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



 
                      SUSTAINABLE HOUSING FINANCE:
                       AN UPDATE FROM THE FEDERAL
                       HOUSING FINANCE AGENCY ON
                        THE GSE CONSERVATORSHIPS
=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 19, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 113-8




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    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
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            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
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    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
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 19, 2013...............................................     1
Appendix:
    March 19, 2013...............................................    53

                               WITNESSES
                        Tuesday, March 19, 2013

DeMarco, Edward J., Acting Director, Federal Housing Finance 
  Agency (FHFA)..................................................     9

                                APPENDIX

Prepared statements:
    DeMarco, Edward J............................................    54

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the National Multi Housing Council 
      (NMHC) and the National Apartment Association (NAA)........    70
Maloney, Hon. Carolyn:
    Letter to the Federal Housing Finance Agency from the New 
      York congressional delegation, dated November 7, 2012......    90
Waters, Hon. Maxine:
    Written statement of Empowering and Strengthening Ohio's 
      People (ESOP)..............................................    93
DeMarco, Edward J.:
    Written responses to questions submitted by Representative 
      Ellison....................................................    96
    Written responses to questions submitted by Representative 
      Royce......................................................   106


                      SUSTAINABLE HOUSING FINANCE:



                       AN UPDATE FROM THE FEDERAL



                       HOUSING FINANCE AGENCY ON



                        THE GSE CONSERVATORSHIPS

                              ----------                              


                        Tuesday, March 19, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Miller, Royce, 
Capito, Garrett, Neugebauer, McHenry, Campbell, Bachmann, 
Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, Duffy, Hurt, 
Grimm, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 
Pittenger, Wagner, Barr, Cotton; Waters, Maloney, Velazquez, 
Watt, Sherman, Meeks, Capuano, Scott, Green, Cleaver, Ellison, 
Perlmutter, Himes, Peters, Carney, Foster, Kildee, Murphy, 
Delaney, Sinema, Beatty, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    The Chair now recognizes himself for 2 minutes for an 
opening statement.
    I would like to start off by quoting from our witness' 
testimony: ``Few of us could have imagined in 2008 that we 
would be approaching the fifth anniversary of the placing of 
Fannie Mae and Freddie Mac in conservatorship and have made 
little meaningful progress to bring those government 
conservatorships to an end.''
    I could not agree more and that is why I am determined that 
today's hearing will be a truly historic one. I am determined 
that this hearing will be the last time that Director DeMarco--
or, if you believe press reports, his successor--will testify 
before this committee before we finally and belatedly mark up a 
true Government-Sponsored Enterprises (GSE) reform legislation.
    I define this as legislation to one, once and for all 
abolish Fannie Mae and Freddie Mac as Government-Sponsored 
Enterprises; and two, create a truly sustainable housing 
policy--sustainable for our economy, sustainable for those 
seeking the goal of homeownership, and sustainable for hard-
working taxpayers who should never, ever be called upon again 
to bail out Wall Street.
    Now, I know this is a heavy lift, especially in divided 
government, and that is why the leadership of this 
Administration is so critical. Regrettably, they have not 
released a reform plan; instead, over 2 years ago they issued a 
White Paper of options and simply let it gather dust. The 
interested public has long since deleted the PDF file from 
their hard drives.
    After 4\1/2\ years, inaction is no longer an option, 
because the GSEs were at the epicenter of the financial crisis. 
They were part of a tragically misguided government policy to 
incentivize, browbeat, and mandate financial institutions to 
loan money to individuals to buy homes they could not afford to 
keep.
    Consequently, millions saw the American dream turn into an 
American nightmare. Millions more were forced to contribute to 
what has proven to be the mother of all taxpayer bailouts. And 
shamefully, instead of being reformed, Washington continues to 
functionally grant them a monopoly.
    So, part of today's hearing will focus upon what the 
Federal Housing Finance Agency (FHFA) is currently doing to 
reduce the size and influence of the GSEs and how to accelerate 
that process with the goal of repealing their government 
charters in the foreseeable future and help lead us towards a 
truly sustainable housing finance system.
    I will now yield 4 minutes to Ranking Member Waters for her 
opening statement.
    Ms. Waters. Thank you, Mr. Chairman, for holding this 
hearing today on oversight of the Federal Housing Finance 
Agency.
    We are at a pivotal moment in our housing recovery, having 
staunched the bleeding caused by the 2008 financial crisis 
after large declines in home prices in 2007 through 2011. 
Prices in many markets bottomed out in early 2012 and are now 
starting to rise.
    Housing construction is likewise increasing and a record 
1.1 million households were able to refinance under HARP in the 
last year. Freddie Mac posted $11 billion in income in 2012, 
and Fannie Mae expects to report significant net income when 
they file their annual report.
    But headwinds remain in the market, with many homeowners 
still struggling to negotiate loan modification, refinance 
their mortgages, and understand the terms of the many mortgage 
settlements that have been negotiated. Principal reduction 
modifications also, unfortunately, remain rare, and the private 
sector continues to be largely unwilling to offer mortgage 
credit even to qualified borrowers due to investor skittishness 
over lingering problems in the private securitization market.
    Acting Director DeMarco, who is here to testify before us 
today, finds himself at the center of this tremendously complex 
and important market as the conservator of Fannie Mae and 
Freddie Mac.
    I appreciate that this is a tough job and that it is not 
easy serving in an acting capacity for nearly 4 years. But 
having said that, I am concerned that Mr. DeMarco has used his 
wide latitude in regulating Fannie Mae and Freddie Mac to make 
a number of controversial decisions during his tenure, 
including refusing to move forward with principal reduction 
modifications even when they would benefit the taxpayer, and 
raising fees in States with strong consumer protection laws.
    While I have agreed with some of Mr. DeMarco's decisions, I 
am concerned about this lack of accountability, particularly 
since many of the choices being made will impact the future of 
the secondary mortgage market. I have been urging my colleagues 
to begin the work of reforming the GSEs because without action 
from this committee, Acting Director DeMarco will have to 
continue to take it upon himself to do the work of reshaping 
Fannie Mae and Freddie Mac outside of public scrutiny and 
without the input of the Congress of the United States.
    This committee should begin the job of considering the many 
bipartisan reform proposals on the table so that we can give 
the market certainty; guarantee the continued availability of 
the stable mortgage products like the 30-year fixed-rate loan; 
and ensure that institutions of all sizes, including community 
banks and credit unions, are able to participate in the 
secondary mortgage market.
    Moreover, I implore my colleagues in the Senate to support 
the next nominee selected by the President to head the FHFA.
    Finally, as we consider the testimony today, let us 
remember that the issues we are discussing reach beyond 
specific policies regarding the GSEs. Our purpose is not only 
to put the GSEs on solid footing but to create the conditions 
that will help bring our economy back to full strength.
    Mr. Chairman, I hope this is the priority of the committee 
going forward. Republicans are in charge. We have not seen a 
proposal come forward.
    I would hope that this committee, under your leadership, 
would provide the leadership that is necessary to reform the 
GSEs. We know of your longstanding concern, and the criticism 
that you have launched constantly about the GSEs, so I am 
hopeful that you will be in charge of reform for us.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, for 1\1/2\ minutes.
    Mr. Garrett. Thank you, again, Mr. Chairman, for holding 
this important hearing.
    And I would like just to start off, before my comments, by 
thanking Director DeMarco and also the entire team for all of 
their hard work during what have been very, very challenging 
times. Director DeMarco should be commended for his outstanding 
public service and his determination to stand up for the 
American taxpayer and for the American homeowner, as well. And 
he does so against tremendous pressure from those who would 
like to look at these Enterprises as their own piggybanks, if 
you will.
    It is also encouraging to hear the recent announcement by 
the Director that he plans to continue this, and to continue 
the process of transitioning some of the credit exposure of 
Fannie and Freddie outside to the private sector. Everyone on 
this committee can agree, I think, that having over 90 percent 
of the housing market backed by the Federal Government is 
completely unsustainable.
    I believe these changes will allow us to examine some new 
approaches and better ways to facilitate more private sector 
involvement in the mortgage market. And now, with $16 trillion 
in debt and annual $1 trillion deficits, we really cannot 
afford to continue keeping $11 trillion of mortgage credit on 
the back of the taxpayer.
    I would also note that these steps taken by the Director 
are far more than any reforms that this Administration has 
undertaken. It appears to me that they are more content to keep 
their head in the sand, if you will, and act as if no reforms 
are needed in our housing finance system.
    So finally, thankfully, it does not appear that the 
Director feels this way. I thank him for his thoughtful work, 
and I look forward to working with him and also the members of 
this committee to pursue this process of reform.
    Thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, for 3 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, for calling the 
meeting.
    And welcome, Mr. DeMarco.
    It has been 4 years since the GSEs went into 
conservatorship and we all know how important housing is to our 
economy. Some economists estimate that housing and its related 
industries are a roaring 25 percent of our economy. Until we 
straighten out housing, our broader economy will not fully 
recover.
    So this is a tremendously important issue to all of us. I 
applaud the bipartisan efforts on this committee with Mr. 
Campbell and Mr. Peters, and Mr. Miller and Mrs. McCarthy, and 
I hope we will have hearings to focus on their related ideas.
    I look forward to hearing more today about your three-part 
strategic plan to build, maintain, and contract the GSEs. I 
believe your efforts for a single platform and standardized 
practices is a great step forward, a great development.
    And I also believe that your efforts to maintain 
foreclosure prevention activities and credit availability and 
to refinance mortgages has been successful. I also want to 
applaud the work with the Home Affordable Refinance Program 
(HARP) to promote foreclosure prevention activities, which has 
had some successes: 1.1 million refinances have been done, 
which nearly equals the number of HARP refinances over the 
prior 3 years. That is a success.
    And the focus of your office on underwater mortgages with 
those with greater than 105 loan-to-value ratios--these 
refinances represent 43 percent of the total HARP refinances in 
2012 compared to 15 in 2011. So that is a movement in the right 
direction but we can still do more.
    It is in the area of contracting that I have the most 
questions, including the effect that it will have on multi-
family housing and single-family housing. The GSE multi-family 
housing portfolio picks up pieces of the housing sector that 
the private sector has not been interested in. They usually are 
not interested in providing affordable housing.
    So I have questions about the effect that it will have on 
the policy goal of affordable housing, which I deeply support, 
and the 30-year mortgage.
    I also have questions about what contracting will mean in 
terms of the guaranteed fees on States that have longer 
foreclosure times but better outcomes in terms of rates of 
foreclosures. These States are keeping people in their homes. 
Shouldn't we be looking at the result and rewarding States or 
localities that keep people in their homes as opposed to 
raising their fees?
    I look forward to your testimony.
    Thank you. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Miller, for 1 minute.
    Mr. Miller. Thank you, Mr. Chairman.
    Because of securitization technology, the secondary market 
of mortgage investors developed into a deep global market that 
generally worked well to the advantage of the average American. 
But the hybrid public-private model of Freddie and Fannie was 
fundamentally flawed. They acted as private companies with 
public policy charters, serving two masters.
    What we replace them with must capture the important 
function they historically performed. We still need a viable 
secondary mortgage market with sound underwriting principles.
    I introduced a bill last year to eliminate Freddie and 
Fannie, saying that we need to look to a secondary market for 
residential mortgages and focus on that. I proposed a system 
separate from the government, eliminating the conflict inherent 
in a model where the private sector benefitted from the 
government guarantee, meaning government risk, private sector 
rewards.
    Make sure the secondary market was the privately financed 
capital we use was not government funds. Don't cap the maximum 
volume of purchases and sales, crowding out the private sector 
was not a part of the bill, it was the primary portion of it.
    Historically, housing led to recovery in this country. It 
has to this time. We need an alternative to Freddie and Fannie 
and we need it rapidly.
    Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Sherman, for 1\1/2\ minutes.
    Mr. Sherman. In the 1930s, we tried the idea of no Federal 
role in home finance. It did not work out.
    Then we tried this GSE model, where organizations run by 
those rewarded for profits had a full, implicit Federal 
guarantee. They took risks to benefit their shareholders and 
the taxpayers were left holding the bag. So that is not 
something we should return to.
    And I will agree with the chairman if that is as far as he 
goes.
    But I do think we need a Federal agency, or more than one 
involved in the market, otherwise we will see the end of the 
30-year mortgage with fixed rates available to average middle-
class families. What percentage of the market this government 
agency or agencies should control or be involved in is a 
subject I look forward to discussing in this room.
    We all want to help those homeowners who are in trouble or 
underwater, but we should recognize that many of the ways we 
help actually cost the Federal Government money, or should I 
say reduce the value of instruments held or, in effect, 
guaranteed by the Federal Government. I want to commend the 
GSEs for their help in allowing homeowners to refinance even if 
they are underwater since that usually doesn't cost the Federal 
Government any money.
    What it does cost are those investors who are reaping 5 and 
6 and 7 percent yields on government-guaranteed paper. So I 
commend you for that effort, and I look forward to hearing 
about more.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Royce, for 1 minute.
    Mr. Royce. Thank you, Mr. Chairman.
    I want to thank Director DeMarco again for being with us 
here today.
    And I wanted to also share with the committee that I think 
the Director has taken some bold, courageous steps as both a 
regulator and a conservator of the GSEs, but I would have to 
say, the same cannot be said of the Administration.
    Secretaries Geithner and Donovan promised long-term plans, 
and we have been given only options. We had a failure of the 
financial markets, we got a White Paper; we had a failure of 
the housing finance system, we got a White Paper. A White Paper 
with a choose-your-own-adventure response is not what Congress 
needs and it is not what our markets need.
    We need to restore the appropriate role of the private 
sector in housing finance. We need serious leadership to move 
us away from a system overly reliant on taxpayers toward a 
free-functioning market which accurately prices risk.
    Thank you. I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Green, for 1 minute.
    Mr. Green. Thank you, Mr. Chairman.
    Welcome, Mr. DeMarco. There is a role for the private 
sector. There is also a role for the public sector.
    I talk to the builders; they believe that there is a role 
for the public sector. I talk to the REALTORS; they believe 
there is a role for the public sector. I talk to the bankers; 
they believe there is a role for the public sector. And my 
constituents who want 30-year loans understand that there is a 
role for the public sector.
    The question is not really whether there is a role, but 
whether we will take the time to fashion and craft a meaningful 
piece of legislation without anybody's recommendation so that 
we may have the role codified into the law.
    I do regret that we have not codified this into the law, 
but I don't blame the Administration. There are 435 Members of 
Congress. Any one of us can craft our own legislation.
    I believe that those who have said that we should have done 
it in when we were in charge, ought to do it now that they are 
in charge.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, Mrs. Capito, for 1 minute.
    Mrs. Capito. Thank you.
    And welcome, Director DeMarco, to our committee.
    I want to thank the chairman for holding the hearing and 
also for his efforts to center the discussion on housing 
finance as we look forward to, hopefully, structural and 
significant reforms.
    As has been said many times here, we have seen many changes 
to our regulatory structure here in the financial realm, but in 
some cases layered on too heavily for our institutions to be 
able to lend adequately. But one thing we have not done is to 
address the chief underlying cause of the crisis, and that is 
our housing finance system.
    The objectives that led Fannie and Freddie to assume such 
considerable risk in size and the market ultimately led to a 
taxpayers' bailout, a rescue by the taxpayer.
    So it is 4 years later and it is unacceptable that we have 
not reformed and made a business model available for housing 
finance. To date, we have left the taxpayers to pick up $187 
billion in Treasury support.
    The practice of privatizing gains and publicizing losses is 
unfair to the American people and meaningful reforms must 
reflect this.
    Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Neugebauer, for 1\1/2\ minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman, for holding this 
important hearing today.
    And I also want to thank Mr. DeMarco for his service and 
for being here this morning.
    As we approach the 5-year anniversary of Freddie and Fannie 
we realize that the American taxpayers have injected almost 
$200 billion into these entities. And the history of Fannie and 
Freddie has proven that government involvement in housing 
finance not only creates moral hazard but it also creates 
political pressure for increasingly risky lending practices.
    We learned that the government guarantees mortgage debt 
eliminates essential market discipline in the risk aversion for 
investors, and we learned that the government is incapable of 
establishing risk-based fees for guarantees and exposing 
taxpayers to billions of dollars.
    Unfortunately, we evidently haven't learned this lesson 
yet, because here we are 5 years later and we have still not 
done anything meaningful about reforming Freddie and Fannie. In 
the meantime, 9 out of every 10 mortgages in this country have 
some Federal nexus, and the taxpayers are on the hook for that.
    The White House said they wanted to do something about 
that, but to date they have not put forth any meaningful 
proposal. They put together a watered-down White Paper that 
says, ``This is what we might do,'' but as we know, they never 
took any action on that.
    It is really time for Congress and for the Administration 
to just step forward and get the taxpayers off the hook so that 
we can move forward with having a robust housing finance market 
in this country.
    I look forward to your testimony, Mr. DeMarco. And thanks 
again for your service.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Minnesota, Mrs. Bachmann, for 1 minute.
    Mrs. Bachmann. Mr. Chairman, thank you.
    And I thank our witness, as well.
    One thing we have learned about the GSE policies is that 
millions of Americans have been victims of these policies. They 
have lost, collectively, billions of dollars worth of assets.
    The people who have suffered more than any are those at the 
bottom end of the economic scale, particularly the African-
American community. They have suffered from these policies.
    And when, as Mr. Neugebauer said, we see that over 90 
percent of the mortgages have a nexus to government involvement 
this doesn't even pass the falling-off-the-chair-laughing test 
to think that somehow this is a public-private partnership. It 
is not. This is the Federal Government. It has been a failure.
    When are we going to realize that government has been a 
very lousy steward of people's money? And also, we have, at the 
same time, disadvantaged a lot of people with a lot of well-
meaning programs.
    What we need to do is pay back the taxpayers who funded 
this bailout, get them out of guaranteeing the GSEs, and change 
our standards.
    Thank you, and I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from Missouri, Mrs. Wagner, for 1 minute.
    Mrs. Wagner. Thank you, Mr. Chairman.
    As we continue this debate over housing finance reform, I 
am keeping three very basic thoughts in mind. The first is that 
the current situation, as has been brought up previously, with 
the taxpayers backing over 90 percent of the new mortgages, is 
both unacceptable and untenable. We have, of course, arrived 
here due to a history of flawed government policies that 
continue to pose a direct threat to homeowners and taxpayers.
    The second thought is that the GSE model has to go, but in 
order for that to happen, Congress and the FHFA must work to 
establish market guidelines that provide transparency and legal 
certainty for private investors. This will encourage private 
capital finance to finance mortgages just as it finances 
virtually every other credit market in the United States.
    Third, I believe that if we can establish those rules and 
guidelines, we will see private capital enter the mortgage 
market in a large way, moving us away from mistakes of the past 
and protecting families and taxpayers in the process.
    With this in mind, I look forward to hearing the testimony 
of Mr. DeMarco.
    Thanks.
    Chairman Hensarling. We now welcome Ed DeMarco as our sole 
witness today. In 2009, President Obama designated Mr. DeMarco 
to be the acting Director of the Federal Housing Finance 
Agency, which is the regulator of Fannie Mae, Freddie Mac, and 
the 12 Federal Home Loan Banks.
    Mr. DeMarco is a career civil servant, with over 20 years 
of housing policy experience, including stints at GAO, 
Treasury, and OFHEO. He holds both a B.A. and a Ph.D. in 
economics.
    Without objection, Mr. DeMarco's full written statement 
will be made a part of the record. Members are advised that Mr. 
DeMarco will be excused as our witness at 12:30 today.
    Mr. DeMarco, welcome to our committee again, and you are 
recognized for a summary of your testimony at this time.

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

    Mr. DeMarco. Very good. Thank you, Mr. Chairman.
    Chairman Hensarling, Ranking Member Waters, and members of 
the committee, I am pleased to be here to testify before you. 
As required, I submitted a detailed written statement to the 
committee, and I look forward to engaging with you today as 
there are many important topics to be discussed.
    Fannie Mae and Freddie Mac, or the Enterprises, as I will 
refer to them, have been in government conservatorship for more 
than 4\1/2\ years. These lengthy conservatorships are 
unprecedented and they were never intended to be a--
    [Disturbance in hearing room.]
    Chairman Hensarling. The committee will come to order. We 
will give you one warning and then you will be cleared from the 
room. Staff will get the Capitol Police.
    The Rules of the House require all observers to maintain 
order and decorum. Clause 2(k)(4) of Rule 11 provides that the 
Chair will punish breaches of order and decorum by censure and 
exclusion from the hearing.
    I hereby direct the Capitol Police to remove the gentleman 
causing the disturbance from the committee room.
    All guests will be reminded that they are guests of the 
committee. They will observe decorum at all times or they will 
be escorted out of the room by the Capitol Police.
    Mr. DeMarco, you are again recognized for a summary of your 
testimony.
    Mr. DeMarco. Thank you, Mr. Chairman.
    And I do understand the pain that this housing crisis has 
caused for so many families around the country and the 
tremendous cost it has imposed upon the American taxpayer.
    The first chapter of conservatorship focused on restoring 
stability and liquidity to housing finance during the financial 
crisis in the fall of 2008. We succeeded.
    The second chapter focused on foreclosure prevention 
efforts, which were critical to help borrowers in distress and 
essential to meeting our conservatorship mandate to preserve 
and conserve the Enterprises' assets. Efforts to minimize 
losses on troubled mortgages have been good for borrowers, good 
for communities, and good for taxpayers--
    [Disturbance in hearing room.]
    Chairman Hensarling. The Rules of the House require all 
observers to maintain order and decorum. Clause 2(k)(4) of Rule 
11 provides that the Chair may punish breaches of order and 
decorum by censure and exclusion from the hearing.
    Voice in audience. And I thought Barney Frank had retired.
    Chairman Hensarling. The committee will come to order. The 
committee will come to order.
    Mr. DeMarco, you are once again recognized for a summary of 
your testimony.
    Mr. DeMarco. The next line in my prepared remarks is: The 
task has not been easy. While we have not always succeeded, the 
results are better than frequently recognized.
    In conservatorship, the Enterprises have completed more 
than 2.6 million foreclosure prevention transactions. Of these, 
nearly 2.2 million of these transactions resulted in the 
borrower staying in their home.
    For borrowers able to pay their mortgage, the Enterprises 
have refinanced almost 15 million mortgages since 
conservatorship. More importantly, they have completed almost 
2.2 million HARP refinances--
    Chairman Hensarling. The witness will suspend.
    I would ask staff to ask the Capitol Police to come in 
again and escort these individuals outside of the hearing room.
    Ladies and gentlemen, we are not going to allow you to 
disturb this hearing as part--
    Ms. Waters. Mr. Chairman?
    Chairman Hensarling. --of the people's--
    Ms. Waters. Mr. Chairman?
    Chairman Hensarling. --House, and so--
    Ms. Waters. Mr. Chairman?
    Chairman Hensarling. --you will be excluded--
    Ms. Waters. Mr. Chairman?
    Chairman Hensarling. --at this time.
    Ms. Waters. Mr. Chairman, can we just ask the people with 
the signs to put them down rather than putting them out?
    Chairman Hensarling. All guests have been warned. You will 
not interfere with the proceedings of the people's House. The 
Capitol Police is requested to escort all of these people out 
of the room.
    And I would say to the ranking member, they have been 
warned not once but twice, and given every accommodation.
    You will now be cleared from the room.
    Again, Mr. DeMarco, you are recognized for your testimony. 
We hope you can get more than a couple of sentences out.
    Mr. DeMarco. More importantly, we have completed almost 2.2 
million HARP refinances, which are targeted at borrowers with 
little or no equity in their homes. While not without its 
shortcomings, delays, and other problems, this collection of 
programs remains a noteworthy response to an unprecedented 
crisis, and the work to help borrowers continues.
    Today, the tools and the processes are much better-
established than they were a few years ago. A big reason for 
that is the dedicated work of employees at Fannie Mae and 
Freddie Mac and my own team of hard-working civil servants at 
FHFA.
    While we continue to refine and improve these programs, 
last year we began moving on to another chapter of 
conservatorship. A year ago, I sent to this committee a 
strategic plan for the Enterprise conservatorships.
    That plan had three broad strategic goals. First, build. 
Build a new infrastructure for the secondary mortgage market.
    Second, contract. Gradually contract the Enterprises' 
dominant presence in the marketplace while simplifying and 
shrinking their operations.
    And third, maintain. Maintain foreclosure prevention 
activities and credit availability for new and refinanced 
mortgages.
    These goals satisfy our statutory mandate as conservator, 
are consistent with the Administration's call for a gradual 
wind-down of the Enterprises, and preserve all policy options 
for Congress. Achieving these goals will produce a stronger 
foundation on which Congress and market participants can build 
to replace the pre-conservatorship GSE model.
    Earlier this month, I announced specific steps I expect 
Fannie Mae and Freddie Mac to take this year in pursuit of 
these three goals. Briefly, we are building for the future by 
establishing a platform for future mortgage-backed 
securitization.
    This platform, while owned by the Enterprises, will have 
its own CEO and board and will operate away from either 
company. Building this platform is an important element to 
assisting Congress with a transition from the old model to a 
new one.
    We are contracting the Enterprises by setting targets to 
gradually shrink each of their three business lines this year.
    And lastly, we are continuing efforts to maintain market 
stability and liquidity. Areas of focus this year include: reps 
and warrants; mortgage insurance; and force placed insurance.
    In closing, the members of this committee have important 
choices to make--choices that will define the role of the 
government in the housing finance system for years to come. 
These choices will directly affect the business decisions of 
countless financial institutions and investors and help 
determine the framework for millions of households to borrow 
money for buying a home.
    FHFA looks forward to working with this committee, other 
Members of Congress, and the Administration to make these 
policy determinations and end these conservatorships.
    Thank you again for inviting me here today, and I look 
forward to discussing these important matters with the 
committee.
    [The prepared statement of Acting Director DeMarco can be 
found on page 54 of the appendix.]
    Chairman Hensarling. Thank you, Mr. DeMarco, for your 
testimony.
    The Chair now recognizes himself for 5 minutes.
    Mr. DeMarco, on page four of your testimony you use the 
term ``sustainable,'' that you are focusing on a more secure, 
sustainable, and competitive model for the secondary mortgage 
market.
    Jeffrey Lacker, the President of the Richmond Federal 
Reserve, has said, ``We should phase out government guarantees 
for home mortgage debt. Otherwise, financial stability will be 
elusive and fiscal balance will be threatened by repeated boom-
bust cycles in housing. Homeownership may be a laudable social 
goal, but if that is our objective we should subsidize housing 
equity, not housing debt.''
    I, too, am focused on a sustainable housing finance system. 
Mr. Lacker is obviously of the belief that our current system 
can foment boom-bust cycles.
    From your perch, and 20 years of experience in housing 
finance, do you see that as a risk? And how do you use the term 
``sustainable,'' as you used it in your testimony?
    Mr. DeMarco. I certainly think that the housing market does 
go through cycles, and we have certainly experienced a 
wrenching nationwide cycle now. And, I think that there is 
plenty of argument out there that a contributing factor has 
been some government policies. But that is certainly not the 
only thing contributing to the problems we have had the last 
few years.
    What I mean by sustainable is we are trying to build a 
market that truly can last for years and function with whatever 
role government has, that both government and private market 
participants can rely upon the soundness and stability of that 
model. So the infrastructure that we are trying to build is one 
that starts with basic building blocks--something as simple as 
data.
    The first real step FHFA took as conservator to get moving 
on this future is something we announced back in 2010 with the 
Uniform Mortgage Data Program. We wanted to do something as 
simple as bring to the mortgage industry a standard set of data 
definitions for what gets reported on a mortgage application 
and comes to an investor, what the form and format and 
definitions for an appraisal look like so that we have 
consistency of data and that produces more quality.
    It is a very basic building block. It sounds ho-hum. It is 
essential to building a sustainable model.
    We are also looking at bringing standards to the 
marketplace.
    Chairman Hensarling. Mr. DeMarco, on page 15 of your 
testimony--any system of housing finance is going to have some 
cost, some benefits. On page 15, in talking about some of the 
Federal housing policies, including explicit credit support, 
you said such policies ``further direct our nation's investment 
dollars towards housing. It would also drive up the price of 
housing, other things being equal.''
    So are you saying that credit guarantees, for what they do, 
perhaps, to lower interest rates--and I think the last data I 
saw from the Federal Reserve study of several years ago that 
the Fannie and Freddie model saves about seven basis points off 
of the interest to help the consumer but that the consumer may 
pay on the back end by paying more on their principal. Is that 
what you are saying in your testimony?
    Mr. DeMarco. Essentially. Right now, as has been pointed 
out in the opening remarks, over 90 percent of mortgage 
securitization is being backed by the taxpayer either through 
Ginnie Mae or through the Treasury support of Fannie and 
Freddie. If you subsidize this credit to everyone buying a 
house, you are essentially subsidizing no one. It is causing, 
just in sort of simple supply-and-demand terms, the price of 
the good to go up.
    So if there is this broad, across-the-entire-market subsidy 
to housing credit, some portion or a good portion of that gets 
captured by the home seller and is leading to higher prices.
    Chairman Hensarling. I am running out of time here, so your 
answer may have to come in writing, but I am curious, what is 
it that we can do to incent private capital to come into the 
marketplace, as I observed, trillions of dollars of excess 
reserves of either banks or non-financial corporate balance 
sheets?
    And I hope somewhere that we will pursue the questioning--I 
understand you have raised g-fees twice. I am curious, why not 
a third or fourth time?
    But my own time has expired.
    I now recognize the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    During the 112th and 113th Congresses, we have yet to have 
a hearing on various bipartisan GSE reform proposals introduced 
in the House of Representatives. We also did not have a hearing 
on Chairman Hensarling's proposal from the 112th Congress, 
which would have liquidated the GSEs and then hoped that the 
private markets would pick up the pieces.
    Whichever approach you support, I think you agree that the 
Congress should be convening hearings on specific GSE reform 
proposals. From your perspective, Mr. DeMarco, as conservator, 
what are the costs of doing nothing?
    Mr. DeMarco. The costs of doing nothing are that we are 
continuing to risk the taxpayer support of Fannie Mae and 
Freddie Mac and we are making it harder for investors to return 
to this market and have confidence about what the rules of the 
road in mortgage lending are going to be going forward.
    Ms. Waters. In the absence of legislation, however, it 
seems--and I have had this discussion with you--that you have 
broadly interpreted your mandate to not only act as a 
conservator but to aggressively wind down the GSEs' market 
presence and entirely reform the secondary mortgage market. In 
your testimony, you propose winding down the investment 
portfolio at a faster rate than agreed to with the Treasury, 
reducing the GSEs' participation in the multi-family market 
even when it is unclear that private lenders would fill the 
affordable rental housing space, and increase the cost of 
single-family housing by offloading credit risk and raising 
guaranteed fees even higher.
    Given that you are not Presidentially-appointed, permanent 
Director, where do you draw the line in terms of what you are 
able to do? Hypothetically, could you raise g-fees an unlimited 
amount? Could you wind down retained portfolios to zero? How 
are your decisions being informed by Congress and the 
Administration?
    Mr. DeMarco. Ranking Member Waters, I would welcome as much 
congressional direction and legislation on these matters as we 
could get. For my part, what motivates me and what constrains 
me is the statutes that Congress has enacted that provide the 
guardrails about what it is FHFA is supposed to do both as 
regulator and as conservator.
    I am also informed by observing that within the Congress of 
the United States, while there have been a number of proposals 
for housing finance, none of them have involved restoring 
Fannie Mae and Freddie Mac to their pre-conservatorship 
corporate form. I am mindful that the Administration has 
repeatedly discussed its intent to wind down the Enterprises.
    And I have tried to take a transparent process with 
Congress in explaining what it is we are doing and why, and 
with this strategic plan over a year ago, laid out for Congress 
my thoughts about where FHFA found itself as conservator, how 
it viewed its statutory responsibilities, and the gradual steps 
we plan to take under that strategic plan. So I have tried to 
be transparent about this and move in a thoughtful but gradual 
manner.
    Ms. Waters. The Treasury and the FHFA agreed to an 
increased portfolio reduction of 15 percent per year last 
summer. Why do you feel it is necessary to require the GSEs to 
exceed this target by selling less liquid assets? How will you 
ensure that such sales will not result in reduced return to the 
taxpayer?
    Mr. DeMarco. One of the requirements we placed on them is 
that these transactions be economically sensible. But I would 
point out that within the 15 percent reduction that is under 
the Treasury agreement, Fannie Mae and Freddie Mac can achieve 
that over the next couple of years by doing nothing, simply by 
absorbing the natural runoff of their retained portfolio.
    I am trying to shrink their operations. I am trying to de-
risk the companies so that we can get some of this risk off the 
back of the American taxpayer, and we are trying to take a 
gradual approach to doing that by encouraging sales of certain 
non-liquid assets on their portfolio.
    This will also ease the job for Congress in terms of 
thinking about a transition away from Fannie and Freddie in 
conservatorship to a future model. The more we can simplify 
their operation and gradually shrink them, that makes the 
transition easier.
    Ms. Waters. In the multi-family space, you have set a 
target of 10 percent reduction in multi-family business new 
acquisitions in 2012. What will be the impact of this reduction 
on rental prices?
    Mr. DeMarco. I would not expect there to be any meaningful 
impact. Fannie Mae and Freddie Mac, in the early years of the 
conservatorship, their share in the multi-family mortgage 
market increased substantially. In 2012, it decreased; in 2013, 
what I want is to see that decrease continue. And we also have 
reason to believe that the overall size of the multi-family 
market is going to gradually decline.
    So what I am trying to avoid is Fannie Mae and Freddie Mac 
operating with this government backing, taking on a greater 
share of the market than should be the case.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, the chairman of the Capital 
Markets and Government Sponsored Enterprises Subcommittee, for 
5 minutes.
    Mr. Garrett. Thank you, again, Mr. Chairman.
    And thank you, Director.
    Let me just follow up. You said something interesting in 
response to the chairman's question about having such a--90 
percent of the market and subsidizing the market to such an 
extent you said we are basically subsidizing everybody, right? 
That is interesting.
    When you subsidize everybody, what is the effect on pricing 
in the market and what is the effect on the first-time 
homebuyer trying to get into that market?
    Mr. DeMarco. Basic economics would suggest that if you are 
subsidizing everybody on the demand side for housing, it is 
going to push up the price of housing, other things being 
equal. Now, there are a lot of other things going on in the 
marketplace, including the actions of the Federal Reserve, but 
that is just a basic economic observation.
    Mr. Garrett. But when you said it is, a light bulb just 
went off there because for those who say, ``Let's just 
subsidize everyone,'' at the end of the day you are actually 
harming them, because it is going to be harder for that person 
to get into the market or stay in the market.
    Let's talk a little bit about the risk, though, in the 
meantime, to the public, because the GSEs have credit risk, 
right?
    Mr. DeMarco. Yes, sir.
    Mr. Garrett. Okay, and so can you just talk a little bit 
about your work or your ideas about trying to sell off some of 
that credit risk? Because when the GSEs have credit risk, that 
means you and I as taxpayers have credit risk too, right?
    Mr. DeMarco. That is correct.
    Mr. Garrett. What are your plans there?
    Mr. DeMarco. Right now, with every single-family mortgage 
that Fannie Mae and Freddie Mac buy and then securitize, they 
are standing behind that mortgage 100 percent, which means the 
American taxpayer is standing behind it. What we would like to 
do is engage in transactions with private investors, with 
capital markets--to sell off some portion of this credit risk, 
meaning that if the mortgages that Fannie Mae and Freddie Mac 
are buying now, if they default that some portion of that 
loss--those early losses--would be absorbed by a private 
investor rather than the American taxpayer.
    Mr. Garrett. You mentioned somewhere that you have a target 
of around $30 billion in 2013, is that right?
    Mr. DeMarco. Yes, sir.
    Mr. Garrett. Is that the total amount of risk that we would 
be sending out to the private sector, or do you--
    Mr. DeMarco. No, sir. That is the unpaid principal balance 
of mortgages. So we want to see $30 billion worth of mortgages 
in which there is some amount of the credit loss associated 
with those mortgages has been sold off to the private market.
    Mr. Garrett. And what is that percentage-wise of all the 
credit risk that the GSEs have out there?
    Mr. DeMarco. Between them right now, in terms of the stock, 
they have about $5 trillion in mortgage guarantees. So it is a 
pretty tiny fraction.
    Mr. Garrett. This is less than a pilot program.
    Mr. DeMarco. It is a start.
    Mr. Garrett. It is a start. Great.
    Another issue that we are dealing with is trying to deal 
with the sequester, right? And some ideas have come out 
supposedly to try to come up with other revenue to make up for 
lost revenue.
    There was a bipartisan bill introduced last week to prevent 
the U.S. Treasury and the Administration from conducting an IPO 
with Fannie and Freddie, to basically sell part of them off--
spin them off to the private sector and use that money as a new 
revenue stream. Have you heard about that? And what can you 
tell us about whether that would be a good idea or a bad idea?
    Mr. DeMarco. I am generally familiar with the bill. I am 
not sure who would want to purchase equity sold by these 
companies but I understood, really, the intent of the sponsors 
of that bill to say that we wanted to ensure that the Congress 
of the United States had a say in the disposition of Fannie Mae 
and Freddie Mac.
    Mr. Garrett. Okay. You know about the bill, but have you 
heard, is that something that the Administration is actually--
    Mr. DeMarco. No, sir. I am not aware that is being 
contemplated.
    Mr. Garrett. So, this would be one of the worst things that 
we could do, or the Administration could do, if they actually 
did that? If so, why would it be? Because you would be making 
money right, wouldn't it?
    Mr. DeMarco. Right now, they are starting to make money, 
yes, and I am pleased by that. That money, right now, every 
quarter is swept in a dividend payment back to the Treasury 
Department, and the way the senior agreement with the Treasury 
works is the actual liquidation preference of that senior 
preferred stock does not decline regardless of how much is paid 
in dividends. So there is still a liquidation preference 
retained by the Treasury Department that is substantial.
    Mr. Garrett. And isn't the bottom line also that if we did 
this, it would basically just put us back into the situation 
that we were pre-crisis days as far as this public-private 
partnership that just did not work?
    Mr. DeMarco. Yes, sir. If we tried to, in any fashion, 
recapitalize Fannie and Freddie as they are and put them back 
out there.
    Mr. Garrett. In my closing time, you are familiar with the 
preferred stock purchase agreements and the changes that the 
Administration made to it recently, I guess last year. Can you 
just talk about that, whether these changes hurt or helped your 
ability to fix or reform the system?
    Mr. DeMarco. I think that they helped in that they provided 
some assurance to investors in Fannie Mae and Freddie Mac 
securities that the dividend at Fannie Mae and Freddie Mac 
would not continue to borrow from the Treasury in order to pay 
the Treasury with regard to dividends. It also is ensuring that 
the taxpayer starts to see even more of a return on the support 
that has been provided and it does not allow for the companies 
to take their earnings and essentially recapitalize themselves.
    Mr. Garrett. I thank the gentleman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. Why did Fannie and Freddie get into subprime 
lending, and what steps have you put in place to prevent any 
entity, whatever is there, from taking that action in the 
future?
    Mr. DeMarco. It is a complicated story with regard to the 
Enterprises' participation in subprime lending, but clearly it 
was driven by what was going on more broadly in the 
marketplace. There was a sense that Fannie Mae and Freddie Mac 
were losing market share to private participants; there was a 
sense of serving more borrowers at the margin of the mortgage 
market; and there was a sense that the strength of the U.S. 
housing market was such that home prices were going to continue 
to rise. So there were a lot of things going into their 
participation in that marketplace.
    With regard to where we are today, we have undertaken a 
couple of pretty important steps. One of them is that the 
pricing of guarantee fees is much more risk-based today than it 
was. They were clearly underpricing risk in the marketplace.
    The second is that underwriting standards have been 
improved. And the third is that through the discipline on 
lenders through things like enforcing reps and warrants, we are 
getting better discipline in the origination process with 
regard to ensuring that mortgages which are being produced 
today comply with the standards that Fannie and Freddie have.
    Mrs. Maloney. I am concerned about the multi-family 
housing, and I want to quote from your remarks that you gave at 
the National Press Club on March 7th: ``We are setting a target 
of a 10 percent reduction in multi-family business volume from 
2012 levels. We expect that this reduction will be achieved 
through some combination of increased pricing, more limited 
product offerings, and tighter overall underwriting 
standards.''
    Multi-family housing is a critically important base for 
affordable housing in our country--well over 15 million people 
rely on it: seniors; students; low-income; and moderate-income 
families--and I feel that preserving it is very important. So 
first I want to know, how did you decide on a 10 percent 
reduction as the appropriate volume? And have you done any 
studies to see if the private sector will pick up in this area 
and continue to help us with affordable multi-family housing?
    Mr. DeMarco. Of course. And certainly, Congresswoman, I 
share your feeling that the multi-family market is critical to 
housing our citizens and it is particularly an important source 
of housing for low- and moderate-income households.
    With that said, we came to the 10 percent through looking 
at a variety of things, including the market size, the 
traditional role of Fannie and Freddie in this market space, 
expectations about the size of the market in the future, and 
recognizing that we did have a goal of gradually reducing the 
Enterprises' footprint in the marketplace.
    Also paying attention to and being mindful of, unlike 
single-family where, as we talked earlier, over 90 percent of 
the secondary market activity is through the government, that 
is not the case in the multi-family market. The multi-family 
market retains a good bit of private capital participation and 
competition in that marketplace and I certainly have been 
hearing from the banking community that they want to 
participate in this market, they are active participants in it, 
and they are concerned about Fannie and Freddie operating with 
this kind of government backing having an unfair advantage in 
that market. So I am comfortable that there is private capital 
actively competing in this marketplace.
    All that said, I want to assure you that we intend to 
monitor how this is carried out by the companies and how this 
market evolves, and to be mindful of that. And we have reminded 
the companies of their statutory mission to support affordable 
housing.
    Mrs. Maloney. Have you consulted with the Treasury 
Department and FHA about this target and are they part of this 
decision?
    Mr. DeMarco. Yes. I consulted with both of those 
departments in advance of announcing this decision.
    Mrs. Maloney. And I also want to question one of your 
speeches on March 7th on the differences between the single-
family businesses and the multi-family businesses. Are you 
approaching them differently in your approach for the future?
    Mr. DeMarco. Yes, we are. And that is a good thing for me 
to explain, the reasoning here.
    With single-family mortgages, Fannie and Freddie are 
retaining all of the risk when they buy the mortgage. In most 
of the multi-family mortgages they buy, they are already doing 
risk-sharing with private capital. I am trying to get the 
single-family to look a bit more like multi-family, where there 
is risk-sharing with private capital.
    Mrs. Maloney. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from California, Mr. 
Miller, the vice chairman of the committee, for 5 minutes.
    Mr. Miller. Thank you.
    Mr. DeMarco, I have enjoyed some of your responses to the 
questions asked. In 2001, I started introducing language that 
defines subprime versus predatory. I think I got in three or 
four bills to the Senate which--I'm sad to say, they did 
nothing with them--really had specifics on underwriting 
standards.
    But you have released your conservator scorecard in--I 
believe this was March 4th. And you had detailed specific 
priorities on three strategic goals. That sounds a lot like a 
bill I introduced with Mrs. McCarthy last year and I am glad 
you are moving that direction. But what effect do you think the 
new platform will have on getting the private sector money back 
to the secondary market?
    Mr. DeMarco. I think it has an opportunity to be an 
important contributing factor to bringing private capital back 
into the marketplace. When you think about investors in private 
label mortgage-backed securities and the losses that they have 
suffered and the problems that have become apparent as a result 
of the collapse of the housing system, I think that investors 
are going to be more comfortable bringing private capital back 
to the mortgage market if they can rely better on how 
securities are going to work, what the rights and protections 
of investors are, how mortgages are going to be serviced, and 
what kind of transparency there is with regard to the actual 
performance of the underlying mortgages.
    These are all things we are trying to bring to this 
platform and we think it will make returning to this market 
more attractive for investors.
    Mr. Miller. The problem I have with the hybrid model 
without Freddie and Fannie is you have taxpayers being put at 
risk but the private sector is making all the profit. And you 
can see where Freddie and Fannie went wrong when they started 
taking market share to appease their stockholders, basically, 
and then made every mistake they could make at that point.
    But what advantages or disadvantages do you see in spinning 
this platform off as a private entity?
    Mr. DeMarco. We are constructing it as a jointly owned 
entity of Fannie and Freddie. I really expect the Congress of 
the United States to make the final determination.
    It is an asset of the conservatorship so it is going to be 
up to Congress to determine the disposition. Your options are 
essentially: you can make it a government-owned corporation; 
you can sell it to a private entity; or you can turn it into a 
market utility and have it operate really as just that, as a 
financial market utility.
    Mr. Miller. My concern is the approach we use on turning it 
into a private entity. Do you envision avoiding this flaw we 
have had in the past of a hybrid model that exists with Fannie 
and Freddie today?
    Mr. DeMarco. Without some sort of control or knowing what 
the governing mechanism is, it is certainly open to going in a 
direction other than the one I am designing for right now.
    Mr. Miller. What do you see as the benefits in spinning it 
off as a private entity, as you talked about--
    Mr. DeMarco. Let me say this: I think that the larger 
benefit, if I may, on this particular one is, I think, 
structuring it as a market utility--not as a for-profit entity 
but as something there to serve market participants. And one of 
the things that I would be concerned about is making sure that 
however this thing operates in the future, it operates so that 
small and mid-sized lenders have fair access to secondary 
market execution.
    Mr. Miller. The concern I have is, if you look at the FHFA 
today, there has been some debate on that, and I don't think 
the FHFA is necessarily crowding out the private sector as the 
private sector is not crowding in today. And much of that is 
due to legislation we have enacted on the private sector and 
the confusion we have created out there, which I think we have 
to eliminate.
    But what are the main barriers you see today that prevent 
private capital from entering the mortgage market and secondary 
market finances as a loan?
    Mr. DeMarco. I think there are a number of things still 
inhibiting the full return. One of them is that Fannie Mae and 
Freddie Mac are still the dominant players in the marketplace 
and they are operating with taxpayer support, which puts them 
in a place that other private investors cannot get to.
    The other is that the infrastructure for establishing 
standards and allowing for investors to feel comfortable 
returning is not there. And there is still plenty of regulatory 
uncertainty with regard to a range of things, from risk-based 
capital rules to regulations still to be implemented under 
Dodd-Frank.
    Mr. Miller. You have talked about the contraction of the 
GSEs and eliminated the concept of being the dominant presence 
in the marketplace, and they are reforms you are enacting 
today. But how do the barriers that we have created for you 
through legislation--the Dodd-Frank Act and such--impact your 
ability to do that?
    Mr. DeMarco. The biggest impediment, I suppose, for me, or 
the thing I could use most from Congress is legislative 
direction. Even if it is not the whole picture, at least to 
start to provide some sense of--
    Mr. Miller. Parameters within which you could work, 
basically?
    Mr. DeMarco. Parameters, yes, with respect to--take this 
platform, take how to gradually shrink Fannie and Freddie's 
presence in the marketplace. There are steps that we could take 
incrementally today.
    Mr. Miller. Thank you. I yield back.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Ms. Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. DeMarco, the FHFA has proposed reducing the mortgage 
guarantee fees on a State-by-State basis. To determine the new 
fees, you will look at the length of judicial actions and cost 
of legal services, two factors that have high correlation to 
States with robust consumer protection laws.
    As a result, New Yorkers will see the highest increase in 
g-fees under your proposal. Do you think it is fair for 
borrowers in New York to be saddled with higher fees just 
because the State requires accurate documentation and holds 
mortgage servicers accountable in the foreclosure process?
    Mr. DeMarco. Congresswoman, with respect to the State of 
New York or any other State, the residents of that State get 
the benefit of that protection, and if that benefit carries 
some cost, this is having the residents of that State also bear 
the cost that goes along with that benefit, as opposed to the 
residents of all the other States paying that cost.
    But I would say with regard to the State g-fees--
    Ms. Velazquez. Let me ask you this question: The underlying 
message that you are sending to States like New York is, ``That 
is a wrong approach, to provide robust consumer protections,'' 
because--
    Mr. DeMarco. Absolutely not. That is not the intent of my 
message at all.
    My message to the State of New York is that you are three 
standard deviations removed from the rest of the country with 
regard to how long it takes an investor to secure their 
security interest in a mortgage after the borrower defaults, 
and that imposes a great deal of added cost on Fannie and 
Freddie.
    Ms. Velazquez. So borrowers will face higher fees?
    Mr. DeMarco. We have proposed that, and I have put it out 
for public comment. We are evaluating the--
    Ms. Velazquez. And so we have--they will be--
    Mr. DeMarco. We are evaluating the comments--
    Ms. Velazquez. --accountable for the financial crisis for 
which they were not to blame.
    Mr. DeMarco, you continue to reject principal reductions 
that could help underwater homeowners despite analysis that 
shows billions of dollars in long-term savings. As you know, 
the rationale for not participating has been the fear of 
borrowers strategically defaulting to receive benefits.
    So you cannot draft rules that will reduce the risk of 
fraud while also facilitating a faster housing market recovery 
and taxpayer savings.
    Mr. DeMarco. With regard to that issue, Congresswoman, the 
FHFA spent 6 hard months carefully studying and analyzing the 
principal reduction alternative under HAMP, which is what the 
Treasury Department asked us to do. We put out extensive 
analytics regarding the work we did and the conclusions we drew 
and the basis for that conclusion, and I think that we have 
documented the reasons why we declined participating in the 
principal reduction alternative for HAMP.
    With that said, we continue on a path of energetic effort 
to provide foreclosure prevention alternatives to homeowners 
with Fannie and Freddie loans who get in trouble on their 
mortgage, and as I went through in my earlier remarks, I think 
we have demonstrated that through over 2 million homeowners in 
trouble on their mortgage being able to retain their homes--
    Ms. Velazquez. Out of how many millions--11 million?
    Mr. DeMarco. It has to be with regard to the number of 
borrowers who are in trouble.
    Ms. Velazquez. Mr. DeMarco, I heard your answer to the 
Congresswoman from New York about reducing the business volume 
to 10 percent, and so it doesn't make economic sense to me that 
you are going to reduce a 10 percent volume in one of the most 
profitable, stable portfolios that they have. Why is that?
    Mr. DeMarco. Right. Because it is not the actually--as 
conservator, we have set out to gradually shrink the 
Enterprises' footprint in the marketplace so that we can 
restore order to private capital, and I believe that the multi-
family segment needs to be part of that just like the single-
family segment does and the retained portfolio does.
    Ms. Velazquez. We heard that the National Association of 
Home Builders estimates that up to 400,000 new multi-family 
housing units will need to be built each year for the next 10 
years to keep up with demand, so it doesn't make sense--
    Chairman Hensarling. The time of the gentlelady has 
expired.
    Did you finish the question? He can answer in writing.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Hensarling. Okay.
    In that case, the gentlelady from New York is recognized 
for a unanimous consent request.
    Mrs. Maloney. Thank you, Mr. Chairman. I ask unanimous 
consent to place in the record a letter signed by numerous 
Members of Congress in support of the gentlelady's position 
that guaranteed fees should be related to outcome--keeping 
people in their homes--and States should not be penalized for 
policies that--
    Chairman Hensarling. Without objection, it is so ordered.
    Mrs. Maloney. Thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, Mrs. Capito, for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I want to talk timing here. You have talked about reshaping 
and repositioning the GSEs. One of the great questions that I 
think we have before our committee, and you have asked for 
congressional guidance is, what is the timing aspect of this? 
Because I think we all realize if the timing window is too 
short, we could really harm the housing market, which I don't 
think anybody wants to do; if it is too long, are we ever going 
to get there?
    So how do we find that sweet spot of the timing of winding 
down and letting the private market maybe take more of that 
space? And I would like to hear your thoughts on that question.
    Mr. DeMarco. I think that is a very fair concern, given the 
trauma our country's housing system has gone through. But now 
that we are 4\1/2\ years into the conservatorships, we clearly 
are seeing signs of recovery in housing across most of our 
markets in the United States.
    So I do believe it is certainly time to begin that gradual 
stepping back, and we are trying to do that, to get it started, 
do it gradually.
    But I also believe it is a multi-year venture to do that, 
and I think some of the things we are doing are multi-year 
ventures. It is going to take time for us to fully build out 
this platform and have it fully operational, and the steps that 
we have outlined with regard to contracting the Enterprises' 
footprint in the marketplace is meant to be gradual, done 
slowly over time, so that we don't disrupt the recovery of the 
marketplace and so that investors can gradually get comfortable 
and step back in.
    Mrs. Capito. I know you are not going to react to specific 
timeframes but are you talking about a 5- to 10-year timeframe, 
or are you talking about a 10- to 25-year, or--
    Mr. DeMarco. I would like to see this within 5 years. I 
wouldn't even go 5 to 10 years. I think we should be moving 
ahead now.
    Mrs. Capito. All right. Thank you.
    The Consumer Financial Protection Bureau (CFPB) has put out 
a rule on the Qualified Mortgage (QM), and my understanding is 
that if your loan is securitized by Fannie or Freddie, you are 
automatically considered a qualified mortgage. In my view, I 
think this leads to more expansion of Fannie and Freddie 
participation because the lender is going to want a QM, the 
borrower is going to want a QM for a lot of different reasons. 
Do you have any thoughts on that issue?
    Mr. DeMarco. This is a pretty fresh rule, and we are 
actually analyzing it to understand the CFPB's--the way they 
define QM outside of the GSE realm and then looking at what the 
underwriting rules of Fannie and Freddie are, that go beyond 
QM, and we are actually reexamining this to get a sense of what 
this impact looks like. Because yes, to your point, in some 
sense it appears, at least, to run counter to the notion of, we 
are trying to contract the significance of Fannie and Freddie 
in the marketplace.
    Mrs. Capito. Do you anticipate that Fannie and Freddie 
would--because they are going to write their own rule for a QM 
or have their own parameters. Is that correct?
    Mr. DeMarco. They have their own underwriting rules--
    Mrs. Capito. Okay.
    Mr. DeMarco. --and so we are looking at that with--in light 
of what the CFPB has determined is appropriate to define QM in 
the non-GSE realm.
    Mrs. Capito. Do you think there could be a scenario where 
you have a QM--you have a Qualified Mortgage in one scenario 
but in the Fannie and Freddie realm, it is not quite a QM? To 
me, that would lead to massive confusion.
    Mr. DeMarco. Let me put it this way, the way the CFPB has 
written this rule is that right now a mortgage that is not 
otherwise a Qualified Mortgage could be so if it passes through 
Fannie and Freddie's automated underwriting system.
    Mrs. Capito. Okay.
    The other question I is on the taxpayer protection issue. 
Could you--I only have about a minute left, and I know this is 
very complicated, but in my opening statement I talked about 
the $187 billion or whatever the exact figure is, and then we 
have talked about the $9.6 billion in net income over the last 
several quarters.
    What does that $9.6 billion actually go to? Does it ever 
touch that $187 billion? Will it ever if it keeps generating 
profits? I guess what I am asking is if the taxpayers are ever 
going to get their money back?
    Mr. DeMarco. The amount that the taxpayers have put in with 
regard to covering the losses of Fannie and Freddie is not 
being reduced through these dividend payments.
    The taxpayer is getting back a return on the capital that 
is put in; it is a dividend on the capital put in. But it is 
not a repayment of that capital. We are not lowering the amount 
that is owed to the Treasury Department under the senior 
preferred agreement.
    Mrs. Capito. If the improvements continue, would that be a 
scenario where the principal would begin to get repaid, or do 
you--
    Mr. DeMarco. That is not how the agreement is structured.
    Mrs. Capito. That is not the agreement. Okay. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. Watt, for 5 minutes.
    Mr. Watt. Thank you, Mr. Chairman. Mr. Chairman, in light 
of media speculation which started over the weekend, I decided 
to attend today's hearing as a member of this committee because 
of the critical importance of the subject being addressed. I am 
here solely to listen and not to engage. Therefore, I am going 
to yield back the balance of my time.
    Chairman Hensarling. The gentleman yields back the balance 
of his time.
    The Chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. DeMarco, I want to go back to something that you were 
saying a while ago and kind of get you to rephrase that because 
obviously there has been a lot of controversy about the 
principal writedown policy. In fact, there were some people 
here earlier who I think disagree with you, if you may have 
noticed, I don't know.
    I think you spent an inordinate amount of time researching 
that issue. Is that correct?
    Mr. DeMarco. Yes, sir.
    Mr. Neugebauer. And the finding was--and it is your 
responsibility as the conservator--your responsibility is to 
conserve and do what is in the best interest of the taxpayers. 
Is that correct?
    Mr. DeMarco. Yes, sir.
    Mr. Neugebauer. And so did you conclude, then, that writing 
principal down for people who were already paying their 
mortgages was not in the best interest of the taxpayers?
    Mr. DeMarco. Yes, sir.
    Mr. Neugebauer. So I think it is kind of interesting, one 
of the things that has been said about the housing crisis is 
that Freddie and Fannie played a part in it, and there are a 
lot of people to blame, but one of the things that keeps kind 
of coming up is that Freddie and Fannie were being used by 
Congress and other political influence to make housing policy 
that wasn't necessarily sound. Would you concur with that 
finding?
    Mr. DeMarco. I would, sir, yes.
    Mr. Neugebauer. Yes. But isn't it kind of interesting that 
it is still going on?
    Mr. DeMarco. It has a certain irony after $188 billion of 
taxpayer money going into them.
    Mr. Neugebauer. Yes. We still have people who want to 
continue to use Freddie and Fannie for housing policy. Is that 
correct?
    Mr. DeMarco. It would appear that way, yes.
    Mr. Neugebauer. Yes. So I found it kind of interesting, I 
noticed that there were a couple of--I don't know how many 
people were involved, but some attorneys general are calling 
for your replacement because you didn't buy into the principal 
writedown program, so--and I guess--I think it is also 
interesting, some of those attorneys general also were part of 
the settlement. And what we do know is about half of the money 
that these States received for the settlement went to housing 
programs, but the other half of it didn't go to housing. Is 
that correct?
    Mr. DeMarco. From what I have read in press reports, yes, 
sir.
    Mr. Neugebauer. So I think one of the things that it points 
out is the reason that we need to begin to diminish the Freddie 
and Fannie role is that we--I think you heard me say in my 
opening testimony that we don't seem to have learned any of the 
lessons and that, in fact, there just continues to be pressure 
from within Congress and outside groups for Freddie and Fannie 
to keep doing what they have been doing. And basically what you 
testified is we are just putting more and more potential 
contingent liability on the American taxpayers. Is that a fair 
assessment?
    Mr. DeMarco. It is. And certainly, as was demonstrated 
here, this is an emotional issue. It is one that affects real 
families. And I take very seriously the harm that this 
financial crisis and this housing crisis has imposed on 
families across the country.
    But we have tough decisions to make and we have to rebuild 
this system so that we don't put these families at risk like 
this again and we don't put the American taxpayer at risk like 
this again.
    Mr. Neugebauer. I want to go back to one other issue, and 
that is the portfolio. And you and I have had some discussions 
about that.
    We are at record-low interest rates. In fact, I don't know 
how we can go any lower from here but the Chairman of the 
Federal Reserve seems to be on a mission to try to see if we 
can get these rates lower. And so, my opinion is that the value 
of your portfolio has to be at its maximum right now, because 
as those rates begin to trend back up, the value of your 
retained portfolio assets will go down. Is that typically how 
that happens?
    Mr. DeMarco. For certain portions of the portfolio, yes; 
for others, there may be more critical economic factors 
affecting the value of the assets.
    Mr. Neugebauer. What efforts do you currently have underway 
to kind of accelerate the reduction of the portfolio and what 
are some of the things you are doing in that respect?
    Mr. DeMarco. An important thing to understand about the 
retained portfolios of Fannie and Freddie is that they look--
they are much different than they were the day they went into 
conservatorship. When they went into conservatorship, they were 
dominated by their own mortgage-backed securities, which traded 
in the marketplace, and home mortgage loans that they simply 
bought the mortgage and put it on their balance sheet.
    Today, it is much different. It is much less liquid.
    They have a lot of non-performing loans on their balance 
sheet. They have a lot of loans that have gone through loan 
modifications. Those modified loans are sitting on their 
balance sheet.
    And as they have run off the more liquid stuff, including 
their own mortgage-backed securities, or sold that into the 
marketplace, they are left with less liquid assets, and that is 
what we are trying to gradually get off their balance sheet.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. There seems to be a universal belief that it 
is a bad idea to have the taxpayers take all the risk and 
private shareholders get the upside. We tend to view the two 
GSEs as government agencies, but as I understand it, 
technically they are 21 percent owned by their private 
shareholders. Furthermore, by keeping this 21 percent 
ownership, the net operating losses--the tax benefits--are 
still retained, in effect, by these entities.
    We have a net of $137 billion of taxpayer money. It is on 
its way up to maybe $200 billion. Haven't the taxpayers done 
enough to deserve 100 percent ownership of these entities and 
to know that we are not going to lose revenue to the net 
operating loss carry-forwards? Why aren't we taking steps to 
acquire 100 percent ownership?
    Mr. DeMarco. We are looking forward to legislative action 
by the Congress of the United States to make those 
determinations.
    Mr. Sherman. But until then, the taxpayers own 21 percent 
of something we are already paying $137 billion for, and until 
then, we are going to suffer the tax reductions of the largest 
pool of net operating losses I am aware of--losses in effect 
financed by our money. Perhaps there will be some action by 
Congress on that.
    Mr. DeMarco. I would welcome it.
    Mr. Sherman. I would ask you to propose some, as a matter 
of fact. I would like to get your technical assistance in 
putting that together.
    Over the last year or so, you have raised the guarantee 
fees in an attempt to level the playing field for private 
capital. Can you provide the committee with your findings 
regarding any increase in private capital participation in the 
secondary market as a result of your fees or in conjunction 
with your fees being increased?
    Mr. DeMarco. Given that along with Ginnie Mae, Fannie and 
Freddie are still representing over 90 percent of the 
securitization market and well over 80 percent of mortgage 
flow, one can't say that this has led to a dramatic reversal 
with regard to their share. But I can report, and I have said 
this publicly, that in our own conversations with market 
participants and observations of market practices, we do 
believe we are getting closer to a price at which we are going 
to see more mortgages not get sold to Fannie and Freddie 
because there is a more profitable execution elsewhere in the 
marketplace.
    Mr. Sherman. So you think you are getting there but you are 
not--
    Mr. DeMarco. We are making progress, sir.
    Mr. Sherman. You are not there yet.
    I just want to comment that it was interesting to hear your 
opening remarks saying that the beneficiaries of the GSE 
activity are not so much the homebuyer as the homeowner, but I 
don't think that is necessarily a bad thing. Had we seen a 
further collapse in home prices, this country would be in much 
worse shape than we are now.
    Mr. DeMarco. And I wasn't putting a value judgment on it, 
Congressman. I was simply--
    Mr. Sherman. Yes.
    Mr. DeMarco. --noting that if you are subsidizing 
everybody, there is a basic economic principle--
    Mr. Sherman. I think we all understand that you provide 
lower interest rates and that supports housing prices.
    Can you provide the committee with a timeline for the 
completion of this single securitization platform that you are 
constructing?
    Mr. DeMarco. I cannot. We said at the outset that it would 
be a multi-year effort. In response to an earlier question, I 
said that I would like to see this--I think this transition can 
be done within 5 years, but beyond that it is very hard to put 
a strict timeline on something when you are still in the design 
phase, trying to scope out what it is, and it is a pretty 
material undertaking, including a good bit of--
    Mr. Sherman. You have talked about creating a ``market 
utility or public utility.'' There are private sector 
enterprises and we could have some public utility that can 
package loans and sell them into the market. But only the 
Federal Government can provide a Federal guarantee.
    Are you anticipating that this public utility is providing 
a Federal guarantee or just packaging and selling?
    Mr. DeMarco. I am anticipating that this utility will be 
structured in such a way that it can issue mortgage-backed 
securities that have a Federal guarantee on them and it can 
also issue mortgage-backed securities that do not have a 
Federal guarantee on them. They would not, presumably, be the 
entity providing that guarantee for the government. This is the 
operational platform under which the securities would be 
produced, sold into the marketplace, and because they would be 
done as a market utility, that consistency would make the 
market more liquid.
    Mr. Sherman. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. McHenry, for 5 minutes.
    Mr. McHenry. Mr. DeMarco, thank you for your service to our 
people and within our government.
    I want to sort of take off from the previous line of 
questioning. You said that 90 percent of new mortgage 
originations are backed by the Federal Government. And a 
majority of the outstanding mortgages you preside over in what 
is the successor of Fannie and Freddie.
    Now, I bring this up because the chairman started by 
asking--his final question was about how do you incentivize 
private capital back into this marketplace. Let me begin one 
step before that, which is, what are the current barriers to 
private capital coming into this secondary mortgage market?
    Mr. DeMarco. The dominant portion of the market being 
served by Fannie and Freddie operating with taxpayer support, 
uncertainty about what the government's role in the future is 
going to be, including the timing and ultimate disposition of 
Fannie and Freddie. There is uncertainty with regard to 
rulemakings that are still pending in the marketplace, 
including capital rules, and waiting to see a bit more how the 
market itself regains its footing. These are all contributing 
factors.
    Mr. McHenry. So the first factor, which is the government 
backing, makes these mortgages cheaper, which means the private 
sector can't compete? Is that--
    Mr. DeMarco. That is basically it, yes.
    Mr. McHenry. That is basically it. Okay.
    So how can we incentivize private capital to come in?
    Mr. DeMarco. One way we can do it, and that we are doing it 
is we are--as we talked about earlier in this hearing--
gradually increasing guarantee fees to move towards a pricing 
that was reflective of what private capital would expect to 
manage that risk for its own--with putting its own equity in 
place. That is an important component.
    Mr. McHenry. Have you taken steps to actually put the two 
separate platforms of Fannie and Freddie together, and is that 
process ongoing?
    Mr. DeMarco. It is. And that is part of our conservator 
mandate. It is not just about building for the future, as 
important as that is.
    Fannie and Freddie are operating a combined $5 trillion 
book of business. We have to continue to invest in the 
infrastructure for that business.
    And, I have spent a lot of time thinking, what does it mean 
as conservator of two companies that the Administration says it 
wants to wind down? How do I invest taxpayer dollars in 
continuing to develop and strengthen the underlying 
infrastructure of their securitization business, using taxpayer 
money, if at the same time we are expecting ultimately to wind 
these things down? So the platform gives us a more efficient 
way of utilizing taxpayer dollars.
    Mr. McHenry. What are the advantages and disadvantages of 
spinning off that entity as a private versus sort of a 
government-owned utility?
    Mr. DeMarco. I think that certainly if private market 
participants thought they had a greater stake in what this 
platform was doing, we would get their input into it, and it 
would help shape the design. I said when I put out the 
scorecard, we are intending to develop a formal mechanism to be 
receiving market input on this, but I think that the more they 
see that this is something that they can have access to and 
participate in, what it does to serve the market will attract 
them more to what we are doing.
    Mr. McHenry. In previous hearings, I have been very frank 
with the position you have been put in as acting Director and 
the decisions you have had to make. Now I just ask very broadly 
and simply, what is your role here as conservator?
    What does that mean? Does that mean you are here to protect 
the taxpayer? Does it mean you are here to see a vibrant 
housing marketplace and increasing values? Is it to make sure 
that investors are rewarded for investing in these entities? 
What is your purpose and role?
    Mr. DeMarco. Almost all of that, Congressman. In my 
prepared statement, I go through the statutory provision here, 
but fundamentally, we have a responsibility as conservator to 
conserve and preserve the assets. And what that means with the 
American taxpayer providing this capital, with all the risk 
exposure on the legacy book, that meant minimizing losses.
    We also have a responsibility for ensuring stability and 
liquidity in the mortgage market and the statute also tells us 
we have to maximize our efforts to prevent foreclosures subject 
to a net present value test where we are protecting taxpayers.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New York, Mr. Meeks, for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. DeMarco, let me pick up on a couple of things--couple 
of questions, I think, that were asked by Mr. Sherman first, 
and that is--let me first deal with the public utility that you 
proposed. I am wondering, what actions will you take to ensure 
that the large banks and investment firms and others who were 
bad actors, actually, that were shown to have contributed to 
the financial crises, to prohibit them from utilizing these 
public utilities that you proposed?
    Mr. DeMarco. Yes. I think that one of the really important 
things about restoring industry standards from data to the way 
mortgage securitization is done, by getting that to be a single 
industry standard rather than a set of proprietary standards 
operated by major, huge financial institutions--by doing that, 
Congressman, I think we make it easier for small and mid-sized 
institutions to continue to be active participants in this 
marketplace. Because then the industry and the vendors that 
serve this industry have to develop the technology just once 
and then that technology is available to all market 
participants.
    That is why I think it is so important to get these 
standards done and to have standard contracts, standard 
disclosures, standard data reporting, because I think that is 
what is going to help a lot of the small and mid-sized 
participants to remain active in this marketplace.
    Also, what we are looking for with this platform is it is 
very important to me that this operate in such a way that if 
you are a local bank in the State of New York or wherever, that 
you have access to the secondary mortgage market so that you 
can originate mortgages and sell them, and this platform needs 
to be designed in such a way that we ensure that kind of access 
for small and mid-sized institutions.
    Mr. Meeks. Do you think that will exclude the large ones, 
those that have really caused these crises, in my estimation, 
from also trying to take advantage of it?
    Mr. DeMarco. I am not looking to exclude large institutions 
from the marketplace. I am looking to make this marketplace as 
competitive and transparent as we can make it.
    Mr. Meeks. And let me ask, because on another issue--let me 
ask this question first--I want to make sure that I understand. 
We had a hearing here not too long ago, and the title of the 
hearing was, ``Fannie Mae and Freddie Mac: How Government 
Housing Policy Failed Homeowners and Led to the Financial 
Crisis.'' What do you think? Did Fannie and Freddie cause the 
financial crisis?
    Mr. DeMarco. It is hard to say that Fannie and Freddie have 
drawn over $100 billion to the American taxpayer and didn't 
have anything to do with this crisis, so certainly the business 
decisions of these companies in the years leading up to 
conservatorship contributed to the housing crisis and the 
economic crisis we had here. There were a lot of factors at 
play and honestly, Congressman, I am not one to sign up for a 
single explanation for what caused this crisis.
    There are so many parties that have a share in the blame 
here, from regulators, to Fannie and Freddie, to investors, to 
big financial institutions, to borrowers. There is fraud out 
there. There are a lot of contributing factors to what went 
wrong in this marketplace.
    Mr. Meeks. And let me also, because I know that you are 
suing some major banks for mortgage-backed securities that 
originated with triple-A ratings that Freddie and Fannie 
bought. Can you tell me why that lawsuit was brought?
    Mr. DeMarco. It is consistent with how FHFA has understood 
its conservatorship mandate to conserve and preserve the assets 
of the company. If there are losses being absorbed by Fannie 
Mae and Freddie Mac that by contractual or legal rights should 
be absorbed by some other party, or be the responsibility of 
another party, we are looking, with these companies in 
conservatorship, to exercise those rights and to get that 
compensation on the losses Fannie and Freddie have had.
    So we see that with regard to the representation and 
warranty put-back claims that Fannie Mae and Freddie Mac have 
made. And with regard to private label securities, we felt 
confident that we had grounds to say that some of these 
securities sold to Fannie Mae and Freddie Mac were 
misrepresented in terms of what was there and that, after 
seeking other remedies, we resorted to the system that is in 
place to resolve these sorts of business disputes. We have 
resorted to the court system to set forth our claim and to seek 
appropriate compensation for these losses, and that is part of 
our responsibility to protect the American taxpayer.
    Mr. Meeks. I don't think I am going to have much time left, 
so I will yield back.
    Chairman Hensarling. That is an accurate observation on the 
gentleman's part.
    The Chair now recognizes the gentleman from California, Mr. 
Campbell, for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman.
    And thank you, Director DeMarco.
    I am going to follow up on some themes we have kind of 
touched on already, but dig a little deeper into them. You have 
mentioned that it will take several years to do GSE reform and 
to transition to a new and different system. What if we don't 
get started? In other words, what are the costs or risks of 
inaction, of simply just leaving the GSEs as they are, well 
enough alone?
    Mr. DeMarco. There are several. First, certainly to the 
extent that the ongoing role of the GSEs crowds out market 
participants or makes it harder for them to compete, they are 
going to go deploy their capital someplace else. Then, if you 
want to draw them back in, you just make it that much harder.
    Second, I have testified before this committee numerous 
times about the challenge of having two large companies like 
this in conservatorship. The two critical foundations of these 
companies are the people who work there and the basic 
infrastructures that support their operations. And we have been 
asking the employees of Fannie Mae and Freddie Mac for 4\1/2\ 
years to continue working at these companies under this kind of 
scrutiny and criticism and at reduced pay, and we have told 
them, ``We don't know what is going to happen to you. The 
Administration keeps saying we are going to wind you down. All 
of these legislative proposals are that we are not going back 
to that business model. We can't tell you where we are going, 
but we want you to stay and keep working here.'' These 
individuals, they have careers for themselves and they have 
choices, and so I think that we certainly have risk with that 
kind of uncertainty.
    And then another risk that I spoke of earlier is, we need 
to continue to invest in the infrastructure. Every day we buy a 
new 30-year mortgage, that is a 30-year commitment that the 
American taxpayers made, and I have to have a technology 
infrastructure and an operating infrastructure to be able to 
manage that risk over its entire lifespan, and that is quite a 
long tale already. I have to invest taxpayer dollars to keep 
that sound, so this is another reason why I think we should get 
going.
    Mr. Campbell. Looking at the g-fees, we mentioned there is 
a subsidy there; they are not equivalent to what--as you 
mentioned in your answer to Mr. McHenry's question, something 
that might bring private capital back would be a g-fee that 
would be equivalent to what the private sector deemed was the 
risk. If you look at the g-fees we have now--and I understand 
some of those have been diverted and are going to general 
government purposes that are unrelated to housing, or Fannie 
and Freddie, or FHFA, or anything--but if you look at the total 
amount of the g-fees, how close are we to what would be a 
market, for lack of a better term, rate or the kind of rate 
that would make private capital look and say, ``Maybe I would 
take that risk for that price?''
    Mr. DeMarco. I have certainly heard from some market 
analysts who think that we are getting close. We have gone 
from--my testimony says that we have basically doubled the 
average g-fee pre-conservatorship from 25 to 50, and so I think 
that we are within striking distance of certainly getting there 
with regard to at least some portion of the credit risk.
    One of the things that is important about the contract 
element of our strategic plan and what we want to do with these 
risk-sharing, since that is actually going to give us some 
actual market observation of what the market is pricing this 
risk at, and that would make me better-informed to be able to 
answer a question--
    Mr. Campbell. And it will do that how? How is that going to 
provide that information?
    Mr. DeMarco. What we are going to do is we are going to 
sell off some portion of the credit exposure on these mortgages 
and so the investor in the entity taking on that risk is going 
to want a return on it, and so through that price we will be 
able to start to discern how they are assessing the market 
price of this risk.
    Mr. Campbell. Okay. Other than the g-fees, what else would 
attract private capital? What else can we do to start to bring 
in, crowd in, however you want to call it, private capital back 
into taking some additional risk in this sector?
    Mr. DeMarco. One thing that hasn't come up here but 
certainly is on the minds of market participants has to do with 
the conforming loan limits. Conforming loan limits is something 
the Congress of the United States has legislated on a number of 
times since conservatorship, but the last act by Congress 
actually was to see a substantial reduction in the Fannie Mae-
Freddie Mac conforming loan limit in high-cost areas. In early 
2012, it went from basically $730,000 to $625,000, and the 
market is still operating. I think that there is room here for, 
again, as with everything else we are doing--g-fees and so 
forth--a gradual drawing in of conforming loan limits is 
another way to start attracting capital back.
    Mr. Campbell. Thank you.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    And thank you, Mr. DeMarco, for being here.
    Mr. DeMarco, I don't know how I feel about your new 
approach but I want to congratulate you for having the courage 
to do it. Honestly, it has kind of surprised me that in the 
last Congress and this Congress, we have not yet had a single 
hearing on what we are going to do with the GSEs moving 
forward. There are several proposals on the table, and they are 
all worthy of debate, but thus far we have been--I know I 
personally have reached out to a lot of people trying to figure 
out what we should do and where we should go, but thus far, to 
my knowledge, we have had no formalized discussion.
    My hope is that your proposal--good, bad, or indifferent--
will prompt us into at least having an adult conversation about 
where we want to go. So I will watch it closely and maybe at a 
later time, we will have a more in-depth debate as to whether 
it is good or not. But as of today, I just want to congratulate 
you for having the courage to take some action.
    Mr. DeMarco. Thank you, sir.
    Mr. Capuano. As far as the principal writedown, look, I 
fall on the other side of the issue than you do. We can sit 
here for the next 5 minutes and rehash it but that is not going 
to help.
    I suspect that what you said earlier--I accept it, that you 
feel the pain of the people who are kind of caught in this 
vortex. And for me, the people that I have felt the most 
difficult for, at least lately, for a while now, are the people 
who are struggling to meet their mortgage regardless of 
principal writedown.
    I have remortgaged my house 100 times and it is all about 
cash flow. It is nothing else other than, can I afford it? How 
much do I save? How much do I have to cost each month?
    Cash flow is the most important thing that any homeowner 
is--at least the average homeowner, anyway. And the cash flow 
can be affected lots of different ways. Principal writedown is 
one way, and it is a good way by some standards, and that is 
fine.
    The other way is to extend the term or reduce the rates. 
The problem with a lot of these people is that they cannot take 
current benefits of reduced, like I just did by rewriting my 
mortgage, because they are underwater, because they might have 
missed a couple of payments. Again, and I want to distinguish 
that group of people from people who haven't paid anything for 
the last 10 years; it is a different group.
    But there are an awful lot of people who are struggling 
who, maybe if their mortgage was $200, $300, or $400 less per 
month, they could make it. Has there been any consideration to 
coming with a 40-year mortgage or a 50-year mortgage if you 
don't want to write down principal and allowing these people, 
temporarily as a one-time thing, to get into these lower rates 
so that they can get their homeownership back, their life back, 
their control of their life back, and so you can get off the 
hot seat for not doing enough for people with whom we are 
concerned? Have you given any consideration to other 
alternatives?
    Mr. DeMarco. Absolutely, Congressman, and I appreciate an 
opportunity to provide that information to you.
    When we looked at the HAMP principal forgiveness, that was 
an approach within HAMP, but it still focused on getting the 
borrower to a monthly payment of 31 percent of the household's 
monthly income. The loan modifications we are doing at least 
get the borrower to 31 percent because HAMP is the first thing 
we are doing. Fannie and Freddie have done more HAMP refis than 
anybody.
    So to your point, we are lowering the interest rate, we are 
extending the term to 40 years, we are forebearing on 
principal. We are taking the underwater portion of principal 
and setting it aside and charging a zero rate of interest on 
it. And all these things we are doing to do exactly what you 
just laid out, which is to enable the household's cash flow to 
be able to support the mortgage.
    We have gone beyond HAMP. Fannie and Freddie have developed 
modification tools that will result in an even lower monthly 
payment than HAMP would for many of our borrowers. The Treasury 
Department liked it so much that they adopted it themselves 
over a year ago as what they call HAMP 2. It is now part of 
their program because they saw how it was working for us.
    But it does the very things that you have said, 
Congressman, about trying to get the borrower's monthly payment 
down. If they want to stay in that house, we want to give them 
every opportunity to do that.
    One other thing is, with respect to refinances, we have 
touched lightly on the HARP program during the hearing, and 
that is enabling underwater borrowers to be able to refinance 
their mortgage. But I can only do that for mortgages Fannie Mae 
and Freddie Mac already own. And we have seen great success 
with this program.
    If I may, there was one thing in my written statement that 
hasn't come up at this hearing but I would like to make sure 
the Members are aware of it. We are very pleased with the 
success of the HARP program and we are getting prepared to 
undertake a marketing campaign to further reach out to let 
borrowers know, this is a legitimate program and this program 
really can help you, because as much success as we have had 
with it, we want to see more borrowers refinance to take 
advantage of it.
    Mr. Capuano. Mr. DeMarco, I appreciate all that. I, for 
one, would love to see some more detailed statistics on that, 
because to be perfectly honest, when people come into my office 
foyer who can't access the program or they don't know about it, 
and if I can help that in any way, I like the idea of reaching 
out to people, but any detailed information about what you just 
said would be very helpful to--
    Mr. DeMarco. I will make sure our office gets that to you, 
Mr. Capuano.
    Mr. Capuano. Thank you.
    Mr. DeMarco. I would really like to see this work.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from North Carolina, Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Mr. DeMarco, thank you for your very capable service and 
your thoughtful presentation today.
    You recently noted that the Administration's failure to 
provide a detailed plan on how to wind down the GSEs has made 
it harder to support the housing market and stabilize Fannie 
and Freddie. Given that the Administration has not provided 
leadership on winding down the GSEs, what steps have you taken 
as FHFA Director to prepare the GSEs for a post-conservatorship 
housing market? Is there more that can be done or does winding 
down the GSEs require some guidance from the Administration?
    Mr. DeMarco. Ultimately, bringing the conservatorships to 
an end, which is the ultimate wind-down, is going to require 
action by the Congress of the United States. In the meantime, 
we are taking steps to gradually contract the Enterprises' 
footprint in the marketplace: we are raising guarantee fees; we 
are now starting to sell single-family mortgage credit risk; we 
are shrinking the overall size of their multi-family book; and 
we are selling assets at an accelerated rate.
    I will say about the Administration--I obviously have an 
important relationship with the Administration. The Treasury 
Department is the senior shareholder of Fannie and Freddie. I 
consult with them a lot on these things and I believe the 
Administration needs to speak to itself with regard to the 
specifics of what I have laid out, but I believe I have a good 
relationship with the Administration in talking through these 
issues and in indicating to them the direction that, as 
conservator and regulator, I believe it is useful to go, and I 
benefit from the feedback I get from them.
    Mr. Pittenger. So you feel that you have been adequately 
directed?
    Mr. DeMarco. I feel like I have a good working relationship 
and good consultation and I know where we agree and where we 
disagree. I would say what I need most to bring these 
conservatorships to an end is I need both the Congress and the 
Administration to agree on a legislative path that defines the 
role of the government in the mortgage market going forward so 
that we can know where we are actually building towards as we 
build for the future.
    Mr. Pittenger. Thank you.
    I yield back my time.
    Mr. DeMarco. Thank you, Congressman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much.
    And welcome, Mr. DeMarco.
    Mr. DeMarco, with home sales and pricing--prices of homes 
increasing and mortgage spreads back at normal levels, why do 
Fannie and Freddie continue to assess an adverse market 
delivery charge that took in nearly $3 billion in 2012? Aren't 
these actually fees which are no longer needed and is 
effectively a tax on new homebuyers?
    Mr. DeMarco. I wouldn't say it is a tax on new homebuyers, 
Congressman, but I would say that we were--on the one hand, as 
I have made clear, we are on a path of continually raising the 
g-fees. You are talking about a component piece of the g-fees 
that was put in place when the mortgage markets were in 
distress.
    I will say that as part of our valuation of the next steps 
for increasing g-fees, we are looking at the composition of g-
fees, including adverse market fees and so forth. So I am 
assessing what you are talking about but I want to be clear 
that the overall path we are on is to continue to increase g-
fees.
    Mr. Scott. All right.
    Let me ask you about loan level price adjustments, as well. 
Loan level price adjustments of as much as 3 percentage points 
make Fannie and Freddie execution uncompetitive relative to the 
FHA, and reducing these fees would make higher LTV loans with a 
private M.I. more competitive. Do you agree that these LLPAs 
are distracting the market and hampering the return of private 
capital?
    Mr. DeMarco. No. I think the more we raise the overall g-
fees, the more we are going to encourage private capital back 
into this marketplace.
    Mr. Scott. All right.
    Now, with the Administration's intent on winding down 
Fannie and Freddie, is it your sincere and honest belief that 
the private market, in and of itself, will be able to absorb 
this void, especially considering, Mr. DeMarco, that 90 
percent--this is a huge void--90 percent of all of the new 
mortgages were done by Freddie and Fannie? And it is just 
baffling to me that--I just am not satisfied that we have 
something that can take the place of that.
    Mr. DeMarco. Congressman, here is how I think about it: The 
short answer to your question, but I want to make sure I frame 
the question right, can the government step entirely out of 
this marketplace and can this single-family mortgage market be 
supported without any government involvement, and is that what 
I would like to see? That is not what I anticipate and it is 
not really what I am expecting or would like to see.
    But I would frame it this way: The single-family mortgage 
market in the United States is a $10 trillion market, and I 
don't expect the outcome to be that all $10 trillion is done by 
private capital without government involvement nor am I 
expecting all $10 trillion to be done by the government without 
capital. That dial--if you think about a dial on that range--
has moved well towards the government having most of the 
responsibility of this mortgage market, and that dial has moved 
in the last 5 years.
    What I would envision is we have to start moving that dial 
away from government and away from taxpayers and back towards 
more private capital participation. But my gosh, between zero 
and $10 trillion there are a lot of places to put that--to 
reset that dial, and I think that we can make substantial 
progress away from taxpayers and still have a vibrant role for 
government.
    And I have suggested elsewhere that in thinking about where 
that government role ought to be, it might be constructive for 
Congress to begin with the traditional, explicit government 
guarantee programs, such as the FHA program and the VA program, 
because those are existing programs to provide guarantees, and 
let's figure out where Congress intends them to serve the 
market and then one can think about, well, what is left and 
what does the government need to do to support the rest?
    Mr. Scott. But doesn't it make sense that we ought to 
figure out exactly what government's role should be? If you 
agree that government has the role here and it does, how do we 
figure out how to make that work? How do we guarantee that the 
30-year fixed mortgage will stay in place and available as an 
option to that without the government role?
    Chairman Hensarling. The time of the gentleman has expired. 
The witness can answer in writing.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    Thank you, Mr. DeMarco, for being here today. I want to 
first recognize and congratulate you for the 2012 strategic 
plan, the three-point plan that you have undertaken, and I 
think we all agree that is the direction we need to go: first, 
to build a new infrastructure for secondary markets; second, to 
eventually contract the GSEs' dominance; and finally, to 
maintain the foreclosure prevention activities and credit 
availability that the American public require.
    And I want to ask around those three things some questions. 
First, on building the new infrastructure--and I know Mr. 
Capuano asked a little bit about this--do you know what--this 
is sort of a two-part question--timing you have for developing 
a single security, because right now there are changes on a 
monthly basis that some of the servicers are having to deal 
with, and is that single platform that you are envisioning--are 
you trying to use that as a foundation or a building block for 
the reformed housing finance system going forward?
    Mr. DeMarco. The answer to your second question is yes, I 
do think that this could serve as a building block for Congress 
to utilize in envisioning a future secondary mortgage market.
    The answer to the first question about how long, we 
announced 13 months ago that it was our intention to work with 
Fannie and Freddie to develop this platform so we made that 
clear to the Congress and the public. In October of last year, 
we issued a White Paper in which we described for the market 
the potential scope of this platform and how it would actually 
operate and we solicited public input on this.
    We have been considering that input in going about the next 
phase of the design of the platform. We expect to continue to 
reach out to market participants in a formal way to be able to 
continue to get market input.
    But overall, end to end, this is a multi-year project.
    Mr. Stivers. Great. Thank you. And I want to thank you for 
that work, and I think we can potentially use that as a basis 
for our system moving forward.
    I will ask you a rhetorical question that I don't think you 
are going to answer but I am going to ask anyway: Once that is 
complete, do we really need two GSEs? I am not going to ask you 
to answer that, but that is a rhetorical question.
    I would like to ask you some questions with regard to the 
system moving forward and how it pertains to regional banks and 
community banks. Do you believe it is important to maintain a 
competitive market in mortgage origination, secondary, and 
servicing markets--
    Mr. DeMarco. Absolutely.
    Mr. Stivers. Do you think that--do you believe that these 
markets are more or less competitive than they were 5 years ago 
today?
    Mr. DeMarco. Interestingly, in some ways, they are perhaps 
getting a bit more competitive. Some of the largest 
institutions have actually stepped back a little bit.
    Mr. Stivers. And do you believe that concentration in those 
markets--additional concentration of market share in those 
markets--would be a good thing or a bad thing going forward?
    Mr. DeMarco. I am not a big fan of concentration in our 
financial system, and that is why the more we can do to keep 
this competitive and to keep an active role for small and mid-
sized players, the better.
    Mr. Stivers. I agree with you, and I think that is what has 
led to some of the too-big-to-fail, and so I guess I would ask, 
what steps do you take or what analysis do you perform in 
making changes to the GSEs and market rules to ensure that 
those changes won't disproportionately affect regional banks or 
community banks and otherwise lead to more consolidation or 
concentration market share?
    Mr. DeMarco. I think it is critically important that we 
develop standards that define how the mortgage market works.
    Just as one very quick thing--if you used to sell a 
mortgage to Fannie Mae or Freddie Mac and you are a local bank 
and you sell one loan to Fannie Mae you had to provide a whole 
bunch of proprietary coding regarding the characteristics of 
that mortgage. If you were to take that mortgage and say, ``No, 
wait, I want to sell it to Freddie,'' you would have to provide 
all that information in an entirely different system with 
different data definitions, and so forth.
    That was particularly costly for our small and mid-sized 
institutions. It also degraded the quality of the data that 
each company was getting. That is why I think that data 
standards are important and will really help smaller 
institutions compete.
    Mr. Stivers. Thank you.
    And I would just like to thank you for what you are doing. 
I hope we can all work together on this committee and with the 
Senate and with the Administration, because I think every day 
we wait to reform the GSEs is another day that the taxpayers 
are on the hook for more potential losses.
    I want to thank you for the way you have run your 
conservatorship, and I look forward to working with you in the 
future.
    With that, I yield back.
    Mr. DeMarco. Thank you, Congressman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    And I thank the ranking member, as well.
    Mr. DeMarco, some things bear repeating. You have indicated 
to Mr. Scott--and I may be paraphrasing--that you believe there 
is a role for the public sector in home mortgage financing. Is 
this correct?
    Mr. DeMarco. I do, Congressman.
    Mr. Green. That then means, sir, that you are now in 
agreement with the builders that I talk to, the bankers that I 
talk to, the REALTORS that I talk to. I think that this is a 
fair assessment when I say that most of the people who are 
involved in this process that I talk to see a public as well as 
a private role in mortgage financing. Is this a fair statement?
    Mr. DeMarco. It is. And to be clear and elaborate on it, I 
think that--
    Mr. Green. Let me do this, because my time is limited, and 
I will try to give you some time to elaborate, but I do want to 
add this, that because you and I agree that there is a role for 
the public sector, it also means that you and I disagree with 
people who say that there is only a role for the private 
sector. You and I have to assume that this is a fair statement, 
true?
    Mr. DeMarco, listen, you and I are going to have to agree 
or disagree, and right now you and I seem to be in agreement.
    Mr. DeMarco. We are, Congressman.
    Mr. Green. All right. That is what I am talking about, Mr. 
DeMarco--our agreement.
    Mr. DeMarco, that makes news for me because prior to this 
hearing, I was not absolutely sure where you were, and I 
appreciate your being absolutely certain as to where you are.
    Now, moving along quickly, Mr. DeMarco, you indicated that 
you support the HARP program. Is that correct?
    Mr. DeMarco. Yes, sir.
    Mr. Green. That is a refi program.
    Mr. DeMarco. Yes, sir, it is.
    Mr. Green. And, Mr. DeMarco, if you support it tell me, how 
are you working to make sure that persons who are under the 
purview of the GSEs can benefit from your support?
    Mr. DeMarco. We have continually looked at the performance 
of this program and made changes to make this more accessible 
to borrowers around the country. And I think that the numbers 
in 2012 speak for themselves, but importantly, we are not done. 
As I said a little bit earlier, we are intending to undertake a 
marketing campaign in the near future to make citizens more 
aware of this program and the potential benefits--
    Mr. Green. Permit me to ask this: Is there something that 
prevents you from creating an automated process by which you 
can send notices to persons who are financed through the GSEs--
you hold their mortgages--sending them a notice indicating to 
them that they may be eligible for this program?
    Mr. DeMarco. That is being done, Congressman. It is done by 
their mortgage servicer.
    Mr. Green. By the mortgage servicer?
    Mr. DeMarco. Yes, sir.
    Mr. Green. Would it in any way be too much--be done to an 
extent that we would conclude that we had done more than we 
should for you to do this with the portfolio that you have?
    Mr. DeMarco. I think we are doing quite a lot here with it 
and I am not sure what you are driving at but I--
    Mr. Green. I will tell you what I am driving at with 1 
minute and 35 seconds left. We have a lot of people, Mr. 
DeMarco, who can pay a lower mortgage payment and keep their 
homes.
    Mr. DeMarco. Yes, sir.
    Mr. Green. Many of them may lose their homes. I think that 
we can do more to make them aware of the refi program that you 
have talked about, and I think that coming from you and your 
august position, this would mean something to them. So I am 
going to ask that you consider doing something by way of a 
notice.
    Mr. DeMarco. Okay. I have already committed that we are 
going to undertake a public marketing campaign and we are going 
to--
    Mr. Green. Does public marketing mean notice? Public 
marketing--
    Mr. DeMarco. That means we want to--
    Mr. Green. --is a nebulous term.
    Mr. DeMarco. We want to improve general public awareness 
and we also want to reach out directly in those communities 
where--
    Mr. Green. So I am going to have to take, Mr. DeMarco, from 
your testimony that you are not saying you will send a notice?
    Mr. DeMarco. I am sorry, Congressman, I already said that 
we are--we have been sending notices directly to borrowers 
about this.
    Mr. Green. You have?
    Mr. DeMarco. Yes, sir.
    Mr. Green. Then I misunderstood you, and I owe you an 
apology for the misunderstanding.
    Mr. DeMarco. That is fine. I am sorry for the confusion.
    Mr. Green. Mr. DeMarco, I like you--
    Mr. DeMarco. Thank you.
    Mr. Green. --and I want to make sure we understand each 
other.
    Now let me move quickly to the National Affordable Housing 
Trust Fund. Do you believe that such a fund should exist, Mr. 
DeMarco, that we should have a fund to help us maintain our 
affordable housing stock?
    Mr. DeMarco. Congressman, that really is outside the 
bailiwick of my responsibility as regulator and conservator. 
That is a policy decision for the Congress. I really am not--I 
didn't come here prepared to have an opinion about the trust 
fund.
    Mr. Green. I will accept your answer, Mr. DeMarco. Thank 
you.
    Mr. DeMarco. Thank you, sir.
    Mr. Garrett [presiding]. The gentleman's time has expired, 
and we appreciate the comity between the two gentlemen and all 
the areas in which they found common ground.
    And with that, we turn now to the gentleman from Virginia, 
Mr. Hurt.
    Mr. Hurt. Thank you, Mr. Chairman.
    And thank you, Mr. DeMarco, for your candor and for your 
leadership.
    After many long years, the GSEs are beginning to turn a 
profit, and I guess I would like to hear from you, what are the 
advantages and disadvantages of their return to profitability 
for you, as conservator? And what should we--has it led to any 
changes in tactics to accomplish this reform on your part, and 
what are things that perhaps we would be wise to be looking out 
for with this positive turn of events but also recognizing that 
we really do need fundamental reform and the taxpayers have 
ponied up north of $180 billion?
    Mr. DeMarco. It is hard to see any negative to Fannie Mae 
and Freddie Mac starting to show a profit since that is what we 
have been working towards all along. So I think that is 
certainly good news.
    One of the key drivers here is house prices. That has a 
huge impact on the profitability of Fannie Mae and Freddie Mac, 
so it is an indication that the country's housing markets 
really are starting to stabilize and show some sign of 
recovery--also a very positive thing.
    And the fact that they are making money now gives us more 
flexibility to undertake these important steps of selling off 
some portion of the credit risk. It gives us the opportunity 
and the resources to do things like invest in building this 
platform. And because we have worked through a good bit of the 
legacy we can start to free up resources to these future-
looking goals that we have.
    Mr. Hurt. Are there any disadvantages that you can think 
of?
    Mr. DeMarco. I can't think of any disadvantages to them 
earning money.
    Mr. Hurt. Okay.
    In your speech that you gave on March 4th at the National 
Association of Business Economics, you stated that one of the 
effects of the housing crisis has been a shift in consumer 
demand patterns away from home purchases towards renting, and I 
was wondering if you would comment on your view as to whether 
or not this shift is a rational phenomenon of consumers and 
investors adjusting to new market realities versus a 
normalization of demand as the distortions of an over-
subsidized government mortgage market are reduced?
    Mr. DeMarco. I would expect it has elements of both, 
Congressman.
    Mr. Hurt. It has what?
    Mr. DeMarco. It has elements of both. Households have 
reassessed at the margin how they want to manage their balance 
sheets, what the risks are of being a homeowner, and so that 
has certainly come into play, the weakness of the economy, and 
even for those who are still employed, if they have a lack of 
certainty, if they fear that their job could be at risk or 
their hours could be at risk, that is going to make them less 
likely to want to buy a home at this time.
    So these are all contributing factors and I think there is 
perhaps a natural readjustment. We had reached a homeownership 
rate above what we had ever seen before, and if that is above 
some concept of a natural rate then one might expect to see a 
modest decline in it.
    Mr. Hurt. Thank you. I yield back the balance of my time.
    Mr. DeMarco. Thank you.
    Mr. Garrett. The gentleman yields back.
    Mr. Cleaver is now recognized for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    And thank you, Ms. Waters.
    Mr. DeMarco, do you see anything wrong with the mortgage-
backed securities actually guaranteeing a return, which is 
essentially what happens now? Unlike anything else you--if you 
go to Ginnie Mae, it is 100 percent guaranteed.
    Mr. DeMarco. Right.
    Mr. Cleaver. Do you see anything wrong with someone doing 
an MBS and saying, I know I am going to get my money because it 
is guaranteed by the Federal Government?
    Go ahead?
    Mr. DeMarco. I do, Congressman. I think that the basic risk 
of the taxpayer guaranteeing most or all of the mortgages in 
this country is that you are relying on civil servants. As 
loyal as we are and as hardworking as we are, you are relying 
on government agents to interpret and study and follow mortgage 
credit risk and to be able to, from time to time, make 
adjustments in pricing due to that rather than relying on 
market participants who actually have their own money to lose 
having to make that continually informed judgment about what 
mortgage credit risk actually looks like.
    So while I think--as I said in my conversation with Mr. 
Green--there is clearly a role for government, there is also 
clearly a role for the private sector, for people who have 
their own money at risk to be able to assess this risk and help 
price it in the marketplace. That is not a job for government 
alone.
    Mr. Cleaver. But reform is probably needed, but you would 
agree, I think, that any reform would be massive and messy. And 
the charter allows for the GSEs to do the mortgage-backed 
securities and so to undo it creates a problem, and for me, it 
has always seemed a bit unsavory.
    But at the same time, I don't think we can do--I agree with 
you and Mr. Green that we absolutely must have the secondary 
mortgage market. So I don't know how we fashion this.
    Mr. DeMarco. If I may, I may have an explanation about what 
we are doing that might help both of us here--help all of us, 
really. Let me try to explain in a slightly different way what 
we are doing with this contract strategically.
    What I want to do with mortgages that are being sold to 
Fannie and Freddie now--rather than Fannie and Freddie and 
hence the American taxpayer being the only source of guarantee, 
I want to take some portion and say to market participants, 
``Here, we will do a trade, right? I am going to sell you this 
risk, right, and you are going to get a return for being 
willing to bear this risk.''
    So now I get the benefit of your private equity backing 
this and I get the benefit of your perception of what this risk 
actually looks like rather than just relying on my agency to do 
that. And so what we get is a market price, market signals 
about this risk, and we are now in a shared risk environment.
    What we are doing in 2013 is I have instructed Fannie and 
Freddie to undertake multiple types of transactions--there are 
different ways of selling off pieces of this credit risk--so 
that we can see what kind of execution we get in the 
marketplace, how the marketplace is pricing it so that we get a 
better sense of, then, all right, if this starts to look like 
there is good demand for this we can then start to proceed 
gradually to see, okay, how much more can we sell, how much 
more will they buy, and how are they continuing to address this 
risk? And I think that is the way we keep this from being big 
and messy but we make it orderly and gradual; we do it in a 
resolute way to bring private capital back to the market.
    Mr. Cleaver. Have you written anything on that?
    Mr. DeMarco. Pardon?
    Mr. Cleaver. Have you written anything on that?
    Mr. DeMarco. We have a couple of documents. I would be 
happy to share them with you, Congressman, and I would be happy 
to come up and go over them in more depth than our 5 minutes 
here allows.
    Mr. Cleaver. Yes. I would appreciate that very much.
    I yield back the balance of my time.
    Mr. Garrett. The gentleman yields back.
    Mr. Hultgren of Illinois for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman.
    Thank you so much for being here today, Mr. DeMarco. I 
appreciate your time and information.
    Mr. DeMarco, as has been noted, currently over 90 percent 
of new mortgage originations are supported by the Federal 
Government through either the GSEs or FHA, while the GSEs 
either own or guarantee about 61 percent of all new residential 
mortgage loans made in the United States. If the development of 
a sustainable housing finance system based on private capital 
is to be successful, what issues should policymakers consider 
regarding the appropriate role of the FHA and the GSEs moving 
forward, and how can we prevent leakage from the wind-down of 
GSEs from driving business to FHA and expanding taxpayer 
liability?
    Mr. DeMarco. With regard to FHA, while obviously this is 
not a program that I am responsible for I would, in response to 
your question, offer a few observations. First, Congress could 
give FHA greater clarity with what Congress expects FHA's 
targeted market to be. Is this to serve first-time homebuyers? 
Is it based on certain communities? Is this really meant to 
help people get into their starter home, their first home, and 
then after that, you are expected to go to the conventional 
market or not?
    But giving FHA--right now the only real sort of parameter 
or limit is the loan limit that FHA operates under, so that is 
one way Congress could express some guidance to the role of 
FHA. There are things that could be done with FHA to give it 
greater flexibility in terms of pricing risk and being able to 
resource itself as an agency to carry out a mandate.
    In other places, we set up these sorts of guarantee 
functions as independent, government-owned corporations, and 
give them more flexibility in terms of how they manage their 
business, what resources, greater flexibility in the human 
capital, the people they hire to do the job, and greater 
flexibility with regard to pricing. These are all things that 
Congress could consider in the context of FHA's role in the 
marketplace going forward.
    Mr. Hultgren. Switching gears just a little bit, I wonder 
if you could talk a little bit about how you think increasing 
g-fees will affect the FHA. Will increasing g-fees push 
business to FHA? Will there be more explicit government 
guarantees there? How do you see this all playing out?
    Mr. DeMarco. FHA and FHFA certainly keep an eye on what the 
other's g-fees are. We have both been gradually increasing g-
fees in the marketplace.
    Another critical component here that shouldn't be lost is 
it is not just Fannie and Freddie's g-fees that matter in this 
matrix, but it is also the mortgage insurance premium that 
private mortgage insurance companies are assessing for this 
risk. That is also an important price element when one is 
looking at the decision of a borrower to go FHA or go 
conventional.
    But we are well-aware that increasing our g-fees, with 
everything else being constant, could tend at the margin to 
move this risk over to FHA. But the point is, whether it is 
Fannie and Freddie buying the mortgage or FHA buying the 
mortgage, we all should be operating with appropriate risk-
based pricing mechanisms so that we undertake this business in 
a way in which we are adequately pricing for the risk that we 
are undertaking.
    Mr. Hultgren. Thank you.
    I know time is limited, and to get to as many people as we 
can, I will yield back the balance of my time. Thank you, Mr. 
Chairman.
    Mr. Garrett. The gentleman yields back.
    Mr. Ellison is recognized for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman and Ranking Member 
Waters. I appreciate you calling this hearing.
    Mr. DeMarco, I just want to acknowledge that you did 
acknowledge the pain that millions of families have gone 
through. I think it is important for you to note that, because 
as we are having this very civil conversation, the reality that 
people are going through--not just individual families but 
whole neighborhoods.
    Mr. DeMarco. Yes, sir. Absolutely.
    Mr. Ellison. Let me ask you this: Now, Fannie and Freddie 
are making some profit. A few years ago, we passed a bill 
establishing the National Housing Trust Fund and the law said 
that the proceeds would fund the National Housing Trust Fund, 
which would help low-income families. Now, in my own district 
of Minneapolis, we have an occupancy rate of like 98 percent 
and we could really use the help that a National Housing Trust 
Fund for low-income rental housing could provide.
    When do you see the GSEs complying with the law that would 
fund the trust fund, or do you?
    Mr. DeMarco. I would say we have been complying with the 
law from the beginning because the law clearly indicated that 
FHFA could make determinations based upon the financial 
condition of the companies not to contribute money to the 
funds, and that has been our ongoing determination.
    Mr. Ellison. Do you see that changing? What is the future 
of funding the National Housing Trust Fund, given the 
profitability?
    Mr. DeMarco. First of all, I want to make sure this 
profitability is sustainable, Congressman, and I am still 
mindful of the monies that erode to the Treasury Department and 
that frankly these funds, if they don't go to the trust fund, 
are going back to the taxpayer, and I have not thought about 
this recently so I would want to give your question a little 
bit more careful consideration.
    Mr. Ellison. I appreciate that. And proceeds can go in 
different directions--some to pay back the taxpayer, some to 
fund the Housing Trust Fund. I appreciate you thinking about 
that.
    I have talked to people about these difficulties, as 
everybody on this committee has and you have, and one of the 
things that I would like to get your feedback on is the 
situation in which somebody perhaps can't pay their mortgage, 
they will maybe lose their home in foreclosure, and then maybe 
it will be sold back at market rate, which then, at least to my 
understanding, the previous occupant is not allowed to bid on. 
Are you familiar with this situation?
    Mr. DeMarco. I am. That would be--
    Mr. Ellison. Could you speak to this?
    Mr. DeMarco. That would be considered an unsafe and unsound 
practice to engage in that sort of activity, because then you 
are not actually doing things at arm's length.
    Mr. Ellison. What if you were to just treat the person as 
an arms-length person, just look at their new financial 
situation, look at their ability to pay now? Because as has 
been said by many, many people fall into foreclosure because of 
the market, because of a medical problem.
    Will you at least look at these cases on a case-by-case 
basis? Because it seems like there is a blanket denial.
    Mr. DeMarco. I think I would like to do better than that, 
Congressman. I think that where we have gotten to is this: A 
family gets in trouble on their mortgage, we now have processes 
and requirements in place for the servicer to be reaching out 
to that family from day one and there is a whole menu of 
options to help that family that are tailored to what the 
potential circumstances might be that have caused them to get 
into trouble.
    Is it a temporary issue regarding a medical condition where 
the person is out of work for a few months? Is it unemployment? 
Is it a permanent reduction in income for that household?
    For each of those types of situations, we have tailored 
responses, but what we have done much better on now is when 
this happens today, the servicers know what to do and they are 
supposed to be in contact with that borrower right away. I 
don't want that borrower getting 90 or 120 days behind on their 
mortgage before they have actually been working with the 
servicer and have been offered the kind of assistance that you 
are talking about.
    Because fundamentally, Congressman, the way we are going to 
most help people is to get them right away. When they first get 
into trouble, we want to be reaching out to them. And frankly, 
we want them reaching out to us.
    This menu of opportunities here, including significant 
reduction in their mortgage payment, are now well-established. 
We have these systems in place now and I really want to be able 
to help people now.
    Mr. Ellison. We are getting to the yellow light, Mr. 
DeMarco, so I am going to try to get my question in. I might 
have to take the answer in writing.
    Okay, so you have indicated that the FHFA's first goal is 
to build a new infrastructure for the--
    Mr. Garrett. I am going to ask the gentleman to submit his 
question in writing. We have an agreement with the witness and 
also the ranking member that all Members who are in the room 
right now will get their questions in, and then Mr. DeMarco 
will be excused a little past the time that he has agreed upon.
    Mr. DeMarco. Very good. Thank you, Mr. Chairman.
    Mr. Garrett. So we will go now to Mr. Mulvaney.
    And I will be strict on the time for each person.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Mr. DeMarco, thank you for being here today. I want to talk 
a little bit about your strategic plan, which you have laid out 
in your testimony as having three basic pieces: the concept of 
building this new infrastructure; contracting part of the 
business; and maintaining other parts of the business.
    And I want to focus on this concept of contracting, because 
when I look at the details on contracting part of the business 
I see some discussion--I want to talk specifically now about 
single-family. I see some discussion about raising fees, some 
discussion about entering into these risk-sharing transactions, 
but it is not until I move to the multi-family part that I see 
specific targets in terms of percentage reductions, and I think 
you said a 10 percent goal this year for shrinking the multi-
family portion of your business.
    Have you set similar targets for shrinking or contracting 
the single-family portion of the business?
    Mr. DeMarco. No. We have not approached it that way and 
there is an explanation for that, Congressman.
    In the multi-family, segment Fannie Mae and Freddie Mac 
today risk-share on virtually all the multi-family mortgages 
that they purchase. That is, there are already established 
processes and business practices whereby if Fannie Mae buys a 
multi-family mortgage, they are not taking all that credit 
risk; they are sharing it with the originator.
    That is not the way it works in single-family. We have 
another step we have to take first in single-family, and that 
is establishing what these processes are to start sharing the 
risk.
    So my goal is in 2013, let's get those transactions tested 
in the marketplace and let's get the process to do it in place, 
and then in subsequent years we can look towards more like an 
approach we are taking with multi-family to say, we want to see 
an increase in share of this sold off.
    Mr. Mulvaney. Fair enough.
    And let's, to the extent we can, look down the road a 
little bit as to the future when possibly you are able to start 
talking about specific percentage targets for shrinking the 
single-family portion of the business. How small of a market 
share can you have and still provide the liquidity that you 
think is necessary for the market? We go back to the early 
2000s and you all were 80 percent of the market; in the mid-
2000s, you were 45 percent of the market; now you are 
effectively 100 percent of the market.
    How small a role can you play and still fulfill that 
particular function?
    Mr. DeMarco. The particular function of--
    Mr. Mulvaney. Providing liquidity--
    Mr. DeMarco. --providing liquidity? That certainly can be a 
good bit less than 90 percent. But the point is that you are 
not going to turn the switch overnight, and I think that the 
way to sort of get to wherever that answer is is to do it 
incrementally, and that is the path we are on.
    Mr. Mulvaney. But I think it is fair to say historically at 
least, that the market can function with you supplying 
guarantees on less than half of--
    Mr. DeMarco. Absolutely, Congressman, yes. Fannie Mae and 
Freddie Mac traditionally, I believe, had less than half the 
market.
    Mr. Mulvaney. And that sort of transitions to my larger 
question, which is, we talk about contracting the market, which 
obviously folks in here may agree or disagree with, but even 
when you talk about the strategic plan--all different pieces of 
it, including contracting--you are still talking about 
operating within the existing system, the existing regime, 
which is this implicit taxpayer guarantee. And I would ask 
you--and again, it may be rhetorical, Mr. DeMarco--isn't that 
system broken? If your goal in doing this is to protect the 
taxpayer, isn't it true you are just not going to be able to 
protect the taxpayer until you get rid of the guarantee?
    The only way you are going to get rid of the potential 
conflicts that Mr. Ellison so eloquently laid out, which is--
look, you have three masters right now. You have the taxpayers 
that you owe money to and you are also trying to protect them 
from future risk; there are circumstances under which you are 
asked to contribute to a Housing Trust Fund; but you have 
private shareholders.
    Isn't that whose system--isn't the GSE system fundamentally 
flawed, and regardless of anything you do to contract it, build 
it, sustain it, we are still going to have these issues in the 
long run?
    Mr. DeMarco. It is broken, Congressman, and I look forward 
to working with the Congress to come up with a better one.
    Mr. Mulvaney. Is it possible to fix it with leaving the 
implicit taxpayer guarantee in place? Don't you have to either 
go to a system where you all become an agency or you become a 
private entity? Either one or the other, you can't be both?
    Mr. DeMarco. You certainly need to clarify where the 
government's role is and its exposure and where private 
capital's is. The GSE model that you are talking about being 
broken, that was the problem. It was a complete melding of 
private capital and public support in a way that just harmed 
the American--
    Mr. Mulvaney. I think it is fair to say--and I appreciate 
the steps you are taking to protect the taxpayer, because 
clearly that is the goal of your strategic plan, but I would 
put it to you--not to you, put it to the larger group that we 
are always going to have this risk. Regardless of how 
successful Mr. DeMarco is in contracting, building, 
maintaining, whatever, until we get the taxpayer out of the 
business of the guarantee, the taxpayer is always going to be 
on the hook eventually.
    I thank you for the work that you are doing, but I 
encourage everybody else to consider the possibility that it is 
the system that is broken, not the operation of the system.
    Thank you.
    Mr. Garrett. The gentleman yields back.
    Mr. Perlmutter is recognized for 5 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    And, Mr. DeMarco, it is good to see you.
    Mr. Pollard, it is good to see you as well.
    Just a couple of things. Mr. Mulvaney first brought up 
multi-family housing. In the last 4 or 5 years, as we have gone 
through this, I have not heard any complaints about Fannie Mae 
or Freddie Mac's role in the multi-housing market as a 
participant in various loans and obligations. Have you received 
any complaints on the multi-family piece of this?
    Mr. DeMarco. I hear lots of complaints, Congressman, so I 
am sure I have heard complaints about multi-family.
    Mr. Perlmutter. But that hasn't been the area of--where 
there has been substantial requirement by the taxpayers to 
underwrite some of these loans?
    Mr. DeMarco. That is correct. We have managed to keep this 
business profitable.
    Mr. Perlmutter. Okay.
    Second question, speaking of profitability, one of the 
gentlemen--I think Mr. Hurt--brought it up that Freddie Mac has 
made some money recently. Is that true?
    Mr. DeMarco. Yes, sir.
    Mr. Perlmutter. How much? In the last month or 2 months?
    Mr. DeMarco. About $8 billion.
    Mr. Perlmutter. Okay. Has Fannie Mae made any money 
recently?
    Mr. DeMarco. They have. They have not filed their year-end 
financials but they have indicated in a filing to the SEC that 
they will report positive income in 2012.
    Mr. Perlmutter. I just want to congratulate you on that, 
because it hadn't been going that way for a long time. And what 
I thought was a really good description of the zero to $10 
trillion sort of continuum, over the last few years the Federal 
role has grown because there was no private involvement in the 
market because they got clobbered. They got clobbered more than 
Fannie Mae and Freddie Mac.
    So the private sector--and I appreciate the theory, and I 
agree with a lot of the theoretical statements you have made, 
but the private sector didn't price it very well when they were 
pricing it either back in 2005, 2006, 2007, and 2008. Wouldn't 
you agree?
    Mr. DeMarco. Yes. Neither GSEs nor the private sector did a 
very good job pricing mortgage credit risk--
    Mr. Perlmutter. Then, the private sector more or less 
withdrew completely from the market, in which case there was a 
vacuum--
    Mr. DeMarco. That is correct.
    Mr. Perlmutter. --for Fannie Mae and Freddie Mac and for 
the role that you have been playing as FHFA.
    Mr. DeMarco. That is correct, Congressman.
    Mr. Perlmutter. I agree with you. In terms of the continuum 
or the dial, as you described it, we probably are too far in 
terms of the Federal involvement, but without it, there would 
have been no market.
    Mr. DeMarco. That is correct.
    Mr. Perlmutter. So let's talk about standards. You were 
talking about sort of technological platforms and standards. 
One of the reasons that we all got into trouble--both the 
private and the public sector--is that the underwriting 
standards seemed to go out the window for several years. 
Wouldn't you agree?
    Mr. DeMarco. Yes, sir.
    Mr. Perlmutter. So underwriting standards you all have put 
back into place have led to the profitability of two of your 
organizations now?
    Mr. DeMarco. Yes, sir.
    Mr. Perlmutter. One of the standards that I have been 
worried about is sort of this technological standard, and 
Senator Wyden has written a letter to the Department of Justice 
concerning lender processing services, LPS. Were you involved 
in any of the litigation--was Fannie Mae, Freddie Mac, or you 
as the conservator involved in any of the settlements with LPS?
    Mr. DeMarco. Let me verify, but I think I am pretty sure I 
know the answer. I don't believe we were involved in that 
particular litigation.
    Mr. Perlmutter. What I would like you to do--and I would 
ask your counsel, as well--is to take a look at the role of LPS 
in all of this. There was one platform--a technological 
platform--that was very good when things were going smoothly 
but it was very hurried in terms of lawyers processing 
foreclosures, and those kinds of things. And I just ask for you 
all to take a look at that.
    And I would be remiss if I didn't bring up REMX for you to 
say that is an area where I think if you exercised those calls, 
there would be additional profitability to both Fannie Mae and 
Freddie Mac.
    And with that, I will yield back.
    Mr. DeMarco. I appreciate that, Congressman.
    Mr. Garrett. The gentleman yields back.
    Mr. Huizenga is recognized for 5 minutes.
    Mr. Huizenga. I appreciate that your time is growing 
short--2\1/2\ hours under the lights and in front of the 
camera, and I appreciate that.
    I do have something. We just heard about LPS. I want to 
talk a little bit about lender-placed insurance (LPI). I don't 
think that is something that has come up, kind of a technical, 
in-the-weeds thing, but I know that there had been a push by 
Fannie Mae looking at trying to basically come up with one 
lender, one underwriter, one agent group. I believe you had put 
the brakes on that operation or on the movement towards that.
    Do you see any value in selecting these preferred vendors 
versus having a free market system do that?
    Mr. DeMarco. Congressman, I have concerns about the way the 
lender-placed insurance market has worked. I think a lot of 
people do.
    What I am seeking, and we actually made it part of the 
scorecard for 2013, is I am seeking to work with other 
regulators and with other market participants to come up with a 
market standard for how to improve the transparency and the 
competition in this marketplace so that both borrowers and 
investors are better protected. So what I am looking for is not 
a Fannie Mae-centric approach or conclusion here. I certainly 
want to help Fannie Mae. As conservator, I want to see them in 
a better position with regard to LPI.
    But I think we can do better than that. I think we can do 
something to create a better standard for the market so whether 
the borrower's mortgage is owned by Fannie Mae, Freddie Mac, or 
some other market participant, if we can bring something better 
to the way this market works, that is what I am aiming--
    Mr. Huizenga. Okay, so I think I am hearing you say that 
FHFA will--you are going to attempt to preserve a rule for 
these servicers and these NVAs, and underwriters, that you will 
try to put in some reasonable rules and guidelines that will be 
issued but it will--
    Mr. DeMarco. We want to continue to have insurance coverage 
when you have a situation where either a borrower is unable to 
obtain homeowner's insurance in their particular location or 
the borrower defaulted on their mortgage so we don't have 
insurance coverage because they are not been paying. We want to 
make sure that the asset is protected but--
    Mr. Huizenga. Which I think we all see. My background is in 
real estate and developing, and I am very familiar with those 
things, and obviously we have to protect the asset for those 
who have invested heavily in it, and you just can't have it 
hanging out there.
    I have a couple of minutes and a couple of really quick 
things. It does seem to me that we were talking a little bit 
about--my friend from Colorado was talking about how there was 
no marketplace for these mortgages and we needed to have Fannie 
and Freddie step in. I am not sure that they needed to quite 
step in as dramatically as they have; however, it does strike 
me that we got in that situation because of fraud. It wasn't 
because nobody was making a bad business decision based on 
calculations that they--having all the information.
    It seems to me they made bad business decisions because 
there was a significant piece of the equation missing as they 
would go in and make those calculations. Isn't that fair?
    Mr. DeMarco. I would certainly add fraud to the list of 
contributing factors of the housing finance crisis, but I think 
plenty of bad business decisions were made even outside of the 
fraud operating--
    Mr. Huizenga. It seems to me that when we--not verifying 
people's income and then suddenly, through a whole myriad of 
systems, declaring that triple-A probably is not the best 
system to do that.
    On a more philosophical question, do we really need 30-year 
mortgages? We have a neighbor to the north where 30-year 
mortgages have not been part of their history. They may 
amortize over that but then there is 1-year--sometimes even 6-
month--1-year, 5-year now; they are now just really getting 
into long-term mortgages.
    And I am curious if you can unpack that a little bit in the 
next 45 seconds?
    Mr. DeMarco. As an economist, the notion of need is--I 
don't think we interpret that quite the same way as everybody 
else, so it is a little hard for me to respond to a question 
about, do we need.
    I will make an observation about 30-year mortgage, however. 
In some sense, it arose as an affordable product because 
mortgages used to be--even which fixed-rate mortgages became 
more commonplace, they were 15 years, and they were 20 years, 
then it would be 25 years, and we kept pushing out the maturity 
spectrum to make financing more affordable. And not that there 
is anything wrong with that, it is that with a 30-year 
mortgage, you do not really start paying down principal over 
those first several years.
    And one thing I would say about 30-year mortgages, it is 
not necessarily the best mortgage product for a homebuyer, 
especially a first-time homebuyer. If you look at statistics 
and see that the first-time homebuyers in this country tend to 
own their first home for 4 years or for 5 years, it may not be 
the best for their circumstance if they buy that house with 
that kind of timeline is what they expect, there may be a 
different mortgage product in which they can build equity at a 
faster rate than a 30-year fixed-rate mortgage.
    Mr. Huizenga. I appreciate that. And then somebody, 
obviously, at 60 years of age, maybe financing or refinancing 
it for 30 years is--you are outside your potential earning 
power stroke there.
    So thank you. I appreciate that, Mr. Chairman.
    Mr. Garrett. I recognize Mr. Kildee for the remaining 5 
minutes.
    Mr. Kildee. First of all, thank you very much, Mr. DeMarco, 
for hanging in there.
    And thank you to the chairman and ranking member for 
rewarding patience and allowing me a few minutes of your time.
    For a few years before I arrived here in Congress, which 
was just a couple of months ago, I was the president of a 
nonprofit organization dedicated to dealing with vacant and 
abandoned property.
    I came to that work because for 13 years prior to that, I 
was a county treasurer in Genesee County. I was living my 
lifelong dream of being the tax collector in Flint, Michigan. I 
think you understand what I was dealing with to a certain 
extent.
    Mr. DeMarco. Yes.
    Mr. Kildee. But one of the concerns that I developed and 
became much more aware of, especially as I travelled the 
country and helped set up land banks--about 100 land banks 
around the country that I have participated in arranging, 
including the one in my hometown, is the approach that most 
systems seem to take when it comes to real estate, and I am 
speaking specifically about REO management and disposition.
    Systems tend to treat these assets as a commodity at a 
marketplace and often measure the value of a transaction in 
purely transactional terms and don't ever consider, let alone 
attempt to internalize, the sometimes very negative 
externalities of those disposition decisions. So I have a 
couple of questions that deal with that particular area.
    One--and if you could try to be as quick as possible--what 
is the status of the Enterprises' REO now as opposed to, say, a 
year ago?
    Mr. DeMarco. We certainly are reducing the REO inventory, 
and one of the things that is contributing to these reported 
profits in 2012 is that the return we are getting on these 
sales is higher than had been anticipated.
    Mr. Kildee. About a year ago--according to this, it was in 
February of 2012--there was a pilot program announced that 
would take Fannie Mae-owned properties and offer bulk purchases 
to investors. I would just ask you to comment on that, but 
particularly comment--as I understood it, the intent was to get 
property out of your inventory or out of the inventories of the 
Enterprises and support what was an increasing demand for 
quality rental housing in many of those communities. That was 
at least one of the potential outcomes.
    How has FHFA or anyone else ensured that the disposition 
standards that were the basis for those transactions have been 
adhered to by the purchasers?
    Mr. DeMarco. Actually, with the pilot program you 
referenced, there were a number of restrictions on the 
disposition of the properties post-transaction, and so we have 
a regime in place to monitor that, but it was something that in 
some sense limited the ability of the acquirer in terms of how 
they would dispose of the properties.
    Most of the properties that were part of these pilot 
transactions were properties that were already rented, so 
Fannie was the landlord, if you will, for these properties. So 
they already had renters in them and we wanted to see that 
rental--the property would be preserved as a rental property 
for a period of time, and so there were covenants and this 
restricted disposition in that way to ensure most of the 
properties remained rentals for a number of years.
    Mr. Kildee. Is there any data or experience that shows how 
successful that has been in terms of the downstream condition 
of the properties? Is it working or have there been situations 
where purchasers have not adhered to those standards, and has 
there been action taken--
    Mr. DeMarco. It is a little early yet, since we closed on 
the transactions in late summer, but I am not aware of any 
problems that have been identified to date.
    Mr. Kildee. Was there any specific preference granted to 
community-based entities, local land banks, or nonprofit 
intermediaries that might take the approach that the 
transactional value or even the revenue stream generated by 
those properties were not the only considerations, that the 
external effect of the condition of the property was also a 
consideration?
    Mr. DeMarco. Yes, sir. In fact, that was part of it. I 
would probably want to have my staff come talk to you about 
what the technical details were, but we did have provisions in 
there that included partnering with local nonprofits and 
housing groups which had familiarity with these markets.
    Mr. Kildee. And then finally, specific to REOs held by the 
Enterprises, to what extent has it been the case that local 
relevant State law or local ordinances have been adhered to 
regarding management and the condition of those particular 
properties?
    Mr. DeMarco. We adhere to State law. Where State law 
conflicts with Federal law or the operations of the 
conservatorship--we have a couple of instances of that being a 
problem, but those have been rare.
    Mr. Kildee. Thank you very much.
    Mr. Garrett. Thank you.
    I believe the ranking member has something to enter into 
the record?
    Ms. Waters. Thank you, Mr. Chairman. I have here a document 
from ESOP, that is Empowering and Strengthening Ohio's People. 
I ask unanimous consent to enter it into the record.
    Mr. Garrett. Without objection, it is so ordered.
    I would like to say thank you to the Director for, as I 
said at the outset, your work in this area. Also, thank you for 
your testimony today. Thank you for spending a little extra 
time so we could get through all of the Members who did have 
the patience to stay and ask questions.
    And I do also appreciate the comment you made early on to a 
couple of the Members that you would follow up on an individual 
basis to answer some of those additional questions, so I thank 
you for that.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place his 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.
    This hearing is adjourned.
    [Whereupon, at 12:44 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             March 19, 2013
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