It sounds to me 
like you are saying it is an important goal, and you don't plan 
on joining with any forces that want to eliminate it as 
something that we should pursue?
    Mr. DeMarco. I can affirmatively say yes to that question. 
But my role as the regulator is to implement what is being told 
to me by--
    Mr. Ellison. I know. I understand that.
    Mr. DeMarco. I am not a policymaker, per se--
    Mr. Ellison. Right.
    Mr. DeMarco. --in terms of being an advocate for the degree 
or form of government support for housing.
    Mr. Ellison. So you are saying that you don't really have 
any position on whether or not we should--I am just trying to 
get an understanding. I am not trying to--
    Mr. DeMarco. I understand.
    Mr. Ellison. --trick you or anything. I just want to--
    Mr. DeMarco. And I am not trying to be cagey. I am trying 
to respect that I am not a policymaker. I am a regulator. And I 
am trying to provide advice and perspective, where apt.
    But in terms of being able to say what I think is the right 
spot in that spectrum for the government support, I don't feel 
comfortable answering that.
    Mr. Ellison. All right. Fair enough.
    Chairman Garrett. I think your time has expired, actually.
    Mr. Ellison. That quickly?
    Chairman Garrett. It goes by quickly when you are asking 
good questions.
    Mr. Ellison. I guess that is it.
    Chairman Garrett. When you are on the point with the 
questions, it just flies by.
    The gentlelady from New York?
    Dr. Hayworth. Thank you, Mr. Chairman.
    Mr. DeMarco, this is more of a comment, I guess, than a 
question. And it is about something rather different. Perhaps 
it will be refreshing. But there is a great program called--it 
goes by the acronym PACE, the Property Assessed Clean Energy 
program. And as you know, it allows property holders to make 
energy-saving improvements on their homes via loans that are 
financed through their local property taxes. And it actually is 
a program that was designed to allow these improvements to be 
made for the sake of our general good, if you will, without 
costing taxpayers money.
    I understand that there have been problems fitting PACE in 
with the GSE programs because that would be senior debt, but I 
know that there are efforts underway to see how we can fit PACE 
into the mortgage program for people who have Fannie Mae or 
Freddie Mac-related--GSE-related secondary mortgages.
    So is your staff willing to work with us in the legislature 
about trying to get PACE going for these folks so that we can 
really do some good?
    Mr. DeMarco. Yes, we would be pleased to work with you and 
anyone on the Hill who would like to engage in this issue. And 
I appreciate the way you framed it, because I appreciate that 
in the way you framed it, you have recognized what our 
fundamental concern is. It is not that we are opposed to energy 
efficiency. It is that we are looking at mortgages that are 
done with a first lien, where it has been underwritten with the 
presumption that here is what the borrower's capacity to pay is 
and here is what the security is on this loan. And by a PACE 
loan then coming in after that and having a senior position for 
the first lien, ups that whole thing and creates credit risk 
where--after the loan has been finalized.
    With that understanding, we would be very happy to try to 
work with--a way to make these energy efficiency loans more 
available to folks.
    Dr. Hayworth. Great. I think it would just be a terrific 
good for all of us. Our staff is working on trying to get that 
PACE legislation going, so perhaps we can coordinate with your 
staff.
    Mr. DeMarco. We would be glad to meet with your team.
    Dr. Hayworth. I appreciate it. And I yield back the balance 
of my time, Mr. Chairman. I think Mr. Fitzpatrick graciously 
allowed me to take his place in the order, so I am happy to 
yield my time to him, with your permission.
    Chairman Garrett. Since you were so gracious, then I will 
be, as well.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you.
    And I thank the Director for his testimony.
    Sir, you mentioned just a little while ago that revenue 
that Fannie Mae gets is measured in the G-fee. It was in 
response to questions from Mr. Hurt and Mr. Pearce. You say in 
your written testimony that FHFA supports the principle 
advanced by both the Administration and Representative 
Neugebauer that guarantee fees should continue to be gradually 
increased.
    And so my question would be, what effect, if any, might an 
increase in the guarantee fee have on the market?
    Mr. DeMarco. An increase in the G-fee is going to translate 
to some increase in mortgage rates.
    Mr. Fitzpatrick. But you recommend an increase in the G-
fees, a gradual increase?
    Mr. DeMarco. I think that putting us on a path so that G-
fees and, hence, mortgage rates are such that they are 
appropriate to the cost of capital and to the credit risk 
involved is an appropriate place to be moving towards. And we 
are trying to do so incrementally in a way that is less 
disruptive to the market and it is appropriate to the risk. So 
in response to an earlier question, I noted that one of the key 
things we have been doing is trying to enhance the risk-based 
characteristics of pricing.
    Mr. Fitzpatrick. How and when is the Administration, FHFA 
going to require the Enterprises to revise their pricing so 
that the private market does not continue to be crowded out of 
the secondary market--
    Mr. DeMarco. We are actively working on that. And, in fact, 
both Enterprises had a round of G-fee price increases that just 
have gone into effect this month or this past month.
    Mr. Fitzpatrick. Thank you.
    Chairman Garrett. The gentleman yields back.
    The gentleman from Ohio, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    I would like to thank Mr. DeMarco for being here today. And 
I want to thank you for what you are doing on G-fees, on 
portfolio reduction, and strengthening underwriting standards 
as conservator. I think we need to have a thoughtful approach 
that creates a legal framework for a post-Fannie and Freddie 
world, and I think that you bring--obviously, your key function 
is to protect the taxpayers, but the other advantage you bring 
to us is to help us with that transition, so I want to thank 
you for what you are doing there.
    Mr. DeMarco. Thank you, sir.
    Mr. Stivers. I have a couple of concerns about a couple of 
the proposals, similar to your concerns. And I want to focus on 
Mr. Schweikert's--new activities for a second, because I am a 
little concerned that your portfolios are becoming a little 
more nonperforming and a little more illiquid.
    And my question to you is, do you have all the tools you 
need and the powers you need to deal with those loans and 
either get those loans in a position where they are performing 
or get them in productive hands again and, obviously, recapture 
whatever capital you can in that process? And does the 
Schweikert bill limit you in that ability?
    Mr. DeMarco. Very good. Thank you, Congressman. I 
appreciate the question. And the answer is, I don't believe it 
does.
    I do not view loss mitigation activities that we undertake 
to be either a product of the firm.
    Mr. Stivers. Okay.
    Mr. DeMarco. That is not a line of business. It is not a 
product. It is loss mitigation. And so I don't view that as 
being covered by--
    Mr. Stivers. Perfect. That is good stuff.
    And the second thing that I think you can sort of help us 
with is, as we sort of move to a new framework, I think we are 
on the right track with G-fees. You are already on that track, 
as well. I think the chairman of the subcommittee, his goal on 
risk retention is at least to make sure we level the playing 
field. And maybe you can help us with that in other ways.
    I think the thing we need to try to do is to try to pave 
the way to a more private-sector market. And I guess my 
question for you is, do you see a role for Fannie and Freddie 
without a government guarantee as aggregators and securitizers 
in the marketplace potentially?
    Mr. DeMarco. Not as we have known Fannie and Freddie in the 
past. I do see a role for firms that are operating and 
specializing in the process of securitizing mortgages, because, 
again, in an $11 trillion market, that is not going to be 
financed on the balance sheets of depository institutions. We 
need to tap into capital markets, including global capital 
markets, and that requires securitization processes. It means 
you need entities that are engaged in the business of 
securitizing mortgages.
    Mr. Stivers. And that may not be the Fannie and Freddie? 
Certainly not in their current form, but a lot of the expertise 
that Fannie and Freddie have, I guess my point is, can be 
transferred to these new private entities that don't have a 
government--
    Mr. DeMarco. Absolutely, Congressman. I think that is an 
important consideration here, is that the single biggest 
economic stakeholder now in Fannie and Freddie is the American 
taxpayer. As I said my written statement, the business 
processes and platforms and the human capital of these 
companies are intangible assets for the company and are 
available for disposition as Congress figures out what the 
ultimate resolution of Fannie and Freddie are, but they are 
platforms and expertise that can be put back out into the 
marketplace in some fashion and perhaps some value realized 
back for the taxpayer in that process.
    Mr. Stivers. Great. And I think the conforming loan limits 
are an important part of that, so again, like a lot of other 
members, I would urge you to look at what your authority is and 
consider it.
    Obviously, we are going to consider that as policymakers 
here, but our number is the top number, and you can certainly 
go below that. I believe you have the authority to, so I hope 
you would consider that, as well. And I am not going to ask you 
a question about that, because I think you have already 
answered that it is new to you, and that is certainly okay, and 
I appreciate what you are doing to focus on protecting the 
taxpayers.
    The only other concern I guess I have is about the bill 
that forces Fannie and Freddie to be compensated as government 
employees. My goal is to have them move away from the 
government, not toward the government, and so I actually don't 
think I am going to be able to support that bill. And I guess 
if you could give us your thoughts, I know you mentioned them 
briefly earlier.
    Mr. DeMarco. I think to your point that if we are looking 
to put Fannie and Freddie and its employees in business 
platforms back out into the private sector, that keeping a 
private-sector compensation program in place would certainly be 
consistent with that. And my more immediate concern is the 
disruptiveness of making a change like that.
    There is already tremendous uncertainty on the part of the 
12,000-plus employees of these companies about what does it 
mean and kind of repeatedly hears we are going to be wound down 
and we are getting rid of Fannie and Freddie. But, the 
government has an exposure here on $5 trillion worth of 
mortgage securities, and as conservator, I would like to make 
sure that we have qualified people continuing to service that 
book of business on behalf of the taxpayer.
    Mr. Stivers. Thank you.
    Thank you, Mr. Chairman. I yield back my nonexistent time.
    Chairman Garrett. The gentleman from New York?
    Mr. Grimm. Thank you, Mr. Chairman. I appreciate that.
    Thank you, Mr. DeMarco, for coming today and for fielding 
these questions. They are extremely important to just about 
everyone I speak to within banking and mortgage business and my 
constituents back home in Staten Island and Brooklyn. They are 
concerned about the values of their homes and where we are 
going overall.
    Just to piggyback, Mr. Stivers mentioned something that I 
had a question about. Many of those in the industry have spoken 
about the meltdown and the housing bust. And they talk about 
how some--a big part of the problem is unrelated brokers 
dealing with unregulated aggregators, and 60 out of 100 loans 
being done without a bank.
    Specifically to the DUS program, how now is Fannie Mae 
being involved in aggregating and multi-family homes? What role 
is that playing? And is that not consistent with some of the 
problems we have seen?
    Mr. DeMarco. So, actually, the Fannie Mae DUS program, 
which is a program for financing multi-family loans where the 
underwriting is delegated to the loan originator, has been a 
pretty successful model, and it is one, actually, that builds 
in some fashion on some of the provisions of the risk retention 
rules we were talking about earlier in Dodd-Frank, with respect 
to there being exposure by the originator, credit exposure by 
the originator, but I think that program is continuing to work 
successfully. Both firms are continuing to provide service to 
the multi-family market.
    And the other thing I would note about the multi-family--it 
hasn't gotten much attention in this hearing--but virtually all 
of the multi-family business both companies are doing is, in 
fact, being securitized today.
    Mr. Grimm. Just to switch back to maybe bring it back to 
the 30,000-foot level. Can you talk a little bit about the 
impact that a narrow qualified residential mortgage definition 
could have on excluding first-time homebuyers from purchasing a 
home?
    Mr. DeMarco. Congressman, the rule is out for comment. And 
as one of the agencies that has signed off on issuing this 
rule, I look forward to the public comments that are coming in. 
But the concept here, actually, is we understand what we were 
directed to do in Dodd-Frank was to establish an exemption 
through this qualified residential mortgage designation that 
was supposed to be reflecting very low-risk characteristics on 
the mortgages. And we think we have done that.
    And, in fact, I think it helps first-time homebuyers that 
the QRM definition not be too liberal, because this--we fully 
expect there to be a robust market for mortgage lending that is 
not meeting the definition of QRM. And the richer that market 
is, the healthier it is, the better it is going--the more 
easily private firms are going to be able to make those loans 
and ultimately, when we resolve Fannie and Freddie, to be able 
for there to be a re-emergence of a private securitization 
market that securitized them.
    This is not a penalty or an expectation that we will not 
have loans that don't have at least 20 percent down. Not at 
all. That is not the expectation, nor the intent.
    And so I think that the issue of first-time homebuyers can 
be one that policymakers want to take a careful look at in the 
context of looking at the U.S. housing finance system, and in 
terms of visiting questions about, as a matter of public 
policy, do we want to have support or incentives for that?
    But I don't view the QRM rule as proposed as being one that 
is directed at creating harm for first-time homebuyers. I think 
it is meant--what it is really meant to do is to address the 
problems Congress saw with securitization and with 
securitization activity taking place, whereas where the 
securitizers did not have a risk exposure to the mortgages they 
were making.
    Mr. Grimm. A little bit about your opinion regarding the 
impact of lowering the current loan limits on high-cost 
markets, such as California, New York, my district. Can you 
just elaborate a little bit on the impact this will have on 
housing affordability?
    Mr. DeMarco. I would be happy to provide you the mortgage 
research note we just issued that goes through the counties in 
the United States that would see a decline in the conforming 
loan limit if Congress takes no further action this year.
    Frankly, for what Fannie and Freddie have been doing, they 
are not doing a whole lot of mortgages in that space. So I 
think that the--if you happen to be a buyer in that particular 
space, in that part of the country, you may feel like I have 
been affected here. But in terms of the overall--thinking about 
the country's housing mortgage market, this is not a very big 
piece of it.
    Mr. Grimm. My time--
    Chairman Garrett. Your time has expired. Thank you. The 
gentleman from California?
    Mr. Miller of California. Thank you, Mr. Chairman.
    It has been an interesting conversation today, especially 
the last comments on that if you got it out of the high-cost 
areas, it would not be significant, then why get out of them? 
Speaking from a high-cost area, it would have a huge impact on 
the housing market in the areas that are high cost. If you are 
not there, nobody is there. When you are making 92 percent of 
the loans in those areas, it is dramatic.
    I would encourage you--just going back to risk-based loans, 
underwriting standards have increased. And I remember going 
back to the 1970s when I was introduced--I would go to get a 
construction loan from a lender, and they made sure I met 
conforming standards, design criteria, sales criteria, because 
if we didn't do that, there was not an assured takeout on the 
other end when the home was sold, because there was not the 
guaranteed liquidity in the marketplace to be able to make that 
loan.
    Now, if we are trying to stabilize Fannie and Freddie, I 
guess my main question to you is, under TARP, we charged banks 
5 percent. Why are we charging Freddie and Fannie 10 percent 
interest on the money we lend them? Is that risk-based?
    Mr. DeMarco. Congressman, that was a determination made by 
the Treasury Department--
    Mr. Miller of California. Okay, thank you. I just wondered, 
because it seems like we are trying to doom them to failure. If 
you go back to 1970, 1980, 1990, prior to 2005, do you believe 
that the GSEs crowded the private sector out of the 
marketplace?
    Mr. DeMarco. Over that time period, increasingly, sir.
    Mr. Miller of California. What years?
    Mr. DeMarco. I think that the Enterprises' market share 
grows gradually over that time period, until we got to the mid 
2000s, and the emergence of the private-label market and the 
rapid growth in subprime and non-traditional lending saw 
substantial decline in their market share.
    Mr. Miller of California. Yes. And they made bad loans to 
pick their market share back up, which was a huge mistake on 
their part.
    Mr. DeMarco. Yes, sir.
    Mr. Miller of California. Where would the housing market 
have been in mid-2007 if the GSEs weren't there? In a 
disastrous situation. And instead of lending the GSEs $120 
billion, we might have lost $2 trillion in home equity, because 
you couldn't have bought a home or sold a home because there 
was no money in the marketplace to make a loan for a home. Is 
that not correct? Today they are only making 8 percent of the 
loans, the private sector. And those are very difficult at 
that. And FHA, Freddie and Fannie are picking up 92 percent.
    But I am really gratified that you are using a risk-based 
loan criteria and you are assessing the risks you are lending 
on and you are using good underwriting standards, which should 
have been done all along.
    Mr. DeMarco. Yes, sir.
    Mr. Miller of California. It is inexcusable that an agency 
like that--understanding their purpose and their intent--would 
go out and make stupid loans just to pick up a larger 
percentage of the marketplace. But my concern is, if we say 
there is a private sector there to fulfill the void that the 
GSEs would create by backing out, I have never seen it. And if 
at any time in history, it would have been there, it would have 
been probably 2005, 2006, and 2007.
    The only alternative we had was Countrywide and other 
groups like that. And I remember going back to 2001, 
introducing amendments to bills, and I probably got it into 
four bills defining predatory versus subprime. Had we defined 
predatory versus subprime in 2001, 2003, or 2005, Countrywide 
would have not done what they did, nor would the other 
organizations have done what they did to pass off these junk 
mortgage-backed securities, trying to replicate what a GSE 
mortgage-backed security was, which was safe and sound.
    And if you invested in them, you were guaranteed a greater 
return, to the point at where the GSEs--most of their losses 
are taking those bad loans, nonperforming out, and replacing 
them with performing loans, so you--I have demonstrated 
integrity that the private sector abused during those periods 
of time.
    And my concern is, if we look at what the purpose of GSEs 
has been to provide liquidity to the marketplace, they have 
done a pretty good job, but especially in recent years. And 
having been in the building industry since the 1970s, and 
looking at the criteria by most lenders that they placed on you 
to even get a loan, and the intent of that was that if, once 
your product was on the market, that there would be a secondary 
market to sell the loan off to, because the major market did 
not have the liquidity to make fixed 30-year loans and sit on 
those loans, because that took their capital and put them in 
loans that were sitting there that they were virtually out of 
business for any new accounts, so they could close down and 
just wait for their loans to pay back on those loans.
    So when you say that they are in the 1970s, 1980s, and 
1990s, that the GSEs played a more predominant role in the 
marketplace, I would say appropriately so, because there was no 
alternative to that. And if you had allowed the private market 
that went from about--4 lenders had 25 percent of the market to 
today those 4 have 75 percent of the market, that is dangerous, 
having 4 lenders control 75 percent of the marketplace.
    And if it were not for the option of a GSE out there today, 
if something went wrong in those four, this country could be in 
serious, serious trouble. And--
    Chairman Garrett. And with that, I thank the gentleman.
    Mr. Miller of California. My time has expired?
    Chairman Garrett. Some time ago, actually.
    Mr. Miller of California. You are very generous. Thank you.
    Chairman Garrett. But I understand the other side of the 
aisle was probably encouraged--
    Mr. Miller of California. Can I have a point of order? I 
want to wish Mr. Frank a happy 71st birthday today.
    Chairman Garrett. Happy birthday.
    [applause]
    And I yield to the gentleman for a retort.
    Mr. Frank. I would simply say that, while the gentleman's 
time has expired, I am pleased to say that at least I have not, 
as yet.
    [laughter]
    Chairman Garrett. And so with that--Mr. DeMarco, again, I 
appreciate your coming to the hearing, and I appreciate your 
forthright answers and the detail that you provided for those 
answers, as well.
    Mr. DeMarco. Thank you, Mr. Chairman. And I appreciate the 
opportunity. I look forward to continuing to work with all the 
members of the subcommittee.
    Mr. Frank. Mr. Chairman, if you would yield briefly?
    Chairman Garrett. I will yield, yes.
    Mr. Frank. I would just like to add, Mr. DeMarco's 
testimony was exactly what we need from witnesses. It was 
responsive, it was aimed at helping us legislate, and I not 
only want to express my appreciation, I hope other people will 
follow his example.
    Chairman Garrett. Thank you. I appreciate it.
    Mr. DeMarco. Thank you, Congressman Frank.
    Chairman Garrett. Thank you.
    This panel is dismissed and everyone with it. And we will 
at this point bring up the next panel.
    Okay. While you comport yourself there and get your papers 
in order, I welcome the second panel to this hearing. And I see 
we have six of you before us. So for the next half-hour, we 
will be listening eagerly to your testimony.
    And as always, without any objections, your written 
statements, of course, will be made a part of the record. You 
will be each recognized for 5 minutes. And I know many of you 
have been here before, so you follow the lights.
    Mr. Dalton, you are recognized for 5 minutes. And welcome 
to the panel.

 STATEMENT OF THE HONORABLE JOHN H. DALTON, PRESIDENT, HOUSING 
       POLICY COUNCIL, THE FINANCIAL SERVICES ROUNDTABLE

    Mr. Dalton. Thank you very much, Mr. Chairman, Ranking 
Member Waters, and members of the subcommittee. Thank you for 
holding this important hearing, and thank you for the 
opportunity to participate.
    My name is John Dalton, and I am the president of the 
Housing Policy Council of the Financial Services Roundtable. 
Our 32 member originate, service, and insure mortgages, and we 
do business with Fannie Mae and Freddie Mac.
    Mr. Chairman, we see an emerging consensus that private 
capital needs to be the primary insurer of mortgage risk. The 
future system must have two goals: servicing homebuyers; and 
protecting taxpayers.
    Homeownership is a pillar of the U.S. economy and the 
American way of life. A new housing finance system built on 
private capital and clear rules would deliver sound financing 
and keep homeownership within the reach of most Americans. 
Without an approach like this, owning a home in America could 
become a luxury for the few.
    To make sure this does not happen, Congress needs to ensure 
reform enables the continuing availability of the 30-year 
fixed-rate mortgage, which has been the bedrock of our Nation's 
housing finance system for more than half a century. The 30-
year fixed-rate mortgage is as American as opening day in 
baseball.
    A fixed-rate mortgage provides peace of mind, because 
homeowners know that their biggest monthly bill is not going to 
change from month to month and year to year. Without this 
popular financing tool, many homeowners would experience in 
their mortgages the same wild swings they now feel at the gas 
pump. This is a rollercoaster ride most Americans would like to 
avoid.
    Today, approximately 90 percent of newly originated 
mortgages and 95 percent of refinances are fixed-rate loans. 
Homeowners are clearly voting with their checkbooks. The 
predictability of a fixed-rate mortgage needs to be preserved 
for homebuyers, and peace of mind needs to be returned to the 
American taxpayer.
    Several of the bills introduced this week by committee 
members would begin to limit the role of the current GSEs. This 
is part of a needed reform process toward a new stronger 
housing finance system. They are a good first step, but it must 
be accompanied by a comprehensive plan.
    Important issues are addressed in the bills introduced this 
week. The Housing Policy Council agrees that G-fees gradually 
need to be increased, portfolios need to be wound down, a 
strong regulator needs to be in place, and specific housing 
goals need to be eliminated. These bills are a start, but 
simply cannot be the end of GSE reform.
    The Housing Policy Council has laid out a comprehensive 
proposal to reform the secondary mortgage market, and we 
commend it to you. Our plan creates a new private-sector system 
that serves American homebuyers and it protects the American 
taxpayer. Our system ensures that multiple layers of private 
capital bear the risk of securing mortgages while setting clear 
rules for capital, licensing, and mortgage security investment.
    These multiple layers include the downpayments on 
mortgages, private mortgage insurance, the capital of the 
private guarantee companies, and a reserve fund paid into by 
these companies. The layers of private capital would protect 
taxpayers from risk and come before a Federal backstop or 
guarantee.
    Our full plan is in my written testimony.
    Mr. Chairman, I appreciate your leadership and each of you 
on the committee for tackling this difficult issue. It is 
complicated, and I support your efforts to return private 
capital to the housing market. In order to have a full economic 
recovery, it is very important for reform of the housing 
finance system to move forward comprehensively.
    There is much uncertainty in the housing market today, and 
a complete roadmap for GSE reform would go a long way to help 
lessen that uncertainty. The Housing Policy Council stands 
ready to work with this committee and other stakeholders to 
assist wherever we can.
    Thank you very much for the opportunity to testify, and I 
look forward to responding to your questions.
    [The prepared statement of Mr. Dalton can be found on page 
88 of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    The gentleman is recognized for 5 minutes. And I will let 
you introduce--say your name correctly for me.

    STATEMENT OF CHRISTOPHER PAPAGIANIS, MANAGING DIRECTOR, 
                          ECONOMICS21

    Mr. Papagianis. Sure. My name is pronounced ``Papagianis,'' 
Chris Papagianis.
    Chairman Garrett, Ranking Member Waters, and members of the 
subcommittee, thank you for the opportunity to testify today. I 
am the managing director of a nonprofit think tank, e21, 
Economic Policies for the 21st Century.
    Drawing on the expertise of practitioners and academics, 
our mission at Economics21 is to help foster a spirit of debate 
about the way forward on issues like housing finance. 
Previously, I was Special Assistant for Domestic Policy to 
President George Bush. In this role, I helped guide the 
collaborative process within the Executive Branch to develop 
and implement policies, legislation, and regulations across 
numerous agencies, including Treasury and HUD.
    Fannie Mae and Freddie Mac have been in conservatorship now 
for the past 30 months. Over this period, numerous proposals 
have been offered for how to reform or re-envision the 
Government-Sponsored Enterprises. Given how dominant Fannie and 
Freddie are in terms of market share today, reform of these 
institutions will have a significant impact on the future of 
the $11 trillion mortgage market.
    In short, the stakes are quite high, and I agree with this 
committee's approach in assessing long-term solutions while at 
the same time considering reforms that could be advanced in the 
short term to protect taxpayers.
    Importantly, some of the proposals before this committee, 
if enacted, would accomplish two distinct things. They would 
protect taxpayers in the near term, and the implementation 
experience would provide invaluable lessons and data that could 
inform the broader debate about the future of housing finance 
in this country.
    One of the big analytical challenges before this committee 
is that the most egregious excesses of the previous GSE model 
are not necessarily the primary sources of taxpayer losses thus 
far. From my vantage point, this means that there is still a 
lot of taxpayer risk in the GSE system and that near-term 
reform proposals can have a positive impact.
    It is for these reasons that I support near-term measures 
to try and hold the GSEs to the same standards as other private 
market participants, to improve the pricing practices for 
mortgage guarantees, to limit the types of mortgages that can 
be guaranteed or purchased, and to add new oversight measures 
that shed more light on how the GSEs issue debt to fund their 
activities.
    In the end, important decisions still need to be made about 
the future of the GSEs and the government generally in the 
housing market. It might take some time to come to an agreement 
on a wind-down strategy or a lasting structure for housing 
finance. Ahead of these decisions, however, it is still 
important to make practice in protecting taxpayers and reducing 
the risk presented by the GSEs, while at the same time ensuring 
that families have adequate access to mortgages.
    Thank you again for the opportunity to testify today.
    [The prepared statement of Mr. Papagianis can be found on 
page 128 of the appendix.]
    Chairman Garrett. I thank the gentleman very much.
    Mr. Pinto, for 5 minutes?

    STATEMENT OF EDWARD J. PINTO, RESIDENT FELLOW, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. Pinto. Chairman Garrett, Ranking Member Waters, thank 
you for the opportunity to testify.
    In its February 11th report to Congress, the Obama 
Administration asked Congress to work with it to fashion 
legislation to accomplish three broad goals: the winding down 
of Fannie Mae and Freddie Mac; the returning of FHA to its 
traditional role as a targeted lender of affordable mortgages; 
and a largely privatized system of housing finance, with an 
open question as to the level of government involvement as to a 
particular guarantee.
    These three goals provide an opportunity for a bipartisan 
solution that truly reforms our housing finance market. 
Secretary Geithner, in testimony before the Financial Services 
Committee on March 1st, asked that these three goals be 
accomplished sooner rather than later during this Congress.
    I, along with my co-authors, Peter Wallison and Alex 
Pollock, released a White Paper last week detailing a 
comprehensive approach for reforming the housing finance market 
under the Administration's option one. It builds on the 
foundation provided by the Administration and forcefully and 
directly addresses each perceived shortcoming.
    It meets the principles for restoring stability to the 
Nation's housing finance system, as recently outlined by 16 
industry groups. It demonstrates that a government guarantee is 
both unnecessary and undesirable. It provides a bipartisan 
solution that can and should be enacted by this Congress. It is 
the only plan that both creates a housing finance market we can 
be proud of and protects the taxpayers, and I commend it to 
your consideration.
    My written testimony covers each of the eight bills. I will 
limit my oral remarks to a few key points.
    First, increasing guarantee fees. Enactment of this bill is 
appropriate, as it would implement a key step recommended by 
the Administration to responsibly reduce the role of the GSEs 
in the mortgage marketplace and ultimately wind them down. It 
would eliminate the unfair capital advantages that the GSEs 
enjoy and reduce the gap between Fannie and Freddie subsidized 
pricing and private rates.
    This increase in capital requirements would require the 
GSEs to raise their guarantee fee by perhaps 15, 25 basis 
points, and would be phased in over 2 years. The bill wisely 
stipulates that guarantees be set uniformly among lenders.
    The Administration has also just suggested that the GSEs 
rely more on private capital. This subcommittee and the 
Administration should request that the FHFA Director explore 
various means of credit enhancement to reduce the liability of 
the GSEs for losses on mortgages, including the possibility of 
increased use of mortgage guarantee insurance.
    Chairman Garrett and Ranking Member Waters, I commend you 
and over 30 other members for the letter on this topic that you 
sent to Acting Director DeMarco last October.
    I am told--excuse me, subjecting GSEs to credit risk 
retention requirements in the Security Exchange Act of 1934. 
Enactment of a bill addressing this topic is essential, as it 
is needed to sort out the previously noted perpetuation of 
Fannie, Freddie, and FHA. This is an unfortunate consequence of 
the Dodd-Frank Act and is being reinforced by the proposed 
rulemaking that just came out this week.
    I would recommend that the qualified residential mortgage 
standards be set by legislation, rather than by administrative 
rule. In appendix one, we set forth a proposed definition.
    I would also suggest that you limit collateral backing 
private MBS to loans that meet the definition, as we have 
suggested. This would obviate the need for any risk retention 
and its attendant complexity and potential gaming of the 
system. Taking this step would return capital to the housing 
finance system in both a prudent and speedy manner.
    Repeal of affordable housing goals clearly is appropriate, 
and I would also recommend you consider repealing affordable 
housing support fees enacted under HERA and currently suspended 
by FHFA. Compensation of certain Fannie-Freddie employees, I 
cover that in more detail in my testimony. But in light of the 
need to wind down Fannie and Freddie, I would suggest that you 
focus on how to incent employees over the long term to 
accomplish that goal.
    Prohibit the GSEs from engaging in new activities or 
offering new products. Given their wind-down status, this bill 
is appropriate. It particularly needs to focus on efforts that 
might be undertaken to force the GSEs to undertake potentially 
risky activities such as energy retrofit programs, manufactured 
housing programs, and other programs involving mortgage write-
down.
    Finally, turning briefly to the recently introduced 
Hensarling bill, I would commend Representative Hensarling for 
his early and prescient attempts to wind down Fannie and 
Freddie. His bill provides the basis for undertaking a frank 
but crucial discussion between this subcommittee and the 
Administration. This discussion has been requested by Secretary 
Geithner and Representative Biggert. It is my hope it will lead 
to a privatized system of housing finance under option one.
    Thank you.
    [The prepared statement of Mr. Pinto can be found on page 
145 of the appendix.]
    Chairman Garrett. Thank you. Mr. Nielsen, for 5 minutes.

 STATEMENT OF ROBERT NIELSEN, CHAIRMAN OF THE BOARD, NATIONAL 
              ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Nielsen. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, thank you for the opportunity to 
testify today. My name is Bob Nielsen. I am the 2011 National 
Association of Home Builders chairman of the board and a 
builder and a developer from Reno, Nevada.
    Credit is the lifeblood of the housing sector. A reliable 
and adequate flow of affordable funds is necessary in order to 
achieve the Nation's housing and economic goals. Establishing a 
financing system that provides liquidity for the housing sector 
in all markets throughout the economic cycle is a prerequisite 
to achieving housing policy objectives.
    Furthermore, a stable, effective, and efficient housing 
finance system is critical to the housing industry's important 
contribution to the Nation's economic performance and to the 
achievement of America's social goals.
    The housing finance system is currently under a cloud of 
uncertainty. The Federal Government, through FHA and the 
housing GSEs, is currently accounting for nearly all mortgage 
credit flowing to homebuyers and rental properties. Even with 
the current heavy dose of Federal backing, fewer mortgage 
products are available, and loans are being underwritten on 
much more stringent terms.
    In addition, Congress and regulators are piling on layers 
of regulation in an attempt to plug gaps in a system of 
mortgage regulation and prevent a recurrence of the mortgage 
finance debacle that is still playing out. This is not an 
arrangement that can continue indefinitely, and there is no 
clear picture of the future shape of the conforming 
conventional mortgage market.
    One thing is clear. The status quo cannot be maintained. 
NAHB has been actively involved in discussions on changes to 
the financing framework for homebuyers and producers of 
housing. We presented our thoughts on the future of the housing 
finance system to this committee nearly one year ago today. And 
since then, Congress has passed the Dodd-Frank Act, and 
regulators are now busy implementing this massive law that has 
the potential to reduce the availability and increase the cost 
of housing and credit.
    The housing landscape has seen little change during this 
period, as the housing market remains extremely weak. In fact, 
while economic growth has been weak by historic standards for 
an economic recovery, housing's performance has been even 
weaker. Unlike a typical recovery where housing grows at 28 
percent in the first year after the end of a recession, 
housing's growth has been a paltry 5 percent in the first year 
of the current recovery.
    Adding to the current housing crisis, decisions about 
comprehensive structural reforms to the U.S. housing finance 
system are stuck in a quagmire, despite the Administration's 
recent report outlining options for reforming the housing 
finance market.
    Recently, NAHB joined a coalition with 15 other 
organizations outlining principles for restoring stability to 
the Nation's housing finance system. NAHB strongly supports 
these principles, which highlight the need for the continuing 
and predictable government role in housing finance to promote 
investor confidence and ensure liquidity and stability for 
homeownership and rental housing.
    NAHB strongly supports efforts to modernize the Nation's 
housing finance system, including reforms to the Government-
Sponsored Enterprises, Fannie Mae and Freddie Mac. Like the 
principles outlined earlier, NAHB believes strongly that a 
Federal backstop is needed to ensure the continued availability 
of affordable mortgage credit specifically to 30-year, long-
term, fixed-rate mortgages.
    We cannot go back to the system that existed before this 
great recession, but it is critical that any reforms be well 
conceived, orderly, and phased in over time. Proposals offered 
by this subcommittee for short-term dissolution of Fannie Mae 
and Freddie Mac and the support they provide for the housing 
finance system represent a piecemeal approach to reform that 
would disrupt the housing market even further and could push 
the Nation back into a deep recession.
    These proposals, along with similar plans announced by the 
Obama Administration in February, show that many policymakers 
have clearly forgotten housing's importance to the economy.
    America's homebuilders urge policymakers in the 
Administration and Congress to consider the potential 
consequences of their proposal. The subcommittee should not 
move forward with policies that would further destabilize a 
housing market that is already struggling. Housing can be a key 
engine of job growth that this country needs, but it cannot 
fill that vital role if Congress and the Administration make 
damaging, ill-advised changes to the housing system at such a 
critical time.
    Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Nielsen can be found on page 
113 of the appendix.]
    Chairman Garrett. I thank you for your testimony.
    Mr. Phipps please, for 5 minutes?

STATEMENT OF RONALD PHIPPS, PRESIDENT, NATIONAL ASSOCIATION OF 
                           REALTORS

    Mr. Phipps. Good afternoon.
    Chairman Garrett, Ranking Member Waters, and members of the 
subcommittee, thank you for inviting me to testify today 
regarding GSE reform. My name is Ron Phipps. I am the 2011 
president of the National Association of REALTORS.
    My family, now in Rhode Island, has been in the business of 
residential real estate for 4 generations. My passion is making 
the dream of homeownership a reality for American families. I 
am proud to testify on behalf of the more than 1.1 million 
REALTORS who share that passion, as 75 million American 
families who own homes, and the 310 million Americans who 
require shelter.
    REALTORS agree that the existing system failed and reforms 
are needed. However, we caution you to heed the words of 
Treasury Secretary Timothy Geithner and Senator Richard Shelby 
that, ``Housing finance must be addressed and reform passed. 
However, proper homework must be done before action is taken 
and Federal housing policies must be adequately assessed.''
    Today, we ask you to slow down the legislative process and 
begin a methodological, measured effort in order to yield a 
comprehensive solution that is in the best interests of all, 
most importantly, the taxpayers. Therefore, we oppose the GSE 
bills recently introduced to reform GSEs, because they 
represent a piecemeal approach to reforming the housing finance 
system and effectively work to make Fannie Mae and Freddie Mac 
not viable, without putting forth an adequate replacement 
secondary mortgage market mechanism.
    NAR is collaborating with the offices of Congressmen Gary 
Miller and Brad Sherman to develop an alternative comprehensive 
approach to reform the secondary market. This legislation will 
be introduced shortly.
    As you consider the future of Federal housing policies, we 
ask you to keep two things in mind: first, the immense value 
that sustainable homeownership provides for this country; and 
second, investors require certainty in order for markets to 
perform.
    The proposed legislation introduces uncertainty that will 
cause our fragile recovery to slow and possibly stop. Right 
now, the market is not working as many believe it should, and 
change is required. Additionally, REALTORS believe that the 
pendulum on mortgage credit has swung too far in the wrong 
direction and is hurting consumers and the economy. Quick 
decisions aimed at punishing certain market players or 
fostering theoretical ideology will only act to punish 
taxpayers by constraining their ability to access affordable 
mortgage financing and locking in current losses.
    Let me be clear. REALTORS agree that reforms are required 
to prevent a recurrence of the housing meltdown, but 
unnecessary implementation of rules that curtail access to 
affordable credit, i.e. raising downpayments or other mortgage 
costs, will have stark ramifications for that overall economy.
    Let me speak specifically to a couple of proposed bills. 
The QRM is likely to shape housing finance for the foreseeable 
future. REALTORS believe that Federal regulators and members 
of the House Financial Services Committee should honor the 
intentions of Senators Isakson and Landrieu by crafting 
qualified residential mortgage exemptions that accommodate a 
wide variety of staid, well-underwritten products such as 30-, 
15-, and 10-year fixed-rate loans, 7/1 and 5/1 ARMs, and loans 
with flexible downpayments that require mortgage insurance.
    A poor QRM policy that does not heed their intentions will 
displace a large portion of homeowners and could once again 
slow economic recovery and hamper job creation. As noted in 
American Banker yesterday, 69.5 percent of all loans originated 
in 2009 would not qualify under the QRM standard. Furthermore, 
increased GSE fees could really cause additional problems with 
up to 10 percent to 15 percent of other qualified buyers not 
being able to meet those stringent requirements. Approximately 
500,000 sales would not happen.
    In World War II, President Franklin Delano Roosevelt said 
the nation of homeowners is unconquerable. In the 1980s, 
President Ronald Reagan said the need to preserve the mortgage 
interest deduction in order to promote the most important asset 
of the American dream, homeownership, should be protected. We 
REALTORS agree.
    We ask you to be positive in your future. I thank you for 
this opportunity to present our thoughts on GSE reform. And as 
always, the National Association of REALTORS is ready, 
willing, and able to work with you and our partners to make a 
bright future for America.
    Housing is not a partisan issue, nor is it simply in the 
common interest. It is the national interest. Thank you.
    [The prepared statement of Mr. Phipps can be found on page 
138 of the appendix.]
    Chairman Garrett. Thank you.
    And we look now to the professor, Professor Wachter, for 5 
minutes.

 STATEMENT OF SUSAN M. WACHTER, PROFESSOR, THE WHARTON SCHOOL, 
                   UNIVERSITY OF PENNSYLVANIA

    Ms. Wachter. Chairman Garrett, Ranking Member Waters, and 
other distinguished members of the subcommittee, thank you for 
the opportunity to testify at today's hearing. I am honored to 
be here to discuss the proposed legislative initiatives and the 
broader need for a reinvented housing finance system.
    While comprehensive reform is necessary for a stable 
housing finance system, the transition must be accomplished 
while taking into consideration the current extraordinary 
fragility of housing markets. With January prices in real 
dollars breaching the 2009 bottom and still falling, there is a 
danger of a double dip.
    In the reformed system, private capital must be accountable 
and at-risk. However, today, in that part of the market in 
which Fannie and Freddie cannot operate, the jumbo market, 
there is still only a very limited supply of private capital. 
This points to the need for comprehensive reform to bring back 
private capital.
    There is a need for rules of the game, standards and 
transparency to counter the information failures that caused 
reckless mortgage products and underwriting practices to drive 
the system to failure. There is an important role for 
collective or government action to mandate transparency 
standards and information to allow for all market 
participants--borrowers, regulators, and investors--to prevent 
risks from becoming uncontrollable. Investors are asking for 
this before they enter the market.
    My written testimony addresses each of the legislative 
initiatives. I will limit my comments to two. First, the GSE 
Mission Improvement Act repeals affordable housing goals 
without suggesting what might replace them going forward. As we 
re-envision the housing finance system, there will be a need to 
address the goal of nondiscriminatory access to housing 
finance. In the academic literature, there is substantial 
evidence that the affordable housing goals were not the major 
factor responsible for the housing bubble and crash.
    Second, the Portfolio Risk Reduction Act caps the GSEs' 
portfolios at $250 billion in 5 years. While it is ultimately 
both desirable and necessary to reduce the portfolio, 
constraining the path of reduction in this way is not, in fact, 
the way to optimize taxpayer returns.
    Policymakers and the Nation as a whole must make 
fundamental decisions about the shape of our Nation's finance 
system going forward. The issues being considered today are of 
critical importance to the Nation's future.
    I thank you for the opportunity to testify, and I welcome 
your questions.
    [The prepared statement of Professor Wachter can be found 
on page 213 of the appendix.]
    Chairman Garrett. I thank the panel.
    So I will begin by yielding myself 5 minutes. And I guess I 
will just start with Mr. Dalton.
    One of your opening comments was to make a comparison to 
the first day of baseball, which is cute, but, of course, the 
Secretary--the Federal Government doesn't subsidize the first 
day of baseball, at least I hope they are not. Maybe it will be 
something we will discover during the C.R. discussion.
    So can you run down and take a look at some of the things 
that we are doing right now? I am getting a little bit of a 
mixed message here. Some people on the panel are saying that we 
are moving too quickly, that we shouldn't be acting now, that 
despite, of course, the fact that it has been 2 years and we 
have been asking for hearings on this, and we haven't had 
anything. Now we are having hearings, and we are having the 
experts come up before us.
    So do you believe that the legislation that you are seeing 
before, as far as the IG, additional powers there, and the 
rest, as far as the G-fees and the rest, will those things be 
moving too quickly if we begin to consider them and debate them 
and discuss them and move those along?
    Mr. Dalton. Mr. Chairman, I think that there are positive 
aspects to a number of these bills, but I think it is very 
important that we have a comprehensive program in place before 
we--for example, one of the bills has the GSEs going out of 
business in 5 years. And I think to have that without having a 
new system in place--
    Chairman Garrett. Actually, let me just correct you there. 
I think you are talking about the portfolio language, which 
winds that down. Is that what you are talking about?
    Mr. Dalton. That is right.
    Chairman Garrett. Yes, that just deals with the portfolio, 
shrinking the portfolio over 5 years, right? So--yes.
    Mr. Dalton. I was referring to the Hensarling bill, that I 
believe does, in fact, within--at the end of a 5-year period, 
the GSEs--
    Chairman Garrett. So you are not opposed to the idea of 
having an acceleration, for example, of the portfolio so that 
we can try to wind down that $1.5 trillion deficit hanging 
around our head?
    Mr. Dalton. No, sir. I think the winding down of the 
portfolio has merit.
    Chairman Garrett. Okay. Since we only have so much time, 
Mr. Pinto, in your testimony, you describe the advantages that 
the big banks somehow have over the small banks, in terms of 
one of the other bills with regard to the issue of G-fees. Can 
you just elaborate on that and explain that to us?
    Mr. Pinto. Yes. Actually, in my testimony, I believe I 
quote Jay Brinkmann, the chief economist for the Mortgage 
Bankers Association, who about 2 weeks ago said that the 
history of the GSEs was to promote ever-larger consolidation 
among large financial institutions, controlling the housing 
finance market through their offering of discounts to the large 
financial institutions, Countrywide and the large banks.
    The community banks and the other community financial 
institutions were charged what you would consider in hotels 
being called a rack rate, 20, 25 basis points. Countrywide and 
the other larger originators were charged 10 basis points, 12 
basis points.
    As I pointed out in my testimony, what you lose on each 
one, you cannot make up in volume. And I think Director DeMarco 
covered that when he said the G-fees were woefully inadequate. 
It was because they were discounting them for the big banks and 
trying to make it up with the little banks.
    Chairman Garrett. Let me just jump over to Mr. Phipps. You 
were the one who suggested that we may be moving too quickly, 
we don't want to move on a piecemeal approach. So let me just 
ask you, on some of the bills that are before us, for example, 
Mrs. Biggert's bill, with regards to giving more authority in 
creation of the IG, how would that be bad if we did that today? 
Wouldn't that have been good if we actually had that in place 
several years ago?
    Mr. Phipps. The short answer is, we really believe that the 
principles that we spent the last 2 years working on articulate 
a comprehensive plan. And we believe that the replacement, the 
successor for this, is critical and needs to be put in that 
context.
    Chairman Garrett. And I am right with you on that. We have 
to figure out what the replacement is. But until we get there--
and you have to admit, it is going to be pretty hard to get 
consensus on what that replacement is--until we get there, 
aren't there some other things we can do, as we lay out here 
today, that would be good? So you are supportive of the idea, 
right, that they should have--on the--
    Mr. Phipps. --should be reformed.
    Chairman Garrett. And you are supportive of the idea with 
regard to Mrs. Biggert's bill, as far as additional authority 
with regard to the IG. You can't be opposed to the idea of--are 
you? Is anybody opposed to that idea, that they should have 
authority in that area? No? Is anybody opposed to the idea 
that--
    Ms. Wachter. Yes, in my written testimony, I did oppose 
that.
    Chairman Garrett. Okay. And if we had that--okay.
    Ms. Wachter. The reason I opposed it is that reporting to 
Congress with 7 days advance notice may simply not be 
practical.
    Chairman Garrett. Okay, just for the practicality. And just 
one last question, then. With regard to some of the other 
ideas, with regard to the Secretary signing off on the new debt 
issuance, is anyone opposed to that idea?
    Mr. Phipps. We are not taking--
    Chairman Garrett. Besides this one. I know, besides Ms. 
Wachter, because you highlighted that. Okay. So there are 
some--and I suppose, Mr. Nielson, you want to--
    Mr. Nielsen. No. I think that Treasury already has that 
ability to sign off on that debt.
    Chairman Garrett. But this is a requirement that he would 
have to.
    Mr. Nielsen. But they have the ability to do it now, 
correct? Don't they have to sign off on--
    Chairman Garrett. They do.
    Mr. Nielsen. Okay.
    Chairman Garrett. They are not doing it, and we would say 
that they--and so I will just close on this and yield to the 
ranking member that I guess there is a little bit of unanimity 
that there are at least some things that we can do now, even 
though we don't have the final plan, which is going to take a 
little bit more time to accomplish.
    With that, I yield to the gentlelady from California.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Let me thank all of our panelists who have come today to 
help us delve into this very, very difficult and complex 
problem of what to do about the GSEs. I think that it was said 
by one of you that this should not be a partisan issue, that 
this should be a bipartisan issue. And I agree with that.
    There are several things that have been said today that I 
absolutely agree with. Starting with you, Mr. Dalton, and your 
love for the 30-year mortgage, I love it, too. And I think we 
should do everything possible to ensure that is a product that 
is available.
    But let me delve a little bit into who you are and what you 
do. I see, Mr. Dalton, that you are the president of the 
Housing Policy Council of the Financial Services Roundtable. 
You are made up of individuals who are in this business of 
initiating loans, financing, extending mortgages, however you 
want to describe it. These are people who know what is going on 
in this mortgage industry. Is that correct?
    Mr. Dalton. Yes, ma'am. That is accurate.
    Ms. Waters. And having said that, some researchers--
particularly those from the American Enterprise Institute, whom 
Mr. Pinto represents on the panel today, contend that the 30-
year fixed mortgage either isn't going for homeowners or could 
survive and could continue to be an affordable product for 
medium-income families without any government involvement in 
the housing finance system, but you were definite about 30-year 
mortgage. Do you want to say it again in a short sentence for 
us why you feel so strongly about the 30-year fixed mortgage?
    Mr. Dalton. Yes, ma'am. I think it has been the bedrock of 
the Nation's housing finance system for more than a half a 
century. It is sustainable. It is safe. It delivers 
affordability, certainty, stability, and predictability.
    The fact is that for those Americans who live on a budget, 
they know every month, year--month in and month out, year in 
and year out, that mortgage payment is going to be the same. 
And I think that predictability is very important for those 
Americans who are living on a budget and--
    Ms. Waters. You don't have to go any further. I think you 
have really said it. But what is interesting for me is, I think 
your background is Republican and you are willing to stand up 
for this 30-year mortgage. Is that right?
    Mr. Dalton. My background happens to be Democrat, Madam 
Chairwoman.
    Ms. Waters. Oh, is that right? Oh, that is better.
    [laughter]
    Mr. Dalton. But I have served in both Democrat and 
Republican Administrations.
    Ms. Waters. Okay, thank you.
    Now, if our housing finance system were completely 
privatized, as the plan under Representative Hensarling's 
comprehensive GSE reform bill, what would the implications be 
for small and community banks? Would they be able to compete 
with the large financial players? Would they easily be able to 
sell their homes on the secondary market? Would you tell me 
what you think about that plan? He wants to completely 
privatize.
    Mr. Dalton. I am sorry?
    Ms. Waters. Under the Hensarling comprehensive GSE reform 
bill, he would like to completely privatize. And I want to 
know, if the system was completely privatized, what would the 
implications be for small and community banks? Would they be 
able to compete with the large financial players? Would they 
easily be able to sell their loans on the secondary market? 
What would this mean for the small banks?
    Mr. Dalton. I have reservations about a completely 
privatized system, Congresswoman Waters. I think that the--our 
proposal is one that includes the private sector. And we 
welcome that.
    But I think to go completely to the private sector, you 
wouldn't have the government guarantee of the 30-year fixed-
rate mortgage. I think the mortgage market would shrink. I 
think long-term fixed-rate loans would be less available. And 
generally, I think it would be difficult for the institutions 
that you mentioned to be able to finance mortgages.
    Ms. Waters. Thank you very much.
    I want to move quickly to Ms. Susan Wachter, professor, the 
Wharton School, University of Pennsylvania. One of the bills 
offered today by Representative Royce would eliminate the GSEs' 
affordable housing goals. While I don't believe that data 
suggests that those were major contributors to either the 
failure of Fannie and Freddie or the greater housing and 
economic crisis, I am open to perhaps restructuring how we 
support affordable housing in a future housing finance system.
    Would you reiterate what you know about this accusation 
that these affordable housing goals somehow caused the crisis? 
And do you have any ideas about how we could provide support 
for moderate- and low-income folks--how could we restructure 
this?
    Ms. Wachter. Congresswoman Waters, may I take that question 
in reverse order? Support for working Americans is extremely 
important for the mortgage system. And for that, we do need a 
30-year fixed-rate mortgage as a base because of its 
affordability through amortization.
    So for working Americans overall, the starting point is 
that we need comprehensive reform that will allow 
sustainability of the 30-year fixed-rate mortgage.
    Secondly, on the role of affordability, and housing goals 
in particular, it has been alleged that the Community 
Reinvestment Act and the GSEs' housing goals were somehow the 
cause of the crisis. The timing is simply wrong, number one. 
The Community Reinvestment Act and the housing goals were in 
place far earlier.
    In addition, we had a commercial real estate bubble, as 
well. We had a boom and bust of equal dimensions. And when I 
say commercial, I am not simply talking about multi-family 
only. I am talking about office, industrial. That commercial 
real estate bubble certainly could not have been caused by the 
affordable housing goals or the CRE.
    Chairman Garrett. I thank the ranking member.
    To the vice chair of the subcommittee, the gentleman from 
Arizona?
    Mr. Schweikert. Thank you, Mr. Chairman. The joys of trying 
to do this in 5 minutes when you have dozens of different kinds 
of questions.
    And forgive me. This is going to be a little bit shotgun. I 
think it might have been Mr. Nielsen, who spoke to sort of the 
housing policy or housing goals for the country. In, like, 25 
seconds, what is that?
    Mr. Nielsen. In my mind, I think the housing goals should 
be that people who want to have a home should be able to find a 
mortgage, if they are creditworthy, to be able to buy a home. 
That seems to be the American dream, and we believe in that. 
And so we think that is extremely important.
    And all of these discussions have to do with costs. We can 
create a system that is so expensive that only a very few 
people can access themselves to single-family homes. That, we 
think, would be wrong.
    Mr. Schweikert. Mr. Chairman, Mr. Nielsen, and this is one 
of the concerns, because you are my brothers and sisters. I 
come from your industry. But I am being told that as much as 13 
percent of our housing stock in this country is now empty. And 
much of the pricing structure out there right now may be half 
replacement costs. So those on the homebuilding side have a 
devastating type of structural competition.
    You see the solution as what?
    Mr. Nielsen. I can tell you that in some of the most 
devastated markets, number one being Las Vegas, which I just 
visited, there are still homes being built and sold. This 
hangover is not of newly built unoccupied homes, of older 
foreclosed homes. There are going to be 5,000 homes built and 
sold in the worst market, the white hot center of foreclosure 
in this country. And those homes being sold, each one of them 
will employ 3.5 people.
    Mr. Schweikert. Mr. Nielsen--having a little familiarity 
with some of the Vegas market, isn't that because, also those 
lots, the land, the infrastructure, those things basically were 
almost given away for--
    Mr. Nielsen. But, Congressman, still, those homes are being 
sold at way above the foreclosure prices. So people are willing 
to pay more for a home, a new home. It clearly is only 10 
percent of where they were at one time, but the point is, there 
is still a market for new homes. And that exists across the 
country.
    Whether you are in Florida or anyplace else, there are 
niches where people are desirous of homes.
    Mr. Schweikert. But my great fear--and I am going to bounce 
along--is we are still sitting there with a massive number of 
vacant properties in many of my neighborhoods. And I know there 
is a hunger over here to build new products, but I still have 
this concern about what happens to my housing stock when I have 
10 percent, 13 percent vacancies, up and down the country? And 
what does that mean?
    For Mr. Phillips, let's--some of the financing side. What 
would make the REALTORS happy? How about a system where much 
of the guarantee was actually coming through private mortgage 
insurance? Would that be helping us meet some of our mechanics 
and our goals?
    Mr. Phipps. Certainly any pieces that can be brought to the 
table to minimize the exposure would be great. But when you are 
looking at the raw scale, at the end of the day, we need the 
government guarantee. We just do. And the secondary market is 
critical for the whole market, because you are talking about 
the impact of all 75 million--
    Mr. Schweikert. You are saying--okay, Mr. Phillips--
    Mr. Phipps. It is ``Phipps.''
    Mr. Schweikert. Oh, excuse me, sir.
    Mr. Phipps. ``Phipps.''
    Mr. Schweikert. Okay. Glad I was paying attention. Sorry 
about that. Mr. Phipps, you need the government guarantee 
because you are concerned about bondholders' willingness to buy 
the bonds?
    Mr. Phipps. No, actually--
    Mr. Schweikert. The guarantee does what? In your eyes, it 
does what?
    Mr. Phipps. The guarantee provides us with access to 
capital in a market where there are so few--
    Mr. Schweikert. I need you to get more technical with me, 
Mr. Phipps. Is it because people are willing to buy the bonds 
because there is a guarantee and that creates liquidity?
    Mr. Phipps. Essentially, yes. There is no confidence right 
now without the guarantee.
    Mr. Schweikert. So ultimately our solution is, what makes 
it so people are willing to buy the bonds?
    Mr. Phipps. The guarantee makes it possible that they are 
willing to invest. The certainty of the guarantee and the 
certainty of this government is what is facilitating it. It is 
a huge scale. Clearly, insurance will complement it.
    Mr. Schweikert. But ultimately, if we sold that liquidity 
issue, of saying, look, I have the MBS, I need someone willing 
to buy the bonds, right now we do it through a GSE or a full 
faith and credit right now guarantee, but if it was a 
combination of that or something else, as long as someone is 
buying these bonds and it pushes down the liquidity outside the 
securitization into my home mortgages, we are accomplishing the 
goal?
    Mr. Phipps. Provided the average consumer has access to 
competitive cost mortgage money, we get there. We don't see any 
alternative right now. And the principles outlined in my 
written testimony, really tell you how we have to transition to 
it.
    The conversation is really problematic because the winding 
down causes uncertainty in the market, which causes the 
consumer to pause. That is a huge problem where the consumer 
doesn't understand--
    Mr. Schweikert. That is at this end. I am trying to 
actually solve the problem on--if it is a liquidity issue.
    Mr. Phipps. Thank you.
    Mr. Schweikert. Sorry. I am now over my time. I look 
forward to another round.
    Chairman Garrett. The gentleman from Massachusetts?
    Mr. Frank. Thank you, Mr. Chairman.
    Let me begin with Mr. Phipps. I want to echo what my 
colleague, Mr. Sherman, said. Others may have, as well. I think 
it is very important when we are trying to keep confidence in 
the housing industry to make it very clear that the mortgage 
interest deduction is going nowhere. The sun will disappear 
before it goes away.
    Now, I will say this. If I were starting a new country, I 
would not have it. I don't think it is ideal tax policy. But 
given the extent to which people's legitimate vested interest, 
in the best sense, include that, trying to abolish it now, even 
if we were in a wonderful economy, would be unfair. You cannot 
do it without being disruptive to people. Houses are still a 
large part of the wealth for many people.
    And I have to say, I don't think there are 50 votes to get 
rid of it. I understand people are afraid of it, but I think it 
would help us all if we could just make this clear that is 
staying around and then we can build on that.
    And, having that said, I do note that there is a dilemma, I 
think--and I sense this from Mr. Dalton's testimony, whom I 
have enjoyed working with over the years. The specific bills 
that are proposed, in my judgment, are almost all reasonable. I 
do notice--frankly, if you don't mind my phraseology--even Mr. 
Pinto balked at the compensation one. I say, ``even Mr. 
Pinto,'' because he has been most critical of the operations.
    And since everybody agrees they are not going anywhere and 
we have a whole lot of complex tasks to talk about, I don't 
think a drastic reduction in everybody's salary is a realistic 
proposal. We did, I would note, in 2009 put a bill through the 
House that would have covered them under the TARP executive 
restrictions. My colleagues at that point opposed it. Now 
they--I think they went from being too relaxed to too rigid.
    But it did seem to me--and I noticed one of my Republican 
colleagues had concerns about that. Others--I think Mr. DeMarco 
made a good point on the portfolio. I think we should make 
clear that securitization, risk retention applies to them, but 
I think you have to account for that in the portfolio. And 
making a distinction in the portfolio between bad assets and 
good ones, giving you the flexibility--we could work on those.
    But I think there would be a lot of agreement. I have some 
questions about some of the goals, but here is--what I am 
struck by is that three very responsible organizations 
representing major economic interests concerned with housing--
the Financial Services Roundtable, which is itself an amalgam 
of a number of different financial entities, the REALTORS and 
the homebuilders.
    And we have people who represent the financers, the people 
who build the house and people who sell them, all say the same 
thing. Yes, taken individually, these bills are reasonable, but 
to act on them now, in the absence of a broader approach, would 
be a problem.
    Would you elaborate on what you think the negative would 
be? And I know Mr. Dalton mentioned the Hensarling bill, which 
is in limbo somewhere, and I think you are not supposed to 
mention it in polite company. It was filed to satisfy some 
obligation.
    But what is the problem you see? I did sense agreement that 
the bills that were before us are mostly bills that--let's put 
it this way--they are bills everybody would want to see 
included in an overall proposal. What do you think is the 
reason not to go forward with some of them now, given that 
there is still no agreement on what happens at the end?
    Let me start with you, Mr. Phipps.
    Mr. Phipps. I think the short answer, Congressman, is that 
we want to go through with a comprehensive approach, because 
consumers need to know that there is a reliable source of 
financing. And, frankly, when I started in the business 30 
years ago, there were--the top 5 lenders represented 25 percent 
of the market. The top 5 lenders now represent almost 75 
percent of the market. So there is a concentration that really 
makes it hard for competition that is pro-consumer, and we need 
a successor to this--
    Mr. Frank. Can I say then--let me see if I can rephrase 
it--since confidence we all understand is an important part of 
this. We are asking people to make a huge decision. That is why 
I wanted to say that the MID isn't going anywhere.
    Is it your concern that if we appear to be doing this in a 
piecemeal way that people will be reinforced in the sense that 
this is an uncertain future for the whole operation?
    Mr. Phipps. Exactly. When you--
    Mr. Frank. Okay, if I got it right, then I am going to go 
on to Mr. Nielsen.
    Mr. Nielsen. I think you are exactly right. I think it is a 
comprehensive approach that needs to be taken so that there is 
consistency and people can see where we are going. I was 
listening to Mr. DeMarco very closely when he talked about the 
number of folks who worked for Fannie and Freddie and what they 
must be feeling today as they go forward.
    And we still have an ongoing company there that has a whole 
lot of--
    Mr. Frank. I don't want to go over, and I know Mr. Dalton 
has essentially said the same thing. And I just want to say, 
here is the dilemma that my colleagues have. I want to take 
``yes'' for an answer. I think the problem is this: My 
colleagues got themselves, frankly, into a corner by insisting 
last year that they knew what the ultimate solution was, by 
bringing forward a bill that had a longer-range thing, the 
Hensarling bill, that is, as I said, now in limbo. They offered 
it. They said it was our fault we didn't give a chance to have 
hearings to make it better.
    But I have never known them to have to wait for me to do 
what they thought was best. They could talk to other people. 
They don't need my permission. And here is the problem. They 
are a little bit embarrassed, I think, that they were committed 
to something and haven't got the final thing, so they are 
putting forward these proposals to show they are at least doing 
something. And while they are in themselves, I think, 
reasonable, taken together, trying to do it that way instead of 
going forward with the overall approach may do more harm than 
good, and I am struck that it appears to be the view of those 
industry organizations that have this responsibility.
    Thanks for the indulgence, Mr. Chairman.
    Chairman Garrett. Thank you. I didn't hear all of that; I 
just heard the part that they are reasonable.
    [laughter]
    I yield now to the gentleman from Ohio.
    Mr. Stivers. Thank you, Mr. Chairman.
    And I would like to start with a question for Mr. Dalton. I 
think you and the ranking member of the subcommittee had a 
conversation about the 30-year fixed mortgage. I, too, like 
probably all the committee, support the 30-year fixed mortgage, 
and I am just curious if you can tell the committee whether the 
jumbo market that didn't have GSEs involved had a 30-year fixed 
mortgage involved in it for the past 20 or 30 years.
    Mr. Dalton. Mr. Chairman--or, excuse me, Congressman--the 
concern I have about the--
    Mr. Stivers. No, I am asking a question. Did they have--did 
the jumbo market have a 30-year fixed mortgage? This is a yes-
or-no question.
    Mr. Dalton. Yes.
    Mr. Stivers. Thank you. The second question I have for Mr. 
Dalton is about the Federal Home Loan Banks. We have kind of 
not talked about them. And I think you and the ranking member 
of the subcommittee also had a conversation about community 
banks. Can you, in about 10 seconds, talk about the role of the 
Home Loan Banks with regard to community banks? Don't they give 
community banks liquidity on mortgages and provide a similar 
role to what the GSE does?
    Mr. Dalton. The Federal Home Loan Banks did provide that 
role. Yes, sir--
    Mr. Stivers. And don't they help keep community banks 
competitive in the mortgage market, at least to the extent they 
can, without some huge--they don't have the volume of a lot of 
your members.
    Mr. Dalton. Congressman, I would like to answer that for 
the record. I am not sure specifically--
    Mr. Stivers. No, we can back off of that one. But, I just 
wanted to make sure that we put all this in context, because it 
is a puzzle. And the Home Loan Banks have an important piece of 
it.
    I do want to go to something Mr. Phipps said and talk 
quickly about the mortgage interest deduction and agree with 
the ranking member of the full committee that I think we all 
support mortgage interest deduction. I am for a flatter tax 
system, but I still believe that the mortgage interest 
deduction plays an important role here. And it is one way that 
we can support housing going forward.
    I do want to go through and ask a question sort of all the 
members. Is there anyone on the panel who believes that risk-
based pricing of the guarantee fees, the G-fees, is a bad idea?
    Mr. Nielsen. Let me respond to that. As I said before, you 
can create any kind of a cost structure that you want. All it 
does is take more and more people out of the mortgage market. 
So anytime you increase costs--
    Mr. Stivers. Okay, I understand that. So what you are 
saying is, it is fair for my neighbor, if I am a bad credit 
risk, to pay the same amount I pay--
    Mr. Nielsen. No, no.
    Mr. Stivers. --but take some of my risk, because that is 
what happens when you don't have a risk-based pricing system. 
Is that what you are for?
    Mr. Nielsen. No, no. That is not what I am for.
    Mr. Stivers. Okay. Then how do you reconcile that with the 
fact--
    Mr. Nielsen. No, no--
    Mr. Stivers. --increasing G-fees to a risk-based system?
    Mr. Nielsen. I am going back to my original analogy. The 
concept is, if anyone can create risk-based fees to a point 
where you have no risk almost--there is always some risk--but 
at what cost? What--
    Mr. Stivers. Okay--
    Mr. Nielsen. To what portion of the American public are you 
going to say, ``You don't get to have a home?'' ``You don't get 
to have a mortgage.''
    Mr. Stivers. The point is, people need to do as good a job 
of pricing risk. And if we can identify risk, it needs to be 
priced. Is there anybody on the panel who disagrees with that? 
You disagree with that?
    Ms. Wachter. In a nuanced way, yes.
    Mr. Stivers. Okay.
    Ms. Wachter. The fact of the matter is, what is even more 
important is that the system itself delivers what the credit 
risk of the system will be. So your actions going forward will 
determine how risky the system is.
    Mr. Stivers. That is fair. I think that is fair. And I 
don't disagree with folks that we need to figure out where we 
are going, but I think the point of these proposals is you can 
create a foundation that you can move forward with. And while I 
don't agree with all these, I agree with almost all of them. I 
think they create a foundation that allows us to move forward.
    Is there anybody who disagrees with an Inspector General 
for Fannie and Freddie, which is one of the other proposals? I 
didn't think there would be.
    Ms. Wachter. That is not my understanding. I thought--they 
do have an Inspector General. I thought you were talking about 
specific roles of an Inspector General.
    Mr. Stivers. It is powers. It is powers for the Inspector 
General, but yes.
    Ms. Wachter. --very narrow, specific proposals, including 
that are--the problem--
    Mr. Stivers. So do you disagree with--
    Ms. Wachter. Yes, I do, in the following way.
    Mr. Stivers. Tell me. Okay.
    Ms. Wachter. I think the problem is, these are--when you 
say Inspector General, that is, of course, extremely 
reasonable, sir. But all of these are very narrow, and the 
problem is that the American people could say, ``Is this all 
Congress can do in setting up a new system?'' I think it 
undermines confidence.
    Mr. Stivers. I think what we are--the purpose is to set a 
foundation that everybody can agree on while we continue to 
move forward. And you will see more proposals coming forward, 
but I think most of these proposals are very reasonable. I 
support most of them, and I appreciate everybody's time. It 
looks like my time has expired, but I appreciate the 
opportunity to have a conversation with all of you today. And 
we want you included in the discussions going forward.
    Thank you.
    Chairman Garrett. Thank you.
    The gentleman from Colorado for 5 minutes.
    Mr. Perlmutter. I thank the chairman, and I thank the panel 
for their testimony today. What I am getting from most 
everybody's testimony is that we have a fragile real estate 
market. It hasn't begun to move in the way that any of us want 
it to move. We know that so many millions of people are 
employed in housing and in real estate, in finance. And, we 
have to get people back to work.
    And all of a sudden, we are starting to tinker with 
something that has been central to the real estate market since 
the 1930s, as if that is going to help stabilize and underscore 
strength in this market.
    So I think my friends on the Republican side are just wrong 
on this. And I feel like I have to be the historian in this 
committee, because--
    Chairman Garrett. Please do.
    Mr. Perlmutter. --I thought--I know the chairman always 
loves to hear me, because he and I really get going on this 
subject. But Fannie Mae and Freddie Mac in particular--Federal 
Home Loan Banks, I hope are not part of any of this GSE 
conversation. I don't think they are.
    But as to Fannie Mae and Freddie Mac, we have had two 
trouble spots for Fannie Mae and Freddie Mac, once under Ronald 
Reagan and once under George Bush II. And I know, Mr. Phipps, 
you would like this to be a very bipartisan--and I appreciate 
that--but I see a pattern, quite frankly, where particularly 
2003 to 2007, the Fannie Mae and Freddie Mac were used in a 
way--it was like just a cash register.
    Now that stronger and tougher underwriting standards are 
back in place, we don't see the troubled loans. We didn't see 
the troubled loans before that. So in working with these 
particular agencies, companies, and that is something we have 
to look at, whether it is the Federal Government or private or 
both, and that is a legitimate concern. But none of that is 
really addressed here.
    So, Mr. Nielsen, what I would like to--I did have one other 
historical nugget for you, Mr. Chairman, that I know you always 
like to hear.
    Chairman Garrett. About the President or--
    Mr. Perlmutter. That is--no, this is about the former 
chairman, one of the former chairmen of this committee, Mr. 
Oxley, when in 2005, there was an effort to put some 
limitations on Fannie Mae and Freddie Mac and exactly what was 
going on there. And he pointed the criticism at the White 
House. He said all the hand-wringing and bed-wetting is going 
on without remembering how the House stepped up on this to 
modify it.
    What did we get from the White House? We got a one-finger 
salute from the Bush--
    Mr. Sherman. Will the gentleman yield? Did the former 
chairman indicate with which finger he was saluted?
    Mr. Perlmutter. He did not, but I can picture it. And when 
the Democrats came in, in 2007, the very first thing we took on 
was Fannie Mae and Freddie Mac and the excesses--
    Chairman Garrett. Would the gentleman--will the gentleman 
just yield on that?
    Mr. Perlmutter. I would yield to my friend from New Jersey.
    Chairman Garrett. So were you here when all that was 
happening?
    Mr. Perlmutter. I was not.
    Chairman Garrett. Oh, okay.
    Mr. Perlmutter. I am just reading what Mr. Oxley had to 
say.
    Chairman Garrett. Do you remember--that bill moved along in 
the House, right?
    Mr. Perlmutter. It did move in the House. And it stalled in 
the Senate, apparently at the request of the White House, who I 
think was--
    Chairman Garrett. It came out of Senate Banking, right?
    Mr. Perlmutter. --provided--
    Chairman Garrett. It came out of the Senate Banking 
Committee?
    Mr. Perlmutter. No, it did not, did not come out of the 
Senate. But taking back my time, Mr. Chairman--
    Chairman Garrett. You may want to check your record on 
that. It came out of the Senate Banking Committee, and then it 
was stalled in the full Senate.
    Mr. Perlmutter. All I am doing is reading from Mr. Oxley, 
the former chairman of this committee. So--
    Mr. Sherman. If the gentleman would yield--
    Mr. Perlmutter. I yield to my friend from California.
    Mr. Sherman. I understand the chairman's position is that 
blame lies before the full Senate and not the Senate Banking 
Committee, that the Senate Banking Committee was wise up to 
take up the legislation in the full Senate?
    Chairman Garrett. Right. And it was the full Senate where 
we needed 60 votes in order to move the bill, and I guess we 
didn't get support--I guess from your side of the aisle, 
actually, in order to move that.
    Mr. Perlmutter. I will take back my time, because I am just 
reading what Mr. Oxley had to say.
    Now, the point being that here we have a fragile recovery, 
and I would turn to you, Mr. Nielsen, for just this question. 
If we were to take up all of these different efforts right now, 
what would we do to the housing business, to those 5,000 homes 
that you are talking about being built in Nevada?
    Mr. Nielsen. I guarantee it would be a miss. And to your 
earlier point, the secondary mortgage market that we have had 
in place since the 1930s is the envy of the world.
    Mr. Perlmutter. You bet it is.
    Mr. Nielsen. Envy of the world. For us to look at two blips 
and say we should dump the whole thing, in my mind, seems 
inappropriate. And to that end, if you want to change the name 
or change little bits around the edge, that is fine. But please 
maintain that secondary mortgage market that has created a 
homeowner nation out of this country.
    Mr. Perlmutter. Thank you. And I yield back to the Chair.
    Chairman Garrett. The gentleman from New York?
    Mr. Grimm. Thank you, Mr. Chairman, I appreciate it.
    And I thank my colleague for the history lesson, I think.
    [laughter]
    It is amazing how so many different individuals can 
remember history differently. But I think what I am getting out 
of this--and, Ranking Member Frank, you mentioned how we could 
have had these hearings. I think the point is, we are having 
them now.
    I am proud to be a part of a committee that is having this 
dialogue. I come from Staten Island, Brooklyn, where the real 
estate market is imperative. It is crucial and vital for our 
job sector and for our economy overall.
    I am--I do have to admit--and maybe because it is his 
birthday--I agree with Ranking Member Frank, and that will be 
his birthday present, that the interest deduction should not go 
away. I also believe in the 30-year fixed, something my parents 
relied on when they bought their first and only house, the same 
house my mother still lives in.
    That being said, this discussion is important, because I 
think we are all agreeing that we do need reforms. It is a 
matter of getting it right, though, and not--if I am 
understanding this panel--going so fast that we cut off our 
nose to spite our face and we make things worse, rather than 
better.
    Professor Wachter, you mentioned that we have to recognize 
the fragility of the market. And just if you could expand a 
little bit on bringing back private capital and how you would 
propose on bringing back the private capital.
    Ms. Wachter. Thank you, Congressman. The market is at an 
extremely fragile point. And if we were to have a double dip, 
not down a few percentage but a serious double dip, a 
recurrence of what we had before, it would not only put people 
out of jobs, it has the potential to bankrupt our banking 
system again. So we are at a serious crossroads.
    And the confidence in the housing market depends on 
confidence in there being financing for the housing market. 
That said, private capital is not where it could be. Private 
capital has not come to the fore in the jumbo market where 
Fannie and Freddie are not operating. And the suppliers there 
are asking for rules of the game so that they can bring in more 
capital.
    In the short run, there is no alternative to a government 
guarantee, a catastrophic guarantee. Even if--
    Mr. Grimm. Professor, could I just--on that, would you 
agree, though, that the first step has to be, at a minimum, to 
start to unwind where Fannie and Freddie never should have 
been--
    Ms. Wachter. Absolutely, from the sense of--
    Mr. Grimm. --out competing in the marketplace--
    Ms. Wachter. Absolutely--
    Mr. Grimm. --putting them back to a secondary market, which 
is their original mission?
    Ms. Wachter. Absolutely. They should be--they should not 
have been part of the unwinding of credit standards, the 
reckless lending. They should not have been part of that. They 
didn't start it. They were late to the game. But they certainly 
were part of it. And--
    Mr. Grimm. So would you agree that in and of itself--
    Ms. Wachter. And it has been stopped.
    Mr. Grimm. --will be the beginning of starting to bring the 
private capital back?
    Ms. Wachter. No. One solution is to have private capital 
which has a government-guaranteed backstop. And in fact, that 
is what we have with the banking system. It is not correct to 
say that we don't have a government backstop. We have it 
implicitly in the banking system.
    The question is, a backstop that will, in fact, allow a 
flourishing market for 30-year fixed-rate mortgages. And that 
is why we need a system, a secondary market system. It doesn't 
have to be exactly like Fannie and Freddie, and it certainly 
should not replicate the errors of Fannie and Freddie, but 
there is no secondary market system in the world--and we are 
the envy of the world--that doesn't have some government role.
    Mr. Grimm. I am almost out of time. Thank you.
    Mr. Phipps, you mentioned the value of homeownership. And I 
don't think anyone in this room would disagree with you. What 
are you proposing, though? In general broad terms, I am hearing 
just an overall plan. Is it that you want to make sure that we 
don't move too quickly, that there is no secondary market at 
all and the bottom falls out because the private sector and the 
private money have not come to bear yet?
    Mr. Phipps. Essentially, yes. And the reason homeownership 
matters is that even after all the market corrections, the 
average family who owns their house is worth $188,000. The 
average family who rents a house is worth about $4,600. If we 
want self-reliant people, homeownership is the perfect 
opportunity for that. It has been a benefit and a priority of 
this country for almost 100 years. We would like to see that 
for our children and grandchildren.
    Mr. Grimm. Thank you.
    Mr. Dalton, we have met before. I am out of time, so I will 
just ask you yes/no. Are you really a Democrat, Mr. Dalton?
    Mr. Dalton. I am a Democrat.
    Mr. Grimm. Okay, that is fine.
    [laughter]
    My time has expired.
    Chairman Garrett. And did you want to go down the rest of 
the row, too, with--
    [laughter]
    Just to be curious. And--anyway. And, of course, the 
professor's comment--of course, Dodd-Frank was to make sure 
that we are taking away all those explicit and implicit 
guarantees to the banking system, because they are no longer 
too-big-to-fail, and that is what the whole benefit of Dodd-
Frank is, that we don't have that anymore.
    But to the gentleman from California, for 5 minutes.
    Mr. Sherman. I wish the gentleman from New Jersey was right 
and Dodd-Frank completely eliminated too-big-to-fail. As you 
know, we had a number of amendments to Dodd-Frank that might 
have allowed it to achieve that objective.
    Chairman Garrett. Achieve that, yes.
    Mr. Sherman. I think Mr. Dalton is to be commended on his 
most recent answer--
    [laughter]
    And the wisdom that lies behind it.
    Professor Wachter, I think, is right in that the worst 
thing we could do to our economy is to see a slide or 
precipitous drop in home prices. And the biggest thing we can 
do to protect Fannie Mae and Freddie Mac is to make sure that 
they are not buying subprime loans and Alt-A loans and liar's 
loans. And that we have already done.
    The barn is much better now that we have closed the door. I 
don't know what changes we would have to make short term that 
exceed the importance of that.
    Mr. Phillips, I just want to re-emphasize what you just 
said. The average non-homeowning family in this country has an 
average net worth, value of everything they own in the world, 
of under $5,000.
    Mr. Phipps. Correct.
    Mr. Sherman. That is a strong argument for promoting 
homeownership. I commend the gentleman from Staten Island on 
the importance--on his statement that we should keep the home 
mortgage deduction.
    What is most likely to happen in Congress is we will have a 
lot of talk about eliminating the home mortgage deduction, and 
then we won't actually do anything. So whatever Federal 
revenues are available from not doing anything will be 
available. That is to say, zero.
    But what effect does it have on today's home prices that 
people are reading that Congress might eliminate the home 
mortgage deduction, which means when you live in the home, you 
don't get the home mortgage deduction, and when you sell the 
home, you sell it for an awful lot less? I would think from 
your position, as president of the National Association of 
REALTORS, you could give me some insight as to what this talk 
is doing to home prices.
    Mr. Phipps. What all the conversations--and particularly 
the conversations on mortgage interest deduction and its 
elimination do--is cause people to pause. So when we have an 
overhang and an oversupply in the market, to discourage 
qualified, ready, willing, and able buyers from stepping into 
the market means that you have a further eroding of average 
price.
    It is particularly challenging--and the conversation I 
personally find frustrating, because it is something that my 
grandparents, my parents, and I benefited from, to pay down and 
pay off the 30-year mortgages. It feels like generation theft 
that my kids and grandkids cannot enjoy the benefits that we 
have had in place since 1913.
    Mr. Sherman. Fannie and Freddie hold portfolios of well 
over $1 trillion collectively. Their plan is to sell those off 
to reduce that holding of mortgages by about 10 percent. Is 
that too precipitous, too fast, both to keep the housing market 
in good shape and keep the funds flowing in the housing market 
and to make sure that Fannie and Freddie get full value for the 
assets that they are selling? Is 10 percent a year faster than 
it ought to be? Or should I prefer to--
    Mr. Phipps. Actually, I would prefer you ask--I think the 
goal, frankly, is--
    Mr. Sherman. Let me ask the professor.
    Ms. Wachter. I think that Director Ed DeMarco did actually 
respond to that in a way. He was asked whether 5 years is too 
precipitous, and he said there is no way that he can answer 
that question.
    Mr. Sherman. But you are smarter.
    Ms. Wachter. --no, by no means--10 percent at this moment 
in time does not appear to be threatening the recovery.
    Mr. Sherman. So we should encourage the 10 percent, but 
maybe not mandate it in a way--
    Ms. Wachter. Exactly, mandatory--
    Mr. Sherman. --that would lock it in.
    Ms. Wachter. --is exactly where you do not want to be on 
this.
    Mr. Sherman. Mr. Phillips, I come from a high-cost area, 
Los Angeles. If the conforming loan limit drops, what does that 
do to home prices in the 10 largest cities? And then I will ask 
the professor whether that likely drop in home prices would 
adversely affect the economy, but first--
    Mr. Phipps. The answer is that it will actually force down 
prices. What is really interesting is it is portrayed as a 
coastal issue, when, in fact, we are looking at 29 States 
having high-cost areas, 206 counties, and it impacts 51 million 
Americans. So it is a significant portion of this country that 
has broad demographics.
    Mr. Sherman. And if all of a sudden every home that used to 
be worth $800,000 in the L.A. area dropped to a value of 
$500,000, Professor, what would that mean for the national 
economy?
    Ms. Wachter. That would certainly create regional 
recessions and beyond that, of course, if we have a price--
    Mr. Sherman. But only in our 10 biggest metropolitan 
markets.
    Ms. Wachter. --if we have a price fall of that magnitude.
    Mr. Sherman. I yield back.
    Chairman Garrett. Great. Thank you.
    The gentleman from Texas?
    Mr. Sherman. The record should show that when I say only 
the 10 largest markets, that was facetious.
    Mr. Hensarling. Thank you, Mr. Chairman.
    Mr. Pinto, I evoked your name in the earlier panel for some 
work that you did. Just to put it in the proper context, I 
believe you said that, under the normal rate at which Fannie 
and Freddie are dealing with their portfolio holdings, that is 
roughly 20 percent per year.
    I had authored some legislation that would have essentially 
shrinked their portfolios on a stair step basis 700, all the 
way down to 250, over a 5-year timeframe. So did I understand 
correctly--and I didn't hear Mr. DeMarco necessarily disagree--
that your data is accurate?
    I know that you have spent quite a part of your 
professional career studying the GSEs, and I certainly have 
spent some time poring over the paper that you did along with 
Mr. Wallison.
    So, can you give us a little bit more detail about your 
observation on reducing the portfolio of holdings? And is 5 
years a reasonable time period?
    Mr. Pinto. Yes, thank you, Congressman.
    Fannie and Freddie report monthly. They have a monthly 
report. And in that, there is a section on their portfolio, and 
it shows what it consists of, what the additions are, what the 
subtractions are, and it has a liquidation rate.
    And the liquidation rate over the last year, 2010, it is 
known as an annualized liquidation rate. It varies a little bit 
month by month, so you annualize it. And so you are getting 21 
percent is what it was last year. And if you look in January of 
this year, the first month that is reported, it has an 
annualize rate of 21 percent.
    So it is running in January the same. It could drop a bit. 
It could go up a bit. But that is roughly what it has been 
running.
    And when I put that against your stair step, as you 
described it, you started off a little more slowly and then 
accelerated, and so over time, over 5 years, it came out to 
be--I don't remember the exact number--it was about a 15 
percent reduction per year, annualized 15 percent. So it seemed 
that if the liquidations are 21 percent today, if you assume it 
slows up a bit, that 15 percent seemed to be in the ballpark 
and, therefore, shouldn't be troublesome.
    I would add that I believe the reduction over the last 
year-and-a-half has been slower than the liquidation. So in 
effect, they have been adding to the portfolio, not--if they 
were just sticking to the liquidation rate, it would be lower 
than where it is today.
    Mr. Hensarling. Mr. Pinto, in the paper, the AEI paper that 
you presented back in January along with Mr. Pollock and Mr. 
Wallison, you stated that the alternative plans in Washington 
that still retained a government guarantee in the secondary 
mortgage market were flawed. I quote from the paper, ``These 
plans are based on a fundamental error that the government can 
act like an insurance company and set a correct price for the 
risk it is taking.''
    So we know on the menu of options that the Administration 
has presented to us, certainly, option two and option three 
would still have the government setting a price for risk-
taking. Can you tell me why you and the other AEI scholars have 
concluded that the government cannot correctly price for risk?
    Mr. Pinto. Yes, thank you. Basically--and it echoes what 
Director DeMarco said last September before the full 
committee--the government doesn't have a means for figuring out 
how to price for risk. It doesn't have a profit motive. It 
doesn't have the ability to do that.
    And time and time again, it has been proven--and I think 
there were some comments by various members earlier, the number 
of cases that the government has had where it hasn't properly 
figured out the pricing of risk. And so that is your first 
problem.
    The way the government doesn't provide capital backing that 
for the most part, whereas the private sector does. So if the 
private sector actually has a thick cushion of capital at risk, 
it has to do a very good job of pricing for risk. And if it 
doesn't, it loses that capital.
    In fact, we issued a final White Paper last week that 
outlined a completely private system, save for FHA, which we 
talked about earlier, that would rely totally on private 
capital, and it would put that capital at risk if it were not 
properly priced.
    And we priced that with experts in the industry, and we 
came up with pricing that is not that much higher than where we 
are today, and certainly within the confines of both what 
Secretary Geithner said on March 1st, a moderate increase in 
interest rates, and, secondly, the Center for American Progress 
proposal, which relies on a government guarantee, calls for a 
40 basis point increase per year, and ours is less than that.
    Mr. Hensarling. I see my time has expired. Thank you.
    Chairman Garrett. And I thank the gentleman from Texas.
    The gentleman from Indiana is recognized for 5 minutes.
    Mr. Donnelly. Thank you, Mr. Chairman.
    It seems to me that one of the key ingredients here, more 
than almost anything else, is common sense, that we have to 
have a glide path into a product that doesn't disrupt and tear 
apart the housing market as we move forward, that we can't one 
day be here and the next day be completely here and pray that 
everything turns out right in the process, because in the 
process of doing that, Mr. Nielsen, for instance, how many 
people are involved in the home-building industry today?
    Mr. Nielsen. We have 160,000 members that are involved in 
the home-building industry. They represent about 6 million 
total employees. And that is down dramatically from just a year 
or two ago.
    Mr. Donnelly. And, Mr. Phipps, just a little background, 
the first house I bought was a 30-year fixed mortgage, 30-year 
fixed-rate mortgage. And what we were able to do, it enabled us 
to get into the house. And then after some years, we were able 
to refinance into a 15-year mortgage, when we were able to 
handle a little bit more payment.
    But what it did was enable us to raise our family there, to 
be our greatest wealth instrument, and at the same time, the 
30-year fixed got us into the opportunity to be part of this.
    What happens to the real estate market if what we do is not 
a smooth transition as we move away from the way Fannie and 
Freddie is? If we do not handle this properly, what will happen 
to the real estate market?
    Mr. Phipps. An unpredictable market and a market with 
uncertainty is a challenge, because prices go down. It is 
interesting. Our number-one priority as an organization is a 
reliable flow of capital, of mortgage capital, because at the 
end of the day, we live on the river on which capital creates, 
and it impacts all 75 million American families.
    If you take that away and it is not reliable, and it is not 
understood to be available, then it causes people to pause, 
prices go down, unemployment will increase. It is a challenge.
    And I would add one other interesting nuance. The pendulum 
has swung so far in terms of tight credit now that the average 
credit score that Fannie and Freddie are buying is 750, rather 
than 700 to 720. So we need to get back toward medium, because 
there is about 15 percent of the market that should have access 
to credit, that if you look at their whole profile, certainly 
have the ability to pay it back. And they are being 
disenfranchised, and, frankly, that 750,000 additional 
transactions this year could generate 350,000 to 375,000 
additional private-sector jobs. We are very much a jobs 
business.
    Mr. Donnelly. Thank you.
    Mr. Secretary, first, thank you for your service, sir. And 
then I just have one question for you, and that is, what would 
happen to the real estate market if there wasn't a 30-year 
fixed-rate product available?
    Mr. Dalton. Thank you for your nice compliment, Congressman 
Donnelly. With respect to what happens, I think you can see 
that the American people want 30-year fixed-rate mortgages, in 
that in the last quarter of 2010, 95 percent of the refinances 
went into a long-term fixed-rate mortgage. Whatever people had 
before, this is what they want. And so I think clearly we need 
to do that.
    In terms of what would happen without it, I think you would 
see homeownership less available to many Americans. I think 
they want predictability, and that is what the long-term fixed-
rate mortgage gives them. I think without it, you would have 
uncertainty. And one of the things that we have learned is that 
nothing spooks the marketplace more than uncertainty.
    Mr. Donnelly. Thank you, Mr. Secretary.
    Mr. Chairman, I yield back my time.
    Chairman Garrett. Thank you.
    Mr. Donnelly. Thank you, sir.
    Chairman Garrett. Thank you very much.
    The gentleman from Ohio?
    Oh, he is already gone. The gentleman from--unless the 
gentleman from California would like to yield to the gentleman 
from Ohio?
    Mr. Miller of California. No, no, I didn't. I was waiting 
for my time. You are wishing I would yield, but I won't.
    Chairman Garrett. Would you like to yield to anyone?
    Mr. Miller of California. No, I would love to take my time. 
I am a history buff. I love history. If we go back to 490 B.C. 
and discuss Athenian democracy or we look at the issue of the 
GSEs--I enjoyed Mr. Dalton's comments that everybody supports 
the fixed 30-year loan. I do, too. I attended a major seminar 
by all the major lenders in 1982 when they said there would 
never be a fixed 30-year loan again. Remember that? Because of 
the bad times. And the GSEs got that moving, where the jumbo 
market came back in and participated in the fixed 30-year loan, 
so I totally agree with that.
    Now, Mr. Pinto, did you say that the GSEs or the government 
is not capable of pricing risk? Was that your comment?
    Mr. Pinto. The government is not capable of pricing risk.
    Mr. Miller of California. The GSEs are not capable of--
    Mr. Pinto. I said the government is not--
    Mr. Miller of California. Okay, good. I hope you said that, 
because if that were true, the private sector is doing 
horribly, because the GSEs are outperforming the non-agency 
market by far. Have they made mistakes? Yes. The default rates 
are lower. We can't argue that.
    So they have made mistakes, without a doubt. And we tried 
in 2005--and I would like to correct history--we sent a very 
good bill to the Senate. It required a strong regulator, good 
underwriting standards, a fair standard as applies to all 
lenders. It got out of committee, but the Senate Democrats 
filibustered it, but everything else was correct in the 
statement, except that last part.
    So perhaps if we had done that, we wouldn't be where we are 
today. In 2001, I started introducing amendments that probably 
got the Senate 4 or 5 times defining subprime versus predatory. 
And if we had done that, we would not have seen a Countrywide 
and the predatory loans they made, and perhaps we wouldn't have 
seen the debacle we have today.
    But if you look at the GSEs in history, if you go back from 
1970 to 2000, 1985, when Fannie lost some money that one year--
they have always made money--in fact, they have always paid 
money into the Treasury. They have actually made money for the 
government.
    So instead of looking at the history of where they went 
wrong, what they did wrong, and what years they did it wrong 
in, and correcting that, we are looking at other things.
    And I think we need to say that, if they are outperforming 
the private sector--and this economic downturn in housing was 
global, and yet not one of the other countries that suffered 
the downturn had the same form of lending practice that we have 
here, yet they suffered the same identical type of a downturn 
percentage-wise, we should say, what did they do wrong? How can 
we fix this? And how can we make the lending market solvent and 
strong for future generations?
    Now, what I have seen, based on the history of being a 
builder, is--and I think many REALTORS and builders 
acknowledge that--when--lenders, if you couldn't meet 
conforming standards, they didn't want to deal with you, 
because they realize there wasn't the liquidity in the private 
sector to make those fixed 30-year loans and hold those fixed 
30-year loans because it ate up all their liquidity, in most 
cases.
    If we had an alternative to the GSEs, I would like to see 
it, because it wasn't there at the height of the market, 2005, 
2006, and 2007, when you would have seen it. All you saw was 
Countrywide and the like issuing junk bonds out there to people 
and telling them they equaled mortgage-backed securities by the 
GSEs, which they didn't.
    So if we didn't have a GSE, I would like to hear from the 
builders and REALTORS, what impact on the housing market do 
you think that would have today?
    Mr. Nielsen. Probably the major problem would be, who is 
going to be there in another downturn? There is no question 
that private capital is private. And as a private capital, they 
get to go in or get out of any market they want to.
    So when the market is tough, they are not going to be 
there. What we have been able to count on in the past, is for 
the GSEs and FHA to take up that mantle when we had a problem. 
It concerns me greatly to think that the only folks we would 
have out there to help us out in a crisis is private capital.
    Mr. Miller of California. And I am extremely pleased to 
hear that the GSEs are using risk-based loan standards and 
principles and strong underwriting standards. Had they done 
that in recent years, instead of acting like a company that is 
owned by stockholders trying to get a larger market share 
regardless of the cost or the risk, they wouldn't be where they 
are at today.
    But today, the government owns them. Now, the government 
has an opportunity to make them solvent, to get paid back every 
dime we lent them, but charging them 10 percent interest 
doesn't do that. So we have an opportunity to reform the GSEs, 
to put them back to their original intent, to provide liquidity 
to the marketplace, in times like today when we need them, and 
not put taxpayers at risk, as a matter of fact, make money for 
the taxpayers like they have done in all the years they have 
been in business until recent years.
    So if we are looking at what they have done, there is not a 
lender in the private sector historically that has performed as 
well as the GSEs, when they only lost money in one year. Find 
me one lender that has done that in history. There are none.
    So should we be fixing them? Yes. Should we be correcting 
the mistakes they made? Yes. But first, let's find out what 
they did wrong and let's fix it. I yield back the balance of my 
time.
    Chairman Garrett. Thank you.
    To the gentleman who is standing up from Texas, for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman. I want to stand up for 
homeownership.
    Chairman Garrett. There you go.
    Mr. Green. I want to stand up for builders who are trying 
to help us recover.
    Chairman Garrett. And the taxpayers, too.
    Mr. Green. I want to stand up for all taxpayers, including 
you, Mr. Chairman. I stand for making sure that we have a 30-
year affordable homeownership opportunity. And I am 
appreciative of what was said. Someone said that housing is not 
partisan. I made a note of it, and I had to step away. I 
believe it was the REALTOR who said it. I concur. And I want 
to work across lines to make sure that we get this right.
    Ultimately, however, after--let me do this--I thank all of 
you for coming. I want to especially thank, however, the 
REALTORS, the builders, and the Roundtable, simply because you 
are there where the rubber meets the road. And a lot of what 
you have presented is based upon your experiences, and your 
talking to people, and your actual knowledge of what is going 
on from the user's perspective.
    And I don't mean to in any way demean the academicians. I 
thank you for what you have done, as well.
    Ultimately, what we have to decide is, what will the role 
of the Federal Government be? That really is where the rubber 
meets the road right now. And until we do that, it is difficult 
to do all of these other things, because we could find 
ourselves moving in one direction, when, in fact, we have gone 
too far or we have done something that we will regret and we 
will have to try to unwind something that we placed in place.
    So I want to say to you--I believe it was Mr. Nielsen with 
the builders--you said that you think that there should be a 
Federal backstop. And, Mr. Pinto, I believe you are of the 
opinion--and if I am incorrect, I would like for you to correct 
me--there should be no Federal involvement at all, no Federal 
capital should be at risk in any way.
    Mr. Pinto. That is not correct.
    Mr. Green. Okay, thank you. Please correct me. And do it as 
quickly as you can, because I have a question.
    Mr. Pinto. FHA, VA, and the Department of Agriculture 
programs we believe are appropriate.
    Mr. Green. But as it relates to the GSEs, absolutely not?
    Mr. Pinto. We don't--
    Mr. Green. Or anything similar?
    Mr. Pinto. We don't believe there should be any GSEs.
    Mr. Green. Anything similar to that? Okay. So, now, the 
question becomes, in this new paradigm, however, I am sure you 
are aware that there is--we are thinking about a paradigm that 
will include FHA, VA, and some other things that may be unnamed 
at this time or some other paradigm, some system by which we 
will continue to have mortgages promulgated.
    And, of course, your answer would be, ``Just let the 
private market take care of it.'' Is that correct?
    Mr. Pinto. Our answer is, we laid out a very comprehensive 
approach of how the private market--
    Mr. Green. Okay. But is it--in essence, when we get to the 
bottom line, it is the private market, is this correct?
    Mr. Pinto. A private market, yes.
    Mr. Green. And that would be it. Okay. Now, there are some 
other people who are similar to Mr. Nielsen, and they think 
that the Federal Government, while not the primary, maybe not 
the secondary, maybe not the tertiary, but possibly the 
quaternary, somewhere in there, there is a role for the Federal 
Government. And without saying where it is right now, those who 
think that there is a role for the Federal Government, we need 
to know who you are so that we can know what we are supposed to 
do, at least based upon your perspective.
    So let me just start with the lady. And it is interesting 
to note that one lady can counterbalance one, two, three, four, 
five men.
    [laughter]
    Ms. Wachter. I don't know--
    Mr. Green. And you have done well. So where do you stand on 
it? And I regret that I must ask that you say yes, some Federal 
role, or no, no Federal role--
    Ms. Wachter. Yes, on the Federal role.
    Mr. Green. Yes. All right, that is a yes.
    Mr. Phipps. An enthusiastic yes.
    Mr. Green. That is another yes. That is two. Yes, sir?
    Mr. Nielsen. Yes, sir.
    Mr. Green. That is three.
    Mr. Pinto. No for--
    Mr. Green. No, all right.
    Mr. Papagianis. Some Federal role.
    Mr. Green. All right. That is four, and--
    Mr. Dalton. Yes. Yes, sir, we do.
    Mr. Green. All right. So now we have--let the record 
reflect, please, let the record reflect that all persons, 
saving one, believe that there is some role for the Federal 
Government. And the record might also reflect that two of the 
academicians are having a gentle conversation about that. My 
suspicion is that there is--
    Mr. Papagianis. I think we agree. It is FHA.
    Mr. Green. Okay. Then let's--extracting FHA, so we will get 
it right. I don't want to trap you. I want to know what your 
thoughts are. Extracting FHA, removing VA, is there a role for 
the Federal Government? Now let's do this again. Ma'am?
    Ms. Wachter. Yes.
    Mr. Green. Sir?
    Mr. Nielsen. Yes.
    Mr. Green. Sir?
    Mr. Pinto. No.
    Mr. Green. No.
    Mr. Papagianis. I say no, but we have a ton of subsidies in 
the--
    Mr. Green. Okay, you are a no. Okay. All right.
    Mr. Dalton. Yes.
    Mr. Green. Yes. So we have two of our academicians who 
think not, and those who, where the rubber meets the road, seem 
to think yes. Now, if we have this opportunity to have some 
role for the Federal Government, isn't it reasonable and 
prudent--my time is up, so I have to be quick here--isn't it 
reasonable and prudent to have some idea as to where we are 
going with this, so that we can have a comprehensive approach 
to this, as opposed to deciding that maybe we ought to do a few 
things here and a few things there?
    I think what people are saying to us is, let's get some 
certainty, and the way to get the certainty is to take this 
comprehensive approach and deal with it to make sure that we 
don't make another big mistake. If I could just get people to 
say yes or no, I will be honored.
    Ms. Wachter. Yes.
    Mr. Phipps. Yes.
    Mr. Nielsen. Yes.
    Mr. Green. All right. You didn't understand the question. 
That is all right. We will leave you out. You didn't understand 
the question. Yes, sir?
    Mr. Dalton. Nor did I, sir.
    Mr. Green. Okay.
    Chairman Garrett. Thank you for your questions.
    Mr. Green. Okay.
    Chairman Garrett. Votes are going to be called shortly, but 
before the panel leaves, as they did with another hearing, we 
have a little bit of time left, so what we are going to do now 
is to go into what we call a lightning round, because votes are 
going to come very quickly, so we will just go for 2 minutes or 
so for each person, and then we will conclude.
    So, very quickly, following up on your last question, which 
members who had indicated yes to a government role or 
government guarantee or taxpayer-supported backstop have a 
financial interest in it if they were to have the taxpayers 
bail it out? Ms. Wachter?
    Ms. Wachter. I do not.
    Chairman Garrett. Would you--
    Mr. Phipps. Not personally, but--
    Chairman Garrett. Not you, personally. I am asking on 
behalf of those you represent.
    Mr. Phipps. We certainly would benefit.
    Mr. Nielsen. Yes.
    Chairman Garrett. Yes?
    Mr. Pinto. No.
    Chairman Garrett. You didn't vote yes, so--
    Mr. Dalton. No, just the investor would have--
    Chairman Garrett. Thank you. Excuse me?
    Mr. Dalton. I said just the investor, because of the 
government guarantee on the mortgage-backed securities.
    Chairman Garrett. So a partial yes. Mr. Papagianis? There 
we go. Can you tell us, some of the proposals that were laid 
out before, some before us right now, would do what to the cost 
of mortgages? And then, secondly, depending upon your answer to 
what it will do to the cost of mortgages, what will it actually 
do at the end of the day with regard to the homeowner, 
prospective homeowner, as far as his ability to buy a house?
    Mr. Papagianis. Which proposal? You are talking about the 
bills before the committee?
    Chairman Garrett. Bills before the committee, yes.
    Mr. Papagianis. The bills before the committee are, in my 
opinion, as a package. And we can go through individual bills. 
But it would be a--it would send an important signal to the 
market to--so private capital could come back in.
    I think the most important one is actually on the G-fees. 
And I would go back to comments that Mr. DeMarco made, that 
even on the 2010 book of business--and, obviously, they are 
pulling forward losses from the past--but that the G-fee is 
still not appropriately calibrated.
    Chairman Garrett. Right. And so that you may see costs go 
up, as far as the credit costs?
    Mr. Papagianis. I think so. I think that, I am sort of 
where the Treasury Department is, where--that any reasonable 
plan, pathway forward is going to include marginal price 
increases--
    Chairman Garrett. What does that do to the price of the 
house?
    Mr. Papagianis. Price of the house?
    Chairman Garrett. Yes.
    Mr. Papagianis. The price of the house would go down.
    Chairman Garrett. What does that do to the homeowner, as 
far as buying a new house?
    Mr. Papagianis. It makes it more affordable.
    Chairman Garrett. It makes it more affordable, so more--
actually that--more sales and actually more construction and 
more building potential.
    Mr. Papagianis. That is right.
    Chairman Garrett. Okay. And the last question is dealing 
with the 30-year fixed. Secretary, you said that people want a 
30-year fixed mortgage. Isn't it true that people actually want 
the cheapest mortgage that they can possibly get? For a long 
period of time, they actually wanted 1-year and 2-year and 3-
year and 5-year and 7-year ARMs, because those were the 
cheapest things out there? Doesn't the public really want 
whatever is most affordable to them, whether it is 30-year or 
anything else?
    Mr. Dalton. I think they want predictability, Mr. Chairman. 
And that is what the 30-year fixed-rate mortgage gives them.
    Chairman Garrett. And even if it is more expensive, they 
will go with the 30-year fixed, if it is predictable, even if 
there are cheaper things on the market?
    Mr. Dalton. I think that is what they showed in the last 
quarter of 2010, yes, sir.
    Chairman Garrett. Thank you. In the last quarter of 2010, 
because that is really all that was available? But prior to 
that, when there are other things available in the marketplace, 
won't people go for what is cheapest available? Does anybody 
else have a comment as to whether people go for the higher-
priced 30-year mortgage or the cheaper?
    Mr. Nielsen. I think it is still predictability. I think if 
you go back and look at ARMs and what was happening, I think 
the 30-year fixed has always been the mortgage of choice.
    Mr. Phipps. And it was part of the problem that we had in 
the predatory lending period. People did exactly what you are 
saying. They went for the least expensive without realizing 
they were going to reset in 2 years. So there is a lesson that 
we learned as a country that predictability and knowing what 
the payments are of a long term, it is something we really need 
to do for sustainable homeownership and literacy.
    Chairman Garrett. Mr. Green?
    Mr. Green. Thank you, Mr. Chairman.
    I wanted to make that very comment, so I will continue with 
what you were saying. Also, if we examine the empirical 
evidence, we will find that many of the people who went for the 
teaser rate didn't qualify for the adjusted rate. And I think 
we have to factor that into this equation.
    But people do seem to want to have certainty. Certainty 
means something not only to investors, but also to consumers. 
Everybody is looking for certainty. And I think that what we 
need to do, as has been indicated, is to move towards this 
comprehensive approach.
    Now, let's talk about persons who have a vested interest. 
Is it not true that everybody has a vested interest in this? 
Because if we don't--
    Mr. Phipps. Congressman, all 75 million American families 
who own homes have a vested interest in it.
    Mr. Green. Thank you.
    Mr. Phipps. It is their livelihood.
    Mr. Green. Exactly, because when they buy that home, they 
want to be able to pay for it, so it has to be affordable. And 
builders have an interest not only in what they sell, but also 
they have people who are employed by them. They have people who 
are going to--who are taxpayers and who benefit from this, as 
well.
    So the notion that because you happen to provide something 
that the American people need somehow skews your judgment, if 
we take that attitude, then we will never hear from anybody but 
academicians. And I would also point out that we get a lot of 
anecdotal evidence that we put a lot of credence in, and I 
don't think that we ought to stop allowing anecdotal evidence 
to be presented.
    But also I think this evidence from people who are actually 
there on the ground makes a real difference. And I appreciate 
the testimony that you have presented.
    Let's go back now to Mr. Dalton. Mr. Dalton, let me just 
ask you one final question before my time is up. You said you 
had 32 members?
    Mr. Dalton. Yes, sir.
    Mr. Green. And your 32 members, you have had an opportunity 
to poll them. And when you speak today, you are speaking for 
the 32 members. Is this correct?
    Mr. Dalton. I am. Yes, sir.
    Mr. Green. Okay. And I assume that you are speaking for 
REALTORS when you say that you are here today as a 
representative of REALTORS --
    Mr. Phipps. The 1.1 million, but also on behalf of the 310 
million Americans who need shelter and the 75 million Americans 
who own homes.
    Mr. Green. And let me just go to Mr. Nielsen. Are you 
speaking for builders across a--you can't speak for every one 
of them, but across the length and breadth of the country, you 
are in communication with them?
    Mr. Nielsen. Correct.
    Mr. Green. And you are speaking for them, in terms of what 
we need to do as we move forward?
    Mr. Nielsen. That is right.
    Mr. Green. Thank you.
    Chairman Garrett. Thank you.
    The gentleman from Ohio?
    Mr. Stivers. Thank you, Mr. Chairman.
    First, I would like to address Professor Wachter and let 
her--say I am glad to hear from the gentleman from Texas that 
the University of Pennsylvania is where the rubber meets the 
road, but I am sorry. I do find you an academician. He said you 
weren't an academician, and I do think the University of 
Pennsylvania is a fine academic institution. And, I am just 
joking around there.
    But I do want to know how many of the folks at the table 
represent an organization that has a plan on GSEs? A lot of you 
do. Raise your hand if you do. Four--five of you have plans. 
Have any of you been involved in working together with the 
other groups to come together with one plan, for example?
    Because, for example, I know that the Financial Services 
Roundtable plan and the REALTORS' plan and the homebuilders' 
plan have been different components. The two that are closest 
probably are the REALTORS and the homebuilders. But have you 
guys worked together on a plan that you would--or talked at 
least about a plan?
    Mr. Phipps. We talk.
    Mr. Stivers. Do you have one plan at this point? I know you 
have--I know there are five plans, but is there one plan that 
you have come together on?
    Mr. Nielsen. No, I don't think there is one plan. But, 
frankly, we haven't been asked to coalesce in that way. We have 
gone out and developed these on our own--
    Mr. Stivers. I will ask you to do it.
    Mr. Nielsen. Okay.
    Mr. Stivers. So, please, I would like--I would be curious 
to hear how you could come around on one plan. The other thing 
I want to address just quickly is, I do feel like that, on the 
30-year mortgage, I support it, but it has to be an option in 
the marketplace. To Mr. Dalton, to me, it is about what is 
appropriate for each individual borrower. And that may include 
affordability. It may include predictability. It would probably 
include a range of factors for each individual borrower.
    This is not the Soviet Union, and I do not want to force 
any product down borrowers' throats. So while I stand for the 
30-year fixed mortgage, I stand for it as an option, and I 
believe that is the position of everybody at the table, 
although from hearing some of you, it sounded like that is not 
the case.
    Mr. Dalton. Congressman, my point is that we want to keep 
the 30-year fixed-rate mortgage available.
    Mr. Stivers. I agree. And that is exactly where I am. I 
just wanted to make sure we weren't talking about having that 
as the only option, because, frankly, there are--and I will 
quickly ask the REALTORS, because I think I am out of time--
the average length somebody stays in their home is about--
    Mr. Phipps. Seven to 8 years.
    Mr. Stivers. That is what I thought. Okay. Thank you. And I 
support the 30-year fixed mortgage, but I want to recognize 
that it is not always the right option for each individual 
borrower. Thank you for your time, and thank you, Mr. Chairman, 
for including me.
    Mr. Green. Mr. Chairman, may I be recognized to ask a 
question, please? Would the Chair entertain a super-lightning 
round?
    [laughter]
    Chairman Garrett. Sure. I yield to the--the gentleman is 
yielded 10 seconds. No, just kidding.
    Mr. Green. That would be faster than lightning, Mr. 
Chairman.
    Chairman Garrett. Go ahead.
    Mr. Green. How much time?
    Chairman Garrett. Do you have just a couple of questions? 
Another minute.
    Mr. Green. Okay, thank you. I want to follow up, because I 
concur with what my friend has said, that we are talking about 
options. And what we don't want to do is rule out what appears 
to be a significant option. And if we are not careful in terms 
of how we structure this, we may find ourselves with a 30-year 
fixed-rate that is not affordable. It has to be affordable. It 
is just not enough to have a 30-year fixed-rate. It has to be 
affordable.
    That is what we have been trying to get to, affordability. 
And what do we have to do to make sure that we have 
affordability in this marketplace? Because builders can 
construct when they know how these are going to be sold. 
REALTORS can sell houses when they know that the interest rate 
is going to be one that Americans can afford. And bankers can 
lend. And that is what affordability addresses. We have to make 
sure that all of these things are in this equation.
    And if we are not careful, we are going to find ourselves 
privatizing our way back to the way it was in the 1920s, when 
we had the private market and you had to put down 20 percent, 
30 percent, 40 percent, 50 percent, when you had balloons at 
the end of a very short period of time. Yes, there was a 
private market, but it was not an affordable market that gave 
every American the opportunity to fulfill the dream of 
homeownership. Not everybody can afford one, but those who can 
ought to be able to buy one.
    I yield back.
    Chairman Garrett. All right. And I will yield myself a 
minute and then the gentleman from Ohio.
    For those of you who have looked and advocated for the 30-
year mortgage, saying that we need to keep that, can you tell 
me in detail what you have looked at as opposed to the 
traditional government backing for this in order to guarantee 
that, as opposed to investor interest in this area as far as 
drilling down into the structures and making sure that there 
are some other mechanisms in place in order to provide the 
guarantee to them, whether you have a vertical--yes, Mr. Pinto?
    Mr. Pinto. Yes, we actually--in developing our approach, we 
went to the securitization market and had a 30-year fixed-
rate--in this case, freely prepayable, because we wanted to 
compare it to today's Fannie Mae loan. We had them run those 
numbers, and we found that there was a very modest increase in 
interest rate. And if one takes into account what has been 
discussed here by both Director DeMarco and the committee 
members, increasing the G-fees some, the difference is quite 
modest.
    We do believe--and the important point is, you have to do 
this over time. It takes time to develop that transition, and 
we have proposed that, as I think most of the committee members 
do. And if you do that, you will have a robust market, 
including 30-year fixed-rate loans.
    Chairman Garrett. My time is up. But who else did a 
comparable drilling down, as far as other approaches on this?
    Ms. Wachter. I have.
    Chairman Garrett. Okay. How about the other gentleman?
    Mr. Phipps. We have.
    Chairman Garrett. And what is your analysis, that it will 
not work?
    Mr. Phipps. That it is not--it doesn't have the capacity to 
absorb what we need to absorb right now, that is, the market--
    Chairman Garrett. It doesn't have the capacity? It has the 
capacity or the structure that you would analyze--
    Mr. Phipps. Both.
    Chairman Garrett. Can you provide--since we don't have much 
time--can you provide the analytical breakdown of the--and down 
to whether vertical, horizontal tranches that you would have on 
this to show us that this would not work, with regard to 
capacity or just as percentage of the marketplace?
    Mr. Nielsen, do you have--
    Mr. Nielsen. I was just going to say, it is a cost issue, 
again. We could certainly provide you with those numbers.
    Chairman Garrett. Okay. Anybody else?
    Mr. Stivers. Thank you, Mr. Chairman.
    What we are talking about today is a way forward, and there 
are several legislative proposals in front of us which several 
of you opposed, but I guess I would ask you to work together 
and come to some consensus about what then you think the way 
forward is, because I think these are modest first steps that 
get us down the road to where we need to be.
    I guess something Mr. Pinto said just brought up a 
question. You talked about how we need to be thoughtful and it 
is going to take time for a robust marketplace to develop. What 
does that mean, in number of years or how long?
    Mr. Pinto. We have suggested 5 years, and we outlined a 
plan that would wind down Fannie and Freddie over 5 years, and 
then we demonstrate how the private sector will definitely fill 
in behind that and absorb that retreat by Fannie and Freddie 
and do it in a way that is cost-effective.
    Mr. Stivers. Great. And I think we all agree with the 
gentleman from Texas that we want an affordable option in the 
30-year fixed mortgage. It is not enough just to say we want a 
30-year fixed-rate mortgage. Clearly, if it is not affordable, 
it is not a real option.
    So thank you for your time. I again would challenge you to 
work together to come to some kind of consensus that we can all 
work with you on, because we are committed on the way forward 
to making sure that we limit taxpayer exposure and find a 
robust marketplace so that we do have options. Thank you so 
much.
    Thank you, Mr. Chairman.
    Chairman Garrett. And for the last word on this, 1 minute?
    Mr. Schweikert. Thank you, Mr. Chairman, as we do the 
lightning round.
    Mr. Pinto, earlier, I think, in some of the discussions, we 
were bouncing back and forth. The point I was trying to get to 
is, our great concern is liquidity, the ability to have money, 
the ability to finance these mortgages. I have a fixation of 
the number of vacant homes out there so we can start getting 
the velocity.
    Give me a vision that you have worked on that produces that 
liquidity so there is money out there for these deeds of trust 
and these home mortgages without a full faith and credit?
    Mr. Pinto. Great question. Thank you, Representative.
    The proposal that we have made, which relies on a 
combination of portfolio investment roughly at the levels they 
are at today, but expands the private mortgage-backed 
securities market substantially, and that market relies on 
mortgage insurance, a traditional approach, but with much more 
robust capital, which we outline, and securitization through 
the traditional tranches, but, again, only for prime loans.
    When you do that--and just take $10 billion, everyone talks 
about a $10 billion market. Let's take today's dollars, so we 
are not worrying about inflation or anything. So in 10 years, 
we want to handle a $10 trillion market. Let's assume 20 
percent of it is the Federal Government, FHA, VA, some non-
prime loans. Let's assume that is 20 percent. I think that is 
consistent with the Administration's statements on the size of 
FHA, etc.
    You are now down to $8 trillion. Let's assume that half of 
that is covered by mortgage-backed securities. Let's assume a 
different half that also overlaps is also covered by mortgage 
insurance. So what you are looking for is two things. At the 
end of that 10 years, you want to have enough bond investors 
who will buy $5 trillion of mortgage bonds, private mortgage 
bonds, to support that market.
    When we talk to bond investors and we talk to, for example, 
one of the largest insurance companies in this country, with a 
$130 billion portfolio, they say we need private mortgage-
backed securities for two reasons. There is only a $30 trillion 
investable private market in this country. That may sound like 
a lot, but they have investments to make of $30 trillion, and 
so there is a rough match. So there is $30 trillion in 
investable assets.
    The government has, in effect, taken $10 trillion off the 
table by nationalizing the housing finance system. And so you 
are left with $20 trillion. What that does is two things. One 
is, it doesn't allow you to invest in the private securities, 
because there virtually aren't any, but more importantly--or as 
important--it also concentrates your risk in the $20 trillion, 
so you now don't have the diversification that you need, which 
is becoming a concern. So that is number one.
    Number two, on the private mortgage--excuse me, private 
mortgage guarantee side, let's assume you had, again--you had 
$4 trillion of mortgage guarantee that you needed. They would 
cover a 25 percent exposure, which is what we suggested. That 
is $1 trillion. They would have, at the end of 10 years, about 
a 10 percent or 12 percent capital. You would end up needing 
$80 billion to $100 billion of capital. That is very doable. We 
outline how that is done.
    By definition, that would probably involve 10 companies. 
None of them are too-big-to-fail. And each one has so much 
capital at risk that they have to be careful, but if they do 
fail, they fail on their own because of their own capital.
    Mr. Schweikert. Okay, Mr. Chairman--Mr. Pinto, so you think 
there is--sorry, I was going to tease you a bit about the 
ability--
    Mr. Pinto. It was a little bit--
    Mr. Schweikert. --very short answer on--last thing. Mr. 
Chairman, this one is sort of an open-ended and a little bit on 
the ethereal side. How important is it to having a healthy 
housing market if we had products that someone could buy a home 
with less than 20 percent down, assuming we can make it quality 
paper, so, whether it be through a private PMI or some other 
mechanic? For those of us who have been--and I first became a 
member of--as a REALTOR when I was 18 years old. I got my 
license when I was in high school, so it has been my whole 
life.
    And I will tell you, probably the majority of properties 
that I have sold over those years were 10 percent, 15 percent 
down. Do we need that to have--do we need to have something 
less than a 20 percent down option out there?
    Ms. Wachter. I believe we do.
    Mr. Phipps. Yes--
    Mr. Pinto. Absolutely.
    Mr. Nielsen. Yes, particularly for home purchase.
    Mr. Dalton. Yes, sir, absolutely.
    Mr. Papagianis. Same, yes.
    Mr. Schweikert. So our mandate here is to find out if there 
is a way to make that quality enough paper that the bond 
markets are willing to securitize and the bond markets are 
willing to buy it?
    Okay. Thank you, Mr. Chairman.
    Chairman Garrett. I thank you for that. And I thank the 
panel. As always, there may be more questions. And for that 
reason, without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Also without objection, I will be entering into the record 
the statement of the National Association of Credit Unions, 
dated March 30th, with regard to today.
    And with that, I thank the panel once again. And this 
hearing is adjourned.
    [Whereupon, at 2:30 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             March 31, 2011


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