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



 
                    OVERSIGHT OF THE FEDERAL HOUSING
                             FINANCE AGENCY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 1, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-88



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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
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    December 1, 2011.............................................     1
Appendix:
    December 1, 2011.............................................    35

                               WITNESSES
                       Thursday, December 1, 2011

DeMarco, Edward J., Acting Director, Federal Housing Finance 
  Agency.........................................................     7
Haldeman, Charles E., Chief Executive Officer, Freddie Mac.......     6
Williams, Michael J., President and Chief Executive Officer, 
  Fannie Mae.....................................................     9

                                APPENDIX

Prepared statements:
    DeMarco, Edward J............................................    36
    Haldeman, Charles E..........................................    46
    Williams, Michael J..........................................    57

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of Federal Housing Finance Agency Inspector 
      General Steve A. Linick....................................    68
Fincher, Hon. Stephen:
    Written responses to questions submitted to Edward J. DeMarco    75
    Written responses to questions submitted to Charles E. 
      Haldeman...................................................    76
    Written responses to questions submitted to Michael J. 
      Williams...................................................    77


                    OVERSIGHT OF THE FEDERAL HOUSING
                             FINANCE AGENCY

                              ----------                              


                       Thursday, December 1, 2011

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:55 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Fitzpatrick, 
Pearce, Posey, Renacci, Canseco, Fincher; Capuano, Waters, 
Miller of North Carolina, Himes, and Carney.
    Also present: Representatives Miller of California, 
Garrett; and Green.
    Chairman Neugebauer. This hearing will come to order. We 
will have opening statements by each side. We remind all 
Members that their entire written statement will be made a part 
of the record.
    Also, I ask unanimous consent that Mr. Garrett and Mr. 
Miller be allowed to sit in with this subcommittee. They are 
not members of this subcommittee, but they are members of the 
full Financial Services Committee. If there is no objection, 
then so ordered.
    We will start with opening statements, and I will begin. 
This hearing is really about, I think, three things. One is 
stopping any wasteful spending that might be going on in the 
Enterprises, because about 3 years ago and about $170 billion 
ago, the American taxpayers inherited the opportunity to own 
two mortgage companies, and they weren't willing investors. And 
so, one of the things that we want to make sure of is that we 
are being good stewards of their money and their investment; 
and more importantly, in the future, of making sure that down 
the road, we get the taxpayers out of the mortgage business so 
that they are not on the hook.
    The second thing is a part of what is going on within the 
Enterprises to begin to shrink the footprint that these two 
Enterprises have, because as long as these Enterprises, along 
with the FHA, dominate the mortgage market, it is going to be 
extremely difficult to bring private capital back into the 
mortgage market. In fact, today the American taxpayers 
basically dominate, are on the hook for almost every mortgage 
that is originated in this country. And quite honestly, I think 
the American people find that an area that they are not very 
interested in.
    I think the third thing, too, is what kinds of things are 
going on corporately within the entities that would begin to 
shrink that footprint so that we do create the space they need, 
but, more importantly, looking forward towards an exit 
strategy, because long term, I think it has been indicated by 
both the Administration and other Members of Congress that we 
don't think it is in the best interests of the American 
taxpayers to be in this business long term.
    We are going to hear testimony today from the two CEOs as 
well as their conservator about what is going on inside the 
entities. There are some troubling things that have surfaced, 
and we want to have an opportunity to discuss that, and 
expenses that some people feel are extravagant. Some people 
feel that at this time, where these entities are bleeding and 
losing money and having to have infusions by the American 
taxpayers, there ought to be a very frugal attitude within the 
Enterprises.
    Also, I think we want to learn more about the relationship 
between the conservator and the two entities and how that 
interaction is taking place, and the coordination, and, more 
importantly, what kinds of plans and measures are in place so 
that we begin to ascertain if we are, in fact, making progress 
in this area.
    So I think this is a very important hearing for the 
American taxpayers, and I look forward to hearing from the 
witnesses in their various testimonies. I appreciate their 
coming today. With that, I now yield to the ranking member, Mr. 
Capuano.
    Mr. Capuano. Thank you, Mr. Chairman, and I want to thank 
the gentlemen for being here today and enlightening us on a few 
of these issues.
    I want to be clear. From my perspective, I think that the 
original missions of Fannie Mae and Freddie Mac are absolutely 
essential. I cannot envision an America going forward without 
something to take that place, either by the same name or a 
different name. But I am talking about the original mission, 
not the mission that ended up getting us in trouble. I don't 
see them as profit-making centers. I don't see them doing 
anything other than simply helping the middle class afford to 
get into homeownership. That is all they were meant to do. They 
did it successfully for a long time, and then they lost their 
vision, as far as I am concerned. Basically, bottom line, they 
got greedy, and they got sloppy, and the oversight people got 
greedy or allowed greed and got sloppy.
    My hope is that you are rectifying that, but some of the 
things that I have seen during this period have troubled me. 
And for me my interest is, yes, the short term of it, what is 
going on now, but I don't want to give those people who never 
liked the concept of Fannie and Freddie the ammunition in order 
to be able to kill the middle class going forward.
    So for me, the transition is pretty important. I have been 
vocal on certain things that have happened, and I may be vocal 
again today. But I want to be clear as to what my interests 
are. My interests are making sure that when we get out of this 
mess: number one, we don't repeat it; and number two, we have 
something left standing in some category that will be able to 
ensure that the middle class will be able to continue to afford 
a home.
    With that, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    I also want to ask unanimous consent that the gentleman 
from Texas, Mr. Green, be allowed to participate in this 
hearing. We appreciate his attendance as well.
    I now recognize Mr. Fitzpatrick, the vice chairman of the 
subcommittee, for 2 minutes.
    Mr. Fitzpatrick. Thank you, Mr. Chairman. Thank you for the 
hearing, and thanks to the panel as well.
    Recent media reports and subsequent work from your office 
and the subcommittee have brought to light some practices that 
deserve, I believe, the subcommittee's scrutiny here today, and 
I look forward to expanding some of the facts. There is 
documentation of some rather shocking expenditures at Fannie 
Mae and Freddie Mac.
    While we certainly understand the need to be able to 
operate effectively and to staff the GSEs with talented 
individuals, I am sure you recognize that our constituents are 
on the hook for hundreds of billions of dollars. There is some 
justifiable outrage when they read about lavish parties, hefty 
compensation packages, and conferences costing hundreds of 
thousands of dollars, so there are a lot of questions that need 
to be answered.
    As you may know, I have introduced legislation to 
statutorily cap the amount of money the GSEs can get from the 
Treasury. I believe it is necessary because the American 
taxpayers deserve assurance that there is an end to this line 
of credit. But for the time being, of course, it is their money 
that is being spent sponsoring these events and buying these 
meals.
    If there is justification for these expenses, I think that 
the taxpayers are willing to consider that. I suspect, however, 
that this may just be business as usual, and unfortunately, 
after requiring an almost $200 billion bailout, business as 
usual is just not acceptable anymore. So I look forward to the 
testimony to get a better understanding of the matter.
    With that, Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Texas, Mr. Canseco, is 
recognized for 1\1/2\ minutes.
    Mr. Canseco. Thank you, Mr. Chairman, and thank you for 
calling this very important hearing.
    Despite the false narrative told by the majority party of 
the previous Congress as to the roots of financial crisis, more 
and more Americans are coming to realize just how big of a role 
Fannie Mae and Freddie Mac played in the economic boom and bust 
that we all still are trying to recover from.
    Today, taxpayers have been forced to bail out Fannie and 
Freddie to the tune of $170 billion, and some project that 
amount could at least double. Before 2008, many Americans were 
unaware of the incredible risk that was building up on the 
balance sheets of these two entities, but since hearing about 
recent extravagant bonuses being paid to executives and legal 
fees to former executives being put up on the taxpayer tab, it 
has become very clear to the American people that Fannie and 
Freddie all along have played by a very different set of rules.
    To be sure, FHFA and Acting Director DeMarco are to be 
commended for many of their efforts, including resisting 
Administration pressure to further politicize the GSEs and 
doing all that they can to limit taxpayer losses. Yet, there is 
still room for improvement, as a recent FHFA Inspector General 
report highlighted that too much deference has been given to 
Fannie and Freddie decisionmaking.
    We must recognize the GSEs function only by reason of the 
American taxpayers, and that current compensation practices and 
legal fee reimbursements are an inappropriate use of taxpayer 
money. I look forward to today's hearing closely examining 
FHFA's oversight of Fannie and Freddie, and listening to our 
witnesses on this very important matter. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    And now, the ranking member of the Capital Markets 
Subcommittee, Ms. Waters from California, is recognized for 2 
minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for 
convening this hearing. I think it is important that this 
Congress continues to conduct robust oversight on both the GSEs 
and their conservator, the Federal Housing Finance Agency. I am 
sure that Mr. DeMarco is a little tired of coming before us at 
this point, but I appreciate him again joining us here today.
    I understand that the main focus of this hearing is 
administrative expenses at the GSEs, executive compensation, 
the fact that Fannie and Freddie were sponsors of a Mortgage 
Bankers Association conference a few months ago. These things, 
of course, are important for Congress to scrutinize in the 
course of our oversight over the GSEs, but I think by focusing 
so heavily on these issues, we run the risk of playing 
``gotcha'' and neglect to focus on bigger issues; for example, 
whether the Enterprises are for loan modifications that are 
consistent with FHFA's statutory mission to maximize assistance 
to homeowners in order to minimize foreclosures.
    As you know, Mr. DeMarco, I have talked with you quite a 
bit about principal write-downs, which I consider just 
absolutely essential to getting a handle on stabilizing our 
housing market, not just because they could provide the most 
sustainable modifications to borrowers, but because significant 
research suggests that they could actually, again, as I said, 
stabilize the wider economy and provide better long-term 
returns to taxpayers. I hope that we have a chance to discuss 
this again in more detail.
    I also think that this committee should pay increased 
attention to buy-back settlements entered into between GSEs and 
the banks who originated and sold them loans. We need to be 
sure that the Enterprises are getting the best possible deal 
for the taxpayer and not leaving money on the table in order to 
maintain business relationships with banks, as one FHFA 
Inspector General report recently suggested.
    I would also applaud Mr. DeMarco for the nearly $200 
billion lawsuit against 17 financial institutions for alleged 
violations of Federal securities laws and common law in the 
sale of private-label MBSs to the Enterprises. I appreciate his 
rigor in trying to recoup losses borne by the taxpayer, and 
ultimately I think that pursuing these claims will result in 
lower losses to the American public.
    So I look forward to hearing particularly from Mr. DeMarco 
today, and I thank you, Mr. Chairman, and I yield back the 
balance of my time.
    Chairman Neugebauer. I thank the gentlewoman.
    And now, the gentleman from California, Mr. Miller, is 
recognized for 2 minutes.
    Mr. Miller of California. Chairman Neugebauer, I want to 
thank you very much, and Ranking Member Capuano, for allowing 
me to be part of this hearing today. I think this is a very 
important hearing, and it is very timely. And I think we need 
to look at facts when we are debating any issue of importance, 
especially the financial sector of this country and the housing 
sector specifically.
    Before 2007, GSEs were consistently profitable. Nobody 
wants to talk about that. Fannie Mae had not reported a full-
year loss since 1985, and Freddie Mac never had a loss once 
they became shareholder-owned. And GSE default rates have 
always been lower than the private sector's.
    Now, much of the debate is about people worried about 
taxpayer exposures to the mortgage finance system that includes 
any kind of a government backstop or government guarantee. But 
let us look at what the problem is today. When we lent banks 
money with the first part of TARP, we charged them 5 percent 
interest. We are charging Freddie and Fannie 10 percent 
interest. And much of the losses in Freddie and Fannie today 
are paying that 10 percent interest to the government today.
    But if you look at the data on mortgage default rates, it 
is very clear what went wrong. Everybody messed up: 38.7 
percent of subprime ARMs are seriously delinquent; 26.5 percent 
of subprime ARMs are seriously delinquent; 5.4 percent of jumbo 
primes are seriously delinquent. On the GSEs, 4 percent of 
Fannie Mae loans are seriously delinquent, and 3.5 percent of 
Freddie Mac loans are seriously delinquent. That is bad, but 
they are still outperforming the private sector regardless of 
how bad it is. Now, to say let us throw the baby out with the 
bathwater, and let us blame them for all the losses is 
unreasonable. Let us go back and say, what did they do wrong, 
and how do we fix it?
    It is a huge problem, but to say we are just not going to 
deal with them at all is unreasonable. A large number of 
foreclosed properties are putting pressure on the marketplace 
today. If we could stop the foreclosures from being placed in 
the market today, you wouldn't have market values plummeting 
like they are today.
    I have introduced a bill to deal with that. In fact, I 
introduced a bill this last year that Barney Frank, and 
Chairmen Bachus and McCarthy all cosponsored, allowing the 
banks and GSEs to hold those foreclosed properties, lease them 
up to 5 years, and let them go slowly on to the marketplace 
rather than forcing downward pressure on a marketplace like we 
are today.
    So before we make any drastic moves and recommendations, 
let us say what went wrong, how do we fix it, and who is 
performing the best? Have Freddie and Fannie made mistakes? 
Absolutely, without a doubt, but they are still outperforming 
everybody else. So that has to be part of the debate. You can't 
say, they are awful, let us get rid of them, when they are the 
best performers in the marketplace. If you are going to deal 
with the worst out there, let us make subprime ARMs illegal, 
let us make prime loans illegal, let us make subprime loans 
illegal, because they are performing worse than Fannie and 
Freddie. But that is unreasonable. That is the private sector.
    We do need to make sure the private sector dollars come in 
to take the market share of the economy and to take the risk 
out there, and the goal is to get market share to the private 
sector. But let us not say that the conduit for those private 
markets dollars are Fannie and Freddie and they should just be 
put aside without an alternative. They need to go, but there 
needs to be an alternative for them that takes them back to 
their original goals and guidelines.
    But I am looking forward to the testimony today, and thank 
you, Mr. Chairman, for allowing me the time.
    Chairman Neugebauer. I thank the gentleman.
    And I will remind all Members again that if you have an 
opening statement, you can submit that for the record.
    Now, I would like to introduce our panel: Mr. Charles 
Haldeman, who is CEO of Freddie Mac; Mr. Ed DeMarco--and it 
says in my script here that you are Acting Director, and I am 
going to take out the ``Acting'' part, Ed, because after 3 
years, I think you are the Director--Director of the Federal 
Housing Finance Agency; and Mr. Michael J. Williams, president 
and CEO of Fannie Mae.
    Gentlemen, thank you for being here. I ask you to limit 
your opening remarks to 5 minutes. Your full testimony will be 
made a part of the record.
    Mr. Haldeman?

  STATEMENT OF CHARLES E. HALDEMAN, CHIEF EXECUTIVE OFFICER, 
                          FREDDIE MAC

    Mr. Haldeman. Chairman Neugebauer, Ranking Member Capuano, 
and members of the subcommittee, thank you for inviting me to 
speak with you today. My name is Ed Haldeman, and I am the CEO 
of Freddie Mac.
    I recognize the importance of this hearing. With a country 
living through the worst housing crisis since the Great 
Depression, I understand why the oversight of Freddie Mac is so 
important.
    Let me be clear. Freddie Mac is mindful of the taxpayer 
support we have received, and we take very seriously our 
obligation to use the support prudently and efficiently. With 
this in mind, I will discuss with you how we are running the 
company under conservatorship.
    Let me begin by saying that the Freddie Mac of today is a 
new company. We have a new management team. The management team 
running Freddie Mac today is not the one we had 
preconservatorship. For example, I became CEO in August 2009, 
almost a year after Freddie Mac entered conservatorship, and 14 
of our 18 management committee executives have been changed 
during my tenure. We have a new emphasis on strong credit 
standards. We focus on safety and soundness and responsible 
lending, purchasing higher-quality loans with lower loan-to-
value ratios and higher credit scores.
    We have a new approach to expenses. We take seriously our 
obligation to reduce spending responsibly wherever possible. We 
project that by the end of 2011, we will have reduced annual 
general and administrative spending by more than $150 million 
below 2009 levels.
    We have a new approach to the retained portfolio. We 
reduced the size of the retained portfolio by almost 25 
percent, which is beyond what is required of us. We have a new 
approach to executive salaries. We reduced overall compensation 
by 40 percent for the top 10 percent of our officers. We have 
an enhanced focus on assisting families in need, helping 
575,000 families avoid foreclosure since 2009. Finally, we have 
a new culture, one that emphasizes leadership and 
accountability.
    All of this has contributed to significantly improved 
results in our new book of business. Our preconservatorship 
business has generated the vast majority of our credit 
expenses. In contrast, our book of business since 2009 has 
generated income well above credit expenses. The improvement in 
quality is dramatic. Our serious delinquency rate for the 2006-
2007 book of business is approximately 10 percent. In contrast, 
the serious delinquency rate of the new 2009-2011 book of 
business is about one-fortieth of that, or approximately one-
quarter of 1 percent. We have achieved all of this while 
providing more than $1.1 trillion in critically needed mortgage 
liquidity, financing homes and rental housing for more than 5.8 
million American families since 2009. We also enabled over 4 
million homeowners to refinance, saving them collectively about 
$10 billion during the first year alone.
    Clearly, we could not have achieved these results without 
support from FHFA, Treasury, and the American taxpayer. But I 
want to make clear that the ultimate beneficiary of that 
support is not private shareholders, but homeowners, renters, 
and the housing finance system. In all these ways, since 
conservatorship, we have a new set of priorities and a 
fundamentally new company.
    In closing, as CEO of Freddie Mac, I believe strongly that 
one of the most important things we can do for the housing 
market is to clarify the future of the secondary mortgage 
market. That clarity is important to investors, important to 
lenders, and important to families who own or hope to own a 
home. That clarity also will help achieve our shared goal of 
attracting more private capital to the mortgage market. Without 
that clarity, it will become increasingly difficult to maintain 
the stability of our company. This, in turn, will make it 
increasingly difficult for our company to play its important 
role in maintaining the stability of the housing market. For 
all of these reasons, I hope that Congress will resolve this 
important issue sooner rather than later.
    Thank you again for this opportunity to speak with you 
today.
    [The prepared statement of Mr. Haldeman can be found on 
page 46 of the appendix.]
    Chairman Neugebauer. Mr. DeMarco, you are recognized for 5 
minutes.

   STATEMENT OF EDWARD J. DEMARCO, ACTING DIRECTOR, FEDERAL 
                     HOUSING FINANCE AGENCY

    Mr. DeMarco. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. Thank you for having 
me here.
    As requested, my written statement provides updates on a 
range of topics regarding FHFA's oversight of Fannie Mae and 
Freddie Mac, or the Enterprises as I will refer to them, and 
the Federal Home Loan Banks. I would be pleased to discuss any 
of those issues with you.
    In the few minutes that I have, though, I would like to 
provide you with a general overview of how the conservatorships 
have evolved over the past 3 years. FHFA placed Fannie Mae and 
Freddie Mac into conservatorship less than 6 weeks after the 
Agency itself was created, and before FHFA had any meaningful 
opportunity to build its own infrastructure or implement its 
new authorities granted in the legislation that created FHFA.
    While conservatorship is meant to be short term, it has 
turned into a multiyear event. I would like to recap it in the 
form of a multichapter story, a story we are still writing. 
Importantly, however, the final chapter of this story needs to 
be written by Congress.
    Chapter one was the establishment of the conservatorships 
themselves in September 2008, with the Treasury support 
agreements, the Board and executive management changes, and the 
effort to assure employees and market participants alike that 
the companies were open and operating so that America's housing 
finance system would continue to operate. From day one, FHFA 
made clear it was entrusting day-to-day operations to the new 
company management, but reserving for itself key strategic and 
critical business decisions.
    The next chapter began in earnest in early 2009 with the 
effort to establish a uniform, robust loan modification program 
to assist borrowers in troubled, mostly nontraditional 
mortgages. Development of both the HAMP program and the 
Enterprises' proprietary modification programs continued 
throughout the year. These activities are fundamental to 
various aspects of FHFA's conservatorship mandates, including 
mitigating losses on the Enterprises' preconservatorship book 
of business.
    The last half of 2009 and the first half of 2010 were 
dominated by the actual implementation of these programs, 
working through the backlog of delinquent mortgages and trying 
to provide people with the capacity and the desire to stay in 
their homes the opportunity to do so.
    In the next chapter, attention turned in the second half of 
2010 to emerging issues in mortgage servicing, and especially 
foreclosure processing. This year, FHFA made a significant 
advancement in the cause of addressing these issues by 
implementing its Servicing Alignment Initiative, thereby 
improving the clarity, simplicity and consistency of Enterprise 
mortgage service and standards and responding to the identified 
deficiencies.
    Most recently, we announced major refinements to the Home 
Affordable Refinance Program, or HARP, in an effort to reduce 
the credit risk on the Enterprises' preconservatorship book of 
business by enhancing the opportunity for underwater borrowers 
in seasoned loans to refinance at today's lower rates.
    Unlike these chapters, each of which is focused on working 
through the preconservatorship book of business, the next 
chapters will be more forward-looking. As we go into 2012, I 
anticipate FHFA building on the steps we have already begun to 
improve the future mortgage finance system. Several of these 
steps are described in my written statement, but there will be 
more to come to actually implement these and other changes.
    In closing, I would like to reiterate that the final 
chapter is for Congress and the Administration to write. The 
ultimate resolution of the conservatorships and the future 
legal framework for the country's housing finance system needs 
to be determined by lawmakers.
    Mr. Chairman, thank you again for this opportunity, and I 
look forward to responding to the committee's questions.
    [The prepared statement of Mr. DeMarco can be found on page 
36 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    And now, Mr. Williams, you are recognized for 5 minutes.

STATEMENT OF MICHAEL J. WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE 
                      OFFICER, FANNIE MAE

    Mr. Williams. Chairman Neugebauer, Ranking Member Capuano, 
and members of the committee, thank you for inviting me to 
speak with you today about FHFA's oversight of Fannie Mae, the 
company's current condition, and our financial outlook.
    I understand why Congress is interested in these issues, 
and I appreciate the importance of these issues to both 
Congress and to our country. As CEO, I am responsible for 
ensuring that we fulfill our important mission and act as good 
stewards of the taxpayers' unprecedented investment in the 
company.
    Let me begin by discussing how we work with FHFA to operate 
the company effectively in conservatorship. When Fannie Mae was 
placed in conservatorship, FHFA replaced the CEO and the Board 
of Directors, who then recruited a new management team. FHFA 
delegated responsibility for running the day-to-day operations 
to management with oversight from the Board. In turn, FHFA 
retained key responsibilities as conservator.
    As we managed the company in the interests of our primary 
investor, the taxpayer, we have taken actions to strengthen 
Fannie Mae and limit losses on the legacy book of business: 
first, we are funding the market and building a strong new book 
of business; second, we are making strategic investments to 
minimize losses; and third, we are substantially reducing our 
expenses. These are exactly the actions that will enable us to 
achieve the goals of conservatorship and protect the taxpayers' 
interests.
    As the leading provider of funding to the mortgage market, 
Fannie Mae's role has never been more important. We have helped 
6 million homeowners to refinance into a safer, lower-cost 
mortgage; we have enabled 1.7 million homeowners to be able to 
purchase a home; and we have provided financing for nearly 1 
million units of quality, affordable rental housing.
    We are building a new book of business with appropriately 
conservative underwriting standards that will enable 
sustainable homeownership. The new book is now almost half of 
our overall book of business, and these are high-quality loans 
that we currently expect to be profitable over the life of the 
loan.
    In addition to funding the mortgage market, we are reducing 
credit losses. The substantial majority of the company's credit 
losses are attributable to single-family loans purchased or 
guaranteed from 2005 through 2008. It is important to 
understand that we cannot reverse past decisions with respect 
to these loans. We will, however, continue to manage them 
aggressively to limit taxpayer exposure, and we have made 
measurable progress.
    We built one of the Nation's largest foreclosure prevention 
operations to help families avoid foreclosure, stabilize 
neighborhoods, and limit credit losses. We made a prudent 
decision to hire 1,800 people, many in our Dallas loss 
mitigation operation, and dedicated them to these activities. 
As a result, we have helped nearly 1 million families to avoid 
foreclosure.
    When foreclosure is the only option, we help stabilize 
communities by maintaining and improving the properties we 
acquire and selling them to new owners. We pay careful 
attention to expense control. Our core administrative expenses, 
which exclude these investments in loss mitigation, are down 16 
percent this year. Our personnel costs are also down 14 
percent, and we have eliminated positions at all levels of the 
company. These are examples of decisive actions we have taken 
to manage Fannie Mae responsibly in conservatorship.
    Finally, let me address the company's financial outlook. 
According to FHFA's October 2011 report, we may have positive 
net income as early as 2013. This is before the payment of the 
dividend to the government. This is largely the result of 
actions we have taken to reduce credit losses while building 
that strong, new book of business.
    However, our current annual dividend obligation is $11.3 
billion. That exceeds the company's annual net income for any 
year in its history. While we expect to return to operating 
profitability, we do not expect to earn profits in excess of 
our annual dividend obligation to the Treasury.
    In closing, I am confident that we are making sound 
business decisions that protect the interests of the taxpayers 
and will assist struggling homeowners. We are reducing costs 
where appropriate, and we are investing where necessary to 
achieve the goals of the conservatorship.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Williams can be found on 
page 57 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Also, I would ask unanimous consent that--without 
objection, that we submit the written testimony from Inspector 
General Steven Linick of FHFA. Without objection, it is so 
ordered.
    And now, for the question period.
    One of the things that I think, Mr. Williams, that you 
mentioned is that you have had a reduction in your payroll 
expenses of about 16 percent. Did I hear you say that?
    Mr. Williams. Yes, Congressman, this year.
    Chairman Neugebauer. Is that overall, or is that one 
particular area in which you have had a reduction in 16 
percent?
    Mr. Williams. We have reduced our core administrative 
expenses, which exclude those credit loss mitigation activities 
by 16 percent, Congressman.
    Chairman Neugebauer. But I believe if you look at your 
numbers in the two Enterprises, total payroll is actually up in 
both Enterprises. You are saying in one area you are reducing 
them, but in other areas you are increasing them; is that 
right?
    Mr. Williams. Congressman, we made strategic investments in 
loss mitigation because we felt that was in the best interests 
of the taxpayer to reduce credit losses long term.
    Chairman Neugebauer. I just want to be careful because I 
don't want--one of the accounting methods that we use around 
here is if we decrease in one area and we increase the other, 
we always just want to talk about the areas that we are 
decreasing; we don't necessarily want to talk about the areas 
where we are increasing.
    But one of the things that I think is troubling to many of 
us is when we look at, for example, the budget here, and the 
fact that we would--I think in Congress we expect under 
conservatorship, particularly the word ``conserve,'' and to 
begin to look at ways to minimize additional advances from the 
Treasury, because, as you pointed out, they are kind of 
expensive. But, the little things here that lead me to wonder 
what is going on in the bigger picture is that I see that we 
have in your budget $5.1 million in meals and social activities 
for employees. And I think for those kinds of things to show up 
in the budget, it would appear to me that the Enterprises are 
being a little bit tone deaf to exactly what is going on.
    You are on the front line of understanding how a lot of 
families across this country are going through some hard times. 
And then we look at some of the other activities, and I think 
some of my other colleagues are going to talk about that, but 
really what--that, I believe, is a symptom to me, and I am 
hoping it is only a symptom, that the Enterprises really feel 
like what is in order here is business as usual.
    Now, I am impressed, and I wouldn't expect anything other 
than the asset quality for your new origination to increase. It 
should. But one of the things that concerns me is as we have 
this business-as-usual mentality, is that it basically 
continues to crowd out, I think, the ability for the private 
sector to come in. And quite honestly, one of the reasons that 
your numbers are getting better is because of the sheer volume 
of business, because basically the Enterprises are getting a 
majority of the business. I believe if you were getting more 
traditional levels of business, the advances would have been 
much higher.
    So, Mr. Williams, what do you say to the American people 
that, yes, we are being stewards of your money, but the 
evidence in some cases points otherwise?
    Mr. Williams. Congressman, we do believe we are being good 
stewards of the money. We have consciously gone out and reduced 
expenses, gone after other areas where we can reduce losses, 
where we can reduce our expenses and cut costs. We have taken 
our compensation level for executives down by 50 percent. We 
have reduced the number of senior officers by 30 percent. We 
are going through all areas of the company where we can reduce 
our expenditures and do this in a timely fashion. We do believe 
it is important to invest in our loss mitigation areas so that 
we can continue to help homeowners and reduce our long-term 
credit losses.
    Chairman Neugebauer. So do the Enterprises have a 
conservator plan; in other words, this is how we are going to 
operate, these are things we are going to do in our loss 
mitigation area, this is the way we are going to reduce our 
footprint, this is our overall strategy? And how do you 
interface with Mr. DeMarco in executing that plan?
    Mr. Williams. Congressman, we interface with Mr. DeMarco 
quite frequently, I can assure of you of that. We meet 
regularly. We are aligned on the goals of the conservatorship, 
which is to stabilize the companies, to make sure we provide 
the needed liquidity to the market that is needed at this 
critical time in our country, and also do everything that we 
can to help homeowners and reduce credit losses going forward.
    Chairman Neugebauer. I just want to--you have answered part 
of my question. The first part of the question was, do you have 
an actual conservator plan that you are operating under so that 
we have specific goals and objectives of what you are trying to 
accomplish?
    Mr. Williams. We have a number of initiatives that we are 
working on.
    Chairman Neugebauer. Initiatives--I want to know if there 
is a plan, a written plan of your mission and your goals and 
the direction you are headed with this Enterprise?
    Mr. Williams. Congressman, we do have goals and objectives 
that are completely aligned with the conservator's--
    Chairman Neugebauer. Is there a written plan?
    Mr. Williams. A written plan?
    Chairman Neugebauer. Yes. It is a yes-or-no question.
    Mr. Williams. I cannot tell you there is a written plan.
    Chairman Neugebauer. So there is no written plan.
    Mr. Williams. There are goals and objectives that are 
aligned with the conservator's plan.
    Chairman Neugebauer. I thank the gentleman.
    Ranking Member Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Haldeman, you have been doing this for a while, and you 
come to it with a fair amount of experience. I would like to 
ask you, 10 years from now, after we do whatever we do, and 
when this is done, do you envision this country having some 
entity that plays the role that Fannie and/or Freddie play 
currently in the mortgage industry?
    Mr. Haldeman. By your introductory comment that I have been 
doing this for a while, you didn't mean at Freddie Mac?
    Mr. Capuano. You are familiar with the industry.
    Mr. Haldeman. Yes, the financial services industry, 
absolutely. I have been with Freddie Mac since August of 2009. 
It is--I talk to our employees a great deal about the future, 
because as you can imagine, they have a lot of uncertainty, 
insecurity, and anxiety about the future, and what I say is, I 
can't imagine our country without a secondary mortgage market. 
Could you imagine us going back to the time when the originator 
holds the mortgage for 30 years? I certainly can't. I think we 
will not go back to those times.
    I think we will always have a secondary mortgage market. 
And what I say to employees is that we have talent, we have 
expertise, we have infrastructure, we have technology, we have 
relationships, and I think the country should find a way to use 
that in the secondary mortgage market.
    Mr. Capuano. Mr. DeMarco, do you agree with that, again, 
looking in your crystal ball 10 years from now, based on your 
knowledge and experience?
    Mr. DeMarco. Yes, Mr. Capuano. Clearly, a country that has 
a $10 trillion or $11 trillion single-family mortgage market is 
going to need plumbing that will allow local lenders that are 
making mortgages of an average size of, let us say, $200,000, 
but that aggregates up across this country to $10 trillion or 
$11 trillion--it is going to need plumbing, it is going to need 
the infrastructure to connect global capital markets to be able 
to get that size and capacity down to local lenders.
    Mr. Capuano. Mr. Williams, do you agree or disagree with 
that?
    Mr. Williams. Yes, Congressman, I do agree.
    Mr. Capuano. The reason I ask is because in the final 
analysis, the day-to-day activities, what you are doing, we are 
going to talk about that today, but when everything is said and 
done, as I said in my opening statement, I am interested in 
making sure that the next generation of middle-income people 
can afford to buy a home in a reasonable way. Again, hopefully 
they will hit good scores and everything else, and reasonable 
people will be able to buy a reasonable home.
    I will tell you that some of the activity that has happened 
doesn't help that. And it is not about the specifics of what 
you have done within the Agency, but you understand you are no 
longer operating in private companies, you are now operating in 
the public world.
    And I would like to ask you, Mr. Haldeman, do you know the 
total salary and bonuses paid to your highest-paid employee 
this past year? I am not looking for a name, just a number.
    Mr. Haldeman. Highest paid, you mean the top paid, top--
    Mr. Capuano. Just one. Who made the most money?
    Mr. Haldeman. At Freddie Mac?
    Mr. Capuano. Yes.
    Mr. Haldeman. Yes. It was me.
    Mr. Capuano. Other than you.
    Mr. Haldeman. Yes, I know.
    Mr. Capuano. How much?
    Mr. Haldeman. Other than me, it was approximately--it was 
somewhere between $3 million and $3.5 million.
    Mr. Capuano. Between $3 million and $3.5 million.
    Mr. Williams, do you know, again other than you?
    Mr. Williams. Yes, Congressman.
    Mr. Capuano. How much would that be?
    Mr. Williams. It would be between $2.8 million and $3 
million.
    Mr. Capuano. So, in the $3 million range.
    And do you understand that after what Freddie and Fannie 
had been through--it was before your watch, I am not trying to 
lay this on you--do you understand the outrage that the 
American people feel when we are looking at an agency that has 
gotten us to the brink of difficulties--gotten us in 
difficulties, beyond the brink--and has gotten a lot of 
taxpayer funding? And it is awfully hard, for me it is 
impossible, to understand why an individual working for an 
entity such as yours, not a private company, has to make that 
kind of money.
    I am not against people making money. God bless them. But 
go into the private market. It is almost impossible for us to 
understand. I had to vote for a bill the other day to limit 
these kinds of things because, honestly, I am outraged, and not 
about the individual. That is why I don't want names; I am not 
looking to lay it on anybody. But in this situation, that kind 
of activity, the kind of activity--$5 million on meals and 
entertainment. I think meals and entertainment, within the 
normal course of events, is a reasonable business expense. You 
should be able to serve coffee at your breakfast meetings. That 
is fine by me. But it is outrageous to my constituents and to 
me when I turn around and I defend the purposes of the agencies 
every day, and I will continue to do so.
    And I will agree with my other colleagues that you didn't 
do anything worse than anybody else, but you did--not you, but 
your predecessors did it, and we now have to dig you out of it; 
it is our obligation to society. But I guess what I am saying 
is in order for people like me to be able to help meet that 
vision--not help you or your current employees, although I am 
not against anybody, that is not my goal. My goal is for the 
next generation to have someone like you doing what you try to 
do now, and you are making it tougher.
    Mr. Haldeman. Congressman--
    Mr. Capuano. Go ahead, Mr. Haldeman.
    Mr. Haldeman. I totally get the outrage. I get the outrage 
about executive compensation in total; I get the outrage about 
compensation at Freddie Mac in particular. I understand exactly 
what you are saying, and I struggle with it all the time, too.
    Let me tell you about the dilemma, and maybe you can help 
me resolve the dilemma. I came here in August of 2009, and 
there was not a CEO of Freddie Mac, there was not a chief 
operating officer, and there was not a CFO. It felt to me that 
the right thing to do was to do everything we can to try to 
keep the machinery together, to keep it operating, to keep it 
functioning well, to not have mistakes and not have it go down 
the drain.
    And there are many, many functions that have to be 
performed at Freddie Mac that require very specialized 
expertise where we have to get a CFO who is capable of running 
any complicated bank in the country. We have to have investment 
people who can run a $700 billion portfolio. If you are running 
a $700 billion portfolio, and you make a mistake that is one-
tenth of 1 percent, it costs you $700 million. So these are 
very sophisticated things, very complex, and I felt we needed 
to pay that kind of compensation, which troubles me and 
troubles you, in order to get people so that we wouldn't have 
those kinds of mistakes.
    Mr. Capuano. I appreciate it, and if I could just finish 
up, because I know I am over my time.
    That is a fair and reasonable explanation, but if you were 
to make that decision, it would have helped and would help 
going forward for you to present to us and the general public 
not just your thinking, but also backing up as to determining 
so that I can sit here and say, do you know what? Like it or 
not, that is what a person in this position makes across the 
world. There are plenty of companies that can do that or not, 
or they don't. So as opposed to simply picking a number and 
being outraged at a number, I will then be able to say, well, 
it is in the ballpark, everybody in those positions makes this 
kind of money, and at least it is defensible. At the moment, it 
is nothing more than a number in an agency that has caused this 
country a lot of trouble.
    And for me, the most important thing to come out of this 
hearing is that you walk away knowing that you live in a 
fishbowl now, and you have to act as if there is a fishbowl if 
you want the end that we have all discussed.
    And I apologize for going on, Mr. Chairman. Thank you for 
your indulgence.
    Chairman Neugebauer. Now, the chairman of the full 
Financial Services Committee, Chairman Bachus, is recognized.
    Chairman Bachus. Thank you, Mr. Chairman.
    Mr. DeMarco, I do believe you may have the toughest job in 
Washington. And I realize that the reasons for that have been 
beyond your control and really to a certain extent beyond the 
control, Mr. Haldeman, of you and Mr. Williams.
    You work for the two GSEs that were recipients of the 
largest bailout in the history of the country; maybe AIG is 
close. And there is outrage at the failure of Fannie and 
Freddie and a lot of outrage about the activity that went on. 
Gretchen Morgenson's book outlines many of the problems.
    I also recognize that as I saw the case with that new AIG 
president and the General Motors president, they took a lot of 
slings and arrows for what their predecessors did. And so, I do 
have sympathy for you.
    I think we all have to realize, though, that the world has 
changed, and Members of Congress are realizing that on many 
occasions, and altering our behavior. And I think that is a 
good, positive thing because we have to restore the confidence 
of the American people. And my legislation, I believe, does 
that. Now, does it have a negative of making it more difficult 
to hire capable people? It probably does.
    I do say this: I think that anyone considering a top 
management or executive position at either one of the firms 
would have to think, do I want all the baggage that comes with 
that? Because they are going to forever have on their resume 
that they were at Fannie or Freddie. People are not going to 
pay attention to the dates or the facts or any of that. And I 
had a discussion with Mr. DeMarco yesterday where he pointed 
out to me that many people are not taking these jobs because 
they are concerned about liability issues. Why take a job for 
$200,000 if you might have an exposure to $5 million worth of 
legal expenses or lawsuits or even criticism which damages your 
reputation? And I told him that I think this Congress ought to 
work with him.
    So I apologize to you and to the employees who are there at 
Fannie and Freddie that in many cases, you are being 
sacrificial lambs for those who came before you.
    But as far as compensation, I think we are just going to 
have to change our ways. I think we are just not going to be 
able to--as highlighted in today's paper, we are not going to 
be able to go to Chicago and spend two-thirds of a million 
dollars at a reception even if it benefits the business.
    I thought one of the most unfair criticisms was when we 
criticized the presidents of Ford and General Motors for flying 
here in their corporate jets and wanted to know why they didn't 
get in their cars and drive here from Detroit, Michigan. And 
the next time, they drove here from Detroit, Michigan. Now, 
that is going too far. I thought that was ridiculous, and I 
still do.
    So I will promise you, but I will say this, and I will 
close with this, some of the salaries are for people, and they 
are good people, they have been there, but they were there 
before, and they are still there. And at a certain point, I 
think that the decision just had to be made, do they want to 
stay on for these new--whether we pass this legislation, do 
they want to stay for that? And I am hopeful we will get good 
public servants.
    But we will work with you on the liability issues and other 
issues because those do need to be addressed, and I, for 
instance, would not take a job for $200,000 that had a legal 
exposure of millions of dollars, particularly with the grief 
that would come with working at your companies right now for 
things that went on long before you agreed to come in and try 
to fix things.
    So I would hope all members of the committee will not--
their outrage needs to be able taken out on the failure of this 
Congress years ago not to beef up regulation. And it is up to 
this Congress if we want to limit salaries to do so, and that 
is why I filed this legislation. It is not up to you to refuse 
salaries for your employees and potential employees. So thank 
you very much.
    Chairman Neugebauer. The Chair recognizes Ms. Waters from 
California for 5 minutes.
    Ms. Waters. Thank you very much.
    Mr. DeMarco, I mentioned that I wanted to talk about 
principal write-downs. I want to talk about REO and the REO 
pilot program that was in the papers today, but I have to get 
to something else first.
    In August, Fannie Mae paid $500 million to Bank of America 
to purchase the servicing rights to more than 400,000 mortgages 
in its portfolio. According to your staff, Fannie initiated the 
purchase to allow it to transfer the servicing of the mortgages 
to another, presumably better servicer, to improve borrower 
outcomes and minimize losses to Fannie going forward. To be 
honest, I understand that Fannie had a contract with Bank of 
America, and that it would be more expensive to sue them for 
poor performance, but I am not happy that Fannie had to 
purchase the servicing back from a company that was doing such 
a poor job.
    My question is this: Does Bank of America continue to get 
service business from Fannie and Freddie, and, if so, why would 
the GSEs give businesses to a company whose servicing has been 
found to be so problematic that Fannie had to buy back loans in 
order to properly service them?
    Mr. DeMarco. I am not too happy about it either, 
Congresswoman, but it was respectful of the existing business 
contracts that were in place. It was a prudent market 
transaction that was made, and it did get to exactly what you 
said. It was designed to both minimize or reduce potential 
losses to Fannie and Freddie, and improve borrower outcomes by 
getting these high-risk mortgages in the hands of a servicer 
that had a better demonstrated capacity to work with these 
kinds of difficult situations to get the borrower into a better 
outcome.
    And so it met our mandate of trying to minimize 
foreclosures, and maximize assistance to borrowers, and also 
reduce our credit losses. It did reflect existing contractual 
arrangements at the time, and this is something that we are--I 
can assure you we are looking at those sorts of contract terms 
on a go-forward basis.
    Ms. Waters. Are they still getting new business from you?
    Mr. DeMarco. Bank of America is still a major originator of 
mortgages and seller of mortgages to Fannie and Freddie, so 
yes.
    Ms. Waters. There is some kind of contradiction in that, 
isn't there?
    Mr. DeMarco. There are some difficulties here.
    Ms. Waters. So why do you continue to give them business?
    Mr. DeMarco. They are a significant originator, and we are 
dealing with the problems with the mortgage servicing part 
through the business terms that exist today with regard to 
servicing contracts.
    Ms. Waters. I am concerned about the servicing business. As 
a matter of fact, we were beginning to focus, and I have been 
focusing for a long time, on services. They are at the crux of 
this problem that we have, not just with you, but with 
everybody. But I want to know why they are still doing the 
servicing. Just because they are the originators?
    Mr. DeMarco. That is something that they own. They have 
those servicing rights, and those servicing rights have been 
transferred. There has been a tremendous amount of work done by 
both companies to go into Bank of America, work with Bank of 
America on enhancing the way they go about doing the servicing. 
And we have an important initiative that we have, the servicing 
alignment, is to get greater clarity not just to Bank of 
America, but all servicers about the steps that they are 
supposed to follow in order to provide remediation when a 
borrower goes delinquent. This is not just a single-institution 
problem, this is an industry problem, and we are all very 
challenged by it.
    Ms. Waters. I agree. But I spent some time getting 
permission from some of my constituents to help work with them 
to try to get loan modifications, and it just so happens that 
Bank of America was the servicer. And I spent hours on the 
telephone. I can't tell you what I went through. So I do 
understand that.
    Quickly, before my time is up, the REO pilot programs. You 
told me you got the ideas back. You told me we were going to go 
out to bid. I like the idea of the financing part of this, but 
I hope you are not going to be financing speculators to come in 
and get big blocks of REO properties, are you?
    Mr. DeMarco. We are really focused on doing this in a way 
that is targeted at individual geographic markets. We want to 
make this as competitive as possible so that local investors 
can also be meaningful participants. That is important to us as 
conservator, because I think the more competitive we can make 
these transactions, the greater value that we will realize for 
taxpayers. And by inviting and creating an environment in which 
local equity participants and people with local market 
knowledge participate, I think that helps to give a greater 
probability that we are going to have folks who are really 
dedicated to seeing good outcomes in those local communities. 
And it also gets that local community knowledge into the game. 
So that is all part of what we are trying to build into our 
review of these.
    Ms. Waters. Thank you very much.
    And we want to work very close closely with you to 
understand the program so that we can articulate it in our 
communities that have been so devastated by these foreclosures, 
and people want to participate. So we will work with your 
people.
    Thank you very much. I yield back the balance of my time.
    Mr. DeMarco. Thank you, Congresswoman.
    Chairman Neugebauer. Now, the vice chairman of the 
subcommittee, Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I know that we all appreciate the efforts that the 
Enterprises have made so far to reduce expenditures. Hopefully, 
we can agree that there is still more to be done. Chairman 
Bachus was mentioning earlier in his remarks about--I think he 
was referring to a New York Times article or column, 
Morgenson's column--it might have been in today's paper--
entitled, ``Fannie and Freddie, Still the Socialites,'' which 
reviewed, as this subcommittee also reviewed, Enterprise 
expenditures relating to an industry conference that was held 
in October in Chicago. The conference was only 2 days long, but 
the tab was pretty hefty.
    According to the article, the Enterprises spent, combined, 
about $700,000 at the 2-day conference, including $74,000 in 
dinners alone. Freddie Mac spent nearly $50,000 on just two 
dinners, and Fannie Mae spent nearly $25,000 on two dinners.
    So my question is for Mr. Williams and Mr. Haldeman. Given 
the extraordinary taxpayer support that has already been 
received, about $170 billion, how do you justify these expenses 
to my constituents in Bucks County or to the taxpayers of the 
United States generally?
    Mr. Haldeman. Maybe I will start. And, Congressman, I think 
we have to begin by saying, you are right. We can do a better 
job. But let me talk about top-line spending before I get to 
the individual line item because it was where the chairman 
started.
    As I indicated, I came to the company in August of 2009, 
and one of the things that I started to talk about right away 
was that we needed to consistently bring down our total 
spending of the company year after year after year. And that is 
precisely what we have done at the top line. If you take our 
total spending to run Freddie Mac for 2009 and compare it to 
where we are now, we have reduced that top line of spending by 
$150 million a year. That is almost 10 percent, and that is not 
one subset, Mr. Chairman, or one line item, it is the total 
spending of the company. And we brought it down in 2010, and we 
are bringing it down in 2011, and we are going to do the same 
thing in 2012. And that is how I have managed the company at 
the top.
    Within that, we have division budgets, and I monitor those. 
But there is some ability of managers below me to make 
decisions on spending, and I don't think we did as good a job 
as we should have on that MBA program. Do I think it is a 
legitimate business expense and it was good that we sent a lot 
of people there? Absolutely. And it is a very, very efficient 
way to interact with and educate a broad range of seller 
servicers. Literally, every seller servicer in the country 
comes to that one location in Chicago, and it is the most 
efficient way I know of to make sure that we can educate them 
about our credit policy and what we expect from them on the 
servicing side.
    Mr. Fitzpatrick. Do you understand the outrage of the 
taxpayers when they read that in the newspaper?
    Mr. Haldeman. I do. Yes.
    Mr. Fitzpatrick. It is one thing to attend a conference. It 
is another thing to sponsor a conference which you do with 
taxpayer dollars
    Mr. Haldeman. And we did not do it perfectly. Since I have 
been there, each year when we have done--we have attended the 
Mortgage Bankers Association, and we have brought our spending 
down year by year. I think we have to do it faster. And there 
were some things that were done that we are going to take care 
of next year.
    Mr. Fitzpatrick. I appreciate it.
    Mr. Williams, given that Fannie Mae is in conservatorship, 
do you have discretion as to how to spend those dollars, the 
dollars that I am referring to on the conference? And were 
these dollars budgeted?
    Mr. Williams. Congressman, I do appreciate your concern as 
well as the committee's on the topic. We have taken this 
seriously. In fact, we have, since conservatorship, reduced 
sponsorship and attendance at these conferences by over 50 
percent.
    Why we felt this was a good business decision was that this 
was a conference that was going to be attended by over 3,000 
industry participants. It gave us the opportunity to hold over 
200 meetings with industry players that would allow us to 
address the important issues facing not only the industry, but 
are also important to the conservatorship, such as servicing 
alignment, the rollout of HARP 2, servicing compensation, 
increasing guarantees and many other strategic issues.
    Mr. Fitzpatrick. Could Fannie Mae have held those meetings 
and accomplished those meetings without spending $74,000 on 
dinner in 2 days? Could you have gone to Chicago without the 
dinners and held the meetings?
    Mr. Williams. Congressman, we held many meetings during the 
course of those days. The dinners were, too, part of it in 
which it gave us an opportunity to meet with industry players. 
We will do a better job, but we felt this was a very good 
business decision.
    Mr. Fitzpatrick. Mr. DeMarco, do you believe spending 
$74,000, as we have talked about here this afternoon, does that 
advance the interest of the conservatorship?
    Mr. DeMarco. Mr. Fitzpatrick, attendance at the conference 
certainly did. Certain individual expenditures probably could 
have been done away with and still met the essential business 
proposition of meeting with the entire industry and conducting 
a tremendous amount of business and business education in one 
place. So attendance and being an active participant was 
certainly meeting the conservatorship goal. I wouldn't want to 
say that every individual expense was necessary, no, sir.
    Mr. Fitzpatrick. Okay. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Miller is recognized.
    Mr. Miller of North Carolina. Mr. DeMarco, you and I have 
discussed on many occasions Fannie and Freddie's or FHFA's 
policy of not reducing principal in modifying mortgages. And I 
provided you two economic studies, one by the New York Fed, the 
other by Amherst Securities, that examined the arguments and 
reached different conclusions. They concluded that foreclosures 
usually resulted in a 50 to 75 percent loss of principal, that 
reductions in principals of 10 to 40 percent to get an 
underwater homeowner back to even usually resulted in better-
performing loans, and I provided you those studies. They 
concluded that it makes good economic sense for the creditor to 
reduce principal to get an underwater homeowner back above 
water. And you have said that your private analysis reached a 
different conclusion.
    Given the importance of this question, why have you not 
made that private analysis public?
    Mr. DeMarco. I think I will be making it more public on 
this point, Mr. Miller, in response to continued inquiries from 
you and others. But if I could address these two studies that 
you raised.
    The first, the Amherst study, when I first started reading 
it, I started to get a concern, well, wait a minute, maybe 
there is something going on here. Then as I went through it, I 
realized that what was meant by ``principal forgiveness'' there 
wasn't just writing off principal, it also included principal 
forbearance, and that was actually part of what was going on 
there.
    Mr. Miller of North Carolina. Mr. DeMarco, that is not 
true. The study actually says specifically that principal 
reduction is--this is a quote from the study: ``It is 
reasonable to think that the success rate on principal 
forgiveness would be better than forbearance, as the borrower 
is closer to being re-equified.'' That is not a word you hear 
very often.
    So it does appear that the study does specifically address 
the differences between forbearance and--it may not have 
statistics that could distinguish it, but they concluded that 
actually principal reduction would more likely result in a 
performing mortgage than forbearance.
    Mr. DeMarco. I have in front of me here the results on our 
modified loans and the redelinquency rates, and this also goes 
to the--
    Mr. Miller of North Carolina. Isn't it like 44 percent?
    Mr. DeMarco. The redelinquency rates? Let me tell you for--
    Mr. Miller of North Carolina. According to Freddie's 
reports, the mortgages from 2 years ago that were modified, 44 
percent are now 3 months past due. Is that incorrect?
    Mr. DeMarco. That is incorrect. I am looking at 9 months 
after modification, we have 60-day delinquency rates of 15 
percent. That means 85 percent of these loan modifications are 
still performing 9 months after they were made permanent. This 
is down substantially. It used to be up in the 40 percent 
range, sir. You are quite right about that, Mr. Miller. It used 
to be up in the low forties at 9 months later, but it has 
dropped from that all the way down to 15 percent. Right now, 
what we have for loans that were originated in the first 
quarter of 2011, 6 months later were down to less than 10 
percent redefaults.
    Mr. Miller of North Carolina. The last time you were here, 
I asked you about the settlement by--it was actually by the 
Bank of New York Mellon as the trustee for Bank of America 
mortgages, essentially put back claims, and the provisions in 
that requiring that Bank of America refer out the servicing of 
those mortgages. It is hard to conclude from what you said 
earlier and from this settlement that anyone regards Bank of 
America as doing a very good job of servicing. And you said 
that the agreement did not actually require principal 
reduction, which is correct. But it does specifically say, does 
it not, that servicers must consider all loss mitigation 
options, including principal reductions?
    Mr. DeMarco. It may, Congressman. I don't recall the 
precise wording. I did recall correctly, I am glad to hear you 
say, that it did not mandate that.
    Mr. Miller of North Carolina. It doesn't mandate it, but it 
says it doesn't consider anything to reduce their losses, 
including modification. There have been stories in the last 
couple of days at the OCC's required self-audits by the various 
OCC banks that they are servicing, and approximately 5,000--
close to 5,000 appear to be of servicemembers in violation of 
the Servicemembers Civil Relief Act. Do you know if either of 
those were Fannie or Freddie mortgages?
    Mr. DeMarco. I don't know, but I do know this has been an 
important issue, Congressman. And it is one that we have worked 
on with Mrs. Petraeus at the CFPB and with the Department of 
Defense, and Fannie and Freddie have provided updated clarity 
and communication to their seller servicers regarding that. And 
their standards actually were already quite satisfactory to the 
CFPB and to the Defense Department. But it did appear as though 
there was confusion on this point, and we have already acted to 
get improved communications. I don't know whether Mr. Haldeman 
or Mr. Williams want to comment more on that?
    Mr. Miller of North Carolina. Mr. Chairman, I know that the 
light is red, but, Mr. DeMarco, you said that we would shortly 
be hearing more on the subject of principal modification and 
your own analysis. Are you going to be providing your study to 
the public, and if so, when? And why have you not done it 
already?
    Mr. DeMarco. I have certainly explained this numerous times 
in committee hearings, and I have provided written 
communication before to quite a number of Members of Congress 
on it, including you. I just this week got yet another much 
more detailed request, and we are evaluating that request. It 
has quite a number of components to it, and we have tried to be 
responsive to all Members of Congress when they request 
information from us.
    Mr. Miller of North Carolina. But your analysis has to be 
in writing. You don't just talk about this over the water 
cooler. You have this in writing.
    Mr. DeMarco. We have done the analysis, Mr. Miller, and we 
will get it out to folks.
    Chairman Neugebauer. The gentleman from New Mexico, Mr. 
Pearce, is recognized for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Haldeman, you had talked, on page 2 of your testimony, 
about helping families avoid foreclosure. Can you kind of 
expand on what you are doing there?
    Mr. Haldeman. Yes. Since 2009, we have worked--helped, 
benefited 575,000 families, and that would be all inclusive of 
all the various tools that we use to try to help families. So 
it would be traditional modifications, HAMP modifications, 
forbearance plans, short sales, deed in lieus, a whole range of 
tools that we use to try to keep people in their homes.
    Mr. Pearce. Thank you.
    Mr. DeMarco, on page 5, you mention that you are bringing a 
lawsuit against 18 institutions to recover certain losses, and 
you are bringing those lawsuits because you feel that the 
institutions did not act fairly in the relationship; is that 
correct?
    Mr. DeMarco. It has to go with the securities disclosures 
that these institutions had on security instruments that were 
purchased by Fannie and Freddie. And we believe we have 
evidence supporting that the disclosures of what were the 
characteristics of the loans in those securities did not match 
what was actually there.
    Mr. Pearce. I don't have exact documentation, but it looks 
likes Mr. Johnson may have ended up with $100 million, $10 
million a year for 10 years; Mr. Raines maybe $28 million. 
There may be indications that certain accounting techniques 
were used so that they would accelerate their bonuses. Have you 
brought any actions against previous Directors, previous CEOs?
    Mr. DeMarco. This predates me, Congressman, but the 
predecessor--one of the predecessor agencies to FHFA, the 
Office of Federal Housing Enterprise Oversight, did bring such 
a civil action against--
    Mr. Pearce. Did we get any return?
    Mr. DeMarco. We did. I don't know the numbers offhand, 
Congressman. This was all made public at the time. But we can 
get that to you. And, yes, there were penalties associated with 
that, with each company.
    Mr. Pearce. Thank you.
    Mr. Williams, I should know a little bit better. I don't, 
though, so if you would help me out. Do you have a board of 
directors that you answer to?
    Mr. Williams. Yes, we do, sir. They were installed--
    Mr. Pearce. Can you pull your microphone up a little 
closer?
    So you answer to a board of directors. Are you publicly 
traded?
    Mr. Williams. There are shares, sir. But the real 
shareholder, all rights of the shareholders have been conveyed 
to the conservator, and the conservator is the person who 
appoints both the board of directors and approves the 
management team.
    Mr. Pearce. How much were your losses during the last 12 
months? Roughly, just roughly.
    Mr. Williams. Roughly $15 billion. And bottom line--
    Mr. Pearce. Did you have to go to a--did you have to float 
a bond series or something like that? Did you have to go to the 
bank? How did you make up those operating losses?
    Mr. Williams. The funds that are needed to provide the net 
worth for the company are provided by the U.S. Treasury upon 
request from the conservator.
    Mr. Pearce. Now that is, I think, my problem with your 
testimony when you declare that we are a private business. I 
don't know any other private business that could go to the bank 
and get funds. They have a possibility of going bankrupt. If 
they are mismanaged, then the market takes care of that 
mismanagement. And I am not sure that the market is being 
allowed to take care of anything right now, which causes me to 
say it is acting much more like a government agency than a 
private business. So if you have observations about that, I 
would welcome them. But for me sitting on this side of the 
desk, it sounds like you are much more a government agency. In 
other words, we see agencies all the time overspend their 
budgets, and they just come back for more. So just that one 
clarification is critical for me.
    Mr. DeMarco, have you run tests about how you could start 
selling off parts of your mortgages, get private investors in 
there? In other words, when you all are taking--you are taking 
certain steps, forbearance or whatever, the help--as Mr. 
Haldeman suggests, have you compared what would happen, the 
costs stream to the agency, if you just accepted bids from the 
outside to take blocks of loans compared to what you are having 
to do to make those loans start processing? In other words, 
there is a lot of money out there that would invest, I think, 
at the right price.
    Mr. DeMarco. Right. I think that is right, Congressman. I 
can say several things about that. First, both companies have 
been shedding assets. Certainly, there are retained portfolios. 
That is, what they are financing on their own balance sheet has 
been declining over the last few years, and there is a whole 
programmatic system in place for that to continue. There have 
been efforts to sell outside of that progression, identify 
opportunities to sell blocks of assets and realize value.
    My exchange with Congresswoman Waters about real estate 
owned is also to your point of looking at efforts to take 
assets off the balance sheets of Fannie and Freddie and get 
them back into private hands on a more rapid basis. And then 
finally, on a go-forward basis, we are looking at several ways 
of having more of the credit risk that Fannie and Freddie are 
taking on right now on a new business production in identifying 
ways to have some portion of that credit risk actually be 
financed by private capital and have private capital bear a 
portion of that credit risk. And I believe in the coming year 
you are going to see actual--more executions that follow that 
approach.
    Mr. Pearce. I appreciate it.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    Now, the gentleman from Delaware, Mr. Carney.
    Mr. Carney. Thank you, Mr. Chairman. Thank you for having 
this hearing today.
    I have three lines of questioning that I would like to 
explore. The first really is just to go back to Mr. Pearce's 
question about the recovery efforts on security disclosures and 
representations that were made. There was some reference to 
that in the Financial Crisis Inquiry Commission report that was 
presented here some months ago, and in that report, they talk 
about moneys that were recovered through that process. Could 
you update us on those recoveries?
    Mr. DeMarco. I am sorry sir. I am not familiar with the 
particular--
    Mr. Carney. Dollar amounts?
    Mr. DeMarco. The dollar amounts or, frankly, what exactly 
the FCIC had. I can speak to the fact that we have filed these 
lawsuits with regard to certain private-label mortgage-backed 
securities that Fannie Mae and Freddie Mac have purchased where 
we believe that there are deficiencies in the securities 
offerings that were part of those transactions. We are seeing 
this emerging in the marketplace. There have been more and more 
lawsuits filed by all sorts of different parties regarding the 
securitization process for private labels.
    Mr. Carney. Does Fannie or Freddie do that separately or 
independently?
    Mr. Williams. Congressman, we have a separate activity that 
is based on our loss mitigation unit that goes back and looks 
at loans from that period of time, from 2005 to 2008 in 
particular, and looks at whether those loans should be 
repurchased because they did not meet our underwriting 
guidelines.
    Mr. Carney. Right. There is a warranty, right, and 
instrument that says if they didn't meet the underlying 
guidelines, that they could be repurchased, right?
    Mr. Williams. Correct.
    Mr. Carney. So how aggressively are we pursuing those 
representations?
    Mr. Williams. Congressman, I believe we are being very 
aggressive. We have stood up as part of the conversation that I 
was having with the chairman about the growth in our loss 
mitigation activities. That is one of the big areas that we 
have grown because we are going back and looking at all the 
loans that we have--
    Mr. Carney. Is there a way that we can get a report on 
that? Or is there public information available on that? That 
would be helpful. You can answer that later because my time is 
ticking.
    You have talked a little bit about your foreclosure 
prevention efforts. Is there something that we can do or other 
programs or changes in existing programs that would facilitate 
your efforts?
    Mr. DeMarco. I think at this point we have--a lot has 
changed with these various programs, and a lot of programs have 
been put in place. We need to give them time to work. I think 
things like the recent changes to HARP.
    Mr. Carney. The changes to HARP, are some of those 
changes--would they be appropriate for HAMP as well in terms of 
some of the streamlining that was in HARP?
    Mr. DeMarco. They are really targeted at two really 
different sets of situations.
    Mr. Carney. I know that, but there were kind of 
administrative tightenings and changes that were put in place 
in HARP, as I understood it, that maybe could apply to HAMP. 
You don't think so. Okay.
    Mr. Haldeman. Congressman, the way that I would answer that 
would be that over the course of time, the HAMP program has 
become more aligned and more efficient. That was not the case 
in the spring of 2009.
    Mr. Carney. So that is happening as an administrative 
matter?
    Mr. Haldeman. Precisely right.
    Mr. Carney. Perfect.
    Lastly, I would like to ask Mr. DeMarco, I guess, what you 
think of--or it was Mr. Haldeman who mentioned that one of the 
big questions out there is to clarify the future of the 
secondary mortgage market. And, of course, there has been a big 
discussion within this committee and members of this committee 
and pieces of legislation, what to do with Fannie and Freddie, 
unwind them, and so on and so forth. Of course, we had the 
Treasury Secretary in here months ago presenting the 
President's White Paper, which presented a series of options 
from complete privatization to some hybrid model.
    Could you share with us your opinion on what the future 
ought to look like, Mr. DeMarco?
    I will let you each have a shot at it, I guess.
    Mr. DeMarco. I would say simply, Congressman, that I really 
do believe that this is a critical public policy matter for 
lawmakers to decide, and the essential decision point for 
lawmakers is out of a $10 trillion or $11 trillion single-
family mortgage market, what portion of that mortgage market 
warrants the American taxpayer standing behind that set of 
mortgages as the ultimate credit guarantor of the mortgages? 
And then on the other side, that leaves the rest of that $10 
trillion or $11 trillion single-family market to be financed 
through normal financial mechanisms, through private financial 
institutions, exercising private credit assessments and putting 
private capital at risk.
    Mr. Carney. How would you answer that question?
    Mr. DeMarco. I think that the answer is that it is going to 
be a mix of both. Clearly, I don't see the FHA program or VA--
as credit guarantee programs will certainly exist. One of the 
things Congress could do is make determinations about adjusting 
the mission and the potential market scope of those programs 
and leave the rest to the private sector. Or it could go 
further, and it could say in addition to FHA/VA, there are some 
other portions that will have an ultimate government guarantee.
    My experience over time as a career civil servant is that 
over time, government credit guarantee programs get a little 
hard to manage and keep the pricing associated with the risks 
that are involved. So it is a challenge. But on the other hand, 
we certainly have seen that the private sector can be 
challenged in assessing credit risk as well.
    Mr. Carney. We saw that, didn't we?
    I would like to hear from the other two, but I don't have 
any time left. So I appreciate your answers to my questions. 
Thanks.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from California, Mr. Miller.
    Mr. Miller of California. Thank you, Mr. Chairman.
    I have often asked the question, what went wrong, and when 
did it occur? Mr. Williams, you are the first one to publicly 
answer that question without being asked. You said that in 2005 
to 2008, the bad loans were written. And if you know when they 
were written, you know what caused them, and you know how to 
fix them. I am assuming both sides have fixed the problem that 
occurred between 2005 and 2008. Is that a statement of fact?
    Mr. Haldeman. I believe we have, and it is a different 
credit policy.
    Mr. Miller of California. That has been a debate I have 
always tried to engage somebody in, and nobody would ever 
answer.
    The other question was raised by my good friend Maxine 
Waters and others, accountability on the part of lenders. I 
have always believed that has to be paramount. If lenders write 
bad loans, they don't have proper oversight, use underwriting 
standards that are unreasonable, they should buy the loans 
back, and perhaps if they do that enough times, they will stop 
doing that.
    But one structure I have always felt was confusing and 
should never have occurred was a hybrid model of Freddie and 
Fannie, whereby the taxpayers are on the hook, and the private 
sector made the money. We guaranteed it as a government, and 
the private sector made all the profits. That is unreasonable.
    But I do like what I have heard, and I agree with it. There 
has to be some facility as a conduit for the flow of private 
sector dollars to the secondary market. I think that has to 
occur in the future. Probably 15 percent of the money we 
receive in this country for loans comes from other countries, 
and if there was not a government guarantee, those funds would 
not be coming to this country, and many of the investors who 
invested in Freddie and Fannie and bonds would not make the 
investment if there was not a guarantee on those loans.
    But a question that I have great concern over is the 
situation you are in today. And if you aren't required to pay 
this 10 percent dividend, Freddie and Fannie, what would your 
assets be today and possibly in the future? What would they be? 
And would you still be borrowing from the Treasury if you 
weren't required to make this huge payment?
    Mr. Haldeman. I can refer you to an analysis that FHFA 
completed and published in October of 2011 where they took a 
look at the future draws, dividend payments for Freddie Mac 
going into the future, and they have three different scenarios 
that they look at tied to many things, but including house 
prices, how severe, whether we will have a double-dip 
recession, whether housing prices will go down. There are three 
scenarios. And under two of those scenarios, including the most 
likely or the base case, Freddie Mac will not need any 
incremental draw after 2011, and that is despite paying the 10 
percent dividend that you cite.
    Mr. Miller of California. If you weren't paying the 10 
percent today, what would your assets be currently? And would 
Treasury be on the hook for anything?
    Mr. Haldeman. Yes, they still would be, Congressman. But 
maybe one way I can say that, do the math off the top of my 
head, which is dangerous. Our draw thus far is $72 billion. We 
have paid $15 billion. These are all round numbers. We have 
paid $15 billion in 10 percent preferred dividend. If I use 
your interest rate, which I remember from your opening remarks, 
of 5 percent, that would have saved $7.5 billion. So instead of 
$72 billion, it would have been $64.5 billion, I think is the 
math. So, we still would have been substantially in a draw.
    Mr. Miller of California. If you had that $15 billion back 
right now, how much would you be drawing?
    Mr. Haldeman. It would be $72 billion minus $15 billion. 
    Mr. Miller of California. But what you have already 
received, would you need more funds this year or next year if 
you hadn't paid that $15 billion back?
    Mr. Haldeman. I am hesitant to answer that. But even having 
paid the 10 percent interest, we are not going to have any--
under the base case, we won't have a draw on 2012--
    Mr. Miller of California. So your assets would be $15 
billion rather than considering a draw that you are not 
getting. So we are taking what liquidity you have away from you 
by charging you 10 percent.
    On Fannie, the same question, Mr. Williams. If we didn't 
charge that 10 percent that we are charging in interest today, 
would you still need to go to the Treasury right now for 
additional funds?
    Mr. Williams. Congressman, we have paid over $17 billion in 
dividends. Referring to the same report as Mr. Haldeman noted, 
as we move forward, payment of the dividends will be the 
largest part of our draw, but we will continue to draw.
    Mr. Miller of California. So if you didn't have to pay 
that, your draw might be very close to zero?
    Mr. Williams. In the future.
    Mr. Miller of California. And that is something this 
Congress needs to consider, that we charge the banks 5 percent. 
We are charging Freddie and Fannie 10 percent, so we are almost 
dooming the failure, because every dime they take in that would 
be profit, they are giving back to the taxpayers in interest, 
and then we are making them borrow more money to charge them 
more interest on. It seems like a never-ending circle that we 
have caused to happen.
    But I guess the big thing is I think there needs to be some 
form of facility to do what you do, whether Freddie and Fannie 
is wrapped into a facility or whatever we do, to guarantee the 
flow of money. But if there was no facility there, Mr. DeMarco, 
to do this, is the private sector going to fill that position 
today?
    Mr. DeMarco. It would take an adjustment period for the 
private sector to be able to do so. I do believe it could, but 
it would take an adjustment period.
    Mr. Miller of California. Mr. Chairman, thank you for your 
time and patience.
    Chairman Neugebauer. Now, to the gentleman from Texas, Mr. 
Green.
    Mr. Green. Thank you, Mr. Chairman.
    And thank you as well, Ranking Member Capuano.
    And to the witnesses, I thank you.
    Do you have in the GSEs any ARMs that have not adjusted?
    Mr. Williams. As I look at our products, sir, it is 
predominantly--
    Mr. Green. I can barely hear you.
    Mr. Williams. Our products are predominantly 15-, 20-, and 
30-year products, so I would look at it and say in terms of 
ARMs products, it is a small portion of what we have, and I can 
probably follow up and give you a number at a future point.
    Mr. Green. It is a small portion. Would you guess that to 
be 10 percent or more?
    Chairman Neugebauer. Mr. Williams, some of our Members up 
here are having a hard time hearing. If you would speak louder 
and a little clearer, please?
    Mr. Williams. Thank you, Mr. Chairman. I hope that is 
better.
    Chairman Neugebauer. Yes, it is.
    Mr. Williams. As I was saying, Congressman, our product set 
is predominantly 15-, 20-, and 30-year products. We will be 
happy to follow up with you on percentage.
    Mr. Green. ARMs--I understand that you are saying fixed 
rate. Is that what you are saying? I am talking about 
adjustable-rate mortgages.
    Mr. Williams. Congressman, that was my point, that most of 
our products are fixed-rate, 15-, 20- and 30-year products.
    Mr. Green. Okay. Mr. Haldeman, would you respond, please, 
sir?
    Mr. Haldeman. Yes. ARMs are a smaller percentage of what we 
do. But if I understand your question correctly, there still 
would be some that have not adjusted yet because some of them 
adjust, for example, in the fifth year. So there would be some 
that have not yet adjusted, if I understand your question 
correctly.
    Mr. Green. And, Mr. DeMarco, permit me to ask you this: I 
know you have exhibited some frustration in terms of dealing 
with the servicers, and I appreciate your frustration. Like the 
Member from California, I, too, have had my level of 
frustration dealing with the servicers. Notwithstanding all of 
the laws that we have passed to limit their liability and 
encourage them to do things, given that we seem to be in a 
position to write down principal that is not being written 
down, let us put that aside and just talk about refinancing. 
What is the situation with refi?
    Mr. DeMarco. Fannie Mae and Freddie Mac together have 
refinanced about 9 million loans in the last couple of years, 
and we introduced this Home Affordable Refinance Program in 
early 2009 and made some major enhancements to it just a month 
or so ago. And what this program is designed to do is it is 
designed to help those borrowers who have a Fannie Mae or 
Freddie Mac-owned mortgage where they are underwater on the 
mortgage or near underwater, and some of these people were 
having a hard time being able to refinance. We have enhanced 
their opportunity to be able to refinance their mortgage. So we 
expect that this is going to contribute to some additional 
refinances for people who have previously been unable to do so.
    Mr. Green. The question has been raised as to why not 
refinance without being underwater? There are many persons who 
can pay the current interest rates, but they can't handle the 
higher rates that they have now. And these are hardworking 
people who qualified, but they just can't do it. Why would we 
have to wait until they are underwater to refinance?
    Mr. DeMarco. Oh. Well, I am sorry, Congressman, I didn't 
mean to leave you with that impression. For those that are not 
underwater, I think there are really quite ready market 
mechanisms and lenders willing to refinance them. And 
certainly, Fannie Mae and Freddie Mac would be pleased to have 
those mortgages refinanced.
    But there is not a market impediment to them being able to 
exercise that right due to normal functioning of the way our 
markets work. There was an impediment for borrowers who had a 
current loan-to-value ratio above 80 percent, and we have, I 
believe, taken some pretty good steps to remedy that. But those 
who already have at least 20 percent equity in their home today 
shouldn't have an impediment to refinancing.
    Mr. Green. I understand. And I have gone through the refi, 
and I know that it is not as easy as one might think.
    The point that I am making to you is this: If we know that 
people are currently making payments that are much higher than 
they would make if they got a refi, why would we not encourage 
the refi of these loans before they get in trouble and try to 
get them into a payment that they can afford?
    Mr. DeMarco. Mr. Green, it is a fair question. We are 
certainly not discouraging it, and I believe we are encouraging 
it, and the opportunities are there. But if you are seeing, in 
your community or in the marketplace, impediments that we 
should be addressing, I would be happy to take a look at that, 
because certainly, I agree with you.
    Mr. Green. Mr. DeMarco, if I may, the equity that you 
called to our attention, that becomes an impediment. Let us 
assume that they don't have the 20 percent equity, but a refi 
would allow them to stay in the home. Why don't we consider 
simply refinancing to get through these loans that are creating 
problems for us?
    Mr. DeMarco. The HARP program is designed to deal with 
those. But there have been proposals made, why don't Fannie and 
Freddie simply take the mortgage; and if it is 6.5 percent, 
just cross out the 6.5 and put 4.5 or 4 percent, send a letter 
to the borrower saying, hey, you are now at this lower interest 
rate? That is not permissible. That would be a violation of 
several things. But creating a market opportunity for that 
borrower to be able to refinance is something that we have done 
and we are trying to encourage, because I would certainly agree 
with you that that would enhance both the borrower's situation 
as well as Fannie and Freddie's position as guarantor.
    Chairman Neugebauer. I thank the gentleman.
    Mr. Green. Mr. Chairman, may I just ask one additional 
liberty?
    Chairman Neugebauer. Very quickly.
    Mr. Green. All right. Thank you.
    In doing this--and I understand that you are separated from 
certain other entities that do these things--but would 
congressional assistance put you in a position so that you 
could do it? Would that create a problem for you? If you had 
something from Congress, would Congress be of assistance in 
this area? Could Congress be of assistance?
    Mr. DeMarco. I would be happy to go back and think about 
it. Offhand, I can't think of any particular thing. I think 
that what we have done in the HARP program is meaningful. 
Congress could certainly be of assistance in figuring out what 
the end game is with respect to the conservatorships. That 
would certainly be helpful.
    Mr. Green. Thank you.
    Chairman Neugebauer. I thank the gentleman.
    Mr. DeMarco, I want to kind of go back to this plan issue. 
Did you know that for 2011, Fannie Mae is, I think, planning to 
spend $6 million on advertising, and Freddie Mac is going to 
spend $600,000?
    Mr. DeMarco. The specific numbers, no, sir. I do have an 
understanding with them, and they should speak for themselves, 
that the company's advertising is focused on the immediate 
question of informing the marketplace, borrowers, and servicers 
with regard to the changes that have been made in loss 
mitigation programs, and to encourage the outreach with regard 
to loss mitigation so that borrowers who are in troubled 
mortgages know that there is a place to go and there is a path 
to follow to be able to get assistance.
    Chairman Neugebauer. I think my point is one of them has 
about $2 trillion worth of business on the books, the other one 
has about $3 trillion worth of business, but a tenfold 
difference. I think what this hearing is about today is--Mr. 
Williams says there is really not a written plan. Mr. Haldeman, 
do you have a written plan on where you are going with Freddie 
Mac?
    Mr. Haldeman. We are working with our board and FHFA on a 
3-year plan going forward.
    Chairman Neugebauer. But we are 3 years into this 
conservatorship. So I think what I want to say--one of the 
points of this hearing and one of the things from my personal 
perspective is I think it is time for the entities to come 
together with some strategic plan, be able to begin to look at 
how we are spending the money that we are getting, because we 
are going to continue to advance. I think the last report that 
you made, Mr. DeMarco, said that could go up to $230 billion to 
$300 billion. We are at $170 billion now.
    And I think, Mr. DeMarco, you are the boss. These guys work 
for you. And I know you have more of a hands-off approach on 
that, and you feel like you have hired capable people. But our 
job is--the people sitting up here--is to make sure that we 
begin to minimize to the greatest extent possible the 
additional money that the taxpayers have to put into these 
entities. And what I would like to see is for you all to have 
some comprehensive plans, talking about reducing the 
footprints, talking about internally, the culture within that, 
of making sure the employees understand that they are not on 
somebody else's dime right now. They are on the American 
taxpayers' dime.
    And I would hope that we could see some fruits from that as 
we move forward, because I hope you were a little embarrassed 
by the fact that these headlines were not very flattering and 
don't give a lot of confidence to the American people. And it 
overshadows maybe some of the better things that you are doing 
on behalf of the taxpayers. But little things matter. And right 
now, $10 million, $5 million, $600 million, $600,000, those are 
real numbers to the American people.
    And so, I would hope in the future that we can see some 
comprehensive strategic planning, and then I think it would be 
very helpful for the three of you then to come back sometime 
after the first of the year and lay out some strategic plans so 
that we all have a vision and make sure that the conservator 
and the Congress and the conservator and the entities 
themselves are all on the same page. And quite honestly, right 
now I am not sure that I have the confidence that we have that 
connectivity.
    Mr. DeMarco. Thank you for those comments, Mr. Chairman. We 
will take them to heart, and I will commit to you that you will 
see a plan that outlines in a more comprehensive way where we 
are going in the next chapters with conservatorship. But I must 
hasten to add that while I will be pleased to develop that, 
make it available not just to the subcommittee, but to the 
public so the American taxpayer can see that, I will continue 
to make my request and state my willingness and desire to work 
with the entire Congress and the Administration to see the 
final chapter of this written so that we can bring this to an 
end.
    Chairman Neugebauer. Thank you.
    Ms. Waters?
    Ms. Waters. Thank you so much, Mr. Chairman.
    Earlier, I spoke with Mr. DeMarco about my concern about 
their having to pay Bank of America to take back the servicing 
because they were doing such a bad job. I have another issue 
here. In September, the FHFA Inspector General reported on a 
$2.87 billion settlement entered into by Bank of America and 
Freddie Mac. The IG found that Freddie only reviewed troubled 
loans for bank repurchase claims 2 years after origination, 
even though an FHFA senior examiner and Freddie Mac's internal 
auditors noticed that the housing boom loans' foreclosures 
peaked 3 to 5 years after origination. The IG said this shift 
in foreclosure patterns among housing boom loans means that 
most troubled loans are not being reviewed regardless of their 
potential for viability for repurchase claims. In fact, Freddie 
Mac has not reviewed for repurchase claims over 300,000 
foreclosed loans originated between 2004 and 2007. These loans 
have an unpaid principal balance exceeding $50 billion.
    The basic point that the IG was making was that Freddie 
could have left money on the table when it settles with banks 
over loans that weren't originated according to their 
standards. Further, the IG said that an internal Freddie memo 
said that one advantage of pushing through the settlement was 
that it would improve Freddie's business relationship with Bank 
of America. I don't even know why you all want to continue to 
do business with Bank of America.
    But anyhow, what do you think of this IG report or 
preserving ongoing business relationships and appropriate 
criteria by which to gage whether a settlement is appropriate? 
Before this IG report, the Congress knew very little about the 
multibillion-dollar settlements entered into between banks and 
Fannie and Freddie. Can you commit to Congress that you will 
consistently provide the type of transparency that this IG 
report provided as you enter into future settlements? Talk to 
us about this, Mr. Williams.
    Mr. DeMarco. If I may, Congresswoman, it was Freddie Mac. I 
would be happy to address this since the IG report was 
addressed to FHFA.
    Ms. Waters. Okay. Please do.
    Mr. DeMarco. The IG report, at the end of the day, had two 
recommendations to the Agency, each of which the Agency has 
agreed to carry out, neither of which go to whether there was 
a--one had to do with an internal sort of policy for our 
supervision staff that we are addressing. The other had to do 
with something we already had under way, and the recommendation 
we agreed to was to continue that work of examining the loan 
review process.
    This gets into a rather technical area to try to explain 
what was going on with regard to the issues raised by the IG in 
this report, but if I may have a moment, there has been a lot 
of misreporting about this, and I would like to clarify a 
couple of things. And Mr. Haldeman is welcome to add his view.
    But FHFA had a senior examiner who raised a question 
regarding a subset of loans that were on Freddie Mac's books--
they were interest-only loans and pay-option ARMs--and whether 
the sampling strategy that was used by Freddie Mac corporate in 
doing quality control review of these two types of loans--
interest-only loans and pay-option ARMs--was appropriate given 
the pay adjustment characteristics of these mortgages, and 
whether these types of mortgages would bear out default 
characteristics different from other types of mortgages and 
hence require a different sampling strategy.
    This was raised. It was raised. It was something that Mr. 
Haldeman was aware of when the settlement was done. It was 
something I was aware of. And it was factored into the 
settlement. So we identified that issue, signed up a potential 
cost or risk into it, and it was factored into the settlement.
    Since then, this has received a tremendous amount of 
scrutiny by our Inspector General, by our own team, by Freddie 
Mac's own team. And I will tell you that 11 months later, 
almost 12 months later now, after all this scrutiny, if this 
transaction was put in front of me, with everything I have been 
able to learn subsequently, I would sign off on this settlement 
again today.
    There was not $1 billion of taxpayer money left on the 
table. This was a commercially reasonable settlement that was 
done. The issue that was raised by our own examiner was a 
legitimate issue. We have continued to look into it. We believe 
the judgment was appropriately assigned in making the 
settlement, and I think that while it is a legitimate issue to 
have raised, we have gone through it, and I am quite satisfied 
with the transaction that we took here. And it is also 
something that underwent a substantial amount of review within 
Freddie Mac by the management team, by the Board of Directors, 
by an outside firm retained by the company to review this, and 
a good deal of scrutiny by my own team in making a 
recommendation to me to sign off on this settlement.
    There are always things that can be learned from these 
processes. The IG has pointed some out, and we are taking the 
appropriate action based on his recommendations.
    Ms. Waters. Okay. Fine. My question to you is about--
    Chairman Neugebauer. I am sorry. I am going to have to ask 
the gentlewoman to suspend. Her time has expired. We have, I 
think, a couple more Members who want to ask quick questions, 
and they have called votes here.
    Ms. Waters. I just want a commitment to provide 
transparency.
    Mr. DeMarco. Yes, ma'am.
    Chairman Neugebauer. Mr. Miller?
    Mr. Miller of North Carolina. I think I will do Ms. Waters 
a favor and pursue this question. I know you said that the 
criticism of Freddie's settlement was misreported, but I didn't 
just read press reports. At the time, I read the IG report. 
Now, it is not fresh in my mind at this time, but it was very 
critical. It is not that it was misinterpreted as being 
critical. I read it. It was critical.
    Mr. DeMarco. No question about it. It was very critical.
    Mr. Miller of North Carolina. It said that you settled the 
suit too cheaply, and it said that you settled too cheaply, or 
Freddie settled too cheaply for the wrong reason, which was to 
improve your business relationship.
    Mr. DeMarco. I am sorry, Mr. Miller. The report did not 
reach a conclusion.
    Mr. Miller of North Carolina. He quoted emails that left 
that impression. It was a very critical report. I think Ms. 
Waters' question is the same as mine. There is pending 
litigation involving tens of billions of dollars for the 
private-label security, PLS mortgage-backed securities, the 
private-label mortgage-backed securities that you all bought. 
There are other put-back claims. How much conservatorship 
ultimately costs taxpayers may largely depend on how that 
litigation is resolved. We have an Inspector General's report 
that is very critical of how Freddie has settled one set of 
claims already.
    Can the Inspector General review these claims in advance 
before the settlement is entered into so that someone can look 
at this and make sure that these are not settled too cheaply 
and settled too cheaply for the wrong reasons, as the email 
suggested?
    Mr. DeMarco. Mr. Miller, that is a question for the IG, but 
I would view it as highly--I would expect the answer is the IG 
doesn't review things before they are decided or actions are 
taken. The typical activity of an IG is to review an action 
after--
    Mr. Miller of North Carolina. Can you get someone detached, 
someone else to look at it?
    Mr. DeMarco. Yes, Mr. Miller. To that, yes. To that point, 
I believe that we will be taking a different review process to 
enhance the additional review and opinion that we get in 
helping us to assess the settlements.
    Mr. Miller of North Carolina. And who will that be?
    Mr. DeMarco. I don't have that answered yet, Mr. Miller.
    Mr. Miller of North Carolina. I yield back.
    Chairman Neugebauer. Mr. Carney is recognized.
    Mr. Carney. Thank you, Mr. Chairman, and Ranking Member 
Capuano, for the additional time.
    I just want to go back to the last question that I asked. I 
didn't have enough time to ask the two gentlemen on either end.
    Mr. Haldeman, I think it was, said that one of the 
important matters is, I guess, for us to determine the future 
of the secondary market. How would you see that? We did have 
the Treasury come in and present the Administration's White 
Paper. How would you answer that question?
    Mr. Haldeman. Yes. When I took the job, they told me I 
couldn't lobby or advocate, and I have taken that 
responsibility pretty seriously. And so, I really don't want to 
put on the table my personal view.
    Mr. Carney. Could you frame the issue for us a little bit, 
like Mr. DeMarco did? He didn't really answer the question 
either, I don't think.
    Mr. Haldeman. The issue for me is to what extent, if any, 
should the government play a role in the housing finance 
market? And I am sort of a free market kind of person, but I do 
think there could be a legitimate role for the government as 
some sort of ultimate guarantor for which a Freddie or Frannie 
or a participant in the industry could pay an insurance premium 
to get that kind of ultimate guarantee. The benefit of that 
ultimate guarantee, as Congressman Miller said on this side, 
would be that I think you would have a greater chance to get 
foreign capital coming into our country and coming into our 
mortgage market if we had that ultimate guarantee. But I think 
it is critically important that the institutions have to pay an 
insurance premium to get that guarantee.
    Mr. Carney. If there wasn't a guarantee, do you think we 
would have a 30-year fixed-rate mortgage product?
    Mr. Haldeman. I worry about that. I don't think it would be 
nearly so available to as many people as it is today.
    Mr. Carney. Thank you.
    Mr. Williams?
    Mr. Williams. Yes, Congressman. I think it is much like Mr. 
Haldeman noted. We are not in a position to actually advocate a 
specific solution. I think, first of all, it is very important 
that we have a responsible transition to reform to make sure 
that we do not destabilize the housing market as we go through 
it.
    I think, to your question, the key things the policymakers 
will need to evaluate are how do you support a 30-year fixed-
rate mortgage in this market? How do you provide deep liquidity 
that we have in the mortgage market today? How do you make sure 
that low-, moderate-, and middle-income Americans have the same 
access to mortgage financing that upper-income Americans do? 
And how do you support balanced housing policy, meaning 
affordable rental housing as well as homeownership? And I think 
those are really the four to five key questions that 
policymakers need to decide as they look at the solutions that 
are on the table.
    Mr. Carney. Thank you very much.
    Mr. DeMarco, would you like to take another shot at it?
    Mr. DeMarco. I think I am done. Thank you.
    Mr. Carney. Thanks very much.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentlemen, and I thank the 
panel. This has been a good hearing.
    The Chair notes that some Members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    Again, thank you for being here, and this hearing is 
adjourned.
    [Whereupon, at 4:48 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            December 1, 2011


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