[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]

                      FANNIE MAE AND FREDDIE MAC:



                               BEFORE THE



                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                             MARCH 6, 2013


       Printed for the use of the Committee on Financial Services

                            Serial No. 113-5

80-871                    WASHINGTON : 2013
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                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
PETER T. KING, New York              RUBEN HINOJOSA, Texas
EDWARD R. ROYCE, California          STEPHEN F. LYNCH, Massachusetts
FRANK D. LUCAS, Oklahoma             GWEN MOORE, Wisconsin
RANDY NEUGEBAUER, Texas              ED PERLMUTTER, Colorado
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              KEITH ELLISON, Minnesota
MICHAEL G. GRIMM, New York           MELVIN L. WATT, North Carolina
STEVE STIVERS, Ohio                  BILL FOSTER, Illinois
STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
MICK MULVANEY, South Carolina        TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
ANN WAGNER, Missouri

                            C O N T E N T S

Hearing held on:
    March 6, 2013................................................     1
    March 6, 2013................................................    47

                        Wednesday, March 6, 2013

Ligon, John L., Policy Analyst, Center for Data Analysis, the 
  Heritage Foundation............................................     9
Rosner, Joshua, Managing Director, Graham Fisher & Co............    10
Wachter, Susan M., Richard B. Worley Professor of Financial 
  Management, Professor of Real Estate and Finance, and Co-
  Director, Institute for Urban Research, The Wharton School, 
  University of Pennsylvania.....................................    12
White, Lawrence J., Professor of Economics, Stern School of 
  Business, New York University..................................    14


Prepared statements:
    Ligon, John L................................................    48
    Rosner, Joshua...............................................    62
    Wachter, Susan M.............................................    72
    White, Lawrence J............................................    79

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Inserts from the Charlotte Observer..........................    99
    Letter to Hon. Barney Frank, dated September 28, 2006........   102
    Letter to GAO Comptroller General David M. Walker from Hon. 
      Spencer Bachus and Hon. Barney Frank, dated April 25, 2007.   103
    GAO testimony before the U.S. Senate, dated December 4, 2008.   104
Garrett, Hon. Scott:
    J.P. Morgan insert dated May 3, 2011.........................   128
Garrett, Hon. Scott, and Peters, Hon. Gary:
    Letter to Hon. Scott Garrett and Hon. Carolyn Maloney from 
      NAFCU, dated March 5, 2013.................................   133
Maloney, Hon. Carolyn:
    Fannie Mae update dated February 26, 2013....................   136
Perlmutter, Hon. Ed:
    Financial Times article dated September 9, 2008..............   144
Peters, Hon. Gary:
    Bipartisan Policy Center report entitled, ``Housing America's 
      Future: New Directions for National Policy,'' dated 
      February 2013..............................................   145

                      FANNIE MAE AND FREDDIE MAC:


                        Wednesday, March 6, 2013

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Hurt, Bachus, 
Royce, Neugebauer, Bachmann, Westmoreland, Huizenga, Grimm, 
Stivers, Mulvaney, Hultgren, Ross, Wagner; Maloney, Sherman, 
Moore, Perlmutter, Scott, Himes, Peters, Ellison, Watt, Foster, 
Carney, Sewell, and Kildee.
    Ex officio present: Representative Waters.
    Also present: Representative Miller.
    Chairman Garrett. Good morning, everyone. Today's hearing 
of the Capital Markets and Government Sponsored Enterprises 
Subcommittee is now called to order. Today's hearing is 
entitled, ``Fannie Mae and Freddie Mac: How Government Housing 
Policy Failed Homeowners and Taxpayers and Led to the Financial 
    Before we begin, without objection, I move that the Chair 
can put the committee into a recess at any time. Without 
objection, it is so ordered. Also note that we are starting 
today, pretty close to on time, which is 10 a.m., and I 
appreciate everyone being here despite the weather. We may 
have--I was told that the votes may have been moved up. So we 
will try to move things along expeditiously.
    Again, I thank the panel. We will begin with opening 
statements, and then go to the panel. So at this point, I yield 
myself 4\1/2\ minutes for an opening statement.
    So, today's hearing does what? It seeks to examine in 
greater detail the role that Fannie Mae and Freddie Mac played 
in facilitating the 2008 financial crisis. Over the last 4 
years, there has been a great deal of discussion as to what the 
main causes of the financial crisis were. However, I believe 
there is one similar fundamental trait that connects every 
analysis and that is bad mortgages. No matter what part of the 
financial crisis is discussed, it always comes back to bad 
    Our friends on the other side of the aisle sometimes love 
to discuss a wide variety of other reasons that they believe 
led to this crisis, however, for each instance, the underlying 
message is bad mortgages. Some of their favorite things to 
highlight are: opaque and complicated derivatives; an 
overreliance on incompetent credit rating agencies; off-balance 
sheet and synthetic securitizations; procyclical accounting 
standards; and greedy Wall Street banks.
    However, all those things are symptoms and not the actual 
disease. The disease was bad mortgages. The derivatives were 
written on bad mortgages. The rating agencies were rating bad 
mortgages. Securitization, the collateral of bad mortgages. The 
accounting standard market, the market had bad mortgages. 
Failing Wall Street banks were holding bad mortgages.
    All of these symptoms led to the same disease: bad 
mortgages. So we have to ask ourselves, how did this disease 
infect the country? The evidence indicates the disease began 
back in the 1990s with the adoption of the Affordable Housing 
Goals for the Government-Sponsored Enterprises (GSEs) and the 
Clinton Administration's push to rapidly expand homeownership 
opportunities. And they did so by systematically reducing 
underwriting standards.
    In May of 2001, Michael Zimbalist, a global head of 
investment strategy for J.P. Morgan's Asset Management 
business, who had originally believed that the private sector 
had underwritten a majority of the bad mortgages, wrote this to 
his clients, ``In January of 2009, I wrote that the housing 
crisis was mostly a consequence of the private sector. Why? 
Because U.S. agencies appeared to be responsible for only 20 
percent of the subprime, Alt-A and other mortgages. However, 
over the last 2 years, analysts have dissected the housing 
crisis in greater detail.
    ``And what emerges from new research is something quite 
different. Government agencies now look to have guaranteed, 
originated, and underwritten 60 percent of all non-traditional 
mortgages for a total of $4.6 trillion. What's more, the 
research asserts that the housing policies instituted in the 
early 1990s were explicitly designed to require U.S. agencies 
to make riskier loans with the ultimate goal of pushing private 
sector banks to adopt the same standards. To be sure, private 
sector banks and investors were responsible for taking the 
bait. And they made terrible mistakes. But overall, what 
emerges in an object lesson in well-meaning public policy gone 
spectacularly wrong.''
    So if my colleagues on the other side had taken the time 
and done the same due diligence that Mr. Zimbalist and others 
did to actually diagnose the appropriate causes of the 
financial crisis, they may have seen the same thing. But 
instead, they rushed forward with a 3,000-page Dodd-Frank Act 
which basically included a liberal's wish list of policy 
changes that have been pent up over the last 12 years, that had 
absolutely nothing to do with the crisis. They are not the 
issues that are strangling the economy, nor negatively 
impacting job creation. Unfortunately most of Dodd-Frank only 
dealt with the symptoms and not the actual disease, bad 
    Many of the interest groups that directly benefit from 
large subsidization of the housing market continue to state 
that Fannie and Freddie fell victim to the bad private market 
participants. This is completely false. It was government 
housing policy coupled with loose money from the Federal 
Reserve, that caused the housing bubble. And those are the 
areas where we must focus on first.
    One of my esteemed panelists, Mr. Rosner, points out so 
precisely and with many specific examples in his book, 
``Reckless Endangerment,'' ``Fannie and Freddie systematically 
reduced underwriting standards to meet government regulatory 
requirements and to curry favor with the political class. 
Fannie and Freddie are the essence of crony capitalism. And if 
we recreate them in some form or fashion as so many in the 
industry and across the aisle want to do, we are doomed to 
repeat the same terrible outcomes that our Nation has 
experienced over the last 4 years.''
    An analysis that I read before said finally, ``As 
regulators and politicians consider actions designed to 
stabilize the financial system and the housing mortgage market, 
reflection on the role that policy played in the collapse would 
seem like a critical part of the process.''
    I only hope so. And that is what we are about to do today. 
With that, I yield back. And I yield to the gentlelady from New 
York for 4 minutes.
    Mrs. Maloney. Thank you. I thank you for calling this 
hearing and I thank all the panelists for getting here. I 
mentioned that Dr. White is from the great City and State of 
New York. We are so pleased that you are here. And all of you, 
getting here in the middle of a snowstorm, I applaud you.
    We are here on really one of the most important issues the 
subcommittee will be working on over the next 2 years. Many 
economists believe that 25 percent of our overall economy is 
housing and related industries. So getting this segment figured 
out and stable and moving forward is critical to the economic 
growth and security of our country.
    I personally do not want to play the blame game. The title 
of this hearing is very confrontational. I hope we can work 
together in ways to find solutions and go forward. But since it 
was raised, I do want to point out the findings from the 
Financial Crisis Inquiry Report--this was an independent 
report, the final report of the National Commission on the 
Causes of the Financial and Economic Crisis in the United 
States. They interviewed 700 people, had 19 days of public 
hearings, and went through reams of materials from the private 
and public sector.
    And on page 323, in their conclusions they state, ``GSE 
mortgage securities essentially maintained their value 
throughout the crisis and did not contribute to the significant 
financial firm losses that were central to the financial 
    Fannie and Freddie themselves have come out with a report 
that I would like to place in the record on delinquent rates, 
comparing their work with the private sector. And in this 
report, the private sector had roughly 35 percent delinquency, 
whereas Fannie and Freddie were roughly at 3 to 5 percent. So 
anyway, I just wanted to put that into the record.
    Chairman Garrett. Without objection, it is so ordered.
    Mrs. Maloney. Okay, but now we are 4 years after the 
financial crisis and the GSEs are still in conservatorship. The 
hemorrhaging has stopped. The GSEs have even been profitable 
over the last few quarters. But we all agree that the current 
situation is not sustainable. There are a number of proposals 
that have come forward. One from FHFA came out to combine 
Fannie and Freddie, certain functions, and to standardize their 
securitization platform. There are others from the Bipartisan 
Policy Center.
    I for one, look forward to reviewing them with my 
colleagues, and I truly do believe if Mr. Garrett and I can 
agree on anything, then we can get it passed in the entire 
Congress and we can move forward. Homeownership has played a 
critical role in the American Dream in our country. Nowhere in 
the world are mortgage products like the 30-year fixed-rate 
mortgage available without some form of government involvement. 
And I believe we need to be mindful of that as we look forward 
at the various plans.
    We had roughly 70 years of a stable housing finance system 
with credit available to new home buyers, lower-income 
borrowers, and all types of borrowers in between. And I, for 
one, do not want to see the 30-year fixed-rate mortgage 
disappear. So while I agree that the current status is not 
sustainable, I do believe that at the very least, the GSE 
should return to what they did at their inception, be a source 
of liquidity to the markets to ensure that issuers have the 
cash to continue to lend in a prudent way to credit-worthy 
    So I look forward to moving forward toward solutions. And I 
hope that we set a better tone for a path forward than the 
title of this hearing represents. I yield back, and again I 
welcome all of my colleagues and the witnesses.
    Chairman Garrett. And I thank the gentlelady. We turn now 
to the vice chairman of the subcommittee for 1\1/2\ minutes.
    Mr. Hurt. Thank you, Mr. Chairman. Mr. Chairman, thank you 
for holding today's subcommittee hearing on how Fannie Mae, 
Freddie Mac, and Federal housing policy failed taxpayers and 
helped to lead to the financial crisis of 2008. One thing that 
I hear as I travel across my rural Virginia district, the 5th 
District, is that Congress must end Washington bailouts. I 
believe it is our responsibility to end the bailouts of Fannie 
Mae and Freddie Mac and enact reforms that will protect the 
American taxpayer and strengthen our housing finance system.
    With almost $190 billion in taxpayer funds provided to 
Fannie Mae and Freddie Mac to date, this has become, by far, 
the costliest bailout of the financial crisis. As this 
committee begins its work on housing finance reform, it is 
important that we understand what caused these historic losses. 
Before the housing market collapse precipitated a wider crisis, 
Federal housing mandates required Fannie Mae and Freddie Mac to 
buy riskier and riskier loans.
    These aggressive actions by the GSEs, aided by their 
implicit government backing, fed the housing bubble and 
facilitated the explosion of the market share of subprime and 
Alt-A mortgages. As Fannie Mae and Freddie Mac purchased and 
securitized more of these loans, loan originators took this as 
an incentive to write more subprime and Alt-A loans, regardless 
of their quality.
    As we all know, when the housing bubble burst, the American 
taxpayers were left to foot the bill. And yet Dodd-Frank which 
was sold to the American people as a reform of our financial 
system, failed to address any of the problems with Fannie Mae 
and Freddie Mac. Now is the time for Congress to act on this 
issue. And I appreciate Chairman Hensarling and Chairman 
Garrett's leadership in putting this committee on a path to 
fundamentally reforming our Nation's housing finance system and 
protecting the American homeowner and the American taxpayer.
    I would like to thank our witnesses for appearing before 
the subcommittee today. And I look forward to their testimony.
    Thank you, Mr. Chairman. I yield back.
    Chairman Garrett. And I thank you. I now recognize the 
ranking member of the full Financial Services Committee, the 
gentlelady from California, Ms. Waters, for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this hearing today. It is very important. Nearly 5 years have 
passed since this committee worked with the Republican 
Administration to stop the losses at Fannie Mae and Freddie Mac 
by strengthening their regulator and putting them into 
conservatorship to prevent the collapse of the housing market.
    At that time, this committee and others raised important 
questions about what happened in the financial markets to 
necessitate such extraordinary actions. Since then, a consensus 
emerged that the 2008 crisis was the result of a complex mix of 
factors including: credit rating agencies being paid to give 
AAA ratings to toxic assets; securitization and reselling of 
those assets to uninformed investors; and predatory loans 
including the no-income, no-job, no-asset loans or NINJA loans. 
It is overly simplistic and untrue to suggest that Fannie Mae 
and Freddie Mac caused the financial crisis or were even the 
leading cause of the crisis.
    Every credible analysis, including the Financial Crisis 
Inquiry Commission report, and a book by former FDIC Chairman 
Sheila Bair, say otherwise. With that in mind, it is important 
to note that the world is dramatically different today compared 
with 2008. Freddie Mac reported a profit of $11 billion for 
2012, and the total amount given to the GSEs net of repayments 
continues to decline. The tourniquet to stop the bleeding 
worked, providing legislators with time to consider how to 
reform the housing market.
    There are several comprehensive bipartisan reform proposals 
that were introduced last Congress, none of which have yet had 
a hearing before this committee. To each of our witnesses, I 
hope that you will help guide our discussion about how to 
actually reform the markets. For example, I would like to 
discuss what reforms are needed to preserve stable market 
products like 30-year fixed-rate loans, and how we can provide 
liquidity at times of market distress. And how we can ensure 
that all banks, including community banks and credit unions, 
can participate in the secondary mortgage market.
    I thank you, and I yield back the balance of my time.
    Chairman Garrett. The gentlelady yields back. Mr. Royce for 
1 minute.
    Mr. Royce. Thank you Mr. Chairman. I remember very vividly 
the Federal Reserve Chairman speaking with me, the warnings 
that we were given on the inability of the Fed to regulate 
Fannie and Freddie for systemic risk. I remember the questions 
from those at the Fed on, why won't Congress allow us to 
regulate Fannie and Freddie for systemic risk?
    It was pretty clear at the time, with the housing goals 
that we were putting in place with the requirement that of the 
$1.7 trillion that existed in those portfolios, the percentage 
of that which was subprime, this was the objective of Congress. 
Zero downpayment loans. We were driving a policy and the one 
request from the regulator was that they be able to regulate 
the GSEs.
    I had legislation before the House, and the Senate had 
legislation on the Floor. And that legislation on the Senate 
side was filibustered by Mr. Dodd and here we failed to pass it 
on the House side as well. That would have allowed the 
regulation for systemic risk. To deleverage those portfolios 
that were leveraged at 100 to 1. Now, an implicit government 
backstop created a level of moral hazard unseen anywhere else 
in our capital markets and it astounds me that people would try 
to pretend that in not listening to the regulators, that this 
had nothing to do with the problem in the housing market. I 
yield back, Mr. Chairman.
    Chairman Garrett. I thank the gentleman. Mr. Peters is 
recognized now for 2 minutes.
    Mr. Peters. Thank you, Mr. Chairman, and good morning. And 
I would like to thank our witnesses for being here today. I 
would also like to thank Chairman Garrett and Ranking Member 
Maloney for convening our first Capital Markets and Government 
Sponsored Enterprises Subcommittee. And I would like to 
additionally thank them for starting off by examining the role 
of GSEs in our economy.
    In addition to looking back at the collapse of the housing 
market in 2007, which is a topic I think it is very safe to say 
that we have already spent a great deal of time looking at, I 
hope that today, we also look forward. Our housing market 
continues to recover with improving home prices including 
across much of the greater Detroit area that I represent. 
Rental demand is increasing in many regions across the United 
States. But the number of renters spending more than they can 
afford is high and it is growing.
    The government continues to support the vast majority of 
mortgage financing, both for homeownership and rental housing. 
Our economy cannot afford to have an outdated housing system. 
We must look for ways to ensure our system can keep pace with 
today's demands and the challenges of the imminent future.
    For this reason we must look forward. And I hope that we 
can spend a portion of our time here today examining not just 
the role the GSEs played last decade, but what role our 
government should play in the housing markets of the future. 
Clearly, we need to put an end to taxpayer-funded bailouts. But 
we must also ensure that responsible hardworking families can 
still achieve the dream of homeownership.
    Our status quo is unsustainable but completely eliminating 
any government role in the mortgage market would likely 
undermine the housing recovery and risk eliminating the 30-year 
fixed-rate mortgage. Despite the housing collapse, responsible 
homeownership can produce powerful economic, civic, and social 
benefits that serve not just individual homeowners, but their 
communities and our Nation as a whole.
    I believe our committee has a real window of opportunity 
this Congress to meaningfully engage in GSE reform on a 
bipartisan basis. And I look forward to working with my 
colleagues on both sides of the aisle on this critical issue. I 
yield back.
    Chairman Garrett. The gentleman yields back. Thank you. The 
gentleman from Texas for 1 minute.
    Mr. Neugebauer. Thank you, Mr. Chairman, for holding this 
important hearing today. I think it is important to understand 
the consequences of all of this policy. We have talked about 
the huge losses that were accreted by these entities and the 
fact that the taxpayers had to inject massive amounts of their 
money into that.
    But there is another victim in all of this and that is the 
homeowners who did the right thing. The people who took out 
mortgages, who bought homes, who could afford those and are 
making their payments on it. What we realized is when we have 
monetary policy or fiscal policy that creates these bubbles, 
when the bubbles bust, it not only hurts the people who were a 
part of the bubble, but also hurts some of the people on the 
    And so, I think one of the things that I am hopeful that we 
can begin to work on is the fact that we make sure that history 
does not repeat itself. We have to understand that 
homeownership in America is about the opportunity to own a 
home, but it is not an entitlement. And in some ways, the 
government has turned homeownership into entitlement. We need 
to make sure it is an opportunity. So, I will look forward to 
our discussion today.
    Chairman Garrett. Thank you. The gentleman yields back. Mr. 
Scott for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. I think that 
this is indeed an important hearing. But here is what we must 
remember and this is for both Democrats and Republicans: As 
Fannie and Freddie prepare to wind down and have private 
lenders take on more responsibility in providing credit to the 
U.S. housing market, Congress, both Democrats and Republicans, 
must commit to ensure that Americans who require extra 
assistance in obtaining a sound mortgage are able to do so.
    We have to make sure that there is a willingness on the 
part of the private market to fill the gap that will be left by 
the absence of Fannie and Freddie. To do less than that is 
meaningless. We can sit here and debate the merits or demerits 
of Fannie and Freddie, but the problem remains. We must 
remember that the GSEs were formed to increase liquidity in the 
market, to provide long-term fixed-rate mortgages. This type of 
option for potential homeowners is valuable, and is often 
necessary in obtaining a mortgage that is sustainable, that is 
sound, and is less likely to fall into foreclosure.
    I have heard a lot of criticism about Fannie and Freddie. 
But they, in fact, were created to fill a very important 
purpose. And without Fannie and Freddie, millions of those who 
own homes now would have not been able to do so. Because the 
private market, the private sector, must be willing. That is a 
fundamental issue we have to make sure happens.
    Thank you, Mr. Chairman. If I have a moment? I guess I 
    Chairman Garrett. Thank you. The gentleman yields back. 
Mrs. Bachmann is recognized for 1 minute.
    Mrs. Bachmann. Thank you, Mr. Chairman. I thank you for 
this hearing that finally admits the truth, that it was 
government housing policy that failed homeowners. And as Mr. 
Neugebauer said, it is truly the taxpayers and the homeowners 
who lost in this issue.
    And who lowered these lending standards? We know now it was 
government policies. Why was it that we agreed to zero down 
mortgages? Government policies. Who agreed to the so-called 
``liar loans?'' It was government policies. And who pushed 
Fannie and Freddie to buy more and more of these inferior 
performing loans? It was government policies.
    And why was no one in the lending chain ever willing to say 
no, in a game that was destined for failure? We know now it was 
because a lot of people made a lot of money selling inferior 
products. And why? Because of the implied promise that if 
anything went wrong, don't worry, the taxpayers would bail it 
out and the taxpayers would pay.
    This is a game that can never happen again. We have to 
raise lending standards to what they were historically and we 
will once again have a strong housing market. I yield back.
    Chairman Garrett. Thank you. And for the last word on the 
matter, Mrs. Wagner is recognized for 1 minute.
    Mrs. Wagner. Thank you, Mr. Chairman, and I thank our 
witnesses. At the signing ceremony for the Dodd-Frank Act in 
July of 2010, President Obama proclaimed, ``Unless your 
business model depends on cutting corners, or bilking your 
customers, you have nothing to fear from reform.''
    Unfortunately, the bill the President signed that day did 
nothing to reform the two entities that cut the most corners, 
bilked taxpayers out of billions of dollars, and were more 
responsible than anybody or any institution for the financial 
crisis of 2008. I am of course referring to Fannie Mae and 
Freddie Mac, the government mortgage giants that for years 
worked to drive down underwriting standards and increase 
borrower leverage in the housing market. All under the guise, I 
believe, of promoting homeownership. These policies created an 
enormous housing bubble which inevitably crashed and in the 
process, hurt the very families, real families who were 
supposed to be helped, and instead stuck the taxpayers with the 
bailout bill.
    As our committee works to bring real and lasting reform to 
the housing market, I hope that today's hearing serves as a 
vivid reminder of where misguided government policies have 
gotten us in the past.
    I thank you, Mr. Chairman, for this hearing. I thank our 
witnesses for being here today and I yield back my time.
    Chairman Garrett. The gentlelady yields back. We now turn 
to our esteemed panel. We again thank the panel for being with 
us on this snowy day. We also remind those who have not been 
here before that you will all be recognized for 5 minutes, and 
your complete written statements will be made a part of the 
record. The lights will come on green, yellow, and red; there 
is 1 minute remaining at the yellow light.
    And I will also remind you to please make sure that you 
bring your microphone as close to you as you can when you 
    We will begin with Mr. Ligon from The Heritage Foundation, 
and you are recognized now for 5 minutes.


    Mr. Ligon. Good morning. My name is John Ligon, and I am a 
policy analyst in the Center for Data Analysis at The Heritage 
Foundation. The views I express in this testimony are my own 
and should not be construed as representing any official 
position of The Heritage Foundation.
    I thank Chairman Scott Garrett, Ranking Member Carolyn 
Maloney, and the rest of the subcommittee for the opportunity 
to testify today. The focus of my testimony is that the Federal 
housing policies related to the Government-Sponsored 
Enterprises, Fannie Mae and Freddie Mac, have proven costly, 
not only to the Federal taxpayer but also to the broader 
financial system. We should recognize their failure and move 
toward a mortgage market without the distortions of GSEs.
    Allow me to offer several observations. First, Fannie Mae 
and Freddie Mac are the ultimate guarantors of the U.S. 
mortgage market. Fannie and Freddie own or guarantee 
approximately half of all outstanding residential mortgages in 
the United States, including a share of subprime mortgages. 
Additionally, they finance about 60 percent of all new 
    These GSEs fall within Federal conservatorship. Their 
combined agency debt, mortgage, and mortgage-related holdings 
are directly guaranteed by the Federal Government. Their level 
of debt is massive and has exploded over the last 40 years. In 
1970, agency debt as a share of U.S. Treasury debt was 15 
percent. And as of 2010, this share was 81 percent, a combined 
$7.5 trillion.
    This brings me to my second observation. Fannie Mae and 
Freddie Mac have actually undermined the stability of the U.S. 
financial system. Beginning in the 1990s, Fannie and Freddie 
began relaxing credit standards for the mortgages they 
purchased. In 1995, the Department of Housing and Urban 
Development, HUD, established a target goal relating to the 
homeownership rate among low-income groups which was eventually 
set at 70 percent.
    Then, in 1999, HUD directed Fannie Mae and Freddie Mac to 
further relax their requirement standards for purchased 
mortgage loans, including a move toward sub and non-prime loan 
    Starting in 2000, there was yet a further easing of 
mortgage lending standards which stretched more broadly across 
the private mortgage system.
    The erosion of lending standards spread throughout the U.S. 
mortgage market from 2000 to 2006, and severely weakened the 
quality of holdings in the GSE's portfolios since a sizable 
share of their mortgage back-holdings were securitized for non-
prime loans.
    The total level of non-prime loans in the U.S. mortgage 
market peaked at 48 percent of the overall market in 2006. 
Looked at from the perspective of homeowners, between 2002 and 
2008, there was a $1.5 trillion increase in household debt 
attributable to existing homeowners borrowing against the 
increased value of their homes.
    By 2009, aggregate household debt increased $9.4 trillion 
over the prior decade while home equity as a share of aggregate 
household wealth decreased from 62 percent to 35 percent from 
    As a result, 39 percent of new defaults on home mortgages 
occurred in households that had aggressively borrowed against 
the rising value of their homes.
    This brings me to my third and final observation. Ending 
the present role of Fannie Mae and Freddie Mac would lead to a 
more stable housing market. After more than 3 decades of 
experience with boom-and-bust cycles, which have affected not 
only household income and wealth, but also financial markets, 
Federal policymakers should seriously reconsider the Federal 
Government's role in shaping housing policy through Government-
Sponsored Enterprises.
    These institutions distort the U.S. housing and mortgage 
markets at substantial risk to taxpayers and households.
    Eliminating the present role Fannie Mae and Freddie Mac 
play would save taxpayers billions of dollars by eliminating 
the tax, regulatory, and debt subsidy that has held mortgage 
rates lower and induced U.S. households to take on more debt-
related consumption; many of these households end up 
    In conclusion, Congress should consider beginning the 
process of winding down the GSEs and housing finance market and 
establish a market free from the distortions of this 
institutional arrangement.
    Thank you for your time. I welcome your subsequent 
    [The prepared statement of Mr. Ligon can be found on page 
48 of the appendix.]
    Chairman Garrett. And I thank you.
    Next, Mr. Rosner, author of ``Reckless Endangerment.'' We 
appreciate you being on the panel. You are recognized for 5 


    Mr. Rosner. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee for inviting me to 
testify on this important subject.
    In July 2001, I authored a paper entitled, ``Housing in the 
New Millennium: A Home Without Equity is Just a Rental with 
Debt.'' The executive summary of that paper noted, ``There are 
elements in place for the housing sector to continue to 
experience growth well above GDP.'' But I noted, ``It appears 
that a large portion of the housing sector's growth in the 
1990s came from the easing of the credit underwriting process. 
That easing included drastic reduction in minimum downpayments, 
focused effort to target the low-income borrower, changes in 
the appraisal process that have led to widespread over-
appraisal, over valuation problems.''
    I concluded, ``If these trends remain in place, it is 
likely that the home purchase boom of the past decade will 
continue unabated,'' but warned, ``The virtuous cycle of 
increasing homeownership due to greater leverage has the 
potential to become a vicious cycle of lower home prices due to 
an accelerating rate of foreclosures.''
    In the mid-1990s, the GSEs were repurposed to direct social 
policy through the mortgage markets. The combination of using 
the GSEs as tools of social policy and falling interest rates 
built the foundation of the housing bubble.
    In early 1993, the Clinton Administration realized the GSEs 
could be used to drive capital investment for housing and 
community development and, as Susan Wachter noted in 2003, 
``The goal of Federal chartering of Fannie Mae and Freddie Mac 
is to achieve public policy objectives, including the promotion 
of nationwide homeownership through the purchase and 
securitization of mortgages.''
    She went on to note that, ``Through lower mortgage and 
downpayment rates that would not prevail but for the presence 
of the GSEs, they expanded homeownership.''
    In 1994, the Administration set out to raise the 
homeownership rate from 65 to 70 percent by the year 2000 and 
recognized this can be done almost entirely off-budget through 
among others, Fannie Mae and Freddie Mac.
    In 1994, the Administration created the national 
homeownership strategy with the goal of using the GSEs to 
provide low and no downpayment loans to low-income purchasers 
even those ``the private mortgage market had deemed to be 
    Treasury Secretary Rubin recognized many of the risks 
associated with increasing lending to the most at-risk 
borrowers. Still, the Clinton Administration plans continued.
    Reversing major trends, homeownership began to rise in 
1995. In 1989, only 7 percent of home mortgages were made with 
debt less than 10 percent down. By 1999, that number reached 50 
    While the GSEs were certainly a key driver of these 
results, other government actions, including fraud and falling 
interest rates also fueled the expansion.
    By increasing investor confidence in low and no downpayment 
mortgages, the GSEs seasoned the market, but they were surely 
not the only culprits.
    In 2001, after much lobbying, the Basel Committee 
determined that private label securities should carry the same 
risk ratings as correspondingly rated GSE products. This action 
opened the floodgates to reckless, private label securitization 
of the most toxic mortgage products.
    Banks and investment banks, which had sought to reduce 
their exposures to consumer lending, used their branch network 
and third-party lenders to originate loans to distribute 
through securitization.
    By 2002, the private label securitization market was now at 
ease with changes made in 2000 by the GSEs which had expanded 
their purchase to include Alt-A and subprime mortgages as well 
as private label mortgage securities.
    Private issuers aggressively targeted borrowers with lower 
downpayments, lower FICO scores, lower documentation, and 
higher debt-to-income and higher loan-to-value. PLS activity 
    Securitization rates skyrocketed. As the PLS market took 
off, investment banks and third-party originator partners 
created more and more risky products with the support of credit 
rating agencies, their absurd analysis and the CDO market.
    For the first few years, the GSEs avoided direct 
competition with these lenders, but became the largest 
purchasers of private label securities. By 2007, interest-only, 
subprime, Alt-A, and negative amortization loans were 20 
percent of the GSEs book of business.
    By early 2006, it was clear that decreased funding for RMBS 
could set off a downward spiral in credit availability that 
could deprive individuals of homeownership and substantially 
hurt the U.S. economy.
    Now, on the GSEs, there is nothing specifically wrong with 
the entities whose purpose it is to support liquidity in the 
secondary mortgage market. In fact, there is a substantial need 
for such a function.
    The problem is the use of quasi-private institutions as 
tools of social policy to drive housing subsidies to markets 
through an off-balance sheet subsidy arbitraged by private 
market participants.
    The GSEs were no longer merely supporting liquidity in the 
secondary market, as they had been created to do, their 
purchase of almost 25 percent of private label securities 
fostered distortive excess market liquidity.
    Still, there is much to be lauded in the GSEs as they 
existed prior to the 1990s. Some of those features are still in 
place and provide value.
    While there are proposals to replace the GSEs with 
alternatives, those seem to transfer many of the subsidies the 
GSEs receive to other private institutions. To merely replace 
GSEs will result in significant loss of value of their 
proprietary assets.
    Understandably, the GSEs have become a politically charged 
subject, but it is important to remember they had previously 
been valuable tools of financial intermediation. Repairing 
their failures, seeking repayment of $140 billion owed to U.S. 
taxpayers, reducing risk to the taxpayer, eliminating implied 
guarantees, preventing their use as tools of social policy, 
eliminating investment portfolios and ensuring they provide 
backstop liquidity rather than excess liquidity is an 
achievable goal and would place them in their proper role as 
countercyclical buffers in support of private mortgage markets.
    Thank you.
    [The prepared statement of Mr. Rosner can be found on page 
62 of the appendix.]
    Chairman Garrett. And I thank you for your testimony. Next, 
Dr. Wachter from the Institute for Urban Research, among other 
titles. You are recognized for 5 minutes.


    Ms. Wachter. Thank you, Chairman Garrett, Ranking Member 
Maloney, and other distinguished members of the subcommittee. I 
am honored by the invitation to testify at today's hearing.
    Government has, in policy, failed homeowners and taxpayers 
and it is important to understand why. The GSEs contributed to 
the meltdown. The direct cause of the crisis was the 
proliferation of poorly underwritten and risky mortgage 
    The most risky products were funded through private label 
securitization. We know now, but we did not know in real-time 
to what extent the shift towards unsound lending was occurring.
    Non-traditional and aggressive mortgages such as teaser 
rate ARMs and interest-only mortgages proliferated in the years 
2003 to 2006 changing from their role as niche products to 
become nearly 50 percent of the origination market at the 
height of the bubble.
    In addition, the extent to which consolidated loan-to-value 
ratios increased through second liens was not then, nor is it 
known today. Non-agency, private label securitizers issued over 
30 percent more mortgage-backed securities than the GSEs during 
these years.
    As private label securitization expanded, leverage to these 
entities increased through financial derivatives and 
synthetics, such as CDO, CDO-squared, and CDS.
    The amount of the increasing leverage introduced by the 
issuance of CDO, CDO-squared, and CDS was not known. The 
deterioration in the quality of the underlying mortgages was 
not known. The rise in prices enabled by the credit expansion 
masked the increase in credit risk.
    If borrowers were having trouble with payments, which they 
were, homes could be sold and mortgages could be refinanced as 
long as prices were rising.
    But after 2006, when prices peaked and started to decline, 
mortgage delinquencies, defaults, and foreclosures started 
their inevitable upward course.
    In the panic of mid-2007, private label security-issuing 
entities imploded. The issuance of new private label securities 
went from $1 trillion to effectively zero.
    The U.S. economy faced the real threat of a second Great 
Depression. The housing price decline of 30 percent, only now 
being reversed, was due to this dynamic: an unknown, unsourced, 
unidentified, unrecognized increase in leverage and 
deterioration in the quality of leverage.
    As I stated, the GSEs contributed to the crisis. The GSEs 
were part of the irresponsible expansion of credit, but other 
entities securitized the riskiest products.
    There is, in fact, a simple way to measure the failure of 
the GSEs relative to other entities. All we have to do is 
examine default rates. The GSE's delinquency rates were and are 
far below those of non-GSE securitized loans.
    The distribution of mortgage failure is apparent in the 
performance of mortgages underlying securitization, as shown in 
Exhibit C, which I request be entered in the official record 
along with the other exhibits in my testimony.
    Failure of the GSE-securitized loans was one-fifth or less 
of the failure of other entities' securitizations.
    However, in a broad sense, the GSEs or their overseer had a 
larger responsibility, which they did fail to fulfill. The 
failure to identify credit and systemic risk in the markets in 
which they operated was at the heart of the financial crisis. 
No entity was looking out for the U.S. taxpayer.
    We know from this crisis and from previous crises that 
markets do not self-correct in the absence of arbitrage, in the 
absence of security sales, pricing and trading of risk. For 
this, we must have market standardization and transparency.
    This role is an essential requirement for effective markets 
and it requires a coordination platform for its realization. 
This need not be performed by the GSEs or their regulator, 
although such a role had been theirs in the stable decades 
before the crisis.
    The role is a necessary one. We can rebuild a resilient 
housing finance system. We can provide an opportunity for 
sustainable homeownership for future Americans.
    But, in order to do so, we must understand and correct the 
failures of the past. I thank you for the opportunity to 
testify today and I welcome your questions.
    [The prepared statement of Dr. Wachter can be found on page 
72 of the appendix.]
    Chairman Garrett. Thank you. Thank you for your testimony.
    Dr. White, from our neck of the woods at NYU, you are 
welcomed to the panel and you are recognized now for 5 minutes.


    Mr. White. Thank you, Chairman Garrett, Ranking Member 
Maloney, and members of the subcommittee. I appreciate the 
opportunity to testify today. I am pleased to be here on this 
important topic. My name is Lawrence J. White. I am a professor 
of economics at the NYU Stern School of Business.
    As my statement makes clear, during 1986 to 1989, I was one 
of the Board Members of the Federal Home Loan Bank Board and, 
in that capacity I also served on the board of Freddie Mac.
    When I left government service in August of 1989, I also 
left the board of Freddie Mac. Now, in the interest of full 
disclosure, I think I owe it to you to provide two more pieces 
of information.
    In 1997, Freddie Mac asked me to write an article on the 
importance of capital for financial institutions. I wish they 
had listened more closely.
    It was published in the journal that they published at the 
time, ``Secondary Mortgage Markets.'' That article is available 
on my Web site, easily accessed. I am very proud of it. I said 
all the right things. I was paid $5,000 for that article.
    In 2004, Fannie Mae asked me to come into their Wisconsin 
headquarters and talk to their advisory committee on the 
importance of capital. Again, I wish they had listened more 
    I was paid $2,000 for that talk plus my transportation 
expenses. I flew coach class both ways between New York City 
and Washington, D.C. I took street-hail taxi cabs to and from 
the airports. Full disclosure, ladies and gentleman.
    All right, I want to talk a little bit about the financial 
crisis. As Professor Wachter just indicated, in this process of 
housing prices going up sharply, for reasons that I don't fully 
understand, there was this boom. We now know it to have been a 
bubble. It started around 1997.
    And, as Professor Wachter just said, in that context, 
mortgages--if you believe that housing prices are always going 
to go up, mortgages are not going to be a problem because even 
if a borrower loses his or her job, gets hit by a truck, or has 
a serious illness, he or she can always sell the house at a 
profit and satisfy the mortgage in that way.
    Consequently, mortgage securities built on those mortgages 
are never going to be a problem. And, consequently, the 
traditional lending standards, the 20 percent downpayment, the 
good credit history, the adequate income, the adequate 
documentation; all of that goes out the window as well because 
mortgages are never going to be a problem.
    At the time, as Professor Wachter just said, we didn't 
really understand these things, but looking back, you can 
understand why this happens.
    Now, why people got into this mindset that housing prices 
would always go up, I don't really understand. That is not what 
we teach at the Stern School of Business. I am sure that is not 
what Professor Wachter and her colleagues teach at Wharton, but 
it was so.
    Flip your house, all the books, all the television 
programs, they were real. Where were Fannie and Freddie in all 
this? They were special enterprises as you know. Unfortunately, 
among their specialness, they had inadequate capital.
    They went into those lower quality mortgages somewhere in 
the mid-1990s, and may have been responsible for a little bit 
of the starting of the boom.
    The boom went on primarily, as Professor Wachter just 
pointed out, because of the private sector expansion of the 
lower quality mortgages for the reasons I just described and 
their securitization.
    Then, Fannie and Freddie do go more deeply into lower 
quality mortgages around 2003, 2004. There are just some 
striking diagrams, figures at the end of my testimony that show 
how from 2004 onward, those mortgages through 2008 are just 
different from what preceded them.
    Unfortunately, all good things must come to an end. Bubbles 
will eventually burst. And, in 2006, prices started to go down. 
Those mortgages can't survive even a stable environment rather 
than--as well as a declining environment.
    Foreclosures increase, the mortgage sector experiences 
losses, Fannie and Freddie, being inadequately capitalized, not 
enough capital, experience losses; Freddie for the first time 
in 2007, Fannie for the first time since 1985.
    The losses are so severe in 2008 that they are put into 
conservatorship. The Treasury covers all their liabilities. At 
the time, I wasn't so sure. Looking back, I think this was a 
smart thing. It prevented the crisis from getting worse at the 
    But Lehman goes into bankruptcy 1 week later and, then, the 
thin capital levels across the financial sector really bite. 
There are two important lessons from all of this.
    First, beware of implicit guarantees, which is what 
protected Fannie and Freddie. Beware of underpriced guarantees. 
Indeed, beware of guarantees more generally.
    And, second, the importance of good, rigorous, vigorous, 
prudential regulation of systemic, large financial institutions 
with high capital requirements at their heart, terrifically 
    Thank you for the opportunity. I would be happy to respond 
to questions.
    [The prepared statement of Dr. White can be found on page 
79 of the appendix.]
    Chairman Garrett. Thank you for your testimony. Thank you 
for your clarification on your travel arrangements and what 
have you. I appreciate that as well for all the transparency. 
Would that always be the case. Thank you.
    I now recognize myself for 5 minutes for questions. And 
just to start off with, I know Dr. Wachter made the comment 
that no entity was looking out for the U.S. taxpayer.
    I will just give a little response to that by saying that, 
at least as the gentleman from California mentioned before, 
some people within this entity were attempting to look out for 
the U.S. taxpayers by putting some capital requirements and 
other requirements onto the GSEs, but we were stymied, as he 
indicated, across the aisle and in the Senate.
    But I will start with Mr. Rosner. Can you go into a little 
bit more detail as to the effect of the lower underwriting 
standards, and maybe you can just play off of what Dr. Wachter 
said, that GSEs were part of the problem, but the default rate 
outside of the GSEs was higher?
    What I heard there, and you can tell me if I am right or 
wrong, is that with lower underwriting standards, maybe you get 
the effect of, what, cherry-picking going on? Am I right or 
wrong? I will just throw it to you.
    Mr. Rosner. First of all, I think cherry-picking was a real 
issue for a very long time. The GSEs would cherry-pick both the 
private market and FHA for a long time. And that was one of the 
market complaints about the Enterprises for a long time.
    I would also point out that definitionally where the market 
was--the private market was completely unfettered, the GSEs 
did, in fact, still have some statutory limitations upon them 
which constrained them somewhat.
    That said, I think we have to also consider, as I said, the 
large impact that their purchases of private label securities 
had on the rest of the private label market because they were 
the bid in the market when you are buying 25 percent and you 
are adding comfort to the market.
    In terms of the 2004 or the dating of the actual bubble, it 
is interesting to note that what we think of as the bubble is 
really 2004 onward. And, in reality, home prices peaked in the 
fourth quarter of 2004, the first quarter of 2005.
    All of the activity that we saw--
    Ms. Wachter. That is not true.
    Mr. White. Case-Shiller--
    Mr. Rosner. The Case-Shiller--
    Mr. White. 2006.
    Mr. Rosner. If you look at the--I will show you the 
    Mr. White. Okay.
    Mr. Rosner. Anyway, 40 percent of all--
    Mr. White. --two people can differ.
    Mr. Rosner. Forty percent of all home sales between 2004 
and 2007 were essentially second homes and investment 
properties and the bulk of the rest of the remaining were 
    So the push for homeownership--the goals of increasing 
homeownership really didn't have anything to do with the 
    Ms. Wachter. Oh I see. I am sorry. You meant to say 
homeownership rates--
    Mr. Rosner. I am sorry. Right. I apologize. Homeownership 
rates--I am sorry.
    Chairman Garrett. Looks like we have three academics here.
    Mr. White. These two people can agree.
    Mr. Rosner. Peaked in the further quarter of 2004--
    Ms. Wachter. Right.
    Mr. Rosner. And so, all of the bubble period was really 
refinancing, second home, and investment property speculation. 
The GSE's purchase during those periods of large portions of 
private-label securities fostered that speculation and access 
liquidity unnecessarily.
    And rampantly, I would also take a little bit of a 
disagreement with the notion that nobody was trying to ensure 
the safety and soundness. I remember very well--I was very 
involved in spending time in Washington at the time--a very 
weakened and hobbled regulator that was constantly neutered by 
Congress, constantly neutered by the Administration, constantly 
neutered by HUD performance goals, when it did try and take 
actions for safety and soundness.
    Chairman Garrett. Great. Thank you for that last point as 
well. Let me just move down the aisle there then. Mr. Ligon, so 
we have the subsidy for the GSEs. And the question is, who 
benefits, and who is hurt by it? We heard part of the 
explanation with regard to failure, the underwriting standards. 
But who actually--does the homeowner benefit directly, 
significantly from the subsidy, or are the other players; the 
investors, the executives over there, the homebuilders, the 
home sellers, that sort of thing? Who benefits and who is hurt 
by this?
    Mr. Ligon. The subsidy to Fannie Mae and Freddie Mac, in 
particular, cost the taxpayer, in normal-market circumstances, 
anywhere between roughly $7 billion to $20 billion annually. 
Not all of that is going to be transferred down to the 
borrower. There is a portion that is retained by the 
shareholder. Some of it is retained down to the--or passed down 
to the borrower.
    In terms of interest rate terms, probably anywhere between 
7 basis points and 25 basis points of a subsidy to home 
    Chairman Garrett. Okay. So a small percentage, only of 25 
basis point goes to the homebuyer--homebuyer. So the rest--
    Mr. Ligon. --given the tradeoff--
    Chairman Garrett. At the same time, isn't what we are 
seeing here that the price of houses is going up? So I guess 
that benefits who, if the price of houses go up, the homebuyer 
or somebody else?
    Mr. Ligon. If home prices are going up, that benefits the 
home buyers.
    Chairman Garrett. The buyers are paying a higher amount.
    Mr. Ligon. Homebuyers, yes.
    Chairman Garrett. So wouldn't it be the home seller, and 
the builder, and the REALTOR, and all those who benefit? So 
those parts of the complex are benefiting. But the homebuyer 
actually is put at a disadvantage, is he not, because his price 
is higher, and he is only getting a marginal benefit. Would 
that be fair to say?
    Mr. Ligon. Yes, I would agree with that.
    Chairman Garrett. Thank you. And with that, I now yield to 
the gentlelady from New York for 5 minutes.
    Mrs. Maloney. Professor Wachter, could you elaborate on 
what would happen in the private market? Would the private 
market be able to, or would they assume the volume of business 
done by Fannie and Freddie? And what would the impact be on the 
30-year mortgage loan, the cost of it? Would it be affordable? 
Could you elaborate on that?
    Ms. Wachter. Yes. Thank you for those questions. There are 
two questions. First of all, what would happen to the 30-year, 
fixed-rate mortgage in the absence of an entity that took on 
the role of Fannie and Freddie? And the answer is that there 
very likely would not be an option of a 30-year, fixed-rate 
    Throughout the world, the adjustable-rate mortgage is in 
fact what prevails. There are only a few other economies with 
sustainable--of course, we did not have a sustainable mortgage 
system. But there are only a few other economies with a 
sustainable, fixed-rate mortgage as part of the mortgage 
system. And that includes Germany.
    It is possible to have a 30-year, fixed-rate mortgage in a 
sustainable system. But in order to do so, there needs to be an 
entity that is overseeing and identifying risk. And other 
countries can give us some insight into this.
    But a banking system alone, there is no banking system with 
a fixed-rate mortgage. Banking systems support the adjustable-
rate mortgage, and for good reason. We had a crisis in this 
country, the savings-and-loan crisis, which occurred because 
commercial banks and S&Ls were putting into their portfolio 30-
year, fixed-rate mortgages. That was not sustainable. It will 
not be sustainable going forward. Therefore, in order to 
protect American homeowners and taxpayers going forward, we 
need to replace Fannie and Freddie with other entities that 
will support the 30-year, fixed-rate mortgage.
    Why is this? I think we can all agree the interest rates 
have nowhere to go but up. If interest rates go from where they 
are today, perhaps double, go from 3 percent to 6 percent, that 
is equivalent to doubling mortgage payments. We would then put 
mortgage borrowers in a payment shock, which could bring down 
the entire economy, if we were only in our mortgage book of 
nooses, if we were relying on adjustable-rate mortgages. 
Fortunately, we are not, we have not, and hopefully, we will 
not, going forward.
    Mrs. Maloney. Could you comment on whether or not you 
believe the private market can or would absorb the volume? You 
mentioned that they wouldn't for the 30-year mortgage. Would a 
15-year or a 5-year be replaced?
    Ms. Wachter. I think that yes, it could very well be a 5-
year. It could also be a 1-year, adjustable-rate mortgage. Of 
course, in any of those cases, it would be very subject to 
interest rate risk.
    There is no possibility--I think industry experts will 
confirm this--for the trillions of dollars that are supported 
today by the Fannie-Freddie entities to be taken over, at this 
point, by individual banking institutions.
    There is no likelihood at this point of entities stepping 
up to do this. That doesn't mean that we can rely on Fannie and 
Freddie going forward. It means that we must have a path to an 
alternative going forward.
    Mrs. Maloney. Could you discuss the differences between the 
single-family portfolio and the multi-family portfolio? Do the 
single-family and multi-family books of business need to be 
treated in the same way or a different way? How would they be 
treated in reform, going forward?
    Ms. Wachter. Thank you. I apologize. We should note that 
the multi-family portfolio is doing quite well in both Fannie 
and Freddie. We should also note that the bipartisan commission 
has come out in support of the multi-family functions 
continuing with government support. This is their position.
    There is a lack of clarity going forward as to whether 
multi-family and single-family should be supported by the same 
entity or a different entity, that is, whether they should be 
separate or not. There are arguments pro and con on that. But 
certainly, the need for information, for standards, and for 
monitoring is important on both the multi-family and the 
    And also, the issues of affordability are extremely 
important, not only on the single-family, but also on the 
multi-family, as rents continue to increase across America.
    Mrs. Maloney. Dr. White, can you name any country in the 
world that has a mortgage product like the 30-year, fixed-rate 
mortgage, that does not have some form of government support?
    Mr. White. International comparisons are not my strongest 
    Mrs. Maloney. So then, you agree with the professor?
    Mr. White. --on this. However, thank you for asking. First, 
despite the absence of securitization over the past few years, 
generally, the jumbo market, which isn't supported by any 
guarantee, has been able to support a 30-year fixed-rate 
    Second, and Professor Wachter is certainly right, that too 
much 30-year paper in depository institutions is just a recipe 
for disaster. I can show you the scars from my almost 3 years 
on the Federal Home Loan Bank Board about that.
    But there are large financial institutions. They are called 
``insurance companies,'' they are called ``life insurance 
companies,'' they are called ``pension funds,'' that have long-
lived obligations that ought to be interested in matching those 
obligations with long-lived assets, 30-year fixed-rate 
    And doing more things like helping deal with prepayment 
risk, and having reasonable prepayment fees in structure can 
help expand the market for 30-year, fixed-rate paper.
    Chairman Garrett. Great. Thank you very much for that 
answer. I will now turn to our vice chairman of the 
subcommittee, Mr. Hurt, who is recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman. Thank you again for 
holding this hearing. Obviously, it strikes me that as we try 
to figure out what the future of housing finance is, we need to 
understand the past. And the testimony here is very helpful.
    It also strikes me that what I have heard, and what I have 
learned in studying this, is that clearly, relaxed underwriting 
policies contributed to the crisis. The implicit government 
guarantee, that contributed.
    These are policies that come out of Washington and create, 
it strikes me, the moral hazard that leads to taxpayers being 
hurt, having to bail out these entities to the tune of $190 
billion. And it also obviously hurts the homeowner and the 
marketplace generally.
    And I guess my question is, as we look to the future--and I 
think that there are many on this panel, if not most, who would 
like to see the private sector come back into the secondary 
mortgage market. I guess as we look back over the history of 
this crisis--well, the history of housing finance over the last 
10, 15 years, I guess my question would be directed to Mr. 
Ligon and Mr. Rosner.
    What is the effect of the implied guarantee, and the 
relaxed underwriting standards? What effect has that had on the 
private marketplace? What is the effect of that?
    And if the GSEs had behaved differently in entering the 
subprime mortgage market, would that have prevented--is there a 
theory that says that we could have avoided and prevented the 
crisis in 2008? I will start with Mr. Ligon.
    Mr. Ligon. Most of those questions I will defer to Mr. 
Rosner. What I would say is to the extent that the guarantees 
had an effect on interest rates, there is research showing that 
there is little correlation between interest rates and prices.
    So removing that subsidy shouldn't have a huge effect going 
forward on the housing market and the economy. On the other 
questions, I will defer to Mr. Rosner.
    Mr. Rosner. Yes. Look, I don't think that the crisis itself 
would necessarily have been avoided were it not for the GSEs. I 
think that they certainly accelerated, exacerbated the issues.
    There were a lot of borrowers, though, who might not have 
qualified for a GSE loan in the first place, but were able to 
re-fi ahead of the crisis into one with appreciation, et 
cetera. And I think that does need to be considered, because 
that ends up also becoming the chance for further refinancing 
into riskier products down the road, which occurred.
    I think that we are overcomplicating something which is 
quite simple. If there are borrower classes that we feel need 
to have a subsidy behind them, that is an acceptable--I think a 
rightful purpose of government. Do it on balance sheet.
    That shouldn't be expected to be delivered through the 
markets, because definitionally, it ends up distorting an 
arbitrage. And by the way, the subsidies end up arbed away, not 
to the benefit of the borrower.
    So I think that is one of the things we should consider. I 
think it was--look, there was a conflict. There was a perfect 
storm. There was the falling interest rates, was a reality of 
this, and a major backdrop of this. And it accelerated 
behaviors that otherwise might not have occurred, along with 
the implied government guarantee, and the push to expand 
homeownership beyond reasonable levels. And I think that is 
also very important.
    The leverage that was in the system--and Professor Wachter 
is right--the leverage in the securities--which I wrote about 
extensively in 2006, warning we were going to have a CDO and 
MBS market meltdown that was going to bring the housing market 
with it--were part of it.
    But also, the leverage of increasing homeownership rates in 
borrower classes that probably couldn't be sustained is 
something that, frankly, if you will see in the footnotes, 
Secretary Rubin warned about in, I think it was 1998, if the 
Administration pushed forward.
    Mr. Hurt. Got it. Thank you. I yield back the balance of my 
    Chairman Garrett. The gentleman yields back. The gentleman 
from California is recognized.
    Mr. Sherman. I have a few preliminary comments. First, 
almost no one in this country saw, in 2007, where we would be 
in 2008. The few who did sold Countrywide stocks short, and 
they are billionaires.
    Now, a few others had an inkling, had a fear, had some 
anxiety, maybe made a comment. But if you didn't bet your house 
on Countrywide going bankrupt, you weren't sure that this 
thing--I see Mr. Rosner believes otherwise.
    I am applying this to only 99 percent. There may have been 
a few people who knew that we were headed for disaster, but 
didn't bet on it. I think there are one or two people who 
actually bet on this happening. And they are billionaires 
    Looking back on it, it is pretty obvious. I saw one of the 
most interesting charts, which shows median home price compared 
to median family income. And if you had looked at that chart on 
the first day of 2007, you would have sold your Countrywide 
stock short. But nobody--I didn't look at that then. I looked 
at it afterwards.
    Everybody who bought mortgages in 2007 lost money, even if 
they were buying the primest of the prime, because even if you 
have the best underwriting standards in the world, some people 
get divorced, some people get ill, some people lose their job.
    And in the real-estate market of 2006, that meant they sold 
their house at a big profit. The divorce lawyers fought over 
the profit, and the bank got paid. That same thing happens in 
2010, and it is a short sale at best.
    Next, we needed better prudential regulation of the GSEs. 
Mr. Royce pointed out that he had a bill.
    I should point out that Richard Baker had a bill. We passed 
it through this committee. We passed it through this House. 
Chairman Oxley describes what happened to that bill. He says 
that it ``got the digital salute from the White House.'' He has 
failed to inform us which digit.
    And I am not saying that bill would have solved everything. 
Even those of us who voted for the bill didn't realize just how 
big a cliff we were headed off. But this House and this 
committee knew that we needed better prudential regulation.
    I will disagree with our chairman on one criticism of Dodd-
Frank, and that is, I don't think it was a rushed process. It 
certainly didn't seem rushed while I was in this room.
    We haven't commented on the credit rating agencies. They 
are the ones that gave Triple-A to Alt-A. They got paid by the 
bond issuers. They gave the bonds that were being issued a very 
high rating. Dodd-Frank gives the SEC the tools and the mandate 
to do something about this. And the SEC, of course, hasn't.
    There is a lot of comparison here of the GSEs to the 
private market. What is the ratio of the default rate of the 
private label versus the GSEs? I believe it was Dr. White, but 
it might have been Dr. Wachter, who said it was 5 to 1?
    Ms. Wachter. I have that in Exhibit 6. And I have the 
foreclosure rates for Fannie and Freddie, which were never 
higher than 2 percent. They are closer to 1--these are 
foreclosure rates--1 percent per quarter. Whereas, they were--
    Mr. Sherman. One percent per quarter?
    Ms. Wachter. Per quarter. Whereas, they were 5 percent to 7 
percent per quarter for private-label securities.
    Mr. Sherman. Now, when you say ``private label,'' that 
includes both the private subprime and the private prime?
    Ms. Wachter. Correct.
    Mr. Sherman. Wow. So you have the private label doing a 
very bad job of underwriting. You have the private sector 
credit union--credit rating agencies--doing an extremely bad 
job of evaluating the risk. You have private investors and 
banks doing a terrible job of evaluating the risk, and buying 
these CDOs. And some of our biggest banks needed bailouts as a 
    And we are here to see why the GSEs didn't get it right. 
The whole world didn't get it right. I believe this is a 
question that has somewhat been answered. But not only do we 
have 30-year mortgages here in this country, but they are 
freely pre-payable.
    If we didn't have those elements, 30-year, fixed--has my 
time expired?
    Chairman Garrett. Indeed, it has.
    Mr. Sherman. Indeed, it has. I will submit additional 
questions for the record. Thank you.
    Chairman Garrett. We turn now to--and this may be the last 
question, depending on when votes are, before we come back from 
votes. The gentleman from Alabama is recognized for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman. I would like unanimous 
consent to introduce a report that Chairman Frank and I called 
for in April of 2007, when we warned of the increasing 
foreclosures and the subprime lending. One thing we actually 
specifically asked for an investigation of, is what role has 
been played in the rise in subprime lending and risk-based loan 
practicing by alternative or exotic mortgages, including 
interest-only, high-loan-to-value, no documentation--
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Bachus. Thank you. I yield my time to the gentlelady 
from Missouri, Mrs. Wagner.
    Mrs. Wagner. Thank you very much. I thank the gentleman 
from Alabama, for yielding his time.
    Mr. Rosner, one of the things we have heard from Fannie and 
Freddie defenders since the crisis is that the GSEs were 
basically innocent bystanders, as underwriting standards 
deteriorated over the last couple of decades. And that in the 
mid-2000s, they were only trying to ``catch up'' with what the 
private sector was doing.
    I know in your book, which we have spoken about, ``Reckless 
Endangerment,'' you seem to refute that argument, saying in the 
prologue, ``Fannie Mae led the way in relaxing loan 
underwriting standards, a shift that was quickly followed by 
private lenders.''
    Then in chapter 4, you describe Fannie Mae's 1994 trillion-
dollar commitment to be ``spent on affordable housing goals.''
    This was 14 years before the financial crisis and way 
before anyone had ever heard of NINJA, or Alt-A, or no-doc 
loans. I am just wondering, what came first here, the chicken 
or the egg? Were Fannie and Freddie the ones that led the 
charge to decrease underwriting standards, or were they 
innocent bystanders as things went haywire?
    Mr. Rosner. As you point out, they did lead the charge. And 
frankly, it is not just the easing of underwriting standards. I 
think it is very important to remember that it is easing of 
underwriting standards and reductions of downpayments.
    And that is critically important, because the foreclosure 
rates would be significantly lower nationally if people had 
equity in their homes as home prices were falling. And the GSEs 
again, led the way to lower downpayments.
    In fact, the subprime industry--I was on the sell side in 
the space for the 1990s. And there was a subprime industry. It 
disappeared in 1998 and 1999 because of the Russian debt 
    But at that point, subprime was defined by the borrower, 
not by the product. And for the most part, the borrower was 
self-employed, or had a ding in their credit history. But they 
were required to bring more equity to the table in terms of a 
downpayment to get the mortgage. So it really was the GSEs in 
the market. It really was the GSEs making the rest of the 
market comfortable with concepts of lower downpayments, eased 
underwriting standards, lending to borrowers who historically 
would not have met underwriting standards.
    Remember, Beneficial and Household, two of the original 
subprime lenders in this country, which existed since the 
1950s, were subprime lenders to non-traditional borrowers, but 
again, required significant amount of equities be brought to 
the table on those products.
    We ended up with the GSEs offering low downpayment loans to 
lower and lower-quality borrowers.
    Mrs. Wagner. Let me ask you on that point, can you trace 
these activities of the GSEs back to the 1992 Act that created 
affordable housing goals for the GSE?
    Mr. Rosner. Yes. There is absolutely a piece of it that 
goes back to the 1992 Act in terms of affordable--in terms of 
the goals. But also in terms of the safety and soundness 
problems, and in terms of the cronyism that ultimately led to 
this, right?
    Again, it is not even just the GSEs per se, in terms of the 
role, as a provider of liquidity--not excess liquidity, 
liquidity to the secondary mortgage market. It is the special 
ties to government that created all of the perversions that 
    Mrs. Wagner. We had Ed Pinto here from AEI who spoke with 
us in the past week. And he noted in a post-crisis study that 
in 1990, 1 in 200 mortgages in the United States had 
downpayments of less than 3 percent. In 1999, that number was 1 
in 10. And by 2006, that number was 1 in 2.5 downpayments of 3 
percent. That is a dramatic increase in borrowing throughout 
the financial system.
    What role did GSEs play in increasing borrower leverage, 
and how did that cause or exacerbate this crisis? And I know 
our time is limited.
    Mr. Rosner. Again, the GSEs did lead the way in lowering 
downpayment. That was one of the concerns that I really 
highlighted in the 2001 report, ``Home Without Equity is a 
Rental with Debt,'' and one of the reasons that it became clear 
that we were going for an increasing leveraged system.
    And while that posed opportunities for growth well in 
excess of GDP, it ultimately would come at the risk of a 
vicious spiral downward in home prices on the other side.
    Mrs. Wagner. I thank you.
    Chairman Garrett. The gentlelady yields back. The 
gentlelady from Wisconsin, Ms. Moore, is now recognized for 5 
    Ms. Moore. Thank you, Mr. Chairman. I believe my colleague, 
Mrs. Wagner, had a very interesting line of questioning. And I 
guess I would like to follow up on that. She asked you if the--
first of all, let me back up and say that I am a little 
distressed about the name of this hearing, ``Fannie Mae and 
Freddie Mac: How Government Housing Policy Failed Homeowners 
and Taxpayers and Led to the Financial Crisis.''
    Would I be wrong to say that it is just government housing 
policy that led to the financial crisis, and that there are no 
other bad actors out there in the private sector? Is this a 
misleading title for this hearing? Maybe I will ask Dr. Wachter 
and Mr. White that question. Just yes or no?
    Chairman Garrett. --or gentlelady, is this a rose by any 
other name?
    Ms. Moore. Is that misleading? Are we just to assume that 
it is government housing policy and the GSEs that led to the 
meltdown Is that--
    Ms. Wachter. I don't think there is anybody on this panel 
who would agree that it is Fannie and Freddie Mac who are the 
primary cause of the meltdown.
    Ms. Moore. Okay. All right. Good. Thank you.
    Mr. White. Can I add something?
    Ms. Moore. Yes, Dr. White.
    Mr. White. Again, we have this bubble. The bubble bursts. 
If you look at the value of mortgages in 2006, and the value of 
mortgages in 2012, there was about a $7 trillion meltdown. 
Nobody likes $7 trillion of loss. But that turns out to be 
roughly the same amount as the tech bubble bursting.
    Ms. Moore. All right. I am reclaiming my time, because I 
will give you another chance to answer some other questions. I 
guess the point that I am making is that we are talking about 
government housing policies that led to this problem.
    Did the government--did the GSEs have anything to do with 
the faulty appraisals, the criminal appraisals, I would say, 
that were involved in the meltdown? Did they actually 
underwrite these loans where people didn't bring in--these 
NINJA loans? Did the GSEs give Triple-A ratings to these 
mortgage-backed securities, and CDS's?
    I am not trying to say that the GSEs are totally innocent 
here, but I guess what I am saying is, are there no other bad 
actors here other than the government policy that said that you 
ought to try to give more loans to low- and moderate-income 
    And by the way, that suggestion may have come about to the 
historians of the panel, because we found, as in the case of 
Milwaukee, Wisconsin, that there were a lot of moderate-income 
people, minorities, who qualified for loans, who were given 
subprime loans simply because they were Black or Hispanic, and 
led into higher, riskier loans because of that kind of 
    So were the government policies--there are plenty of good 
loans out there if you would give them an opportunity. So I 
guess I want to hear what Dr. White and Dr. Wachter say about 
    Mr. White. All right. As I had said earlier, once you are 
in this mindset of housing prices are always going to go up, 
then deterioration of underwriting standards, along with all 
those sorts of things that--
    Ms. Moore. But did the GSEs cause deterioration?
    Mr. White. They are part of it, but they are not the whole 
story. The other part is the extent to which there were 
households who were defrauded, put into inappropriate loans. I 
am going to have to use a technical term in economics here. The 
people who were responsible ought to burn in hell.
    Ms. Moore. And it is right, because--I sort of resent the 
implication that it was low-income Black people, and so on, 
that--and trying to serve good borrowers. And the GSEs that 
caused the problem, that there were no other bad actors in the 
private underwriting, and appraisal, and--
    Dr. Wachter, take the last 10 seconds.
    Ms. Wachter. It was definitely not the Community 
Reinvestment Act. It was not affordable housing goals that 
created this crisis.
    I think--and I think Dr. White and Mr. Rosner will agree 
with me--homeownership, as Mr. Rosner pointed out, peaked in 
2004. Minority homeownership peaked in 2004, and low-income 
homeownership peaked in 2004.
    The worst years of the crisis were after that: 2004; 2005; 
and 2006. This was not about support for low-income 
homeownership. This was not about support for undoing the years 
of discrimination against minorities where household wealth 
could be built up in sustainable homeownership.
    This was not the Community Reinvestment Act, which was a 
1990s phenomenon. This was not affordable housing goals. I 
think what we heard from Mr. Rosner and Dr. White is that there 
was some kind of ``in the ether'' change that allowed the 
private sector to take these concepts well.
    Indeed, the private sector did take these concepts, and 
they did in fact lead to FHA going from a market share of, 
what, about 10 percent to 3 percent, squeezing FHA down to 3 
percent. And also, Fannie and Freddie lost their market share 
as well in this period.
    Ms. Moore. Mr. Chairman, thank you for your indulgence.
    Chairman Garrett. The gentlelady yields back. The gentleman 
from Texas is recognized.
    Mr. Neugebauer. Thank you, Mr. Chairman. Just kind of a 
follow-up here. There was some question about the title of this 
hearing. It says, ``Fannie Mae and Freddie Mac: How Government 
Housing Policy Failed Homeowners and Taxpayers and Led to the 
Financial Crisis.''
    Mr. Ligon, is that a fair assessment?
    Mr. Ligon. It is a very fair assessment. Without Fannie and 
Freddie, it is entirely likely that the vast expansion of 
mortgage finance could not have taken place. GSEs were always 
backed by the Federal Government.
    And they have continued to extend their mortgage holdings 
at all quality levels, including a dangerous increase in risky 
holdings. That entirely weakened the entire financial position. 
And that, in turn, required even more government support, and 
at the end of the day, a substantial amount of taxpayer--
    Mr. Neugebauer. Thank you. I don't mean to cut you off. I 
have a couple of questions.
    Mr. Rosner, just your reflection on the title of the 
    Mr. Rosner. Again, I think the GSEs are really seizing the 
market. I think while we could say that they didn't make the 
worst loans, I think it is sort of disingenuous to suggest that 
their purchase of large portions of the private label market 
were meaningless and had no impact on the market.
    Mr. Neugebauer. In fact, it validated it. Isn't that 
    Mr. Rosner. That is exactly right.
    Mr. Neugebauer. Yes, it was a validation. While they are 
not a rating agency, the fact that they would buy that paper, 
and they were AAA-rated, was a validation. They thought that 
was a legitimate--
    Mr. Rosner. And I think that is a point, when it was raised 
before, they were, in fact, putting their AAA rating on these 
securities through the purchase.
    Mr. Neugebauer. And they were actually buying paper that 
they couldn't actually underwrite themselves.
    Mr. Rosner. Right. And to be fair in that regard, had they 
been kept to their original goal of having portfolios only for 
liquidity purposes rather than speculative purposes, the 
impacts would have been greatly diminished.
    Mr. Neugebauer. I want to move to another topic here 
because I think one of my colleagues mentioned that we need to 
talk about moving forward. And moving forward, housing finance 
is an important part of our economy. Financing is an important 
part of our economy. We finance cars, we finance houses, we 
finance small businesses.
    Not all of those transactions have to have a Federal nexus 
to be completed in the marketplace. And so moving forward, 
there are a number of plans out there that folks are bringing 
and I am glad to see all of the people who have a stake in this 
bringing these proposals forward. We welcome those.
    From your perspective, is there a necessity for a Federal 
nexus in housing finance across-the-board in this country?
    Mr. Rosner. Across-the-board, as in, outside of very 
defined borrower classes explicitly done by the government?
    Mr. Neugebauer. Yes.
    Mr. Rosner. Other than potentially as a well pricing, 
monoline insurer, no.
    Mr. Neugebauer. Because one of the things I find since I 
have been to Congress is that government doesn't know how to 
price risk. We have a flood insurance program that is 
underwater. No pun intended. We just heard a report the other 
day that FHA is now underwater because they have not been 
    And so the question is, if we have a structure there, how 
can we be assured that government is getting compensated for 
that risk?
    Mr. Rosner. Especially when government policy, more broadly 
in this area relative to any other area of lending that the 
government supports, incents leverage more than equity. And so 
part of the reason for a 30-year mortgage, or part of the value 
and part of the reason that we saw it distorted in this crisis, 
was the mortgage interest deduction, the ability to maximize 
    And so we are still not thinking in terms of any of the 
proposals that are out there. How do we help borrowers go back 
to the traditional notion of home-ownership where, at about the 
age of household formation, you take out a mortgage. Thirty 
years later at about the age of retirement, you have a mortgage 
burning party and you retire with what is your single largest 
retirement--wealth transfer asset.
    That is the proper role and that is what conveyed all of 
the social benefits of homeownership. Housing policies have 
been, in the past 15 years, inverted against that.
    Mr. Neugebauer. And I think you make an extremely good 
point there. I have been in the housing business for a number 
of years. We encourage people for homeownership. It is a way of 
saving for the future, building a nest egg.
    But what we want to make sure is that we are not creating, 
as I said in my opening statement, these policies where it 
blows up and a lot of these people who just got to retirement 
found out that instead of having equity in their house, or that 
they were going to have a greater asset value, their nest egg 
actually shrank because of the housing policy.
    And so what we want is a sustainable housing market and a 
sustainable housing finance system in this country.
    Thank you, and I yield back, Mr. Chairman.
    Chairman Garrett. The gentleman yields back. The last 
panelist will be the gentleman from Colorado and then, after 
that, we will go into recess. And we will be back in at noon.
    Mr. Perlmutter?
    Mr. Perlmutter. I want to thank the chairman and the panel 
for this hearing today, for livening up what is a rather gray 
and gloomy day outside. And I really do appreciate the chairman 
bringing this because it always gets my blood going.
    Because a crash on Wall Street, the failure of Fannie Mae 
and Freddie Mac, an abysmal response to Hurricane Katrina, and 
a misguided war in Iraq have one thing in common: the Bush 
    And it is no coincidence that Fannie Mae and Freddie Mac 
did well before the Bush Administration and are making billions 
of dollars now. It was the abuse and misuse of Fannie Mae and 
Freddie Mac by the Bush Administration that led to the failure 
of the housing market.
    So the title to today's hearing should be, ``Fannie Mae and 
Freddie Mac: How the Bush Administration Housing Policy Failed 
Homeowners and Taxpayers and Led to the Financial Crisis.'' And 
this is what I really appreciate, Mr. Chairman.
    I never thought I was going to get a chance to read the 
article which quotes a former chairman of the committee, Mr. 
Oxley. But on September 9, 2008, Chairman Oxley was interviewed 
by the Financial Times.
    He was upset, and he said, ``The dominant theme has been 
that Congress let the Government-Sponsored Enterprises morph 
into a creature that eventually threatened the U.S. financial 
system. Mike Oxley will have none of it.
    ``Instead, the Ohio Republican who headed the House 
Financial Services Committee until his retirement after midterm 
elections last year blames the mess on ideologues within the 
White House as well as Alan Greenspan, former Chairman of the 
Federal Reserve.
    ``Oxley fumes about the criticism of his House colleagues 
that they didn't do anything. He says, `All the hand-wringing 
and bed-wetting is going on without remembering how the House 
stepped up on this to reform the GSEs.' He says, `What did we 
get from the White House? We got a one-finger salute.'''
    So this is a situation. And Professor White, I was 
looking--or maybe it was Professor Wachter's report, but there 
is an Exhibit A to somebody's report.
    Ms. Wachter. Mine, yes.
    Mr. Perlmutter. Which definitely shows the bulge in 
purchases that were made between 2004 and 2007, which is when 
the no doc loans and the no downpayment loans were purchased 
and proliferated across the country.
    And it was in this period of time, it wasn't during the 
Clinton Administration, it wasn't during the prior Bush 
Administration, it wasn't during the Reagan Administration that 
we had this; it was just in this period of time.
    So Dr. Wachter, I have made a lot of statements because I 
just feel like there was been a lot of revisionist history 
going on here. This is an abuse of Fannie Mae and Freddie Mac 
during this period of time that I think led to what became a 
big housing crash and a crash on Wall Street.
    How do you respond to that?
    Ms. Wachter. Let me describe exhibit A. It shows almost 
perfect correlation between the market share of non-traditional 
mortgage products and private label securitization. It shows 
that these doubled in the years 2003 through 2007.
    It shows that they were at very moderate and very low 
levels from 1990. Non-traditional mortgages, from 1990 through 
2000, were niche products. In 2002, 2003, and 2004 is when, 
starting in December of 2003, when these non-traditional, very 
risky products gained market share, along with private label 
    Mr. Perlmutter. And I want to jump on something Dr. White 
said. There was a belief, or at least a sales job, that housing 
prices only go up.
    And in this period of time, and one of the reasons we have 
not placed Fannie Mae and Freddie Mac into liquidation, we have 
just placed them in a conservatorship, is because we 
repatriated a lot of money from China, from Saudi Arabia, and 
from Europe by, in effect, selling Fannie Mae and Freddie Mac 
bonds on the premise that housing prices only go up.
    Are you familiar with that at all?
    Mr. White. I know that there were substantial non-U.S. 
purchases, central banks of other countries, important 
financial institutions buying the Fannie and Freddie 
    That indeed was one of the contributing factors to the 
Treasury's decision to put them into conservatorship rather 
than a receivership, something that might involve liquidation. 
They needed to provide the reassurance to the non-U.S. 
purchasers that they were going to be kept whole. That is 
    Mr. Perlmutter. Thank you. And I would ask to put the 
article from September 9, 2008, into the record, Mr. Chairman.
    Chairman Garrett. Actually, I think that may have been done 
once already during this hearing. I assume it will be brought 
up repeatedly. And so, without objection, and also, before the 
gentleman from Colorado leaves--
    Mr. Perlmutter. Yes, sir.
    Chairman Garrett. --without objection, I would also--since 
you are the only person here who could object--like to put into 
the record a statement from HUD's affordable housing goals 
during not Bush's Administration but during the Clinton 
    And I will share it with you before I put it in the 
record--which says, ``Because the GSEs have a funding advantage 
over other market participants, they have the ability to under-
price their competitors and increase their market share.
    ``This advantage could allow the GSEs to eventually play a 
significant role in the subprime market and the line, 
therefore, between what today is considered a subprime loan 
versus a prime loan will likely deteriorate, making expansion 
by the GSEs look more like an increase in the prime market.
    ``So the difference between the prime and the subprime 
market will become less clear. And this melding of markets will 
occur even if many of the underlying characteristics of the 
subprime borrowers in the markets, i.e., non-GSEs, evaluation 
of the risk posed by these borrowers remains unchanged.''
    Again, this was during the Clinton Administration in the 
year 2000 by HUD's affordable lending goals.
    Mr. Perlmutter. And to my friend, the chairman, I have no 
objection to the introduction, just the conclusions you draw 
from these things.
    Chairman Garrett. I am just reading what they said back in 
2000. So with that, the committee stands in recess and, again, 
we will try to reconvene right at noon.
    Chairman Garrett. The committee will reconvene at this 
point and I thank the Members for coming back so promptly.
    Before we proceed, without objection, I ask unanimous 
consent to enter into the record a letter from the National 
Association of Federal Credit Unions with regard to today's 
    Without objection, it is so ordered.
    We will now turn to the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Let me start with Mr. Rosner with a point here, nobody has 
pointed out that if the GSEs were not playing in the market 
during 2004 and 2007, they would have been able to provide 
liquidity to the market as they are chartered to do in the 
    So in a way, this was so countercyclical by moving to a 
position where they were leveraged 100 to 1, $1.7 trillion or 
so in the portfolios.
    You had a situation where it was almost guaranteed and this 
was the fear of the Fed, because I remember the chairman 
conveying this to us, that if it started in the housing market, 
it would collapse the financial system. This is why they wanted 
regulation for systemic risk.
    But the other aspect of this that I think nobody attributed 
to it at the time, and I wanted to ask you about now, is that--
so instead, when everything collapses, they then have no 
capital, they then back away because of insolvency, so it is 
also the other side of that coin that hits us at exactly that 
    Could you comment on that?
    Mr. Rosner. Absolutely. I totally agree and that is one of 
the areas of failing that I think needs to be considered. It is 
under-considered and as we think about ways forward, which I 
think is very important, we need to make sure that whatever we 
replace them with is able to be countercyclical rather than 
procyclical and has the capital base to do exactly that or 
provide the functions of providing liquidity to the secondary 
mortgage market at the time that the market needs it because 
they did not provide excess liquidity; they underpriced that 
liquidity and put themselves at risk.
    Mr. Royce. Let me also make another observation because I 
think your analysis has been the most inclusive of any that I 
have seen, including your explanation of the Basal standards 
and how that also contributed to this.
    The one element of this that I think we haven't spent 
enough emphasis on because I do think that the setting of 
interest rates by the central bank at negative real interest 
rates 4 years running helped create the bubble to begin with. 
But what was so unusual here was that we set in place a moral 
hazard situation with the GSEs like no other.
    Other countries had the same problem because their Fed had 
followed--Ben Bernanke was then head of the New York Fed,--I 
went through the minutes at the time because we were arguing 
that the interest rate was set too low and that was his 
initiative, he pushed that and I think he got that very wrong.
    But what really compounded this was the GSEs; that 
collapsed the entire housing market, but on top of it, the 
GSE's instruments, oddly enough, were also used for capital, 
essentially by the banking systems.
    So maybe you could comment on that and my thoughts about 
those negative real interest rates which ran for that 4-year 
cycle and the role that played.
    Mr. Rosner. Obviously, that was one of the key drivers of 
that 2004 to 2007 period, because at a point where 
homeownership had already peaked, we saw the industry, both the 
GSEs and private players, have every incentive to get every 
last drop of juice that they could out of the system, squeezing 
it for refinancing, for speculative purchase of second homes 
and investment properties, frankly to the ultimate determent of 
the public.
    None of those features are likely to occur anytime soon--
the negative interest rate issue--in a going-forward system. 
But I do think that it speaks to the need for us to consider 
whether private enterprises securities should considered 
capital for the banking system because it also complicated the 
resolution, both of the banks that needed to be resolved and of 
the enterprise.
    Mr. Royce. Let me make one last point, and that was one of 
the things that impressed me about your work was that you were 
the first to recognize the accounting problems of the GSEs, at 
least as far as I recall, and you were the first to identify 
the peak that we hit. Ideas do have consequences and for the 
members here, I would really suggest a re-read of your 
testimony about the--how these different factors came together 
to create the crisis because going forward, we are going to 
have to do a lot of--we are going to have to overcompensate in 
terms of--it is going to take us a long time to get out of this 
because everything is overleveraged now and deleveraging is a 
very painful thing for societies to go through.
    But we have to learn the lessons in retrospect and that is 
why I think this hearing is so important.
    Mr. Chairman, thank you.
    I yield back.
    Chairman Garrett. The gentleman yields back. Thank you.
    Mr. Scott from Georgia is recognized for 5 minutes.
    Mr. Scott. I thank the chairman.
    I stated my concern and great worry about this whole issue 
in my opening statement. But last year in this very committee, 
we witnessed a strategy whereby the majority of some of our 
Republican friends attempted to pass piecemeal legislation to 
accelerate the dismantling of the GSEs without clearly 
identifying what should replace it. What is the alternative? 
And this is especially true. I don't think sometimes we gather 
the magnitude of what we are talking about here.
    These GSEs, Fannie and Freddie, accounted for 90 percent of 
the new mortgages in the last recordable year, I think around 
2008. That is a significant void, and I just think it is the 
height of irresponsibility for us to do this without some good 
discussion as to what is going to take its place? Should 
anything take its place? What impact will this have? We can 
talk about the bad things about Fannie and Freddie all we want, 
but still, that void is out there.
    And so I would like to ask this panel if each of you might 
be able to comment, especially you, Dr. Wachter, because I 
believe you hit the nail on the head, that should Congress even 
begin to consider the future of our housing finance without 
first taking a look to see what this would look like before we 
throw the baby out with the bath.
    What are the consequences of moving ahead without giving 
any thought to what will take the place of this gigantic void? 
Would you comment on that, Dr. Wachter? Because I think you 
were right when you said and raised doubts, everybody says the 
private sector is not going to be able to accomplish this. And 
those 30-year mortgages that you talk about will not continue 
to be affordable.
    So could we put some attention on this issue? What are we 
going to do?
    Ms. Wachter. I think the private sector itself would agree 
that they, at this point, could not step in to replace Fannie, 
Freddie, and FHA, which you are quite correct are 90 percent of 
the market.
    What we must do is set up a--we must move to a consensus 
where there is a coordinated platform, an understood way of 
going forward, we can't simply just dismantle Fannie and 
Freddie. If we did, that would lead to the destruction of the 
recovery. It would turn the recovery it into a disaster again, 
housing prices would plummet, bringing down financial sector--
causing systemic risk and this time, we are out of solutions. 
So it would be Great Depression 2.0 if we simply withdrew 
Fannie and Freddie and FHA without an alternative in place.
    Mr. Scott. And what might that alternative be? Is there an 
alternative that can take the place of Fannie and Freddie?
    Ms. Wachter. There is no alternative today, however, there 
are beginnings of discussions of, and we have heard some 
allusions on this panel, to some alternatives.
    Mr. Rosner suggests a monoline-government backstopped and 
that is a one possibility. The New York Fed has a utility 
approach. The bipartisan commission has come out with an 
insurance approach with again, a government backstop. I think 
it is quite similar to the proposal that Larry White and his 
team have come out with.
    So there are a number of alternatives and I think this 
first step is necessary is to build a consensus on the pros and 
cons of these alternatives before we think of dismantling the 
system which is keeping our economy afloat.
    Mr. Scott. Mr. Ligon from the Heritage Foundation, do you 
concur with what she just said?
    Mr. Ligon. Any redesign of the mortgage market must enforce 
competition between mortgage originations and the 
securitization and also ensure property capital requirements 
for all forms involved.
    I think a big problem of what we have right now is that a 
lot of the stuff is off balance and that there is a huge 
finance subsidy to Fannie Mae and Freddie Mac doing business. 
    Mr. Scott. But beyond that, you do agree that: one, the 
private market cannot fill this void alone; and two, we do need 
to replace it with something.
    Mr. Ligon. No, I don't agree with that. I think that the 
private market--there--you can make an argument that the 
private market is crowded out right now because of Fannie Mae 
and Freddie Mac and what they are doing.
    So to say that the private market couldn't step in or 
wouldn't step in is not necessarily the way I would put it.
    Mr. Scott. All right, thank you, Mr. Ligon.
    Ms. Wachter. If I may, I--
    Chairman Garrett. The gentleman's time has expired--
    Ms. Wachter. --is the private market itself would agree 
that they would step in or could step in.
    Chairman Garrett. Okay.
    Mr. Mulvaney is recognized for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Ordinarily, I sort of ignore the political blame game in 
these meetings, but since my colleague from Colorado, who is 
now no longer with us, was so effusive in his praise of the 
Bush Administration, in an attempt to sort of bring a balanced 
approach, Mr. Rosner, let me ask you a couple of quick 
questions. Who is James Johnson?
    Mr. Rosner. The former Chairman of Fannie Mae.
    Mr. Mulvaney. Did he have any political ties?
    Mr. Rosner. Significant political ties.
    Mr. Mulvaney. With who?
    Mr. Rosner. Both to the--well to Mondale, to the Clinton 
Administration, and frankly to most of Congress.
    Mr. Mulvaney. And I think he advised the Kerry 
Administration or the Kerry political candidate?
    Mr. Rosner. Absolutely.
    Mr. Mulvaney. Who is Franklin Delano Raines?
    Mr. Rosner. The former OMB Director who was also Chairman 
of Fannie Mae.
    Mr. Mulvaney. So, between 1991 and 2005, those were the two 
CEOs of Fannie Mae, right?
    Mr. Rosner. Correct.
    Mr. Mulvaney. Did Mr. Raines have any political 
    Mr. Rosner. Absolutely.
    Mr. Mulvaney. With what Administration is he most--
    Mr. Rosner. The Clinton Administration.
    Mr. Mulvaney. Thank you very much. So I think there is 
probably plenty of blame to go around. Let's talk about what 
actually happened, because I was reading Dr. Wachter's 
testimony. She talked about the fact that the amount of 
increasing leverage introduced by the issuers of CDO, CDO-
squared CDs was not known. Also, the deterioration of the 
quality of the mortgages used as collateral for these 
securities was not known. Is it so much they didn't know or 
they didn't care? Mr. Rosner?
    Mr. Rosner. First of all, it was known.
    Mr. Mulvaney. Okay.
    Mr. Rosner. The degree wasn't known, and this goes to a 
point that I think was raised by Representative Scott, which I 
would like to point out. Look, there are two separate issues 
here involving the private market and the GSEs. We need to fix 
securitization. Private label securitization, investors did not 
have adequate information about the underlying collateral in 
the pools. There was no standardization of reps. There was no 
standardization of policing of servicing agreements. That needs 
to happen before you can ever have the private markets come 
back in any meaningful way.
    I have been writing about this, screaming about this since 
2006, and it is vitally important if we hope to have the 
private markets come back.
    Mr. Mulvaney. But to a certain extent, isn't it true that I 
don't care about the risks if there is an implicit government 
guarantee of the underlying collateral?
    Mr. Rosner. I think there is a whole host of issues. So, 
yes that is true, but it is also true that if you are an 
investment grade chartered investor, you have the ability to 
say at almost--you are almost implored into the view that if I 
am--if I buy this and it fails, I won't get in trouble because 
everyone else ended up in this trade. And if I miss out on the 
outside returns of buying this highly risky AAA or AA rated 
security, I will get pegged by my investors.
    There was also herd behavior that occurred. So, yes I think 
you are right that you don't care as much, but I think there 
are a number of reasons for that.
    Mr. Mulvaney. Dr. Wachter, you go on to talk later in your 
testimony about--that we know from this crisis and from 
previous crises that markets do not sell correctly in the 
absence of arbitrage, that is, in the absence of markets in 
which securities sales can't price and trade risk. Would you at 
least agree with me that implicit government guarantee 
contributed to that lack of ability to price risk? There was no 
risk in this market, was there?
    Ms. Wachter. Yes, there was. There are private label 
securities, and private label securities were held in 
portfolio. AIG, for example, was creating CDS and those were 
held in portfolio, Lehman and other entities were heavily held 
private label securities, and they went under. The majority of 
riskiest mortgages were held by private entities, and they 
needed to be rescued by government. So the question of who 
cared and who knew is a very difficult question, if I may go 
back to that.
    Some people did know and they didn't care, in part because 
they were making a lot of fees. And I think that we totally 
agree on that, and your point being that Fannie and Freddie had 
implicit subsidies, but these were not subsidies that were an 
implicit guarantee. This implicit guarantee was not used for 
the most poorly underwritten, the riskiest mortgages that ended 
up defaulting at a 30 percent rate.
    Mr. Mulvaney. Mr. Ligon, let's talk a little bit about who 
benefited from these policies. I enjoyed your testimony, and I 
am trying to get a feel for the distribution of benefit. We 
spent a lot of money on this, the taxpayers did, over the 
course of the last several years. If you look back to the 
beginning of the--let's say the Johnson Administration to the 
early 1990's, who benefited most from the policies that this 
government put forward? The shareholders and the officers of 
Fannie Mae and Freddie Mac, taxpayers, or homeowners?
    Mr. Ligon. I am not sure how exactly to comment on that. I 
don't know a lot about the profits and the upsides to--
    Mr. Mulvaney. Mr. Rosner, did you--
    Mr. Rosner. Yes, absolutely, it was the management of the 
company. It was the shareholders who had the good fortune to 
own it at the right time. And in retrospect, it certainly 
wasn't many of the homeowners who ended up trapped in homes 
that they couldn't afford. Again, I think it is to some degree 
helpful to remember that none of these issues are necessarily 
implicit to the purpose of a government-sponsored entity, to 
provide liquidity to the secondary mortgage market, as much as 
it is a problem with the way they were distorted, manipulated, 
moved and ultimately run.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Chairman Garrett. The gentleman yields back. And we are 
cognizant of the fact that may happen if a new system is 
created, and allow for those problems to occur again. Mr. 
Peters is now recognized for 5 minutes.
    Mr. Peters. Thank you, Mr. Chairman, and I ask unanimous 
consent to enter into the record a letter from the National 
Association of Federal Credit Unions, and also the report from 
the Bipartisan Policy Center entitled, ``Housing America's 
Future: New Directions for National Policy.''
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Peters. Thank you, Mr. Chairman. And I would like to 
reference briefly the report from the Bipartisan Policy Center, 
which I have just entered into the record. They released the 
report last week, and it made some recommendations on the 
future. I want to focus on the future of housing finance. And 
the report was adopted by what I think was a very impressive 
list of bipartisan folks, former Senators, Governors, Cabinet 
Secretaries, and others who called for the future of the 
mortgage market, and for there to be a diminished role of 
government in that mortgage market, nevertheless to be some 
role for the government in stabilizing it.
    I would just like to ask a question of each of the 
panelists, if we could start with Mr. Ligon. Do you see any 
role for government in the mortgage market? And if so, what 
role do you see government playing in housing finance 10 years 
from now?
    Mr. Ligon. To the extent that there is a role for the 
Federal Government in housing policy and subsidizing housing 
and homeownership, it should be much smaller in scale, and very 
    Mr. Peters. What would it be?
    Mr. Ligon. Definitely not guaranteeing loans through Fannie 
Mae and Freddie Mac, or an institution like the GSEs.
    Mr. Peters. Mr. Rosner?
    Mr. Rosner. Going forward, the government's role should be 
explicitly backstopping those segments of the market that all 
of you decide should be backstopped. And that private be 
private. That it be a fully private--whether it is the GSEs and 
they survive, or otherwise. There needs to be a function to 
provide--or provide a backstop of liquidity to the secondary 
mortgage market, and I think that is important. But it needs to 
be fully private with no implicit or explicit government 
guarantee, so that markets can price effectively.
    And to the degree that there is any government role, it 
should be more along the lines of the VA loan program, where 
you define a borrower class and the government provides direct 
subsidies, and let the markets price private risk privately 
without government interference.
    Mr. Peters. Dr. Wachter?
    Ms. Wachter. There needs to be a role for government or a 
government-like entity in documenting risk. As we have heard 
from others, the problem of mispricing of risk was really a 
base cause of the problem. The underpricing of risk occurred 
across-the-board. But in any case, we did not have 
documentation of the creation of credit risk either of the 
private label securitization or indeed Fannie/Freddie's loans 
to the degree that second liens were not understood. The loan 
to value ratios increasing was not known, not recognized, not 
understood. So that role of documentation of risk is number 
    Number two, at this point, I think there is no doubt that 
there needs to be a government backstop, that needs to be 
explicitly priced. Number three, there needs to be private 
capital at risk and overseeing that market, setting up a 
platform to bring these parties together has to be the role of 
a cooperative utility and the government has to have an 
accountability behind this to make sure that the data standards 
are in fact in place.
    We can over time move to a system where there is a utility 
approach where the government is stepping back. That could 
happen. But for now, I think it is quite clear that we 
absolutely need a government guarantee in place, even though 
hopefully we can bring more private capital at risk over time.
    Mr. Peters. Dr. White?
    Mr. White. There is, I think, a fair degree of agreement 
here. First, for sure, an FHA that is focused on low- and 
moderate-income households sees it as its mission on budget, 
and expected that there is going to be a subsidy element to 
pursue this socially worthwhile effort of encouraging low- and 
moderate-income households who are close to the edge of, ``Do I 
buy? Do I rent?'' to become homeowners. It is absolutely 
    In the current housing environment, with a lot of 
uncertainty, there does still need to be a government element, 
but over the longer run, I believe that the private sector is 
capable. Again, we have to make sure that the natural buyers of 
long-life paper, like insurance companies, like pension funds, 
are not discouraged from doing that. And again, I think 
prepayment fees have to be part of the story. I think the 
private sector, some expansion by depositories, a lot more 
expansion by insurance companies and pension funds.
    I think that there can be a largely private, focused FHA on 
low- and moderate-income households, and the Fed will always be 
there as a backstop if things really do fall apart, as we have 
seen. The Fed is ready to step in and buy more mortgage 
securities. I think that kind of system is what the long run 
looks like.
    Chairman Garrett. I thank the gentleman and the gentleman 
yields back. The gentleman from Illinois is recognized for 5 
    Mr. Hultgren. Thank you, Chairman Garrett. Thank you all 
for being here today. Following up on a couple of points that 
my colleagues have brought up, I do have a few questions. I am 
going to address the first one to Dr. White. I wonder if you 
could comment briefly, I do have a couple of follow-up 
questions as well, but besides lower borrowing rates as a 
result of their implicit government guarantee, what other 
competitive advantages do Freddie and Fannie enjoy? My 
understanding is an estimated 40 basis point subsidy on GSE 
debt existed before the crisis. Would some of these other 
advantages add to that?
    Mr. White. It was primarily that they could borrow at 40 
basis points--two-fifths of a percentage point, less--they--
their rating, to the extent you want to believe ratings, were 
of--on a standalone basis AA-minus, but they were able actually 
to borrow in the markets at better than AAA rates, and that 
roughly translated to 40 basis points, two-fifths of a 
percentage point. Of that, about 25 basis points were passed 
through in the form of lower mortgage rates on conforming 
mortgages, about a quarter of a percentage point advantage.
    And why did the financial markets do this? Because they 
perceived these guys as special, and it turns out the 
perception was correct. Now, in addition to that borrowing 
advantage, they had lower capital requirements for holding 
mortgages, only 2.5 percent, as compared with 4 percent for a 
depository institution, or at least 4 percent. And especially 
on their mortgage guarantees, they had to hold only 0.45 
percent to cover the credit risk on the mortgage guarantee that 
a depository was expected to cover with 4 percent capital.
    So they had a major capital--much lower capital 
requirement, and again at the end of the day, that is what did 
them in. They did not have enough capital to cover the riskier 
portfolio--it is unclear whether it was even enough for the 
safe portfolio of the 1980s and early 1990s, but for sure it 
was not enough for the riskier portfolio that they had as of 
    Mr. Hultgren. Thank you. Let me--let's see, Mr. Rosner, you 
are nodding your head. I wondered if you would agree with some 
of those competitive advantages with the subsidy question? And 
just wondering, those benefits--that competitive advantage and 
benefits, were any of those passed on to homeowners?
    Mr. Rosner. Yes. I think as Professor White pointed out, 
some of it was passed on in lower rates. And other than that, 
no, most of them were retained. You also have to remember that 
the special relationship was further fostered by the fact that 
they weren't required to file with the SEC as other companies 
were, and they were tax exempt. Not the securities, the 
companies. So all of this led to the perception of them as 
being government-guaranteed entities all along. If I could, I 
would just make a quick point, transparency and liquidity led 
prices and value to converge. And one of the problems that has 
been absent in the mortgage market, the private label market, 
less important in the GSE market because there was an 
assumption that they were government guaranteed, is that price 
and value were always able to stay separate, because there was 
just not enough information. There was asymmetry of 
information, which really fostered the worst elements of the 
crisis. And so anything we do going forward, needs to repair 
    Mr. Hultgren. Let me talk about going forward. And I just 
have about a minute left, but Congress does want to continue to 
subsidize the mortgage market, if we choose to continue to help 
homebuyers, is there a better way? Mr. Rosner, you talked about 
it a little bit, just helping us crystallize this. One of my 
passions is, let's do the right thing, but let's not do any 
harm either. And so, is a government guarantee in the secondary 
market really the best way for homebuyers to see that subsidy? 
Or is there something else we can do?
    Mr. Rosner. No, I don't think the government guarantee of 
the secondary mortgage market is either necessary or 
beneficial. I think it puts us back on the same path. And part 
of the problem I have with most of the proposals that have been 
floating around is they really demonstrate that a rose by any 
other name is still a rose. And most of the policy proposals 
that we have seen frankly, are slightly different, but still 
essentially the same. The BPC report preserves a lot of those 
implicit guarantees. I am also a little bit concerned that it 
was conceived of by many of the people who brought us the GSE 
issue in the first place.
    And being run by some of those same people, as opposed to 
really coming in and saying, you know what? If we were to start 
with a clean slate, what would it look like? And again, it 
could include the GSEs, but you need to sever all of the 
government ties and implied government support, and we are 
still not really talking about that. We are rather talking 
about taking many of those same advantages, flushing $140 
billion that the Enterprises owe us, wiping out what value they 
do have in data and systems, et cetera, and transferring many 
of those same perverse benefits to new players.
    Mr. Hultgren. My time has expired. Thank you very much, and 
I yield back.
    Chairman Garrett. The gentleman from Delaware?
    Mr. Carney. Thank you very much, Mr. Chairman. Thank you 
for having this hearing, and thank you for those of you coming 
here on a snowy day for your testimony. It is been very 
interesting, and I am more interested in the future than I am 
in the past. I am more interested in what we should do to 
answer your last question, Mr. Rosner, which is, what should we 
do now? You said, what should we do if we could start from 
scratch? We are not exactly starting from scratch. What should 
we do, given where we are today? What we know happened? And 
where should we go? I thought there was some agreement among 
the three of you--Mr. Rosner, Dr. Wachter, and Dr. White--that 
there should be a role of some continuation of something that 
looks, maybe not similar, but has the same role in the second--
to create a secondary market. Is that an accurate read of what 
you said? Or Mr. Rosner what you just said seemed to be 
different than that? That there is still an appropriate role 
    Mr. Rosner. Liquidity provider, but that doesn't mean that 
it is government-owned, government-backstopped, or providing 
government subsidies, okay? So it could be a true private 
monoline, that prices credit--
    Mr. Carney. So are the three of you--
    Mr. Rosner. --on a countercyclical--
    Mr. Carney. I assume, Mr. Ligon, you are not interested in 
this? As I heard what you said, you don't think there is really 
an appropriate role? That the private market can handle it?
    Let me move on because my time is--are you familiar with 
the Treasury Department's White Paper? The Administration's 
White Paper on the various options? Could you comment on the 
options, and what you think we ought to focus on, as we 
Democrats and Republicans hopefully on this committee and in 
this Congress try to address this issue going forward, and 
answer Mr. Rosner's question. Dr. Wachter?
    Ms. Wachter. Yes, I would be pleased to do so. There were 
three alternatives put out on that White Paper. One was to have 
an entity which could immediately move to support the private 
sector if it collapsed. And my concern with that as a solution 
is it takes time to stand up such an entity. It would take 
months, a year, whatever. What do we do in the meantime? So I 
do think we need to have an entity in place, which can in fact 
act in moments of crisis--
    Mr. Carney. So what should it look like?
    Ms. Wachter. --so that--and if I may say, a crisis will 
come unless there is standardization and the ability to price 
and trade risk because there will be an underpricing race to 
the bottom, just as we have seen. So what should that entity 
look like? That entity at this point has to have, I believe, a 
government backstop with private capital. Going forward, that 
entity could be a monoline. Where I disagree is that monoline 
if ``is purely private sector'' would need to be carefully 
overseen by the Federal Government because the Federal 
Government, the taxpayer, owns that risk.
    And it needs to recognize that it owns that risk. If that 
monoline goes under, it is the Federal taxpayer who will 
support it.
    Mr. Carney. Regardless of whether it is explicitly defined, 
you don't believe in that?
    Ms. Wachter. We are absolutely back to the GSEs if we have 
a monoline, one monoline which is providing this, and that 
fails, we are back to the GSEs, that will be rescued.
    Mr. White. All right. As Dr. Wachter indicated, the 
Administration report 2 years ago had three choices. All three 
said there should be a clearly defined role for FHA, and I 
absolutely agree. They also said, and Dr. Wachter just 
reinforced that there has to be rigorous prudential regulation 
of any entities where the Federal Government, if push came to 
shove, would be on the hook. And again, strong, vigorous, 
prudential regulation. Adequate capital requirements have to be 
at the heart of that.
    After that, there is this issue of, is a government 
presence as an explicit backstop necessary? And again, 
certainly in the current environment. There is so much 
uncertainty out there. Half of the Dodd-Frank rules have not 
been finalized. In the mortgage area, the QRM, the Qualified 
Residential Mortgage rules, have yet to be finalized.
    Mr. Carney. My time is running out. So were you familiar 
with H.R. 1859, which is the Campbell-Peters bill, in the last 
Congress? Could you comment on that approach, Dr. Wachter?
    Ms. Wachter. Yes, it is an excellent approach.
    Mr. Carney. Excellent approach. Thank you very much, I 
yield back.
    Chairman Garrett. The gentleman yields back. Without 
objection, we will put 30 seconds on the clock for the 
gentleman from Alabama for an additional question.
    Mr. Bachus. Thank you. We talked about the Federal Reserve 
and perhaps the low interest rates, but I want to sort of set 
the record straight. I do recall that starting in 2005, I 
think, the Fed became aware of the rise in prices, and I would 
like you to comment. Did they not bump the interest rate up, I 
think 17 consecutive times, from 2005 to 2007 and were 
criticized for that?
    Ms. Wachter. Yes, absolutely and I am glad you have raised 
that. Because I was wondering whether I should step in. 
Interest rates actually bottomed in 2004. The Fed started 
pulling out money supply and interest rates started increasing 
as of 2004. Interest rates across-the-board 10 years started 
increasing in 2004, 2005, 2006. The worst years of the bubble. 
The Fed started to pull money out. Interest rates started going 
    Nonetheless, interest rates on private label securities 
decreased in that period. There was a race to the bottom. 
Despite the fact that the quality of the book of business 
deteriorated substantially, interest rates, over Treasuries 
collapsed. So there was a race to the bottom, a race to take on 
risk by the private label securities, in part because the 
information was not out there as how bad credit quality was 
    Mr. Bachus. Thank you. Now, I am going to ask unanimous 
consent to introduce three items. One is an article from June 
6, 2006, in The Charlotte Observer that highlighted some of our 
attempts to pass a subprime lending bill.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Bachus. The second is a letter I wrote the Honorable 
Barney Frank on September 28th where we proposed, we had a 
draft and he and I, which had a suitability standard, a yield 
spread premium and points and figures trigger. A prohibition on 
mandatory arbitration. A prohibition on prepayment penalties on 
loans less than $75,000. All of those were drivers by, and the 
right of an individual consumer to initiate private rights of 
action to enforce the provisions of the law, which was pretty 
radical in that day but it showed an alarm.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Bachus. And third, we requested--and I have referred to 
this before--the GAO to do a study and talked about several 
problems we saw, which came out in April 2007.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Bachus. And I will add that it shows really the 
perverse effect of heavy lobbying by the industry, which 
unfortunately retarded our efforts.
    Chairman Garrett. Without objection, it is so ordered, and 
those items will be entered into the record. I thank the 
gentleman for each of those. At this point, I yield to the 
gentlelady from California, the ranking member of the full 
Financial Services Committee, for 5 minutes.
    Ms. Waters. Thank you very much.
    Mr. Chairman and Mr. Ranking Member, I know that quite a 
bit of discussion has gone on during this hearing, and 
unfortunately I couldn't be here for all of it. But I have an 
early mission in this discussion about the future of the GSEs. 
I am anxious for both sides of the aisle to recognize the need 
and to come to grips with whether or not the private sector can 
supply the need for mortgages in a way that we have been 
accustomed to.
    With nearly $10 billion of single family residential 
mortgage debt outstanding, and with the Joint Center for 
Housing Studies at Harvard University projecting one million 
new households per year over the next decade, the question is, 
do you think that bank portfolio lending can provide the 
capital necessary to supply the U.S. market and maintain the 
homeownership rates to which we have become accustomed?
    If we can just agree, if both sides of the aisle can get an 
agreement on this, then I think we can start down the road to 
talking about what this perhaps private-public partnership can 
be. But if we get stuck thinking that somehow we have to get 
rid of these GSEs, and that somehow the private lenders can 
take care of the mortgage needs, I think we are in trouble.
    So what do you think about this? Is this something that you 
think we need to pay special attention to and come to some 
agreement on? And I guess that would be for Dr. Susan Wachter.
    Ms. Wachter. I don't think that the $10 trillion can be 
taken on by the banking system at this point. It is just a no-
starter, it won't, it cannot happen. And it is a recipe for 
disaster for the overall economy to assume that we can just 
pull Fannie and Freddie out and there will be funding for the 
mortgage market going forward.
    I think that the private sector itself would confirm that 
they could not step up to the plate with that kind of funding 
in mind. This is the largest debt backed in the world, book of 
business. And there is no way that it can go to portfolios of 
the banking system at this point and still have a 30-year 
fixed-rate mortgage. That simply is, it is not, it cannot 
happen. I don't think anyone could disagree with that. But I am 
interested to hear what others say.
    Ms. Waters. I suppose I can ask the other members of the 
panel. Does anyone else think differently? Is there anyone on 
this panel who believes that the private market can handle this 
debt? This kind of mortgage lending?
    Mr. Rosner. I would suggest that at this very moment, the 
answer would be ``no.'' But as Professor White has pointed out, 
the private market is a lot larger than bank balance sheets. It 
is the capital markets. So we first have to set about to repair 
the problems with securitization, to bring investors back. To 
bring comfort back to increased transparency and disclosure.
    In 1939, I guess, we created the Trust Indenture Act. I am 
still trying to figure out why we haven't created something 
similar for the ABS market.
    Ms. Waters. Excuse me, are you suggesting that some of the 
problems that we had with the subprime meltdown, those problems 
must be cured before we take a look at what we do with the 
    Mr. Rosner. No, what I am suggesting is if you want the 
private markets to play a significant role and fill any void 
that Congress chooses to pull away from, you first need to make 
sure that the mechanisms are in place for private capital to be 
able to price risk.
    Ms. Waters. So what you are saying is, you agree that there 
is a role for both government and the private sector to play?
    Mr. Rosner. I think there is a role for the government to 
play because it is already in there and playing. I think the 
goal should be, medium- and long-term, to pull the government 
out of the market except where we explicitly backstop it on the 
balance sheet. And we need to foster the ability of private 
market to price risk. And we haven't done any of that.
    The SECs had a Reg AB extension sitting in front of it for 
2 years and did nothing to force the increased transparency 
that investors deserve. That would help standardize and create 
the transparency so that securitization markets, private 
securitization markets could come back. You can't expect the 
private markets to do anything, until they have clarity as to 
what their contractural rights are--
    Ms. Waters. Excuse me, if I may, we have allowed the 
private markets to do a lot. Which finds us in the situation 
that we are in today. And so my question really is whether or 
not you think government has a significant role to play in 
these GSEs? Can they be in partnership with the private sector 
in order to do the kind of mortgage lending that we need? That 
is really what the question is. It is not whether or not we 
should wait to repair--
    Mr. Rosner. In answer to that question, I think that we 
should have the government explicitly focus on areas that it 
wants to put loans on its balance sheet. And other than that, 
there should be no implicit or partnership, I should say, 
between the government and private markets. That was the basis 
of the distortions that we have lived through.
    Mr. White. I want to add one thing, Congresswoman. There 
has been a lot of talk about a revival, not of Fannie and 
Freddie, but a revival of some kind of government guarantee or 
government backstop. And somehow that is linked to a 30-year 
fixed-rate mortgage. And it is important to remember the 
guarantee, the backstop would be on credit risk, not on 
interest rate risk. But the 30-year fixed-rate mortgage and its 
problems, is primarily one of interest rate risk and a 
government guarantee doesn't really deal with that.
    Now as Mr. Rosner just said, in the current environment 
with a lot of uncertainties and a lot of just unresolved, what 
are the rules? What is the information? There is clearly a 
strong role for government, as well as a focused role for FHA 
for dealing with the low- and moderate-income household 
segments of the market.
    But going forward, as the uncertainties are resolved, as 
private sector, as insurance companies, as pension funds become 
more comfortable with properly structured, lots of information, 
30-year paper, I think that can be handled. That doesn't mean 
eliminate FHA. FHA has a very valuable role to play. But it has 
to be clear, it has to be defined, it has to be on balance 
sheet. It shouldn't be implicit and foggy and hope for the 
best. That is a big part of how we got to where we are today.
    Chairman Garrett. The gentleman--
    Mr. Rosner. The concept of a partnership between private 
enterprise and government is, in and of itself, sort of a scary 
    Chairman Garrett. And on that scary concept, the 
gentlelady's time has expired. We will--
    Ms. Waters. I yield back.
    Chairman Garrett. The gentlelady yields back. And we 
    Mr. Ellison. Do you need more time? I yield to the 
gentlelady. Oh, okay, never mind.
    Chairman Garrett. The gentleman is recognized for the final 
5 minutes, and the last word.
    Mr. Ellison. Thank you, Mr. Chairman, and thank you, 
ranking member. And also let me thank the panel, you all have 
been helpful to our deliberations as we figure out how to move 
forward. One of the things that we are doing today, is not only 
exclusively focusing on what to do next, which is what my 
preference would be. But it is talking about what happened, 
because I think many of us hope that there are at least some 
lessons to be learned.
    I just want to ask a question, Mr. Rosner, again, thank you 
for your contribution. You were asked by one of my colleagues 
earlier, ``If GSEs had behaved differently in a subprime 
market, would that have prevented the crisis of 2008?'' Your 
answer was, ``I don't think that the crisis itself would have 
necessarily been avoided if not for the GSEs. I do think that 
they accelerated and exacerbated those issues.''
    And so we are here today, trying to make sure the record is 
right. We have a hearing entitled, ``Fannie Mae and Freddie 
Mac: How Government Housing Policy Failed Homeowners and 
Taxpayers--and here I want to emphasize--``Led to the Financial 
Crisis.'' Based on your response to Mr. Hurt, you do think that 
Fannie and Freddie played a role. But I think it is accurate to 
say that you don't agree that Fannie and Freddie's behavior led 
to the crisis. Is that a fair statement?
    Mr. Rosner. I would say that Fannie and Freddie's behavior 
seasoned the markets, created the foundation on which the 
crisis was able to occur. I would say separate housing policy 
from the GSEs further and government housing policies--
    Mr. Ellison. Okay.
    Mr. Rosner. --did in fact lead to the crisis.
    Mr. Ellison. It is interesting you would say that. Because 
on the one hand, you very clearly said they didn't lead it, but 
they exacerbated it. Now the statement you just gave me, made 
me think that you are sort of arguing that they did lead it. So 
I am not sure what you are saying.
    Mr. Rosner. ``Led'' and ``become the ultimate cause of'' 
are two different things. And so again, the crisis, let's go 
back to, one of the issues, I think the issue that a lot of us 
are having is, how do you date the crisis? How do you bound it? 
Did the crisis begin in 2004 and end in 2007, 2008, 2009?
    Mr. Ellison. Excuse me Mr. Rosner--
    Mr. Rosner. Or did the crisis begin before?
    Mr. Ellison. They only give me 5 minutes, I am sorry.
    Mr. Rosner. Sorry.
    Mr. Ellison. I wish we could hear more. But I read your 
book. And in your book you say, of all the partners in the 
homeownership push, no industry contributed more to corruption 
of the lending process than Wall Street. And then on another 
page, you say, ``Wall Street had financed the questionable 
mortgages before, of course, but it was during the manias 
climactic period of 2005 to 2006 that these firms' activities 
as the same primary enablers to the freewheeling lenders really 
went wild. No longer were the firms simply supplying capital to 
lenders trying to meet housing demand across America. Now Wall 
Street was supplying money to companies making increasingly 
poisonous loans to people with no ability to repay, and the 
firms knew precisely what they were doing.''
    Now again, we are in the very messy business of trying to 
apportion blame and fault. And I think that, as I said, my 
first comments were, that is unfortunate. But I didn't bring 
this on you, Mr. Rosner. The committee chairman did by naming 
the hearing as he did. And I just want the record to be clear, 
you clearly are not trying to minimize the role of the GSEs. 
You have made it clear. But if I may just be explicit one more 
time, you don't contend that they led to it, not withstanding 
other things that you do think, you don't contend that they led 
to it?
    Mr. Rosner. I don't contend--
    Mr. Ellison. Can you give me a simple answer to that 
    Mr. Rosner. I don't think it is a simple question.
    Mr. Ellison. Okay, that is fair. I get it. In other words, 
I will just let your words in the book and your comments on the 
record today stand--
    Mr. Rosner. ``Led to'' and ``caused'' are two different 
    Mr. Ellison. And because my problem isn't with you, Mr. 
Rosner, my problem is that we are, this is a serious problem 
which should be approached in a bipartisan way, and it isn't. 
And you are coming here to help us understand this crisis as 
best you understand it. People are trying to use your words to 
sort of make a particular point. I am trying to, I am giving 
credit to what you said. You said they contributed. You said 
they ended up playing a fatal role. But you also said they did 
not lead to it. Isn't that right?
    Mr. Rosner. So you accept that I contend that they played a 
critical role?
    Mr. Ellison. Yes.
    Mr. Rosner. Then I will accept what you are suggesting.
    Mr. Ellison. Okay, thank you. How much time--I am on the 
yellow light. Let me just ask you this, if you could tell 
Congress what they need to do, to make sure that ordinary 
income people with good credit can get a 30-year mortgage, what 
would you tell us we need to think about? Anybody who wants to 
    Ms. Wachter. We can't have a race to the bottom. You have 
to have standards. We have to have information that allows 
standards so that we can't have this stealth underwriting 
crisis, brought about by Wall Street, happen again. We had 
years of growing homeownership before the crisis. We can get 
back on that path.
    Mr. Ellison. Thank you.
    Mr. White. ``Conforming'' and ``conventional'' are terms 
that should be definitionally standard terms. And they became 
constantly more and more distorted. I think that is really the 
problem, once you set a standard, that standard can't creep 
over time. And the markets need to understand that is the 
standard, it is inviolable, and that is where it will stay.
    Mr. Ellison. Let me thank all of the panelists and you, Mr. 
Chairman, and the ranking member.
    Chairman Garrett. The gentleman yields back. And with that, 
let me just say, first of all, thank you to the panel. It is 
important testimony that we received today. We heard unanimity 
from both sides of the aisle that we need to go forward on this 
issue of the mortgage housing market, to try to fix it.
    Today's hearing was important in that regard, that before 
you can solve a problem, before we can fix a problem, you have 
to know what caused the problem. In order to go forward, you 
have to know where you have been. And so, that was the point of 
today's hearing. I think we heard significant testimony--
    Mr. Bachus. Mr. Chairman?
    Chairman Garrett. --out of that. The gentleman from 
    Mr. Bachus. Mr. Chairman, let me second that. I think 
Shakespeare originated, ``the past is the prologue of the 
future,'' in ``The Tempest.'' But this has been a very 
educational panel, and I want to thank all of you. And I would 
say that all our Members who didn't go through this crisis, 
should read and I think by reading all four testimonies, we can 
certainly get some guideposts for the future.
    Mr. Ligon. Thank you, Congressman.
    Chairman Garrett. I thought that you were going to suggest 
that they all read Mr. Rosner's book to help support the sale 
of that book.
    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 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And again, thank you all. Thank you to the ranking member 
for staying with us through all of this and for her 
participation as well. The hearing is adjourned.
    [Whereupon, at 1:01 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             March 6, 2013